For more information, see Bosnia and Herzegovina and the IMF

The following item is a Letter of Intent of the government of Bosnia and Herzegovina, which describes the policies that Bosnia and Herzegovina intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Bosnia and Herzegovina, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 

December 4, 2000

Mr. Horst Köhler
The Managing Director
International Monetary Fund
Washington, D.C.

Dear Mr. Köhler:

1.  In the period since we wrote to Mr. Fischer, on February 23, 2000, the Bosnia and Herzegovina authorities have continued their efforts to consolidate financial stabilization and reinvigorate the structural reform process. Inflation has remained low and real GDP has continued to experience high rates of growth. Official reserves have continued to increase. In spite of these positive results, there is a substantial agenda of unfinished work. There is a need to accelerate structural reforms to underpin the achievements in the macroeconomic area on a durable basis and enhance Bosnia's growth prospects over the medium term. This letter outlines the progress made thus far, confirms our key policy goals, and sets out new macroeconomic and structural policy steps to accelerate the momentum of the adjustment process. To support our adjustment effort, we request the Fund to complete the fourth and fifth reviews of the stand-by arrangement, extend the arrangement by two months, and rephase the disbursements as set out in the attached Annex I.

A.  Macroeconomic Developments

2.  Macroeconomic developments were favorable in 1999 and in the first half of 2000. Following the adverse effects of the conflict in Kosovo, a recovery of economic activity in the second half of 1999 resulted in real GDP growth of about 9 percent for the year as a whole, while inflation remained low. Similar developments continued to characterize economic conditions in both Entities during the first half of 2000. Developments in the external current account were broadly as anticipated, but official reserves at end-1999 were significantly higher than targeted, owing to the remarkable increase in the demand for the Convertible Marka.

3.  The favorable macroeconomic developments thus far have resulted principally from the stringent implementation of the currency board rules, supported by prudent cash management by the State and Entity Governments. The prospects for economic growth during the rest of 2000 remain positive, and inflation in both Entities is expected to remain low. In both Entities, the sharp public sector wage increases granted earlier in the year, which were substantially out of line with budget parameters, have been partially reversed and budget execution is now heading towards acceptable outcomes. In the Republika Srpska, both revenues and expenditures are expected to finish the year at targeted levels. In the Federation, revenues have performed less well. However, the anticipated underperformance of excise revenue is expected to be more than compensated for by higher foreign financing, which will enable expenditure targets to be reached within the program constraint of zero domestic borrowing.

B.  Macroeconomic Objectives and Policy Framework

4.  The macroeconomic objectives for 2000 are to achieve a real GDP growth rate of 10 percent, a 12-month inflation rate of under 5 percent in both Entities, and a strengthening of the external position with an increase in reserves to the equivalent of 2¼ months of imports, including a substantial increase in the free reserves of the Central Bank. To achieve these objectives, we will continue to strictly implement the currency board rules and will reinforce fiscal restraint in order to observe the budgetary ceilings over the year. Large inflows of grants and concessional loans to support the reconstruction of the country will continue to exert a heavy influence on economic activity in 2000. Such assistance is expected to decline sharply over the medium term, and for this reason the policies envisaged under the program for 2000 are also intended to set the stage for rapid private-sector-led growth in the period ahead.

5.  To this end, our medium-term economic strategy intends to establish the basis for fiscal stability, with a particular emphasis on making the tax system more efficient and on initiating measures to ensure continued financial discipline (Tables 1 and 2). In addition, the strategy calls for an acceleration of financial sector reform, privatization of state enterprises, enhancement of social policies, and labor market reform. We also believe that promoting good governance is key to generating public support and confidence in the reform program. Under the program, these issues will be addressed largely through efforts to enhance the transparency of fiscal operations and intensified efforts to fight corruption at all levels of government.

C.  Fiscal Policies

6.  During the first half of the year both Entities experienced considerable difficulties in implementing the approved budgets for 2000. Expenditure commitments in both Entities exceeded those envisaged in their budgets, notably because of larger than affordable wage adjustments. Such wage increases, in the Republika Srpska, were accompanied by large non-wage expenditures such as transfers to the pension fund. In addition, the very substantial depreciation of the euro against the dollar has significantly boosted the foreign debt service costs for 2000, and both Entities are facing higher expenditure requirements to fund refugee returns. In the Federation, the expenditure pressures have been compounded by adverse developments on the revenue side, as increased evasion has contributed to a decline in the collection of excise taxes. Aware that such developments should not be allowed to continue unchecked, we have been addressing these problems in both Entities with ambitious revenue and expenditure measures.

7.  All levels of government reaffirm their commitment to run balanced budgets on a cash basis, without any recourse to borrowing from domestic sources, and to limit external borrowing exclusively to loans on concessional terms. To this end, the respective parliaments have adopted revised Entity budgets for 2000. In the Federation, to accommodate partially the higher expenditure requirements for the return of refugees and external debt service, allocations for goods and services and subsidies have been reduced. We are ensuring that these lower allocations are respected by implementing a tightened system of monthly spending ceilings for ministries, strictly enforced by the government. In addition, to keep wage spending within the budgeted amount, wages have been rolled back by 9 percent and a decision to freeze government employment has been taken. Similarly, in the Republika Srpska, a 33 percent wage increase has been reduced to 13 percent and government employment has been frozen. We will consult with the IMF before granting any future wage increases. In addition, budgeted Entity obligations for State administrative outlays and servicing of foreign debt will continue to be fully covered by monthly transfers that will be made no later than the end of the month for which they are due.

8.  As regards revenue, in the Federation, we have already taken steps to strengthen tax and customs administrations by beginning the implementation of an action plan to remove smuggled alcoholic beverages and cigarettes from the market. In addition, tax collections from other high-duty goods will improve because we have increased the exchange of information between the tax and customs administrations and reduced the number of border crossings where high-duty goods can enter the country. In the Republika Srpska, although aggregate revenues have remained broadly on target, there is scope to improve further the collection of taxes during the remainder of the year. To this end, we have implemented measures to improve the collection of tax arrears and tax collections from high-duty goods such as cigarettes, alcoholic beverages, and oil. In addition, in the Republika Srpska, we have increased the effective tax on tobacco and included excise taxes in the sales tax base in order to harmonize them with those in the Federation.

9.  The revenue measures noted above will be carried out in conjunction with the ongoing reform of tax administration. With technical assistance from the international community, we continue to streamline the organizational structure of tax administration in both Entities, enhance the exchange of information, and improve filing and payments procedures. In order to enhance tax compliance, we intend to intensify taxpayers' education campaigns and increase auditing efforts of the respective tax administrations.

10.  Achieving medium-term fiscal sustainability will require a rationalization of the tax system and a major change in the structure of expenditure. These reforms have already been initiated. Specifically, as regards revenue, in the last year both Entities have implemented a common schedule of excise duties, reduced customs duties exemptions, and eliminated temporary sales tax exemptions. During the next 12 months we intend to build on these achievements. Specifically, by January 2001, the existing array of sales taxes on goods and services will have been replaced in both Entities by a single-stage, two-rate sales tax that will be collected at the retail level. We intend to curtail sales tax exemptions, broaden the base of the sales tax to include construction materials and services, and harmonize sales tax exemptions and bases between the two Entities. Prior to implementation we will fully discuss our tax reform plans with the IMF. In the Federation, we will raise the social security contribution rates for military personnel to the standard rates. In addition, in 2001 both Entities will formulate and initiate implementation of a reform of the system of social contributions, to broaden their base and allow a reduction of rates without loss of revenues. We will also intensively monitor contribution payments and enforce compliance with such obligations. Other important measures for 2001 will include the reform of personal and corporate income taxes.

11.  We are committed to lowering the share of GDP devoted to expenditures and to changing the composition of expenditures over the next 3–4 years, with measures focused in two areas. First, a comprehensive reform of the social welfare system will be launched to provide adequate and more equitable basic social benefits to the population. Second, military expenditure will be reduced significantly over the medium term, a process that is already underway. For 2001, on-budget military expenditure will decline by one percentage point of GDP (5 percent in nominal terms). The total decline will be even larger, however, as a result of anticipated reductions in off-budget expenditure. During 2001, the reduction in off-budget expenditures will be quantified on the basis of audits carried out in both entities by external auditors and, by 2002, all military revenues and expenditures will be brought on budget.

12.  Both Entities are adopting measures to improve transparency and control over budget execution. An important step in this direction will be taken in early 2001 with the establishment of State, Entity and Canton Treasuries, incorporating the principle of a treasury single account held at the CBBH. To enhance the credibility of governments, draft laws that have expenditure implications will be submitted to the respective parliaments accompanied by an estimate of their budgetary cost. In the Republika Srpska, we have recently brought on budget the independent revenues of customs administration, tax administration, and the financial police. Entity governments will strive to include all fiscal operations within their budgets. In particular, donor-financed activities and external support for the military will be included in future budget documentation. Comprehensive external audits of military budget execution in 1999 and 2000 will be performed in order to provide a basis for assessing the restructuring of the military. Moreover, from 2001, the financial plans of extrabudgetary funds and the uses of privatization proceeds will require approval by the respective parliaments. In addition, we will ensure that the operations of the Goods Reserve Directorate in both Entities will be strictly limited to the core activities assigned to it by law.

D.  Financial Sector Development and Reform

13.  The banking system in both Entities remains fragile and beset by poor profitability and low capitalization. In response, we are continuing to strengthen banking supervision and we will enforce supervisory sanctions on banks that are not in compliance with regulations. In both Entities, Banking Agency officials, examiners, staff, and contract employees are now legally protected from prosecution in the performance of their legitimate duties. In the Federation appropriate legislation to this end has been adopted by the parliament, while in Republika Srpska such legislation is currently before the National Assembly. In the meantime, the required law has been imposed by the High Representative. In order to deepen financial intermediation, the amended Banking Laws in both Entities now allow commercial banks to operate throughout the country, and Laws on Deposit Insurance have been adopted in both Entities. Net capital requirements for all banks will be increased in stages from KM 5 million to KM 10 million by end-June 2001 in the Federation and end-June 2002 in the RS.

14.  Our banking sector reform strategy is being pursued through the liquidation of insolvent banks and the privatization of all other state-owned banks. To ensure that only sound private banks remain in the financial system, the governments will not recapitalize any banks and will liquidate at an early-stage some state-owned insolvent banks. In the Federation, tenders for the sale of Union Banka, and Postanska Banka have already been issued while discussions with a potential buyer for the sale of Sipad Banka are ongoing. In addition, either a substantial nonrefundable deposit will have been received for the sale of the Federation Investment Bank or it will be placed under foreign management. A Divestiture Strategy Plan was agreed in October between the Federation Government and the World Bank that will allow solvent banks from the Privredna Banka Sarajevo group to be sold as banking institutions, but those found to be insolvent will be closed and liquidated. In the Republika Srpska, privatization plans have been approved for all majority state-owned banks other than the Development Bank, and tenders for the sale of 5 state-owned banks have been published.

15.  The development of a robust banking system has been hindered by the existence of payments bureaus, which until recently had a monopoly on domestic payments transfers among legal and physical persons, and relegated banks to a minor role in the financial system. In this context, a key objective for 2000 is the reform of the payments system, including the elimination of the three payments bureaus operating in Bosnia and Herzegovina by the end of the year. All activities currently performed by the payments bureaus will be transferred to commercial banks, government agencies, and statistical institutes, and a countrywide interbank clearing system will be put into place by December 2000. In this regard, we have made progress in preparing the commercial banks to carry out payments transactions. In addition, preparations are underway to establish systems to replace the limited treasury functions performed by the payments bureaus. We intend to intensify our efforts in this area, and we will ensure that adequate alternate treasury systems are in place before the payments bureaus are closed.

E.  Enterprise Sector Restructuring

16.  We are working closely with the World Bank, the Office of the High Representative, USAID, and other donors to accelerate the privatization of state enterprises. To that end, the Republika Srpska has implemented a key outstanding measure by appointing Securities Commission and Share Registrar officials. Also, both Entities have adopted international standard tender regulations and rules for tender registrations. With assistance from international tender advisors, in each Entity at least three tenders for large enterprises will be brought to completion by end-2000. In addition, in both Entities, a list of enterprises—and the value of state equity therein, according to the opening balance sheet—has been published; and public offerings for up to 300 large enterprises are expected to be conducted by end-2000—with the full participation of privatization investment funds.

17.  All levels of government, including cantons and municipalities, will abstain from assuming or guaranteeing any obligations of banks or enterprises that were not specified in the initial contracts as obligations of government. Moreover, the privatization process will be monitored closely to ensure that neither foreign nor domestic debts of enterprises or banks are transformed into explicit or implicit obligations of any level of Government. We will also ensure that all levels of government refrain from using privatization receipts until a framework for their utilization has been developed in agreement with the Fund. As regards the Privredna Banka Sarajevo, we will continue to ensure that the outstanding foreign liabilities do not generate any claims on the Federation budget, and seek, in the future, to treat in a comparable manner any similar liabilities of other public banks. We will also ensure that such liabilities are not absorbed by other public enterprises, and thus indirectly passed on to the Federation budget through lower privatization receipts.

F.  Other Policies

18.  Entity Governments intend to achieve over the medium term financial viability of the pension systems. In the Republika Srpska, the recently adopted pension benefit legislation includes the requirement that pension entitlements beyond a guaranteed minimum be made contingent on the availability of resources, precluding hence, further accumulation of debt to pensioners. In the Federation, the adoption of similar amendments to the benefit system is expected soon. Also, the financial demands placed by new pensioners resulting from the demobilization of soldiers, and also from the addition of pensioners that were previously receiving their pensions from Croatia will be met by increasing the level of contributions to the social funds by the military. Both Entities are committed to raising pension contribution collection through better enforcement, and to prudent pension fund management in order to ensure that full statutory benefits can be met from available resources in the near future.

19.  Both Entities are also committed to not using any cash privatization revenues to recapitalize the pension funds before the financial situation of the funds has been permanently stabilized. Under no circumstance will privatization revenues be used for current pension payments.

20.  Recent changes to labor legislation in both Entities, key to the reduction of unemployment and to the progress of enterprise restructuring, mark a turning point in labor market reform. Amendments to the Entity framework labor laws adopted in August in the Federation and in October in the Republika Srpska redefine important aspects of labor relations, including the role of the various levels of governments and of employment contracts as well as eliminating the institution of employment on "waiting lists." The changes are aimed at increasing the flexibility of employment and termination of employment as well as bringing entitlements to more affordable levels. Legislative changes expected to be adopted before end-2000 in both Entities also redefine the role of employment bureaus and unemployment insurance, further increasing the flexibility of the employment process and conditioning unemployment benefit payments on the availability of resources in the employment funds.

21.  In light of the rapid transformation of labor and social relations described above, we consider it essential to review the social benefit framework in order to ensure that adequate benefit coverage of the most vulnerable, and for workers displaced by privatization, is maintained. We consider this to be an important area of reform, since public support for the privatization of state-owned enterprises could be jeopardized by the absence of progress in establishing a suitable social safety net. We are, therefore, presently drafting social protection strategies for the period 2000–03, which will be implemented, together with labor market reform, with the support of a World Bank adjustment credit. The strategy will aim to reform existing programs to increase the effectiveness of resources currently allocated to social protection, provide more equitable benefits through greater pooling of resources, and raise the credibility of the system by committing to affordable levels of protection.

22.  We have made progress toward implementing our program of trade liberalization and we intend to continue addressing any remaining obstacles to domestic competition. Our efforts to establish a transparent and non-discriminatory trade regime have continued in 2000. The amended State Customs Policy Law will become effective in December. We are committed to early elimination of the few remaining restrictive elements in our trade regime. To this end, we will begin to lower in steps the levels of the specific customs surcharges during 2001, with a view to eliminating the customs surcharge over a two-year period. Stimulating exports is critical to enhancing Bosnia and Herzegovina's growth potential. Accordingly, we have replaced the ban on the exports of raw timber with an export tax as an intermediate step towards the introduction of a stumpage tax.

23.  We are in the process of negotiating a free trade agreement (FTA) with Croatia. In these discussions we will emphasize the need to phase the implementation of the FTA in a manner that is consistent with our objective of multilateral trade liberalization. A Working Group for our accession to the WTO has been formed, and in an effort to expedite the process, we are making good progress in preparing all the relevant documents.

24.  We will ensure that the State and Entities refrain from borrowing on nonconcessional terms, including "in kind" loans. This prohibition on nonconcessional external borrowing will also apply to the granting of domestic or foreign payments guarantees or the assumption of liabilities under existing contracts that are not specifically identifiable as liabilities of the State, Entities, Cantons, or other levels of Government. These prohibitions will also apply to both Entities' Goods Reserves. The sole exception to this policy will be projects financed by the European Bank for Reconstruction and Development, the International Finance Corporation, the European Investment Bank, the European Commission, or other donors in conjunction with World Bank lending.

G.  Program Monitoring

25.  Reflecting the importance of accelerating the momentum of structural reforms, some of them have been made into prior actions or structural benchmarks (Table 1 and 2). Quantitative performance criteria for end-December 2000 and end-March 2001 have been set on: (i) the floor for net free reserves of the central bank; (ii) the ceilings on the cumulative change in gross credit from the banking system to the general government, the State government, the government of the Federation and the government of Republika Srpska; (iii) the ceiling on the contracting or guaranteeing of new non-concessional external debt; and (iv) external payments arrears (Annexes II–V).

Sincerely yours,

The State of Bosnia and Herzegovina   The Federation of Bosnia and Herzegovina   Republika Srpska
 
/s/
Martin Raguz
Chairman, Council of Ministers of Bosnia and Herzegovina
  /s/
Edhem Bicakcic
Prime Minister
Federation of Bosnia and Herzegovina
  /s/
Milorad Dodik
Prime Minister
Bosnia and Herzegovina
 
/s/
Peter Nicholl
Governor, Central Bank of Bosnia and Herzegovina
  /s/
Dragan Covic
Deputy Prime Minister and Minister of Finance
Federation of Bosnia and Herzegovina
  /s/
Novak Kondic
Minister of Finance
Republika Srpska
Bosnia and Herzegovina




Table 1. Bosnia and Herzegovina: Prior Actions
to Conclude the Fourth and Fifth Reviews of the Stand-By Arrangement1/

  Status

1. Entity and State Parliaments to pass the revised 2000 budgets agreed with the IMF. Fed.: Done
RS: Done
State: Done
 
2. Government to adopt and implement measures addressing key sources of tax evasion
as agreed with IMF staff.
Fed: Done
RS: Done
 
3. Republika Srpska to include excise taxes in the sales tax base, and increase the
effective excise tax on tobacco products.
Done
 
4. Entities to be current on transfers to State institutions for administrative expenditures. Fed: Done
RS: Done
 
5. Freeze employment of the Entity governments and roll back government employee wages
to effect savings of 9 percent and 15 percent, respectively, in the Federation and Republika
Srpska governments' monthly wage bills.
Fed: Done
RS: Done
 
6. Governments to begin setting monthly spending limits (on a commitment basis) to each
ministry based on Ministry of Finance recommendations, and to impose sanctions against ministries that do not observe these limits.
Fed: Done
RS: Done
 
7. Republika Srpska to set pensions for May 2000 onward to no more than 33 percent above pensions in May 1999.Done
 
8. Republika Srpska to reverse the February 2000 pension contribution rate. reduction. Done
 
9. Federation Parliament to confirm the director, deputy director, and managing board of the
Banking Agency.
Done

1Unless specified otherwise, measures refer to the institutions of the two Entity Governments.

 

Table 2. Bosnia and Herzegovina: Structural Benchmarks, November 2000–March 20011

Fiscal Issues
 
1. Implement comprehensive excise and sales tax reform. end-January 2001
 
2. Prepare strategy to raise collections of social funds by broadening the
contribution base while lowering rates.
end-March 2001
 
3. Entity governments to forbid the use of privatization revenues: (a) for
paying off debts of institutions that cannot meet their current obligations from
current resources; (b) by any privatization agency before it has adopted
regular reporting procedures on its receipts and their use.
end-November 2000
onwards
(Done)
 
4. Implement measures agreed with IMF staff to have interim Treasury functions in
place prior to closure of the payments bureaus.
end-December 2000
 
Financial Sector
 
1. Real Time Gross Settlement System and clearinghouse to begin interbank
settlement operations.
end-December 2000
 
2. Enforce prudential regulations, mainly minimum net capitals requirements, and
implement strategy to bring offending banks into compliance.
continuous

1Measures refer to institutions of both Entities.

 

Table 3. Bosnia and Herzegovina: Structural Reform Measures, September 2000–March 20011

Fiscal Issues
 
1. Based on technical assistance from the IMF, prepare draft legislation for
comprehensive sales and excise tax reform.
end-November 2000
(Done)
 
2. Federation to increase social security contribution rates for military personnel
to the standard level.
end-March 2001
 
3. Republika Srpska to bring on budget revenues of the customs administration, tax administration and financial police. end-September 2000
(Done)
 
4. Entity Parliaments to appoint Auditors General for a period of five years. end-September 2000
(Done)
 
Financial Sector
 
1. Submit amendments to the Law on Commercial Banks to the Parliament increasing
the minimum net capital requirements for commercial banks to:
end-December 2000
(Federation: Done)
 
     Federation    RS
KM 7.5 million effective end-Dec. 2000    end-June 2001
KM 10 million effective    end-June 2001    end-June 2002
KM 15 million effective end-Dec. 2002    end-June 2003
 
 
2. Adopt criteria harmonized between the two Entities for the supervision of
out-of-Entity bank branches.
end-December 2000
 
3. Federation to harmonize criteria in the Law on Deposit Insurance with the
forthcoming minimum capital requirements in the Law on Commercial Banks.
end-September 2000
(Done)
 
4. Republika Srpska to adopt Deposit Insurance Law and complete preparatory
work to establish deposit insurance mechanism.
end-January 2001
 
5. Federation to offer for sale Sipad, Union, and Postanska Banks. end-September 2000
(Done)
 
6. Adopt divestiture plans for state banks in the PBS bank group in the Federation. end-October 2000
(Done)
 
7. Amend legislation to provide limited immunity to Banking Agency officials,
examiners, staff, and contract Employees, while performing duties pursuant to
the law.
end-October 2000
(Federation: Done)
(RS: imposed by OHR)
 
Other Structural
 
1. Observing international tender regulations, bring at least 6 large enterprises to
the point of sales (3 in each Entity; the 6 Republika Srpska timber industry
enterprises with IFC participation count as one).
end-December 2000
 
2. Federation to appoint an international sales advisor for Air Bosnia. end-December 2000
 
3. Submit to parliaments amendments to legislation on labor relations and rights
of the unemployed to create an environment conducive to private market
development and employment growth.
end-November 2000
(Done)
 
4. Amend legislation on veterans' and military invalids rights to ensure there is no accumulation of debt for unpaid benefits. end-December 2000
 
External Sector
 
1. dopt and implement amendments to Customs Policy Law. end-December 2000
(Done)
 
2. Begin reduction of the specific import tariffs according to a schedule to be
agreed with the IMF.
end-December 2000

1Unless specifically stated otherwise, measures refer to institutions of both Entities.

 

Annex I


 

Bosnia and Herzegovina: Schedule of Proposed Purchases Under Stand-by Arrangement

Amount of Purchase   Availability Conditions include:

1. SDR 8.08 million May 15, 2000 Completion of fourth review and observance of end-March 2000 performance criteria
 
2. SDR 8.08 million August 15, 2000 Completion of fifth review and observance of end-June 2000 performance criteria
 
3. SDR 8.08 million February 15, 2001   Completion of sixth review and observance of end-December 2000 performance criteria
 
4. SDR 5.91 million May 15, 2001 Completion of seventh review and observance of end-March 2001 performance criteria 1

Source: Staff estimates.
1The stand-by arrangement expires on May 29, 2001.

Annex II


Bosnia and Herzegovina: Ceilings on the Cumulative Change in Gross Credit from the Banking System to the General Government

  Limits

  (In millions of convertible marka)
 
  General Govt. State Govt. Entity Governments
      Federation Rep. Srpska
 
Cumulative change from level on December 31, 1999:1  
 
September 30, 2000 (indicative target) 15 15 0 0
December 31, 2000 (performance criteria) 6 6 0 0
March 31, 2001 (performance criteria) –2 –2 0 0

1Negative flows indicate deposits to the SDR account or other accounts at IMF. The targeted deposits include half of the amounts disbursed under the stand-by arrangement less debt service to the Fund. The targeted deposits at September 30, 2000, December 31, 2000, and March 31, 2001 will be adjusted downward for delays in disbursements under the SBA. Flow increases of borrowing by the goods reserve are measured using September 30, 2000 as a base.

The general government is defined to include the State, Entity (Federation, and Republika Srpska), cantonal and municipal budgets, together with their respective extrabudgetary funds. From September 30, 2000 onwards, for the purposes of this performance criterion, it also includes the goods reserves of each entity. Extrabudgetary funds include, but are not limited to, the pension funds, health funds, unemployment funds, and invalids and surviving family insurance funds in the two Entities.

Banking system claims on the general government for the purposes of program monitoring are defined as the sum of: (i) claims from the monetary authorities (the Central Bank of Bosnia and Herzegovina and the payment bureaus); and (ii) loans, advances, securities or bills issued (or guaranteed) by the general government and held by commercial banks.

For program purposes, those components of gross claims on the general government that are denominated in foreign currencies will be converted into convertible marka at the agreed accounting exchange rate prevailing on December 31, 1999.

The limits will be monitored from the accounts of the banking system, supplemented by information provided monthly by the Entity Ministries of Finance, and payment bureaus.


Annex III


Bosnia and Herzegovina: Currency Board Cover and Minimum Stock of Free Reserves of the Central Bank of Bosnia and Herzegovina

  Minimum

  (In millions of convertible marka)
  Stock of minimum free reserves1/
 
  September 30, 2000 (indicative target) 40
  December 31, 2000 (performance criteria) 43
  March 31, 2001 (performance criteria) 43

1Corresponds to the minimum capital of CBBH. The free reserves of CBBH stood at KM 42 million at end-September 2000.

Under the Central Banking Law and the program, the CBBH (acting as a currency board) is required to ensure that its domestic liabilities do not exceed the convertible marka counter-value of its net foreign exchange reserves. Net foreign exchange reserves of CBBH are defined as the difference of the following foreign assets and liabilities, both in convertible currencies and denominated in convertible marka.

Under the Central Banking Law and for the purposes of the program, foreign assets include: (i) gold, and other precious metal and stones; (ii) convertible foreign exchange notes held by the CBBH; (iii) credit balances in convertible foreign exchange—including SDRs—due to the CBBH on the books of foreign central banks or other financial institutions; (iv) liquid debt securities issued by the government and the central bank of the country in whose currency the securities are denominated and held by the CBBH on its own account; and (v) officially guaranteed forward and repurchase contracts of different types providing for future payments in convertible foreign exchange to the CBBH by non-residents.

Under the Central Banking Law and for the purposes of the program, foreign liabilities include: (i) foreign exchange and convertible marka balances on the books of the CBBH due to non-residents, including foreign central banks and international financial institutions; (ii) credit balances due to foreign central banks, governments, international organizations, and foreign financial institutions; (iii) forward and repurchase contracts of different types providing for future payments in foreign exchange by the CBBH to non-residents; and (iv) any other liabilities due to non-residents.

Free reserves of the CBBH are foreign exchange reserves not utilized as backing for the currency. They therefore consist of the CBBH net foreign exchange reserves in excess of the currency board liabilities. The program calls for quarterly minimum levels of free reserves. Foreign currency holdings will be converted into convertible marka at fixed exchange rates of December 31, 1999 (exchange rates other than that of the Deutsche mark will be those published in the IMF International Financial Statistics). Valuation changes will be excluded from cumulative changes in free reserves. The above limits will be cumulative from the actual level as of December 31, 1998 and will be monitored from the accounts of the CBBH, with information on net foreign assets provided monthly by the CBBH. The information will be made available to the Fund within two weeks following the end of each month throughout the program period. As the stock of free reserves as of December 31, 1998 is equivalent to the initial capital of the CBBH, the implication is that the capital cannot be drawn upon to finance operational expenditures or the acquisition of physical assets.


Annex IV


Bosnia and Herzegovina: Ceilings on Contracting or Guaranteeing of New Non-Concessional External Debt

Of which: One year and under1 3 Over 1 year2 3 1–5 years2 3

  (In millions of U.S. dollars)
 
Cumulative change from December 31, 1999 4  
  September 30, 2000 (indicative target) 0 0 0
  December 31, 2000 (performance criteria) 0 0 0
  March 31, 2001 (performance criteria) 0 0 0

1The limit applies to the flow of short-term debt contracted or guaranteed by the general government or the CBBH with an original maturity of up to and including one year. After September 30, 2000, the term "debt" is defined to include all current liabilities, which are created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which require the general government to make one or more payments in the form of assets (including currency), at some future point(s) in time to discharge principal and/or interest liabilities incurred under the contract. In effect, all instruments that share the characteristics of debt as described above (including loans, supplier's credits, and leases) will be subject to the ceiling. After September 30, 2000, for the purpose of monitoring the performance criterion, the definition of general government will include the goods reserves of each Entity. (The flow of short-term debt contracted or guaranteed by the goods reserve of each Entity will be measured using the stock as at September 30, 2000 as a base; the flow of leasing obligations will be calculated using September 30, 2000 as a base; and the stock of leases will be calculated as the present value, at the inception of the lease, of all lease payments expected to be made during the period of the leasing agreement, excluding those payments that cover the operation, repair or maintenance of the property being leased.) The stocks and limits exclude normal import-related financing. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantees become effective. Information on the stock of short-term debt will be reported monthly to the Fund.
2The limit applies to the contracting or guaranteeing of external debt by the State Government, the Entity Governments or the CBBH with maturity over one year. After September 30, 2000, the term "debt" is defined as in footnote 1, above. After September 30, 2000, for the purpose of monitoring the performance criterion, the definition of general government will include the goods reserves of each Entity. (The flow of debt contracted or guaranteed by the goods reserve of each Entity will be measured using the stock as at September 30, 2000 as a base; the flow of leasing obligations will be calculated using September 30, 2000 as a base; and the stock of leases will be calculated as in footnote 1, above.) The limits apply to all new nonconcessional foreign debt and leases with a maturity of more than a year, and within this limit with an original maturity of more than one year and up to including 5 years.
3For program purposes, the following will be excluded from the calculation of the amount of external debt contracted or guaranteed: (i) borrowing from the IMF, the World Bank, EBRD, EIB, IFC, or bilateral cofinancing of lending by these institutions; and (ii) concessional loans. Concessional loans are defined as those with a grant element of at least 35 percent of the value of the loan, using currency-specific discount rates based on the commercial interest rates reported by the OECD (CIRRS). The average CIRRs over the last ten years—plus a margin reflecting the repayment period (1 percent for repayment period of 15-19 years; 1.15 percent for repayment period of 20–29 years; and 1.25 percent for repayment period of 30 years or more)—will be used as discount rates for assessing the concessionality of loans of a maturity of at least 15 years. For loans with shorter maturities, the average CIRRs of the preceding six-month period (plus a margin of 0.75 percent) will be used. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time of contracting or guaranteeing the debt. Information on the contracting and guaranteeing of new debt falling both inside and outside the limit will be reported monthly to the Fund.
4Except as noted in footnotes 2 and 3.

Annex V


Bosnia and Herzegovina: Ceiling on External Payments Arrears1

  Limits

  (In millions of U.S. dollars)
Outstanding as of:
  December 31, 1999 (estimated)2
0
 
Cumulative reduction from level on
  December 31, 1999
 
  September 30, 2000 (indicative target) 0
  December 31, 2000 (performance criteria) 0
  March 31, 2001 (performance criteria) 0

1Arrears to multilaterals, excluding arrears to the IFC pendinbrmination as to whether these are government obligations.
2External payments arrears as of end-1998 to the Council of Europe Social Development Fund and the European Investment Bank were repaid during 1999.

The limit on the change in external payments arrears applies to the change in the stock of overdue payments on medium- and long-term debt contracted or guaranteed by the State, the Federation, the Republika Srpska, and the CBBH. The limit also applies to the change in the stock of overdue payments on short-term debt in convertible currencies with an original maturity of up to and including one year. The limit excludes reductions in connection with rescheduling of official and commercial debt and debt buy back. Accumulation of new external arrears is prohibited.