Press Release: IMF Executive Board Approves €405.3 million Stand-By Arrangement for Bosnia and Herzegovina
IMF News, September 26, 2012
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- Published: September 26, 2012
Approval and Financial Terms
- Duration: 24-month Stand-By Arrangement (SBA).
- Approved amount: SDR 338.2 million (about €405.3 million or about US$ 520.6 million).
- Initial disbursement: SDR 50.73 million (about €60.8 million or US$78.1 million).
- Remaining amount: to be phased in over the duration of the arrangement, subject to successful completion of quarterly reviews.
- Purpose: in support of the government’s economic program for 2012–14 aimed at countering the effects of the worsening external environment and addressing domestic structural weaknesses.
Executive Board Action and Article IV Consultation
- The Executive Board completed the 2012 Article IV Consultation with Bosnia and Herzegovina, which reviews economic policies from a medium-term perspective and is distinct from SBA approval.
- Following the discussion, Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, highlighted key concerns and priorities:
- Recent slowdown: “In recent months, Bosnia and Herzegovina’s economic recovery has been losing momentum and risks to the outlook have tilted to the downside.”
- Policy coordination: “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.”
- Fiscal stance: “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.”
- Medium-term fiscal reforms recommended: reining in the wage bill, overhauling the pension system, and stepping up reforms of rights-based benefits and transfers to free up budgetary resources for infrastructure investment.
- Financial sector resilience: “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.”
- Monitoring risks: “With nonperforming loans trending up, continued close monitoring of credit quality and spillover risks from regional developments will be needed.”
Annex — Recent Economic Developments
- Growth drivers and vulnerabilities:
- Past growth increasingly relied on domestic demand, fuelled by a credit boom financed from abroad.
- The 2009 crisis exposed vulnerabilities when capital inflows stopped.
- Currency board arrangement, fiscal tightening, and IMF financial support under the previous SBA in 2009 helped safeguard macroeconomic stability.
- Post-2009 recovery and current trajectory:
- Economy grew at a moderate pace in 2010–11, but the pickup did not spread from export-oriented industries to the wider economy.
- Domestic demand constrained by stagnant wages and employment, and slow credit growth.
- Domestic investment recovered some ground after steep declines in 2009–10.
- Latest indicators point to a marked slowdown amid falling external demand.
- Inflation and external sector:
- Headline inflation has declined despite high world oil and food prices, and increases in utility prices and tobacco excises.
- Core inflation has remained below 1 percent, reflecting softness of domestic demand.
- Current account deficit has started to narrow.
- Official foreign exchange reserves have been volatile in recent months.
- Fiscal and banking developments:
- Fiscal consolidation has continued, but the composition of expenditure has not improved.
- The banking system has remained relatively stable.
Program Summary and Objectives
- Rationale: Authorities’ program designed to create conditions for a sustained recovery amid uncertain global environment.
- Four main objectives:
- Improve national policy coordination, including by strengthening the role of the Fiscal Council.
- Pursue fiscal consolidation accompanied by structural fiscal reforms to safeguard medium-term fiscal sustainability.
- Enhance crisis preparedness and contingency planning to safeguard the currency board and improve financial sector resilience.
- Use the arrangement as a catalyst for other reforms to create an environment conducive for private sector development.
Key Statistics and Membership
- Bosnia and Herzegovina joined the IMF on December 14, 1992.
- Bosnia and Herzegovina’s quota: SDR 169.10 million (about €202.7 million or US$260.3 million).
International Monetary Fund — Press Release No. 12/366, September 26, 2012