Effects of Unofficial Euroisation in Serbia With Regards to the Inflation and Real GDP

Abstract

The term euroisation or dollarization involves several different monetary systems that are very different from one another, but have a common feature of having a foreign currency widespread as a means of payment in the formal or informal transactions. Therefore,Serbiahas the highest index of unofficial euroisation in the region ofSouth Eastern Europe. The aforementioned index demonstrates clearly the high level of informal euroisation inSerbiain the balance sheets of commercial banks. The share of dinar (RSD) corporate loans inSerbiais modest, having 77% of the total loans to corporations inSerbiabeing either euro-indexed or credited directly in euros. During the financial crisis in 2008 and 2009 euroisation was not reduced, but quite the contrary, it was increased and has begun gaining momentum. Despite favourable conditions for dinar loans in terms of lower inflation rate, lower interest rates on dinar loans in such conditions, but also due to the reduction of RRs required (mandatory) reserves to dinar share of commercial banks’ balance sheet, the share of loans in dinars is not increased, but, on the contrary, the loan activity of commercial banks in Serbia is reduced. The current level of informal euroisation inSerbiarepresents a serious challenge in terms of active monetary policy, due to controlled exchange rate, lack of local funding, high foreign exchange risk and lack of hedging instruments in terms of foreign exchange risk mitigation, which are the limiting factors of an active monetary policy.