Press Release: IMF Approves Stand-by for Bosnia and Herzegovina

IMF News, May 29, 1998

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Press Release: IMF Approves Stand-by for Bosnia and Herzegovina

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Bibliographic details

• Published: May 29, 1998

Summary of the IMF decision

• The International Monetary Fund (IMF) approved a 12-month stand-by credit for Bosnia and Herzegovina in an amount equivalent to SDR 60.6 million (about US$81 million).
• Of the total stand-by, an amount equivalent to SDR 24.2 million (about US$32 million) is available immediately.

Background and macroeconomic context

• The 1992-95 war left most of Bosnia and Herzegovina devastated.
• Real GDP growth is estimated at 30-50 percent annually in recent years, reflecting increases in capital expenditures and net exports; GDP in 1997 is still estimated to be only half of the 1990 level.
• The unemployment rate remains about 40 percent of the labor force; this is exacerbated by demobilization and the return of refugees.
• Inflation varied among regions; the hyperinflation of 1992-94 was followed by a decline in prices due to improved access to imported consumer goods, a sharp tightening of fiscal and monetary policies, and successful pegging of local currencies in some regions to the Deutsche mark.
• The new constitution (Dayton peace treaty, December 1995) established a decentralized system: a central ("State") government with limited powers and substantial responsibilities reserved for regional ("Entity") governments—the Federation and the Republika Srpska.
• Creation of basic economic institutions of the state (a new central bank, state budget, and laws on external debt, trade, investment, and customs tariff policy) has been achieved.

The 1998-99 program: policy pillars and macro projections

• Four elements of the economic strategy:
  • A fixed exchange rate under a currency board arrangement.
  • Budgets supportive of reconstruction and social needs while avoiding any domestic borrowing.
  • External financial assistance to supplement limited domestic resources and promote economic recovery.
  • Acceleration of the transition to a market economy through structural reforms.
• Central macro projections under the program:
  • Economic growth in 1998 is projected at 30 percent.
  • Inflation at 10 percent.
  • Gross international reserves to reach the equivalent of 3½ months of merchandise imports.
• Currency board specifics:
  • Central bank issues a new domestic currency—the Convertible Marka—at a fixed 1:1 exchange rate with the Deutsche mark.
  • Choice motivated by difficulty of restoring trust, lack of administrative capacity, and the role transparency could play in reinforcing fiscal discipline.

Fiscal strategy and public finances

• Fiscal strategy tied to the currency board: monetary authorities are precluded from extending credit to the public sector.
• Given limited banking intermediation capacity and non-existent domestic capital markets, budgets are based on avoiding domestic borrowing at all levels of government.
• Cash-basis expenditures will not be able to exceed the total of revenues and external financing.
• Total fiscal expenditures are expected to rise from an estimated 33 percent of GDP in 1997 to about 35 percent of GDP in 1998, mainly due to an increase in budgetary expenditures in the Republika Srpska.
• The strategy emphasizes avoiding further accumulation of domestic arrears and dealing transparently with existing obligations.

Structural reforms

• Key structural elements for 1998-99:
  • Banking reform.
  • Initiation of enterprise privatization.
  • Pension and health system reform.
  • Implementation of a simplified customs tariff system.
  • Exchange and trade liberalization.
  • Steps to improve economic statistics.
• Governance measures:
  • Strengthening budgeting and treasury management techniques.
  • Improving and monitoring the workings of customs administrations.
  • Reorienting the legal framework.
  • Continuing efforts to seek out and prosecute official corruption.

Social protection and reconstruction

• Early postwar period depended heavily on emergency humanitarian assistance from external donors.
• Both Entities have begun to rebuild education, health, and pension systems and adopted programs to assist war invalids and their surviving families.
• Authorities will continue efforts to design a more efficient social safety net targeted on the most vulnerable groups and to complete a poverty assessment with the assistance of the World Bank.
• Special programs, with assistance from international donors, are being devised to provide housing, infrastructure, and employment opportunities in conjunction with the return of refugees.

External financing and the challenge ahead

• Bosnia and Herzegovina faces substantial balance of payments financing requirements in the coming years due to:
  • Depressed export capacity.
  • Urgent reconstruction projects.
  • The need to reconstitute foreign exchange reserves and normalize relations with external creditors.
• Meeting these needs without creating an unsustainable debt burden will require large-scale and highly concessional support over a number of years from the international community—through grant assistance, concessional loans, and debt relief.
• Issues of political and economic reintegration and governance remain prominent and need resolution over time.

IMF membership and existing IMF credit

• Bosnia and Herzegovina succeeded to the IMF membership of the former Socialist Federal Republic of Yugoslavia effective December 14, 1992; on December 20, 1995 Bosnia and Herzegovina succeeded to that membership.
• Its quota is SDR 121.2 million (about US$162 million).
• Its outstanding use of IMF credit currently totals SDR 30 million (about US$40 million).

Selected economic indicators (as reported)

• Real GDP (percent change):
  • 1994: ---
  • 1995: 32
  • 1996: 50
  • 1997*: 30
  • 1998**: (no entry shown)
• Consumer prices (end of period):
  • Federation (DM):
  • 1994: -4
  • 1995: -25
  • 1996: 14
  • 1997*: 10
  • 1998**: (no entry shown)
  • Republika Srpska (DM-based index):
  • 1994: 13
  • 1995: 45
  • 1996: -7
  • 1997*: (no entry shown)
  • 1998**: (no entry shown)
• Consolidated fiscal balance (Percent of GDP)1:
  • 1994: -11
  • 1995: 0
  • 1996: -1
  • 1997*: -2
  • 1998**: (no entry shown)
• External current account balance, excluding official transfers (deficit-) (Percent of GDP):
  • 1994: -26
  • 1995: -39
  • 1996: -33
  • 1997*: -34
  • 1998**: (no entry shown)
• Gross international reserves (Months of imports):
  • 1994: 1.2
  • 1995: 2.4
  • 1996: 2.9
  • 1997*: 3.7
  • 1998**: 3.4

*Estimate. **Projection. 1Since 1995, the deficit has been financed entirely by external grants and loans. 1A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.

Press Release: IMF Approves Stand-by for Bosnia and Herzegovina; May 29, 1998; International Monetary Fund.

References

• Bosnia and Herzegovina and the IMF
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/home