Statement by the IMF Mission in Bosnia and Herzegovina

Press Release No. 12/195
May 29, 2012

An International Monetary Fund (IMF) mission, led by Costas Christou, held discussions with the authorities of Bosnia and Herzegovina (BiH) during May 16–29, 2012 on the 2012 Article IV consultation and on a possible new program that could be supported by the Fund. At the conclusion of the visit, Mr. Christou made the following statement:

“After successfully weathering the initial effects of the global financial crisis, BiH’s economy is facing renewed pressures. The recovery, which started in 2010, has weakened amid signs that the euro zone crisis is negatively affecting BiH’s exports and capital inflows. Domestic demand remains subdued, held back by fiscal restraint, stagnant wages and slow credit growth. With the softness in the economy, inflation has been trending lower. We see no output growth in 2012 and the prospects beyond 2012 remain clouded by ongoing uncertainty in the euro zone and BiH’s own vulnerabilities.

“On the positive side, continued fiscal restraint helped contain the general government deficit within 3 percent of GDP in 2011, down from 4.2 percent of GDP in 2010. However, this was achieved in part through temporary measures, as national policy coordination weakened and progress on structural fiscal reforms slowed. Public finances are expected to remain under pressure in 2012 as the economy weakens.

“We welcome the prospect of adoption of the 2012 budget of the Institutions of BiH. This will remove an element of uncertainty in budget planning, allowing the Entities to revise their budgets and base them on more realistic tax revenue and financing assumptions. In the current environment, ongoing 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 banking system has been weathering the impact of the global financial crisis well. The sector as a whole returned to profitability in 2011 and banks have continued to build their capital buffers through capital injections and profit retention. Household deposits have grown strongly. However, nonperforming loans, which rose again slightly in the first quarter of 2012 after signs of stabilizing, act as a drag on credit growth. This is affecting particularly credit to the private sector, which is being crowded out by large government financing needs that are being met increasingly through bank borrowing.

“We also initiated discussions on a program that could be supported by the Fund. The authorities expressed commitment to a program that would provide a policy framework for macroeconomic stability, support renewed efforts to advance the unfinished reform agenda, and help BiH meet its external financing needs. The mission is prepared to return to BiH to continue program negotiations in the coming weeks. In the meantime, the authorities have committed to develop a clear common economic strategy, agree on the policy objectives, and identify steps for implementation of much-needed reforms.”



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