IMF Executive Board Approves US$1.57 Billion Stand-By Arrangement for Bosnia and Herzegovina

Press Release No.09/258
July 8, 2009

The Executive Board of the International Monetary Fund (IMF) today approved a 36-month SDR 1.01 billion (about US$1.57 billion) Stand-By Arrangement for Bosnia and Herzegovina to support an economic program designed by the authorities to mitigate the effects of the global financial crisis. The approval makes SDR 182.63 million (about US$282.37 million) immediately available and the remainder in installments subject to quarterly reviews.

The authorities’ program aims to safeguard the currency board, consolidate public finances and bring them on a sustainable medium-term path, maintain adequate liquidity and capitalization of banks, secure sufficient external financing, and restore confidence.

Following the Executive Board discussion on Bosnia and Herzegovina, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, said:

“Bosnia and Herzegovina exhibited solid growth performance in recent years, largely reflecting the effects of reforms in key sectors, the benefits of the currency board, and a favorable external environment. Robust growth has been increasingly accompanied by macroeconomic imbalances, as rapid credit expansion, funded by large capital inflows, drove domestic demand past sustainable levels. The loosening of fiscal and income policies in 2008 further aggravated the overheating and left public finances vulnerable when the global financial crisis hit. Against this background, the corrective policies adopted by the authorities, along with international financial support, will contribute to realizing an orderly adjustment.

“In these circumstances, the authorities’ economic and financial policies are rightly geared toward safeguarding the currency board arrangement, which has served the country well. A determined implementation of the fiscal income and financial sector policies is the best guarantee of the continued viability of the currency board.

“The authorities’ fiscal policy strikes an appropriate balance between the near-term adjustment and the reforms to ensure medium-term sustainability. The large structural fiscal deficit, financing constraints, and the need to support the currency board mean that automatic fiscal stabilizers have limited room to operate. The containment of recurrent expenditure will create fiscal space for public investment and social spending. Better targeted social programs would help the most vulnerable groups. The authorities’ determination to undertake difficult structural fiscal reforms—essential for improved effectiveness of public spending and medium-term sustainability—is welcome.

“Steps to maintain confidence in the banking system are also welcome. The program calls for enhanced monitoring of financial stability by establishing a standing committee in charge of crisis prevention and management, and by strengthening the capacity to conduct stress tests. Foreign parent banks’ commitment to maintain exposures to their subsidiaries and enhance the subsidiaries’ capital as needed is critical for the stability of the banking system. The authorities are also taking steps to bolster the deposit insurance framework and will need to improve bank resolution procedures.

“Given the possibility that the external economic environment may deteriorate and the challenge of implementing fiscal policies, clear communication of the authorities’ policy objectives and effective public engagement on the benefits of reforms are of prime importance. The authorities’ strong commitment to appropriate policies and to undertaking measures as needed to achieve the program’s economic and financial objectives bode well for a successful outcome,” Mr. Kato stated.

Recent Economic Developments

Benefiting from a favorable external environment, the currency board, and the effects of reforms in key sectors, growth averaged 6 percent per year during 2003-08, while inflation remained low. Bank privatizations and reforms in the financial sector, along with improved growth prospects, attracted large capital inflows. However, with capital inflows driving a domestic demand boom, internal and external imbalances worsened: growth of bank credit to the private sector rose sharply, core inflation accelerated, and the current account deficit widened. Loose fiscal and incomes policies also contributed to the overheating of the economy.

The negative fallout from the global crisis started to become increasingly evident in late 2008. Stock market indices slumped, international reserves began to decline, bank credit growth came to a halt, and financial soundness indicators started to deteriorate. With bank credit drying up, construction activity faltered, and a number of enterprises began to lay off workers. Revenue performance weakened, while expenditure, driven by increases in wages and social benefits, rose sharply. As a result, the general government deficit widened to 4 percent of GDP from a near-balance in 2007.

Program Summary

The authorities’ economic program is designed to safeguard the currency board and cushion the effects of the deteriorating external environment, while adopting policies to redress fiscal imbalances and strengthen the financial sector. The program should help position the country’s economy for a strong recovery once the global economic environment improves, and, in the medium-term, help set the stage for sustainable growth and convergence with the European Union by providing a framework for structural reforms to strengthen the economy’s supply side, and safeguard competitiveness.

The specific objectives of the program are to:

• Reduce the structural fiscal balance to limit the government's financing needs and bring public finances on a sustainable medium-term path;

• Reestablish public wage restraint;

• Support adequate liquidity and capitalization of banks; and

• Secure sufficient external financing and improve confidence.

Bosnia and Herzegovina joined the IMF on December 14, 1992, and its quota is SDR 169.10 million (about US$261.45 million). Its latest arrangement with the IMF was a Stand-By Arrangement that expired on February 29, 2004.

Bosnia and Herzegovina: Selected Economic Indicators, 2005–09



2005 2006 2007 2008 2009





  Est. Proj.
  (Percent change)

Real GDP

3.9 6.9 6.8 5.5 -3.0

CPI (period average) 1/

3.6 6.1 1.5 7.4 1.6

Money and credit (end of period)


Broad money

18.2 24.7 21.6 4.3 0.6

Credit to economy

27.5 23.3 28.1 20.8 0.0
  (In percent of GDP)

General government budget



45.5 47.4 47.4 45.8 45.0

Expenditure (on a commitment basis)

44.7 45.2 47.5 49.9 49.7

Overall balance

0.8 2.2 -0.1 -4.0 -4.7

External public debt

25.6 21.2 18.3 17.1 21.5

NPV of external public debt

19.6 16.2 14.0 13.0 16.5

Total public debt

25.6 22.0 29.8 27.8 34.7
  (In millions of euros)

Balance of payments

Exports of goods and services

2,832 3,589 4,062 4,580 3,843  

Imports of goods and services

6,393 6,493 7,656 8,688 7,050

Current account balance

-1,555 -816 -1,401 -1,842 -1,201

(In percent of GDP)

-18.0 -8.4 -12.7 -14.7 -9.7

Gross official reserves

2,145 2,761 3,425 3,219 2,932

(In months of imports)

4.0 4.3 4.7 5.5 4.7

External debt service

267 412 326 364 433

(In percent of exports of goods and services)

9.4 11.5 8.0 8.0 11.3

Exchange rate regime

Currency board since August 1997

Exchange rate, July 8, 2009

1KM = Euro 0.5113

Real effective exchange rate (2000=100, increase=appreciation) 2/

87.8 89.8 88.2 90.1 ...

Sources: Bosnian authorities; and IMF staff estimates and projections.
1/ In 2006, affected by the VAT introduction.
2/ Adjusted for VAT effects.


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