Press Release No. 07/114

Press Release: IMF Statement on the Conclusion of the Article IV Discussions with Bosnia and Herzegovina

May 30, 2007

An IMF mission for the 2007 Article IV Consultation with Bosnia & Herzegovina, led by Dimitri Demekas, Mission Chief for Bosnia & Herzegovina in the European Department, issued the following statement in Sarajevo on May 22:

"The economy performed strongly in 2006 and its performance in 2007 will also be good. This strong performance reflects a favorable external environment and the benefits from past privatization and foreign investment.

"Long-standing weaknesses of the economy remain. The external current account deficit is likely to widen during 2007. Economic growth is unlikely to dent unemployment and it will not benefit all regions of the country equally. Moreover, as we had warned last year, the government's failure to resist spending pressures will be reflected in a sharp deterioration in the government balance in 2007: absent bold measures to control spending, the accumulated surplus from 2006 of some 3 percent of GDP will turn into a deficit of 1-1½ percent of GDP in 2007.

"Now is the time to start addressing these long-standing weaknesses:

• Put order in the public finances by halting the deterioration in the government budget balance, ensuring that domestic claims and restitution payments are in-line with the budget's long-term ability to pay, and using privatization receipts wisely.
• Improve the institutions and management of the public finances by giving the Fiscal Council a firm legal basis, agreeing on a simple, transparent, and fair revenue allocation formula, and stopping the proliferation of extra-budgetary funds and off-budget agencies.
• Strengthen financial stability by tightening loan classification in line with international best practice, raising the fines on banks for noncompliance with supervisory regulations, and relaxing the maturity matching requirements between banks' assets and liabilities. Unification of banking supervision remains necessary.
• Complete the creation of a single economic space by harmonizing corporate and personal income taxes and employers' contributions on wages in both Entities while vigorously enforcing compliance. Pension and health benefits should be harmonized and made portable between Entities. Together with streamlining the regulatory burden on business, these policies will help bring activity into the formal economy."