December 4, 2000
Mr. Horst Köhler
The Managing Director
International Monetary Fund
Dear Mr. Köhler:
1. In the period since we wrote to Mr. Fischer, on February 23, 2000, the
Bosnia and Herzegovina authorities have continued their efforts to consolidate financial
stabilization and reinvigorate the structural reform process. Inflation has remained low and real
GDP has continued to experience high rates of growth. Official reserves have continued to
increase. In spite of these positive results, there is a substantial agenda of unfinished work. There
is a need to accelerate structural reforms to underpin the achievements in the macroeconomic area
on a durable basis and enhance Bosnia's growth prospects over the medium term. This letter
outlines the progress made thus far, confirms our key policy goals, and sets out new
macroeconomic and structural policy steps to accelerate the momentum of the adjustment
process. To support our adjustment effort, we request the Fund to complete the fourth and fifth
reviews of the stand-by arrangement, extend the arrangement by two months, and rephase the
disbursements as set out in the attached Annex I.
A. Macroeconomic Developments
2. Macroeconomic developments were favorable in 1999 and in the first half of
2000. Following the adverse effects of the conflict in Kosovo, a recovery of economic activity in
the second half of 1999 resulted in real GDP growth of about 9 percent for the year as a
whole, while inflation remained low. Similar developments continued to characterize economic
conditions in both Entities during the first half of 2000. Developments in the external current
account were broadly as anticipated, but official reserves at end-1999 were significantly higher
than targeted, owing to the remarkable increase in the demand for the Convertible Marka.
3. The favorable macroeconomic developments thus far have resulted
principally from the stringent implementation of the currency board rules, supported by prudent
cash management by the State and Entity Governments. The prospects for economic growth
during the rest of 2000 remain positive, and inflation in both Entities is expected to remain low. In
both Entities, the sharp public sector wage increases granted earlier in the year, which were
substantially out of line with budget parameters, have been partially reversed and budget
execution is now heading towards acceptable outcomes. In the Republika Srpska, both revenues
and expenditures are expected to finish the year at targeted levels. In the Federation, revenues
have performed less well. However, the anticipated underperformance of excise revenue is
expected to be more than compensated for by higher foreign financing, which will enable
expenditure targets to be reached within the program constraint of zero domestic borrowing.
B. Macroeconomic Objectives and Policy
4. The macroeconomic objectives for 2000 are to achieve a real GDP growth
rate of 10 percent, a 12-month inflation rate of under 5 percent in both Entities, and a
strengthening of the external position with an increase in reserves to the equivalent of 2¼
months of imports, including a substantial increase in the free reserves of the Central Bank. To
achieve these objectives, we will continue to strictly implement the currency board rules and will
reinforce fiscal restraint in order to observe the budgetary ceilings over the year. Large inflows of
grants and concessional loans to support the reconstruction of the country will continue to exert a
heavy influence on economic activity in 2000. Such assistance is expected to decline sharply over
the medium term, and for this reason the policies envisaged under the program for 2000 are also
intended to set the stage for rapid private-sector-led growth in the period ahead.
5. To this end, our medium-term economic strategy intends to establish the
basis for fiscal stability, with a particular emphasis on making the tax system more efficient and on
initiating measures to ensure continued financial discipline (Tables 1 and 2). In addition, the strategy calls
for an acceleration of financial sector reform, privatization of state enterprises, enhancement of
social policies, and labor market reform. We also believe that promoting good governance is key
to generating public support and confidence in the reform program. Under the program, these
issues will be addressed largely through efforts to enhance the transparency of fiscal operations
and intensified efforts to fight corruption at all levels of government.
C. Fiscal Policies
6. During the first half of the year both Entities experienced considerable
difficulties in implementing the approved budgets for 2000. Expenditure commitments in both
Entities exceeded those envisaged in their budgets, notably because of larger than affordable wage
adjustments. Such wage increases, in the Republika Srpska, were accompanied by large non-wage
expenditures such as transfers to the pension fund. In addition, the very substantial depreciation of
the euro against the dollar has significantly boosted the foreign debt service costs for 2000, and
both Entities are facing higher expenditure requirements to fund refugee returns. In the
Federation, the expenditure pressures have been compounded by adverse developments on the
revenue side, as increased evasion has contributed to a decline in the collection of excise taxes.
Aware that such developments should not be allowed to continue unchecked, we have been
addressing these problems in both Entities with ambitious revenue and expenditure measures.
7. All levels of government reaffirm their commitment to run balanced budgets
on a cash basis, without any recourse to borrowing from domestic sources, and to limit external
borrowing exclusively to loans on concessional terms. To this end, the respective parliaments
have adopted revised Entity budgets for 2000. In the Federation, to accommodate partially the
higher expenditure requirements for the return of refugees and external debt service, allocations
for goods and services and subsidies have been reduced. We are ensuring that these lower
allocations are respected by implementing a tightened system of monthly spending ceilings for
ministries, strictly enforced by the government. In addition, to keep wage spending within the
budgeted amount, wages have been rolled back by 9 percent and a decision to freeze
government employment has been taken. Similarly, in the Republika Srpska, a 33 percent
wage increase has been reduced to 13 percent and government employment has been
frozen. We will consult with the IMF before granting any future wage increases. In addition,
budgeted Entity obligations for State administrative outlays and servicing of foreign debt will
continue to be fully covered by monthly transfers that will be made no later than the end of the
month for which they are due.
8. As regards revenue, in the Federation, we have already taken steps to
strengthen tax and customs administrations by beginning the implementation of an action plan to
remove smuggled alcoholic beverages and cigarettes from the market. In addition, tax collections
from other high-duty goods will improve because we have increased the exchange of information
between the tax and customs administrations and reduced the number of border crossings where
high-duty goods can enter the country. In the Republika Srpska, although aggregate revenues
have remained broadly on target, there is scope to improve further the collection of taxes during
the remainder of the year. To this end, we have implemented measures to improve the collection
of tax arrears and tax collections from high-duty goods such as cigarettes, alcoholic beverages,
and oil. In addition, in the Republika Srpska, we have increased the effective tax on tobacco and
included excise taxes in the sales tax base in order to harmonize them with those in the
9. The revenue measures noted above will be carried out in conjunction with the
ongoing reform of tax administration. With technical assistance from the international community,
we continue to streamline the organizational structure of tax administration in both Entities,
enhance the exchange of information, and improve filing and payments procedures. In order to
enhance tax compliance, we intend to intensify taxpayers' education campaigns and increase
auditing efforts of the respective tax administrations.
10. Achieving medium-term fiscal sustainability will require a rationalization of
the tax system and a major change in the structure of expenditure. These reforms have already
been initiated. Specifically, as regards revenue, in the last year both Entities have implemented a
common schedule of excise duties, reduced customs duties exemptions, and eliminated temporary
sales tax exemptions. During the next 12 months we intend to build on these achievements.
Specifically, by January 2001, the existing array of sales taxes on goods and services will have
been replaced in both Entities by a single-stage, two-rate sales tax that will be collected at the
retail level. We intend to curtail sales tax exemptions, broaden the base of the sales tax to include
construction materials and services, and harmonize sales tax exemptions and bases between the
two Entities. Prior to implementation we will fully discuss our tax reform plans with the IMF. In
the Federation, we will raise the social security contribution rates for military personnel to the
standard rates. In addition, in 2001 both Entities will formulate and initiate implementation of a
reform of the system of social contributions, to broaden their base and allow a reduction of rates
without loss of revenues. We will also intensively monitor contribution payments and enforce
compliance with such obligations. Other important measures for 2001 will include the reform of
personal and corporate income taxes.
11. We are committed to lowering the share of GDP devoted to expenditures
and to changing the composition of expenditures over the next 3–4 years, with measures
focused in two areas. First, a comprehensive reform of the social welfare system will be launched
to provide adequate and more equitable basic social benefits to the population. Second, military
expenditure will be reduced significantly over the medium term, a process that is already
underway. For 2001, on-budget military expenditure will decline by one percentage point of GDP
(5 percent in nominal terms). The total decline will be even larger, however, as a result of
anticipated reductions in off-budget expenditure. During 2001, the reduction in off-budget
expenditures will be quantified on the basis of audits carried out in both entities by external
auditors and, by 2002, all military revenues and expenditures will be brought on budget.
12. Both Entities are adopting measures to improve transparency and control
over budget execution. An important step in this direction will be taken in early 2001 with the
establishment of State, Entity and Canton Treasuries, incorporating the principle of a treasury
single account held at the CBBH. To enhance the credibility of governments, draft laws that have
expenditure implications will be submitted to the respective parliaments accompanied by an
estimate of their budgetary cost. In the Republika Srpska, we have recently brought on budget the
independent revenues of customs administration, tax administration, and the financial police.
Entity governments will strive to include all fiscal operations within their budgets. In particular,
donor-financed activities and external support for the military will be included in future budget
documentation. Comprehensive external audits of military budget execution in 1999 and 2000 will
be performed in order to provide a basis for assessing the restructuring of the military. Moreover,
from 2001, the financial plans of extrabudgetary funds and the uses of privatization proceeds will
require approval by the respective parliaments. In addition, we will ensure that the operations of
the Goods Reserve Directorate in both Entities will be strictly limited to the core activities
assigned to it by law.
D. Financial Sector Development and
13. The banking system in both Entities remains fragile and beset by poor
profitability and low capitalization. In response, we are continuing to strengthen banking
supervision and we will enforce supervisory sanctions on banks that are not in compliance with
regulations. In both Entities, Banking Agency officials, examiners, staff, and contract employees
are now legally protected from prosecution in the performance of their legitimate duties. In the
Federation appropriate legislation to this end has been adopted by the parliament, while in
Republika Srpska such legislation is currently before the National Assembly. In the meantime, the
required law has been imposed by the High Representative. In order to deepen financial
intermediation, the amended Banking Laws in both Entities now allow commercial banks to
operate throughout the country, and Laws on Deposit Insurance have been adopted in both
Entities. Net capital requirements for all banks will be increased in stages from KM 5 million to
KM 10 million by end-June 2001 in the Federation and end-June 2002 in the RS.
14. Our banking sector reform strategy is being pursued through the liquidation
of insolvent banks and the privatization of all other state-owned banks. To ensure that only sound
private banks remain in the financial system, the governments will not recapitalize any banks and
will liquidate at an early-stage some state-owned insolvent banks. In the Federation, tenders for
the sale of Union Banka, and Postanska Banka have already been issued while discussions with a
potential buyer for the sale of Sipad Banka are ongoing. In addition, either a substantial
nonrefundable deposit will have been received for the sale of the Federation Investment Bank or it
will be placed under foreign management. A Divestiture Strategy Plan was agreed in October
between the Federation Government and the World Bank that will allow solvent banks from the
Privredna Banka Sarajevo group to be sold as banking institutions, but those found to be insolvent
will be closed and liquidated. In the Republika Srpska, privatization plans have been approved for
all majority state-owned banks other than the Development Bank, and tenders for the sale of 5
state-owned banks have been published.
15. The development of a robust banking system has been hindered by the
existence of payments bureaus, which until recently had a monopoly on domestic payments
transfers among legal and physical persons, and relegated banks to a minor role in the financial
system. In this context, a key objective for 2000 is the reform of the payments system, including
the elimination of the three payments bureaus operating in Bosnia and Herzegovina by the end of
the year. All activities currently performed by the payments bureaus will be transferred to
commercial banks, government agencies, and statistical institutes, and a countrywide interbank
clearing system will be put into place by December 2000. In this regard, we have made progress
in preparing the commercial banks to carry out payments transactions. In addition, preparations
are underway to establish systems to replace the limited treasury functions performed by the
payments bureaus. We intend to intensify our efforts in this area, and we will ensure that adequate
alternate treasury systems are in place before the payments bureaus are closed.
E. Enterprise Sector Restructuring
16. We are working closely with the World Bank, the Office of the High
Representative, USAID, and other donors to accelerate the privatization of state enterprises. To
that end, the Republika Srpska has implemented a key outstanding measure by appointing
Securities Commission and Share Registrar officials. Also, both Entities have adopted
international standard tender regulations and rules for tender registrations. With assistance from
international tender advisors, in each Entity at least three tenders for large enterprises will be
brought to completion by end-2000. In addition, in both Entities, a list of enterprises—and
the value of state equity therein, according to the opening balance sheet—has been
published; and public offerings for up to 300 large enterprises are expected to be conducted by
end-2000—with the full participation of privatization investment funds.
17. All levels of government, including cantons and municipalities, will abstain
from assuming or guaranteeing any obligations of banks or enterprises that were not specified in
the initial contracts as obligations of government. Moreover, the privatization process will be
monitored closely to ensure that neither foreign nor domestic debts of enterprises or banks are
transformed into explicit or implicit obligations of any level of Government. We will also ensure
that all levels of government refrain from using privatization receipts until a framework for their
utilization has been developed in agreement with the Fund. As regards the Privredna Banka
Sarajevo, we will continue to ensure that the outstanding foreign liabilities do not generate any
claims on the Federation budget, and seek, in the future, to treat in a comparable manner any
similar liabilities of other public banks. We will also ensure that such liabilities are not absorbed by
other public enterprises, and thus indirectly passed on to the Federation budget through lower
F. Other Policies
18. Entity Governments intend to achieve over the medium term financial
viability of the pension systems. In the Republika Srpska, the recently adopted pension benefit
legislation includes the requirement that pension entitlements beyond a guaranteed minimum be
made contingent on the availability of resources, precluding hence, further accumulation of debt
to pensioners. In the Federation, the adoption of similar amendments to the benefit system is
expected soon. Also, the financial demands placed by new pensioners resulting from the
demobilization of soldiers, and also from the addition of pensioners that were previously receiving
their pensions from Croatia will be met by increasing the level of contributions to the social funds
by the military. Both Entities are committed to raising pension contribution collection through
better enforcement, and to prudent pension fund management in order to ensure that full statutory
benefits can be met from available resources in the near future.
19. Both Entities are also committed to not using any cash privatization
revenues to recapitalize the pension funds before the financial situation of the funds has been
permanently stabilized. Under no circumstance will privatization revenues be used for current
20. Recent changes to labor legislation in both Entities, key to the reduction of
unemployment and to the progress of enterprise restructuring, mark a turning point in labor
market reform. Amendments to the Entity framework labor laws adopted in August in the
Federation and in October in the Republika Srpska redefine important aspects of labor relations,
including the role of the various levels of governments and of employment contracts as well as
eliminating the institution of employment on "waiting lists." The changes are aimed at
increasing the flexibility of employment and termination of employment as well as bringing
entitlements to more affordable levels. Legislative changes expected to be adopted before
end-2000 in both Entities also redefine the role of employment bureaus and unemployment
insurance, further increasing the flexibility of the employment process and conditioning
unemployment benefit payments on the availability of resources in the employment funds.
21. In light of the rapid transformation of labor and social relations described
above, we consider it essential to review the social benefit framework in order to ensure that
adequate benefit coverage of the most vulnerable, and for workers displaced by privatization, is
maintained. We consider this to be an important area of reform, since public support for the
privatization of state-owned enterprises could be jeopardized by the absence of progress in
establishing a suitable social safety net. We are, therefore, presently drafting social protection
strategies for the period 2000–03, which will be implemented, together with labor market
reform, with the support of a World Bank adjustment credit. The strategy will aim to reform
existing programs to increase the effectiveness of resources currently allocated to social
protection, provide more equitable benefits through greater pooling of resources, and raise the
credibility of the system by committing to affordable levels of protection.
22. We have made progress toward implementing our program of trade
liberalization and we intend to continue addressing any remaining obstacles to domestic
competition. Our efforts to establish a transparent and non-discriminatory trade regime have
continued in 2000. The amended State Customs Policy Law will become effective in December.
We are committed to early elimination of the few remaining restrictive elements in our trade
regime. To this end, we will begin to lower in steps the levels of the specific customs surcharges
during 2001, with a view to eliminating the customs surcharge over a two-year period.
Stimulating exports is critical to enhancing Bosnia and Herzegovina's growth potential.
Accordingly, we have replaced the ban on the exports of raw timber with an export tax as an
intermediate step towards the introduction of a stumpage tax.
23. We are in the process of negotiating a free trade agreement (FTA) with
Croatia. In these discussions we will emphasize the need to phase the implementation of the FTA
in a manner that is consistent with our objective of multilateral trade liberalization. A Working
Group for our accession to the WTO has been formed, and in an effort to expedite the process,
we are making good progress in preparing all the relevant documents.
24. We will ensure that the State and Entities refrain from borrowing on
nonconcessional terms, including "in kind" loans. This prohibition on nonconcessional
external borrowing will also apply to the granting of domestic or foreign payments guarantees or
the assumption of liabilities under existing contracts that are not specifically identifiable as
liabilities of the State, Entities, Cantons, or other levels of Government. These prohibitions will
also apply to both Entities' Goods Reserves. The sole exception to this policy will be projects
financed by the European Bank for Reconstruction and Development, the International Finance
Corporation, the European Investment Bank, the European Commission, or other donors in
conjunction with World Bank lending.
G. Program Monitoring
25. Reflecting the importance of accelerating the momentum of structural
reforms, some of them have been made into prior actions or structural benchmarks (Table 1 and 2). Quantitative performance criteria for
end-December 2000 and end-March 2001 have been set on: (i) the floor for net free
reserves of the central bank; (ii) the ceilings on the cumulative change in gross credit from
the banking system to the general government, the State government, the government of the
Federation and the government of Republika Srpska; (iii) the ceiling on the contracting or
guaranteeing of new non-concessional external debt; and (iv) external payments arrears (Annexes II–V).
|The State of Bosnia and Herzegovina
||The Federation of Bosnia and Herzegovina
||Republika Srpska |
Chairman, Council of Ministers of Bosnia and Herzegovina
Federation of Bosnia and Herzegovina
Bosnia and Herzegovina
Governor, Central Bank of Bosnia and Herzegovina
Deputy Prime Minister and Minister of Finance
Federation of Bosnia and Herzegovina
Minister of Finance
Bosnia and Herzegovina
|Table 1. Bosnia and
Herzegovina: Prior Actions|
to Conclude the Fourth and Fifth Reviews of the Stand-By
||Entity and State Parliaments to pass the revised 2000 budgets agreed with the
||Government to adopt and implement measures addressing key sources of tax
as agreed with IMF staff.
||Republika Srpska to include excise taxes in the sales tax base, and increase
effective excise tax on tobacco products.
||Entities to be current on transfers to State institutions for administrative
||Freeze employment of the Entity governments and roll back government
to effect savings of 9 percent and 15 percent, respectively, in the Federation and
Srpska governments' monthly wage bills.
||Governments to begin setting monthly spending limits (on a commitment basis)
ministry based on Ministry of Finance recommendations, and to impose sanctions against
ministries that do not observe these limits.
||Republika Srpska to set pensions for May 2000 onward to no more than 33
percent above pensions in May 1999.Done|
||Republika Srpska to reverse the February 2000 pension contribution rate.
||Federation Parliament to confirm the director, deputy director, and managing
board of the
|1Unless specified otherwise, measures refer to
the institutions of the two Entity Governments.|
|Table 2. Bosnia and
Herzegovina: Structural Benchmarks, November 2000–March
||Implement comprehensive excise and sales tax reform.
||Prepare strategy to raise collections of social funds by broadening the
contribution base while lowering rates.
||Entity governments to forbid the use of privatization revenues: (a) for
paying off debts of institutions that cannot meet their current obligations from
current resources; (b) by any privatization agency before it has adopted
regular reporting procedures on its receipts and their use.
||Implement measures agreed with IMF staff to have interim Treasury functions
place prior to closure of the payments bureaus.
||Real Time Gross Settlement System and clearinghouse to begin interbank
||Enforce prudential regulations, mainly minimum net capitals requirements,
implement strategy to bring offending banks into compliance.
|1Measures refer to institutions of
|Table 3. Bosnia and
Herzegovina: Structural Reform Measures, September 2000–March
||Based on technical assistance from the IMF, prepare draft legislation for
comprehensive sales and excise tax reform.
||Federation to increase social security contribution rates for military
to the standard level.
||Republika Srpska to bring on budget revenues of the customs administration,
tax administration and financial police.
||Entity Parliaments to appoint Auditors General for a period of five years.
||Submit amendments to the Law on Commercial Banks to the Parliament
the minimum net capital requirements for commercial banks to:
|KM 7.5 million effective
|| end-June 2001|
|KM 10 million effective
|| end-June 2002|
|KM 15 million effective
|| end-June 2003|
||Adopt criteria harmonized between the two Entities for the supervision of
out-of-Entity bank branches.
||Federation to harmonize criteria in the Law on Deposit Insurance with the
forthcoming minimum capital requirements in the Law on Commercial Banks.
||Republika Srpska to adopt Deposit Insurance Law and complete
work to establish deposit insurance mechanism.
||Federation to offer for sale Sipad, Union, and Postanska Banks.
||Adopt divestiture plans for state banks in the PBS bank group in the
||Amend legislation to provide limited immunity to Banking Agency
examiners, staff, and contract Employees, while performing duties pursuant to
(RS: imposed by OHR)
||Observing international tender regulations, bring at least 6 large enterprises
the point of sales (3 in each Entity; the 6 Republika Srpska timber industry
enterprises with IFC participation count as one).
||Federation to appoint an international sales advisor for Air Bosnia.
||Submit to parliaments amendments to legislation on labor relations and
of the unemployed to create an environment conducive to private market
development and employment growth.
||Amend legislation on veterans' and military invalids rights to ensure there is no
accumulation of debt for unpaid benefits.
||dopt and implement amendments to Customs Policy Law.
||Begin reduction of the specific import tariffs according to a schedule to be
agreed with the IMF.
|1Unless specifically stated otherwise, measures
refer to institutions of both Entities.|
|Bosnia and Herzegovina:
Schedule of Proposed Purchases Under Stand-by Arrangement|
|Amount of Purchase
|1. SDR 8.08 million
||May 15, 2000
||Completion of fourth review and observance of end-March 2000 performance
|2. SDR 8.08 million
||August 15, 2000
||Completion of fifth review and observance of end-June 2000 performance
|3. SDR 8.08 million
||February 15, 2001
||Completion of sixth review and observance of end-December 2000
|4. SDR 5.91 million
||May 15, 2001
||Completion of seventh review and observance of end-March 2001 performance
|Source: Staff estimates.|
1The stand-by arrangement expires on May 29, 2001.
|Bosnia and Herzegovina:
Ceilings on the Cumulative Change in Gross Credit from the Banking System to the General
||(In millions of convertible
|Cumulative change from level on
December 31, 1999:1
|September 30, 2000 (indicative target)
|December 31, 2000 (performance criteria)
|March 31, 2001 (performance criteria)
|1Negative flows indicate deposits to the SDR
account or other accounts at IMF. The targeted deposits include half of the amounts disbursed
under the stand-by arrangement less debt service to the Fund. The targeted deposits at
September 30, 2000, December 31, 2000, and
March 31, 2001 will be adjusted downward for delays in disbursements under the
SBA. Flow increases of borrowing by the goods reserve are measured using September 30, 2000
as a base.|
The general government is defined to include the State, Entity (Federation, and Republika
Srpska), cantonal and municipal budgets, together with their respective extrabudgetary funds.
From September 30, 2000 onwards, for the purposes of this performance criterion, it also includes
the goods reserves of each entity. Extrabudgetary funds include, but are not limited to, the
pension funds, health funds, unemployment funds, and invalids and surviving family insurance
funds in the two Entities.
Banking system claims on the general government for the purposes of program monitoring
are defined as the sum of: (i) claims from the monetary authorities (the Central Bank of
Bosnia and Herzegovina and the payment bureaus); and (ii) loans, advances, securities or
bills issued (or guaranteed) by the general government and held by commercial banks.
For program purposes, those components of gross claims on the general government that are
denominated in foreign currencies will be converted into convertible marka at the agreed
accounting exchange rate prevailing on December 31, 1999.
The limits will be monitored from the accounts of the banking system, supplemented by
information provided monthly by the Entity Ministries of Finance, and payment bureaus.
|Bosnia and Herzegovina:
Currency Board Cover and Minimum Stock of Free Reserves of the Central Bank of Bosnia and
||(In millions of convertible marka)|
| Stock of minimum free
| September 30, 2000 (indicative target)
| December 31, 2000 (performance criteria)
| March 31, 2001 (performance criteria)
|1Corresponds to the minimum capital of CBBH.
The free reserves of CBBH stood at KM 42 million at end-September 2000.|
Under the Central Banking Law and the program, the CBBH (acting as a currency board) is
required to ensure that its domestic liabilities do not exceed the convertible marka counter-value
of its net foreign exchange reserves. Net foreign exchange reserves of CBBH are defined as the
difference of the following foreign assets and liabilities, both in convertible currencies and
denominated in convertible marka.
Under the Central Banking Law and for the purposes of the program, foreign assets include:
(i) gold, and other precious metal and stones; (ii) convertible foreign exchange notes held by the
CBBH; (iii) credit balances in convertible foreign exchange—including SDRs—due to
the CBBH on the books of foreign central banks or other financial institutions; (iv) liquid
debt securities issued by the government and the central bank of the country in whose currency
the securities are denominated and held by the CBBH on its own account; and (v) officially
guaranteed forward and repurchase contracts of different types providing for future payments in
convertible foreign exchange to the CBBH by non-residents.
Under the Central Banking Law and for the purposes of the program, foreign liabilities
include: (i) foreign exchange and convertible marka balances on the books of the CBBH
due to non-residents, including foreign central banks and international financial institutions; (ii)
credit balances due to foreign central banks, governments, international organizations, and foreign
financial institutions; (iii) forward and repurchase contracts of different types providing for future
payments in foreign exchange by the CBBH to non-residents; and (iv) any other liabilities due to
Free reserves of the CBBH are foreign exchange reserves not utilized as backing for the
currency. They therefore consist of the CBBH net foreign exchange reserves in excess of the
currency board liabilities. The program calls for quarterly minimum levels of free reserves.
Foreign currency holdings will be converted into convertible marka at fixed exchange rates of
December 31, 1999 (exchange rates other than that of the Deutsche mark will be
those published in the IMF International Financial Statistics). Valuation changes will be
excluded from cumulative changes in free reserves. The above limits will be cumulative from the
actual level as of December 31, 1998 and will be monitored from the accounts of the
CBBH, with information on net foreign assets provided monthly by the CBBH. The information
will be made available to the Fund within two weeks following the end of each month throughout
the program period. As the stock of free reserves as of December 31, 1998 is
equivalent to the initial capital of the CBBH, the implication is that the capital cannot be drawn
upon to finance operational expenditures or the acquisition of physical assets.
|Bosnia and Herzegovina:
Ceilings on Contracting or Guaranteeing of New Non-Concessional External Debt|
||One year and under1 3
||Over 1 year2 3
||1–5 years2 3|
| ||(In millions of U.S. dollars)|
|Cumulative change from December 31, 1999
| September 30, 2000 (indicative
| December 31, 2000 (performance
| March 31, 2001 (performance
|1The limit applies to the flow of short-term debt
contracted or guaranteed by the general government or the CBBH with an original maturity of up
to and including one year. After September 30, 2000, the term "debt" is defined to
include all current liabilities, which are created under a contractual arrangement through the
provision of value in the form of assets (including currency) or services, and which require the
general government to make one or more payments in the form of assets (including currency), at
some future point(s) in time to discharge principal and/or interest liabilities incurred under the
contract. In effect, all instruments that share the characteristics of debt as described above
(including loans, supplier's credits, and leases) will be subject to the ceiling. After September 30,
2000, for the purpose of monitoring the performance criterion, the definition of general
government will include the goods reserves of each Entity. (The flow of short-term debt
contracted or guaranteed by the goods reserve of each Entity will be measured using the stock as
at September 30, 2000 as a base; the flow of leasing obligations will be calculated using
September 30, 2000 as a base; and 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 agreement, excluding those payments that cover the operation, repair or maintenance of
the property being leased.) The stocks and limits exclude normal import-related financing. Debt
falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time
the contract or guarantees become effective. Information on the stock of short-term debt will be
reported monthly to the Fund.|
2The limit applies to the contracting or guaranteeing of external debt by the State
Government, the Entity Governments or the CBBH with maturity over one year. After September
30, 2000, the term "debt" is defined as in footnote 1, above. After September 30,
2000, for the purpose of monitoring the performance criterion, the definition of general
government will include the goods reserves of each Entity. (The flow of debt contracted or
guaranteed by the goods reserve of each Entity will be measured using the stock as at September
30, 2000 as a base; the flow of leasing obligations will be calculated using September 30, 2000 as
a base; and the stock of leases will be calculated as in footnote 1, above.) The limits apply to all
new nonconcessional foreign debt and leases with a maturity of more than a year, and within this
limit with an original maturity of more than one year and up to including 5 years.
3For program purposes, the following will be excluded from the calculation of the
amount of external 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. 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 20–29 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 preceding six-month period (plus a margin of 0.75 percent) will
be used. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing
at the time of contracting or guaranteeing the debt. Information on the contracting and
guaranteeing of new debt falling both inside and outside the limit will be reported monthly to the
4Except as noted in footnotes 2 and 3.
|Bosnia and Herzegovina:
Ceiling on External Payments Arrears1|
||(In millions of U.S. dollars)|
|Outstanding as of:
December 31, 1999 (estimated)2
|Cumulative reduction from level on |
December 31, 1999
| September 30, 2000 (indicative target)
| December 31, 2000 (performance
| March 31, 2001 (performance criteria)
|1Arrears to multilaterals, excluding arrears to the
IFC pendinbrmination as to whether these are government obligations.|
2External payments arrears as of end-1998 to the Council of Europe Social
Development Fund and the European Investment Bank were repaid during
The limit on the change in external payments arrears applies to the change in 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 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