Press Release: IMF Executive Board Approves €405.3 million Stand-By Arrangement for Bosnia and Herzegovina

September 26, 2012

Press Release No. 12/366
September 26, 2012

The Executive Board of the International Monetary Fund (IMF) today approved a 24-month SDR 338.2 million (about €405.3 million or about US$ 520.6 million) Stand-By Arrangement (SBA) for Bosnia and Herzegovina in support of the government’s economic program for 2012–14. The program aims at countering the effects of the worsening external environment and addressing domestic structural weaknesses. The Board’s decision enables the initial disbursement of SDR 50.73 million (about €60.8 million or US$78.1 million), with the remaining amount to be phased in over the duration of the arrangement, subject to successful completion of quarterly reviews.

The Executive Board also completed today the 2012 Article IV Consultation with Bosnia and Herzegovina, which discusses economic policies from a medium-term perspective. The Article IV Consultation usually occurs on an annual or biannual cycle for all IMF member countries, and is distinct from the approval of the SBA.

Following the Executive Board discussion on Bosnia and Herzegovina, Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, said:

“In recent months, Bosnia and Herzegovina’s economic recovery has been losing momentum and risks to the outlook have tilted to the downside. In this context, the authorities’ comprehensive economic program for the period ahead is timely and welcome.

“Better policy coordination and cooperation are key to economic success. To this end, further strengthening the Fiscal Council’s operational framework and efforts to make it the focal point for fiscal policy coordination would be essential.

“The authorities’ commitment to continued fiscal prudence is welcome. The measures to contain the 2012 general government deficit strike an appropriate balance between cyclical and longer-term fiscal considerations. Over the medium term, lasting improvements to the fiscal position can be achieved by reining in the wage bill, overhauling the pension system, and stepping up reforms of rights-based benefits and transfers. Freed-up budgetary resources would help finance much-needed infrastructure investment, which along with reforms to improve the business environment, will foster private sector activity and raise the country’s growth potential.

“Prudent financial sector policies have helped the financial system weather the global financial crisis well. Nevertheless, further enhancing the resilience of the financial sector calls for better cooperation between the central bank and the banking agencies as well as greater collaboration with supervisors abroad. With nonperforming loans trending up, continued close monitoring of credit quality and spillover risks from regional developments will be needed.”


Recent Economic Developments

Bosnia and Herzegovina’s past economic growth relied increasingly on domestic demand as the key driver. Private sector demand expansion was fuelled by a credit boom financed from abroad. This produced strong output growth amid a benign external environment and ample bank financing. However, the associated vulnerabilities became clear in the 2009 crisis when capital inflows came to a stop. Against this backdrop, the currency board arrangement, fiscal tightening, and financial support under the IMF’s previous SBA in 2009 helped safeguard macroeconomic stability.

The slow post-2009 economic recovery is losing momentum. Following the 2009 recession, the economy grew at a moderate pace in 2010–11. However, the pickup in economic activity did not spread from export-oriented industries to the wider economy. Domestic demand has been held back by stagnant wages and employment, and slow credit growth. Following steep declines in 2009–10, domestic investment has recovered some ground. Latest indicators point to a marked slowdown of economic activity amid falling external demand. Headline inflation has declined despite high world oil and food prices, and increases in utility prices and tobacco excises, while core inflation has remained below 1 percent, reflecting the softness of domestic demand. The current account deficit has started to narrow and official foreign exchange reserves have been volatile in recent months. Fiscal consolidation has continued, but the composition of expenditure has not improved. The banking system has remained relatively stable.

Program Summary

The authorities, cognizant of the risks emanating from the present uncertain global economic environment, have put together an economic program to create conditions for a sustained recovery.

The authorities’ economic program has four main objectives. First, it aims at improving national policy coordination, including by strengthening the role of the Fiscal Council. Second, fiscal consolidation is being accompanied by structural fiscal reforms to safeguard medium-term fiscal sustainability. Third, further steps to enhance the authorities’ crisis preparedness and contingency planning will safeguard the currency board and improve the resilience of the financial sector. Finally, the arrangement is expected to act as a catalyst for other reforms to create an environment conducive for private sector development.

Bosnia and Herzegovina joined the IMF on December 14, 1992, and its quota is SDR 169.10 million (about €202.7 million or US$260.3 million).


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