Press Release: IMF Approves Stand-by for Bosnia and Herzegovina

May 29, 1998

The International Monetary Fund (IMF) today approved a 12-month stand-by credit for Bosnia and Herzegovina in an amount equivalent to SDR 60.6 million (about US$81 million), in support of the government’s 1998-99 economic program. Of the total, an amount equivalent to SDR 24.2 million (about US$32 million) is available immediately.


The 1992-95 war left most of Bosnia and Herzegovina devastated. Although real GDP growth is estimated at 30-50 percent annually in recent years, reflecting increases in capital expenditures and net exports, GDP in 1997 is still estimated to be only half of the 1990 level. The unemployment rate remains about 40 percent of the labor force, and the situation is exacerbated by demobilization and the return of refugees. Inflation has varied among regions of the country, but in all of them the hyperinflation of 1992-94 was followed by a decline in prices reflecting the improved access to imported consumer goods, a sharp tightening of fiscal and monetary policies, and the successful pegging of local currencies in some regions to the Deutsche mark.

The new constitution, adopted as part of the Dayton peace treaty in December 1995, provides for a decentralized system of government. The central ("State") government has limited powers and consensus is required for most decision-making. Substantial responsibilities are reserved for the regional ("Entity") governments--the Federation and the Republika Srpska. The international community has cooperated closely, under the leadership of the High Representative, to help the authorities put in place new structures consistent with the Dayton treaty. Serious initial difficulties in inter-regional cooperation were significantly reduced in early 1998, making it possible to reach understandings on a country-wide economic program. The creation of the basic economic institutions of the state--a new central bank, state budget, and laws on external debt, trade, investment, and customs tariff policy--has been a remarkable achievement in light of the recent history of Bosnia and Herzegovina.

The 1998-99 Program

The economic strategy under the 1998-99 program is based on four elements: a fixed exchange rate under a currency board arrangement; budgets that are as supportive as possible of reconstruction and social needs, while avoiding any domestic borrowing; external financial assistance, to help supplement the still-limited domestic resources and promote economicrecovery; and acceleration of the transition to a market economy through structural reforms. Under the program, economic growth in 1998 is projected at 30 percent; inflation at 10 percent, and gross international reserves to reach the equivalent of 3½ months of merchandise imports. The central macroeconomic pillar of the program is the currency board arrangement, under which the central bank issues a new domestic currency--the Convertible Marka--at a fixed 1:1 exchange rate with the Deutsche mark. The choice of a currency board arrangement for the immediate postwar period was motivated by the difficulty of restoring trust; concerns over the lack of administrative capacity; and recognition of the role that transparency could play in reinforcing fiscal discipline.

The fiscal strategy is tied closely to the currency board arrangement, under which the monetary authorities are precluded from extending credit to the public sector. In addition, the banking system has little capacity for financial intermediation and domestic capital markets are non-existent. Therefore, budget plans are based on avoiding domestic borrowing at all levels of government, and cash-basis expenditures will not be able to exceed the total of revenues and external financing. Reflecting this cautious approach, total fiscal expenditures are expected to rise from an estimated 33 percent of GDP in 1997 to about 35 percent of GDP in 1998, mainly due to an increase in budgetary expenditures in the Republika Srpska for the first time in several years. Another important aspect of the fiscal strategy is to avoid any further accumulation of domestic arrears and deal transparently with existing obligations.

Structural Reform

The key structural elements of the program for 1998-99 include banking reform, the initiation of enterprise privatization, pension and health system reform, implementation of a simplified customs tariff system, exchange and trade liberalization, and steps to improve economic statistics.

Severe governance problems arose during and immediately after the war. During the past year the authorities have begun to address these problems with the assistance of the international community. Under the program, the authorities will intensify these efforts by strengthening budgeting and treasury management techniques, improving and monitoring the workings of the customs administrations; reorienting the legal framework; and continuing to seek out and prosecute official corruption.

Addressing Social Needs

In the early postwar period, the country depended heavily on emergency humanitarian assistance from external donors to meet the basic needs of its population. Since then both Entities have begun to rebuild their education, health, and pension systems and have adopted programs to assist war invalids and their surviving families. During the coming year the authorities will continue their efforts to design a more efficient social safety net, targeted on the most vulnerable groups, and to complete a poverty assessment with the assistance of the World Bank. Specialprograms are being devised, with the assistance of international donors to provide housing, infrastructure, and employment opportunities in conjunction with the return of refugees.

The Challenge Ahead

Bosnia and Herzegovina faces substantial balance of payments financing requirements in the coming years, associated with depressed export capacity, urgent reconstruction projects, and the need to reconstitute foreign exchange reserves and normalize relations with external creditors. Filling this gap in a way that does not create an unsustainable debt burden will require large-scale and highly concessional support over a number of years from the international community, through grant assistance, concessional loans, and debt relief. Issues of political and economic reintegration and governance remain prominent and need to be resolved over time.

On December 20, 1995 Bosnia and Herzegovina succeeded to the membership in the IMF of the former Socialist Federal Republic of Yugoslavia, effective December 14, 1992; its quota1 is SDR 121.2 million (about US$162 million). Its outstanding use of IMF credit currently totals SDR 30 million (about US$40 million).

Bosnia and Herzegovina: Selected Economic Indicators






(Percent change)

Real GDP






Consumer prices (end of period)

Federation (DM)






Republika Srpska (DM-based index)






(Percent of GDP)

Consolidated fiscal balance1






External current account balance, excluding official transfers (deficit-)






(Months of imports)

Gross international reserves






Sources: Bosnia and Herzegovina authorities; and IMF staff estimates and projections.

1Since 1995, the deficit has been financed entirely by external grants and loans.

1A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.


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