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Bosnia and HerzegovinaLetter of Intent, Supplementary Memorandum on Economic and Financial Policies, and Supplementary Technical Memorandum of Understanding

Sarajevo and Banja Luka, Bosnia and Herzegovina
December 4, 2002

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.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

The overarching objective of Bosnia and Herzegovina's economic policies is to promote sustained economic growth and improved living standards through continued macroeconomic stability and further implementation of structural reforms necessary to create a fully-functioning market economy and enhance competitiveness. In this context, we view as central to our economic program the maintenance of the currency board arrangement, further fiscal consolidation, and continued structural reforms. In support of this program, we are requesting completion of the first review under the Stand-By Arrangement.

Based on discussions for the first review, the attached Supplementary Memorandum of Economic and Financial Policies assesses economic developments and policy implementation through September 2002 under the arrangement, and lays out the concrete policy measures to be taken during the remainder of 2002 and 2003.

As noted in the attached memorandum, overall policy implementation through September 2002 has been strong, but some requirements were not satisfied. In each case, corrective action has been taken. Accordingly, we are confident that the difficulties will not recur and that the end-December performance criteria will be fully adhered to. In that light, we request that the Executive Board of the IMF waive the non-observance of the quantitative performance criteria on the ceiling on credit from the banking system to the RS extra-budgetary funds, the Federation cantons, and the Federation municipalities for end-September 2002. The proposed performance criteria are set out in the attached Table 4 and further specified in the supplementary TMU, clarifying the definition of the performance criteria on external payments arrears and external debt.

To ensure smoother continuation of the Stand-By Arrangement while new administrations form following the October 5 elections, we have prepared budgets for 2003, which are consistent with the program. These will be submitted to the newly inaugurated parliaments and National Assembly for approval by early December 2002 and the details are described in the attached memorandum.

We expect the second, third, and fourth reviews under the arrangement to be conducted with the Fund as scheduled by mid-February 2003, mid-May 2003, and mid-August 2003, respectively. The second review will focus on the economic program for 2003 and beyond of the new administrations, in particular the budgets for 2003, rationalization of public expenditure, preparations for a restructuring of domestic claims on government, and strengthening financial market regulatory structures.

We believe that the policies described in the memorandum are adequate to achieve the objectives of our economic program, but we stand ready to take additional measures to meet these goals should the need arise. During the period of the arrangement, we will consult with the Fund on the adoption of any such measures that may be necessary in accordance with the Fund's rules on such consultations and we will provide the Fund with any information it requests for monitoring progress in program implementation.

We are committed to transparency in our economic policies, and we authorize the Fund to publish this letter and the SMEFP following Executive Board consideration of the first program review.

          Sincerely yours


Dragan Mikerevic
Chair of the Council of Ministers
Bosnia and Herzegovina

Alija Behemen
Prime Minister
Federation of
Bosnia and Herzegovina

Mladen Ivanic
Prime Minister
Republika Srpska

Anto Domazet
Minister of Treasury
of BiH Institutions
Bosnia and Herzegovina

Ms. Sefika Hafisovic
Acting Minister of Finance
Federation of Bosnia and Herzegovina

Simeun Vilendecic
Minister of Finance
Republika Srpska

Peter Nicholl
Central Bank of Bosnia and Herzegovina

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



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.


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.


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,


Anto Domazet
Minister of the Treasury of BiH Institutions

Sefika Hafisovic
Acting Minister of Finance
Federation of Bosnia and Herzegovina


Simeun Vilendecic
Republika Srpska


Table 1. Bosnia and Herzegovina: State Fiscal Operations, 2002-2003
(In millions of KM)







Administrative transfers




Debt service











Debt service







Balance (before grants)














Foreign loans




Succession money




Purchase of shares in IBRD and EBRD



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)


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)



Total receipts







Transfers from the budget







Total expenditures
















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)








Sales tax (including railways surcharge)








Trade tax











Debt service




Administrative transfers to the State




Transfers to the Pension and Health Funds1







Balance (before grants)










Domestic financing



  of which

reconstitution of succession money




Foreign financing




Privatization proceeds




Succession money



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
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



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


  • 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.


  • 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


  • 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


  • 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


  • 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.