Bosnia and Herzegovina and the IMF

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Bosnia and HerzegovinaLetter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Sarajevo and Banja Luka, Bosnia and Herzegovina
May 31, 2002

The following item is a Letter of Intent of the government of Bosnia and Herzegovina, which describes the policies that Bosnia and Herzegovina intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Bosnia and Herzegovina, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

The attached Memorandum of Economic and Financial Policies (MEFP) describes the policies that the State, Federation and Republika Srpska governments and the Central Bank of Bosnia and Herzegovina intend to implement during this year and next. These policies are aimed at ensuring continued macroeconomic stability and supporting sustainable economic growth. In this context, we view as central to our economic program the maintenance of a prudent fiscal policy as well as a completion of the structural reform agenda required to create a fully-functioning market economy. In support of these policies, we are requesting a 15-month stand-by arrangement in the amount of SDR 67.6 million (40 percent of quota).

We believe that the policies described in the attached MEFP are appropriate to meet the objectives of our economic program, but we stand ready to take additional measures to meet these goals should the need arise. During the period of the arrangement, we will consult with the Fund on the adoption of any such measures that may be necessary in accordance with the Fund's rules on such consultations and we will provide the Fund with any information it requests for monitoring progress in program implementation.

The program will be evaluated on the basis of quarterly quantitative performance criteria and structural performance criteria and benchmarks (summarized in the attached Tables and Annexes of the MEFP).We will also conduct with the Fund four reviews of economic developments under the program; these reviews will be undertaken by mid-November 2002, mid-February 2003, mid-May 2003, and mid-August 2003 respectively. All of these reviews will assess actions taken to further strengthen the credibility of the Currency Board, notably in regard to fiscal and labor market developments, and adherence to the commitment to avoid incurring new expenditure arrears. The first review will concentrate on the implementation of the 2002 budgets, design of the 2003 budgets as well as the application of structural measures including an evaluation of the new treasury system and actions to strengthen corporate governance. Quantative and structural performance criteria for end-September and end-December have been established in the attached memorandum of Economic and Financial Policies. Quantitative performance criteria for end-March 2003 will be specified at the time of the first review and performance criteria for end-June will be specified during the second review. The second and third reviews will focus on the implementation of the 2003 budget and continued implementation of those structural reforms of critical importance for macroeconomic performance, including public sector reforms.




Dragan Mikerevic
Chair of the Council of Ministers
Bosnia i Herzegovina

Alija Behmen
Prime Minister
Federation of
Bosnia and Herzegovina

Mladen Ivanic
Prime Minister
Republika Srpska




Anto Domazet
Minister of Treasury of
BiH Institutions
Bosnia and Herzegovina

Nikola Grabovac
Minister of Finance
Federation of
Bosnia and Herzegovina

Milenko Vracar
Minister of Finance Republika Srpska


Peter Nicholl
Central Bank of Bosnia and Herzegovina

Attachments: Memorandum of Economic and Financial Policies
of the State and entity governments of Bosnia and Herzegovina

Memorandum of Economic and Financial Policies
For Bosina And Herzegovina

Use the free Adobe Acrobat Reader to view Tables 1-2 and Annexes 1-3

A. Introduction

1. In the six years since peace returned, significant progress has been made. The sense of confidence between the various communities has clearly begun to be restored and this is reflected in the increased momentum of refugee resettlement. And on the economic front, output has risen dramatically since its immediate post-conflict levels and inflation has stabilized at industrial country rates. These successes reflect the efforts of the peoples of Bosnia and Herzegovina, supported by the international community.

2. Significant challenges remain over the medium term. As international assistance declines from its recent extraordinary levels, economic growth will need to become self sustaining and less reliant on external aid. This transition, alongside the continued reintegration of the economy into the region and the ongoing transition to market-oriented economic structures, will provide the basis for increased prosperity and reduced unemployment and poverty. It will also set the stage for eventual EU accession.

B. Macroeconomic Outlook for 2002-2006.

3. In the context of the policies described in section C below, our goals for 2002-2003 are to stem the downward momentum in GDP growth rates, to maintain low inflation, and to secure a modest reduction in the external current account deficit:

  • At the BiH level, real GDP growth is projected to decline to around 2½ percent in 2002 before strengthening to 4 percent in 2003. In both years, activity will be buoyed by continued growth in the construction and services sectors but weakened by the industrial sectors, on balance allowing some increase in growth in 2003. In the Federation, recent privatizations and bank sector restructuring will provide support to activity. In the Republica Sprska (RS), in contrast, the signs are that output is already contracting and industrial activity will continue to weaken ahead of restructuring and privatization, offset somewhat by continued strength in agriculture.
  • CPI inflation is projected at around 2-3 percent at the BiH level in 2002-03, with the CPI in the RS likely to be a little higher as the process of price convergence between the two Entities is completed.
  • With aid inflows already declining, gross fixed investment rates will ease somewhat and alongside some strengthening in public savings, the current account deficit is projected to fall by about 2 percentage points of GDP to a little below 20 percent of GDP in 2003.

4. Looking further ahead, in the next five years reconstruction aid flows will likely halve from their recent extraordinary levels of over 10 percent of GDP annually, requiring a substantial reduction in the external current account deficit relative to GDP. If this is to be realized alongside the high public and private fixed investment rates needed to achieve sustained real GDP growth of 4-6 percent a year, domestic savings will need to rise significantly.

5. In the first instance, this will require a comprehensive rationalization of public spending so as to lower domestic consumption. This will also create room for increased public investment to refurbish public infrastructure over the medium term while maintaining public external indebtedness below 65 percent of GDP. In addition, private savings rates will need to rise, notably through retained earnings in the corporate sector. This will require significant moderation in labor costs and ongoing efforts to improve the efficiency of all aspects of corporate operations. We will look to the International Monetary Fund for guidance on steps to be taken in the area of macroeconomic, fiscal, and tax policies to secure these needed adjustments in domestic savings and investment balances.

6. But the provision of savings for investment in this way will not alone suffice to stimulate fixed investment and activity. Four other areas will be critical:

  • Corporate governance needs to be transformed through comprehensive privatization which is designed to provide for effective owner control of corporate activities and which brings know-how and capital into firms;
  • Relative price structures will need to be brought into line with international relative prices through further liberalization of trade structures and the removal of domestic distortions;
  • A considerably more business-friendly environment needs to be established through reform of the legal, regulatory, tax, and competition structures which encompass business activities;
  • A concentrated effort will be needed to address poverty and unemployment. This will include the provision of sustainable social safety nets, improved education and training, and the removal of structural barriers to small and medium-scale business growth and to employment. Our efforts will be guided by our Interim Poverty Reduction Strategy Paper which is envisaged to lead to a full Poverty Reduction Strategy Paper to be prepared in collaboration with civil society.

Reforms in these areas will be pursued with the assistance of the World Bank and other responsible aid agencies.

7. Alongside strengthened domestic savings, these measures will provide the basis for strong export led growth of economic activity over the medium term. On this basis, the external current account deficit could decline by as much as 10 percentage points of GDP over the next five years.

C. Macroeconomic Policy Framework 2002-03

8. To achieve these objectives our policy framework has three central elements:

  • Continued adherence to the strict currency board arrangement;

  • Prudent fiscal policies;

  • Further structural reforms.

Monetary and Exchange Rate Arrangements

9. The currency board arrangement has served us well. It has secured low inflation in a difficult environment. And it has done this even in the context of a sizeable correction to relative prices between the two Entities. After initial difficulties, the KM is now accepted throughout the country as the unit of account, a means of settlement, and a store of value. Recently, these achievements have been crowned by large conversions of DM notes held by households and firms to KM in the context of the introduction of euro notes and coins. As a result, international reserves have surged to provide over five months of import cover.

10. As a structural performance criterion, we will continue to maintain the strict currency board arrangement now in place. Under this arrangement, the Central Bank of Bosnia and Herzegovina is prohibited from extending credit to the government, from issuing central bank securities, and to granting credit to banks and other private agents, including through the purchase of securities. The currency board had been pegged to the DM. In light of the withdrawal of the latter, the currency board has de facto already been reanchored to the euro at the end-2001 DM:euro conversion rate. This arrangement will be reflected in the Central Bank law once amendments now in Parliament are passed. We will shortly adopt legislation to widen the permissible range for the reserve requirement imposed on commercial banks from the current 10-15 percent to
10-20 percent to provide some scope for discretionary policy adjustments that may be needed in future. But the applied reserve requirement will remain at the present rate of 10 percent during the program. Finally, the central bank will make no dividend payments to government until its capital equals or exceeds 10 percent of its monetary liabilities.

11. Commencing with this program, we will appoint the CBBH as the fiscal agent for the International Monetary Fund.

Fiscal policy

12. In 2002, we will implement budgetary policies that we project will secure a decline in the consolidated budget deficit for the whole country, including grants and on a commitment basis, from 6.3 percent of GDP in 2001 to 5.5 percent of GDP and a further decline to some 3 percent of GDP in 2003. We are also committed to securing, once and for all, to terminate the accrual of spending arrears that have so marred fiscal policy in the past. All levels of General Government in Bosnia and Herzegovina will also continue to abjure borrowing from domestic and external commercial sources, except as agreed in advance with the International Monetary Fund. As part of our efforts to minimize the need for such borrowing, we will transfer KM 110 million of the succession funds now held at State level to the Entities by end-May 2002. Its use at Entity level is described below. Both revenues and expenditures are projected to rise only modestly, with both declining relative to GDP.

13. This overall adjustment is reflected in the fiscal policies for the RS, the Federation, and at the State Level:

  • In the RS, the consolidated deficit on a commitment basis will decrease from 4.3 percent of RS GDP in 2001 to 0.8 percent in 2002. Underlying this, revenues for the central government are projected to increase by 4½ percent, while spending rises 11 percent on a cash basis. Revenues will be supported by strengthened tax administration across the board—on high duty goods (especially oil and tobacco), through implementation of the Tax Identification Number and the ASYCUDA++ system in customs—but budgeted proceeds from these efforts have been kept deliberately cautious. The base for the wage withholding tax has been widened to include all allowances, an extension we expect to exactly match the revenue losses arising from the reduction in the rate of tax. On the spending side, we will not increase the minimum wage. We will decrease the number of employees by 1,500 persons (2/3 in the Army and 1/3 in the police) from the current level of 44,000. In addition, we have established a contingency mechanism for spending, to reduce spending commitments across the board by a total of KM 8 million. We will also reimburse to the electricity utility KM 9 million in eight monthly installments starting May 2002, for electricity coupons distributed to pensioners. If a review by the IMF staff of revenue financing and macroeconomic developments to be completed in September 2002 is favorable, the temporarily delayed spending will be implemented thereafter. Amongst the extrabudgetary funds, the Health Fund is projected to experience a decline in revenues in 2002 owing to the decrease in contribution rates, and will secure a matching decline in spending commitments.
  • In the Federation, the consolidated deficit on a commitment basis will rise slightly in 2002 to 2.5 percent of Federation GDP from 1.8 percent in 2001. Revenues for the central government are budgeted to rise by 16 percent, but correcting this for several one-off receipts in 2001, the underlying increase is almost 30 percent in 2002. This reflects vigorous efforts to strengthen customs administration, including through implementation of the Tax Identification Number and the ASYCUDA++ system in customs. However, the yields from these efforts to strengthen tax administration are uncertain. In that light, we have established a list of "delayed spending commitments" (Annex 1) on which spending will not begin before end-September 2002 at the earliest. The IMF will review revenue, financing, and macroeconomic developments in mid-2002 and in the Autumn. If the latter review reaches favorable conclusions, spending on these items may begin in amounts agreed with the IMF staff at that time. This represents a prudent implementation of our budget in light of uncertainties over revenue yields and financing and we will immediately publish details of these decisions in the government gazette. Excluding these "delayed spending commitment" items, cash spending will rise by 14.1 percent. This amount includes severance packages of KM 10,000 each for 10,500 soldiers whose demobilization will reduce the army to a force of slightly more than 13,000 (Annex 2). This represents a major step towards our goal of a force of 7,000. Temporary financing for the severance package will be obtained from our share of the succession funds to be received from the State. Full reconstitution of the succession monies in escrow during 2002 will precede any release of "delayed spending commitments" items after September. We will actively seek additional donor support for this demobilization program. In addition, wages and hiring is frozen at the federation government level. Reforms to the war invalids programs will be expenditure reducing overall.
  • At the State level, the 2002 budget anticipates a deficit of 0.1 percent of GDP. Receipts of funds from the Entities' for debt service are matched by corresponding outflows to external creditors to service that debt. Revenues and expenditures will increase by 40 percent so as to finance the expansion of the State Border Service and the new State institutions.

14. For 2003, we envisage further progress in fiscal consolidation. We expect to lower the overall deficit from 5.5 percent of BiH GDP in 2002 to some 3 percent in 2003, though a further adjustment will be made if reconstitution of succession monies used during 2002 is incomplete. With declines in grant aid, albeit partly offset by our continued efforts to strengthen tax administration, this will require expenditure containment. This will include the savings yielded by the military demobilization effected in 2002 of over 1¼ percent of GDP, a decline in spending directly funded by grants of some 2 percent of GDP, and further spending efficiencies of some ¼ of a percentage point of GDP. In addition, in case succession monies used for demobilization in the Federation are not reimbursed in 2002, we will further tighten our deficit in 2003. At end-2003, public external debt is projected at 61.4 percent of GDP, compared with 57.7 percent of GDP at end-2001. The increase reflects activities funded by donors and a sizeable assumption of debt of state owned enterprises in 2002, and this ratio is projected to decline in the medium term. We will continue our attempts to reach agreement on the final outstanding issue from the 1998 Paris Club Agreement which concerns the penalty interest rate, the moratorium period, and coverage of the agreement on our obligations to the Government of Japan. During 2002, we will also assume the debts of certain state-owned enterprises to Russia for gas imports and will continue our efforts to identify and restructure our remaining former Comecon-related debts.

15. These fiscal policies in 2002-03 will be accompanied by continued initiatives to strengthen the harmonization of our fiscal systems with each other. Any changes to be made to the indirect tax system will retain or strengthen the principle of harmonization. In particular, both Entities and the Brcko District will implement the excise attribution mechanism and stop double taxation on excises. The Brcko District will revise its legislation to include excise taxes in the base for calculating the sales tax, align the base and tax rates for sales tax with those in the two entities, and bring retail units in the "Arizona" market into the tax net. On the spending side, we will complete during 2002 a comprehensive review of public expenditures with the assistance of the World Bank which is already underway. This review will assess the need for adjustments to current expenditures to make room for additional public investment, and will prioritize new public investments focusing on refurbishment of our infrastructure. We will act decisively and quickly to implement the key findings of the review. We will abjure "across the board" tax amnesties and restructure overdue obligations through normal bankruptcy procedures.

16. These steps will be buttressed by strengthened fiscal operations:

  • In each entity, we will complete the introduction of our Treasury system at the central level, and as a prior action under the program, we will prepare plans to extend our treasury systems to local governments and the extrabudgetary funds. These steps will also be taken at the State level.
  • We have agreed on a monthly schedule for transfers from the Entities to the State, both for debt service and administrative transfers (Annex 3). Adherence to this schedule will be a prior action and an ongoing commitment under the program.
  • We will take steps to better enforce tax collection. At the Federation level, we will as a prior action under the program pass the tax administration law already in Parliament that was designed in consultation with the U.S. Treasury. In addition, in both entities and the Brcko District, our customs administration will introduce the ASYCUDA++ information system to better enforce customs tariffs by July 2002.
  • We will project revenues prudently so as to minimize the risk of accumulation of new arrears, and, as part of our planning to extend our Treasury systems, we will take steps to eventually enable us to monitor new arrears. As part of the execution of those plans, we will clarify the potential conflict between the budget and labor laws so that wage entitlements are defined by the labor laws. In addition, to prevent accumulation of new pension arrears, we will adhere to defined cut-off dates (10th of each month in the RS, end of the previous month in the Federation) for contribution collections to pay pensions of the previous month. This is a structural benchmark under the program. We will also abstain from any offset operations for liabilities that were incurred after 2001.
  • We remain concerned by the very high level of debt and the associated issue of fiscal sustainability. Claims on the government, including external debts, the frozen foreign currency deposits, the war damage claims and spending arrears could sum to more than 150 percent of GDP. After appropriate preparation, we will initiate a domestic debate about the implications for policy including the possibility of partial payment of domestic claims. In the mean time, as a prior action under the program, we will reform our privatization legislation as necessary immediately to place all privatization receipts and succession monies at central, cantonal, municipal and state government levels in escrow accounts so that they are available for use as part of an eventual comprehensive settlement of the debt. 1 Any earlier use of these resources will be conditional on understandings to be reached with IMF staff. We will, as part of the same policy, desist from further repayment of arrears that were accrued before end-2000 until the comprehensive settlement.

Structural Policies

17. Structural policies need to be considerably strengthened if Bosnia and Herzegovina is to realize its growth potential and reduce unemployment and poverty.

18. Prime among these steps will be an improvement in the business environment. Under the aegis of a prospective credit from the World Bank and according to timetables to be agreed with the Bank in the context of that credit, we will:

  • facilitate easier entry of new firms by strengthening the legal framework for foreign direct investment. We will also harmonize State and Entity laws in this area and streamline registration processes for all firms;
  • lower administrative costs to business operation by strengthening legislation to protect creditors rights, formalizing the legal foundations for pledge collateral, and harmonize commercial laws between entities;
  • streamline business exit processes by implementing a thorough reform and harmonization of our bankruptcy laws and procedures.

19. These steps will be accompanied by strengthened privatization programs with the support of international donors grouped under the International Advisory Group on Privatization.

  • In the Federation, at least 8 large strategic enterprises are earmarked for privatization in 2002. Over the next five years, the remaining large strategic enterprises, including the Aluminum Company in Mostar, BiH telecom, and the generating and distribution components of Elektropreveda, will be sold.
  • In the RS, we will complete in 2002 the privatization of medium scale enterprises by selling the government's remaining share in these enterprises. We will aim to reduce the excessive dispersion of ownership in the newly privatized enterprises by abolishing limit on the share of individual companies which individual Privatization Investment Funds may hold. We will accelerate the privatization of the strategic enterprises, which includes enterprises in the manufacturing sector and the Brod petroleum refinery.

20. In support of private sector development, we will continue to negotiate with our trading partners to increase our market access, notably in the region and in the EU. While we enjoy unrestricted access to EU markets, some of our agricultural exports have been impeded by insufficient proof that they meet health and safety standards. To address this problem, the State will seek authority from the EU for BiH veterinary and agricultural control offices to provide a certification of inspection based on EU standards. Additionally, by mid-2002, free trade agreements will be in effect with all of the former Yugoslav republics. We intend to negotiate bilateral agreements with Turkey and Bulgaria during 2002. These policies will dramatically reduce the maximum and average tariffs of 15 and 6.8 percent, respectively. Finally, we will act to complete preparations for WTO accession as soon as the new law on Customs has been adopted by the State parliament with a view to entering WTO in early 2003.

21. Increased availability of disciplined credit for business for current operations and investment will form a critical element of our growth strategy. The financial system is currently small relative to GDP and depositor confidence in it, though much strengthened recently, needs to be deepened further. We will strengthen our financial system by completing banking sector privatization, strictly enforcing prudential banking regulations, and creating the infrastructure for a capital and securities market. All remaining state-owned banks will be privatized according to the timetable prescribed by law. Those state-owned banks that have not been privatized by the final deadline will undergo the bank resolution procedures prescribed by law. By 31 December 2002, all commercial banks will have a minimum capital of KM 15 million. Banks that fail to meet this minimum capital requirement will be placed under the bank resolution procedures prescribed by law. We intend to create a country-wide Deposit Insurance Agency to supercede the current Entity based arrangements. In the Federation, we intend to create a financial agency to channel certain credit lines from international donors to end users. However, this agency will not require any resources from the government, it will not engage in any commercial bank operations, and it will not extend any credits except those directly related to financial resources extended by international donors. Once the agency's work is complete, it will be abolished.

22. The poor quality of our statistical data base bedevils our efforts to formulate policies. With the support of the European Union, the IMF, the World Bank and bilateral donors, we will take the necessary steps to improve the quality and coverage of economic data. We will improve the coordination between the three statistical institutes and the Central Bank with a view to creating countrywide statistical data, including consolidated government finance statistics. In 2002, we will initiate the first comprehensive household budgetary survey, update the registry of enterprises and, with the support of CAFAO, finalize the preparation of comprehensive exports and import database broken down on a commodity basis. The Central Bank will compile and publish comprehensive quarterly balance of payments data by end 2002. During the following two years, we will produce our first set of national accounts on an expenditure basis, will produce real GDP estimates for 1998-2002, will continue our efforts to estimate the size of the parallel economy, will produce a revised CPI and a revised industrial production index based on updated weights, and improve the quality of data on foreign direct investment. We will also initiate the first population census since the end of the war and launch regular consumer and business surveys.


Technical Memorandum of Understanding
on Definitions and Reporting Under the 2002-2003 Economic Program

May 2002

This memorandum sets out the understanding between the government of Bosnia and Herzegovina and the IMF mission regarding the definitions of quantitative and structural performance criteria and targets for the stand-by arrangement (Tables 1 and 2) as well as data reporting required for monitoring the implementation of the program.

I. Definitions

The following definitions are to be used in monitoring the program. In the following definitions, the end-quarter test dates apply to the last working day of each quarter for both banking and budgetary statistics.

A. Ceiling on the Stock of Gross Credit from the Banking System to the General Government


  • The general government is defined to include the State, Entity (Federation, and Republika Srpska), cantonal (Federation) and municipal budgets, Brcko budget, together with their respective extrabudgetary funds. The definition also includes the Goods Reserve Directorates of each entity. Extrabudgetary funds include, but are not limited to, the pension funds, health funds, unemployment funds, and children's fund in the two Entities and the State.
  • The banking system consists of the Central Bank of Bosnia and Herzegovina (CBBH) and the commercial banks in both Entities and the District of Brcko.
  • Gross credit is defined as all claims (e.g. loans, securities, bills, and other claims in both convertible marka and foreign currencies). For program purposes, those components of gross claims that are denominated in foreign currencies will be converted into convertible marka at the agreed accounting exchange rate prevailing on December 31, 2001.

Application of performance criteria:

  • The quantitative value of banking system claims on the general government will be monitored from the accounts of the banking system, as complied by the CBBH, and supplemented by information provided by the Ministries of Finance of each Entity and the State.
  • The ceilings on the stock of gross credit from the banking system to the general government will be defined in terms of seven sub-ceilings that sum to the ceiling for the general government. These seven sub-ceilings will be on the stock of gross credit from the banking system to the State government, the Federation of Bosnia and Herzegovina government, the Republika Srpska government and municipalities, the Federation Cantons, the Federation municipalities and the extrabudgetary funds. For the purposes of program monitoring, compliance with the ceiling on banking system credit to general government will require that each of these seven sub-ceilings be observed independently.

B. Operation of the Central Bank of Bosnia and Herzegovina

Under the Central Banking Law and the program, the CBBH is required to ensure that the value of its domestic liabilities does not exceed the convertible marka counter-value of its net foreign exchange reserves. Furthermore, the CBBH will not pay a dividend until its capital and reserves exceeds 10 percent of its monetary liabilities.


  • Net foreign exchange reserves are defined as the value of foreign assets less the value of foreign liabilities, including assets and liabilities denominated in convertible currencies or convertible marka.
  • Foreign assets are defined as (a) monetary gold and (b) monetary authorities claims on nonresidents including currency bank deposits, government securities, other bonds and notes, financial derivatives, equity securities, and nonmarketable claims arising from arrangements between central banks or governments.
  • Foreign liabilities are defined to include: (i) foreign exchange and convertible marka balances on the books of the CBBH due to nonresidents, including foreign central banks (ii) credit balances due to foreign central banks, governments, and foreign financial institutions; (iii) forward and repurchase contracts of different types providing for future payments in foreign exchange by the CBBH to nonresidents; and (iv) any other liabilities due to nonresidents.
  • Monetary liabilities are defined as the sum of (a) currency in circulation, (b) credit balances of resident banks at the CBBH, and (c) credit balances of other residents at the CBBH.
  • Capital and Reserves are defined as (a) initial capital and reserves of the CBBH, (b) shares, and (c) accumulated profits of the CBBH since the beginning of its operation on August 11th 1997.
  • Free reserves of the CBBH are defined as foreign exchange reserves not utilized as backing for the currency. They therefore consist of the stock of CBBH net foreign exchange reserves less the stock of CBBH monetary liabilities.

Application of performance criteria:

  • Foreign currency holdings will be converted into convertible marka at the exchange rates of December 31, 2001, as published in the IMF International Financial Statistics. Valuation changes will therefore be monitored from the accounts of the CBBH, with information on net foreign assets provided monthly by the CBBH.

C. Ceiling on External Payments Arrears


  • External payment arrears are defined as overdue debt service arising in respect of debt obligations incurred directly or resulting from guarantees by the general government that have been called, except on debt subject to rescheduling or restructuring.
  • Debt obligations are defined as follows. The term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of this program, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property. (b) Under the definition of debt set out in point (a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt."The definition of general government is as described above.
  • Application of performance criteria:

    • The ceiling on external payments arrears applies to the stock of overdue payments on medium- and long-term debt contracted or guaranteed by the State, the Federation, the Republika Srpska, and the CBBH.
      • The limit on the change in external payments arrears also applies to the change in the stock of overdue payments on short term debt in convertible currencies with an original maturity of up to and including one year. The limit excludes reductions in connection with rescheduling of official and commercial debt and debt buy back. Accumulation of new external arrears is prohibited under the program.

    D. Ceiling on Contracting or Guaranteeing of New Non-Concessional External Debt


    • Debt obligations are defined as above in section "C".
    • Concessional loans are defined as those with a grant element of at least 35 percent of the value of the loan, using currency-specific discount rates based on the commercial interest rates reported by the OECD (CIRRS). The average CIRRS over the last ten years—plus a margin reflecting the repayment period (1 percent for repayment period of 15-19 years; 1.15 percent for repayment period of 20-19 years; and 1.25 percent for repayment period of 30 years or more)—will be used as discount rates for assessing the concessionality of loans of a maturity of at least 15 years. For loans with shorter maturities, the average CIRRS of the proceeding six-month period (plus a margin of 0.75 percent) will be used.
    • Non-concessional external debt refers to all debt creating instruments with a grant-element of less than 35 percent (as defined above).
    • New non-concessional external debt is defined as including all debt (as defined above) contracted or guaranteed by the general government or the CBBH during the program period. The ceiling will be on the increase in short-term, medium-term, and long-term new non-concessional external debt from end-March 2002.
    • Short-term debt is defined as debt contracted or guaranteed by the general government with an original maturity of up to and including one year.
    • Medium-term debt is defined as debt contracted or guaranteed by the general government with an original maturity of greater than one year and up to and including five years.
    • Long-term debt is defined as debt contracted or guaranteed by the general government with an original maturity of greater than five years.

    Application of performance criteria:

    • The ceilings on the stock of contracted or guaranteed new non-concessional external debt disbursed after March 31, 2002, will be defined for each test date. This excludes letters of credit at the State level for CIPS project financing up to 40 million KM.
    • The value of the stock of leases will be calculated as the present value, at the inception of the lease, of all lease payments expected to be made during the period of the leasing arrangement, excluding those payments that cover the operation, repair or maintenance of the property being leased.
    • Debt and leases will be valued in U.S. dollars at the exchange rates prevailing at the time the contract or guarantees become effective.
    • For program purposes, the following are not considered as non-concessional debt and thus are excluded from the calculation of non-concessional debt contracted or guaranteed: (i) borrowing from the IMF, the World Bank, EBRD, EIB, IFC, or bilateral cofinancing of lending by these institutions; and (ii) concessional loans.
    • The ceiling on the stock of contracted or guaranteed new non-concessional external debt excludes normal import-related financing.

    E. Ceiling on Contracting New Concessional Debt


    • Debt obligations are defined as above in section "C".
    • Concessional loans are defined as above in section "D".

    Application of performance criteria:

    • Debt and leases will be valued in U.S. dollars at the exchange rates prevailing at the time the contract or guarantees become effective.
    • For program purposes, the following will be included in the calculation of the amount of external debt contracted or guaranteed: (i) borrowing from the IMF, the World Bank, EBRD, EIB, IFC, or bilateral co financing of lending by these institutions; and (ii) concessional loans.

    II. Data Reporting

    The Bosnia and Herzegovina authorities will report the following data to the Fund within the time limits listed below. The authorities will also provide, no later that the first week of each month, a summary of key macroeconomic policy decisions taken during the previous month. Any revisions to past data previously reported to the Fund will be reported to the Fund promptly, together with a detailed explanation. The Bosnia and Herzegovina authorities will make every effort to move speedily towards sending the required data by electronic mail.

    All magnitudes subject to performance criteria or indicative targets will be reported in millions of convertible marka where the corresponding target is in convertible marka, or in millions of U.S. dollars where the target is in U.S. dollars.

    The Bosnia and Herzegovina authorities will supply the Fund with any additional information that the Fund requests in connection with monitoring performance under the program on a timely basis.

    Monthly data reporting

    The Bosnia and Herzegovina authorities will send to the Fund the following data no later than 3 weeks after the end of each month:

    (i) Stock of free reserves of the CBBH; the balance sheet of the CBBH.

    (ii) The commercial bank survey and monetary survey;

    (iii) Banking supervision indicators including capital adequacy ratio, loan-loss provisioning data, bad loan information (classification);

    (iv) Revenues, expenditures and financing data for all levels of government (including the State, Entities, and Cantonal (for FBiH));

    (v) Pension funds payment data and cut-off dates for contributions collection;

    (vi) Revenues, expenditures and financing data for the Brcko District;

    (vii) Revenues, expenditures and financing data for the extrabudgetary funds (including health funds, unemployment funds and (in the RS) the children's fund).

    (viii) Debt service payments by the State to creditors.

    (ix) Report on privatization revenues, including revenues received and the balances held in escrow accounts.

    (x) Monthly Statistical Data on Economic and Other Trends review published by the Federation `s Office of Statistics and Monthly Statistical Review published by the Republika Srpska Institute of Statistics.

    (xi) Data sheets issued by the Republika Srpska Institute of Statistics.
    reporting on data that are not included in their Monthly Statistical Review

    Quarterly data reporting

    The Bosnia and Herzegovina authorities will send to the Fund the following quarterly data within the timeframes indicated:

    (i) State debt service projections for current year;

    (ii) Summary of government guarantees on quarterly basis;

    (iii) Summary of government loans and degree of concessionality (grant element);

    (iv) Summary of short-term loans by government on quarterly basis;

    (v) Budget execution data by individual canton;

    (vi) Report on privatization revenues, including revenues received and use of funds.

    (vii) Summary of the financial activities of the RS Goods Reserve;

    (viii) Execution of foreign-financed investment projects.

    1 For the Federation central government, its share of the succession monies will be used to finance the military demobilization scheme, and during 2002, those monies will be reconstituted prior to release of any "delayed spending commitment" items.