Country Reports
2015
August 3, 2015
Bosnia and Herzegovina: Financial Sector Assessment Program-Detailed Assessment of Observance of the CPMI-IOSCO Principles for Financial Market Infrastructures
Description: This paper discusses key findings and recommendations of the Detailed Assessment of Observance of the CPMI–IOSCO (Committee on Payments and Market Infrastructures–International Organization of Securities Commissions) Principles for Financial Market Infrastructures in Bosnia and Herzegovina. Major achievements have been made in modernizing the payment system. Resiliency of the interbank payment system was demonstrated against the severe floods of May 2014. The currency board arrangement has helped protect the payment system from credit risks. The formal assessment of the real-time gross settlement system suggests that many of the standards are observed. The legal basis is relatively sound, but finality and netting arrangements require greater legal certainty and protection at the law level.
August 3, 2015
Bosnia and Herzegovina: Financial Sector Assessment Program - Insurance Sector—Technical Note
Description: This Technical Note discusses key findings and recommendations of the assessment on the Insurance Sector for Bosnia and Herzegovina (BiH). It is observed that 10 insurance companies, accounting for 40 percent of the nonlife market, have low solvency margins and may require supervisory action in the near future. Motor Third Party Liability insurance remains under pressure as market participants are not always compliant with the statutory tariff. It is expected that the Insurance Agency of Bosnia and Herzegovina will enhance the harmonization of entity-level regulations within BiH as well as with the European Union insurance directives.
August 3, 2015
Bosnia and Herzegovina: Financial Sector Assessment Program Technical Note—Systemic Liquidity Management, Financial Safety Net, Insolvency Framework, and Macroprudential Policy
Description: This Technical Note discusses key findings and recommendations of the assessment on Systemic Liquidity Management, Financial Safety Net, Insolvency Framework, and Macroprudential Policy on Bosnia and Herzegovina. It is observed that there are constraints on the ability of both banks and the Central Bank of Bosnia and Herzegovina to manage liquidity. The system lacks a central bank liquidity window, and the secondary market for government securities is also small and illiquid. Liquidity regulations should be streamlined and the adoption of the liquidity coverage ratio would strengthen liquidity management. The deposit insurance framework is a relatively well-developed paybox scheme, but further enhancements of the deposit insurance arrangements would be beneficial.
August 3, 2015
Colombia: Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement
Description: This paper discusses Colombia’s Arrangement Under the Flexible Credit Line (FCL) and Cancellation of the Current Arrangement. In the baseline scenario, growth in Colombia is expected to decelerate to 3.4 percent in 2015 but gradually return toward potential over the medium term and inflation to remain at the midpoint of the central bank’s 2–4 percent target range. The authorities are requesting a successor two-year FCL arrangement for 500 percent of quota, and cancellation of the current arrangement which expires on June 23, 2015. The IMF staff assesses that Colombia meets the qualification criteria for access to IMF resources under the FCL arrangement, and recommends its approval by the Executive Board.
July 31, 2015
Republic of Kosovo: Request for Stand-By Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Republic of Kosovo
Description: EXECUTIVE SUMMARY Key issues: Kosovo faces the dual challenge of maintaining fiscal credibility and debt sustainability while shifting its growth model from one driven by remittances and consumption to one driven by investment and the tradable sector. This requires fiscal consolidation over the next two years that deflates unproductive current spending while increasing space for critical public investment and donor-financed capital projects. It also requires steps to further preserve financial stability, improve competitiveness, remove structural impediments to bank lending, and reduce corruption. Stand-By Arrangement (SBA): The authorities have requested a 22-month, SDR 147.5 million (250 percent of quota) SBA. An initial purchase of SDR 28.1 million would become available upon approval of this request. The program will seek to preserve low debt and financial stability and rebuild government bank balances while creating conditions for more dynamic and better-balanced growth. Specifically, policies would aim at: • Strengthening public finances through fiscal consolidation, with the deficit path within the fiscal rule’s limits. This will be supported by steps to improve budget composition and deflate unproductive current spending. Capital expenditure will be protected and even enhanced through the modification of the investment clause under the fiscal rule. A new debt limit will ensure that debt remains sustainable. • Advancing financial sector reforms related to emergency liquidity assistance and risk-based supervision to bolster financial sector stability. • Raising Kosovo’s long-term growth prospects. Reforms will include the introduction of a public wage bill to boost competitiveness, a new public procurement process to improve the business environment, and steps to catalyze donor-project financing related to Kosovo’s large development needs.
July 30, 2015
Morocco: Second Review Under the Arrangement Under the Precautionary and Liquidity Line-Staff Report; Press Release; and Statement by the Executive Director for Morocco
Description: EXECUTIVE SUMMARY The economy is recovering and the outlook is favorable but still subject to significant risks. After slowing to below 2½ percent in 2014, growth is expected to be close to 5 percent in 2015, boosted by a strong agricultural output and a gradual acceleration of activity in other sectors. Fiscal policy is on track to achieve the annual deficit objective of 4.3 percent of GDP. The external position has improved rapidly, benefiting from lower oil prices and strong export performance. Inflation remains low. However, more remains to be done to reduce unemployment, especially among the youth. Assuming steadfast implementation of reforms, growth should gradually accelerate over the medium term. However, the outlook remains subject to the risks of a structurally weak growth in key advanced economies, tighter or more volatile global financial conditions, and increased volatility of energy prices. Important progress has been made on key reforms; sustaining these efforts will be important to foster higher and more inclusive growth. Significant progress was made in reforming the subsidy system, thereby reducing its costs and associated fiscal risks. At the same time, social programs on health and education were expanded. The adoption of the new organic budget law in May 2015 was a crucial step in improving the fiscal framework, while progress has also been made in upgrading the financial policy framework. Timely reform of the pension system is needed to ensure its viability while extending its coverage. Sustaining efforts to improve the business environment, competition, governance and transparency, as well as the functioning of the job market and the quality of education and vocational training, will also be important for increasing competitiveness, growth, and employment. The program remains on track and Morocco continues to meet the PLL qualification criteria. Both March 2015 quantitative indicative targets were met comfortably. Morocco continues to perform strongly in three out of the five PLL qualification areas, while not substantially underperforming in the fiscal and external areas. Staff recommends the completion of the second review under the arrangement.
July 29, 2015
Kiribati: 2015 Article IV Consultation-Press Release; and Staff Report
Description: KEY ISSUES Context. Donor-financed large infrastructure projects, increased public spending, and a pick-up in credit to households have boosted real GDP growth to close to 4 percent in 2014 and to about 3 percent in 2015. Inflation remains low, underpinned by lower food and commodity prices. Steps are being taken to reduce the many hurdles to private growth that Kiribati faces, among which are high transportation and communication costs and an increasing impact of climate change. Fiscal policy. The fiscal outlook has improved, but further efforts are needed to ensure sustainability. The recurrent balance was in large surplus in 2014 and is expected to remain positive in 2015, reflecting high revenue from license fees, and notwithstanding a large increase in expenditures. But under the historic pace of spending the sovereign wealth fund (Revenue Equalization Reserve Fund—RERF) would be depleted in about 20 years. Ensuring sustainability requires containing nominal expenditure growth to around 1½ per annum over the next five years (after accommodating climate-change-related costs), with transparent and symmetric transfers and withdrawals from the RERF around this path. Structural reforms. There is a consensus among donors that significant progress has been achieved. The State-Owned Enterprise (SOE) Reform Act is being implemented in a satisfactory way, as illustrated by the recent successful privatization of the telecommunication company. Key outstanding issues include further reforming the energy and copra sectors and improving the investment climate.
July 29, 2015
Somalia: 2015 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Somalia
Description: KEY ISSUES Context: Somalia is a fragile state emerging from a protracted civil war. In 1991, the government was toppled by armed opposition groups, leading to implosion of the central government and devolution of power to administrative regions. The Fund recognized the Federal Government of Somalia on April 12, 2013, paving the way for staff to provide policy advice and technical assistance. While Somalia has been welcomed back as an active member of the Fund, it remains ineligible for financial assistance pending the clearance of its longstanding arrears. The political and security situation remains challenging. Complex clan politics and high turnover in the members of the economic team have undermined policymaking. A new government took office on February 18, 2015, and presidential elections are planned for September 2016. Key policy issues: The Article IV discussions focused on immediate and medium-term actions for building institutions and policy frameworks for fiscal and financial management. Specifically, • Capacity building and governance. Concerted action is needed to build institutions and improve governance in order to support sustainable, inclusive growth, and poverty reduction. In particular, urgent efforts are required to set in place sound mechanisms and institutions to ensure that prospective natural resource wealth, notably hydrocarbons, is well managed. Considerable donor assistance is required for helping Somalia to meet these daunting challenges. • Fiscal. Decisive steps are necessary to build fiscal discipline, underpinned by realistic budgeting and effective implementation systems, including commitment controls. The 2015 budget needs to be revised in light of revenue shortfalls. An emergency revenue mobilization plan and an expenditure review are warranted. • Financial sector. Efforts are needed to develop the currently rudimentary financial system. Swift action is required so that remittances can be channeled through the international banking system. Currency reform should not be implemented until prerequisites are in place. Given the extent of dollarization and the absence of monetary policy instruments, the central bank is unable to conduct monetary policy. Past IMF advice: The latest Article IV consultation was on November 13, 1989, and focused on the low priority attached by the government in place then on the need for better controlling unproductive spending, and on the need for better economic and social services.
Notes: See Also Somalia Achieves Key Economic Data Milestone and Video: Four Things You Need to Know about Somalia's Economy
July 27, 2015
Euro Area Policies: Staff Report for the 2015 Article IV Consultations with Member Countries
Description:
Context. The recovery is strengthening, underpinned by lower oil prices and the ECB’s Policies. A concerted, collective effort is needed to sustain the recovery, avoid overburdening Demand support. Quantitative easing (QE) has boosted confidence and improved financial conditions. Balance sheet repair. High non-performing loans (NPLs) in some banks are eroding profitability and Better economic governance. A more effective and simpler governance framework, including a move towards "outcome-based" benchmarking, could help advance
expanded asset purchase program. But the medium-term outlook remains weak, weighed down by the
legacies of insufficient demand, lagging productivity, and weak bank and corporate balance sheets.
monetary policy, and lift potential growth over the medium term, which would have positive
spillovers for the rest of the world:
The ECB’s clear communication to stay the course on QE until inflation is on a sustained adjustment
path will help anchor expectations. Countries should adhere to the SGP, but those with fiscal space
should use it to support investment and structural reforms.
discouraging new lending. Complementary policies are needed to incentivize NPL resolution through
strengthened prudential supervision, insolvency reforms, and development of distressed debt
markets. Asset management companies (AMCs) could help banks to offload NPLs and assist with
corporate
restructuring.
Productivity-enhancing structural reforms. Labor and product market reforms
should be combined with faster implementation of the Services Directive, further improvements of
insolvency regimes, and a greater push toward a single market in capital, transport, energy, and
the digital economy. A capital markets union would help diversify funding sources and reduce
reliance on bank lending.
structural reforms, while the fiscal framework could be simplified and strengthened.
July 27, 2015
Euro Area Policies: Selected Issues
Description: This Selected Issues paper discusses the risks of low growth and inflation over the medium term for the euro area. It examines the consequences of longer term trends that predate the crisis and the progress made in addressing the crisis legacies of high unemployment and debt. The paper illustrates, in a downside scenario, how low potential growth and crisis legacies leave the euro area vulnerable to the risks of stagnation. The weak medium-term prospect and limited policy space leave the euro area vulnerable to shocks that could lead to a prolonged period of low growth and inflation. Model simulations suggest that a modest shock to investor confidence could push up risk premia and real interest rates, as policy space is constrained at the zero lower bound and fiscal policy space to provide stimulus is limited. Moreover, the lingering crisis legacies of high debt and unemployment could amplify the original shocks, creating a bad feedback loop and keeping the economy stuck in equilibrium of stagnation.