Bosnia and Herzegovina: Turning the Economy Around
IMF News, September 9, 2016
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- Published: September 9, 2016
Overview and program scope
- Publication date: September 9, 2016.
- New three-year, $608 million IMF loan under the Extended Fund Facility (EFF) to support a more competitive economy that can attract investment and create private sector jobs.
- IMF program approved on September 7, 2016.
- Program promotes a unified economy in a highly decentralized country comprising the Institutions of Bosnia and Herzegovina, two main entities, 10 cantons, and an independent district.
Economic context and challenges
- GDP growth rate: above 3 percent in 2015.
- Budget position: budget was close to balance in 2015.
- Per capita income: remains only one quarter of that in the countries of the European Union.
- Public sector: oversized, with one of the highest levels of public employment in Eastern Europe, crowding out productive public infrastructure spending.
- Financing: country has found it difficult to obtain financing from international markets.
- Private sector and investment: structural reforms left unfinished; private investment is low; foreign investors have generally stayed away.
- Unemployment: youth unemployment rate exceeds 62 percent.
- Demographics and labor force: large number of educated young people have left for Western Europe over the past two decades, affecting future growth potential.
- Political/administrative constraints: decentralized administrative structure makes preserving a single economic space and policymaking difficult.
Reform agenda and international support
- In early 2015, incoming governments adopted a reform agenda covering economic and social reforms, strengthening the rule of law, tackling corruption, and improving public institutions.
- The Reform Agenda has the support of the European Union, the IMF, the World Bank, and bilateral donors.
- IMF mission chief Nadeem Ilahi: “The Reform Agenda is a welcome development, but successful implementation would depend on tackling entrenched interest groups that often operate along ethnic lines. It would also require improved coordination and cooperation among governments within the decentralized administrative structure. The new IMF program helps carrying out the much-needed structural reforms and contains measures to strengthen the single economic space.”
Main objectives of the government economic program supported by the IMF
- Enhance the business environment to attract investment, create private sector jobs, and raise growth potential by:
- carrying out the recently approved labor market reforms to make the labor market more flexible;
- boosting potential by restructuring or selling large and often inefficient state-owned enterprises;
- lowering the distortive tax on formal sector employment—the labor tax wedge—and reducing intra-country fragmentation by harmonizing tax laws among entities.
- Improve the quality of government spending and make it pro-growth by:
- lowering public employment and the public wage bill, and allowing the private sector to become an important player in the labor market;
- improving tax collection through better coordination among the tax authorities;
- spending more on infrastructure, health care, education, and investment;
- more focused targeting of social spending, including through pension reform;
- introducing fiscal and financial discipline in lower levels of government and state owned enterprises.
- Safeguard financial stability and revive bank lending by:
- preserving central bank independence and the currency board arrangement, which provides a fixed exchange rate anchor to policies;
- tackling vulnerable banks and improving the nonperforming loan recovery and resolution framework to revive bank lending;
- harmonizing banking legislations across the two entities;
- enhancing coordination and cooperation among the bank supervisory and regulatory agencies;
- lowering the fiscal risks from the operations of public development banks.
Expected complementarities and external financing
- The IMF program enables further financial assistance from the World Bank, the European Union, and other international partners to help Bosnia and Herzegovina turn around its economy.
International Monetary Fund