IMF Completes Second and Third Reviews under Stand-By Arrangement with Bosnia and Herzegovina, Approves €132.8 million Disbursement

Press Release No. 10/388
October 15, 2010

The Executive Board of the International Monetary Fund (IMF) today completed the second and third reviews of Bosnia and Herzegovina's economic performance under a program supported by a 36-month Stand-By Arrangement (SBA). The completion of the reviews enables the immediate disbursement of an amount equivalent to SDR 118.37 million (about €132.8 million or US$187.1 million), of which the authorities intend to draw SDR 33.82 million, bringing total disbursements under the program to an amount equivalent to SDR 338.2 million (about €379.4 million or US$534.6 million). In completing the review, the Executive Board approved request for waiver of nonobservance of continuous performance criterion on the accumulation of domestic payment arrears and waiver of applicability of the end-September 2010 performance criterion on net bank credit to the government.

The SBA was approved on July 8, 2009 (see Press Release No.09/258). Following the Executive Board's discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

"Bosnia and Herzegovina’s satisfactory implementation of policies supported by the Stand-By Arrangement is proceeding amidst a challenging economic and political environment. Fiscal restraint is addressing large imbalances of recent years and structural fiscal reforms have advanced. Strong implementation by the newly-elected governments of the structural reform agenda is needed to ensure fiscal and external sustainability and provide the basis for robust, sustainable growth.

"Attaining the program’s 2010 fiscal target is the first step towards restoring fiscal sustainability. The authorities have demonstrated expenditure restraint and have adopted measures to ensure that the 2010 general government deficit objective will be met. Implementation of reforms of war-related benefits and the reduction of current expenditures by the Federation’s cantons will be essential in this regard.

"The 2011 fiscal deficit target of 3 percent of GDP strikes an appropriate balance between the need for fiscal tightening and promoting the incipient economic recovery. Medium-term fiscal consolidation will need to be accompanied by a shift from recurrent to capital expenditures. With government expenditure now in excess of 50 percent of GDP, policies should focus on reducing current expenditure by intensifying reforms of rights-based benefits to improve their efficiency through better targeting of the poor and most vulnerable, reining in the public wage bill, and putting the pensions systems on a sustainable footing. Freed-up resources will help finance badly needed infrastructure investments, which alongside reforms to tackle labor market rigidities and improve the business environment, will set the stage for a robust, sustainable growth.

"The authorities’ financial sector policies have been appropriate, helping preserve financial stability in the face of the global financial crisis. Foreign parent banks’ commitment to maintain their exposure vis-à-vis Bosnia and Herzegovina and keep their subsidiaries well capitalized further strengthened market confidence. Rising non-performing loans and declining bank profitability call for continued vigilance and close monitoring of developments in credit quality and spillover risks from regional developments".



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