Bosnia and Herzegovina and the IMF
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Bosnia and Herzegovina's membership in the IMF was made possible partly by the clearance of its outstanding arrears, arising from its share of liabilities and assets of the former SFRY in the IMF (see Press Release No. 92/92), totaling SDR 25.1 million (about $37 million). The clearance of arrears was effected through a short-term bridge loan provided by the Netherlands Central Bank, which has been repaid from the credit being provided by the IMF under the policy on involvement in post-conflict countries.
The Government of Bosnia and Herzegovina is faced with the very difficult and urgent task of rebuilding the country after the devastations of war without losing control over financial policies. This task is complicated by physical bottlenecks, a weak and fragmented administration, severe foreign exchange shortages, and deep-rooted structural problems in the enterprise and banking sectors that make the economy highly inflation-prone. While it is too early to develop a quantified framework for macroeconomic policies, two key decisions lend considerable assurance as to the authorities' capacity to maintain control over financial policies.
First, it has been decided that the new central bank, to be established under the constitution, will operate for at least six years as a de facto currency board, issuing currency only when there is full foreign exchange backing. Second, the central government and public sector entities have decided to refrain from domestic bank financing of fiscal expenditures.
The authorities intend soon to initiate discussions on a more comprehensive economic program that could be supported by the IMF under the upper credit tranches or the enhanced structural adjustment facility (ESAF),1 once effective procedures for policy development and implementation are in place and an adequate administrative infrastructure has been established.
There is clearly a need for the international community to assist the reconstruction process with large-scale financial and technical support. Financial support must be on highly concessional terms considering the limited debt-servicing capacity of the country, and it must be received urgently in order to overcome acute bottlenecks in key sectors. To unlock broad-based foreign assistance, the authorities will need to seek an early normalization of relations with external creditors, starting with the problem of arrears to multilateral institutions, other than the IMF.
1. The ESAF is a concessional IMF lending facility for assisting low-income members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years with a 5 1/2-year grace period.
IMF EXTERNAL RELATIONS DEPARTMENT