Supplementary Memorandum of Economic
and Financial Policies
I. Introduction
1. In our Memorandum of Economic Policies of May 31, 2002, we laid out
our strategy for Bosnia's economic prosperity in the context of prospective
declines in reconstruction aid inflows from the exceptional levels of
recent years: fiscal consolidation to help spur domestic savings; structural
reforms to stimulate private investment and exports; and stable inflation
anchored by the currency board. We continue to see no alternative.
2. Progress this year towards those goals has been considerable: (i)
the fiscal deficit has been lowered by significantly more than programmed;
(ii) fiscal structures have strengthened; (iii) broader structural reforms
have deepened; and (iv) the currency board remains firmly in place.
3. Much more remains to be done. Unemployment is high, a sizeable reduction
in the external current account still lies ahead, and despite some signs
of revived activity during 2002, output growth has yet to become self
sustaining.
4. The burden of this medium-term agenda will fall to new administrations
which are being formed after the October 5, 2002 elections. Given the
deepening consensus on the medium-term agenda, we are confident that the
new administrations, whatever their political complexion, will take up
this challenge with determination. In that light, our immediate task,
acting as the caretaker authorities, is to ensure that momentum of reform
is maintained during the political interlude so that the legacy of progress
achieved passes to them intact. This memorandum outlines our approach
to that task.
II. Developments Under the Stand-By Arrangement
5. Our key 2002 objectives were: fiscal consolidation, to strengthen
the fiscal system; and action to spur private activity. We have met or
exceeded our objectives in all these areas.
6. The fiscal consolidation now projected in 2002 is 1.8 percentage points
of GDP, 1½ percentage points of GDP stronger than programmed.
- In the RS general government, strong revenue performance has allowed
additional spending allocations, while achieving the programmed fiscal
consolidation of 1 percentage point of GDP (commitments, after
grants). Vigorous tax administration underpinned revenue, allowing us
to finance pensions fully, to clear some recent arrears, and to pay
severance for the demobilization of almost 1,000 military personnel.
These successes are reflected in our "rebalanced" 2002 budget
proposals. If revenues are even stronger than our revised projections,
we will clear additional recent pre-program arrears, and begin reconstitution
of succession monies used in the demobilization.
- In the Federation general government, after a difficult start early
in the year, revenues have strengthened considerably as the new Tax
Administration Law and tax stamps on cigarettes went into effect and
the impact of strengthened custom administration due to the full implementation
of the ASYCUDA program. The strict spending discipline applied early
in the year has continued—including placement of some 3 percent
of GDP spending on the "delayed payments" list, and the subsequent
cancellation of that spending. Accordingly, even with the severance
costs of some 0.6 percentage points of GDP for 10,000 military
personnel, the budget consolidation (commitments, after grants) is projected
at 0.4 percent of GDP compared with the program target of -0.5 percentage
point of GDP. This progress allows us to reconstitute before year end
some 0.3 percent of GDP of the succession monies used to finance the
demobilization.
- Cantonal revenue also fell short of projections early in the year,
subsequently strengthening significantly as tax administration improved.
Spending adjustment relative to budget estimates kept the cantonal fiscal
balance on track.
- The state budget has also adhered to the program targets, and we have
used succession monies and a grant to clear overdue to the European
Bank for Reconstruction and Development (EBRD) and to the World Bank
capital subscriptions.
7. And this understates the progress: the demobilizations increased spending
in 2002 but they will save future budgets significant sums. And we are
the first of the post-war administrations which have regularly paid wages,
social benefits, and pensions on time and in full, even clearing some
recent arrears.
8. Alongside, structural fiscal reforms have deepened:
- The Treasury system is installed in central governments and, with
the USAID assistance, preparations to extend it to cantons and the municipalities
are advancing.
- The excise allocation mechanism began operating in July and we are
committed to immediate acceleration of the issue of inter-Entity licenses
to traders.
- We remain committed to the harmonization of indirect taxes. In particular,
the oil fee will be harmonized at mid-year Entity rates by end-2002.
- To strengthen fiscal discipline, we have prohibited future bank borrowing
by Federation cantons and municipalities, and borrowing by RS municipalities
will remain restricted to investment and short-term purposes.
- As well as placing all privatization proceeds since the start of the
program in escrow accounts, previous receipts have also been escrowed
in the RS thereby going beyond our formal program commitments.
- These funds in escrow are earmarked for use in a forthcoming comprehensive
settlement of the unsustainable domestic claims on government, including
war-related claims. Work to prepare that settlement continues apace,
notably through initiatives to quantify war damage claims.
9. Broader structural, financial, and monetary policies have also advanced:
- Free trade agreements are now effective with all of the former Yugoslav
republics and in August, we formally initiated WTO accession procedures.
- The ASYCUDA++ customs information system was installed in the Federation
by mid-year, and now covers 5 of 8 customs houses in the Republika Srpska.
- Voucher privatization has been completed in both Entities. Under this
program, government holdings in 900 Federation and over 350 RS SMEs
have been sold since 1999.
- In October 2002, 10 percent of the Federation electricity company
was sold through vouchers. And though sales of other large firms have
been below our expectations, we have greatly accelerated tender issues—half
of the 200 issues since 1999 occurred this year.
- A strong bankruptcy law was adopted in the RS in September and similar
legislation is under discussion in the Federation. We have also adopted
a new state law on Foreign Direct Investment and established a Foreign
Investment Promotion Agency.
- We have almost completed bank privatization. The three largest publicly
owned RS banks remaining were privatized in 2002 raising the share of
private capital in banks to 90 percent in 2002 from 25 percent in 2000.
The share of private banks in Federation bank capital has risen to 88
percent from 53 percent at end-2000. Private banks with a majority share
of foreign capital now dominate the system and bank competition has
lowered spreads in both Entities. A growing number of banks in the Federation
now satisfy the criteria for deposit insurance, thus strengthening confidence
in bank depositing and the banking system as a whole.
- Banking regulation has strengthened. The Entity banking laws were
amended to strengthen governance and prevent insider lending. The minimum
bank capital requirement of KM 10 million was enforced through merger
or liquidation, and we have created the State Deposit Insurance Agency
and opened a branch in both Entities.
- The KM was repegged to the Euro in September, recognizing de facto
practice.
- The ASYCUDA++ system has already begun to yield strengthened trade
statistics. And the state statistics agency has been empowered to collect
and disseminate data according to international standards. Preparations
for a household budget survey scheduled for 2004 is the focal point
of our efforts, alongside strengthened business registries.
10. Despite this stronger-than-projected performance, several difficulties
prevented full compliance with the program. Corrective action has been
taken in all cases.
- A prior action governing Entity transfers to the State was not observed
in mid-year, giving rise to US$ 2.5 million of external arrears. These
difficulties were resolved in September, but in addition, the Ministry
of Treasury for the BiH Institutions will henceforth inform the IMF
monthly in writing on developments in Entity transfers.
- The program limit on RS extra-budgetary fund bank borrowing for end-September
was exceeded by KM 8 million because the Health Fund borrowed to clear
arrears and a bank prevented the Pension Fund from clearing debt from
its bank deposits. We will allocate additional budget funds to lower
health fund debt and we have reduced pension indebtedness by KM 3.7
million. Accordingly, we are confident that the end-December performance
criterion for extra-budgetary fund borrowing will be met.
- Federation canton borrowing from banks also exceeded the end-September
program ceiling by KM 11 million. But in October, cash rich cantons
lent others KM 7 million to retire bank debt, reducing it to some KM
14 million. Amortization will reduce this further, bringing it well
below the end-December ceiling.
- Federation Municipalities breached their ceiling on bank borrowing
by KM 1 million. We are investigating this borrowing and will take necessary
corrective action.
11. Though all highly regrettable, these difficulties reflect the structural
weaknesses of our fiscal system. As is clear from the stronger-than-programmed
fiscal outturn, none is symptomatic of a fundamental fiscal or macroeconomic
malaise, and corrective actions have been taken.
12. In this strong policy context, economic growth also looks set to
exceed our program projections. At the BiH level, real GDP is now expected
to grow 4 percent in 2002, up from the programmed 2¼ percent boosted
by strengthening industrial activity and good harvests in both entities.
At close to zero, inflation has been lower than programmed, and average
nominal wages paid have grown strongly as enterprise accumulation of wage
arrears has slowed. Exports appear to be rising again after a weak second
half in 2001, albeit slower than programmed. And with domestic demand
buoying imports, the overall correction in the current account deficit
is likely to be 0.7 percentage points of GDP, slightly below program projections.
III. Macroeconomic Policy Framework for 2003
A. Fiscal Policy
13. Fiscal policy lies at the heart of our approach to securing an effective
transition to the new administrations.
14. In our view, the process of fiscal consolidation must continue during
2003 in order to anticipate declines in external assistance and to support
the currency board. Accordingly, prior to the formation of new governments,
we have prepared budgets for 2003 which anticipate a consolidated deficit
(commitments, including grants) of 2.1 percentage points of GDP. This
represents a reduction in the deficit of 1.9 percentage points of GDP
from the expected 2002 outcome.
15. This further consolidation in 2003 is secured not by assuming major
new policy actions by our successor administrations but by the full-year
effects of the tax administration and spending reforms that we implemented
during 2002. And these effects are sufficiently large, alongside unchanged
tax, wage, employment, and benefit rates, to meet the program commitments
to reconstitute all succession monies used during 2002 by end-2003.
16. We aim to secure passage of these budgets by early December 2002
on the basis that once new administrations form, they may adjust them
to reflect their policy preferences. But we are confident that if those
administrations make such adjustments, their budgets for 2003 will remain
consistent with the fiscal stance as described above and the overall program
objectives.
17. We have, again, programmed revenue and foreign financing deliberately
cautiously in order to minimize the risks of spending arrears, and our
proposals are outlined below in Tables 1-3 as follows:
- The RS will lower the commitments balance for general government including
grants from the projected outturn of -0.2 percent of GDP in 2002 to
a surplus of 0.3 percent of GDP in 2003. This, and projected increases
in debt service and administrative transfers to the state, is secured
by savings from demobilization and unchanged nominal wage and social
benefit levels. The latter allows reduced transfers to the pension fund
and further reductions may arise from structural reforms in the pension
system. Deficit outturns stronger than projected will be applied to
clearing arrears on veterans' benefits and reconstituting succession
monies.
- The Federation anticipates a reduction in the commitments balance
for general government including grants from -0.3 percent of GDP in
2002 to a surplus of 0.6 percent of GDP in 2003. The bulk of this
reflects savings from the 2002 demobilization, but nominal wage and
benefit levels will also be unchanged from current levels. This leaves
scope for increased outlays on investment and increased administrative
and debt service transfers to the State. We will complete the reconstitution
of succession monies in 2003.
- The 2003 State budget benefits from higher administrative transfers
from the Entities, including Brcko District. This allows full year financing
of commitments initiated during 2002. We will fund new programs and
institutions only to the extent that additional grant financing can
be secured for such. Entity commitments to ensure timely administrative
transfers from the Entities to the State during 2003 are outlined in
Annex I.
- We also anticipate that the Cantons will target balanced budgets or
small surpluses in 2003 as a result of their restricted financing options,
but strengthening revenue will ease their spending constraints.
18. To ensure implementation of our commitments and maintain financial
discipline, future severance packages for military and civil public employees
will be paid according to the stipulations of the Labor Law. And we propose
to set the levels of the performance criteria for government borrowing
and the contracting of new external debt as outlined in the attached Table 4 as clarified in the Supplementary Technical Memorandum
of Understanding (STMU). Overall, the implementation of the agreed
budget frameworks for 2003 should result in a fall in public external
debt from 51.6 percent to 50.6 percent of GDP by end-2003.
19. We will continue our good faith efforts to resolve the outstanding
issues pertaining to Paris Club debts owed to Japan and the debts to Russia.
We will also make efforts to track developments in non-government external
indebtedness.
B. Structural Fiscal Reforms
20. We will maintain the strong momentum of structural fiscal reforms
as reflected in the commitments in the attached Table
5. Harmonization of indirect taxes will be strengthened when Brcko
District introduces the road fee by end-December and as inter-Entity licenses
for the excise attribution mechanism are issued. Alongside, all import
surcharges will be incorporated into tariffs effective January 1, 2003,
and we are investigating how to strengthen customs administration further.
To maintain payment discipline, we will continue to refrain from tax offsets
and tax amnesties. And we will continue to abjure clearance of pre-end
2000 payment arrears until a comprehensive strategy to clear such arrears
has been prepared. We have begun discussions to replace the sales tax
with a VAT.
21. We will also continue to strengthen implementation of structural
fiscal reforms to which we committed under the program.
- The Republika Srpska aims to implement the ASYCUDA++ customs information
system in full by end-2002.
- Work on the treasuries according to our work plans will continue.
The first cantonal pilot project in Sarajevo will commence on April
1, 2003, to be followed by further pilots in two other cantons shortly
thereafter. We still remain committed to begin treasury operations in
all cantons on January 1, 2004. In the RS, we will resume discussions
with the municipalities, with the objective to get an agreement with
3 municipalities by February 1, 2003 on plans to introduce treasury
pilot projects.
- Privatization receipts from banks and non-banks will continue to be
placed in escrow, alongside any further succession monies.
- We intend to publish quarterly budget execution reports with a two-month
lag during the next fiscal year and will commence technical preparations
to allow the incoming governments to do so from the first quarter of
2003.
- We will continue to meet our program commitments on collection periods
and to restrict total monthly spending to available resources as required
under our pension laws. Health sector reform remains critical and we
will facilitate continued investigation of the options for consideration
by incoming governments.
22. In addition, we will establish a mechanism to collect data on public
investment and prepare an investment program for 2003-06, covering domestic
and donor-financed projects. And we will continue to develop proposals
to rationalize veterans' benefits and our pensions systems in collaboration
with the World Bank.
C. Other Structural Policies
23. Our broader programs of structural reform will also continue.
- In accord with our commitments to the World Bank, we will reduce
the time and number of steps required for business registration, prepare
an implementation plan for a collateral registry system and streamline
business inspections.
- By end-2002, at most two active banks will remain publicly owned in
each Entity. We will raise the minimum capital requirement to KM 15
million at end-2002, and prepare regulations to implement the new banking
laws, and strengthen banking supervisory agencies in line with MAE recommendations.
Banks which do not meet the required minimum capital standard will be
liquidated by mid-2003.
- We will continue the privatization of SMEs and accelerate large-scale
privatization with the support of the International Advisory Group for
Privatization, and will encourage use of the bankruptcy laws. The privatization
of some 50 remaining Federation strategic enterprises will be accelerated,
including tobacco, electricity, and telecoms companies. Tenders for
privatization of the RS petroleum refining companies will be issued
and plans for new tender issues in 2003 will be advanced.
- The free trade agreement with Turkey will go in to effect by January
1, 2003 and the government is working towards signing similar agreements
with Albania, Bulgaria, Romania and Moldova by end 2002.
- We will implement the new statistics law, including by amending entity
statistical laws and will set up the required infrastructure for the
State agency to carry out its mandate. We will continue our preparations
for new national accounts, CPI data, the household survey, and for a
comprehensive database for external trade.
- We will present the first draft PRSP to donors by end-November. We
will review the proposals to ensure consistency with medium-term public
spending limits and will present affordable proposals to the State Parliament
for ratification.
D. Exchange Rate and Monetary Policy
24. The steps outlined above will maintain strong support for the currency
board in the post election period. As a structural performance criterion,
we will continue to maintain the strict arrangement now in place. This
will include the prohibition on lending to the government or to banks
and other private agents. And we will continue to desist from issuing
central bank securities in order to avoid any risks that such initiatives
might pose for confidence in the future of the currency board, notwithstanding
the advantages such issues might secure for the development of the interbank
market. And we will maintain reserve requirements at 10 percent.
25. We agree with the favorable conclusion of the recent Safeguard Assessment
Report and will address the areas highlighted in that assessment, notably
in respect of internal audit and control systems. Specifically, we aim
to complete our assessment of risks in all our operations by end-March,
and will strengthen staff expertise.
26. We have taken all the steps necessary to transfer the function of
the fiscal agent for our dealings with the IMF from the State Ministry
of Treasury to the Central Bank in accordance with the currency board
and this action will be completed by mid-December.
Pursuant to Chapter II, Article 7, Point 1 of the Law on Foreign Debt
and Article 14, Point b of the Treasury Law, and in the context of the
first review of the program supported by a Stand-By Arrangement from the
IMF, the entity Ministers of Finance and the Minister of the Treasury
of the BiH Institutions have reached the following
AGREEMENT ON THE TIME SCHEDULE FOR THE PAYMENT
OF RESPECTIVE AMOUNTS FOR FOREIGN DEBT SERVICING
AND ENTITY CONTRIBUTIONS FOR THE ADMINISTRATIVE
SEGMENT OF THE 2003 BUDGET OF THE BiH INSTITUTIONS
I
In order to ensure timely payment of foreign liabilities and 2003 liability
projections arising from foreign debt, in a total amount of KM 324.4 million,
out of which KM204.3 milion is the Federation liability and KM 120 million
is the Republika Srpska liability,
The Federation of Bosnia and Herzegovina and the Republika Srpska shall
pay the required amounts against each due liability, 5 days ahead of the
respective maturity date.
II
Total transfers in 2003 for the administrative segment of the budget
of the BiH institutions amount to KM 87 million out of which KM 58 million
is to be paid by the Federation and KM 29 million is to be paid by the
Republika Srpska.
The transfer to the budget of the BiH institutions shall be paid on a
monthly basis, ensuring that 1/12 (one twelfth) of the total transfer
shall be remitted for every current month.
III
By the 15th day of each month, the Minister of the Treasury
of the BiH Institutions will provide a written report to the IMF indicating
developments in transfers from the Entities to the State for administrative
and debt service purposes during the previous month, noting their consistency
with the commitments made in this agreement.
In Sarajevo,
|
/s/
Anto Domazet
Minister of the Treasury of BiH Institutions
|
|
/s/
Sefika Hafisovic
Acting Minister of Finance
Federation of Bosnia and Herzegovina
|
/s/
Simeun Vilendecic
Republika Srpska
|
Table
1. Bosnia and Herzegovina: State Fiscal Operations, 2002-2003
(In millions of KM)
|
| |
2002
Proj.
|
2003
Proj.
|
|
|
Revenue
|
363.2
|
465.9
|
| |
Administrative transfers
|
86.1
|
87.0
|
| |
Debt service
|
232.2
|
324.4
|
| |
Other1
|
44.9
|
54.5
|
|
|
Expenditure
|
397.1
|
509.3
|
| |
Debt service
|
232.2
|
324.4
|
| |
Other
|
164.9
|
184.9
|
|
|
Balance (before grants)
|
-33.9
|
-43.4
|
|
|
Grants
|
38.8
|
30.8
|
|
|
Financing
|
-5.0
|
12.6
|
| |
Domestic2
|
-17.0
|
12.6
|
| |
Foreign loans
|
0.0
|
0.0
|
| |
Succession money
|
19.7
|
0.0
|
| |
Purchase of shares in IBRD and EBRD
|
-7.6
|
0.0
|
Sources: IMF Staff
1Includes transfers from Brcko District
of KM 2.5 million in 2002 and KM 3.9 million in 2003.
2In 2003, borrowing for CIPS project. |
Table
2a. Bosnia and Herzegovina: Federation Fiscal Operations, 2002–2003
(In millions KM)
|
| |
2002
Proj. |
2003
Proj. |
|
| Revenue |
1,038.0 |
1,112.3 |
| |
Excises and trade tax |
921.9 |
991.3 |
| |
Other |
116.1 |
121.0 |
|
| Expenditure |
1,244.3 |
1,217.4 |
| |
Debt service |
134.1 |
204.3 |
| |
Administrative transfers to the State |
57.3 |
58.0 |
| |
Transfers to the Pension Fund |
21.0 |
10.0 |
| |
Other |
1,031.9 |
945.1 |
|
| Balance (before grants) |
-206.3 |
-105.1 |
|
| Grants |
28.3 |
26.1 |
|
| Financing |
178.0 |
79.0 |
| |
Domestic financing |
-40.2 |
-52.6 |
| |
of which: |
reconstitution of succession
money |
-31.5 |
-40.0 |
| |
Foreign financing |
134.3 |
131.6 |
| |
Privatization proceeds |
3.0 |
0.0 |
| |
Succession money |
71.5 |
0.0 |
Sources: IMF Staff |
Table 2b. Bosnia and Herzegovina:
Federation Pension Fund, 2002–03
(In millions KM)
|
| |
|
2002
|
2003
|
|
|
Total receipts
|
723.1
|
705.7
|
|
Contributions
|
679.5
|
691.5
|
| |
Transfers from the budget
|
41.0
|
10.0
|
| |
Other
|
2.6
|
4.2
|
|
|
Total expenditures
|
718.1
|
702.2
|
|
Pensions1
|
687.7
|
670.3
|
| |
Others
|
30.4
|
31.9
|
|
|
Balance
|
5.1
|
3.5
|
|
|
Financing
|
-5.1
|
-3.5
|
Sources: IMF Staff
1Unchanged levels of pensions and number of pensioners
in 2003 from August-2002 levels. |
Table
3a. Bosnia and Herzegovina: Republika Srpska Fiscal Operations, 2002–2003
(In millions KM)
|
| |
2002
Proj.
|
2003
Proj.
|
|
|
Revenue
|
929.0
|
926.9
|
| |
Sales tax (including railways surcharge)
|
251.5
|
260.0
|
| |
Excises
|
192.1
|
196.7
|
| |
Trade tax
|
170.8
|
158.7
|
| |
Other
|
314.6
|
311.5
|
|
|
Expenditure
|
1027.8
|
979.7
|
| |
Debt service
|
100.2
|
120.1
|
| |
Administrative transfers to the State
|
28.8
|
29.0
|
| |
Transfers to the Pension and Health Funds1
|
115.3
|
91.0
|
| |
Other
|
783.5
|
739.6
|
|
|
Balance (before grants)
|
-98.8
|
-52.8
|
|
|
Grants
|
7.7
|
13.0
|
|
|
Financing
|
91.1
|
39.8
|
| |
Domestic financing
|
-33.5
|
-33.0
|
| |
of which: |
reconstitution of succession money
|
-8.3
|
-8.3
|
| |
Foreign financing
|
76.2
|
64.2
|
| |
Privatization proceeds
|
10.0
|
8.6
|
| |
Succession money
|
38.5
|
0.0
|
Sources: IMF Staff
1If contributions collected by the Pension Fund are higher,
budget transfers will be reduced. |
Table 3b. Bosnia
and Herzegovina: Republika Srpska Pension Fund, 2002–03
(In millions KM)
|
| |
2002 |
2003 |
|
| Total receipts |
331.0 |
332.2 |
| Contributions |
240.3 |
247.3 |
| |
Transfers from the budget and public
utilities1 |
90.7 |
84.0 |
|
| Total expenditures |
331.9 |
331.9 |
| Pensions2 |
302.3 |
302.3 |
| |
Others |
29.5 |
29.5 |
|
| Balance |
-0.9 |
0.3 |
|
| Financing |
0.9 |
-0.3 |
| Domestic Financing |
0.9 |
-0.3 |
Sources: IMF Staff
1If contributions collected by the Pension Fund are higher,
budget transfers will be reduced.
2Unchanged levels of pensions and number of pensioners
in 2003 from August-2002 levels. |
Table 4. Bosnia
and Herzegovina: Quantitative and Structural Performance Criteria
Under the 2002–2003
Stand-By Arrangement
(In millions of KM, unless otherwise noted)
|
| |
2002 |
2003 |
End-Mar.
|
End-June
|
End-Sep.
|
End-
Dec.
Prog2 |
End-
Mar2 |
End-
June1 |
| Prog1 |
Est. |
Prog1 |
Est. |
Prog2 |
Est. |
|
| A. Quantitative performance criteria |
|
|
|
|
|
|
|
|
|
| |
Ceiling on gross credit of the banking
system to the consolidated general government |
|
|
|
|
|
|
|
|
|
| |
|
the State government3 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
| |
|
the RS government and municipalities |
10 |
1 |
10 |
1 |
10 |
6 |
10 |
10 |
10 |
| |
|
the RS extra-budgetary funds |
2 |
5 |
2 |
6 |
2 |
10 |
2 |
2 |
2 |
| |
|
the Federation government |
20 |
18 |
20 |
19 |
20 |
19 |
20 |
20 |
20 |
| |
|
the Federation cantons |
10 |
23 |
10 |
22 |
10 |
21 |
10 |
10 |
10 |
| |
|
the Federation municipalities |
8 |
9 |
8 |
8 |
8 |
9 |
8 |
8 |
8 |
| |
|
the Federation extra-budgetary funds |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|
| |
Ceiling on contracting or guaranteeing
of new concessional external debt with original maturity of more than
one year by the public sector4,5 |
0 |
0 |
445 |
0 |
445 |
187 |
445 |
445 |
445 |
| |
Ceiling on contracting or guaranteeing
of new non-concessional external debt by the general government3,4
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
| |
Ceiling on contracting or guaranteeing
of new external debt by the general government with an original maturity
of up to and including one year4 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
| |
Ceiling on the outstanding stock of external
payments arrears6 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|
| B. Structural Performance Criteria |
|
|
|
|
|
|
|
|
|
|
| |
Continued adherence of the
Currency Board Arrangement as constituted under the law, incorporating
the amendments described in paragraph 10 of the MEFP (EBS/02/91),
and paragraph 24 of the SMEFP. |
|
Met |
|
Met |
|
Met |
|
|
|
Sources: BIH Authorities; and IMF staff estimates.
1Targets are indicative.
2Targets for end-September 2002 and end-December 2002 are
performance criteria and those for March 2003 are proposed performance
criteria.
3Excluding letters of credit at the state level for CIPS
financing up to KM 40 million. Actual borrowing for CIPS was Km 3
million at end-September 2002.
4New refers to all operations taking place after August
2, 2002.
5The public sector is defined as general government and
public enterprises.
6This will apply on a continuous basis.
7BiH was in external arrears in the amount of US$ 1.2 million
as of July 1, 2002, and in the amount of US$ 2.5 million as of July
30, 2002. These arrears were cleared as of September 25, 2002 (EBS/02/193). |
Table 5. Bosnia
and Herzegovina: Structural Benchmarks, September 2002–June
2003
|
| |
|
Implementation
Date |
Lead Institution |
|
| 1. |
The Entities will make
transfers to the State, at least according to the agreed cumulative
monthly schedule reported in Annex 1 of the MEFP. |
continuous |
IMF |
| 2. |
All privatization receipts
accruing to the central governments of the RS and the Federation,
and to the Cantons in the Federation will be placed in escrow accounts
alongside all succession monies pending a comprehensive strategy to
clear arrears. |
continuous |
IMF |
| 3. |
The Entities and the Brcko
District will implement laws establishing the excise attribution mechanism
as previously agreed with the World Bank and thereby avoid the double
taxation on excises. |
continuous |
World Bank |
| 4. |
There will be no new free
trade zones. |
continuous |
IMF |
| 5. |
Any changes to the current
indirect tax system should retain or strengthen the principle of harmonization. |
continuous |
IMF |
| 6. |
The Federation pension
fund will adhere to the cut-off dates for contribution collections
at the end of each month as specified in the 2000 pension law. The
RS pension fund will adhere to the cut-off date of the 10th of each
month for contributions collections. |
continuous |
IMF |
| 7. |
(a) The base of the Brcko
District sales tax will remain aligned with that in the Entities.
|
continuous |
IMF |
|
(b) The two rates of sales
tax in the Brcko District will be 8 and 18 percent unless changes
are agreed with IMF staff. |
continuous |
IMF |
| 8. |
A comprehensive strategy
to clear arrears will be prepared. All arrears, including frozen foreign
currency deposits, will be audited by the Supreme Auditor Institutions. |
End-June-2003 |
IMF |
| 9. |
Bosnia and Herzegovina
will not clear domestic government payment arrears that were accrued
before end-2000, pending a comprehensive strategy to clear arrears. |
continuous |
IMF |
| 10. |
There will be no offset
operations for tax liabilities that are incurred after 2001. |
continuous |
IMF |
| 11. |
Banking supervision will
be strengthened by enforcing the current prudential regulations. |
continuous |
IMF/World
Bank |
BOSNIA AND HERZEGOVINA
Supplementary Technical Memorandum of Understanding on
Definitions and Reporting Under the 2002-2003 Economic Program
December 2002
This memorandum sets out the understanding between the Government of
Bosnia and Herzegovina and the IMF mission regarding the definitions of
quantitative and structural performance criteria and targets for the Stand-By
Arrangement (Tables 1 and 2),
as well as data reporting required for monitoring the implementation of
the program.
I. Definitions
The following definitions are to be used in monitoring the program. In
the following definitions, the end-quarter test dates apply to the last
working day of each quarter for both banking and budgetary statistics.
A. Ceiling on the Stock of Gross Credit from
the Banking System to the General Government
Definitions:
- The general government is defined to include the State,
Entity (Federation, and Republika Srpska), cantonal (Federation) and
municipal budgets, Brcko budget, together with their respective extrabudgetary
funds. The definition also includes the Goods Reserve Directorates of
each entity. Extrabudgetary funds include, but are not limited to, the
pension funds, health funds, unemployment funds, and children's fund
in the two Entities and the State.
- The banking system consists of the Central Bank of Bosnia
and Herzegovina (CBBH) and the commercial banks in both Entities and
the District of Brcko.
- Gross credit is defined as all claims (e.g. loans, securities,
bills, and other claims in both convertible marka and foreign currencies).
For program purposes, those components of gross claims that are denominated
in foreign currencies will be converted into convertible marka at the
agreed accounting exchange rate prevailing on December 31, 2001.
Application of performance criteria:
- The quantitative value of banking system claims on the general government
will be monitored from the accounts of the banking system, as compiled
by the CBBH, and supplemented by information provided by the Ministries
of Finance of each Entity and the State.
- The ceilings on the stock of gross credit from the banking system
to the general government will be defined in terms of seven sub-ceilings
that sum to the ceiling for the general government. These seven sub-ceilings
will be on the stock of gross credit from the banking system to the
State government, the Federation of Bosnia and Herzegovina government,
the Republika Srpska government and municipalities, the Federation Cantons,
the Federation municipalities and the extrabudgetary funds. For the
purposes of program monitoring, compliance with the ceiling on banking
system credit to general government will require that each of these
seven sub-ceilings be observed independently.
B. Operation of the Central Bank of Bosnia and Herzegovina
Under the Central Banking Law and the program, the CBBH is required to
ensure that the value of its domestic liabilities does not exceed the
convertible marka counter-value of its net foreign exchange reserves.
Furthermore, the CBBH will not pay a dividend until its capital and reserves
exceeds 10 percent of its monetary liabilities.
Definitions:
- Net foreign exchange reserves are defined as the value
of foreign assets less the value of foreign liabilities, including assets
and liabilities denominated in convertible currencies or convertible
marka.
- Foreign assets are defined as (a) monetary gold and
(b) monetary authorities claims on nonresidents including currency bank
deposits, government securities, other bonds and notes, financial derivatives,
equity securities, and nonmarketable claims arising from arrangements
between central banks or governments.
- Foreign liabilities are defined to include: (i) foreign
exchange and convertible marka balances on the books of the CBBH due
to nonresidents, including foreign central banks (ii) credit balances
due to foreign central banks, governments, and foreign financial institutions;
(iii) forward and repurchase contracts of different types providing
for future payments in foreign exchange by the CBBH to nonresidents;
and (iv) any other liabilities due to nonresidents.
- Monetary liabilities are defined as the sum of (a) currency
in circulation, (b) credit balances of resident banks at the CBBH, and
(c) credit balances of other residents at the CBBH.
- Capital and Reserves are defined as (a) initial capital
and reserves of the CBBH, (b) shares, and (c) accumulated profits
of the CBBH since the beginning of its operation on August 11, 1997.
- Free reserves of the CBBH are defined as foreign exchange
reserves not utilized as backing for the currency. They therefore consist
of the stock of CBBH net foreign exchange reserves less the stock of
CBBH monetary liabilities.
Application of performance criteria:
- Foreign currency holdings will be converted into convertible marka
at the exchange rates of December 31, 2001, as published in the IMF
International Financial Statistics. Valuation changes will therefore
be monitored from the accounts of the CBBH, with information on net
foreign assets provided monthly by the CBBH.
C. Ceiling on External Payments Arrears
Definitions:
- External payment arrears are defined as overdue debt
service arising in respect of debt obligations incurred directly or
resulting from guarantees by the general government or the CBBH that
have been called, except on debt subject to rescheduling or restructuring.
- Debt obligations are defined as follows. The term "debt"
will be understood to mean a current, i.e., not contingent, liability,
created under a contractual arrangement through the provision of value
in the form of assets (including currency) or services, and which requires
the obligor to make one or more payments in the form of assets (including
currency) or services, at some future point(s) in time; these payments
will discharge the principal and/or interest liabilities incurred under
the contract. Debts can take a number of forms, the primary ones being
as follows: (i) loans, i.e., advances of money to the obligor by the
lender made on the basis of an undertaking that the obligor will repay
the funds in the future (including deposits, bonds, debentures, commercial
loans, and buyers' credits) and temporary exchanges of assets that are
equivalent to fully collateralized loans under which the obligor is
required to repay the funds, and usually pay interest, by repurchasing
the collateral from the buyer in the future (such as repurchase agreements
and official swap arrangements); (ii) suppliers' credits, i.e.,
contracts where the supplier permits the obligor to defer payments until
some time after the date on which the goods are delivered or services
are provided; and (iii) leases, i.e., arrangements under which property
is provided which the lessee has the right to use for one or more specified
period(s) of time that are usually shorter than the total expected service
life of the property, while the lessor retains the title to the property.
For the purpose of this program, the debt is the present value (at the
inception of the lease) of all lease payments expected to be made during
the period of the agreement excluding those payments that cover the
operation, repair, or maintenance of the property. Under the definition
of debt set out in point (a) above, arrears, penalties, and judicially
awarded damages arising from the failure to make payment under a contractual
obligation that constitutes debt are debt. Failure to make payment on
an obligation that is not considered debt under this definition (e.g.,
payment on delivery) will not give rise to debt.
- The general government is defined as above in section
"A".
Application of performance criteria:
- The ceiling on external payments arrears applies to the stock of overdue
payments on medium- and long-term debt contracted or guaranteed by the
general government or the CBBH.
- The ceiling on external payment arrears applies on a continuous basis.
- The limit on the stock of external payments arrears also applies to
the stock of overdue payments on short-term debt in convertible currencies
with an original maturity of up to and including one year contracted
or guaranteed by the general government. The limit excludes reductions
in connection with rescheduling of official and commercial debt and
debt buy-back.
D. Ceiling on Contracting or Guaranteeing of New Non-Concessional
External Debt
Definitions:
- Debt obligations are defined as above in section "C".
- 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 proceeding six-month period (plus a margin
of 0.75 percent) will be used.
- Non-concessional external debt refers to all debt creating
instruments with a grant element of less than 35 percent (as defined
above).
- New non-concessional external debt is defined as including
all debt (as defined above) contracted or guaranteed during the program
period. The ceiling will be on the increase in short-term, medium-term,
and long-term new non-concessional external debt from August 2, 2002.
- Short-term debt is defined as debt contracted or guaranteed
with an original maturity of up to and including one year.
- Medium-term debt is defined as debt contracted or guaranteed
with an original maturity of greater than one year and up to and including
five years.
- Long-term debt is defined as debt contracted or guaranteed
with an original maturity of greater than five years.
- The general government is defined as above in section
"A".
Application of performance criteria:
- The ceilings on the contracting or guaranteeing of new non-concessional
external debt after August 2, 2002, will be defined for each test date.
This excludes letters of credit at the State level for CIPS project
financing up to 40 million KM.
- The value of 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 arrangement, excluding those
payments that cover the operation, repair or maintenance of the property
being leased.
- Debt and leases will be valued in U.S. dollars at the exchange rates
prevailing at the time the contract or guarantees become effective.
- For program purposes, the following are not considered as non-concessional
debt and thus are excluded from the calculation of non-concessional
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.
- The ceiling on contracting or guaranteeing of new non-concessional
external debt excludes normal import-related financing.
E. Ceiling on Contracting or Guaranteeing of New Concessional
Debt
Definitions:
- Debt obligations are defined as above in section "C".
- Concessional loans are defined as above in section "D".
- The general government is defined as above in section
"A".
- The public sector is defined as general government and
public enterprises.
- A public enterprise is defined as an enterprise which
is more than 50 percent directly or indirectly owned by the state.
Application of performance criteria:
- Debt and leases will be valued in U.S. dollars at the exchange rates
prevailing at the time the contract or guarantees become effective.
- For program purposes, the following will be included in the calculation
of the amount of external debt contracted or guaranteed: (i) borrowing
from the IMF, the World Bank, EBRD, EIB, IFC, or bilateral co financing
of lending by these institutions; and (ii) concessional loans.
II. Data Reporting
The Bosnia and Herzegovina authorities will report the following data
to the Fund within the time limits listed below. The authorities will
also provide, no later that the first week of each month, a summary of
key macroeconomic policy decisions taken during the previous month. Any
revisions to past data previously reported to the Fund will be reported
to the Fund promptly, together with a detailed explanation. The Bosnia
and Herzegovina authorities will make every effort to move speedily towards
sending the required data by electronic mail.
All magnitudes subject to performance criteria or indicative targets
will be reported in millions of convertible marka where the corresponding
target is in convertible marka, or in millions of U.S. dollars where the
target is in U.S. dollars.
The Bosnia and Herzegovina authorities will supply the Fund with any
additional information that the Fund requests in connection with monitoring
performance under the program on a timely basis.
Monthly data reporting
The Bosnia and Herzegovina authorities will send to the Fund the following
data no later than 3 weeks after the end of each month:
(i) Transfer payments by Entities to the State;
(ii) Stock of free reserves of the CBBH; the balance sheet of the CBBH;
(iii) The commercial bank survey and monetary survey;
(iv) Banking supervision indicators including capital adequacy ratio,
loan-loss provisioning data, and bad loan information (classification);
(v) Revenues, expenditures and financing data for all levels of government
(including the State, Entities, and Cantonal (for FBiH));
(vi) Pension funds payment data and cut-off dates for contributions collection;
(vii) Revenues, expenditures, and financing data for the Brcko District;
(viii) Revenues, expenditures, and financing data for the extrabudgetary
funds (including health funds, unemployment funds, and (in the RS) the
children's fund);
(ix) Debt service payments by the State to creditors;
(x) Report on privatization revenues, including revenues received and
the balances held in escrow accounts;
(xi) Monthly Statistical Data on Economic and Other Trends review published
by the Federation's Office of Statistics and Monthly Statistical Review
published by the Republika Srpska Institute of Statistics;
(xii) Data sheets issued by the Republika Srpska Institute of Statistics
reporting on data that are not included in their Monthly Statistical Review.
Quarterly data reporting
The Bosnia and Herzegovina authorities will send to the Fund the following
quarterly data within the timeframes indicated:
(i) State debt service projections for current year;
(ii) Summary of government guarantees on quarterly basis;
(iii) Summary of government loans and degree of concessionality (grant
element);
(iv) Summary of short-term loans by government on quarterly basis;
(v) Budget execution data by individual canton;
(vi) Report on privatization revenues, including revenues received and
use of funds;
(vii) Summary of the financial activities of the RS Goods Reserve;
(viii) Execution of foreign-financed investment projects.
|
