Currency Regulation
Bosnia and Herzegovina‘s currency, the convertible mark (KM), is pegged to EUR at KM 1 per 0.51129 EUR under a currency board arrangement. The Central Bank of Bosnia and Herzegovina (CBBH) conducts monetary policy through a currency board arrangement, as stipulated in the CBBH Law and in the Dayton Peace Agreement.
The most important function of the CBBH is to “formulate, adopt and control the monetary policy of Bosnia and Herzegovina”. The choice of a currency board had two main motivations. First, it provides a firm nominal anchor in the form of a fixed exchange rate. Second, it is a rule-based approach to monetary policy that took into account the difficulty there would be in establishing institutions and making political decisions in the complex political environment that existed in Bosnia and Herzegovina after the war.
The three essential features of the currency board, all of which are specified in the CBBH Law, are:
- Fixed exchange rate: KM 1 = EUR 0.51129;
- Full foreign exchange backing: the domestic currency liabilities of the CBBH have to be fully backed with convertible foreign assets;
- Full convertibility: the CBBH had to be prepared to exchange KM for EURO at any time for any amount. So it is a fully convertible currency in practice as well as in name.