1. 1 Business Operations of the National Bank of Serbia in 2005 and the Challenges to Come in 2006 Radovan Jelašić - Governor 21 December 2005

2. 2 In 2005 inflation soared beyond the expected level even though both money supply (М1) and reserve money (M2) remained at the level recorded in December 2003*! Budget Energy sources Psychological factors Loans * In euro terms Money supply (М1) and reserve money (RМ) М1 RМRМ bn EUR

3. 3 During 2005, the NBS undertook a number of unpopular measures which had significant effects on the monetary policy June Меasures Dinar deposits (21%)* FX deposits (21%)** Еffects (in CSD) Dinar deposits FX deposits Net effects 20% 26% 0.1 bn -7.4 bn -7.3 bn 18% Total 40.4 bn 38%*** * Reserve requirement rates on 10 January 2005 ** With interest equaling 20% of the benchmark rate, up to June 2005 *** Including new FX savings, with interest equaling 100% of the benchmark rate up to 10 December 2005 - -5,9 bn -5.9 bn August November December 20% 29% - -6 bn 18% 35% 1.7 bn -22.9 bn -21.2 bn

4. 4 NBS also undertook additional measures via open market operations * Average weighted rate on 14-day maturity securities stock of sold securities in billion CSD average weighted rate (%)

5. 5 2005 saw the continuation of lending growth Total lending* Lending growth 270.1 295.4 315.6 353.0 401.2 Lending structure Retail Corporate Other *Banks excluded bn CSD

6. 6 The speed of natural persons’ borrowing is much more disquieting than its level Average indebtedness per employed citizen equals CSD 54,318 or as at this moment – the equivalent of 3 average net monthly salaries! In 2005 alone, indebtedness increased more than in all the years preceding 31 December 2004! Banks pass on the currency risk to citizens with no protection whatsoever. Stock of disbursed loans Ratio of indebtedness per citizen to GDP per capita bn CSD

7. 7 Level of issue: CSD 1 bn; Maturity: 26 December 2005 – 26 June 2006; Form: discounted security; Nominal value: CSD 5,000; Interest rate: up to 25% per year; Purchase: in the business units of Komercijalna banka Savings Bills of the National Bank of Serbia – best investment ever

8. 8 Exchange rate of the dinar was freely formed, whereas the present appreciation is attributable to the fact that supply is higher than demand NBS sale of euros in December 12.6 5.0 0.5 mln EURexchange rate EUR/CSD

9. 9 The NBS share in foreign exchange trade has entered a gradual decline Banks - banks NBS – banks (IFEM) * from 14 May 2002 ** closing with 16 December 1.2 3.1 2.6 3.8 Volume of foreign exchange trade 2002-2005 bn EUR

10. 10 Foreign exchange reserves in both currencies experienced robust expansion in the course of 2005 *Increase of EUR 1.6 bn or 51.8% in the period 1 January – 16 December 2005 With commercial banks НБС +51.8% ЕУР 1.6 млрд* Foreign exchange reserves to money supply ratio equaling 304%! Foreign exchange reserves ~ 5-month imports! With commercial banks bn EUR bn CSD

11. 11 2005 witnessed significant improvements in the financial sector Bank ownership transformation is nearly finished –Banks with majority foreign capital account for 63% of the balance sum; –As consolidation advances, the number of banks dwindles; –Several private banks are in the final phase of sale. Insurance companies –Increase in the total premium, as well as in the number of employees; –Launching of the privatization process; Leasing –Amended legislation, supervision of leasing companies assigned to the NBS competence; Voluntary pension funds –Enactment of the new law on voluntary pension funds, supervision of VPFs falling within the NBS competence.

12. 12 From 1 February 2006 insurance policies will be issued in a new format

13. 13 2005 achievements we pride ourselves on... Implementation of the London Club Agreement – consensus of 99.95% of creditors; Agreement with the IMF and Paris Club of Creditors; Securities – repo operations; Confidence in the banking system; New Law on Banks and Deposit Insurance Law; Bolstered autonomy of the National Bank of Serbia.

14. 14 Challenges in 2006 Curbing the inflation; New arrangement with the IMF; Ownership transformation of insurance companies; Final rounding up of the financial sector supervision.

15. 15 Merry Christmas and Happy New Year!