IMF Executive Board Concludes 2012 Article IV Consultation with Bosnia and Herzegovina

Public Information Notice (PIN) No. 12/119
October 5, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2012 Article IV Consultation with Bosnia and Herzegovina is also available.

On September 26, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bosnia and Herzegovina.1


Bosnia and Herzegovina’s (BiH) growth in the years leading to the global financial crisis increasingly relied on domestic demand expansion, which 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 crystallized 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 2009 Stand-By Arrangement (SBA) helped safeguard macroeconomic stability, but were not enough to propel the economy forward. Structural impediments continue to hamper economic performance—the large government crowds out the private sector and the business environment discourages investment and business expansion, leading to high unemployment and low labor force participation.

Following the 2009 recession, BiH’s 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 and has lost momentum in recent months. Latest high frequency indicators point to a marked slowdown of activity amid falling external demand. Meanwhile, reflecting the softness of domestic demand, core inflation remains subdued (below 1 percent) and the current account deficit has started to narrow. Fiscal restraint has continued—with the overall fiscal deficit in 2010–11 having stayed within the targets of the 2009 SBA—but the composition of expenditure has not improved, as spending on public wages and war-related benefits remains high. The banking sector has remained broadly stable despite an elevated level of non-performing loans.

The authorities have requested IMF’s financial assistance in support of their program. The program aims at countering the effects of the worsening external environment and addressing domestic structural weaknesses. The authorities’ agenda encompasses a four-pronged approach. The first priority is to improve national policy coordination, including by strengthening the role of the Fiscal Council. The second priority is to continue fiscal consolidation accompanied by structural fiscal reforms to safeguard medium-term fiscal sustainability. The third priority is to enhance the authorities’ crisis preparedness and contingency planning to safeguard the currency board and improve the resilience of the financial sector. Finally, the authorities’ program is expected to act as a catalyst for other reforms to create an environment conducive for private sector development. It will be supported by a Stand-By Arrangement with the IMF, which was also approved by the Executive Board on September 26, 2012.

Executive Board Assessment

Executive Directors noted that the recovery that started in 2010 has been losing momentum, and challenging external and internal environments are threatening the economic outlook. Against this background, Directors supported the authorities’ economic program, which focuses on maintaining fiscal discipline, safeguarding the soundness of the financial sector, and intensifying reforms to improve the business and investment environment.

Directors emphasized that better policy coordination is key to macroeconomic stability. They welcomed the recent steps to enhance cooperation within the Fiscal Council and called for further efforts to strengthen the council’s operational framework.

Directors agreed that continued fiscal adjustment, including measures to meet the program’s fiscal targets, is necessary to ensure fiscal sustainability and support the currency board arrangement. They welcomed the authorities’ commitment to expenditure restraint and the measures to contain the 2012 general government deficit, which strike an appropriate balance between cyclical considerations and medium-term policy requirements.

Directors underscored that medium-term fiscal consolidation should be accompanied by a rationalization of recurrent spending with a view to creating space for capital expenditure and protecting the poorest. They welcomed the authorities’ commitment to rein in the wage bill, overhaul the pension system, and step up reforms of rights-based benefits and transfers. Broadening the tax base should also be an important policy objective.

Directors commended the authorities for prudent financial policies which have helped the financial system weather the global financial crisis well. In this regard, they supported recent efforts to better monitor financial stability, and improve crisis preparedness and resolution. Directors urged the authorities to further strengthen cooperation between the central bank and the banking agencies as well as cross-border collaboration with other bank supervisors. Noting that non-performing loans remain pervasive, they encouraged the authorities to closely monitor credit quality and spillover risks from regional developments.

Directors emphasized that accelerating the pace of structural reforms is critical for unlocking the economy’s potential. Reforms to improve the business environment and the labor market would help boost private sector activity and the medium-term prospects for growth. Directors also highlighted the importance of improving data quality.

Directors noted the risks to the program from a further deterioration in the external environment and the challenging political situation. They welcomed the authorities’ strong commitment to the program’s objectives and their willingness to take additional measures if necessary.

Bosnia and Herzegovina: Selected Economic Indicators, 2009–13


2009 2010 2011 2012 2013
      Prel. Proj. Proj.
    (Percent change)    

Output and prices






Real GDP

-2.9 0.7 1.3 0.0 1.0

CPI (period average)

-0.4 2.1 3.7 2.2 2.1

Money and credit (end of period)


Broad money

2.2 7.2 5.8 1.9 3.9

Credit to the private sector

-3.9 2.1 4.2 1.0 3.9
    (In percent of GDP)    

General government budget



45.0 46.7 46.5 46.5 46.2


50.5 50.9 49.3 49.5 48.6

Net lending

-5.5 -4.2 -2.9 -3.0 -2.3

External public debt

21.8 25.7 26.1 28.2 27.2

Total public debt

36.1 39.6 40.6 43.1 40.3
    (In millions of euros)    

Balance of payments


Exports of goods and services

3,945 4,737 5,270 5,471 5,802

Imports of goods and services

-6,792 -7,402 -8,355 -8,539 -8,937

Current account balance

-778 -719 -1,142 -1,008 -1,005

(In percent of GDP)

-6.3 -5.7 -8.8 -7.6 -7.3

Gross official reserves

3,174 3,303 3,285 3,229 3,343

(In months of imports)

5.1 4.7 4.6 4.3 4.3

External debt service (In percent of exports of goods

and services)

28.4 15.5 11.7 9.8 13.1

Exchange rate regime

(Currency board since August 1997)  

Exchange rate (KM/Euro)

0.51 0.51 0.51    

Real effective exchange rate (2000=100,


0.1 -2.5 0.7    

Sources: BiH authorities; and IMF staff estimates and projections.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100