Global Finance: Small and midsize enterprises (SMEs) face a productivity gap compared with larger firms. What does BTG Pactual Empresas offer to improve SME productivity?

Rogério Stallone: Other banks and startups typically start with banking and then move to lending. Access to credit is the biggest bottleneck in Brazil today. That’s why BTG Pactual, the largest investment banking in Latin America, began to operate in this segment through credit. As a full-service bank, we have a lot of banking products, but we decided to start this project in 2019 with an offer that we knew would be a hallmark for the segment. We now have a credit portfolio of around $4.6 billion, with the aim of reducing corporate inequality.

Our strategy is to combine efforts and support SMEs in a market that was, until then, dominated by large companies. We believe that with appropriate credit and the right pricing, SMEs have the capability to operate competitively with other players, which is a good thing for the market as a whole.

Gabriel Motomura: On the cash management side of the business, we are also very focused on increasing our clients’ productivity. Just a few examples: Here in Brazil, and thinking almost worldwide, SMEs must log in to their bank website and then process payments, entering information individually. Huge companies can upload files from their ERPs and process those files within the bank, have feedback on whether the transactions went over or not, and then input that into their systems.

Here at BTG, we automated this task. For example, you can use Excel spreadsheets or Google Sheets. You enter the payments you want to make within that spreadsheet and then upload the spreadsheet to BTG, so there is no code platform. Instead of spending hours processing payments, you can do it in five minutes, maximum. We can update your bank statement automatically, and in Excel as well. We create a new line in your spreadsheet for every payment you make and save that transaction for you.

Another bottleneck is the payment of invoices, and we can also save them in Google Drive or OneDrive for you while you keep all your receipts in a single location. Whenever you want to verify a transaction with a supplier or a client, you can access that 24/7 with no logging needed.

GF: Are the offerings for all SME clients, or do you offer specialized offerings based on their sector, such as agribusiness?

Stallone: Yes, we customize some products depending on the sector. For example, agribusiness represents around 30% of Brazil’s GDP. We created a new credit card just for the agribusiness segment. Clients can use our credit card to buy raw materials, seeds, and other things and pay for them after they receive the money from the harvests. This is just an example of a product that we just launched.

GF: Some global banks have recently merged their business banking lines with their corporate and investment bank businesses to help SMEs grow to be larger clients. Is this on the bank’s road map?

Stallone: BTG Pactual historically was a wholesale bank, with more than 40 years of history. In the past, its focus was on large companies in Brazil. Why? Not because it didn’t like SMEs but because we didn’t have the appropriate products and services for them. Since 2019, we have invested heavily in IT and digitazation to offer SMEs the same products and services that large corporations can access.

GF: Do you still feel like a startup, six years since your launch?Motomura: Sure, part of that is how we organize ourselves. For example, we may be the singular segment within the bank where the business and IT teams actually sit next to each other. We have a very lean structure. We are just 60 people businesswide, covering more than 100,000 companies. It’s 100% based on technology. We couldn’t do it otherwise. 

Global Finance: What is the Philippines economic growth outlook for 2024-25?

The outlook for domestic output growth over the medium term is largely intact. With 6.3% growth in the 2^nd quarter, it would likely settle within the government’s target in 2024 as a whole. We expect growth to be supported by robust construction spending and the timely implementation of various government programs.

GF: The Philippines Central Bank (BSP) was the first major central bank in Asia to cut rates following the widespread regional post Covid-19 monetary tightening. Is the bank comfortable acting ahead of the Fed?

Eli Remolona: The BSP takes a data-driven approach to policymaking. The cut in rates in August was driven by our projections of inflation and growth based on the latest data on domestic conditions. The timing of the FOMC’s actions did not play much of a role in our decision.

In fact, about two months before our latest policy rate cut, our forward guidance already indicated that we expected to shift to a less hawkish monetary stance. I also mentioned during an economic forum in early July that the BSP did not need to wait for the US Fed to cut rates before we do.   

The rate cut [in August] came amid a favorable inflation outlook. A key factor to this is the recent Executive Order lowering the tariff on rice imports. Rice is the staple in Filipino households, and so changes in rice prices have considerable impact on overall inflation. In addition, core inflation has continued to ease, with a September reading of 1.9%.

Our latest estimates show that even if some risks to inflation materialize, inflation will settle at 3.3 % this year, 2.9% next year, and 3.3% in 2026. These are all within the target range of 2-4%.

With inflation now on a target-consistent path, we have room for a calibrated shift to a less restrictive monetary policy stance.  

The reaction of financial markets to the BSP easing its policy rate earlier than the US Fed has been relatively muted, with the Philippine peso weakening only slightly versus the US dollar right after the recent policy decision and has since continued to appreciate.

GF: How has BSP’s prior policy-rate tightening impacted the Philippine’s key economic variables, and what direction are domestic interest rates headed?

Remolona: Previous policy rate increases had some dampening effect on demand, including credit activity. Nevertheless, the impact of tight financial conditions was something the domestic economy could absorb — as indicated by sustained GDP growth and improving employment conditions.   

On the domestic interest rate path, the current macroeconomic outlook, including target-consistent inflation, supports a calibrated shift to a less restrictive monetary policy stance. However, the BSP will continue to monitor lingering upside risks to prices, including those coming from higher electricity rates and external factors.

GF: What is the outlook for credit growth and credit quality in the Philippines over the next year?

Remolona: The country’s banking sector has been a reliable source of strength for the economy. Bank lending has consistently grown to support economic activities without compromising credit quality. We attribute this in part to prudent lending standards of banks.

Total loan portfolio of the country’s banking sector amounted to P14.2 trillion ($254 billion) as of end-July 2024, up by nearly 11% from a year ago. Of this loan portfolio, non-performing loans account for 3.58%, which is very manageable.

We expect the trend of robust loan growth and good credit quality to continue in the months ahead.

GF: How significant are ESG considerations and the net zero commitment to the BSP’s modus operandum over the medium term?

Remolona: The Philippines had committed to peak carbon emissions by 2030. At the same time, we recognize that climate change poses challenges to our mandates of promoting price and financial stability. This highlights the urgent need for central banks and supervisors to refine monetary and prudential tools to take account of ESG factors.

Firstly, monetary policy decisions will need to take increasing account of the physical risks of weather events. These threaten to present supply shocks that are more significant than the recent shocks in oil and food prices. In the case of the Philippines, these shocks led to an inflation rate of 8.7% in January 2023, the highest in 14 years. It is evident that we can no longer look through these shocks since they change inflation expectations and lead to significant second-round effects. 

Climate change also presents a major challenge to our mandate of promoting financial stability. We think climate risk is the ultimate systemic risk. While we have issued regulations that embed ESG considerations into bank’s risk management frameworks, we must enhance our surveillance tools further. 

We are collaborating with relevant government agencies and other stakeholders to leverage available data, models and expertise in order to strengthen our understanding of climate risk and its impact on the financial system. Our efforts to deepen the domestic capital market and provide alternative funding sources aim to channel funds toward eligible green or sustainable projects.  In addition, the BSP is pursuing an inclusive sustainability agenda. Our initiatives to increase capital flows and green finance to promote just transition and resilience building are also designed to benefit the most climate vulnerable segments, such as the agriculture sector, and small and medium enterprises. 

Moreover, the BSP is committed to incorporating sustainability in its own operations. As a signatory to the UN-supported Principles for Responsible Investments, we are dedicated to integrating ESG considerations into our investment practices.

Global Finance: QNB Group had solid returns in 2023. How did the organization achieve this?

Abdulla Mubarak Al-Khalifa: In 2023, QNB Group delivered robust net profit of $4.3 billion, an increase of 8% over the previous year, and an operating income of $10.7 billion, an increase of 11%. As a result, QNB remains the largest bank in Middle East and Africa [MEA] and one of the world’s top 50 banks in terms of market capitalization, reaching $41.9 billion. It is QNB’s vision and strategy to be one of the leading banks in MEA. Our strategy is comprised of three elements: a focus on our core of being an international wholesale bank, while leveraging innovation as a strategic enabler and embedding sustainability into our business and operating model.

GF: How does QNB differentiate itself from its competitors?

Al-Khalifa: To successfully compete against our competitors, we rely on a winning value proposition of our strong ratings, relationships and brand value as well as our international network. S&P [A+], Moody’s [Aa3] and Fitch [A+] recognize us as one of the highest-rated banks in MEA. We have built strong relationships with the government and private-sector companies across our network, including our subsidiaries in Turkey and Egypt. We continue to grow our brand value, which currently stands at $8.4 billion, and have maintained our status as MEA’s most valuable banking brand. Finally, with a network that spans across 28 countries in Asia, Africa and Europe, we are one of the few banks with a strong rating that can operate as a full-service financial institution across a range of hard-to-access frontier and emerging markets.

GF: What are the latest milestones QNB has reached on its digital transformation journey?

Al-Khalifa: As part of our strategy, we are embedding the topic of digital transformation into our business and operating model. Our value proposition is supported by cutting-edge digital technology and innovation delivered with a human touch to maintain the highest levels of customer satisfaction. Our QNB digital 3.0 program focuses on investing in our IT capabilities to enable digitization through the adoption of new technologies within our IT architecture and infrastructure. Digitization helps to drive efficiency and automation through robotics, AI, machine learning and an ongoing streamlining of our processes. Last but not least, we are striving to leverage the latest technology to optimize our channels and network to adjust to new customer expectations and behaviors.

GF: Sustainability is one of the most important topics across industries. How does QNB support it?

Al-Khalifa: Banks play an important role in contributing to financial stability and economic growth. As the largest financial institution in the Middle East and Africa, we recognize the importance of ESG and have consequently embedded the topic of sustainability in our purpose and strategy. Sustainability is the delivery of long-term value in terms of financial, environmental, social and governance. QNB’s purpose is to promote prosperity and sustainable growth across the markets we serve. Our strategy therefore fully integrates the E, S and G across our business and operating model.

GF: Where do you expect growth regarding business lines, sectors or geographies in the coming year?Al-Khalifa: Domestically, in Corporate Banking, the multibillion-dollar North Field Expansion project is a major opportunity for us to continue to support Qatar’s development in the coming years. We are actively supporting initiatives across the value chain, ranging from wells, pipelines, LNG storage tanks and new LNG tankers, all the way through to the expansion of Qatar’s refining and downstream capacity. Internationally, one of the key markets that presents a big growth potential for us is the Kingdom of Saudi Arabia. We developed a dedicated strategy for our presence in the country and also opened a second branch in Jeddah. Furthermore, we see significant growth potential in our international branches in London, Paris, Singapore and Hong Kong. These financial centers allow us to capture market share for trade and investment flows with global and multinational corporate customers to fuel our growth.

Global Finance: How did BBVA’s corporate banking business achieve such a strong year?

Javier Rodríguez Soler: Indeed, BBVA Corporate & Investment Banking had a great 2023, with annual revenue of €4.8 billion [$5.3 billion], and just in the first half of 2024, we generated revenue of €2,872 million, up by 23% on 2023. We devise our strategy based on globality—with a focus on geographical diversification, the opportunities derived from nearshoring and the increased relevance of business with institutional clients—and sustainability, which is a strategic priority at BBVA in all its business lines.

Combining growth and sustainability is one of our mantras. I am a true believer that it is possible to grow and decarbonize at the same time, and BBVA is a living proof of this.

In a business environment that demands the transition to more sustainable production models and adherence to global regulatory requirements that set the standard in terms of ESG, sustainability emerges as a key element to face a volatile world influenced by global events. That’s why we have implemented a sector-related advisory model to proactively address transition opportunities. It’s a model that reaches the whole organization—all our geographies, all our bankers and all our business products.

GF: Where do you see growth in the coming year?

Soler: For us, growth will come mainly through three levers: our advisory services, the big bets we have been working on over the past few years, and our investments in equity funds.

In terms of advisory, we have two relevant lines of work. First, we have sector strategies for corporate clients and plans in the most emission-intensive sectors to define a commercial strategy with our clients to finance the transformation to low-carbon technologies and to accompany them in their transition plans. We also offer advisory on specific solutions and cost-cutting issues such as energy efficiency for business clients, leveraging specialized teams that develop data-driven solutions and tools.

Second, we keep working on plans and specific initiatives to strengthen our long-term competitive position with existing businesses by leveraging our digital capabilities and advisory; leveraging sustainability capabilities to grow in new markets with a niche strategy; and developing new business to respond to sustainable transformation needs. 

Last but not least, our investment in top-tier capital climate funds is critical to our success in this journey. We have already invested more than €100 million in cleantech projects through six fund managers, who in turn have invested in over 160 companies.

GF: How do you expect corporate banking will change in the next few years?

Soler: One of the main changes will come from data and artificial intelligence, and its environmental impact should be a concern. Large language models are indeed very power-hungry. That is why we are looking into a new generation of models that achieve comparable performance with fewer parameters, significantly reducing energy consumption.

One of our primary strategies at BBVA is adhering to the principle of data minimization when building AI models. By using the data that is absolutely necessary, we create smaller, more efficient models that require less computational power—and consequently, less energy.

GF: Are there any business issues that keep you up at night?

Soler: What I see is that supervisors in different industries, and in particular the banking industry, as well as the politicians in the different geographies where we operate may not be moving at the same pace as we are at BBVA in terms of understanding the relevance of sustainability and decarbonization and where the world is heading with the development of new technologies. 

The role of governments in creating an enabling environment for decarbonization is crucial. In my opinion, a new industrial policy is key. It also needs to ensure relevant and adequate incentive schemes and facilitate faster permits with less bureaucracy, as some countries such as the Netherlands and Denmark have already done with a one-stop shop for relevant investment projects.

Global Finance: How does CIBC Mellon distinguish itself from the competition?

Mal Cullen: At CIBC Mellon, we pride ourselves on a relentless focus on client service, innovative technology and operational excellence. Our unique position as a Canadian leader backed by the global strength of BNY allows us to offer our clients a combination of local expertise and global capabilities.

We emphasize building deep, trusted relationships with our clients, understanding their specific needs and delivering tailored solutions. Our commitment to continuous improvement, agility and staying ahead of industry trends enables us to provide exceptional value and maintain our competitive edge. 

Receiving the title of best sub-custodian in the world for the third year in a row is a remarkable achievement that highlights our unwavering commitment to our clients. Canada continues to be a vibrant and resilient market, and this accolade underscores our role in supporting the country’s financial ecosystem. Our devotion to excellence in asset servicing has always been our driving force, and this recognition highlights our efforts in fostering trust and stability in the Canadian financial sector.

GF: Where are you seeing innovation in this space?

Cullen: Innovation in the sub-custody space is largely driven by the rapid advancements in technology and the growing power of data analytics. We are witnessing transformative progress in areas such as automation and artificial intelligence. These technologies are revolutionizing how transactions are managed and processed, allowing for greater efficiency, accuracy and speed. We are actively investing in these cutting-edge technologies to elevate our service offerings, streamline our operations and deliver real-time insights and efficiencies to our clients. This commitment to innovation ensures that we can deliver top service for our clients in an increasingly complex market.

Innovation extends beyond technology; it is also evident in our collaborative efforts with fintechs and industry peers. Through these strategic partnerships, we are developing and deploying new solutions and capabilities that are reshaping the sub-custody landscape.

GF: What impact has artificial intelligence (AI) had on sub-custody offerings?

Cullen: The integration of AI into sub-custody services has been nothing short of transformative. By harnessing the power of AI, firms are now able to deliver more sophisticated predictive analytics, significantly bolster risk-management frameworks, and drive substantial gains in operational efficiency. AI’s ability to process and analyze vast quantities of data with unparalleled speed and precision allows institutions to identify patterns and anticipate potential challenges long before they materialize. This not only enhances the quality of decision making but also results in superior outcomes for clients. AI-driven tools are redefining the level of personalization available within sub-custody offerings.

GF: How will sub-custody change in the coming years?

Cullen: The sub-custody industry is poised for significant transformation in the coming years. We expect to see increased adoption of digital assets, which will revolutionize the way securities are issued, traded and settled. There will be a greater emphasis on transparency, security and real-time processing. Additionally, regulatory changes and the shift toward shorter settlement cycles, such as T+1, will require the industry to be more agile and responsive. At CIBC Mellon, we are committed to staying at the forefront of these changes, ensuring that we continue to provide our clients with cutting-edge solutions and services.

GF: What keeps you up at night?

Cullen: Cybersecurity is a constant and evolving concern, particularly as cyber threats grow in sophistication and persistence. CIBC Mellon has and will continue to take actions to sustain the high-quality service, stability and flexibility clients have come to expect of us. As a trusted safeguard of more than $2.9 trillion of assets held on behalf of banks, pension plans, investment funds, corporations and other institutional investors, we recognize the importance of our resilience to our clients. Our commitment to staying ahead of cybersecurity threats is underpinned by continuous investments in state-of-the-art security technologies, enhanced threat-detection capabilities, and a proactive approach to risk management. However, our strength in this area is amplified by the support of our parent organizations, CIBC and BNY—both of which place a high premium on a risk-management culture. CIBC Mellon’s cybersecurity strategy benefits from the considerable focus, investment and resources of CIBC in Canada and BNY globally, ensuring that we are well positioned to protect our clients in Canada.  

Global Finance: What is Mongolia’s economic growth outlook for 2024-2025?

Byadran Lkhagvasuren: The Mongolian economy grew by 5.6% in the first half of 2024, mainly driven by high growth in the mining and transportation sectors as well as in the service sector, despite the sharp decline in the agriculture sector. The growth outlook for 2024 and 2025 remains favorable, supported by strong external demand and a significant rise in the Oyu Tolgoi mine’s copper concentrate production. Significant growth in coal exports and the transportation sector have been the main factors driving economic growth, which is expected to be sustained at around 6% this year and 8% next year. Certainly, any unpredictable changes in external conditions and policies of leading economies continue to be a main source of uncertainty.

GF: Mongolia’s foreign exchange reserves increased last year and external debt was reduced. What have been the benefits of this positive backdrop, and is it likely to continue?

Lkhagvasuren: As of July 2024, Mongolia’s foreign exchange reserves reached $4.7 million, reflecting a 23.8% increase from the last year. Several factors have strengthened Mongolia’s external position. In particular, the current account balance was in surplus, largely due to a strong recovery in coal exports in 2023. The government also implemented effective debt management strategies by refinancing parts of the sovereign bond, with no major external bond maturities until 2026. The Bank of Mongolia started repaying the PBoC [People’s Bank of China] swap line in late 2023 to reduce interest costs and improve the central bank’s balance sheet. Despite repaying 6 billion Chinese yuan [$843 million] of the swap usage, foreign exchange reserves remained robust. Based on our current projections, gross reserves are expected to increase in the short to medium term. Maintaining an adequate level of foreign exchange reserves is crucial for ensuring economic stability, fulfilling the country’s international financial obligations, reassuring foreign investors, and strengthening the national currency.

GF: How has the BOM’s rate policy impacted Mongolia’s key economic variables, and where are interest rates headed?

Lkhagvasuren: The tight monetary policy has effectively eased the demand-driven inflationary pressures and prevented inflation from the second-round effects. The supply-side price increases have also decelerated due to the reduced transportation costs for imported goods, while the favorable external conditions—with strong export performance—eased the exchange rate pass-through on inflation. As a result, inflation has declined to the midpoint of the target range in 2024 and is expected to remain within the target range for the medium term. Inflation may slightly rise next year, considering several factors causing inflationary pressures. Aside from the uncertainties surrounding the external environment, the expected increase in fiscal spending will fuel demand-driven pressures on inflation. The ongoing discussions about raising electricity and heating prices may have set the stage for cost-related price hikes. The future direction of the policy stance will depend on these risk factors for price increases, depending on developments in domestic and external markets. [In mid-September, the central bank cut rates 100 basis points to 10%.]

GF: What will be required over the next five years if Mongolia’s Vision 2050 is to be achieved?

Lkhagvasuren: As outlined in Vision 2050, achieving macroeconomic stability and transforming the middle class into the predominant group requires maintaining the inflation rate at its target level and pursuing a managed, flexible exchange rate to absorb and mitigate any external shocks. Moreover, given the Mongolian economy’s vulnerability to external shocks, diversifying the economic structure and setting priorities for investment projects—without compromising external and internal balances—is crucial for sustainable economic development.

With the growing impact of climate change, the Mongolian financial sector has been emphasizing the promotion of green finance initiatives. Mongolia has made ambitious commitments, as part of the Paris Agreement, to lower its carbon emissions by 22.7% against the business-as-usual scenario by 2030. In light of the achievement of sustainable goals, Mongolia became the second country in the world to develop and enforce a green taxonomy in the financial sector. The green taxonomy was approved by the Financial Stability Committee in 2019. Since then, banks have been reporting to the central bank on their green financing according to the taxonomy. The Financial Stability Committee approved the National Sustainable Finance Roadmap in 2022. This important document heightened the commitment of not only the BOM but of all relevant stakeholders in furthering the green finance cause. The goal of the Roadmap is to increase green lending to 10% in the banking sector and 5% in the non-bank financial sector by 2030.

Global Finance: Next year marks the end of your second term as governor of the MNB. Looking back to 2013, what have been the biggest changes in Hungary’s economy, and what have been your main achievements?

György Matolcsy: After the global financial crisis, central banks realized that monetary institutions and policy needed to be renewed. This turnaround took place successfully in Hungary after 2013. The crisis pointed out the vulnerability of the financial system; therefore, the merger of the central bank and financial supervision into one institution helped strengthen financial stability. In parallel with achieving and maintaining price stability, the MNB strengthened the economy with targeted instruments.  

In the second half of the 2010s—largely due to the central bank’s measures—Hungary’s economy was characterized by balance and high growth; average GDP growth during 2014-2019 was 4.1%. The MNB has recognized that these results can be preserved through an improvement in competitiveness.

The [post-Covid-19] global inflationary shock affected Hungary greatly, but the MNB reacted in a decisive and timely manner. It has taken appropriate measures to reduce inflation from a high level, but it is not over yet—the return of inflation must be avoided. 

The main message of the past 12 years is that the formula of economic balance and growth takes you forward. The MNB contributed the most to growth by restoring and maintaining stability and, when it was possible, it strengthened it by implementing strong economic stimulus measures.

GF: Does Hungary still have plans to join the euro and, if so, what might be the timetable?

Matolcsy: The MNB is committed to the successful and safe introduction of the euro, but the right timing is key. As a catching-up economy, we must reach the appropriate preparedness for euro adoption.

In recent years, the MNB has recognized that for successful euro introduction, we cannot be satisfied with just fulfilling the Maastricht criteria. A stricter set of criteria is needed to determine the optimal timing, which takes into account real criteria—for example, competitiveness, relative GDP per capita position, the harmonization of business and financial cycles—in addition to the nominal conditions. By reaching the appropriate level of economic development, we can be among the winners of the euro project.

GF: Earlier this year the government said it wished to increase oversight over the MNB, something which you were very much opposed to, as it would undermine its independence. What is the status of these plans now?

Matolcsy: Central bank independence is absolutely key, particularly in such an uncertain environment. It provides assurance that the central bank is able to concentrate on its long-term statutory mandate to achieve and maintain price stability. Economic history shows us that independent central banks are more successful in bringing down inflation, and ultimately in creating the conditions for sustainable economic growth. The government has openly received the bank’s reasoning, and it is fundamental that any decisions [it makes] must strengthen central bank independence.

GF: Going forward, what do you think will be the main challenges facing the MNB and, more broadly, the Hungarian economy?

Matolcsy: In the 2020s, the world is facing complex challenges with the effects of colliding megatrends—geopolitical changes, the green transition, deteriorating demographic prospects and digitalization. These must surely also affect the monetary policy framework. For central banks, achieving and ensuring price stability remains the primary objective, in addition to ensuring financial stability. At the same time, megatrends will influence the expected path of inflation. Among these megatrends, central banks must also be open to the green transition and digitalization and give an adequate response to them. Central banks can facilitate a faster and smoother green transition and thereby ensure a lower inflation path. The MNB has undertaken a pioneering role in supporting the green transition of the economy with several instruments. Digitalization can open a new era in the history of money, such as through central bank digital currency [CBDC], something being actively researched right now by central banks around the world.

Global Finance: What is your view of the Costa Rican economy in the coming 12 months?

Róger Madrigal López: Costa Rica’s economy is set to maintain its positive momentum in the coming months, with growth expected to hover around 4%. This growth trajectory builds on several favorable developments observed in recent years.

First, the country’s trade surplus has been improving significantly, reflecting a strong export sector. This trend is likely to continue, based on robust foreign direct investment [FDI] thanks to Costa Rica’s appeal as a destination for international capital, and complemented by the tourism sector returning to its pre-pandemic levels. Additionally, the services sector continues to gain prominence, evidencing the shift toward more service-oriented economic activities, which allows more economic diversification in products and markets.

However, there are some short-run challenges to address. Higher interest payments are putting pressure on fiscal resources, potentially limiting the government’s expenditure. This situation requires careful management to ensure that essential services and investments are not adversely affected.

Moreover, there are ongoing issues in the labor market, particularly with the integration of the female workforce. Addressing these issues through targeted policies will be crucial for fostering inclusive economic growth. Additionally, there are long-term challenges like improving human capital, enhancing infrastructure, and fostering competition.

In summary, while Costa Rica is on a positive path with continued growth and improving economic indicators, tackling the challenges related to fiscal constraints and employment will be key to ensuring a sustainable and equitable economic future.

GF: How important is it to institutionalize the central bank’s autonomy, as demanded by the International Monetary Fund?

Madrigal López: Institutionalizing the Central Bank of Costa Rica’s autonomy is crucial, which has been noted not only by the IMF but also by other international bodies, such as the Organization for Economic Co-operation and Development [OECD]. These organizations have consistently emphasized the importance of this measure for ensuring effective and independent monetary policy.

The empirical observation is that, in the long run, independent central banks are more successful in achieving price stability and autonomy.

There is a proposed legislative initiative that aims to address these recommendations by adding a final paragraph to Article 188 of the Costa Rican Constitution. This amendment would grant the BCCR administrative and governance autonomy, thereby safeguarding its essential functions. It ensures that the bank can set its own objectives and targets without undue external interference.

GF: What is your view on the economic outlook of the Central America region?

Madrigal López: The economic outlook for the Central America region is quite varied, as each country faces its own unique set of challenges. For instance, some countries share similar characteristics with Costa Rica, such as a shift toward a services-based economy and notable growth in recent years.

In contrast, other countries in the region are grappling with the need for greater economic integration and accelerated growth to enhance their average income levels. Notably, these other nations have benefited significantly from remittance flows, which play a crucial role in their economies. All our economies have also simultaneously faced the challenge of increasing their debt-to-GDP ratios following the pandemic shock.

Overall, there are opportunities for growth and improvement across the region. The path forward involves addressing these diverse challenges and leveraging the benefits of economic reforms. They also need to convince the rest of the world that they can become good commercial partners, which will inevitably benefit our integration as a larger market.

GF: What keeps you up at night?

Madrigal López: The Central Bank of Costa Rica remains committed to fulfilling its primary objective of maintaining price stability. Ensuring this stability is crucial for fostering a predictable economic environment and supporting sustainable growth. This sounds like a trivial concern for central banks, but for BCCR, to have low inflation is a relatively recent achievement that must be protected. To attain this objective, the autonomy of the BCCR’s governance must be effectively de jure and de facto guaranteed. This autonomy is needed to safeguard the bank’s ability to manage monetary policy independently and effectively. There is a concern regarding the risk to the BCCR’s management capabilities, particularly related to the availability of skilled technical personnel. Addressing this concern is important to uphold the bank’s operational efficiency and decision-making.   

Global Finance: You are Bosnia and Herzegovina’s first female central bank governor. How important is this, and how have you defined your priorities?

Jasmina Selimović: It makes me proud but also very aware of the huge responsibilities that this honorable duty carries. In a modern society, women holding leadership positions is not unusual. But in central banking, according to the IMF, 29 women are central bank governors in just 16% of the world’s 185 central banks. There is still a long way to go.

Regarding priorities, we will stay focused mainly on preserving the currency board and the stability of the institution. The work method, defined by the Law on the Central Bank of Bosnia and Herzegovina, clearly defines the parameters of monetary policy, as well as the currency board arrangement. The CB must keep its independence, integrity and professionalism. The currency is stable and convertible, those being the preconditions for financial stability and economic prosperity. As the owner of the RTGS [Real Time Gross Settlement] and GIRO [General Interbank Recurring Order] clearing systems, we will continue to ensure the stability of payment systems.

Looking ahead, we will invest particular attention in connecting with the central banks of the region and of Europe. We will continue to fulfill commitments toward European integration, which will become increasingly complex. We already participate in the preparation of analytical publications, such as the ECB’s financial stability assessment for EU candidate countries and the European Commission’s annual report.

GF: Having a currency board links your currency to the euro. What precisely does this mean for day-to-day operations? 

Selimović: Our currency is pegged to the euro at 1.95583, a rate derived from the previous exchange rate of one German deutsche mark to one Bosnian convertible mark [BAM]. Our main objective is stability, reflected in the currency board mechanism, which is strict and conservative. This means that every single BAM is at least 100% covered by foreign exchange reserves, so convertibility is unquestionable. In operations, this means that our main units [in Sarajevo, Banja Luka, Mostar and branches in Brčko and Pale] carry out daily transactions at the above-mentioned fixed rate. These transactions affect the level of the foreign exchange reserves, which is consequently reflected in the portfolio managed on daily basis by the CB.

It is very important that we are able at any moment to fulfill any request by our commercial banks to buy currency or sell it to them, as convertibility is granted by the law. Our main objective is maintaining the stability of the domestic currency, which requires safe and prudent management of the foreign exchange reserves.

GF: One of the biggest challenges for BH has been poor transparency and corruption, listed 110th out of 180 countries in Transparency International’s 2022 report. Where is it now, and what can the CB do to improve things?

Selimović: Based on the Corruption Perceptions Index from the 2023 TI Report, BH is in 108th place, so it has not recorded much progress. We must make significant steps in resolving corruption and strengthening the judiciary.

At the CB, we apply EU corruption prevention standards. We monitor business compliance to prevent conflicts of interest, corrupt actions and other risks that may result in financial losses or undermine our reputation. Our work impacts the entire financial system of the country, so public trust is extremely important to us, especially in times of crisis.

Related to this, we have introduced a Code of Ethics to prevent conflicts of interest and to enable online reports of any corruption or irregularities in the work of the CB. The system is independent and protected, and the CB’s determination to strengthen integrity and ethics enabled it to win the prestigious Transparency category in the 2023 Central Banking Awards.

GF: How serious a problem is slowing economic growth, 2% in 2023, and what can do done to boost it?

Selimović: The slowdown of economic activity in the EU, as well as global geopolitical tensions, led to a decrease in our exports. Domestic industrial production and exports declined significantly in 2023, while in the first five months of 2024, these declined by an additional 5.7% and 8.5%, respectively. Furthermore, competitiveness in past two years was undermined by a high growth in labor costs and low productivity. Structural reforms are necessary to boost domestic economic growth and harmonize it with the EU.          

Global Finance: Iraq went through decades of wars and crises. How did that impact the Iraqi banking sector?

Ali Muhsen al-Allaq: The banking sector faced severe headwinds starting with the Iraq-Iran war of 1980-1988, which damaged the country’s financial stability and the banks’ ability to service internal debt. With the 1990’s crisis and the Kuwait war, the dinar’s value then collapsed on the parallel market. That created a major challenge for banks in settling deposits and loans, ultimately undermining public confidence in the banking system.

More recently, the fall of the former regime coupled with terrorism, the war against the Islamic State, and ongoing security and political unrest directly impact banks’ ability to attract savings. In times of uncertainty, particularly during displacement in war-torn areas, individuals tend to hold onto cash.

On the other hand, Iraq’s isolation from the rest of the world, starting in the 1990s, resulted in a large technological gap. This is particularly true of state-owned banks, which inherited problems from previous decades. They find themselves unable to keep up with the recent challenge of building a solid private sector to help diversify the economy.

GF: What is the top priority for the Central Bank of Iraq currently?

Al-Allaq: Our primary objective is to maintain price stability while also promoting sustainable development. The CBI is continuously trying to balance its economic responsibilities in light of the inflationary waves currently impacting the global economy, which have a severe impact on the cost of living for low- and middle-income households. Given Iraq’s reliance on imports, the CBI works hard to stabilize prices by controlling liquidity levels. The central bank also supports economic growth by financing projects that stimulate local production and reduce imports. Finally, the CBI also drives banking sector reform and promotes financial inclusion through electronic payments to deepen the overall level of banking services in Iraq.

GF: What are the main challenges facing the central bank?

Al-Allaq: Iraq’s delay in keeping pace with technology, due to prolonged security and political crises, has made banking sector reform a top priority for us. Because reform takes time, we have set the stability of exchange rates as a first, and very challenging, intermediate goal. The ongoing crises have eroded public confidence in the banking sector, reducing the impact of action on interest rates on the real economy—a crucial tool for all central banks, especially during inflationary periods.

Additionally, the low level of financial depth, the prevalence of an unregulated small and midsize enterprise [SME] network and the heavy reliance on the oil sector exacerbate structural imbalances. That makes our country vulnerable to external shocks, leading to increased budget deficits and rising internal public debt, all of which further weaken the impact of monetary policies on the real economy.

GF: The Iraqi banking sector is under international scrutiny, with concerns that some countries sanctioned by the United States access US dollars through Iraq. How do you combat fraud and money laundering?

Al-Allaq: The central bank is striving to strengthen Iraqi lenders through various measures including intensified controls, procedures and inspections targeting banking and non-banking financial institutions, and the establishment of an AML/CFT and a compliance office in Baghdad. To ensure a high level of compliance with global regulatory standards, we also contract with specialized international companies to pre-audit foreign transfers, restrict the delivery of US dollars to travelers at Iraqi airports and conduct enhanced internal processes regarding all transactions in foreign currencies.

GF: How can the Central Bank of Iraq help diversify Iraq’s economy?

Al-Allaq: One of our primary goals is to promote sustainable development by supporting bank liquidity and directing it toward private sector projects. In 2015, the CBI launched two key initiatives: the One Trillion Initiative to finance small and midsize enterprises through commercial banks, and the Five Trillion Initiative to fund large projects via specialized banks. These efforts have expanded to include a one trillion dinar [$770 million] initiative for renewable energy, aimed at addressing our country’s electricity challenges and climate concerns.

These initiatives are designed to develop the non-oil sector and drive economic diversification. As a result, non-oil GDP grew by 4.4%, reaching 87.7 trillion dinars in 2023, driven by growth in manufacturing, construction, trade and services. Additionally, the central bank’s National Strategy for Bank Lending has further supported economic diversification by organizing funding for private sector projects.