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Press Release No. 99/26
June 28, 1999
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Augmentation and Extension of Bosnia and Herzegovina's Stand-By Credit

The International Monetary Fund (IMF) today approved an augmentation of SDR 16.91 million (about US$23 million) and an extension-through end-April 2000-of Bosnia and Herzegovina's stand-by credit that was approved on May 29, 1998, in an amount equivalent to SDR 60.6 million (about US$81 million). (See Press Release No. 98/19.) This brings total financial support to SDR 77.51 million (about US$ 104 million). Today's decision was made in conjunction with completion of the first review, and makes an amount equivalent to SDR 29.03 million (about US$39 million) available immediately.

In commenting on the Executive Board discussion on Bosnia and Herzegovina, Stanley Fischer, First Deputy Managing Director of the IMF, said:

"Directors commended the authorities for the solid macroeconomic performance in 1998, particularly as regards the continued decline in inflation. They considered that this success stemmed from strict adherence to currency board rules, together with prudent fiscal policies. Moreover, Directors praised the authorities for persevering with their stabilization and reform efforts despite the challenges posed by the Kosovo conflict.

"Directors considered that further strengthening of government finances was critical, and urged the authorities, particularly those at BiH state level, to improve the timeliness of reporting budget execution. They also urged the authorities to improve the budgetary process, including by enhancing transparency and by bringing off-budget expenditure on the budget. They noted that Donor support to finance budgetary gaps arising from the Kosovo conflict should enable all levels of government to implement their budgets for 1999. At the same time, Directors stressed that the authorities should refrain from undertaking new expenditure commitments beyond those contemplated in the 1999 budgets unless additional resources become available.

"Directors welcomed the satisfactory operation of the Currency Board Arrangement, and the increased acceptance of the convertible marka (KM). They encouraged the authorities to accelerate and implement forcefully, the comprehensive reform of the payments system.

"Directors stressed that the authorities should accelerate structural reforms and improve governance in order to foster sustained growth. They urged the governments to eliminate discretionary tax and customs tariff exemptions, including for foreign investors, to be more even-handed and transparent in their approach to the payment of social benefits, and to improve customs and tax administrations. Other priorities were to accelerate privatization of banks and enterprises, and to close insolvent banks.

"Directors noted that political difficulties continue to hinder policy implementation in many areas of reform. In this connection, they highlighted the importance of the authorities demonstrating ownership of their program. Recent accomplishments were encouraging and an intensification of the authorities' efforts to implement structural reforms was urged.

"Directors reiterated their support for the BiH authorities' adjustment and reform efforts and wished them every success," Fischer said.

ANNEX

Program Summary

Bosnia and Herzegovina has made important progress toward a sustainable market economy, and economic developments have been broadly in line with program1 expectations. Output expanded by approximately 20% during 1998, although it remains at one-third its level before the 1992-95 war, and economic recovery remains weak and largely aid driven. During 1999, real growth is expected to slow to about 8%-owing to the impact of the Kosovo conflict. Inflation is expected to be less than 5% in convertible marka (KM) terms through continued fiscal restraint and firm application of currency board rules. Policies for 1999 aim to further expand domestically financed private investment to set the stage for decreasing reliance on external assistance, though in the near term, substantial inflows of external assistance on concessional terms are essential.

The currency board arrangement was established in mid-1997, and, together with prudent fiscal policies, has been instrumental in achieving solid macroeconomic performance. The central bank (CBBH) has expanded its branch network throughout the country, set up reserve accounts for all domestic banks, and introduced the KM as the new currency. Inflation has continued to decline in areas of the country where the KM, which is at 1:1 parity with the deutsche mark, is the dominant currency.

The fiscal system consists primarily of budgets for the State of Bosnia and Herzegovina and the two Entities (the Federation of Bosnia and Herzegovina and the Republika Srpska). In June 1998, ad hoc transfers from the Entities to finance the State were replaced by automatic transfers from Entity budgets to cover the State administrative budget and external debt service. For both Entities, fiscal plans for 1999 specify that 90% of budgeted expenditures are to be covered by their own resources, with the remaining10% covered through external grants and concessional loans. There will be no recourse to domestic financing of the 1999 budgets.

Structural reforms have suffered delays, owing in part to the complex governmental decision-making process. During the fourth year of the reconstruction program, Bosnia and Herzegovina aims to make progress on privatization of banks and enterprises; reform of the payments systems; liquidation of payment bureaus; strengthening the financial system; development of treasury systems and improved government administration; greater transparency and accountability at all levels of government; reform of the pension and health systems; and consistent implementation of a simplified customs tariff system throughout the country.

On December 20, 1995, Bosnia and Herzegovina succeeded to the membership in the IMF of the former Socialist Federal Republic of Yugoslavia, effective December 14, 1992. Its quota2 is SDR 169.1 million (about US$227 million). Its outstanding use of IMF credit currently totals SDR 47 million (about US$63 million).


Bosnia and Herzegovina: Main Economic and Financial Indicators, 1995-991

             
             
 

1995

1996

1997

1998

1998

1999

       

Prog.

Est.

Prog.

             
             

Population (in millions)

4.2

4.1

4.2

4.2

4.2

4.3

GDP (in millions of U.S. dollars)

1,867

2,741

3,423

5,956

4,082

4,533

Industrial production (percent change)2

           

Federation

341

122

34

...

24

...

Republika Srpska

-13

20

31

...

22

...

Employment, end-period3

220,396

338,656

340,361

...

407,047

...

Wages (KM/month)4

           

Federation

76

296

466

...

574

...

Republika Srpska5

60

85

138

...

210

...

             
   

(Percent change)

   
             

Real GDP (annual average)

21

69

30

30

18

8

CPI6

           

Federation (in KM terms)

-4

-25

14

10

5

3

Republika Srpska (in YUD terms)

118

66

3

...

38

...

Republika Srpska (DM-based index)5

21

17

-7

-12

2

5

             
 

(Percent change, end-of-period)

             

Money and credit7

           

Broad money

8

96

52

...

31

32

Foreign assets (net)

42

52

-16

...

3

16

Domestic assets (net)

-33

45

68

...

28

16

             
   

(In percent of Entity GDP)

   

Fiscal balances8

           

Federation

           

Revenue

. . .

10

13

. . .

13

15

Expenditure

. . .

13

14

. . .

15

17

Balance8

. . .

-3

-1

. . .

-2

-2

Republika Srpska9

           

Revenue

. . .

24

15

. . .

19

30

Expenditure

. . .

24

15

. . .

24

33

Balance9

. . .

0

0

. . .

-5

-4

             
 

(In millions of U.S. dollars; unless otherwise indicated)

             

External current account balance10 11

-570

-1,306

-1,482

-2,005

-1,287

-990

Exports11

152

336

575

822

817

955

Imports11

-1,082

-1,882

-2,333

-3,007

-2,573

-2,398

             

Foreign assets12

           

In millions of U.S. dollars

207

458

279

. . .

338

441

In months of merchandise imports

1.9

2.4

1.3

. . .

1.4

2.2

             

External debt13

           

(In millions of U.S. dollars)

3,361

3,620

4,076

5,837

2,879

3,055

(In percent of GDP)

180

132

119

98

71

67

Debt service (in percent of exports of goods and services)

118

53

16

16

17

8

             

Memorandum items:

           

Exchange rates (period average)

   

Convertible marka (KM) per deutsche mark

. . .

. . .

1.0

1.0

1.0

1.0

BiH dinar per deutsche mark14

100

100

100

. . .

. . .

. . .

Yugoslav dinar per deutsche mark15

2.4

3.5

3.9

. . .

6.4

. . .

Croatia kuna per deutsche mark

3.6

3.6

3.5

3.6

3.3

. . .

             
             

Sources: Data provided by the authorities; and IMF staff estimates.

             

1Data refer to the entire country, unless otherwise indicated.

2Period average. Data for industrial production in both Entities are affected by post-war instability in the sample base.

3Bosnian-majority area prior to November 1996, Federation thereafter. Data for 1998 include military personnel.

4Data refer to average wages paid in a particular period, not average earnings in that period; only firms paying wages in a particular month are included in the data.

5Measured in DM using the RS parallel market exchange rate for the Yugoslav dinar (YUD).

6Period average retail price index. Data for both Entities are affected by post-war adjustments to market pricing.

7Country-wide monetary aggregates. In percent of beginning of year broad money stock.

8No net domestic financing of the budget deficit, other than arrears, in 1996-98.

9Excludes municipal government operations. Data for 1996 exclude military expenditures financed by external grants.

10Excluding official transfers.

11Data for 1995-97 are rough estimates for the whole territory of Bosnia and Herzegovina.

12Stock at end of period. Foreign assets of the monetary authorities, excluding earmarked funds and blocked accounts; including foreign exchange held by Payments Bureaus.

13Projected external debt and debt service for 1998 exclude debt relief.

14Official rate. Parallel rate not collected by the Central Bank of BiH. The BH dinar was replaced by the convertible marka (KM) in mid-1998.

15YUD/DM exchange rate in the parallel market in Belgrade area, as reported by the NBFRY. The official exchange rate in the FR Yugoslavia was set at YUD 3.3=DM 1 from December 1995 to March 1998, and YUD 6.0=DM 1 since March 31, 1998.

 

1Details of the program will be available via the IMF's website: http://www.imf.org.external/np/loi/mempub.asp
2A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.


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