Interview- National Bank of Serbia's Kori Udovicki

First published by the Financial Times, 28 July.

Kori Udovicki, the Yale-educated economist newly chosen to run Serbia's central bank, spoke to Eric Jansson, the FT's correspondent in Belgrade. This is an abridged version of the interview.

FT: How have the financial markets received you so far?

Mrs Udovicki: There has been more purchase of foreign exchange, but this is already calming down. We are enjoying a bit more liquidity overall because we reduced the obligatory reserve rate just recently. There are already clear signs that nervousness is going away. Now people are waiting to see whether I really succumb to pressure from the government. I do not blame people for wondering, but I know that if anybody put me here for that reason they made a big mistake.

FT: Your predecessor Mladjan Dinkic emphasised Serbia's need to cut inflation, and this was accomplished during his time as bank governor. Do you intend to continue with the same monetary policies? As for banking policy, he closed more than 20 banks. Will you continue along these lines?

Mrs Udovicki: I will continue, absolutely, with just as strict a monetary policy and just as strict, if not stricter, banking supervision. I expect continuity in terms of firmness ss, no doubt about it. I think there is going to be a boost to the independence and strength of Serbia's central bank in that I plan to have absolutely no political role, no political interest.

FT: Are there any systemic reforms not yet put in place?

Mrs Udovicki: I think I can extend and develop the work started by Mr Dinkic, and in that sense I do have some instincts that are different from his. I wan to create more sophisticated markets, and I think I am less interventionist in the market. His instincts were useful for the beginning. Someone who comes in with training like mine - believing that markets work with some optimisation rules, that you can find equilibria and so on - might have been too naive for the first days after October 2000. I think it was good that Mr Dinkic intervened with his instinct for more direct control. At this point, I am glad to inherit the institution he has created. But my goal - and I think I am more committed to this than he would have been - is to evolve the system with market-based instruments.

FT: Mr Dinkic's deputies have accused government ministers of pressuring the central bank to invest Serbia's foreign exchange reserves. If you face such pressures how will you respond as bank governor?

Mrs Udovicki: There is no question about it. Reserves will be managed as reserves, and there is no instrument for the government to try to put pressure on me other than, perhaps, something psychological.

FT: Your predecessors at the central bank also weathered some pressure on the dinar, coming from the top of government. First the former prime minister, Zoran Djindjic, not long before his March 12 assassination, commented that the dinar was overvalued. When Zoran Zivkovic, the new prime minister, came to power, he accused the central bank of issuing counterfeit banknotes. You were a minister during these incidents, both of which infuriated bankers. Is the government pushing for devaluation?

Mrs Udovicki: To anybody in countries that have more developed financial markets, it might sound as if such a statement coming from such a high level has to have been planned, thought out, carrying special meaning.

It is my intimate conviction that this was not the case in either of these two cases. Mr Djindjic believed that foreign exchange was over-appreciated simply because he was nervous about export performance. It is the received knowledge in Serbia that this is how you resolve export problems. He expressed his opinion. At that point, he was not aware of the effects that it could have on the market, and quite honestly it did not have tragic effects on the market because they are not very developed in Serbia. We are only beginning to create financial markets.

Similarly, I believe that Mr Zivkovic basically slipped his tongue. He reflected on it and later realised it had been a mistake. Mr Djindjic was, and Mr Zivkovic is, a politician of high calibre and caution. But in Serbia macroeconomic issues and markets have really not functioned or been treated as in other countries. Although we have had a market economy, it has always been rather peculiar. People of the prime ministers' stature and calibre are not necessarily as aware, as they would be anywhere else, of the effects such statements can have, nor do such statements have, in the domestic market, as marked effects as you might expect.

FT: If you face pressure but resist it can you be forced out as Mr Dinkic was?

Mrs Udovicki: Under the new law, if one were to try to get rid of the governor, it probably could be done. But one would have to break a series of checks and balances now established, and it would be terribly embarrassing to any government.

FT: Much of the money that flowed out of Serbia under the Milosevic regime was stolen, allegedly laundered through offshore banks. Early in his term, Mr Dinkic vowed to trace the missing cash. The task is difficult and incomplete. Do you consider it your responsibility as governor to continue this chase?

Mrs Udovicki: We have inherited a very weak administrative apparatus with very weak capacity. Knowing how hard it will be to track what has happened, knowing how little of it will come back, as in fact it justly should to the Serbian people, I believe more in concentrating the few resources we have to make our new system watertight. This is more important than trying to rectify the past.

I do not want to close my eyes. On the contrary, what resources can be sensibly invested should be. But we have to keep in mind the central bank's responsibilities, and I must say that some of these things really should be pursued by other institutions.