Bosnia and Herzegovina and the IMF
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IMF Approves Extension of Bosnia and Herzegovina's
Stand-By Credit and Completes Fourth and Fifth Reviews
The International Monetary Fund's (IMF) Executive Board today approved the extension of Bosnia and Herzegovina's stand-by credit by two months to May 29, 2001. This decision was made in conjunction with the completion of the fourth and fifth reviews of Bosnia and Herzegovina's economic program under the stand-by credit, and makes an amount equivalent to SDR 16.16 million (about US$21 million) available immediately.
The stand-by credit, which was approved May 29, 1998, totals an amount equivalent to 94.42 million (about US$122 million), of which an amount equivalent to SDR 64.3 million (about US$83 million) has already been disbursed.
Following the Executive Board discussion on Bosnia and Herzegovina, Stanley Fischer, First Deputy Managing Director and Acting Chairman said:
"Bosnia and Herzegovina has made welcome progress toward macroeconomic stability and country-wide acceptance of the convertible marka, thanks to the policy of fiscal restraint and strict adherence to the rules of the currency board. The authorities have successfully implemented policies, following fiscal slippages earlier in 2000, to partially reverse the unsustainably-high wage and pension increases.
"Nevertheless, Bosnia and Herzegovina faces serious challenges in the period ahead, and it will be important to continue the stabilization effort into 2001. The overall fiscal stance adopted in the draft 2001 budgets is appropriate, and the Fund's Directors strongly supported the reduction of budgeted military expenditure. They also endorsed the authorities' medium-term goal of increasing capital expenditure while lowering the expenditure-to-GDP ratio, noting that this will take on increasing importance in the years ahead, when foreign-financed reconstruction spending declines, as envisaged.
"With regard to structural reforms, Directors warmly welcomed the major efforts made in the financial sector, labor market, and small-enterprise privatization, and the authorities commitment to increase transparency by bringing all military expenditure on-budget in 2002. However, Directors stressed that the Bosnia and Herzegovina authorities need to maintain the reform momentum in order to create an environment conducive to private sector activity. In particular the authorities need to follow through with the end year closure of the payments bureaus, by improving financial management, implementing tax and social welfare reform, completing the financial sector reform, and making significant progress with large-scale privatization." Mr. Fischer said.
Bosnia and Herzegovina's economy is continuing its recovery from the devastation of war and overcoming the adverse effects of the Kosovo conflict with the aid of large inflows of foreign assistance. Real GDP growth is estimated to have been 9 percent in 1999 and, despite the adverse effects of a severe drought on agricultural production, is projected to reach about 10 percent in 2000 and about 14 percent in 2001. Industrial production, which fell in 1999 in the Republika Srpska and showed modest growth in the Federation, has been exhibiting a sustained and broad recovery in the first half of 2000. Nevertheless, production in most traditional industries remains at less than half its pre-war level which, combined with weak legal frameworks for the labor and financial markets, keeps unemployment high. Inflation, which was low in both Entities in the first half of 2000, rose in the third quarter, reflecting the severe drought in the region. In the Federation, inflation over the 12-month period ending in September 2000 was only 3.5 percent. In the Republika Srpska, which has a greater share of GDP devoted to agriculture and was therefore more affected by the drought, the 12-month inflation rate rose to 16.9 percent by September 2000.
The government's main objectives under the program remain to move toward fiscal sustainability through tax and expenditure reform and to foster market development.
Faced with substantial financing gaps under policies implemented during the first half of 2000, both Entities' parliaments approved major revisions of the 2000 budgets in the third quarter. The revised budgets aim to maintain macroeconomic stability while supporting the return of refugees. They are consistent with the injunction not to borrow domestically and to limit external borrowing to loans on concessional terms. Expenditures on wages and goods and services were lowered to make room for increased spending on refugees and displaced persons, foreign debt-service transfers to the State (Federation), and transfers to social funds and war invalids (Republika Srpska). Revenue measures included in the revised 2000 budgets focused on enhancing tax enforcement. Those corrective fiscal measures will close the budget gaps for 2000, while allowing for higher than originally budgeted expenditures on refugees and displaced persons.
Furthermore, the authorities have made some progress in the area of fiscal transparency. They also intensified their efforts to reform the sales tax system and are planning to rationalize operations of the pension funds to bring pension entitlements in line with available resources. In the 2001 budgets, the authorities will focus their efforts on shifting the composition of overall spending away from recurrent and nonproductive expenditure.
The evolution of monetary aggregates in 1999-2000 continued to be governed by demand for foreign currencies, in line with currency board rules. Monetary developments in 1999 and the first nine months of 2000 therefore reflected the increasing acceptance of the convertible marka as well as continued slow growth of private sector credit. In 1999, a portfolio shift into convertible marka contributed to a 40 percent growth in broad money and a US$264 million increase in gross reserves. The shift from foreign to domestic currencies has since moderated, and gross reserve growth in 2000 is projected to slow to US$40 million. With continued modest growth in net domestic assets, broad money is expected to increase by only 13 percent by end-year.
Significant progress was made during the first half of 2000, particularly in overhauling the payments system and strengthening bank supervision, while enterprise privatization gathered momentum. However, reform in some areas continues to be slow. The authorities have intensified their efforts to accelerate enterprise privatization, but the technical complexities involved have slowed progress. Despite high unemployment, major strides have been made in labor market reform. In this regard, the authorities have begun the reform of the social protection system in order to provide social safety net for workers who are vulnerable to retrenchments that will follow the privatization of state-owned enterprises.
In the area of banking, much progress has been made in strengthening bank regulation and supervision. Preparations to close the payments bureaus and transfer their clearing functions to commercial banks are well advanced. However, progress in privatizing or liquidating state-owned banks has been patchy. The authorities also continue to advance in implementing their trade reform program.
Bosnia and Herzegovina joined the IMF on December 14, 1992.The member's quota1 is SDR 169.1 million (about US$218 million). Bosnia and Herzegovina's outstanding use of IMF credits totals SDR 68.1 million (about US$88million).