Press Release No. 11/426

Press Release No.11/426
November 22, 2011

An International Monetary Fund (IMF) team led by Costas Christou visited Bosnia and Herzegovina (BiH) during November 9–22 to hold discussions with the authorities about recent economic developments and government policies. At the conclusion of the visit Mr. Christou made the following statement today in Sarajevo:

“The near-term economic outlook for BiH has weakened. The recovery that started in mid-2010 is at a risk of being derailed, as the region becomes caught in the downward trend of the euro area. We are now projecting real GDP growth at 1.7 percent in 2011 and 0.7 percent in 2012.

“BiH is a small open economy and therefore is vulnerable to a possible economic downturn. All levels of government are facing financing pressures. In addition, the policy drift since the October 2010 elections has weakened the national policy coordination needed to design an effective response to the emerging challenges.

“Our discussions focused on budgetary policies for 2012. We urge the authorities to speedily agree on the 2012–14 Global Fiscal Framework to provide a firm basis for 2012 budget planning. The initial drafts of the budgets elaborated by the Institutions of BiH and the Entities rely on overly optimistic revenue assumptions and lack overall consistency. They also assume heavy bank borrowing by the Entities, which may not be realistic. In the current environment, expenditure restraint is critical to safeguard the stability of public finances at all government levels. We encourage the governments to move beyond one-off savings measures and step up reforms of public sector wages and employment, war-related benefits, and the pension and health systems.

“The financial sector is also facing pressures, with nonperforming loans on the rise. It will be important for the banking supervisors and the Central Bank of Bosnia and Herzegovina to maintain close monitoring of the banking sector’s health and to ensure that the banks remain liquid and well capitalized.

“We encourage the authorities to develop a clear common economic strategy, agree on the policy objectives, and accelerate implementation of the much-needed reforms. That is the best way to strengthen the resilience of the economy and to improve its medium-term prospects.”