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Bosnia and Herzegovina: Sixth and Seventh Reviews under the Stand-By Arrangement and Requests for Augmentation of Access and Modification of Performance Criteria

Author(s):
International Monetary Fund. European Dept.
Published Date:
July 2014
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OUTLOOK AND RISKS

1. The economy rebounded stronger than expected in 2013, with real GDP estimated to have expanded by nearly 2 percent, and external imbalances were reduced. Supported by growing external demand, especially from EU countries, exports continued to lead the recovery. This despite a decline in exports to Croatia, one of BiH’s largest trading partners, due to unresolved trade issues following Croatia’s EU accession. The expansion of industrial production became gradually more broad-based. High unemployment, fiscal consolidation, and weak consumer confidence continued to dampen domestic demand, however, while inflation turned negative in the second half of the year. Credit growth, althought still weak, started to pick up, including to enterprises. With strong export growth and weak domestic demand, the current account deficit is estimated to have narrowed to 5½ percent of GDP, and international reserves continued to rise to a record high (about 5.4 month of prospective imports). However, the increase in economic activity did not yet result in a decline in unemployment, which remains high at 27½ percent.

2. Growth was set to accelerate in 2014, but record rainfalls in May that caused massive flooding and a large number of landslides dramatically changed the outlook. This natural disaster caused major human suffering and hardship, affecting almost one quarter of the population (Box 1). A large number of houses, businesses, farmlands, and infrastructure were destroyed or severely damaged. Dislodged landmines will complicate the recovery and reconstruction process. Preliminary estimates suggest a loss equivalent to 5–10 percent of GDP, and an immediate rehabilitation need of essential infrastructure amounting to nearly 2–4 percent of GDP.

3. The level of uncertainty is high, as the impact of the disaster has yet to become fully clear, but growth is expected to slow considerably this year, to about 0.7 percent, with considerable downside risks. Production will fall sharply in the immediate aftermath of the disaster, not only in the directly affected areas, but also elsewhere through interruptions in supply chains and damage to roads, railroads, and other essential infrastructure. As a result, exports will fall too, and together with a likely rise in imports, particularly of such items as food, equipment, and construction materials, this has created an urgent balance of payments need. The current account deficit is projected to increase to nearly 11 percent of GDP, cushioned by an increase in remittances as the diaspora responds to the emergency. Output is expected to gradually recover in the course of the year, as the clean-up and reconstruction get underway. The extent to which activity is affected and the speed at which the economy will recover in the course of this year and next will not only depend on the size of the damage, but will also depend heavily on the speed at which support for the reconstruction effort can be mobilized and absorbed. Growth is likely to accelerate in 2015 as reconstruction continues and activity rebounds. Inflation is projected to increase, albeit from a lower base.

Bosnia and Herzegovina: Macroeconomic Impact of Natural Disaster
201320142015
EBS/14/4Est.EBS/14/4Proj.EBS/14/4Proj.
Economic growth0.81.82.00.73.53.5
Inflation0.3-0.11.11.11.51.5
Current account balance-7.9-5.4-7.6-10.7-7.0-8.6
General government budget balance-2.2-1.9-1.7-4.1-1.3-2.7
Public debt44.942.542.846.240.246.0
Sources: IMF staff estimates and projections.
Sources: IMF staff estimates and projections.

Box 1.Impact of the Flooding and Landslides

In May 2014, the heaviest rainfall in more than a century hit BiH, causing intense flooding and a large number of landslides. Three months worth of rainfall fell within a period of three days. A comprehensive Recovery and Needs Assessment, conducted by the European Union (EU), the World Bank, and the United Nations, is underway, but very preliminary estimates suggest that this natural disaster:

  • Affected 1 million people, or more than a quarter of the population.

  • Affected more than a quarter of the total area of BiH. 72 municipalities, half of the total number of municipalities, were hit by floods and landslides, of which 25 were severely impacted.

  • Damaged over 50,000 homes and destroyed about 2,000.

  • Damaged or destroyed large parts of critical infrastructure: roads, railroads, bridges, and electricity and water supplies.

  • Damaged about 200 schools, hospitals, and other public buildings.

The total damage, including economic losses, is estimated at a range between €1-1½ billion, equivalent to 5–10 percent of GDP, of which roughly €0.5 billion is the estimated immediate damage to buildings and infrastructure.

The clean-up and reconstruction will be complicated as a large part of the impacted areas could now contain mines and other unexploded ordinance, which are feared to have become dislodged as a result of the flooding and landslides. This could add substantially to the cost of the recovery.

4. The outlook for 2014 also remains clouded by significant domestic political risks and uncertainty about the external environment. As the general elections—scheduled for October 2014—approach, an already difficult political situation is becoming more unpredictable, even more so as political parties may propose sub-optimal policies to ease the hardship caused by the disaster. This poses significant risks to the sustained implementation of policies envisaged under the program. Large protests erupted in February, reflecting socio-economic and political grievances, especially of the younger generation, and it has become more difficult to obtain parliamentary support for economic reform measures. On the external side, rising geo-political tensions, financial market strains, or stagnation in Europe also pose risks to the outlook.

Figure 1.BiH: Selected Economic Indicators, 2007–14

Sources: BiH authorities; and IMF staff estimates and projections.

PERFORMANCE UNDER THE PROGRAM

5. Fiscal consolidation was largely on track in 2013 and public debt was put on a downward path. The overall government budget deficit is estimated to have been reduced to 1.9 percent of GDP in 2013, compared to an (unadjusted) target of 2 percent of GDP (or 2.4 percent of GDP adjusted), and down from a deficit of 2.7 percent of GDP in 2012.1 Sizable revenue shortfalls—including lower-than-budgeted indirect tax revenues, a delay in the distribution of dividends from the electricity transmission company TRANSCO, and lower receipts from the sale of military assets—combined with delays in securing external financing forced the authorities to significantly compress non-priority spending toward the end of the year. In addition, foreign loans to finance road construction have been disbursing at a somewhat slower pace than originally planned. The indicative target on net lending by the general government (excluding foreign-financed projects) based on staff’s estimates is expected to have been met by a considerable margin.2 The public debt-to-GDP ratio fell for the first time in several years from nearly 45 percent in 2012 to 43 percent in 2013.

6. Revenue collection continued to lag behind, however, and the end-2013 indicative target for the gross collection of indirect taxes was missed by a wide margin. For the largest part, this was due to the weak state of domestic consumption—and falling prices—but it also reflected delays in the full implementation of measures to improve tax collection (see below).

7. As a result, the entities missed the end-December 2013 performance criteria on their central government fiscal balances (net lending). All other end-December 2013 performance criteria and indicative targets were met. Despite considerable efforts to compress spending toward the end of the year—spending by the entity central governments was 6 percent less than originally budgeted—this was not enough to fully offset the shortfall in indirect tax revenues. The Institutions of BiH met its fiscal balance target by a wide margin, however, and the three central governments combined still recorded a budget surplus of 0.8 percent of GDP in 2013 as planned.3

8. Indirect tax collection started to show encouraging signs in the first quarter of 2014. Gross collection rose by 6½ percent in the first quarter of 2014, meeting the indicative target, and by over 8 percent through mid-May compared to the same period last year, suggesting that domestic demand was starting to recover and that recent measures to improve collection had started to generate results.

9. With revenue collection picking up and with continued tight control over spending, all end-March 2014 fiscal performance criteria were met. Also, neither the entity central governments, nor the Institutions of BiH accumulated any new domestic spending arrears through end-March 2014. The performance criteria on non-concessional short-term debt and external payment arrears were also met. Based on preliminary data and staff’s estimates the indicative target for net lending by the general government for end-March is expected to have been met as well, while data to assess observance of the indicative ceilings for changes in the stock of other accounts payable of the general governments of the Federation of Bosnia and Herzegovina (FBiH) and the Republika Srpska (RS) are not yet available.2

10. Progress continued to be made in implementing structural reforms, albeit with increasing delays. These delays largely reflected the increasing difficulties in the run-up to the elections to obtain parliamentary approval of key measures and to implement measures aimed at strengthening inter-entity cooperation and joint institutions. Nevertheless, all continuous and quarterly structural benchmarks were observed, albeit also with some delays, and:

  • The authorities harmonized excises on different tobacco products. The BiH parliament approved an increase in excises on fine-cut tobacco, to make them equivalent to those on cigarettes, effective July 2014 (a prior action). This will help reverse the decline in tobacco excises due to substitution between different tobacco products that had emerged in recent years—as excises on cigarettes were gradually raised closer to EU levels, while excises on fine-cut tobacco were left unchanged. However, its effectiveness will also depend on increased cooperation between the Indirect Tax Authority (ITA), the entity inspection offices, and customs to combat smuggling and evasion.

  • The four tax agencies (ITA, FTA, RSTA, and BDTA) expanded their exchange of taxpayer information, which had started in January 2014. With the removal of remaining technical and legal hurdles, the tax agencies now have comprehensive and automated access to each other’s taxpayer information (a prior action) to help improve compliance.

  • The ITA has continued to publish updates of the list of largest tax debtors to enhance transparency. The ITA will also start to publish information on the stock of indirect tax arrears and rescheduled tax debts, and information on rescheduling agreements. This enhanced transparency has increased pressure on debtors to reduce their outstanding tax obligations, and the stock of arrears was reduced by close to KM 20 million in the first quarter of 2014.

  • The RS government linked farmers’ eligibility for agricultural subsidies to their registration and payment of contributions. The necessary legal and administrative changes have been completed (a prior action). This will help to improve the pension funds’ financial position and enable the authorities to better target agricultural subsidies.

  • The FBiH authorities amended the annual Law on Budget Execution to ensure the continued functioning of the finance ministry in the absence of a minister (a prior action). The amendment allows the government to assign an alternate to the finance minister who can sign payment orders. This will prevent a recurrence of the disruption to the government’s financial transactions in January 2014 when the finance minister was dismissed by the president—a decision later suspended by the FBiH Constitutional Court.

  • The implementation of the new Law on Budgets for the FBiH is well underway. The required by-laws and implementation regulations have largely been completed. A new FBiH Fiscal Coordinating Body—including the central government, the cantons, and representatives of municipalities—first met in May. The Coordinating Body will be able to play a useful coordinating role in addressing the fiscal impact of the recent natural disaster.

  • The BiH Fiscal Council endorsed a common definition of arrears. Any amount that is not paid within 90 days after the due date is considered to be in arrears. This common definition, together with the earlier requirement to enter payment due dates for all commitments into the treasury systems, is expected to improve the reporting and monitoring of budget execution at all levels.

  • The BiH parliament approved a new procurement law for BiH in May (an end-February 2014 structural benchmark). The new law was prepared with assistance from the EU and the OECD, and will align BiH’s procurement framework with EU standards.

  • The BiH parliament also approved a new law to combat money laundering and the financing of terrorism in early June. The new law is consistent with Financial Action Task Force (FATF) recommendations. However, parallel changes to the BiH criminal code that are needed for the new AML/CFT framework to become fully effective are still under parliamentary consideration. These will need to be adopted soon to ensure that MONEYVAL can reverse its listing of BiH as having made insufficient progress to address AML/CFT shortcomings.4 Adoption of the changes to the criminal code is expected by end-July.

  • All banks under intensified supervision have hired external auditors to conduct a thorough asset quality review (an end-December 2013 structural benchmark). The review process is expected to be completed in the coming months—the process will be somewhat delayed due to the impact of the disaster—and provide valuable information to the banking agencies about potential balance sheet risks in those banks that had already been identified as vulnerable under adverse scenarios.

POLICY DISCUSSIONS

Policy discussions took place in the immediate aftermath of the disaster. The uncertainty about the impact of the disaster is still large, but it is clear that fiscal consolidation will need to be temporarily interrupted as the country recovers and rebuilds. Discussions focused mainly on addressing the impact of the disaster on government finances and the banking system, and particularly on the need to ensure the continued function of the governments—including by paying wages and benefits—in light of the expected fall in revenues, also to avoid a further drop in economic activity. Meanwhile, the need to continue with economic reforms has become even larger if the economy is to recover stronger and create more jobs. Thus, existing and proposed new structural conditionality for the period ahead of the elections focuses not only on strengthening revenue collection and safeguarding financial stability, but also on the preparatory work for critical but complex reform measures, such as new banking and labor laws, with the aim to have these ready to be taken forward immediately after the elections.

A. Fiscal Policy

11. While uncertainty is still very high, it is clear that fiscal consolidation will need to be temporarily interrupted to absorb the large shock to the economy posed by the natural disaster. The authorities had been on track so far this year to reduce the overall fiscal deficit to the target of 1.7 percent of GDP (excluding the one-off dividend distribution by the electricity transmission company TRANSCO).5 However, based on current information and estimates, staff expects the overall deficit, including foreign assistance, to increase to over 4 percent of GDP this year, causing public debt to increase to over 46 percent of GDP. The entity central governments will need to amend their budgets for 2014 in the coming months, in consultation with Fund staff, as the situation becomes clearer. The deficit is projected to narrow in 2015 as the economy recovers, but will still be higher than projected prior to the disaster as rehabilitation efforts will continue into 2015. More specifically:

  • Revenues will fall significantly this year. The collection of indirect taxes and social contributions fell sharply in the immediate aftermath of the disaster, by some 20–30 percent. Revenues are expected to gradually recover, however, in the course of the year as the rehabilitation process gets underway and activity resumes. Also, the bulk of economic activity is located outside of the directly affected areas. The collection of direct taxes and social contributions is expected to remain depressed for a longer period in the directly affected areas, but to remain strong elsewhere. On balance, domestic revenues—taxes and contributions—are projected to fall short by about 4 percent of original forecasts for this year, equivalent to about 1½ percent of (2013) GDP.

  • Spending needs will rise, but execution will depend on availability of resources and absorption capacity. A key near-term challenge is to ensure the continued functioning of the governments as revenues fall—including the payment of wages and benefits—also to avoid a further collapse in activity. The central governments will also need to increase transfers to the social funds and lower levels of government to help offset revenue losses at those levels.6 Several donors have already made pledges of support to help with the recovery and reconstruction, either by providing new financing or redirecting and accelerating existing programs. Much of this support will take the form of loans, adding to the general government deficit, but as the implementation of assistance is likely to carry over into 2015, staff expects the impact on the 2014 overall fiscal balance to be equivalent to about 1–1½ percent of (2013) GDP.

  • The higher deficit is envisaged to be largely financed by additional foreign assistance. Other international financial institutions than the Fund are expected to provide assistance for the recovery and rehabilitation, while additional Fund support is envisaged to be used to help offset the revenue losses.

  • As the impact of the disaster—including its impact on government finances—gradually becomes clearer, fiscal policies may need to be further adjusted during the remainder of the year. A sharper-than-projected decline in revenues would increase financing needs— which could be covered by mobilizing additional external or domestic financing—and may require a further compression of non-priority spending. Alternatively, should revenues decline by less the overall deficit could be contained to below the current forecast.

12. To contain current spending, the authorities agreed to:

  • Strictly contain spending on wages and benefits and to curtail non-priority spending where possible. In this regard, they will refrain from wage and pension increases other than those that had already been included in the 2014 budgets. Moreover, the cost of advancing the public sector wage increases in the RS that had already been planned to come in effect mid-year will be offset by the recently revised law on public sector wages and by savings elsewhere within the budget envelope, mainly on non-priority current spending (goods and services, transfers, and grants).7

  • Ensure that the costs of privileged pensions in the FBiH stay within allocated amounts. With the exception of some minor elements, the new law on privileged pensions that was adopted last year was upheld in a review by the FBiH Constitutional Court. Savings from reducing benefits of existing beneficiaries, by 20 percent on average, have been somewhat less than anticipated, mainly as the audits of existing beneficiaries are taking longer to complete. This has been offset, however, by fewer-than-projected new entrants. Audits are taking longer to complete following a Constitutional Court ruling to ensure due process.

  • Finish work to establish a centralized database of all beneficiaries of social benefits in FBiH. The new law for this purpose was submitted to the FBiH parliament in April and is expected to be adopted by end-July 2014 (a new deadline for this structural benchmark). This database will help the authorities to improve the targeting of benefits and avoid double-dipping.

13. Efforts to improve revenue collection remain of critical importance. The authorities aim to mitigate the impact of the disaster on revenues by continuing with their efforts to improve tax collection:

  • The ITA is stepping up its fight against VAT fraud. A new unit for the detection and prevention of VAT fraud will be set up within the ITA, and with the help of technical assistance from the Fund, it will implement a risk-based approach for the selection of VAT refunds for audit, focusing more on a claimant’s compliance history than the amount of the refund—also as the scope for VAT fraud is likely to increase with a loss of records and higher levels of foreign assistance. In addition, only taxpayers that are fully compliant with their VAT obligations can request VAT refunds.

  • The ITA will also increase its efforts to collect outstanding tax debts. Building on the momentum generated by the publication of the largest tax debtors, the ITA will try to work out payment plans with tax debtors that owe more than KM 2.5 million, requiring at least 15 percent payment upfront and that debtors remain current thereafter. If no agreement can be reached by end-September 2014—or if taxpayers fall into arrears again—the ITA will pursue all options open to it under domestic law to enforce collection (a new structural benchmark for end-September 2014). The ITA already transferred several cases to the BiH prosecutor’s office in recent months.

  • The FBiH government is finalizing a new corporate income tax law and its adoption by parliament is expected by end-July 2014. The new law, prepared with assistance from the Fund, aims to broaden the tax base by reducing deductions and tax expenditures and to clarify the tax treatment of depreciation and banks’ loan loss provisioning to bring these in line with international practice. Similarly, the RS plans to conduct a review of its corporate income tax law to foster consistency between the two entities and with a particular focus also on its tax treatment of loan loss provisioning and transfer pricing. The new laws would become effective at the start of 2015.

  • A new customs policy law is expected to be submitted to the BiH parliament in July 2014. The new law was developed with the assistance of the Austrian and Slovenian authorities, to bring customs policies in line with EU legislation, and was approved by the ITA governing board in December 2013.

B. Financial Sector Policies

14. The natural disaster will also affect the financial sector. The banking system has been well capitalized and liquid at the aggregate level, but the impact from a prolonged period of weak economic growth had already been evident. The quality of banks’ loan portfolios had continued to deteriorate steadily in the last few years and non-performing loans (NPLs) stood at close to 15 percent prior to the disaster. This, together with a subdued demand and a lack of a comprehensive framework for NPL resolution, created a significant drag on bank lending and put pressure on banks’ profits. NPLs are expected to increase significantly as a result the natural disaster: some loans will need to be written off, while many others will need to be restructured.8 This will create a need for additional provisioning by banks and may also require some banks to raise additional capital.

15. The Standing Committee on Financial Stability (SCFS) is taking the lead in coordinating the efforts to manage the impact of the disaster on the banking system. The central bank has ensured that depositors have been able to access their funds while bank branches in the affected areas had become inoperable. The banking agencies have requested banks to make a first assessment of the impact on their loan portfolios. The SCFS is also developing guidelines for the restructuring of loans to clients who were directly or indirectly impacted. In this regard, staff stressed it was crucial that banks continue to classify loans and provision in line with regulations, to be able to accurately assess banks’ health. In doing so, the banking agencies could then allow some forbearance for banks that may need additional capital as a result of the impact of the disaster, to avoid excessive deleveraging, by allowing longer timeframes for remedial actions, provided banks can present a credible plan to return to meeting capital adequacy requirements, including such actions as profit retention, dividend bans, potential asset sales, and equity issuances.

16. The recovery and reconstruction will also require new bank loans. Businesses affected by the disaster will require new funding to get back on their feet and be able to service existing debts. Several donors have already indicated they are willing to provide new, or redirect undisbursed, loans that can be channeled through banks or micro-credit institutions to facilitate the recovery.

17. Meanwhile, the authorities will continue to build on the progress made in safeguarding financial sector stability. These efforts focus on improving contingency planning and crisis preparedness; enhancing risk monitoring; and strengthening the legal and regulatory framework for the banking sector, including the framework for NPL resolution. In particular:

  • The Standing Committee on Financial Stability (SCFS) is preparing an overarching contingency plan for BiH. All SCFS members, with the assistance from the Fund, developed contingency plans in their respective areas, detailing possible actions and coordination with others in the event of financial sector difficulties. Based on these individual plans, the SCFS will adopt a consolidated contingency plan, and amend the Memorandum of Understanding that governs the SCFS as needed, by end-September 2014, with a view to ensuring that the SCFS can effectively fulfill its coordinating role in crisis resolution (a new structural benchmark for end-September 2014).

  • The detailed asset quality reviews of banks that had already been under enhanced supervision will be completed soon. The banking agencies already asked four banks to increase their capital, of which two already did. Meanwhile, the banking agencies have increased communication and cooperation with home supervisors and expect to sign Memoranda of Understanding with the home supervisors of the largest foreign-owned banks in the coming months.

  • Work has started on drafting new banking laws in both entities, with assistance from the Fund and the EU. The laws will be in line with EU banking directives and Basel II requirements, while the tool-kit for dealing with problem banks will be expanded. As preparing the new laws will require more time—and further technical assistance—the authorities aim to have drafts approved by the respective governments by end-September 2014 (new deadlines for the end-June 2014 structural benchmarks).

  • Efforts are also underway to improve the framework for recovering and resolving NPLs, and to enhance creditors’ and consumers’ rights. This includes legislative and regulatory changes needed to support the establishment of asset management companies—which will also require more time and technical assistance, with drafts now expected to be ready by end-September 2014 (new deadlines for the end-June 2014 structural benchmarks)—and establishing a voluntary out-of-court restructuring system. To protect consumers’ rights, the FBiH adopted a new Law on the Protection of Consumers of Financial Services, and at the same time, to protect creditors’ rights, the FBiH authorities have asked parliament to issue an authentic interpretation of the newly adopted Law on Guarantors, to clarify that guarantees cannot be revoked retroactively. Both entities will also review bankruptcy laws to streamline and shorten bankruptcy proceedings.

C. Improving the Business Environment and Job Creation

18. Reforms to improve the business environment are moving forward, but labor market reforms are faced with resistance. In particular:

  • Both entities have been making substantial progress in making it easier to start and operate a business. In the RS, the one-stop shop for business registration has been fully operational since late 2013, resulting in a surge in business registration. To further streamline the process, online e-registration will be introduced in the RS by mid-2014. Similarly, the FBiH parliament is expected to approve shortly the new Laws on Companies and Inspections and amendments to the Law on Business Registration that had been prepared with the assistance of the World Bank.

  • Achieving consensus with the social partners on new labor market legislation that would help create more jobs is proving difficult, however. The dialogue with the social partners has been progressing only slowly with frequent setbacks and the recent natural disaster—causing near-term job losses estimated between 10,000 and 20,000—and the approaching elections have further complicated the process. Nevertheless, both entities remain committed to move ahead with this critical reform. They will continue to work with World Bank and Fund staff in the coming months to finalize draft labor laws that are more conducive to job creation. These drafts can then form the basis for further discussions with the social partners, and with sufficient time also needed for public debate, approval of the new laws would fall to the next parliaments by end-December 2014 (new deadline for these structural benchmarks). The adoption of new labor market legislation will also pave the way for the elimination of take-home pay protection for public sector employees in the RS by end-December 2014 (a new deadline for this structural benchmark).

19. Good progress continues to be made in WTO accession discussions and the authorities expect to complete the process by end-2014. The remaining legislative changes requested by partner countries are expected to be completed in the coming months, including adoption of a revised FBiH Law on Trade and the BiH By-Law on Genetically-Modified Organisms. On the other hand, little progress has been made in resolving trade disputes with Croatia and the EU following Croatia’s EU accession, which continues to adversely affect BiH’s agricultural exports to Croatia.

D. Program Modalities

20. The authorities are requesting an augmentation of access of SDR 84.55 million (50 percent of quota) to help address the balance of payments need created by the recent natural disaster. The drop in production and exports and the increased import needs as a result of the flooding and landslides have created an urgent balance of payments need. As this financing need is immediate, the authorities request that the additional financing is made available upon completion of the sixth and seventh reviews. The requested augmentation would bring total access under the arrangement to SDR 558.03 million (330 percent of quota). The additional access would not trigger exceptional access policy, neither under annual nor under cumulative access limits. As noted above, within the context of BiH’s currency board arrangement, the additional support would be channeled to the entity central government budgets, to help cover the revenue losses due to the disaster and thus avoid a further collapse in activity.

21. Other international financial institutions are also expected to help cover BiH’s additional financing needs. This includes the World Bank, which is planning to provide $100 million in emergency relief, as well as the EU, the European Investment Bank, the Council of Europe Development Bank, and the European Bank for Reconstruction and Development, which together are considering to provide new or to redirect existing assistance toward the rehabilitation in the amount of €200–300 million, of which the EU already committed to provide €42 million in immediate emergency relief. With this, the program will remain fully financed, but any additional support would help limit the decline in reserves.

22. The authorities are also requesting a modification of the fiscal performance criteria for end-June, end-September, and end-December of 2014, to reflect the expected loss in revenues and additional spending needs, as shown in Table 1 attached to the authorities’ supplementary Letter of Intent of June 13, 2014. As the degree of uncertainty is very high, further revisions may be needed during the remainder of the program.

Table 1.Bosnia and Herzegovina: Selected Economic Indicators, 2011–19
201120122013201420152016201720182019
EBS/14/4Proj.Proj.
Nominal GDP (KM million)25,77225,73426,38527,39327,12328,73530,57432,73035,02737,472
Gross national saving (in percent of GDP)9.08.912.88.79.111.011.912.512.913.3
Gross investment (in percent of GDP)18.118.118.216.319.819.718.818.718.418.2
(Percent change)
Real GDP1.0-1.21.82.00.73.53.74.04.04.0
CPI (period aver age)3.72.0-0.11.11.11.51.82.02.12.1
Money and credit (end of period)
Broad money5.83.47.95.03.64.74.55.25.85.8
Credit to the private sector4.22.82.32.43.26.77.27.97.98.0
(In percent of GDP)
Operations of the general government
Revenue45.946.345.146.245.145.345.545.645.645.6
Of which: grants2.12.22.42.12.52.62.72.82.93.0
Expenditure48.848.947.047.549.248.046.846.445.945.6
Of which: investment expenditure6.36.36.46.57.87.87.17.27.17.1
Net lending-2.8-2.7-1.9-1.4-4.1-2.7-1.4-0.8-0.30.0
Net lending, excluding interest payment-2.2-1.9-1.2-0.5-3.3-1.7-0.40.00.40.8
Total public debt40.844.642.542.846.246.044.642.238.735.9
Domestic public debt15.016.814.512.313.213.013.714.513.912.6
External public debt25.827.828.130.532.933.030.927.624.823.2
(In millions of euros)
Balance of payments
Expor ts of goods and services4,1034,0624,2984,5684,4124,7445,0945,4325,7816,160
Imports of goods and services7,6947,1166,9147,7137,9838,0268,3698,8049,2349,682
Cur rent transfers, net1,7921,8621,8401,9341,9701,9012,0352,1382,2492,367
Cur rent account balance-1,284-1,218-734-1,071-1,489-1,270-1,085-1,036-990-945
(In percent of GDP)-9.7-9.3-5.4-7.6-10.7-8.6-6.9-6.2-5.5-4.9
Foreign direct investment (+=inflow)342.3273.2259.3328.8256.6333.3355.4379.4405.5433.9
(In percent of GDP)2.62.11.92.31.92.32.32.32.32.3
Gross official reserves3,2853,3263,6133,4853,6213,6373,6473,6753,6753,784
(In months of imports)5.45.65.45.15.45.24.94.74.54.5
Exter nal debt, percent of GDP48.952.250.853.954.654.251.647.744.342.1
Exter nal debt service/GNFS exports (percent)14.912.613.714.714.812.813.015.213.78.9
Sources: BiH authorities; and IMF staff estimates and projections.
Sources: BiH authorities; and IMF staff estimates and projections.
Bosnia and Herzegovina: Estimated Financing Requirements(in millions of euros)
20142015Incremental
EBS/14/4Proj.EBS/14/4Proj.needs 2014-15
Government support7581,188432620618
Project financing and rehabilitation444707373565455
Existing projects444427373379-11
Rehabilitation--280--187467
BoP gap (budget gap)3144815955163
IMF 1/276371191995
World Bank38110403668
Gross international reserves (+ = increase)9686215-135
Sources: IMF staff estimates and projections.

EBS/14/4 2014 figure includes sixth purchase that was disbursed in January 2014.

Sources: IMF staff estimates and projections.

EBS/14/4 2014 figure includes sixth purchase that was disbursed in January 2014.

23. Notwithstanding the natural disaster, BiH has sufficient capacity to discharge its obligations to the Fund in a timely manner. Public and external debt will increase this year and next given the large amounts of financing that are needed to offset the revenue losses and to facilitate the reconstruction. Debt sustainability analysis suggests that with a resumption of economic growth and fiscal consolidation next year, public and external debt will return to a downward path and debt servicing obligations will be manageable. Debt indicators could deteriorate rapidly to unsustainable levels, however, in case of sustained adverse shocks, notably in case of a prolonged growth shock or a departure from the currency board arrangement. BiH has an excellent record of meeting Fund financial obligations. With the expectation that performance under the program remains strong, BiH would return to a sustainable medium-term growth path, providing assurance that it should continue to be able to service its obligations to the Fund on time.

Box 2.Structural Conditionality until the October Elections

Tax collection
- Parliamentary approval of harmonization of excises on tobacco productsPA
- Full exchange of taxpayer information between tax agenciesPA
- Collection of indirect tax arrears from largest tax debtorsSB (Sep)
Public financial management
- Ensure uninterrupted operation of the FBiH finance ministry in the absence of a finance ministerPA
- Condition farmers’ eligibility for agricultural subsidies in the RS on their registration and payment of contributionsPA
- Establisment of single registry of beneficiaries of social benefits in the FBiHSB (Jul)
Financial stability
- Adoption of overarching contingency plan by SCFSSB (Sep)
Preparing draft legislation for adoption after the elections
- Government approval of new entity banking lawsSB (Sep)
- Government approval of new entity legislation on asset management companiesSB (Sep)

24. A safeguards assessment of the central bank is currently underway. This assessment updated the previous assessment completed in March 2013. All recommendations from this previous assessment, including strengthening of the audit mechanism and legal functions, have since been implemented.

STAFF APPRAISAL

25. Performance under the program had been broadly satisfactory prior to the natural disaster in May, but had become more uneven as the elections approach. Economic growth and external adjustment had been on track, but weaker domestic demand and lower inflation, as well as policy slippages contributed to revenue shortfalls and two missed end-December 2013 performance criteria. Notably the implementation of measures that required parliamentary approval or aim to strengthen inter-entity cooperation and joint institutions proved more difficult as elections near, causing delays in meeting structural benchmarks. By implementing the prior actions, however, the authorities ensured that progress continued to be made in advancing reforms, including strengthening revenue collection. With revenue collection improving and continued tight spending control, the authorities were able to meet all end-March 2014 performance criteria.

26. The massive flooding and landslides in May will have a large impact on economic activity and government finances. Growth will slow, but the extent of the slowdown will depend on the speed at which support for the reconstruction effort can be mobilized and absorbed. With a considerable loss in revenues and additional spending needs, the overall government deficit will rise and will require additional financing to ensure that governments can continue to function. Non-priority government spending will need to be strictly contained and efforts to improve revenue collection will need to continue. Against this background, it is unavoidable that the process of fiscal consolidation is temporarily interrupted this year and that public debt rises to facilitate the rehabilitation and avoid a further decline in economic activity.

27. The authorities will need to closely monitor the impact of the disaster on the financial sector. The banking system has been stable and liquid, but vigilance is warranted. NPLs are likely to increase further and some banks may need additional capital. This underscores the need to continue with improving bank supervision and contingency planning, and to strengthen the legal and regulatory framework for the banking sector in general and NPL resolution in particular. As new bank financing will be crucial to help businesses and households recover, efforts to improve the legislative and regulatory framework will help place the banking system in a better position to support the economic recovery.

28. While the immediate focus is rightly on relief and rehabilitation efforts, it also remains important to maintain the reform momentum. This will require parliamentary support, as well as close policy coordination and cooperation between the Institutions of BiH and the entities to come out of the current crisis stronger, and to achieve faster growth and create more jobs in the years ahead. Improvements in business environment that make it easier to start and operate a business have already started to yield positive results, but more needs to be done to improve economic governance. It is also disappointing that the social partners have so far been unable to agree on new labor market legislation that would be more conducive to job creation, thus helping to reduce the high level of unemployment.

29. Risks to the program have increased, as the outlook is subject to a high degree of uncertainty, and domestic political risks are large. While the authorities re-affirmed their commitment to the policies under the program, the impact of the natural disaster in combination with the upcoming general elections in an already fragile domestic political environment with growing popular discontent, and combined with capacity constraints and the complex legal framework, pose significant risks to the timely and sustained implementation of policies envisaged under the program. On the external side, any softening of Europe’s economic recovery or increased financial market nervousness will directly affect BiH’s economic outlook through its adverse impact on exports, remittances, and capital flows.

30. Despite these risks, in view of the authorities’ performance so far, corrective actions already taken, and their policy commitment for the period ahead as summarized in the attached supplementary Letter of Intent of June 13, 2014, staff supports the authorities’ request for the completion of the sixth and seventh reviews under the SBA. Staff also supports the authorities’ request for an augmentation of access under the SBA to address the immediate balance of payments need and for the modification of performance criteria on the fiscal balances (net lending) of the central governments of the FBiH and the RS. Staff believes that the arrangement continues to provide a valuable anchor for economic policies during this uncertain and difficult period, as the impact of the disaster is addressed and the rehabilitation gets underway, at the same time as elections are held and the next governments are formed.

Table 2.Bosnia and Herzegovina: Real Sector Developments, 2011–19
201120122013201420152016201720182019
EBS/14/4Proj.Proj.
Real aggregates(Percent change)
Growth rates
GDP at constant 2005 prices1.0-1.21.82.00.73.53.74.04.04.0
Domestic demand1.0-2.0-1.02.15.80.33.34.33.93.8
Private2.6-2.3-0.72.64.70.24.04.03.73.6
Public-4.5-1.0-1.90.79.90.51.05.34.44.3
Consumption-1.6-1.8-1.52.35.0-0.34.24.34.03.9
Private-2.7-2.1-1.12.65.1-0.24.24.23.93.8
Public3.6-0.7-3.31.14.8-0.84.05.04.64.5
Gross capital formation16.5-3.12.01.59.63.0-0.83.93.13.2
Private56.5-3.71.92.82.02.82.32.72.42.6
Public-21.6-1.92.0-0.423.83.3-5.76.04.14.0
Net Exports
Exports of goods and services3.4-2.88.39.7-0.411.78.27.36.76.9
Imports of goods and services2.4-4.2-1.77.013.60.15.46.75.45.4
Contributions to real GDP growth(Year-on-year change over real GDP in previous year, in percent)
GDP at constant 2005 prices1.0-1.21.82.00.73.53.74.04.04.0
Domestic demand1.2-2.4-1.12.66.70.43.95.04.54.5
Private2.4-2.2-0.62.44.30.23.63.63.43.3
Public-1.2-0.3-0.50.22.50.10.31.41.21.1
Consumption-1.6-1.8-1.52.34.9-0.34.04.23.93.8
Private-2.3-1.7-0.92.04.0-0.13.33.33.13.0
Public0.7-0.1-0.60.30.9-0.10.70.90.80.8
Gross capital formation2.8-0.60.40.31.90.6-0.20.80.60.6
Private4.7-0.50.20.30.30.40.30.30.30.3
Public-1.9-0.10.10.01.60.3-0.50.50.30.3
Net Exports-0.21.22.9-0.6-6.03.1-0.2-1.0-0.5-0.5
Exports of goods and services0.9-0.72.23.4-0.13.22.42.22.12.2
Imports of goods and services1.1-2.0-0.84.05.90.12.63.22.72.7
Deflators(Percent Change)
GDP2.61.10.72.32.12.42.62.92.92.9
Domestic demand4.42.00.82.01.32.71.92.02.32.3
Consumption4.81.80.82.21.32.91.71.92.22.3
Investment3.83.01.11.21.92.12.62.32.52.3
Exports of goods and services7.21.8-2.4-2.53.1-3.7-0.7-0.6-0.3-0.3
Imports of goods and services9.44.0-0.1-1.2-0.70.2-1.0-1.5-0.5-0.5
Nominal aggregates
Nominal GDP (KM million)25,77225,73426,38527,39327,12328,735 30,57432,73035,02737,472
(In percent of GDP)
Consumption106.1106.2102.8106.4106.4103.0102.5101.8101.2100.5
Private84.183.981.785.084.882.281.881.180.579.9
Public22.022.321.121.421.620.820.720.720.720.6
Gross capital formation18.118.118.216.319.819.718.818.718.418.2
Private11.911.811.99.812.011.911.711.511.311.1
Public6.36.36.46.57.87.87.17.27.17.1
National Savings9.08.912.88.79.111.011.912.512.913.3
Private6.86.69.94.26.57.07.27.17.67.0
Public2.32.32.94.52.64.04.75.45.36.3
Saving-Investment balance-9.1-9.3-5.4-7.6-10.7-8.6-6.9-6.2-5.5-4.9
Labor market(In percent)
Unemployment rate (ILO definition) 127.628.027.5
Source: BiH, FBiH and RS Statistical Agencies, and Fund staff estimates.Notes: Nominal and real GDP series are based on the production approach.

Based on the BiH Labor Survey. The unemployment rate based on the number of unemployed persons registered in Unemployment Offices is significantly higher.

Source: BiH, FBiH and RS Statistical Agencies, and Fund staff estimates.Notes: Nominal and real GDP series are based on the production approach.

Based on the BiH Labor Survey. The unemployment rate based on the number of unemployed persons registered in Unemployment Offices is significantly higher.

Table 3.Bosnia and Herzegovina: Balance of Payments, 2011–19 1/(In millions of euros, unless otherwise indicated)
201120122013201420152016201720182019
EBS/14/4Proj.
Current account-1,284-1,218-734-1,071-1,489-1,270-1,085-1,036-990-945
Trade balance-3,185-3,199-2,836-3,181-3,632-3,329-3,334-3,430-3,513-3,583
Goods-4,267-4,318-3,989-4,399-4,866-4,646-4,702-4,848-4,991-5,134
Export of goods (fob)2,6252,5752,7992,9272,7843,0073,2723,5223,7724,036
Import of goods (fob)-6,892-6,893-6,788-7,326-7,650-7,653-7,974-8,371-8,763-9,170
Services (net)1,0821,1181,1531,2181,2341,3171,3691,4181,4781,551
Exports1,4771,4871,4991,6411,6291,7381,8221,9102,0092,124
Imports-396-369-346-423-395-420-454-491-531-573
Primary Income (net)110119262176173158213255274271
Total credit477442425504497527567604639673
Total debit-367-323-163-328-324-369-354-349-365-402
Of which, Interest payments-162-154-112-151-148-185-162-147-154-181
Secondary Income (net)1,7921,8621,8401,9341,9701,9012,0352,1382,2492,367
Government (net)152162171194194224264314364414
Workers’ remittances9991,0421,0491,0881,2091,1101,2051,2571,3181,386
Other (NGOs etc.)726738703723710710710710710710
Capital and Financial Accounts (excl. Reserves)1,2081,1369618971,0161,2311,0961,0659891,054
Capital account182172173144196201210219229240
Capital transfers (net)182172173144196201210219229240
General government11011812491142145148151154157
Other sectors72544953545762687583
Financial account-1,026-965-788-754-820-1,029-885-846-760-815
Direct investment (net)-342-273-259-329-257-333-355-379-405-434
Assets-40-1510101010101010
Liabilities338273244339267343365389415444
Portfolio investment (net)2396820202020202020
Other investment (net)-707-701-597-445-584-716-550-486-375-401
Assets (net)-281-220-78-80-64-84-84-84-83-83
Short-term-276-233-98-30-13-33-33-33-33-33
Banks-36-10818-10-10-10-10-10-10-10
Other sectors, excl. government and central bank-166-116-122-10-10-30-30-30-30-30
Medium and long-term-51320-51-51-51-51-51-50-50
Banks0114-1-1-1-1-1-1-1
Other sectors, excl. government and central bank-5136-50-50-50-50-50-50-50
Liabilities (net)426480519365520632466403291318
Short-term238249127176165178209259281168
General government0000000000
Banks-3521-771651415161718
Other sectors273227204160160164194243264150
Medium and long-term19411126618935645425714310149
Monetary authority0000000000
General government19921312587343269-15-210-326-149
Disbursements of loans290337397444700559367367367367
Project290216171444700559367367367367
Budget01212260000000
Amortization of loans91124272357357290381576692516
Banks-275-139145-3785112119116124
Other sectors270361405749100160234220175
Errors and omissions591191360000000
Overall balance17-37-36217347339-10-291-109
Financing-1737362-173-473-391029-1109
Change in net international reserves (“+”=increase)-1737362968151029-1109
External financing gap (for budgets)26948155
Memorandum items
Current account balance (in percent of GDP)-9.7-9.3-5.4-7.6-10.7-8.6-6.9-6.2-5.5-4.9
Trade balance (in percent of GDP)-32.4-32.8-29.6-31.4-35.1-31.6-30.1-29.0-27.9-26.8
Import of goods (change, percent)13.20.0-1.55.812.70.04.25.04.74.7
Export of goods (change, percent)19.9-1.98.76.9-0.58.08.87.77.17.0
Transfers (in percent of GDP)13.614.213.613.814.212.913.012.812.612.4
Net foreign direct investment (in percent of GDP)-2.6-2.1-1.9-2.3-1.9-2.3-2.3-2.3-2.3-2.3
External debt/GDP (in percent)48.952.250.853.954.654.251.647.744.342.1
Private sector23.024.422.723.421.721.220.720.019.418.9
Public sector25.827.828.130.532.933.030.927.624.823.2
External debt service/GNFS exports (percent)14.912.613.714.714.812.813.015.213.78.9
Gross official reserves (in millions of Euro)3,2853,3263,6133,4853,6213,6373,6473,6753,6753,784
(In months of prospective imports of goods and services)5.45.65.45.15.45.24.94.74.54.5
Sources: BiH authorities; and IMF staff estimates and projections.

Based on BPM6.

Sources: BiH authorities; and IMF staff estimates and projections.

Based on BPM6.

Table 4.Bosnia and Herzegovina: General Government Statement of Operations, 2011–19(Percent of GDP)
201120122013201420152016201720182019
EBS/14/4Proj.
Revenue45.946.345.146.245.145.345.545.645.645.6
Taxes23.023.022.122.221.621.921.921.721.721.6
Direct taxes3.53.63.63.53.33.43.53.53.53.5
Indirect taxes19.419.418.518.718.218.418.318.218.017.9
Other taxes0.10.00.10.10.10.10.10.10.10.1
Social security contributions15.715.815.515.815.315.515.715.715.715.7
Grants2.12.22.42.12.52.62.72.82.93.0
Other revenue5.15.35.26.05.75.35.35.35.35.3
Expenditure48.848.947.047.549.248.046.846.445.945.6
Expense42.542.640.741.041.440.239.839.238.838.5
Compensation of employees12.913.012.212.312.411.811.811.911.811.8
Use of goods and services10.510.810.410.510.710.410.310.310.210.2
Social benefits14.614.514.314.414.414.113.813.713.513.3
Interest0.60.80.70.90.81.01.00.80.70.8
Subsidies1.71.61.41.31.31.31.21.11.11.0
Other expense2.11.91.71.61.81.71.61.51.41.3
Net acquisition of nonfinancial assets6.36.36.46.57.87.87.17.27.17.1
Acquisition of nonfinancial assets6.46.56.56.88.18.07.37.37.37.3
Foreign financed capital spending3.63.34.24.15.65.44.74.74.74.7
Domestically financed capital spending2.73.22.32.72.52.52.62.62.62.6
Disposal of nonfinancial assets0.10.20.10.30.30.20.20.20.20.2
Gross / Net Operating Balance (revenue minus expense)3.43.74.45.13.75.15.76.46.87.1
Net lending/borrowing (revenue minus expenditure)-2.8-2.7-1.9-1.4-4.1-2.7-1.4-0.8-0.30.0
Net acquisition of financial assets-1.00.60.60.40.01.11.21.12.42.3
Domestic assets-0.50.60.50.40.01.11.21.12.42.3
Currency and deposits-1.10.10.30.2-0.30.81.11.02.22.2
Debt securities0.00.00.00.00.00.00.00.00.00.0
Loans0.20.40.00.2-0.20.30.10.10.20.2
Equity and investment fund shares0.30.20.10.00.50.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.0
Other accounts receivable0.0-0.10.10.00.00.00.00.00.00.0
Foreign assets-0.50.00.10.00.00.00.00.00.00.0
Net incurrence of liabilities1.92.91.6-0.20.73.52.61.92.72.3
Domestic liabilities0.70.5-0.1-0.6-2.31.62.42.94.02.6
Currency and deposits0.00.00.00.00.00.00.00.00.00.0
Debt securities1.00.30.1-0.1-0.40.00.0-0.3-0.4-0.1
Government obligations under the Law on Internal Debt, issued
guarantees, and other obligations from previous years-1.0-0.9-0.9-0.9-1.3-1.2-1.1-0.6-0.4-0.4
Loans0.50.70.20.5-0.62.83.53.94.83.1
Equity and investment fund shares0.00.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.0
Other accounts payable0.20.40.4-0.10.00.00.00.00.00.0
Foreign liabilities1.22.41.80.53.01.80.2-1.0-1.3-0.3
Currency and deposits0.00.00.00.00.00.00.00.00.00.0
Debt securities0.00.00.00.00.00.00.00.00.00.0
Loans1.22.41.80.53.01.80.2-1.0-1.3-0.3
Drawings2.13.74.13.05.53.82.62.42.32.1
Amortization0.91.22.32.52.62.02.43.43.62.4
Equity and investment fund shares0.00.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.0
Other accounts payable0.00.00.00.00.00.00.00.00.00.0
Financing gap0.00.00.01.93.50.40.00.00.00.0
Identified financing0.00.00.01.93.50.40.00.00.00.0
IMF0.00.00.01.72.70.10.00.00.00.0
WB0.00.00.00.30.80.20.00.00.00.0
EU0.00.00.00.00.00.00.00.00.00.0
Other0.00.00.00.00.00.00.00.00.00.0
Unidentified financing0.00.00.00.00.00.00.00.00.00.0
Statistical discrepancy-0.10.30.90.00.00.00.00.00.00.0
Memorandum items
Net lending excluding externally-financed operations-1.2-1.50.10.6-1.00.20.71.11.51.7
Structural balance (% of potential GDP)-3.0-1.4-0.70.7-1.3-0.9
Sources: BiH authorities; and IMF staff estimates and projections.
Sources: BiH authorities; and IMF staff estimates and projections.
Table 5.Bosnia and Herzegovina: General Government Statement of Operations, 2011–14(KM million)
2011201220132014
Mar.Jun.Sep.Dec.
EBS/14/4ActEBS/14/4Proj.EBS/14/4Proj.EBS/14/4Proj.
Revenue11833.811912.411905.12743.62812.76048.05864.29152.78888.312646.012235.1
Taxes5929.15923.65832.21358.71376.12921.52818.14475.84296.66093.45865.7
Direct taxes907.2918.6943.2243.7241.7493.8466.6701.7666.2951.3906.9
Indirect taxes5004.64992.24873.41109.81132.82418.92343.03759.73616.65109.74927.3
Other taxes17.312.815.75.21.68.98.514.313.832.431.6
Social security contributions4046.34056.94084.5988.8961.32072.11991.73161.03029.54331.74150.6
Grants539.0570.2625.5140.5178.1283.4333.6427.4502.7568.7679.1
Other revenue1319.41361.81362.9255.5297.2771.0720.81088.51059.51652.31539.6
Expenditure12565.912595.512412.82845.12994.05993.76213.49276.79610.713024.213357.7
Expense10954.610967.610734.22563.12516.05343.85331.28160.98149.611245.711238.8
Compensation of employees3337.33356.53206.5828.1809.61660.71655.32490.42482.53367.93357.8
Use of goods and services2711.42774.82734.5623.4614.01320.31325.82021.62028.22883.22891.3
Social benefits3749.93736.73771.6936.4944.21908.81894.02903.72881.53948.83910.4
Interest164.7193.2195.548.644.3122.2114.4171.5160.2237.0230.4
Subsidies440.7414.5377.049.937.0153.6152.0251.8254.6361.4362.9
Grants10.218.116.40.91.32.52.615.013.319.317.0
Other expense550.6491.8436.076.766.9178.2189.7322.0342.5443.9482.3
Net acquisition of nonfinancial assets1611.31627.91678.6281.9478.0649.9882.21115.81461.11778.62118.9
Acquisition of nonfinancial assets1642.41670.21710.6304.8483.5692.9933.01166.01522.31852.02207.1
Foreign financed capital spending937.0849.81102.2233.1335.7466.0663.8709.31089.81110.31523.3
Domestically financed capital spending705.4820.4608.471.6147.8226.9269.2456.7432.6741.7683.8
Disposal of nonfinancial assets31.142.332.022.85.543.050.850.261.273.488.2
Gross / Net Operating Balance (revenue minus expense)879.3944.91170.9180.4296.6704.2533.0991.8738.71400.4996.3
Net lending/borrowing (revenue minus expenditure)-732.1-683.0-507.7-101.5-181.454.3-349.2-124.0-722.5-378.2-1122.6
Net acquisition of financial assets-267.0142.8145.8-56.2-90.172.3248.5-94.5306.3105.60.3
Domestic assets-132.0142.8126.2-56.2-90.172.3248.5-94.5306.3105.60.3
Currency and deposits-276.214.472.92.7-43.164.4125.6-74.4101.555.7-85.0
Debt securities0.40.00.00.00.00.00.00.00.00.00.0
Loans63.3105.713.2-58.9-79.17.95.2-20.185.044.9-45.1
Equity and investment fund shares71.043.316.40.027.50.0117.70.0119.85.0130.5
Other accounts receivable9.6-20.623.70.04.50.00.00.00.00.00.0
Foreign assets-135.00.019.60.00.00.00.00.00.00.00.0
Net incurrence of liabilities484.6753.1427.6-48.9166.6-244.0132.0-364.5420.2-42.1182.2
Domestic liabilities176.2123.4-36.6-48.12.2-170.8-8.3-343.6-66.0-170.3-619.2
Debt securities256.287.721.6-51.2-45.8-68.6-119.0-43.6-44.0-22.4-106.3
Government obligations under the Law on Internal Debt, issued
guarantees, and other obligations from previous years-261.0-237.7-231.2-79.2-31.9-93.2-108.1-215.9-241.9-246.8-356.4
Loans124.6169.756.782.3-5.7-41.9185.7-84.1219.8126.3-156.5
Other accounts payable56.3103.7116.30.085.633.033.00.00.0-27.40.0
Foreign liabilities308.5629.6464.3-0.8164.4-73.2140.3-20.9486.2128.2801.3
Debt securities0.00.00.00.00.00.00.00.00.00.00.0
Loans310.7629.6464.3-0.8164.4-73.2140.3-20.9486.2128.2801.3
Drawings550.5947.71081.4141.9302.1297.3498.3492.5991.9824.81496.4
Amortization239.8318.0617.1142.7137.7370.5358.0513.4505.7696.6695.1
Other accounts payable-2.20.00.00.00.00.00.00.00.00.00.0
Financing gap0.00.00.094.2-75.4261.9465.7393.9608.5525.8940.8
Identified financing 1/0.00.00.094.293.1262.0465.7393.9608.6525.9940.8
IMF0.00.00.094.293.1188.5465.7320.4465.7452.4726.5
WB0.00.00.00.00.073.50.073.5142.973.5214.3
EU0.00.00.00.00.00.00.00.00.00.00.0
Other0.00.00.00.00.00.00.00.00.00.00.0
Unidentified financing0.00.00.00.00.00.00.00.00.00.00.0
Statistical discrepancy-19.672.8225.80.0-168.50.00.00.00.00.00.0
Memorandum items
Indirect revenues5004.64992.24873.41109.81132.82418.92343.03759.73616.65109.74927.3
Net lending excluding externally-financed operations-314.1-375.315.5-7.6-11.7241.9-14.1167.6-125.8175.2-266.8
Sources: BiH authorities; and IMF staff estimates and projections.

A share of the financial assistance from the IMF and World Bank in 2014 is disbursed to Brcko District.

Sources: BiH authorities; and IMF staff estimates and projections.

A share of the financial assistance from the IMF and World Bank in 2014 is disbursed to Brcko District.

Table 5a.Institutions of Bosnia and Herzegovina: Statement of Operations, 2011–14 1/(KM million)
2011201220132014
Mar.Jun.Sep.Dec.
EBS/14/4ActEBS/14/4Proj.EBS/14/4Proj.EBS/14/4Proj.
Revenue848.3924.4968.6209.3219.5459.1459.1691.2691.2937.0937.0
Taxes689.0750.0750.0180.9180.9364.8364.8557.4557.4750.0750.0
Direct taxes0.00.00.00.00.00.00.00.00.00.00.0
Indirect taxes689.0750.0750.0180.9180.9364.8364.8557.4557.4750.0750.0
Other taxes0.00.00.00.00.00.00.00.00.00.00.0
Social security contributions0.00.00.00.00.00.00.00.00.00.00.0
Grants18.922.739.50.28.41.41.41.81.83.73.7
Other revenue141.6151.7179.028.229.892.992.9132.1132.1183.2183.2
Expenditure898.7882.1903.6206.4204.8424.6423.9657.8656.6947.8945.3
Expense877.3844.5848.6202.5202.3415.5414.7631.4630.2881.2878.7
Compensation of employees648.4628.3626.4163.5163.5322.7322.7484.8484.8643.7643.7
Use of goods and services179.3162.4172.335.835.882.782.7131.5131.5201.6201.6
Social benefits38.511.55.30.10.11.11.11.61.62.02.0
Interest0.30.00.00.00.00.00.00.00.00.70.7
Transfers to other general government units-1.219.513.10.00.00.00.00.00.03.53.5
Other expense12.122.831.53.12.89.18.313.512.329.727.2
Net acquisition of nonfinancial assets21.437.655.03.92.59.29.226.426.466.666.6
Acquisition of nonfinancial assets21.945.356.33.92.59.29.226.426.467.367.3
Foreign financed capital spending3.42.23.80.20.60.40.40.70.70.70.7
Domestically financed capital spending18.543.052.53.71.98.78.725.825.866.666.6
Disposal of nonfinancial assets0.67.71.40.00.00.00.00.00.00.80.8
Gross / Net Operating Balance (revenue minus expense)-29.079.9120.06.817.243.644.459.961.055.758.3
Net lending/borrowing (revenue minus expenditure)-50.442.365.02.914.734.435.233.534.6-10.8-8.3
Net acquisition of financial assets-83.08.0120.32.9-5.934.450.433.549.8-10.817.8
Domestic assets52.08.0100.82.9-5.934.450.433.549.8-10.817.8
Currency and deposits49.016.098.32.9-12.234.450.433.549.8-10.817.8
Debt securities0.00.00.00.00.00.00.00.00.00.00.0
Loans0.00.00.00.00.00.00.00.00.00.00.0
Equity and investment fund shares-1.00.00.00.00.00.00.00.00.00.00.0
Other accounts receivable4.0-8.02.50.06.30.00.00.00.00.00.0
Foreign assets-135.00.019.60.00.00.00.00.00.00.00.0
Net incurrence of liabilities-34.1-34.056.20.0-20.60.015.20.015.20.015.2
Domestic liabilities-33.0-34.036.70.0-20.60.00.00.00.00.00.0
Debt securities0.00.00.00.00.00.00.00.00.00.00.0
Issuance0.00.00.00.00.00.00.00.00.00.00.0
Amortization0.00.00.00.00.00.00.00.00.00.00.0
Government obligations under the Law on Internal Debt, issued
guarantees, and other obligations from previous years0.00.00.00.00.00.00.00.00.00.00.0
Loans0.00.00.00.00.00.00.00.00.00.00.0
Other accounts payable-33.0-34.036.70.0-20.60.00.00.00.00.00.0
Foreign liabilities-1.10.019.50.00.00.015.20.015.20.015.2
Debt securities0.00.00.00.00.00.00.00.00.00.00.0
Loans-1.10.019.50.00.00.015.20.015.20.015.2
Drawings0.00.019.50.00.00.015.20.015.20.015.2
Amortization1.10.00.00.00.00.00.00.00.00.00.0
Other accounts payable0.00.00.00.00.00.00.00.00.00.00.0
Financing gap0.00.00.00.00.00.00.00.00.00.010.9
Identified financing0.00.00.00.00.00.00.00.00.00.010.9
IMF0.00.00.00.00.00.00.00.00.00.00.0
WB0.00.00.00.00.00.00.00.00.00.00.0
EU0.00.00.00.00.00.00.00.00.00.010.9
Other0.00.00.00.00.00.00.00.00.00.00.0
Unidentified financing0.00.00.00.00.00.00.00.00.00.00.0
Statistical discrepancy1.50.3-0.80.00.00.00.00.00.00.00.0
Memorandum items
Net lending excluding externally-financed operations-47.044.568.83.115.334.935.635.335.3-7.6-7.6
Sources: BiH authorities; and IMF staff estimates and projections.

Tables 5a, 5c and 5e comprise central government according to international standards

Sources: BiH authorities; and IMF staff estimates and projections.

Tables 5a, 5c and 5e comprise central government according to international standards

Table 5b.Federation of Bosnia and Herzegovina: General Government Statement of Operations, 2011–14 1/(KM million)
2011201220132014
Mar.Jun.Sep.Dec.
EBS/14/4Act.EBS/14/4Proj.EBS/14/4Proj.EBS/14/4Proj.
Revenue6926.16896.66936.71603.11676.73541.13431.75380.85173.97409.57122.1
Taxes3177.83130.83156.7735.9738.31591.61515.42486.42300.83314.53143.5
Direct taxes468.8472.9485.4141.8134.2279.3259.6387.7360.6528.3491.5
Indirect taxes2700.22652.02659.4591.4603.51307.61250.92091.71932.92774.72639.9
Other taxes8.95.811.82.60.64.74.97.07.311.412.1
Social security contributions2649.02670.62707.2653.4657.81363.71335.12068.72025.32822.62763.3
Grants351.9354.1392.893.9113.2189.2222.7286.3336.5379.8446.8
Other revenue747.4741.1680.1119.9167.3396.6358.5539.3511.3892.6768.5
Expenditure7317.07392.17338.71730.71906.93636.33862.85552.95898.47728.88078.8
Expense6424.26419.76247.31509.81473.63171.63174.84805.54813.46558.06573.5
Compensation of employees1675.51694.01602.9420.9402.3841.0843.71263.41267.41722.01727.7
Use of goods and services1528.51559.11531.1362.0350.3768.0778.91150.91166.31605.11626.4
Social benefits2467.42492.22485.4635.5622.31284.31262.91951.01918.02602.62554.8
Interest96.6105.597.524.222.061.459.387.083.5119.6115.6
Subsidies250.5256.3232.334.526.5115.2112.8160.7155.9237.2229.6
Other expense405.7312.6298.232.750.3101.6117.3192.4222.2271.5319.3
Net acquisition of nonfinancial assets892.9972.31091.4220.8433.3464.7688.0747.41085.01170.81505.3
Acquisition of nonfinancial assets900.4983.21101.8222.1434.6468.9692.1754.91092.41181.51515.9
Foreign financed capital spending638.1530.8767.7185.6317.8371.3547.9556.9902.5846.41192.0
Domestically financed capital spending262.3452.4334.136.5116.897.6144.2198.0189.9335.1323.8
Disposal of nonfinancial assets7.610.910.41.31.44.24.17.57.410.710.6
Gross / Net Operating Balance (revenue minus expense)488.7476.9689.493.3203.1369.5256.9575.3360.6851.5548.6
Net lending/borrowing (revenue minus expenditure)-404.2-495.5-402.0-127.5-230.2-95.2-431.1-172.1-724.4-319.3-956.7
Net acquisition of financial assets-288.4-26.2-100.9-83.9-147.6-71.448.0-150.3111.9-52.315.9
Domestic assets-288.4-26.2-100.9-83.9-147.6-71.448.0-150.3111.9-52.315.9
Currency and deposits-213.022.0-68.24.9-55.8-11.049.9-51.449.6-9.7-48.9
Debt securities0.00.00.00.00.00.00.00.00.00.00.0
Loans-69.2-48.1-32.6-88.8-91.8-60.5-59.9-98.94.3-47.51.8
Equity and investment fund shares-6.2-0.1-0.10.00.00.058.00.058.05.063.0
Insurance, pensions, and standardized guarantee schemes-0.10.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.00.0
Other accounts receivable0.00.00.00.00.00.00.00.00.00.00.0
Foreign assets0.00.00.00.00.00.00.00.00.00.00.0
Net incurrence of liabilities199.0332.6118.6-19.2157.4-150.9201.6-240.8490.9-83.6405.7
Domestic liabilities49.529.0-144.3-20.5-25.2-89.2107.7-180.0248.7-94.6114.6
Debt securities89.7101.630.10.029.90.0-58.925.0-8.930.0-77.9
Government obligations under the Law on Internal Debt, issued
guarantees, and other obligations from previous years-95.1-112.1-112.2-55.9-31.2-53.4-52.4-140.4-136.3-146.2-141.9
Loans6.0-13.7-6.035.47.9-68.8186.0-64.6393.948.9334.5
Equity and investment fund shares0.00.00.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.00.0
Other accounts payable48.953.3-56.30.0-31.933.033.00.00.0-27.40.0
Foreign liabilities149.5303.6262.91.3182.6-61.793.9-60.8242.211.0291.1
Currency and deposits0.00.00.00.00.00.00.00.00.00.00.0
Debt securities0.00.00.00.00.00.00.00.00.00.00.0
Loans151.7303.6262.91.3182.6-61.793.9-60.8242.211.0291.1
Drawings295.3503.0667.192.8270.6185.6328.8278.5573.8475.1753.7
Amortization143.6199.4404.391.587.9247.4234.8339.3331.6464.1462.6
Equity and investment fund shares0.00.00.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.00.0
Other accounts payable-2.20.00.00.00.00.00.00.00.00.00.0
Statistical discrepancy / financing gap-83.2136.6182.562.8-74.8174.7277.5262.6345.4350.6566.9
Sources: BiH authorities; and IMF staff estimates and projections.

General Government statement of Operation includes entity central government; local governments and social security and other funds.

Sources: BiH authorities; and IMF staff estimates and projections.

General Government statement of Operation includes entity central government; local governments and social security and other funds.

Table 5c.Federation of Bosnia and Herzegovina: Central Government Statement of Operations, 2011–14 1/(KM million)
2011201220132014
Mar.Jun.Sep.Dec.
EBS/14/4ActEBS/14/4Proj.EBS/14/4Proj.EBS/14/4Proj.
Revenue1671.91809.11849.4414.9423.11068.31015.61560.01493.92041.52001.8
Taxes1137.51171.31262.5305.0292.4682.1649.21032.5967.41376.31324.2
Direct taxes46.647.149.326.420.737.135.243.841.653.350.7
Indirect taxes1090.81124.11213.0278 6271 7645 1614 0988 7925 81323 01273 5
Other taxes0.20.10.10.00.00.00.00.00.00.00.0
Social security contributions0.00.00.00 00 00 00 00 00 00 00 0
Grants343.1347.7383.992.8109.6185.6219.1278.5328.7371.3438.3
Other revenue191.3290.1203.117 121.1200.6147.2249.1197.7293.8239.3
Expenditure1954.71881.82009.6453.4464.01040.51222.51526.51743.12152.52252.5
Expense1372.01377.71342.1276.1268.2689.0704.11032.61053.71395.21457.4
Compensation of employees239.7226.1224.962.754.3124.6120.6185.9180.0251.9244.0
Use of goods and services67.066.773.410 010 427.427.445.645.676.476.4
Social benefits468.7460.5460.6109.0108.2239 8239 2356 0355 0462 3460 4
Interest84.791.884.220.118.751.349.372.268.998.594.8
Subsidies115.5128.6126.214 26 675 074 999 698 4122 9120 9
Transfers to other general government units327.6308.6317.057.658.3145.2166.9213.9246.0312.4389.5
Other expense69.095.455.82 611 925.725.859.559.870.671.5
Net acquisition of nonfinancial assets582.7504.1667.5177.2195.8351.5518.5494.0689.3757.3795.0
Acquisition of nonfinancial assets582.7505.7667.5177.2195.8351.5518.5494.0689.3757.3795.0
Foreign financed capital spending569.0494.4654.6173.5195.5341.5513.2479.9682.0729.2780.4
Domestically financed capital spending13.711.212.93.70.310.05.214.17.328.114.6
Disposal of nonfinancial assets0.01.60.00 00 10 00 00 00 00 00 0
Gross / Net Operating Balance (revenue minus expense)299.8431.4507.3138.8154.9379.4311.6527.5440.2646.3544.3
Net lending/borrowing (revenue minus expenditure)-282.8-72.7-160.2-38.5-40.927.9-206.933.5-249.2-111.0-250.7
Net acquisition of financial assets-238.048.1-84.3-42.2-29.9-61.150.2-124.080.1-61.718.2
Domestic assets-238.048.1-84.3-42.2-29.9-61.150.2-124.080.1-61.718.2
Currency and deposits-162.687.0-51.9-42.2-29.9-60.90 0-101.00 00.0-39 1
Debt securities0.00.00.00.00.00.00.00.00.00 00.0
Loans-69.7-39.9-33.70 00 0-0 3-7 8-23 022 1-66.7-5 7
Equity and investment fund shares-5.61.01.40.00.00.058.00.058.05.063.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00 00 00 00 00 00 00 00 0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.00.0
Other accounts receivable0.00.00.00 00 00 00 00 00 00 00 0
Foreign assets0.00.00.00.00.00.00.00.00.00.00.0
Net incurrence of liabilities69.8122.076.2-66.67.4-263.6-20.4-420.2-16.2-301.3-298.1
Domestic liabilities-8.213.5-78.1-56.1-54.2-173.2-80.8-284.2-39.7-197.4-179.8
Debt securities89.0100.430.10.030.10.0-58.925.0-8.930.0-77.9
Issuance89.0248.6119.230 059 950 050.0100 0100 0150 0150.0
Amortization0.0-148.3-89.1-30.0-29.7-50.0-108 9-75.0-108.9-120.0-227.9
Government obligations under the Law on Internal Debt, issued
guarantees, and other obligations from previous years-93.3-110.2-110.3-52.8-31.1-53.2-52.3-139.4-135.3-144.2-140.0
Loans-8.8-5.6-5.0-3.30.0-153.0-2.6-169.8104.5-55.838.2
Equity and investment fund shares0.00.00.00 00 00.00 00.00.00.00 0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00 00.00 00 00 00.0
Financial derivatives and employee stock options0.00.00.00 00 00.00 00.00.00.00 0
Other accounts payable4.928.97.10.0-53.233 033.00 00 0-27 40.0
Foreign liabilities78.0108.5154.3-10 461.7-90.460 3-136.023.5-103.9-118 3
Debt securities0.00.00.00.00 00.00.00.00 00.00.0
Loans78.0108.5154.3-10 461.7-90 460 3-136 023.5-103 9-118 3
Drawings226.0302.1550.680.7148 2155.8294.1201.4353 3357.9342.1
For budget support0.1155.3279.80 062.30.00.00.00.00.00.0
For investment projects225.9146.8270.880.785 9155 8294 1201 4353 3357 9342 1
Amortization148.0193.6396.291 186.6246.2233.8337.4329.8461.9460.4
Equity and investment fund shares0.00.00.00.00 00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00 00.00 00 00 00 00 00 0
Financial derivatives and employee stock options0.00.00 00.00 00.00.00.00.00.00.0
Other accounts payable0.00.00.00 00.00 00 00 00 00 00 0
Financing gap0.00.00.062.862.1174.7277.6262.6345.4350.6566.9
Identified financing0.00.00.062.862.1174.7277.6262.6345.4350.6566.9
IMF0.00.00 062 862 1125.7277.6213.6277.6301.6451.4
WB0.00.00.00.00.049.00.049.067.949.0115.5
EU0.00.00 00 00 00 00 00 00 00 00.0
Other0.00.00.00.00.00.00.00.00.00.00 0
Unidentified financing0.00.00 00 00 00 00 00 00 00 00.0
Statistical discrepancy-25.0-1.2-0.30.0-58.50.00.00.00.00.00.0
Memorandum items
Net lending excluding externally-financed operations-57.074.1110.642.245.0183.787.2234.9104.1246.991.4
Sources: BiH authorities; and IMF staff estimates and projections.

Tables 5a, 5c and 5e comprise central government according to international standards

Sources: BiH authorities; and IMF staff estimates and projections.

Tables 5a, 5c and 5e comprise central government according to international standards

Table 5d.Republika Srpska: General Government Statement of Operations, 2011–14 1/(KM million)
2011201220132014
Mar.Jun.Sep.Dec.
EBS/14/4ActEBS/14/4Proj.EBS/14/4Proj.EBS/14/4Proj.
Revenue3873.53850.63768.6883.1865.01945.41872.62966.02842.44030.93932.5
Taxes1881.61858.91745.0402.0415.1877.0852.91372.91303.51839.11789.9
Direct taxes421.6423.0434.997.1101.8204.1196.9295.7287.8398.8391.8
Indirect taxes1452.41430.21307.3302.7312.9669.3652.81070.81009.81420.71379.6
Other taxes7.55.72.92.20.53.53.26.45.919.618.5
Social security contributions1365.71350.61341.6334.8297.7707.0649.51062.9976.51471.21351.5
Grants175.8194.4195.246.456.592.8109.6139.2164.4185.6229.1
Other revenue460.7446.7486.899.995.7268.6260.6391.0398.1534.9561.9
Expenditure4133.24148.93919.1882.3841.11865.61862.12918.12907.74088.94077.6
Expense3443.83536.23409.3825.1802.41698.31685.72589.92571.73571.13553.5
Compensation of employees934.1952.5901.1223.1226.2455.6451.3679.2673.0917.4909.3
Use of goods and services928.1978.7955.8221.9216.5457.4452.2695.1687.4996.8985.4
Social benefits1211.91232.91244.4300.8316.7623.4630.0951.0961.91305.61315.3
Interest67.487.297.624.122.260.554.983.976.1116.1113.6
Subsidies180.1146.4123.415.38.336.535.979.678.6111.6111.1
Other expense122.2138.386.940.012.564.961.4101.094.6123.5118.9
Net acquisition of nonfinancial assets689.4612.7509.857.238.6167.3176.5328.1336.1517.8524.0
Acquisition of nonfinancial assets712.3636.5530.178.742.8206.2223.2370.8389.9579.7600.8
Foreign financed capital spending295.4316.7330.747.317.294.3115.5151.7186.6263.1330.5
Domestically financed capital spending416.9319.8199.431.425.6111.9107.7219.1203.3316.6270.4
Disposal of nonfinancial assets22.923.820.321.64.238.946.742.753.862.076.8
Gross / Net Operating Balance (revenue minus expense)429.7314.5359.357.962.6247.2186.9376.1270.7459.8379.0
Net lending/borrowing (revenue minus expenditure)-259.7-298.2-150.50.823.979.910.448.0-65.3-58.0-145.1
Net acquisition of financial assets94.2173.179.29.963.389.9125.994.8140.3128.2-56.0
Domestic assets94.2173.179.29.963.389.9125.994.8140.3128.2-56.0
Currency and deposits-113.9-23.6-5.3-20.124.921.54.715.78.234.5-76.5
Debt securities0.40.00.00.00.00.00.00.00.00.00.0
Loans106.7154.146.930.012.768.461.479.170.393.7-47.0
Equity and investment fund shares78.243.416.50.027.50.059.70.061.80.067.5
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.00.0
Other accounts receivable5.6-0.921.20.0-1.80.00.00.00.00.00.0
Foreign assets0.00.00.00.00.00.00.00.00.00.00.0
Net incurrence of liabilities326.1462.7262.3-22.337.1-77.3-69.0-84.4-46.710.8-273.9
Domestic liabilities166.1136.680.4-20.255.4-65.7-100.2-124.4-275.4-106.3-768.9
Debt securities166.5-13.8-8.6-51.2-75.7-68.6-60.1-68.6-35.1-52.4-28.3
Issuance207.7128.7118.625.024.050.083.375.0108.3116.2149.5
Amortization41.2-142.6127.176.299.8118.6143.4143.6143.4168.6177.9
Government obligations under the Law on Internal Debt issued
guarantees, and other obligations from previous years-159.6-117.4-109.6-23.3-0.7-39.8-55.7-65.4-95.5-90.5-204.4
Loans117.7183.562.754.3-6.242.715.69.6-144.936.6-536.2
Equity and investment fund shares0.00.00.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.00.0
Other accounts payable40.584.4135.90.0138.10.00.00.00.00.00.0
Foreign liabilities160.0326.0181.9-2.1-18.2-11.531.239.9228.8117.1495.0
Debt securities0.00.00.00.00.00.00.00.00.00.00.0
Loans160.0326.0181.9-2.1-18.2-11.531.239.9228.8117.1495.0
Drawings255.1444.7394.749.131.6111.6154.3214.0402.9349.6727.4
For budget support0.078.1179.40.00.00.00.00.00.00.00.0
For investment projects255.1366.6215.349.131.6111.6154.3214.0402.9349.6727.4
Amortization95.1118.7212.851.249.8123.2123.1174.1174.1232.5232.5
Equity and investment fund shares0.00.00.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.00.0
Other accounts payable0.00.00.00.00.00.00.00.00.00.00.0
Statistical discrepancy / financing gap27.78.6-32.631.42.287.3184.4131.3252.3175.3363.0
Sources: BiH authorities; and IMF staff estimates and projections.

General Government statement of Operation includes entity central government, local governments and social security and other funds

Sources: BiH authorities; and IMF staff estimates and projections.

General Government statement of Operation includes entity central government, local governments and social security and other funds

Table 5e.Republika Srpska: Consolidated Central Government Statement of Operations, 2011–14 1/(KM million)
2011201220132014
Mar.Jun.Sep.Dec.
EBS/14/4ActEBS/14/4Proj.EBS/14/4Proj.EBS/14/4Proj.
Revenue1880.21875.31810.0410.9446.7925.7882.91407.71338.01890.71840.1
Taxes1440.01437.31360.7311.1329.7679.7659.51050.0994.41403.71358.8
Direct taxes340.3345.1350.580.586.9167.7159.4238.1226.5315.6300.5
Indirect taxes1094.71088.21007.9228.8242.5509.1497.1806.3762.21070.21040.5
Other taxes5.04.12.41.90.33.03.05.65.617.817.8
Social security contributions0.00.00.00.00.00.00.00.00.00.00.0
Grants171.5182.6191.946.454.892.8109.6139.2164.4185.6219.1
Other revenue268.7255.0257.153.462.1153.1113.8218.5179.2301.2261.9
Expenditure2012.91945.41778.9374.9371.0792.5821.01238.81282.01777.61866.0
Expense1729.81672.71524.0343.8353.3714.3717.51100.31106.31574.31628.2
Compensation of employees713.4722.6677.7167.6172.4337.6337.6501.2501.2676.6676.6
Use of goods and services163.1150.6156.916.519.646.246.283.483.4138.6138.6
Social benefits275.9247.7230.651.463.3104.8104.8161.4161.4251.7251.7
Interest46.064.664.616.614.742.140.756.555.179.278.1
Subsidies165.6128.8112.85.87.120.120.151.551.598.098.0
Transfers to other general government units304.4284.5242.761.073.8124.5124.8188.2189.2266.8306.8
Other expense61.473.838.725.02.439.043.258.164.663.478.4
Net acquisition of nonfinancial assets283.1272.7254.931.117.678.2103.5138.5175.6203.3237.8
Acquisition of nonfinancial assets293.6280.4261.646.918.6108.0133.3168.3205.4248.1282.6
Foreign financed capital spending201.1223.7211.341.610.585.7102.7132.5158.1195.1229.6
Domestically financed capital spending92.556.750.45.38.022.330.635.847.453.053.0
Disposal of nonfinancial assets10.57.76.715.81.029.829.829.829.844.844.8
Gross / Net Operating Balance (revenue minus expense)150.4202.6286.067.193.3211.3165.4307.4231.7316.4211.9
Net lending/borrowing (revenue minus expenditure)-132.8-70.131.136.075.7133.261.9168.956.0113.2-26.0
Net acquisition of financial assets217.6344.0109.738.672.2121.6134.6140.3208.2105.7188.5
Domestic assets217.6344.0109.738.672.2121.6134.6140.3208.2105.7188.5
Currency and deposits-127.6-33.812.7-13.236.613.413.412.112.1-5.0-20.0
Debt securities0.40.00.00.00.00.00.00.00.00.00.0
Loans282.1322.793.551.810.1108.261.4128.2134.3110.7141.0
Equity and investment fund shares75.443.44.30.027.50.059.70.061.80.067.5
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.00.0
Other accounts receivable-12.611.70.00.00.0-1.0-1.0-1.1-1.10.00.0
Foreign assets0.00.00.00.00.00.00.00.00.00.00.0
Net incurrence of liabilities343.1407.574.2-28.9-3.6-98.9-111.7-159.9-100.1-182.8-148.5
Domestic liabilities177.7129.1-13.9-26.017.9-72.5-48.3-149.6-9.4-209.9-20.3
Debt securities161.3-14.1-3.9-51.2-75.1-68.6-60.1-68.6-35.1-52.4-28.3
Issuance196.9125.0118.625.024.050.083.375.0108.3116.2149.5
Amortization35.6139.1122.576.299.2118.6143.4143.6143.4168.6177.9
Government obligations under the Law on Internal Debt, issued
guarantees, and other obligations from previous years-88.5-66.5-7.4-23.0-0.6-39.2-52.1-64.3-89.1-84.9-110.2
Loans73.0148.411.548.2-4.135.363.9-16.8114.8-72.7118.2
Equity and investment fund shares0.00.00.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.00.0
Other accounts payable31.961.40.00.00.00.00.00.00.00.00.0
Foreign liabilities165.3278.488.1-2.8-21.6-26.4-63.5-10.3-90.827.1-128.2
Debt securities0.00.00.00.00.00.00.00.00.00.00.0
Loans165.3278.488.1-2.8-21.6-26.4-63.5-10.3-90.827.1-128.2
Drawings255.9390.3296.748.327.796.859.7163.883.3259.6104.2
For budget support0.078.1179.40.00.00.00.00.00.00.00.0
For investment projects255.9312.3117.348.327.796.859.7163.883.3259.6104.2
Amortization90.6111.9208.651.249.3123.2123.1174.1174.1232.5232.5
Equity and investment fund shares0.00.00.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.00.00.0
Other accounts payable0.00.00.00.00.00.00.00.00.00.00.0
Financing gap0.00.00.031.431.087.3184.4131.3252.3175.3363.0
Identified financing0.00.00.031.431.087.3184.4131.3252.3175.3363.0
IMF0.00.00.031.431.062.8184.4106.8184.4150.8271.3
WB0.00.00.00.00.024.50.024.567.924.591.7
EU0.00.00.00.00.00.00.00.00.00.00.0
Other0.00.00.00.00.00.00.00.00.00.00.0
Unidentified financing0.00.00.00.00.00.00.00.00.00.00.0
Statistical discrepancy7.3-5.14.40.00.20.00.00.00.00.00.0
Memorandum items
Net lending excluding externally-financed operations-103.1-29.050.431.231.5126.054.9162.249.7122.6-15.5
Sources: BiH authorities; and IMF staff estimates and projections.

Tables 5a, 5c and 5e comprise central government according to international standards.

Sources: BiH authorities; and IMF staff estimates and projections.

Tables 5a, 5c and 5e comprise central government according to international standards.

Table 6.Bosnia and Herzegovina: Monetary Survey, 2011–14
2011201220132014
DecDecDecDec
Proj.
(Million KM, end of period)
Net foreign assets4,9995,0926,0335,975
Foreign assets9,1779,0409,7319,747
Foreign liabilities4,1773,9473,6983,772
Net domestic assets9,4209,82110,06010,707
Domestic credit14,68315,41515,99115,625
Claims on general government (net)-117204404-436
Claims on nongovernment14,80015,21115,58716,061
Other items (net)-5,263-5,594-5,931-4,918
Broad money (M2)14,41814,91016,09416,681
Narrow money (M1)6,1856,1436,6967,216
Currency2,3662,4142,5423,000
Demand deposits3,8193,7284,1534,217
Quasi-money (M1)8,2338,7689,3999,465
Time and savings deposits2,2862,6733,0062,714
Foreign currency deposits5,9476,0956,3926,751
(12-month change over broad money in same period last year, in percent)
Net foreign assets3.50.66.3-0.4
Net domestic assets2.32.81.64.0
Domestic credit8.75.13.9-2.3
Claims on general government (net)4.52.21.3-5.2
Claims on nongovernment4.32.82.52.9
Other items (net)-6.5-2.3-2.36.3
Broad money (M2)5.83.47.93.6
Memorandum items:
(Annual percent change)
Broad money (M2)5.83.47.93.6
Reserve money (RM)-0.9-0.810.32.2
Credit to the private sector4.22.82.33.2
(Percent)
Credit to the private sector (in percent of GDP)54.456.055.956.2
Broad money (in percent of GDP)55.957.961.061.5
Central bank net foreign assets (in percent of monetary base)110.3112.6110.8108.6
(Ratio)
Velocity (GDP/end-of-period M2)1.81.71.71.6
Reserve money multiplier (M2/RM)2.52.62.52.5
Source: CBBH and IMF staff estimates and projections.
Source: CBBH and IMF staff estimates and projections.
Table 7.Bosnia and Herzegovina: Schedule of Purchases Under the Stand-By Arrangement, 2012–15
Amount of Purchase
Available onIn millionsIn percentConditions
or afterof SDRsof quota 1
1September 26, 201250.73030Board approval of the arrangement.
2December 19, 201250.73030Observance of end-September 2012 performance criteria and completion of the first program review.
3May 6, 201333.82020Observance of end-December 2012 performance criteria, and completion of the quarterly program review.
4June 28, 201333.82020Observance of end-March 2013 performance criteria and completion of the quarterly program review.
5October 28, 201342.27525Observance of end-June 2013 performance criteria and completion of the quarterly program review.
6January 31, 201442.27525Observance of end-September 2013 performance criteria and completion of the quarterly program review.
7March 15, 201442.27525Observance of end-December 2013 performance criteria and completion of the quarterly program review.
8June 15, 2014126.82575Observance of end-March 2014 performance criteria and completion of the quarterly program review.
9September 15, 201459.18535Observance of end-June 2014 performance criteria and completion of the quarterly program review.
10December 15, 201459.18535Observance of end-September 2014 performance criteria and completion of the quarterly program review.
11March 15, 20158.4555Observance of end-December 2014 performance criteria and completion of the quarterly program review.
12June 15, 20158.4555Observance of end-March 2015 performance criteria and completion of the quarterly program review.
Total558.03330.00

The quota is SDR 169.1 million.

The quota is SDR 169.1 million.

Table 8.Bosnia and Herzegovina: Quantitative Performance Criteria and Indicative Targets Under the 2012–15 Stand-By Arrangement, 2013–14(Cumulative flow since the end of the previous year; in millions of KM)
20132014
End-DecemberEnd-MarchEnd-JuneEnd-SeptemberEnd-December
EBS/12/161EBS/13/131AdjustedAct.EBS/14/4Act.EBS/14/4ModifiedEBS/14/4ModifiedEBS/14/4Modified
Performance Criteria
Floor on the net lending of 1/
Institutions of BiH-25.0-5.0-5.068.83.115.334.935.634.134.1-10.1-10.1
Federation central government179.0174.0116.0110.642.245.0183.787.2234.9104.1246.991.4
RS central government120.0105.063.050.431.231.5126.054.9162.249.7122.6-15.5
Ceiling on contracting and guaranteeing of new nonconcessional short-term external debt

by
Institutions of BiH000000000000
Federation general government000000000000
RS general government000000000000
CBBH000000000000
Ceiling on accumulation of domestic arrears by
Institutions of BiH000000000000
Federation central government000000000000
RS central government000000000000
Ceiling on accumulation external payment arrears by 1/
Institutions of BiH000000000000
Federation general government000000000000
RS general government000000000000
CBBH000000000000
Indicative targets
Floor on the net lending of the general government of BiH 1/-17.1-17.1-117.115.5-7.6-11.7241.9-14.1167.6-125.8175.2-266.8
Ceiling on changes in the stock of “other accounts payable”
Federation general government100.0100.0100.0-56.3100.0-31.9100.0100.0100.0100.0100.0100.0
RS general government160.0160.0160.0135.9100.0100.0100.0100.0100.0100.0100.0
Floor on the ITA gross revenue collection6,056.06,056.05,882.01,395.01,395.22,957.02,881.74,649.04,506.76,297.06,115.7

Excluding foreign financed projects as defined in TMU.

Continuous.

Excluding foreign financed projects as defined in TMU.

Continuous.

Table 9.Bosnia and Herzegovina: Structural Conditionality Under the Stand-By Arrangement
ActionsTest dateStatus
Prior actions
1Amend the Federation Law on Budget Execution to ensure the uninterrupted operation of the Federation Ministry of Finance in the absence of a finance ministerMet
2Approve by BiH parliament the harmonization of excise rates on different tobacco products and raise excises on fine-cut tobacco effective July, 2014Met
3Start automated and unfettered exchange among the FTA, RSTA, BDTA, and ITA of taxpayer data as defined in article 4 of the Memorandum of Understanding of June 12, 2013Met
4Adopt necessary legal and administrative changes in the RS to condition farmers’ eligibility for subsidies on their registration and payment of contributionMet
Existing structural benchmarks
1Continue to adhere to the Currency Board Arrangement as constituted under the lawContinuousMet
2Refrain from introducing new privileged or special rights for retirementContinuousMet
3Publish on the web site of the Institutions of BiH quarterly consolidated general government accounts with a 6 week lagQuarterlyMet (with delay)
4Carry out eligibility audits for war benefit recipients; publish results (quarterly within 4 weeks after the end of each quarter) of audits (Entities)QuarterlyMet (with delay)
5Amend legislation in the RS to eliminate the take-home pay protection for public sector employeesEnd-December 2013Not met; proposed to re-set to end-December 2014
6Adopt by the Federation parliament a new labor law with a view to facilitating job creationEnd-December 2013Not met; proposed to re-set to end-December 2014
7Adopt by the RS parliament a new labor law with a view to facilitating job creationEnd-December 2013Not met; proposed to re-set to end-December 2014
8Adopt by the BiH parliament a new public procurement law in line with EU standardsEnd-February 2014Met (with delay)
9Raise the excises on fine-cut tobacco to be fully equivalent with those on cigarettesMarch 1, 2014Not met; proposed as a prior action for the sixth and seventh review
10Adopt by the Federation parliament a new law on Single Registry of Beneficiaries of Cash Payments without ContributionEnd-March 2014Not met; proposed to re-set to end-July 2014
11Submit legislation in line with IMF staff recommendations regulating the establishment and supervision of asset management companies to the Federation parliamentEnd-June 2014Proposed to re-set to end-September 2014
12Submit legislation in line with IMF staff recommendations regulating the establishment and supervision of asset management companies to the RS parliamentEnd-June 2014Proposed to re-set to end-September 2014
13Submit to the Federation parliament a new draft law on banks and other lending institutions in line with IMF staff recommendationsEnd-June 2014Proposed to re-set to end-September 2014
14Submit to the RS parliament a new draft law on banks and other lending institutions in line with IMF staff recommendationsEnd-June 2014Proposed to re-set to end-September 2014
15Submit to the Federation parliament the amendments to the relevant legislation to implement the Federation pension reform strategyEnd-December 2014
Newly proposed structural benchmarks
1Reach agreements on payment schedules with largest tax debtors to ITA in line with para. 7, bullet point 6 of the Supplementary Letter of Intent of [June xx], 2014. Otherwise, the ITA will pursue all options open to it under domestic law to enforce collectionEnd-September 2014
2Develop by the Fiscal Council the procedures for its role in SCFS, adopt by the SCFS an overarching contingency plan, and amend the MOU that governs the SCFS as needed, in line with para. 10 of the Supplementary Letter of Intent of [June xx], 2014End-September 2014
Table 10.Bosnia and Herzegovina: Indicators of Capacity to Repay the Fund, 2011–20
2011201220132014201520162017201820192020
ActualProjections
Fund repurchases and charges 1/
In millions of SDRs4.824.3142.1152.044.273.0148.1168.487.53.41
In millions of euros5.529.0162.6171.349.481.2163.5186.096.73.8
In percent of exports of goods and NFS0.10.73.83.91.01.63.03.21.60.1
In percent of external public debt service3.113.645.941.313.017.625.230.420.50.7
In percent of general government revenues0.10.52.72.70.71.12.12.31.10.0
In percent of gross official reserves0.20.94.54.71.42.24.45.12.60.1
Fund credit outstanding 1/
In millions of SDRs338.2416.8389.8488.7467.1399.5255.889.83.20.0
In millions of euros383.8496.6446.0550.5522.0444.1282.599.23.50.0
In percent of quota200.0246.5230.5289.0276.3236.3151.253.11.90.0
In percent of GDP2.93.83.34.03.62.81.70.50.00.0
In percent of gross official reserves11.714.912.315.214.412.27.72.70.10.0
Memorandum items:
Exports of goods and services (millions of euros)4,1034,0624,2984,4124,7445,0945,4325,7816,1606,564
External public debt service (millions of euros)178214355415378462648612470541
Quota (millions of SDRs)169169169169169169169169169169
Quota (millions of euros)192201193190189188187187187187
Gross official reserves (millions of euros)3,2853,3263,6133,6213,6373,6473,6753,6753,7843,897
GDP (millions of euros)13,16513,15013,48613,86814,69215,63216,73418,16319,70021,366
Euros per SDR1.131.191.141.131.121.111.101.101.101.10
Source: Fund staff estimates.

Based on existing and prospective drawings.

Source: Fund staff estimates.

Based on existing and prospective drawings.

Table 11a.Bosnia and Herzegovina: Gross Financing Requirements 2014–18(In millions of euros)
20142015201620172018
Financing requirements1,9961,6931,5841,7161,631
Current account deficit1,4891,2701,0851,036990
Amortization507423499680641
Government357290381576542
Other15013311810499
Financing1,5151,6391,5841,7161,631
Capital transfers196201210219229
FDI257333355379405
Net bank financing-4389116124123
Foreign loans916829727851857
Government707565373373373
Existing projects427379
Post-Flood280187
Other209264354477484
Gross international reserves (- = increase)-8-15-10-291
Other19820118517116
Financing gap48155000
IMF37119000
EU00000
World Bank11036000
Table 11b.Bosnia and Herzegovina: Gross Financing Requirements 2014–18(In percent of GDP)
20142015201620172018
Financing requirements14.411.510.110.39.1
Current account deficit10.78.66.96.25.5
Amortization3.72.93.24.13.6
Government2.62.02.43.43.0
Other1.10.90.80.60.6
Financing10.911.210.110.39.1
Capital transfers1.41.41.31.31.3
FDI1.92.32.32.32.3
Net bank financing-0.30.60.70.70.7
Foreign loans6.65.64.75.14.8
Government5.13.82.42.22.1
Other1.51.82.32.92.7
Gross international reserves (- = increase)-0.1-0.1-0.1-0.20.0
Other1.41.41.21.00.1
Financing gap3.50.40.00.00.0
IMF2.70.10.00.00.0
EU0.00.00.00.00.0
World Bank0.80.20.00.00.0
Source: IMF staff projections and calculations.
Source: IMF staff projections and calculations.
Table 12.Bosnia and Herzegovina: Financial Soundness Indicators, 2009–14(In Percent)
200920102011201220132014
Mar
Capital
Tier 1 capital to risk-weighted assets (RWA)12.412.613.614.115.215.5
Net capital to RWA16.116.217.217.017.817.3
Quality of assets1
Nonperforming loans to total loans5.911.411.813.515.114.9
Nonperforming assets (NPAs) to total assets3.98.18.810.311.411.5
NPAs net of provisions to tier 1 capital25.946.126.130.431.529.4
Provision to NPAs34.640.868.267.468.069.3
Profitability
Return on assets 20.1-0.60.70.6-0.2-0.1
Return on equity 20.8-5.55.95.0-1.4-1.0
Net interest income to gross income61.560.163.863.762.362.5
Noninterest expenses to gross income97.4109.086.387.2101.278.1
Liquidity
Liquid assets to total assets30.929.027.325.426.424.7
Liquid assets to short- term financial liabilities52.949.746.744.146.243.6
Short- term financial liabilities to total financial liabilities66.266.968.467.967.367.0
Foreign exchange risk
Foreign currency and indexed loans to total loans73.970.066.763.162.961.8
Foreign currency liabilities to total financial liabilities69.267.066.065.263.863.2
Net open position1.74.416.15.46.74.7
Source: CBBH.

Prior to 2010, assets classified as loss, alongside the provisions made against them, were held off-balance sheet by banks in BiH. This lowered the reported NPL ratios and coverage of nonperforming loans by provisions. Starting with the December 2010 data in the RS, and the December 2011 data in the Federation, banks record on-balance sheet the “loss” loans and related accrued interest and provisions, resulting in a structural break in the series.

Interyear values obtained by summing up the quarterly net income in the current and the preceding three quarters.

Source: CBBH.

Prior to 2010, assets classified as loss, alongside the provisions made against them, were held off-balance sheet by banks in BiH. This lowered the reported NPL ratios and coverage of nonperforming loans by provisions. Starting with the December 2010 data in the RS, and the December 2011 data in the Federation, banks record on-balance sheet the “loss” loans and related accrued interest and provisions, resulting in a structural break in the series.

Interyear values obtained by summing up the quarterly net income in the current and the preceding three quarters.

Table 13.Bosnia and Herzegoniva: External Debt Sustainability Framework, 2009-2019(In percent of GDP, unless otherwise indicated)
ActualProjections
20092010201120122013201420152016201720182019Debt-stabilizing
non-interest
current account 6/
1Baseline: External debt54.451.448.952.250.854.654.251.647.744.342.10.2
2Change in external debt7.2-3.0-2.53.3-1.43.9-0.5-2.6-3.9-3.4-2.2
3Identified external debt-creating flows (4+8+9)11.99.68.215.44.412.39.17.46.66.05.6
4Current account deficit, excluding interest payments4.04.28.07.53.99.26.95.55.04.43.7
5Deficit in balance of goods and services24.322.024.224.321.026.222.721.320.519.618.7
6Exports9.614.016.916.818.217.217.618.018.118.118.1
7Imports33.936.141.141.139.243.440.339.438.637.736.8
8Net non-debt creating capital inflows (negative)1.42.12.62.11.91.92.32.32.32.32.3
9Automatic debt dynamics 1/6.53.3-2.45.9-1.41.20.0-0.4-0.7-0.6-0.4
10Contribution from nominal interest rate2.52.01.71.81.51.51.81.41.21.21.3
11Contribution from real GDP growth1.4-0.5-0.50.6-0.9-0.3-1.8-1.9-1.9-1.8-1.6
12Contribution from price and exchange rate changes 2/2.61.8-3.73.4-2.0
13Residual, incl. change in gross foreign assets (2-3) 3/-4.7-12.6-10.8-12.1-5.8-8.4-9.6-9.9-10.5-9.4-7.7
External debt-to-exports ratio (in percent)567.1366.5288.7311.2279.2317.3307.8286.2263.1244.7233.1
Gross external financing need (in billions of US dollars) 4/3.53.14.03.63.64.84.34.44.95.04.0
in percent of GDP20.318.721.721.219.910-Year10-Year25.121.220.020.419.014.1
Scenario with key variables at their historical averages 5/54.654.153.151.851.452.6-1.4
HistoricalStandard
Key Macroeconomic Assumptions Underlying BaselineAverageDeviation
Real GDP growth (in percent)-2.70.81.0-1.21.85.39.10.73.53.74.04.04.0
GDP deflator in US dollars (change in percent)-5.2-3.27.7-6.64.13.210.85.24.23.94.54.44.3
Nominal external interest rate (in percent)4.93.53.73.43.14.10.93.23.52.92.52.63.1
Growth of exports (US dollar terms, in percent)-16.142.831.2-8.614.916.631.70.410.210.39.28.48.3
Growth of imports (US dollar terms, in percent)-28.83.924.0-7.81.15.118.017.30.05.36.76.05.8
Current account balance, excluding interest payments-4.0-4.2-8.0-7.5-3.9-8.34.3-9.2-6.9-5.5-5.0-4.4-3.7
Net non-debt creating capital inflows-1.4-2.1-2.6-2.1-1.9-0.85.7-1.9-2.3-2.3-2.3-2.3-2.3

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 2.Bosnia and Herzegovina: External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

Table 14a.Bosnia and Herzegovina: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario(in percent of GDP unless otherwise indicated)
Debt, Economic and Market Indicators1/
ActualProjectionsAs of October 30, 2013
2003-20112/ 20122013201420152016201720182019Sovereign Spreads
Nominal gross public debt27.944.642.546.246.044.642.238.735.9EMBIG (bp)3/n.a.
Public gross financing needs2.45.45.69.06.85.35.34.22.45Y CDS (bp)n.a.
Real GDP growth (in percent)3.4-1.21.80.73.53.74.04.04.0RatingsForeignLocal
Inflation (GDP deflator, in percent)3.71.10.72.12.42.62.92.92.9Moody’sB3B3
Nominal GDP growth (in percent)7.2-0.12.52.85.96.47.17.07.0S…PsBB
Effective interest rate (in percent) 4/2.51.81.72.12.32.22.01.82.2Fitchn.a.n.a.
Contribution to Changes in Public Debt
ActualProjections
2003-201120122013201420152016201720182019cumulativedebt-stabilizing
Change in gross public sector debt1.13.8-2.13.6-0.1-1.5-2.4-3.4-2.8-6.6primary
Identified debt-creating flows-1.72.2-0.43.00.1-1.4-2.1-2.4-2.6-5.4balance 9/
Primary deficit0.81.91.23.31.70.40.0-0.4-0.84.2-1.7
Primary (noninterest) revenue and gra46.346.345.145.145.345.545.645.645.6272.6
Primary (noninterest) expenditure47.148.246.348.447.045.945.645.244.8276.9
Automatic debt dynamics 5/-1.60.3-1.5-0.3-1.6-1.8-2.1-2.1-1.7-9.6
Interest rate/growth differential 6/-1.10.8-0.4-0.3-1.6-1.8-2.1-2.1-1.7-9.6
Of which: real interest rate-0.30.30.40.0-0.1-0.2-0.5-0.5-0.3-1.5
Of which: real GDP growth-0.80.5-0.8-0.3-1.5-1.6-1.7-1.6-1.4-8.1
Exchange rate depreciation 7/-0.5-0.5-1.2
Other identified debt-creating flows-1.00.00.00.00.00.00.00.00.00.0
General Govt - Financing - Privatizati-native)0.00.00.00.00.00.00.00.00.00.0
Contingent liabilities0.00.00.00.00.00.00.00.00.00.0
Other debt flows (incl. ESM and Eurons)0.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes 8/2.81.6-1.70.6-0.3-0.1-0.3-1.0-0.3-1.2
Source: IMF staff.

Public sector is defined as general government.

Based on available data.

Long-term bond spread over German bonds.

Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 5 as r - π(1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last proiection year.

Source: IMF staff.

Public sector is defined as general government.

Based on available data.

Long-term bond spread over German bonds.

Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 5 as r - π(1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last proiection year.

Table 14b.Bosnia and Herzegovina Public DSA - Composition of Public Debt and Alternative Scenarios
Source: IMF staff.

Appendix. Letter of Intent

Sarajevo and Banja Luka, Bosnia and Herzegovina

June 13, 2014

Ms. Christine Lagarde Managing Director International Monetary Fund Washington, D.C. 20431

Dear Ms. Lagarde:

1. The Stand-By Arrangement (SBA) for Bosnia and Herzegovina (BiH) approved in September 2012 by the Executive Board of the International Monetary Fund (IMF) and extended in January 2014 continues to anchor our economic policies in a difficult economic and political environment. We remain committed to implementing the broad policies described in our original Letter of Intent dated September 11, 2012, and that were further specified and augmented in our Supplementary Letters of Intent of December 6, 2012, April 23, 2013, June 12, 2013, October 9, 2013, and January 8, 2014. This Supplementary Letter of Intent provides information on our efforts and achievements since the completion of the fifth review under the arrangement in January 2014, as well as on the additional policy measures we plan to undertake in the remainder of 2014 to help ensure that the objectives of the program continue to be met.

2. Moreover, with this letter, we also request an augmentation of access under the SBA, to help us address the impact of the floods and landslides that followed massive rainfalls in May. Although the damage assessment conducted by the UN, the EU, and the World Bank is still underway, it is clear that the floods and landslides have caused major damage to housing, businesses, farmlands, and infrastructure. Very preliminary estimates suggest a loss equivalent to 5-10 percent of GDP. Production and exports are expected to fall and import needs will rise, creating an urgent balance of payments need that, if not addressed, would result in an immediate and severe economic disruption. Government finances are faced with substantial revenue losses and short-term spending needs for relief efforts. Banks’ loan portfolios will worsen.

3. The economy returned to growth in 2013, with real GDP estimated to have expanded by nearly 2 percent. Production and exports grew strongly in 2013, although domestic demand remained weak. Growth was projected to pick up further in 2014 and to become gradually more broad-based, but due to the impact of the floods and landslides on production and incomes, we now expect growth to slow considerably this year, to about 0.7 percent. Following a steady expansion of activity in the first quarter of the year, a sharp contraction is expected for the second quarter, but we hope that the economy will rebound towards the end of the year, depending also on the availability of international support to assist with the reconstruction efforts. Inflation, which remained low in 2013, is expected to pick up somewhat in 2014, in part reflecting a loss of agricultural production, but is still projected to remain low. Similarly, the current account deficit, which had narrowed substantially in 2013 on account of strong export growth, is expected to widen again in 2014, as export growth is likely to slow markedly and imports will rise. Unemployment remains high, meanwhile, at 28 percent, and may rise in the near future as businesses were destroyed or suffered severe damage.

Program Implementation and Further Reforms

4. In the period prior to the natural disaster, we continued to make progress toward meeting our program objectives, although our efforts were complicated by delays in securing parliamentary approval of key measures and the weak state of domestic demand. All end-March 2014 performance criteria on the fiscal balances of the Institutions of BiH and the central governments of the Federation of Bosnia and Herzegovina (FBiH) and the Republika Srpska (RS) were observed. Also, neither the central governments of the FBiH and the RS, nor the Institutions of BiH, saw an increase in domestic arrears in the period through end-March 2014. Similarly, although data are still preliminary, the changes in the stock of other accounts payable for the general governments of the FBiH and the RS—and indicative target—are likely to have remained below their respective ceilings through end-March 2014. The indicative target for gross revenue collection by the Indirect Tax Authority (ITA) for end-March 2014 was also met, as domestic demand started to pick up and measures to improve collection started to yield result (see below), after the end-December 2013 target had still been missed by a considerable margin. Moreover, the indicative target on net lending by the consolidated general government for end-March 2014 was, based on available information, met as well. We did not contract or guarantee any new non-concessional short-term external debt, nor did we accumulate any external payment.

5. Fiscal policies were largely on track in 2013. The consolidated general government budget deficit is estimated to have declined to 1.9 percent of GDP in 2013, compared to our (unadjusted) goal of 2.0 percent of GDP (or 2.4 percent of GDP adjusted), and the indicative target on net lending by the consolidated general government for end-December 2013 was met. As noted, revenue collection was weaker than already had been anticipated, reflecting weak private consumption, falling prices, and growing exports that contributed to rising VAT refunds, but also because our efforts to strengthen collection did not yet generate the expected results. Thus, and despite a significant compression of spending in the last months of the year, the (adjusted) end-December 2013 performance criteria on the fiscal balances of the central governments of the FBiH and the RS were missed, albeit by relatively small margins (the equivalent of about 0.02 percent and 0.13 percent of GDP, respectively). This was largely offset by the Institutions of BiH, which met the end-December 2013 performance criterion on its budget balance by a large margin.

6. Looking ahead, we intend to adhere as much as possible to the expenditure envelopes in the approved 2014 budgets for the Institutions of BiH, and the central governments of the FBiH and the RS, but we will reallocate spending depending on urgent disaster-relief needs. In line with this commitment, the cost of advancing the public sector wage increases in the RS that had already been planned were contained by the adoption of the revised Laws on Wages and offsetting measures identified in consultation with IMF staff. The requested additional disbursement under the SBA will primarily be used to offset the sizable revenue losses due to the recent natural disaster. In this context, we will also need to provide additional transfers from the entity central government budgets to the pension and health funds as contributions will fall, to ensure that these will be able to pay pensions and benefits without undermining their financial soundness. Against this background, we also request a modification of the performance criteria on the budget balances of the central governments of the FBiH and the RS and of the indicative target on net lending of the general government for the remainder of 2014 (Table 1). Given the uncertainty about the size and timing of donor assistance, we also propose to include adjustors to the performance criteria on the budget balances of the central governments that would enable us to utilize such donor support for our reconstruction efforts. Although the outlook is highly uncertain, as a result of the natural disaster we expect the consolidated general government budget deficit—including additional foreign assistance—to increase to over 4 percent of GDP this year.

Improving revenue collection

7. We have accelerated our efforts to improve tax collection, which has become even more important in light of the likely shortfall in revenues due to the impact of the floods and landslides. In particular:

  • The exchange of taxpayer information among the four tax agencies (ITA, FTA, RSTA, and BDTA) that started in January 2014 has now been expanded, after some remaining legal and technical hurdles were overcome, so that the FTA, RSTA, BDTA, and ITA now have automated and unfettered access to each other’s taxpayer data as defined in article 4 of the Memorandum of Understanding of June 12, 2013 (a prior action), in a process coordinated by a Technical Compliance Committee comprising senior staff from the four tax agencies. Going forward, the directors of the four tax agencies will meet at least once every quarter, to coordinate and guide the process. In the coming months, we will also make comprehensive company information available in the entity business information agencies (AFIP and APIF) freely available to the tax agencies.

  • The BiH parliament approved the harmonization of excise rates on different tobacco products, and excises on fine-cut tobacco were raised, effective July 2014 (a prior action). The amendments to the Law on Excises also ensure that the tax treatment of different tobacco products remains equivalent as we further raise the excise rate on cigarettes gradually in the coming years to achieve convergence with EU levels. The ITA, the entities’ inspection offices, and the customs office will step up their cooperation to combat smuggling and evasion, including the sale in domestic markets of tobacco products that do not have excise stamps.

  • The ITA Governing Board approved a new draft Law on Customs Policy that is consistent with EU legislation and we aim to submit the draft to the BiH parliament by end-September 2014.

  • A revised staffing scheme for the ITA will be adopted shortly by the ITA Governing Board that will allow the ITA to establish the unit for the detection and prevention of VAT fraud within an unchanged overall staffing envelope. Following recent IMF technical assistance, the ITA will introduce a risk-based approach for the selection of VAT refunds for audit, one of the key elements of our strategy to strengthen the control of VAT refunds and credits. Moreover, the ITA will continue to ensure that VAT refunds will only be provided to taxpayers who are fully compliant with their VAT obligations.

  • The entities will reach an agreement on the settlement of outstanding indirect tax revenue claims from 2012.

  • Meanwhile, the ITA has started publication of the largest tax debtors on its website and will update this list monthly. The ITA will also publish monthly information on the stock of indirect tax arrears and the stock of rescheduled tax debts, as well as information regarding debt rescheduling agreements, in a format to be agreed with IMF staff. The ITA is actively engaging the largest tax debtors and by end-September 2014 it will seek to have reached agreements on payment schedules with the largest tax debtors—those with outstanding liabilities of KM 2.5 million or more as of March 31, 2014—requiring at least 15 percent of the outstanding liabilities to be paid upfront for an agreement to be reached and requiring that taxpayers remain current on their tax payments for the agreement to remain in effect, and, if no agreement has been reached by then or when taxpayers fall into arrears again the ITA will pursue all options open to it under domestic law to enforce collection (a new structural benchmark for end-September 2014). The ITA will publish the results of its efforts on its website. In this context, we will also refrain from forgiving the full amount of penalty interest on any tax debts, to maintain adequate incentives for taxpayers to pay taxes on time. More broadly, the ITA will clarify its criteria for approval of rescheduling agreements of outstanding tax obligations—including collateral requirements—with the assistance of the IMF.

  • The new corporate income tax law for the FBiH—which was prepared with assistance from the IMF with a view to broadening the tax base and clarifying the tax treatment of depreciation and banks’ loan loss provisioning—was submitted to the FBiH parliament, with its adoption expected by end-July 2014. The RS will aim to complete the review of its corporate income tax law in the coming months with the assistance of the IMF, to foster consistency and to avoid double taxation, and with a particular focus also on its tax treatment of loan loss provisioning, as well as transfer pricing, with government approval expected by end-September 2014 and parliamentary approval by end-December 2014.

Strengthening public finances

8. On the expenditure side, we will continue to strive to streamline and increase the efficiency of government operations, and rationalize the benefit system. Thus:

  • The FBiH parliament adopted an amendment to the FBiH Law on Budget Execution to ensure the uninterrupted operation of the FBiH Ministry of Finance in the absence of a finance minister (a prior action). This amendment designates an alternate person authorized by the government who has the authority to sign on the minister’s behalf in the event of the minister’s absence.

  • Following the adoption of the new FBiH Law on Budgets, the implementing regulations and rulebooks are expected to be finalized and adopted shortly. Moreover, an FBiH Fiscal Coordination Body was established to coordinate fiscal policy between all levels of government in the FBiH, with a view to securing macroeconomic stability and fiscal sustainability, and met for the first time in May. The Fiscal Coordination Body is expected to play an important coordinating role in addressing the fiscal impact of the natural disaster in the FBiH.

  • The BiH Fiscal Council adopted a common definition of arrears in the Institutions of BiH and both entities, with any amount that is not paid within 90 days after the due date considered to be in arrears.

  • The new public procurement law for BiH, prepared with assistance of the OECD and the EU, was adopted by the BiH parliament in May 2014 (an end-February 2014 structural benchmark). This new law will align BiH’s public procurement framework with EU standards.

  • In the RS, the registration of farms in accordance with the rulebook on classification of household farms into commercial and non-commercial farms is ongoing. To help stabilize the financial condition of the social funds we will also ensure that registered farmers pay social contributions. To achieve better targeting of agricultural subsidies, we have made the necessary legal and administrative changes conditioning the eligibility of farmers for agricultural subsidies on their registration and payment of contributions (a prior action).

  • A new Fiscal Responsibility Law has been prepared in the RS, with a view to ensuring long-term fiscal sustainability and enhancing transparency. The new law will establish clear fiscal rules and an independent Fiscal Council. The new law is expected to be adopted by the RS parliament by end-September 2014.

  • Fiscal control on spending units in the RS that operate outside of the treasury general ledger and have their own transaction accounts will be tightened. Specifically, the new Law on Fiscal Responsibility will oblige all such units maintaining their own transaction accounts to obtain an approval of financial plans by the Ministry of Finance prior to their submission to the government. We will also ensure that these spending units maintain a balanced budget throughout the year or refrain from creating commitments in access of approved allocations.

  • Efforts are underway to establish a centralized database in the FBiH of all beneficiaries of social transfers. To this end, the draft Law on Single Registry of Beneficiaries of Cash Payments without Contribution was submitted to the FBiH parliament in April, and we expect it to be adopted by end-July 2014 (a new deadline for this structural benchmark). Subsequently, we will make the necessary financial and administrative resources available to make this database operational by end-September 2014.

  • We continue to move ahead with the implementation of the new Law on Privileged Pensions in the FBiH. The audits to verify the eligibility of the existing beneficiaries are being carried out throughout the FBiH and the FBiH government has been working on amending the Law on Audits and the Law on Organization of Federation Ministries to improve the audit process. Sufficient administrative resources have been made available to ensure that the screening of new entrants will be completed by end-March 2014. The FBiH Pension and Disability Insurance Fund (PIO) and the Ministry of War Veterans found that the deviation between the expected and actual savings from the adjustment of benefit levels of existing beneficiaries was due to insufficient information about the ranks of a number of beneficiaries when the initial estimates were made. Meanwhile, the main elements of the new law were upheld by the FBiH Constitutional Court, although other rulings by this and other courts that impact the privileged pension system would add to the cost of the system if no offsetting measures would be taken. We will continue to ensure, however, that the overall cost of the privileged pension system will remain within the agreed upon amounts, as included in the 2014 budget, to safeguard the financial health of PIO, and we will take corrective measures as envisaged by the law as needed to achieve this, including the use of a payment rationing coefficient if necessary.

  • We recognize that improving the financial position of our health care system is needed to stem the increasing costs and to create conditions for reducing the tax burden on labor by lowering the health care contribution rate over the medium-term. As a precondition, this requires a comprehensive reform of our health care system. To this end, our key reform priorities—indentified with the assistance of the World Bank—include: (i) improving the efficiency of procurement and dispensing of pharmaceuticals, medical devices, and equipment; (ii) restructuring hospitals to improve quality and efficiency of services: (iii) revising legal frameworks to delink employment services from the provision of health insurance coverage; and (iv) strengthening the regulation and public health interventions to improve public health. In the months ahead, we will work closely with the World Bank on developing specific measures underpinning these reform efforts.

Safeguarding financial sector stability

9. While our financial sector remains broadly stable and well capitalized, the sector’s profitability had already come under pressure on account of subdued credit activity and the continued gradual deterioration of banks’ loan portfolios, but the large destruction of housing and businesses due to the floods and landslides will cause a further rise in non-performing loans (NPLs) and create additional provisioning needs. In this context, and as set out below, we remain committed to safeguard financial sector stability and the Standing Committee on Financial Stability (SCFS) will coordinate our efforts and take measures to create an environment in which the financial sector can support the economic recovery and reconstruction with a revival of sustainable credit activity, and safeguarding depositors.

10. Preserving financial sector stability by bolstering our contingency planning and crisis preparedness toolkit has remained the cornerstone of our financial sector policy agenda to date. The members of the SCFS have already each developed, with the assistance of the IMF, contingency plans detailing their respective responsibilities, as well as the coordination across institutions in the event of financial sector distress. On the basis of these individual plans and with the assistance of the IMF: (i) the Fiscal Council will develop the procedures for its role in the SCFS as recognized in the Memorandum of Understanding of the SCFS , and (ii) the SCFS, based on the work of a working group of representatives of all SCFS members and coordinated by the Central Bank of Bosnia and Herzegovina (CBBH) and in cooperation with the Fiscal Council Advisory Group, will adopt an overarching contingency plan for the SCFS and amend the Memorandum of Understanding that governs the SCFS as needed by end-September 2014 (a new structural benchmark). Going forward, the members of the SCFS will each continue to update their contingency plans.

11. The Banking Agencies have continued their close monitoring of the financial sector and, in particular, the enhanced supervision of those banks identified as vulnerable under adverse scenarios. All banks that have been under enhanced monitoring by the Banking Agencies have now completed the selection of external auditors to perform thorough asset quality reviews of these banks. The results of these reviews, expected to become available soon, will provide valuable information to the banking agencies about potential balance sheet risks. The banking agencies have also maintained a high level of engagement with foreign supervisory bodies as regards cross-border banks of systemic importance. We will seek to further formalize these engagements by signing Memoranda of Understanding with relevant foreign supervisors by end-July 2014.

12. We also continue our work to complement our contingency planning and supervisory efforts with a set of legislative and regulatory initiatives aimed at: (i) modernizing and strengthening the legal and regulatory framework; (ii) addressing the high level of non-performing loans (NPLs); and (iii) unlocking the credit channel. In particular:

  • We are advancing the preparation of new banking laws in both entities by identifying existing gaps with EU legislation and Basel II requirements. We will coordinate the drafting of these new banking laws to ensure consistency between the entities with the support of further technical assistance from the IMF and the EU. Moreover, we will review and amend as necessary related legislation, such as the Deposit Insurance Agency law. As the preparatory work will require more time and assistance, we expect the respective entity governments to approve the draft laws by end-September 2014 (proposed new deadlines for the end-June 2014 structural benchmarks).

  • We are also preparing, with IMF assistance, legislation to regulate asset management companies, a crucial component in the NPL resolution framework, although more time and assistance is needed in this area too before we expect to be able to have drafts approved by the respective entity governments by end-September 2014 (proposed new deadlines for the end-June 2014 structural benchmarks), and revise tax legislation as needed to facilitate loan sales.

  • We will furthermore bolster our NPL resolution strategy by establishing, with support of upcoming IMF assistance, a voluntary out-of-court-restructuring system in 2014, to promote the return of operationally viable companies to sustainable debt servicing. In this context, both entities will also review their bankruptcy laws to streamline and shorten bankruptcy proceedings.

  • We are also advancing legislation that will create an environment more conducive to credit growth and economic activity. This includes:

    • Following the recent adoption by the FBiH parliament of a new Law on Protection of Consumers of Financial Services, we have requested the FBiH parliament to issue an authentic interpretation ruling out the retroactive application of the also recently adopted Law on Guarantors, to provide a better balance between the protection of creditor and borrower rights.

    • Adoption by the FBiH parliament by end-July 2014 of a new Law on Internal Payment Systems that will ensure the necessary flow of information across entities, also including the CBBH, regarding the registry of accounts and the designation of a main account.

    • The RS parliament adopted a new Law on the Single System for Multilateral Offsets aimed at reducing corporations’ and governments’ overdue liabilities, including those to banks and to each other. We expect this law to boost companies’ liquidity and further spur investment and growth.

    • The RS parliament also adopted amendments to the Law on Foreign Exchange Operations to increase compliance with EU standards and to facilitate and streamline firms’ external operations, including transactions conducted with alternative methods of payment.

13. To help safeguard the integrity and stability of our financial markets, the BiH parliament recently adopted a new law on AML/CFT that is consistent with FATF recommendations. We expect the parliament to adopt the changes to the BiH Criminal Code that are also needed to align our legal framework with FATF recommendations by end-July 2014.

Supporting a vibrant private sector

14. Job creation and inclusive growth remain key objectives of our policies. To this end, we have made progress in improving the business environment, by making it easier to start and operate a business. In the RS, the one-stop business registration is fully operational and more than 300 new businesses have registered since its start in December 2013. To achieve similar results, in the FBiH the new Laws on Companies and Inspections, and amendments to the Law on Business Registration, which were prepared with the assistance of the World Bank, as well as a new Law on Offenses are expected to be adopted by the FBiH parliament by end-June 2014.

15. We have continued to seek consensus with the social partners on new labor market legislation in the FBiH and the RS that is more conducive to job creation. We had aimed to have the new labor laws adopted by the respective parliaments by end-December 2013 (structural benchmarks), but as we have so far been unable to reach a consensus with the social partners we were not able to complete this process as planned, and this has become even more difficult in the aftermath of the recent natural disaster. More time is therefore needed for our dialogue with the social partners, but as we are determined to move forward with this critical reform, the entity governments will improve the drafts of new labor laws in the coming months, with assistance of staff from the World Bank and the IMF, that can then form the basis for renewed discussions with the social partners. The drafts at a minimum will: (i) require all collective bargaining agreements to be time-bound, and with sector-specific collective agreements applying only to those enterprises and workers that want to be part of the agreement; (ii) allow differentiated wage setting based on skills, qualifications, experience, and performance; (iii) reduce disincentives for hiring; (iv) step up labor inspections and increase penalties for labor law violations; and (v) protect workers’ rights consistent with ILO labor standards and EC labor directives. Given the time that would subsequently be needed for the required public debate and taking into account the timing of the parliamentary elections, we would expect the new laws, consistent with the above principles, to be adopted by the respective parliaments by end-December 2014 (a new deadline for these structural benchmarks). In the meantime, we will also continue drafting new laws on civil servants and employees, with the assistance of the World Bank, to facilitate public administration reform, to allow for these laws to be adopted shortly following the adoption of the new entity labor laws. Adoption of the new labor laws will also enable the RS to eliminate the take-home-pay protection by end-December 2014 (a new deadline for this structural benchmark).

16. We continue making progress toward WTO accession. We will strive to adopt the FBiH Law on Trade and the BiH by-law on Genetically-Modified Organisms in the coming months. This would complete the legislative changes required for WTO accession.

Program Modalities

17. We believe that our economic program continues to be on course and that our policies set forth in our Letter of Intent of September 11, 2012, and supplemented by the policies described in the Supplementary Letters of Intent of December 6, 2012, April 23, 2013, June 12, 2013, October 9, 2013, January 8, 2014, and this Supplementary Letter of Intent remain adequate to achieve the objectives of our program. We stand ready, however, to take any additional measures that may be needed to achieve the objectives of our economic program. We will consult with the IMF on the adoption of additional policy measures and in advance of any revision to the policies contained in our economic program, in accordance with IMF policies on such consultation. We will continue to provide IMF staff with the necessary information for assessing progress in implementing our program and will maintain a close policy dialogue with IMF staff. We will provide any necessary information to facilitate the safeguards assessment update. We will also refrain from introducing or intensifying any exchange and trade restrictions and other measures or policies that could worsen balance of payments difficulties.

18. In light of the expected impact of the recent natural disaster on the central government budgets, we request the IMF Executive Board to approve a modification of the end-June 2014, end-September 2014, and end-December 2014 performance criteria on the fiscal balances (net lending) of the central governments of FBiH and the RS as detailed in Table 1. We also request the IMF Executive Board to complete the sixth and seventh reviews under the SBA, augment the amount of the eighth purchase by SDR 84.55 million (equivalent to 50 percent of quota) to meet the urgent balance of payments need caused by the natural disaster, and therefore to make available the seventh and eighth purchases in a total amount equivalent to SDR 169.1 million. The additional access of SDR 84.55 million will be used to alleviate the impact of the disaster and will be allocated with the RS receiving 49 percent, the FBiH 49 percent, and the Brcko District receiving 2 percent.

19. We authorize the IMF to publish this Supplementary Letter of Intent and its attachments, as well as the related staff report on the IMF’s website following consideration of our request by the IMF’s Executive Board.

/s//s//s/
Vjekoslav BevandaNermin NikšićŽeljka Cvijanović
ChairmanPrime MinisterPrime Minister
of the Council of MinistersFederation of BosniaRepublika Srpska
Bosnia and Herzegovinaand Herzegovina
/s//s//s/
Nikola ŠpirićAnte KrajinaZoran Tegeltija
Minister of FinanceMinister of FinanceMinister of Finance
and Treasury ofFederation of BosniaRepublika Srpska
Bosnia and Herzegovinaand Herzegovina
/s/
Kemal Kozarić
Governor
Central Bank of Bosnia and Herzegovina
Table 1.Bosnia and Herzegovina: Quantitative Performance Criteria and Indicative Targets Under the 2012–15 Stand-By Arrangement, 2013–14(Cumulative flow since the end of the previous year; in millions of KM)
20132014
End-DecemberEnd-MarchEnd-JuneEnd-SeptemberEnd-December
EBS/12/161EBS/13/131AdjustedAct.EBS/14/4Act.EBS/14/4ModifiedEBS/14/4ModifiedEBS/14/4Modified
Performance Criteria
Floor on the net lending of 1/
Institutions of BiH-25.0-5.0-5.068.83.115.334.935.634.134.1-10.1-10.1
Federation central government179.0174.0116.0110.642.245.0183.787.2234.9104.1246.991.4
RS central government120.0105.063.050.431.231.5126.054.9162.249.7122.6-15.5
Ceiling on contracting and guaranteeing of new nonconcessional short-term external debt by
Institutions of BiH000000000000
Federation general government000000000000
RS general government000000000000
CBBH000000000000
Ceiling on accumulation of domestic arrears by
Institutions of BiH000000000000
Federation central government000000000000
RS central government000000000000
Ceiling on accumulation external payment arrears by 2/
Institutions of BiH000000000000
Federation general government000000000000
RS general government000000000000
CBBH000000000000
Indicative targets
Floor on the net lending of the general government of BiH 1/-17.1-17.1-117.115.5-7.6-11.7241.9-14.1167.6-125.8175.2-266.8
Ceiling on changes in the stock of “other accounts payable”
Federation general government100.0100.0100.0-56.3100.0-31.9100.0100.0100.0100.0100.0100.0
RS general government160.0160.0160.0135.9100.0100.0100.0100.0100.0100.0100.0
Floor on the ITA gross revenue collection6,056.06,056.05,882.01,395.01,395.22,957.02,881.74,649.04,506.76,297.06,115.7

Excluding foreign financed projects as defined in TMU.

Continuous.

Excluding foreign financed projects as defined in TMU.

Continuous.

Table 2.Bosnia and Herzegovina: Structural Conditionality Under the Stand-By Arrangement
ActionsTest dateStatus
Prior actions
1Amend the Federation Law on Budget Execution to ensure the uninterrupted operation of the Federation Ministry of Finance in the absence of a finance ministerMet
2Approve by BiH parliament the harmonization of excise rates on different tobacco products and raise excises on fine-cut tobacco effective July, 2014Met
3Start automated and unfettered exchange among the FTA, RSTA, BDTA, and ITA of taxpayer data as defined in article 4 of the Memorandum of Understanding of June 12, 2013Met
4Adopt necessary legal and administrative changes in the RS to condition farmers’ eligibility for subsidies on their registration and payment of contributionMet
Existing structural benchmarks
1Continue to adhere to the Currency Board Arrangement as constituted under the lawContinuousMet
2Refrain from introducing new privileged or special rights for retirementContinuousMet
3Publish on the web site of the Institutions of BiH quarterly consolidated general government accounts with a 6 week lagQuarterlyMet (with delay)
4Carry out eligibility audits for war benefit recipients; publish results (quarterly within 4 weeks after the end of each quarter) of audits (Entities)QuarterlyMet (with delay)
5Amend legislation in the RS to eliminate the take-home pay protection for public sector employeesEnd-December 2013Not met; proposed to re-set to end-December 2014
6Adopt by the Federation parliament a new labor law with a view to facilitating job creationEnd-December 2013Not met; proposed to re-set to end-December 2014
7Adopt by the RS parliament a new labor law with a view to facilitating job creationEnd-December 2013Not met; proposed to re-set to end-December 2014
8Adopt by the BiH parliament a new public procurement law in line with EU standardsEnd-February 2014Met (with delay)
9Raise the excises on fine-cut tobacco to be fully equivalent with those on cigarettesMarch 1, 2014Not met; proposed as a prior action for the sixth and seventh review
10Adopt by the Federation parliament a new law on Single Registry of Beneficiaries of Cash Payments without ContributionEnd-March 2014Not met; proposed to re-set to end-July 2014
11Submit legislation in line with IMF staff recommendations regulating the establishment and supervision of asset management companies to the Federation parliamentEnd-June 2014Proposed to re-set to end-September 2014
12Submit legislation in line with IMF staff recommendations regulating the establishment and supervision of asset management companies to the RS parliamentEnd-June 2014Proposed to re-set to end-September 2014
13Submit to the Federation parliament a new draft law on banks and other lending institutions in line with IMF staff recommendationsEnd-June 2014Proposed to re-set to end-September 2014
14Submit to the RS parliament a new draft law on banks and other lending institutions in line with IMF staff recommendationsEnd-June 2014Proposed to re-set to end-September 2014
15Submit to the Federation parliament the amendments to the relevant legislation to implement the Federation pension reform strategyEnd-December 2014
Newly proposed structural benchmarks
1Reach agreements on payment schedules with largest tax debtors to ITA in line with para. 7, bullet point 6 of the Supplementary Letter of Intent of [June xx], 2014. Otherwise, the ITA will pursue all options open to it under domestic law to enforce collectionEnd-September 2014
2Develop by the Fiscal Council the procedures for its role in SCFS, adopt by the SCFS an overarching contingency plan, and amend the MOU that governs the SCFS as needed, in line with para. 10 of the Supplementary Letter of Intent of [June xx], 2014End-September 2014

Attachment. Addendum to the Technical Memorandum of Understanding on Definitions and Reporting Under the 2012–2015 Stand-By Arrangement

June 13, 2014

1. The Technical Memorandum of Understanding (TMU) on Definitions and Reporting Under the 2012–15 Stand-By Arrangement dated January 8, 2014 shall remain in effect except for the amendments below.

2. Paragraph 9 shall be replaced by a new adjustor to the performance criterion in Section A reading:

  • “The respective floors on the net lending will be adjusted downward by the full amount of the respective shares of any donor disbursement, excluding the IMF’s and the World Bank’s Development Policy Loans (DPL) disbursements for budget financing, disbursed for use by the budgets of the Institutions of Bosnia and Herzegovina, the central government of the Federation of Bosnia and Herzegovina, or the central government of the Republika Srpska.”

3. Paragraph 14 shall be replaced by a new adjustor to the indicative target in Section B reading:

  • “The target will be adjusted downward by the full amount of any donor disbursement in excess of the projected disbursements related to the recovery and reconstruction of the equivalent of €443 million, of which the equivalent of €280 is projected to be disbursed by international financial organizations other than the IMF and the World Bank, the equivalent of €68 million by the World Bank, and the equivalent of €95 million by the IMF.”

The program included an adjustor for the end-2013 targets for any shortfalls in programmed dividend payments from TRANSCO (equivalent to 0.4 percent of GDP; see EBS/12/161) that allowed the authorities to seek alternative financing.

Due to capacity constraints and recent resignations of four (out of ten) canton governments, reporting by the lower levels of government in the FBiH has yet to be fully completed and staff estimates have to be used. However, the outcome is unlikely to materially change due to the relative small sizes of the units that have not yet reported.

Excluding foreign-financed projects.

MONEYVAL is a FATF-style regional body of which BiH is a member.

The dividends, equivalent to 0.4 percent of GDP, were paid out in April 2014 following parliamentary approval of the necessary legislative changes and the adoption of an investment plan that ensures the longer-term viability of the transmission system. New management had already been appointed in late 2013 when audited financial accounts of the company had also been approved. Given the one-off nature of the dividends, staff decided to treat these as a financing item, below the line, consistent with GFSM 2001.

In the FBiH, cantons and municipalities receive about two-thirds of the entity’s share in indirect taxes, while in the RS, municipalities receive about one-third on the entity’s share. Social contributions accrue directly to the entity pension and health funds.

Prior to the disaster, the RS authorities advanced a 5 percent public sector wage increase that had been budgeted for mid-year (thus fully reversing the wage cut of early 2013) and had granted the lowest-paid workers higher increases, up to 15 percent, at an additional cost to the budget of about 0.1 percent of GDP

About one quarter to one third of banks’ corporate loan portfolio is directly or indirectly exposed to the disaster.

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