Press Release No. 04/36

Press Release: IMF Completes Final Review Under Stand-By Arrangement for Bosnia and Herzegovina and Approves US$18 Million Disbursement

February 25, 2004

The Stand-By Arrangement, which was approved on August 2, 2002 totals SDR 67.6 million (about US$101 million). So far, Bosnia and Herzegovina has drawn SDR 55.6 million (about US$83 million). Following consecutive two-month extensions approved on October 7, 2003 (see Press Release No. 03/164) and December 31, 2003 (see Press Release No. 03/231), the Arrangement will expire on February 29, 2004.

Following the Executive Board discussion, Anne Krueger, First Deputy Managing Director and Acting Chair, said:

"Bosnia and Herzegovina continued to make significant progress in economic reform in 2003, by sustaining economic growth, despite a severe drought, and bringing inflation down to industrial country levels. A firm fiscal stance and a reduction in credit expansion led to a strengthening of the external current account, supporting the currency board arrangement, which serves the country well. An impressive structural reform agenda is underway and will support efforts at macroeconomic control.

"The authorities' commitment to maintain a strong fiscal stance in 2004 is critical as it will contribute to a sustainable fiscal position and a reduction in the external current account deficit. Further fiscal tightening might be required in view of uncertain trends in the balance of payments and domestic savings. Difficulties in approving the 2004 budget point to the challenges in improving fiscal policy coordination and containing current spending, especially on wages and pensions. The April 2004 civil service employment and remuneration reforms in the Republika Srpska need to be implemented with particular care.

"A rapid expansion in bank credit is being contained, but further restraint is called for. The authorities need to firmly apply monetary policies and regulations introduced in mid-2003 that alter reserve requirements, and tighten bank core capital requirements and foreign exchange exposure regulations.

"The recently adopted law on indirect taxation will provide for establishment of a single indirect tax and customs administration, harmonization of indirect taxes, and a means to replace the sales tax with a value-added tax in the next few years. In addition, the authorities have developed a plan to restructure unsustainable domestic claims on government, and expect to achieve major defense spending reforms in 2004. The installation of the central bank board in August 2003 and improved banking regulation should contribute to a strengthened financial system.

"Although the authorities have already taken steps to invigorate corporate restructuring and privatization of state enterprises, core tasks remain. The authorities need to resolve state enterprise debt issues and take specific steps to remove regulatory, legal, and tax impediments to business development. They also need to induce more efficient labor markets and strengthen macroeconomic statistics," Ms. Krueger said.