Press Release No. 99/26

Press Release: IMF Approves Augmentation and Extension of Bosnia and Herzegovina's Stand-By Credit

June 28, 1999

The International Monetary Fund (IMF) today approved an augmentation of SDR 16.91 million (about US$23 million) and an extension-through end-April 2000-of Bosnia and Herzegovina's stand-by credit that was approved on May 29, 1998, in an amount equivalent to SDR 60.6 million (about US$81 million). (See Press Release No. 98/19.) This brings total financial support to SDR 77.51 million (about US$ 104 million). Today's decision was made in conjunction with completion of the first review, and makes an amount equivalent to SDR 29.03 million (about US$39 million) available immediately.

In commenting on the Executive Board discussion on Bosnia and Herzegovina, Stanley Fischer, First Deputy Managing Director of the IMF, said:

"Directors commended the authorities for the solid macroeconomic performance in 1998, particularly as regards the continued decline in inflation. They considered that this success stemmed from strict adherence to currency board rules, together with prudent fiscal policies. Moreover, Directors praised the authorities for persevering with their stabilization and reform efforts despite the challenges posed by the Kosovo conflict.

"Directors considered that further strengthening of government finances was critical, and urged the authorities, particularly those at BiH state level, to improve the timeliness of reporting budget execution. They also urged the authorities to improve the budgetary process, including by enhancing transparency and by bringing off-budget expenditure on the budget. They noted that Donor support to finance budgetary gaps arising from the Kosovo conflict should enable all levels of government to implement their budgets for 1999. At the same time, Directors stressed that the authorities should refrain from undertaking new expenditure commitments beyond those contemplated in the 1999 budgets unless additional resources become available.

"Directors welcomed the satisfactory operation of the Currency Board Arrangement, and the increased acceptance of the convertible marka (KM). They encouraged the authorities to accelerate and implement forcefully, the comprehensive reform of the payments system.

"Directors stressed that the authorities should accelerate structural reforms and improve governance in order to foster sustained growth. They urged the governments to eliminate discretionary tax and customs tariff exemptions, including for foreign investors, to be more even-handed and transparent in their approach to the payment of social benefits, and to improve customs and tax administrations. Other priorities were to accelerate privatization of banks and enterprises, and to close insolvent banks.

"Directors noted that political difficulties continue to hinder policy implementation in many areas of reform. In this connection, they highlighted the importance of the authorities demonstrating ownership of their program. Recent accomplishments were encouraging and an intensification of the authorities' efforts to implement structural reforms was urged.

"Directors reiterated their support for the BiH authorities' adjustment and reform efforts and wished them every success," Fischer said.

ANNEX

Program Summary

Bosnia and Herzegovina has made important progress toward a sustainable market economy, and economic developments have been broadly in line with program¹ expectations. Output expanded by approximately 20% during 1998, although it remains at one-third its level before the 1992-95 war, and economic recovery remains weak and largely aid driven. During 1999, real growth is expected to slow to about 8%-owing to the impact of the Kosovo conflict. Inflation is expected to be less than 5% in convertible marka (KM) terms through continued fiscal restraint and firm application of currency board rules. Policies for 1999 aim to further expand domestically financed private investment to set the stage for decreasing reliance on external assistance, though in the near term, substantial inflows of external assistance on concessional terms are essential.

The currency board arrangement was established in mid-1997, and, together with prudent fiscal policies, has been instrumental in achieving solid macroeconomic performance. The central bank (CBBH) has expanded its branch network throughout the country, set up reserve accounts for all domestic banks, and introduced the KM as the new currency. Inflation has continued to decline in areas of the country where the KM, which is at 1:1 parity with the deutsche mark, is the dominant currency.

The fiscal system consists primarily of budgets for the State of Bosnia and Herzegovina and the two Entities (the Federation of Bosnia and Herzegovina and the Republika Srpska). In June 1998, ad hoc transfers from the Entities to finance the State were replaced by automatic transfers from Entity budgets to cover the State administrative budget and external debt service. For both Entities, fiscal plans for 1999 specify that 90% of budgeted expenditures are to be covered by their own resources, with the remaining10% covered through external grants and concessional loans. There will be no recourse to domestic financing of the 1999 budgets.

Structural reforms have suffered delays, owing in part to the complex governmental decision-making process. During the fourth year of the reconstruction program, Bosnia and Herzegovina aims to make progress on privatization of banks and enterprises; reform of the payments systems; liquidation of payment bureaus; strengthening the financial system; development of treasury systems and improved government administration; greater transparency and accountability at all levels of government; reform of the pension and health systems; and consistent implementation of a simplified customs tariff system throughout the country.

On December 20, 1995, Bosnia and Herzegovina succeeded to the membership in the IMF of the former Socialist Federal Republic of Yugoslavia, effective December 14, 1992. Its quota² is SDR 169.1 million (about US$227 million). Its outstanding use of IMF credit currently totals SDR 47 million (about US$63 million).