Money: Bulgaria, Bosnia and Jamaica

This article appeared in the Daily Observer on September 12, 2007.

In 1997, Bulgaria and Bosnia andHerzegovina, which is commonly knownas Bosnia, introduced currency boardsystems on July 1 and August 11,respectively. With a currency board system,a monetary authority issues a domesticcurrency that is freely convertible into ananchor currency at a fixed rate. Confidencein the domestic currency is establishedbecause the monetary authority must holdforeign reserves to fully cover the domesticcurrency that is issued.

Prior to the introduction of theircurrency board systems, both Bulgaria andBosnia were in bad shape. Bulgaria haddefaulted on its international debt,narrowly escaped arevolution in late 1996,and was battlinghyperinflation (a rate ofinflation per month thatexceeds 50 per cent) thathad virtually wiped outits banking system andsent the real economyinto a free fall.


The newly independentBosnia and Herzegovinahad just come out of abloody civil war, one thathad disrupted and displaced most of thepopulation, destroyed 18 per cent anddamaged 60 per cent of the housing stock,and covered much of the territory withlandmines. Its economy was in shambles,declining to about 20 per cent of its 1990level. With the exception of the Germanmark, the other three currencies incirculation — the Bosnia and Herzegovinadinar, the Croatian kuna, and the Yugoslavdinar — were not freely convertible andwere very unstable.

In both Bulgaria and Bosnia, I had anopportunity to play a role in designing andimplementing their currency reforms. In1991, I co-authored with Dr Kurt Schuler amonograph Teeth for the Bulgarian Lev: ACurrency Board Solution. After itspublication, I began making regular visitsto Sofia to introduce the currency boardidea to government officials and the public. Thegovernor of the central bank set the tone for the1991-95 period. He always asserted that the centralbank had everything under control and had noneed for currency board rules.

These conclusions were echoed in official circlesuntil late 1996. But, as the hyperinflation andeconomic collapse gathered momentum, theofficial resistance to the currency board ideabegan to crumble. What forced it to completelycollapse was a sharp turn in public opinion, as wellas a revolt carried out in the streets of Sofia.

The public had lost all confidence in thegovernment and the central bank. Instead, itembraced the currency board idea. As an indicatorof the public’s support for the idea, consider thatone of my books, Currency Boards for DevelopingCountries, had been translated into Bulgarian andreached the top of Sofia’s bestseller list in early 1997.

In March 1997, President Petar Stoyanovappointed me as hiseconomic adviser. Myimmediate task was todraft a currency boardlaw and assist inimplementing it. OnJuly 1, 1997, Bulgariaintroduced a currencyboard law to govern itscentral bank.


In Bosnia, the currencyboard system wasmandated by theDayton/Paris Treaty(December 1995) which ended the civil war. Toassist in the implementation of the new currencyboard system, I was invited to Sarajevo inDecember of 1996. And what a trip it was: militarytransport flights, armoured cars, bodyguards andother local oddities.

At the time of their installation, criticsclaimed that neither currency board wouldsucceed because Bulgaria and Bosnia didn’tmeet preconditions required for a successfulcurrency reform. Those who peddle thisprecondition notion claim that a currencyboard is unlikely to be successful withoutsolid economic fundamentals, adequatereserves, fiscal discipline, a strong and wellmanagedfinancial system and an adherenceto the rule of law.

The preconditions argument falls intowhat I term the “95 % Rule”: ninety-five percent of what is written about economics iseither wrong or irrelevant. Just look atTables 1 and 2. In the last decade, Bulgariaand Bosnia have experienced sustainedeconomic growth, stable prices and a rapidincrease in the demand for the currenciesproduced by their currency boardsystems (as reflected in the growth inforeign reserves).

Since their currency boards wereestablished in 1997, the Bulgarian lev andBosnian marka have been firmly fixed totheir anchor currencies (the German markand subsequently the euro). In consequence,the lev and marka have moved in lockstepwith the euro against the US dollar —appreciating by almost 17 per cent relativeto the greenback since the launch of the euroon January 1, 1999. The Bulgarian lev andBosnian marka appreciation against the USdollar is a far cry from the performance of theJamaican dollar. It has lost an incredible 47per cent of its value against the greenbacksince January 1, 1999.


In 1995, I co-authored a monograph withDr Kurt Schuler: Alternative MonetaryRegimes for Jamaica. It was published bythe Private Sector Organisation of Jamaicaand remains available on the internet at: We concludedthat, unless Jamaica adopted a currencyboard system (or simply replaced theJamaican dollar with the US dollar), it wouldcontinue to be in the grip of excessively highreal interest rates, a weak currency, relativelyhigh inflation and anaemic economic growth.

It is clear that Jamaica’s economy wouldbe in better shape today and thescourge of poverty would have beenchallenged if Jamaica had followed thesound money path taken by Bulgariaand Bosnia.

Prime Minister Golding, kindly reviewthe data in Table 3.