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Bosnia and Herzegovina: Staff Report for the 2015 Article IV Consultation

Author(s):
International Monetary Fund. European Dept.
Published Date:
October 2015
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Economic Developments: Weak Growth and High Unemployment

A. Context

1. BiH has a complex constitutional set-up that has made it difficult to effect policy changes and implement reforms. It has a central government—the Institutions of Bosnia and Herzegovina—two regional entities with a high degree of autonomy—the Federation of Bosnia and Herzegovina (FBiH) and the Republika Srpska (RS)—and a small district, Brcko. Furthermore, the FBiH is comprised of ten highly autonomous cantons.

2. BiH has been lagging other countries in the region on the road toward EU integration, although progress has been made recently. While the 2012 Stand-By Arrangement (SBA) helped support macroeconomic stability in a difficult external environment, progress in addressing domestic structural weaknesses was limited. The adoption of a written commitment by the authorities in January 2015 to conduct all reforms needed to prepare BiH for future EU membership allowed the EU Foreign Affairs Council to let the Stabilization and Association Agreement enter into force in June this year. The Council also urged the authorities to develop an agenda for economic reforms, stressing that strong reform implementation would be necessary for a membership application to be considered by the EU.

3. The new governments that came to office following the October 2014 general elections have pledged to accelerate economic reforms. Against the backdrop of popular discontent with a high rate of unemployment, the new governments adopted a comprehensive Reform Agenda in July this year, in close cooperation with the EU and the International Financial Institutions (IFIs) (see below). Implementation of the Reform Agenda will face considerable challenges, however, given a difficult domestic political environment and the need to overcome strong opposition from vested interests.

4. Data are adequate for surveillance purposes. The authorities are working, including with Fund assistance, to address remaining shortcomings, notably in the coverage and quality of fiscal and real sector data.

B. A Steady Reduction in External and Internal Imbalances since the Global Crisis and Signs of an Economic Recovery

5. BiH had experienced strong economic growth prior to the global financial crisis. Sizable inflows into the banking system fueled a credit boom, while the introduction of value added taxation in 2006 allowed for large increases in public sector employment and in public sector wages and social benefits. But while incomes rose, so did domestic and external vulnerabilities. When the economy fell into recession in the aftermath of the global crisis, the current account and budget deficits rose sharply, and with that public debt. Growth was lackluster following the crisis, with several starts and stops, reflecting weak activity across Europe, deleveraging by foreign-owned banks, and slow progress with domestic reforms.

Average Real GDP Growth

Source: Authorities and IMF staff estimates.

1/ WBSconsists of ALB, HRV, MKD, MNE, SRB.

2/ NMS consists of BGR, CZE, EST, HUN, LVA, LTU, POL, ROU, SVK, SVN.

Source:BiH Agency for statistics, and IMF staff calculations.

1/ Private sector employment includes workers employed by a number of state-owned enterprises.

6. External and internal imbalances have been gradually reduced in recent years, mainly through fiscal consolidation, but also reflecting lower investment and higher savings. The budget deficit was brought down to just below 2 percent of GDP in 2013 by containing current expenditures and improving revenue collection. The economy started to recover in 2013, with growth reaching 2.5 percent. This progress was interrupted by the natural disaster that hit BiH in May 2014. However, the economy proved more resilient to the impact of the floods than initially expected. Production and exports rebounded faster than anticipated, and despite the limited disbursements of donor assistance—beyond the immediate emergency assistance—growth is estimated to have reached over 1 percent in 2014. The current account and budget deficits widened, but much less than had been feared, while public debt rose to 45 percent of GDP by end-2014.

Bosnia and Herzegovina: Donor Support to Address the Floods(in millions of Euros; as of end-June 2015)
DonorPlegedDisbursed
Bilateral54.729.2
International Financial Institutions755.8175.6
IMF95.795.7
World Bank140.010.2
EU85.039.1
EBRD, EIB, CEB435.130.6
Total810.5204.7
Source: BiH authorities, preliminary data
Source: BiH authorities, preliminary data

7. After these difficult years, an economic recovery is showing signs of taking a firmer hold. As economic activity is slowly picking up in Europe, growth in BiH is expected to rebound to over 2 percent this year. Industrial activity and exports have been gathering momentum and, together with the decline in fuel prices, boost incomes and consumption. Meanwhile, deflation has been imported through the currency board arrangement.

Figure 1.BiH: Selected Economic Indicators

Sources: BiH authorities; and IMF staff estimatesand projections.

C. But Lagging Reform Implementation has held Back Incomes and Employment

8. While key macro-economic indicators have been improving, BiH still substantially lags its peers in income convergence to more advanced European economies. Per capita incomes average only about a quarter of the average EU income level. In addition, unemployment is stuck at a very high level—28 percent—and high youth and long-term unemployment are particularly worrisome. Unemployment rates appear relatively unresponsive to changes in economic growth, suggesting a large structural component in unemployment.

GDP per Capita in PPP

(Index, EU28 = 100)

Sources: Eurostat.

9. Standard analyses do not suggest major issues with regard to external stability. In the wake of the global crisis, the current account balance has moved closer to its sustainable path. Assuming a continuation of fiscal consolidation, EBA-Lite methodologies suggest that the real effective exchange rate is broadly in line with fundamentals.

Effective Exchange Rates

(2010 = 100)
BIH Exchange Rate Assessment 1/
Current account/GDPREER misalignment
MethodologyNormUnderlying
Current account model−6.2−7.74.2
External sustainability−3.4−4.93.9
Equilibrium real exchange rate3.9

Based on IMF EBA-Lite methodology. External sustainability provides medium term assessment of the current account, while the other two methods provide assessments of the projected current account balance and REER in 2015.

Based on IMF EBA-Lite methodology. External sustainability provides medium term assessment of the current account, while the other two methods provide assessments of the projected current account balance and REER in 2015.

10. Other price indicators, such as average wages, also do not point to competitiveness problems. Wages in BiH are low in absolute levels and appear to be only moderately higher than labor productivity. Average wage levels are pushed up by high wages in the public sector; private sector wages—at least recorded wages—appear to be competitive. At the same time, labor productivity is quite low by regional standards, amounting to just over 25 percent of average productivity in EU countries. Minimum wages, however, are higher than elsewhere in the region.

Wages and Labor Productivity, 2014 1/

1/ EU average = 100 (excl. Luxemburg), productivity calculated using 2014 IMF WEO projections for GDP. Wages for Montenegro, Poland, Russia, Serbia and Ukraine as of 2014q4.

Source: Haver Analytics, IMF World Economic Outlook and IMF staff calculations.

11. Private investment—and notably foreign direct investment—is low compared to other countries in the region, limiting potential output and private sector job creation. Low private sector activity has translated also in a relatively low level of exports.

Figure 2.BiH: Structural Weaknesses

Sources: national authorities, World Bank, Haver, Eurostat, OECD, CEA, IMF World Economic Outlook database, and IMF staff calculation.

1/ 2012 data used in place of 2013 data.

2/ Balkan average used for long-term unemployment rate. due to missing data.

3/ NMS consists of BGR, CZE, EST, HUN, LVA, LTU, POL, ROU, SVK, SVN.

4/ WBS consists of ALB, HRV, MKD, MNE, SRB.

5/ Baltics consists of EST, LVA, and LTU.

6/ CE consists of CZE, HUN, POL, SVK, and SVN.

7/ SEE consists of BGR and ROU.

12. This lack of private investment reflects not only political risks, but a still largely unfinished reform agenda, resulting in a poor business environment and labor market rigidities. The complex governing structure with its multitude of regulations and a fragmented economic space create major obstacles to businesses. Despite recent progress, BiH still substantially lags its regional peers in ease of doing business indicators.

13. The result is a high level of structural unemployment. With few private sector jobs and relatively high public sector wages, many unemployed are either waiting for a public sector job or are looking for opportunities abroad—in a 2013 survey 80 percent of young people indicated they would leave the country if they could. In the meantime, remittances provide an important source of income for many households, and may result in higher reservation wages.

Policy Discussions: Accelerating Growth While Maintaining Macroeconomic Stability

14. The authorities agreed with staff that an ambitious policy agenda is necessary to accelerate growth and reduce unemployment, while maintaining macroeconomic stability. The Reform Agenda adopted in July sets out the governments’ plans for economic and social reforms for the coming years, as well as measures to strengthen the rule of law, tackle corruption, and enhance administrative capabilities of public institutions. More specifically, with regard to economic policies, the authorities agreed that these need to focus on:

  • intensifying reforms to improve the business environment, attract investment, and raise the economy’s growth potential;

  • resuming fiscal consolidation to place public debt on a steady downward path, while improving the quality of government spending;

  • and safeguarding financial sector stability and reviving bank lending.

The international community has expressed strong support for the authorities’ Reform Agenda and has pledged to help the authorities in their efforts, including by providing financial assistance, depending on progress in implementation. Following the adopting of the Reform Agenda, the authorities have been preparing detailed action plans and have started with its implementation.

A. Supporting a Vibrant Private Sector

Background

15. Some progress has been made in the last few years to improve the business environment, but much remains to be done. As noted above, structural reforms have been progressing slowly and face resistance from vested interests. Both entities have been making 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. Similarly, in the FBiH, amendments to the Law on Business Registration and a new Law on Companies and on Inspections were adopted. It had proven difficult in both entities, however, to achieve consensus between the social partners on new labor market legislation that would help create more jobs. The privatization process has yet to be completed, notably in the FBiH, as continued public ownership allows for a system of patronage and weak financial discipline.

Policy Advice

16. To attract investment and boost job creation in the formal economy, it will be critical to:

  • Improve the business environment by: (i) further reducing the administrative burden on businesses, including by harmonizing regulations between the entities and reducing para-fiscal fees; (ii) restarting privatization of state-owned companies, notably in the FBiH, by divesting minority shares and the resolution of remaining state-owned enterprises either through the restructuring and privatization of viable enterprises or the liquidation of non-viable ones; (iii) improving the resolution framework for commercial and labor disputes, including by adopting new entity bankruptcy legislation and enhancing the court system by establishing commercial courts in the FBiH and improving their functioning in the RS to speed up the processing of disputes; (iv) enhancing anti-corruption efforts, including by implementing the anti-money laundering framework; and (v) finalizing the process of WTO accession and resolving trade issues with the EU.

  • Enhance the functioning of the labor market by: (i) revitalizing the collective bargaining process by setting a limit on the duration of collective agreements and requiring renegotiation of existing ones; (ii) allowing wages to be better linked to performance; (iii) reducing disincentives for hiring by increasing opportunities for part-time work and fixed-term contracts and by limiting severance payments; and (iv) increasing labor inspections to reduce informal employment and better protect workers’ rights. This will need to be accompanied by strengthening the system of unemployment benefits and active labor market policies, including by expanding training and education opportunities, and by broader education reform to reduce skills mismatches.

Authorities’ Views

17. The authorities recognized that future growth must be based on attracting investment and agreed with staffs recommendations. The Reform Agenda includes a set of measures to make it easier to start and operate a business, including by simplifying and harmonizing regulations, as well as commitments to proceed with the restructuring, privatization, or liquidation of most remaining state-owned enterprises and to adopt new labor market legislation that is more conducive to job creation. In a major step forward and notwithstanding continued strong resistance from the labor unions, the FBiH parliament adopted a new Labor Law in line with IMF and World Bank recommendations by the end of July 2015. The RS authorities aim to adopt a new labor law in the coming months.

Box 1.Implementation of Recommendations of the 2012 Article IV Consultation and Performance under the 2012–14 SBA

Performance under the 2012–14 SBA The 2012 Article IV consultation coincided with the start of a new SBA aimed at countering the effects of a weak external environment and addressing domestic structural weaknesses. The program had as goals to: (i) improve national policy coordination; (ii) maintain fiscal discipline, and advance public sector reforms to reduce the size of the government and improve the composition of expenditure; (iii) safeguard financial sector stability in the context of the currency board; and (iv) intensify reforms to improve the business and investment environment to support growth, investment and job creation.

During the program period, the authorities have been successful in reducing external and internal imbalances. While the external environment proved more adverse than expected, the budget deficit was steadily reduced, the current account deficit narrowed, and official foreign exchange reserves rose steadily. An augmentation of the SBA in June 2014 helped address the urgent balance of payment needs created by the floods.

While macro-economic policies were sound—and remained so in the run up to the October 2014 elections—progress in structural reform implementation was mixed and reform efforts stalled once the election campaign got underway:

  • Progress was made in strengthening public financial management—with the adoption of a new budget framework law in the FBiH, amendments to the Law on Financing of the Institutions of BiH, and a new BiH procurement law—and in the area of taxation—with an increase in tobacco excises and a start with the exchange of taxpayer information between the four tax agencies. In the FBiH, privileged pensions for war veterans were reduced, although the number of beneficiaries was increased. New pension legislation is under preparation. Little or no progress was made, however, in improving the composition and quality of government spending.

  • Progress was also made in strengthening bank oversight and in safeguarding financial sector stability. Financial sector contingency plans were adopted, including a BiH-wide plan focusing on systemic events. Asset quality reviews of weaker banks were conducted or are underway. All banks conducted bottom-up stress tests for the first time in addition to the regular top-down stress testing. New banking laws are under preparation, while amendments had already been introduced regarding treatment of confidential information to allow for enhanced cooperation with foreign supervisors.

  • Less progress was made in improving the business environment and labor market, although a one-stop business registration process was introduced in the RS and the last of a series of legislative changes was recently approved in the FBiH to achieve the same. Moreover, after long delays a new labor law that is more conducive to job creation was recently adopted in the FBiH, while this is still pending in the RS. No progress was made in restructuring or divesting remaining state-owned assets.

B. Fiscal Policies: Ensuring Sustainability, While Supporting Growth

Background

18. The authorities’ gradual fiscal consolidation over the past several years brought the increase in the public debt ratio to a halt—and would have supported a decline if not for the floods. The overall budget deficit was reduced from its peak of 6 percent of GDP in 2009 to just under 2 percent of GDP in 2013, mainly by strictly containing current spending. This downward trend was interrupted by the floods in 2014. The reduction in the deficit was achieved despite a worse economic environment: economic growth during 2012–14—both in nominal and real terms—turned out to be much lower than anticipated at the start of the last Fund-supported arrangement in 2012, due to lower growth in Europe, deflation, the floods, and weak bank lending. Consequently, revenues also did not reach the levels projected three years ago, forcing much lower spending levels.

19. Despite the natural disaster and the elections, the overall fiscal stance in 2014 was tighter than anticipated. The overall deficit is estimated to have reached 3 percent of GDP in 2014, from an original pre-disaster target of 1.7 percent of GDP. However, this was much lower than the 4 percent of GDP deficit projected immediately following the disaster, owing to a faster than expected recovery in revenues, slower reconstruction efforts, and restraint on non-flood related expenditures. Public debt reached 45 percent of GDP by the end of 2014.

20. A number of key fiscal structural weaknesses remain:

  • Deficiencies in tax policy and revenue administration. The overall level of tax and social security contributions is one of the highest in the region, with indirect taxes and social security contributions together providing more than 90 percent of revenues. Standard tax rates of both income taxes and VAT are low and competitive in the region. Notably, the single VAT rate of 17 percent and its broad base ensure a high efficiency of VAT collection. Some progress has been made in recent years in improving revenue administration, especially in the collection of indirect tax revenues. Revenues from corporate and personal income taxation on the other hand are very low, and not only because of low rates. Narrow tax bases, generous incentives, and low compliance erode revenues.

  • A high tax burden on labor. The tax wedge—comprising both personal income taxes and social security contributions, but with most of the burden coming from the latter—is higher in the FBiH than in the RS, but it is relatively high in both entities compared to elsewhere in the region. The high burden on labor is a strong disincentive for people to move from informal to formal employment and for some, possibly, even to enter the labor market. The tax base of untaxed benefits, in the form of allowances, both personal income taxes and social security contributions is very narrow, with a substantial share of workers’ compensation provided through untaxed benefits, in the form of allowances, especially in the FBiH.

  • An outsized public sector with a high share of current spending, but with a low quality of spending. The public sector is among the largest in the region, and has the highest share of spending on wages and goods and services. And while public financial management has improved, outcome indicators of public spending on health care and social assistance are among the worst in the region, even though spending in these areas is the highest.

  • Moreover, due to administrative problems and difficulties in reaching agreements between the entities and the central government, the public sector has not managed to unlock all the donor support for reconstruction. Faster absorption of donor assistance could have provided a much-needed boost to the economy.

Social Security Contributions Revenue, 2012

(Percent of GDP)

Source: IMF’s Government Finance Statistics and World Economic Outlook, Eurostat, and country authorities.

General Government Expenditures in the Balkans

(Percent of GDP)

Source: IMF’s Government Finance Statistics and World Economic Outlook New Member States include: Bulgaria, Czech R., Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia, Slovakia

Policy Advice

21. Looking ahead, with a tight monetary policy and deflation imported via the currency board arrangement, a gradual fiscal consolidation would strike an appropriate balance between ensuring medium-term sustainability and supporting the nascent recovery. A gradual reduction of the budget deficit to between zero and one percent of GDP over the medium-term is a suitable target consistent with reducing public debt to below 40 percent of GDP—an appropriate level for an emerging economy with a currency board and limited access to international markets.

22. The 2015 central government budgets that were adopted in late 2014 and early 2015 and which aimed to contain current spending were consistent with this goal. The overall budget deficit was initially projected to decline to about 2½ percent of GDP this year, although this depended on the availability of sufficient financing, progress in implementing foreign-financed capital projects, and the ability to control spending by lower levels of government, extra-budgetary funds, and state-owned companies. Given delays, however, in the preparation and implementation of foreign-financed capital projects—including the ones to address the impact of last year’s floods—the overall budget deficit is more likely to remain limited to just over 1½ percent of GDP this year.

23. Continuing with a gradual pace of fiscal consolidation will require the authorities to mobilize sufficient financing. External debt servicing obligations are projected to increase again in the coming years and BiH has little or no access to international capital markets. The authorities could raise additional domestic financing, as banks have ample liquidity, but banks may be reaching exposure limits, while too much reliance on domestic financing could crowd out private sector lending and hurt growth. A gradual fiscal adjustment will therefore depend on the authorities’ ability to secure official external support Without this, fiscal policy would have to be tightened considerably faster than appropriate—and cuts would likely fall heaviest on public investment, although spending on wages and benefits would be affected too—which would undermine the economic recovery.

24. In any event, comprehensive fiscal reforms are needed to make fiscal consolidation sustainable, create room for investment in infrastructure, and improve the efficiency of public finances:

  • Improving revenue collection. Progress has been made in recent years to improve revenue collection, but more remains to be done to fight tax evasion and collect tax debts. Revenue collection and administration will need to be strengthened by: (i) enhancing the cooperation between the four tax authorities and strengthening the powers of the entity tax administrations to improve compliance; (ii) moving more toward a risk-based approach for the selection of tax audits and inspections; and (iii) increasing efforts to collect outstanding tax and social security contribution debts. Meanwhile, the single-rate VAT tax that is applied to a broad base is highly effective and will need to be preserved.

  • Lowering the tax burden on formal employment. The tax wedge could be reduced by lowering social security contribution rates. This could be offset by broadening the tax base for labor income by taxing all sources of work-related income, in particular allowances, and by eliminating corporate income tax exemptions and incentives.

  • Reducing public spending, while improving its composition and quality. This includes: (i) implementing public administration reform, including limiting new hiring and refraining from general public sector wage increases as wages in the public sector appreciably exceed those in the private sector; (ii) initiating health care reform; (iii) ensuring the sustainability of the pension system by completing pension reforms, including by increasing the effective retirement age and broadening the base for contributions; and (iv) improving the targeting of social assistance to protect the most vulnerable, while containing the costs of benefits to war veterans, including by completing audits of beneficiaries.

  • Strengthening controls over lower levels of government, extra-budgetary funds, and state-owned enterprises. Efforts are needed to fully account for and stop the increase in uncovered liabilities by lower levels of government and loss-making state-owned enterprises. Further efforts are needed to strengthen fiscal accountability frameworks and reporting in both entities, including by adopting a new fiscal responsibility law in the RS and strengthening implementation of the new law on budgets in the FBiH. Moreover, a comprehensive strategy is needed to tackle the issue of unpaid social security contributions by state-owned enterprises.

Authorities’ Views

25. The authorities agreed that fiscal policies need to be aimed at resuming fiscal consolidation, while making adequate room for capital spending. They are committed to strictly contain current spending, notably the wage bill, and to adopt new civil service laws to increase flexibility. The authorities are aiming to mobilize sufficient external financing to allow for a more gradual pace of fiscal consolidation and they expect that strong implementation of the Reform Agenda will help them in securing the necessary financing. They also noted the difficulties in controlling lower levels of government, given the high degree of decentralization.

26. The authorities are planning to lower the tax burden on labor and adopt new income tax laws. New personal and corporate income tax laws are under preparation in the RS, with assistance from the Fund, while in the FBiH a new corporate income tax law, also developed with Fund assistance and substantially broadening the base by eliminating exemptions, has been submitted to parliament. While there was general agreement on the need to broaden the tax base and improve revenue administration, some expected only limited effect from enhanced cooperation between the tax agencies and stressed the need to adhere to constitutional competencies. Instead, they preferred raising the VAT rate to finance a reduction in social security contribution rates. Staff concurred that a VAT rate increase—albeit a more modest one—could be considered but stressed that this hike should only be a last resort measure if other measures proved insufficient.

27. The authorities are seeking the assistance of the World Bank and the EU to improve the effectiveness of government spending. Immediate efforts are to be focused on pension and health care reform, reform of state-owned enterprises, as well as on public administration reform. In the FBiH, new pension legislation, prepared with the assistance of the World Bank, is expected to be submitted to parliament in the coming months.

C. Safeguarding Financial Sector Stability and Reviving Bank Lending

Background

28. The currency board arrangement has served the country well by providing stability in an otherwise uncertain environment, even though more recently it resulted in the importation of low inflation. Official foreign exchange reserves are adequate and the currency board has a sizeable foreign exchange buffer. BiH continues to avail itself of the transitional arrangements under Article XIV, but no longer maintains restrictions under Article XIV. Restrictions subject to Fund jurisdiction under Article VIII remain on the transferability of frozen foreign-currency deposits.

Reserve Adequacy

(in percent of ARA metric)

Source: IMF staff estimates.

29. The Financial System Stability Assessment (FSSA) concluded in June 2015 found the financial system at the aggregate level to be liquid, adequately capitalized, and resilient to shocks. The financial system is dominated by a moderately concentrated banking sector which compromises mostly foreign subsidiaries. A conservative regulatory framework and a traditional banking model have supported high capital and liquidity buffers in the system. Banks have withstood the impact of the floods well and only made limited use of temporary regulations that allowed them to reschedule or temporarily halt the repayment of loans of clients affected by the floods.

Capital Adequacy Ratio

Liquid Assets to Total Assets

30. Nevertheless, pockets of vulnerabilities exist among domestically-owned banks. Some domestically-owned banks with governance and risk management shortcomings, high loan concentration ratios, and higher levels of non-performing loans are struggling to meet capital requirements or rely on government support. A number of detailed asset quality reviews (AQRs) of banks that had been under enhanced supervision were conducted last year. Based on these, banking supervisors required several banks to raise additional capital, much of which has been already implemented. One small bank that failed to raise new capital was closed in late 2014 and insured deposits were paid out quickly.

31. Moreover, credit to the private sector is still stuck in low gear, as demand for new loans is weak and banks continue to repair their balance sheets. A deterioration in banks’ asset quality and profitability, together with an inadequate resolution and insolvency framework, have resulted in a persistently high level of non-performing loans—14 percent of total loans at the end of the first quarter of 2015, although these are largely provisioned for.

32. Coordination among the various institutions involved in bank oversight has improved, but there remain critical gaps in the financial sector safety net. The Standing Committee on Financial Stability (SCFS) adopted an overarching contingency plan for BiH, focusing predominantly on systemic events, including the role of the Fiscal Council, the fiscal coordination body between the national and entity governments of BiH. The plan defines the principles of information exchange and communication; the triggers for actions by all levels of government; and the tools and actions in the event of severe financial sector difficulties. Significant deficiencies remain in the financial safety net, especially with regard to resolution powers, institutional responsibility for resolution, and recovery and resolution planning.

Policy advice

33. Further efforts are needed to ensure financial sector stability and to help revive bank lending. These include:

  • Taking strong and timely actions to deal with weaker banks. This will require developing a more comprehensive strategy—backed by a thorough diagnostic assessment—including a credible backstop to deal with any systemic cases. This includes: (i) completing pending AQRs and requiring AQRs to be conducted also for banks that have been expanding rapidly in recent years; (ii) setting clear deadlines for banks where AQRs revealed capital shortfalls to remedy these; (iii) and closing any bank that continues to fail to meet capital requirements after the deadline.

  • Finalizing new banking legislation, including elements to strengthen the financial sector safety net. Both entities, supported by Fund staff, have made good progress in preparing new banking laws that are consistent with EU directives and Basel requirements, but gaps remain, and further assistance will be needed. These laws are expected to strengthen supervisors’ corrective and enforcement powers, introduce consolidated supervision, and improve crisis management and resolution frameworks, including by designating resolution authorities. Related legislation, such as the Deposit Insurance Agency law, and Banking Agency laws, will need to be reviewed and amended accordingly, also to allow for the establishment of a single resolution fund to deal with any failing systemic banks and for the Deposit Insurance Fund to provide funding for bank resolution subject to the least cost principle.

  • Introducing legislative and regulatory changes to improve the framework for recovering and resolving non-performing loans, including by facilitating out-of-court restructuring of debts and the sale of non-performing loans by banks—including by clarifying the tax treatment of loan sales and the establishment and supervision of private asset management companies.

  • Strengthening the liquidity management framework. Adding liquidity coverage ratios to the liquidity regulations would help to improve banks’ liquidity risk management. Also, given the current high level of liquidity in the system, reserve requirements for banks could be raised to rebuild liquidity buffers, while they could be better tailored toward prudential purposes by increasing the number of holding periods during which the bank under stress can breach the reserve requirements and supplementing this with minimum holding thresholds and higher penalty rates for a breach before more severe sanctions are applied.

  • Ensuring that remaining deficiencies in the legal and regulatory framework for combating money laundering and the financing of terrorism are addressed. While progress has been made in the last year, failure to complete this work by fully implementing the action plan agreed with the Financial Action Task Force could result in serious obstacles to cross-border transactions.

Box 2.Financial System Stability Assessment—Key Findings and Recommendations1

Systemic Solvency and Liquidity. Aggregate solvency and liquidity indicators of the banking system appear broadly sound, but significant pockets of vulnerability exist within domestically-owned banks, some of which are struggling to meet capital requirements, while some others are relying on public support. Decisive and timely actions to deal with weak banks are critical for preserving financial stability, including by developing a comprehensive strategy—backed by a credible diagnostic assessment—to either facilitate the recovery of weak banks or to resolve them in a cost-effective manner, while maintaining financial stability and protecting insured depositors.

Financial Safety Net. The financial safety net needs to be strengthened by establishing resolution authorities with comprehensive powers, appropriate resolution tools, and temporary and limited emergency liquidity support—within the currency board arrangement—for solvent but illiquid banks. While the deposit insurance system is largely compliant with international standards, shortening the payout period would be appropriate. Well-coordinated contingency planning—domestic and cross-border—would contribute to an effective financial safety net. A macro-prudential framework should be established, underpinned by broader and more focused cooperation among the relevant agencies.

Banking and Insurance Oversight. Banking and insurance oversight has improved, but complex institutional arrangements for cooperation among the various oversight institutions and the lack of adequate governance and risk management have contributed to the vulnerabilities. The administrative powers of the agencies to sanction and fine supervisory board members and significant owners are inadequate, while the supervisory board selection process and internal audit functions of state banks need to be strengthened. The identification of ultimate beneficial owners of banks needs to be strengthened as related-party lending and group exposures are obscure. The prudential framework for the insurance sector should be updated to improve its risk sensitivity. Consumer protection and financial literacy in the insurance industry are weak and should be improved.

Resolution of NPLs. A High system-wide NPL ratio is a consequence of the impact of the crisis, low growth since then, and a history of lax lending policies. Bank governance problems, related-party loans and inadequate corporate resolution and insolvency frameworks pose significant obstacles to addressing asset quality problems. The legal framework governing creditor/debtor relationships is comprehensive, but neither debt resolution nor bankruptcy liquidation work effectively. There is a need to streamline execution procedures, introduce incentives to facilitate corporate debt restructurings and resolution, and adopt out-of-court restructuring guidelines. Hiring more commercial court judges and improving the regulation of the insolvency profession is needed.

Financial Market Infrastructure. The payment system meets the international standard, but liquidity and legal risks exist, arising from the high concentration of transaction values in the payment systems across a few banks and lack of legal certainty on finality and netting arrangements. Progress has been made in enhancing the AML/CFT framework, but further efforts are necessary to address remaining deficiencies. The securities market legal and regulatory framework is sound and the infrastructure is well developed. But the markets would benefit from introducing a ‘passporting’ framework, and from increased transparency and information disclosures. Leasing operations could be enhanced by revising collateral requirements and strengthening repossession of assets.

1 The 2015 FSSA of Bosnia and Herzegovina was completed on June 29, 2015 (SM/15/120).

Authorities’ Views

34. The authorities welcomed the FSSA findings and recommendations, especially its efforts to tailor the advice to the country’s specific institutional set-up, and shared staff’s assessment of banks’ health. They acknowledged that not having a single body that has the mandate for financial supervision and crisis preparedness poses considerable challenges, particularly in case of systemic events. The authorities emphasized that it is the role of the SCFS to coordinate financial sector oversight and supervision, although they recognized that its efficiency and effectiveness could be strengthened further. The banking agencies are considering expanding the number of banks to undergo AQRs and are determined to close banks that continue to fail minimum capital requirements after deadlines given for recapitalization expire.

35. Views of the SCFS members on how best to create an effective bank restructuring and resolution framework diverged. Some considered a centralized restructuring and resolution authority at the state level to be optimal, while others preferred to keep resolution powers fully at the entity level. Staff’s suggestion to establish a single resolution fund for systemic banks under the Deposit Insurance Agency, while maintaining the banking agencies as resolution authorities could be a pragmatic solution, provided an appropriate governance structure for the resolution fund can be agreed upon.

36. The authorities agreed with the need to revive bank lending to support economic growth. They expect greater impact from improving the court systems and new bankruptcy legislation to address non-performing loans than from facilitating out-of-court restructuring. Banks, on the other hand, saw greater merit in the latter. The authorities stressed they are committed to address remaining shortcomings in the AML/CFT framework.

Outlook and Risks

37. Looking ahead, with strong implementation of economic reforms as outlined in the authorities’ Reform Agenda, growth could reach 4 percent over the medium term. Moreover, if external official support can be mobilized, fiscal consolidation could be pursued more gradually, allowing fiscal policy—in the absence of an independent monetary policy—to better support the economic recovery. Reconstruction efforts could also substantially add to growth, if the authorities would be able to speed up the absorption of assistance that donors have made available, by accelerating the preparation and approval of projects. With sustained and strong growth, incomes could be expected to gradually catch up to levels elsewhere in Europe. This active policy scenario that reflects the authorities’ commitment to reforms and sound economic policies is shown in tables 15. This scenario shows a financing need that could be filled with support from the EU and the IFIs, who have pledged support depending on strong implementation of the Reform Agenda.

Table 1.Bosnia and Herzegovina: Selected Economic Indicators, Active Scenario 2012–20
201220132014201520162017201820192020
EBS/14/74Est.Proj.
Nominal GDP (KM million)25,73426,28227,12326,77927,38128,62130,13731,89433,94336,196
Gross national saving (in percent of GDP)9.311.29.110.19.710.611.212.112.914.3
Gross investment (in percent of GDP)18.117.019.817.917.618.418.618.919.219.6
(Percent change)
Real GDP−1.22.50.71.12.13.03.53.73.94.0
CPI (period average)2.0−0.11.1−0.9−0.31.01.21.31.92.1
Money and credit (end of period)
Broad money3.47.93.67.35.65.95.75.13.66.6
Credit to the private sector2.82.33.21.82.02.34.25.86.47.2
(In percent of GDP)
Operations of the general government
Revenue46.345.345.145.946.547.047.147.247.447.5
Of which: grants2.22.42.52.62.62.72.72.72.72.7
Expenditure48.947.249.248.848.148.548.347.947.847.5
Of which: investment expenditure6.36.37.87.06.67.47.67.77.87.9
Net lending−2.7−1.9−4.1−3.0−1.7−1.5−1.2−0.8−0.40.0
Net lending, excluding interest payment−1.9−1.2−3.3−2.2−0.7−0.40.00.30.81.1
Total public debt43.641.646.244.845.545.043.942.740.938.5
Domestic public debt15.813.413.214.215.514.613.813.413.312.3
External public debt27.828.232.930.630.030.430.129.327.626.1
(In millions of euros)
Balance of payments
Exports of goods and services4,3124,5974,4124,7335,0375,4395,8056,1846,5836,993
Imports of goods and services7,4837,4147,9837,9438,2598,8389,3009,73110,17510,609
Current transfers, net1,8811,8761,9701,9931,9082,0222,0962,1752,2652,359
Current account balance−1,168−773−1,489−1,057−1,112−1,140−1,143−1,104−1,083−971
(In percent of GDP)−8.9−5.7−10.7−7.7−7.9−7.8−7.4−6.8−6.2−5.2
Foreign direct investment (+=inflow)260.3224.7256.6422.4368.4385.4403.8423.8465.4498.9
(In percent of GDP)2.01.71.93.12.62.62.62.62.72.7
Gross official reserves3,3403,6273,6214,0133,9014,1514,4154,7324,8825,281
(In months of imports)5.45.55.45.85.35.45.45.65.55.7
(In percent of monetary base)112.6107.4108.6112.1107.4106.2108.3110.4110.0111.6
External debt, percent of GDP52.252.254.651.954.655.154.554.153.453.4
Sources: BiH authorities; and IMF staff estimates and projections.
Sources: BiH authorities; and IMF staff estimates and projections.
Table 2.Bosnia and Herzegovina: Real Sector Developments, Active Scenario 2012–20
201220132014201520162017201820192020
Est.Proj.
Real aggregates(Percent change)
Growth rates
GDP at constant 2010 prices−1.22.51.12.13.03.53.73.94.0
Domestic demand−2.30.63.22.23.43.33.33.53.5
Private−2.71.12.62.73.03.23.23.43.3
Public−1.0−1.35.50.14.73.53.54.04.1
Consumption−2.11.42.52.72.93.12.93.02.9
Private−2.52.42.42.83.33.23.03.02.8
Public−0.7−3.12.92.51.12.52.93.33.3
Gross capital formation−3.2−3.47.2−0.66.14.35.16.06.2
Private−3.8−7.23.92.61.23.25.36.36.4
Public−2.03.612.7−5.614.26.14.85.55.7
Net Exports
Exports of goods and services−1.48.24.65.17.07.17.37.47.3
Imports of goods and services−4.11.18.84.26.45.25.15.35.0
Contributions to real GDP growth(Year-on-year change over real GDP in previous year, in percent)
GDP at constant 2005 prices−1.22.51.12.13.03.53.73.94.0
Domestic demand−2.80.73.72.64.03.93.94.24.1
Private−2.51.12.42.52.83.03.03.13.1
Public−0.3−0.31.40.01.20.90.91.01.1
Consumption−2.11.42.42.72.93.12.93.02.9
Private−2.02.01.92.22.72.62.42.42.3
Public−0.1−0.60.50.50.20.40.50.60.6
Gross capital formation−0.6−0.71.3−0.11.10.81.01.21.2
Private−0.5−0.90.40.30.10.40.60.70.8
Public−0.10.20.9−0.41.00.50.40.40.5
Net Exports1.61.7−2.7−0.5−1.0−0.4−0.2−0.3−0.1
Exports of goods and services−0.42.31.41.52.22.32.42.52.6
Imports of goods and services−1.90.54.02.13.22.72.72.82.7
Deflators(Percent Change)
GDP1.1−0.30.80.21.51.72.12.42.5
Domestic demand2.1−1.00.8−0.31.31.51.71.92.1
Consumption1.9−1.11.0−0.71.11.41.61.92.1
Investment3.1−1.00.11.42.72.32.12.12.4
Exports of goods and services1.7−1.5−1.51.10.9−0.3−0.7−0.8−1.0
Imports of goods and services4.2−2.0−1.4−0.40.60.0−0.4−0.7−0.7
Nominal aggregates
Nominal GDP (KM million)25,73426,28226,77927,38128,62130,13731,89433,94336,196
(In percent of GDP)
Consumption106.0104.0105.6105.4104.9104.1102.9101.5100.0
Private83.782.884.384.083.883.282.281.079.5
Public22.321.221.321.421.120.920.720.520.4
Gross capital formation18.117.017.917.618.418.618.919.219.6
Private11.810.610.911.011.011.011.211.411.6
Public6.36.37.06.67.47.67.77.87.9
National Savings9.311.210.19.710.611.212.112.914.3
Private7.08.37.25.75.65.76.86.47.2
Public2.32.92.94.05.05.55.36.57.1
Saving-Investment balance−8.9−5.8−7.7−7.9−7.8−7.4−6.8−6.2−5.2
Labor market(In percent)
Unemployment rate (ILO definition) 128.027.527.527.7
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, Active Scenario 2012–20 1/(In millions of euros, unless otherwise indicated)
201220132014201520162017201820192020
EstProj.
Current account−1,168−773−1,057−1,112−1,140−1,143−1,104−1,083−971
Trade balance−3,171−2,817−3,210−3,222−3,399−3,495−3,547−3,591−3,616
Goods−4,091−3,741−4,142−4,198−4,417−4,557−4,655−4,750−4,829
Export of goods (fob)2,9883,2863,3863,6173,9404,2264,5204,8285,141
Import of goods (fob)−7,079−7,027−7,528−7,815−8,357−8,783−9,176−9,578−9,969
Services (net)9219239329771,0181,0621,1091,1591,213
Exports1,3241,3111,3471,4201,4991,5791,6641,7551,852
Imports−404−388−416−444−481−518−556−596−639
Primary Income (net)122169160202236257268243286
Total credit445432473533558578606643680
Total debit−324−263−313−331−322−321−338−400−394
Of which, Interest payments−154−112−111−150−133−124−132−184−167
Secondary Income (net)1,8811,8761,9931,9082,0222,0962,1752,2652,359
Government (net)162169193228250275299324352
Workers’ remittances1,0421,0691,1321,0711,1631,2111,2671,3321,398
Other (NGOs etc.)757720761761761761761761761
Capital and Financial Accounts (excl. Reserves)1,0979741,2799561,1381,1071,1681,2041,369
Capital account172172264274293314335358383
Capital transfers (net)172172264274293314335358383
General government118122119122126130132135137
Other sectors5450145152168184203223245
Financial account−925−802−1,015−681−845−793−833−846−987
Direct investment (net)−260−225−422−368−385−404−424−465−499
Assets116−3101010101010
Liabilities261241419378395414434475509
Portfolio investment (net)86748202020202020
Other investment (net)−673−644−641−333−480−409−429−400−508
Assets (net)−192−100−298−105−105−105−105−105−104
Short-term−199−120−296−55−55−55−55−55−55
Banks−10818−15−10−10−10−10−10−10
Other sectors, excl. government and central bank−81−144−247−30−30−30−30−30−30
Medium and long-term619−1−51−51−51−50−50−49
Banks114−7−1−1−1−1−1−1
Other sectors, excl. government and central bank656−50−50−50−50−50−49
Liabilities (net)480543343228374304325296404
Short-term248176282164248287354164167
General government000000000
Banks21−7715044111417
Other sectors227254266164244283343150150
Medium and long-term−103114−2016412617−29132237
Monetary authority000000000
General government000141−114−263−171−100
Disbursements of loans000261324329338349359
Project−121−226−355261324329338349359
Budget1212263554500000
Amortization of loans000247323443601519459
Banks−1391−186−203031109152186
Other sectors36113−167095100125150150
Errors and omissions108161128000000
Overall balance−37−362−350156236−64−120−399
Financing37362350−156−2−3664120399
Change in net international reserves (“+”=increase)37362350−111249265316150399
Unidentified external financing 2/25130125230
Memorandum items
Current account balance (in percent of GDP)−8.9−5.7−7.7−7.9−7.8−7.4−6.8−6.2−5.2
Trade balance (in percent of GDP)−31.1−27.8−30.3−30.0−30.2−29.6−28.5−27.4−26.1
Import of goods (change, percent)−0.1−0.77.13.86.95.14.54.44.1
Export of goods (change, percent)1.210.03.06.88.97.37.06.86.5
Transfers (in percent of GDP)14.314.014.613.613.813.613.313.012.7
Net foreign direct investment (in percent of GDP)−2.0−1.7−3.1−2.6−2.6−2.6−2.6−2.7−2.7
External debt/GDP (in percent)52.252.251.954.655.154.554.153.453.4
Private sector24.424.021.424.624.724.424.825.827.3
Public sector27.828.230.630.030.430.129.327.626.1
External debt service/GNFS exports (percent)11.914.215.115.816.417.918.318.66.8
Gross official reserves (in millions of Euro)3,3403,6274,0133,9014,1514,4154,7324,8825,281
(In months of prospective imports of goods and services)5.45.55.85.35.45.45.65.55.8
Sources: BiH authorities; and IMF staff estimates and projections.

Based on BPM6.

External financing gap is expected to be filled by donors if reforms are implemented as planned.

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

Based on BPM6.

External financing gap is expected to be filled by donors if reforms are implemented as planned.

Table 4.Bosnia and Herzegovina: General Government Statement of Operations, Active Scenario 2012–20(Percent of GDP)
201220132014201520162017201820192020
Act.Proj.
Revenue46.345.345.946.547.047.147.247.447.5
Taxes23.022.222.123.123.423.523.523.723.9
Direct taxes3.63.63.43.63.83.83.83.93.9
Indirect taxes19.418.518.719.419.519.619.619.819.9
Other taxes0.00.10.00.10.10.10.10.10.1
Social security contributions15.815.516.015.615.715.715.715.815.8
Grants2.22.42.62.62.72.72.72.72.7
Other revenue5.35.25.25.25.35.25.25.25.1
Expenditure48.947.248.848.148.548.347.947.847.5
Expense42.640.841.841.541.140.740.240.039.6
Compensation of employees13.012.212.312.211.911.711.411.311.2
Use of goods and services10.810.410.510.610.610.610.610.610.6
Social benefits14.514.415.114.714.414.314.113.913.8
Interest0.80.70.80.91.11.21.11.31.1
Subsidies1.61.41.31.31.31.21.21.11.1
Other expense1.91.71.81.81.81.81.81.81.8
Net acquisition of nonfinancial assets6.36.37.06.67.47.67.77.87.9
Acquisition of nonfinancial assets6.56.57.26.77.57.77.87.98.0
Foreign financed capital spending3.34.24.84.14.74.74.64.54.4
Domestically financed capital spending3.22.32.42.62.83.03.23.43.6
Disposal of nonfinancial assets0.20.10.20.10.10.10.10.10.1
Gross / Net Operating Balance (revenue minus expense)3.74.44.14.95.96.46.97.47.9
Net lending/borrowing (revenue minus expenditure)−2.7−1.9−3.0−1.7−1.5−1.2−0.8−0.40.0
Net acquisition of financial assets0.60.60.20.20.20.30.40.50.6
Domestic assets0.60.50.20.20.20.30.40.50.6
Currency and deposits0.10.30.90.10.00.10.20.30.4
Loans0.40.1−0.60.20.20.20.20.20.2
Equity and investment fund shares0.20.1−0.10.00.00.00.00.00.0
Foreign assets0.00.10.00.00.00.00.00.00.0
Net incurrence of liabilities2.91.62.81.90.0−0.4−0.40.80.6
Domestic liabilities0.5−0.10.91.3−0.3−0.10.00.50.1
Currency and deposits0.00.00.00.00.00.00.00.00.0
Debt securities0.30.11.01.30.80.00.2−0.10.7
Government obligations under the Law on Internal Debt, issued guarantees, and other obligations from previous years−0.9−0.9−0.6−1.1−1.2−0.9−0.5−0.7−0.4
Loans0.70.20.51.20.10.80.31.3−0.2
Equity and investment fund shares0.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.0
Foreign liabilities2.41.82.00.50.3−0.3−0.30.20.5
Currency and deposits0.00.00.00.00.00.00.00.00.0
Loans2.41.82.00.50.3−0.3−0.30.20.5
Drawings3.74.14.42.32.52.52.42.32.2
Amortization1.22.32.41.72.22.92.72.11.7
Equity and investment fund shares0.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.0
Other accounts payable0.00.00.00.00.00.00.00.00.0
Unidentified financing 1/0.00.00.00.01.72.01.50.20.0
Statistical discrepancy0.30.90.30.00.00.00.00.00.0
Memorandum items
Net lending excluding externally-financed operations−1.50.1−0.6−0.10.70.91.21.51.8
Structural balance (% of potential GDP)−1.0−0.7−1.50.0−0.2−0.4
Sources: BiH authorities; and IMF staff estimates and projections.

Financing gap is expected to be filled by donors if reforms are implemented as planned.

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

Financing gap is expected to be filled by donors if reforms are implemented as planned.

Table 5.Bosnia and Herzegovina: General Government Statement of Operations, Active Scenario 2012–20(KM million)
201220132014201520162017201820192020
Proj.
Revenue11912.411899.012282.212726.013458.614191.015038.416092.717194.8
Taxes5923.65832.25923.46318.76692.17070.77504.78057.38646.1
Direct taxes918.6943.2913.3977.21084.21146.21216.21320.81418.4
Indirect taxes4992.24873.45000.85316.85582.15897.46259.86706.17195.2
Other taxes12.815.79.424.625.727.128.730.532.5
Social security contributions4056.94084.54285.34266.14488.64726.45002.05349.85704.8
Grants570.2620.3690.4706.5759.2816.8869.1925.6986.6
Other revenue1361.81361.91383.11434.81518.81577.11662.71760.01857.3
Expenditure12595.512403.113076.813177.913877.814553.015283.316234.517195.7
Expense10967.610734.211194.511375.111762.112258.412828.513591.514333.6
Compensation of employees3356.53206.53283.93344.43415.83517.23649.43843.64057.5
Use of goods and services2774.82734.52802.02906.83030.53201.13387.73605.33844.6
Social benefits3736.73771.64047.04023.14127.54295.44506.84730.45008.4
Interest193.2195.5209.8256.6308.9349.5346.8426.6400.0
Subsidies414.5377.0357.2358.3368.3366.8376.1386.8382.2
Grants18.116.413.313.313.914.615.516.517.6
Other expense491.8436.0478.2479.5504.5528.5561.8598.6640.9
Net acquisition of nonfinancial assets1627.91668.91882.31802.72115.72294.62454.82643.02862.1
Acquisition of nonfinancial assets1670.21700.91934.01833.82148.12328.72491.02681.52903.1
Foreign financed capital spending849.81093.51280.81114.81343.01411.01469.71534.61595.1
Domestically financed capital spending820.4607.3653.1719.0805.1917.81021.31146.91308.0
Disposal of nonfinancial assets42.332.051.731.032.434.136.138.541.0
Gross / Net Operating Balance (revenue minus expense)944.91164.81087.71350.81696.51932.62210.02501.22861.2
Net lending/borrowing (revenue minus expenditure)−683.0−504.1−794.6−451.9−419.1−362.0−244.9−141.8−0.9
Net acquisition of financial assets142.8145.847.661.159.597.7134.3174.0217.2
Domestic assets142.8126.247.661.159.597.7134.3174.0217.2
Currency and deposits14.472.9238.114.5−3.731.364.3100.1139.1
Loans105.713.2−160.346.663.166.470.073.978.1
Equity and investment fund shares43.316.4−37.20.00.00.00.00.00.0
Foreign assets0.019.60.00.00.00.00.00.00.0
Net incurrence of liabilities753.1424.1762.3513.1−12.5−129.0−114.0257.2218.1
Domestic liabilities123.4−36.7233.7367.0−87.0−30.6−11.7184.425.1
Debt securities87.721.6268.1351.2228.88.876.3−37.5250.3
Government obligations under the Law on Internal Debt, issued guarantees, and other obligations from previous years−237.7−231.2−159.2−303.7−352.2−282.7−171.2−221.3−159.9
Loans169.756.6133.4319.536.4243.483.2443.1−65.3
Foreign liabilities629.6460.8528.6146.174.5−98.4−102.372.8193.0
Loans629.6460.8528.6146.174.5−98.4−102.372.8193.0
Drawings947.71077.91173.0624.6702.2762.6773.7787.4792.6
Amortization318.0617.1644.4478.5627.7861.0876.0714.6599.6
Other accounts payable0.00.00.00.00.00.00.00.00.0
Unidentified financing 1/0.00.00.00.0491.2588.7493.258.70.0
Statistical discrepancy72.8225.879.90.00.00.00.00.00.0
Memorandum items
Indirect revenues4992.24873.45000.85316.85582.15897.46259.86706.17195.2
Net lending excluding externally-financed operations−375.315.6−151.4−21.3188.0256.7381.7494.8637.1
Sources: BiH authorities; and IMF staff estimates and projections.

Financing gap is expected to be filled by donors if reforms are implemented as planned.

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

Financing gap is expected to be filled by donors if reforms are implemented as planned.

38. This outlook is subject to substantial risks, however. Notably, domestic political risks weigh heavily on the outlook, as the risk of policy slippages and delays in implementation of the Reform Agenda is significant given the complex political set-up and the strong opposition to reforms from vested interests. On the external side, as highlighted in the attached Risk Assessment Matrix, risks are more balanced, as stagnation in Europe, possible financial market strains, or geopolitical tensions could dampen growth, while a faster recovery in Europe or the resolution of trade issues between BiH and the EU could spur exports.

Bosnia and Herzegovina: Key Economic Indicators, 2014–2020
2014201520162017201820192020
Active scenario
Real GDP (percent change)1.12.13.03.53.73.94.0
Gross investment (percent of GDP)17.917.618.418.618.919.219.6
CPI (percentage change)−0.9−0.31.01.21.31.92.1
Credit to the private sector (percentage change)1.82.02.34.25.86.47.2
Government investment expenditure (million KM)1882180321162295245526432862
Budget balance (percent of GDP)−3.0−1.7−1.5−1.2−0.8−0.40.0
Public debt (percent of GDP)44.845.545.043.942.740.938.5
Export of goods and services (million EUR)4733503754395805618465836993
Current account balance (percent of GDP)−7.7−7.9−7.8−7.4−6.8−6.2−5.2
Gross official reserves (million EUR)4013390141514415473248825281
Per capita GDP (EUR)3529361637893999424145204828
Passive scenario
Real GDP (percent change)1.12.12.22.32.32.42.5
Gross investment (percent of GDP)17.917.617.117.417.417.417.5
CPI (percentage change)−0.9−0.30.91.11.41.71.9
Credit to the private sector (percentage change)1.82.01.62.02.83.23.9
Government investment expenditure (million KM)1882180317221877201621462372
Budget balance (percent of GDP)−3.0−1.7−0.20.00.00.00.0
Public debt (percent of GDP)44.845.544.542.841.239.537.6
Export of goods and services (million EUR)4733503752685545584061636528
Current account balance (percent of GDP)−7.7−7.9−7.7−8.1−7.5−7.1−6.5
Gross official reserves (million EUR)4013390139063782368237163860
Per capita GDP (EUR)3529361637513908409542914508
Sources: BiH authorities, and IMF staff estimates and projections.
Sources: BiH authorities, and IMF staff estimates and projections.

39. In an alternative scenario without reforms and external financial support, growth prospects are likely to be much weaker than in the baseline. Fiscal policy, as noted above, would have to be tightened faster, hurting growth. Private investment would remain low, as would private sector job creation and export growth. Such a passive scenario of muddling through would not need to lead to economic instability, but would rather imply a lower growth path. This passive scenario is shown in tables 610. Incomes, however, would continue to fall behind relative to the rest of Europe, which could result in increased popular discontent and further emigration.

Table 6.Bosnia and Herzegovina: Selected Economic Indicators, Passive Scenario 2012–20
201220132014201520162017201820192020
EBS/14/74Est.Proj.
Nominal GDP (KM million)25,73426,28227,12326,77927,38128,33629,44530,79732,22133,799
Gross national saving (in percent of GDP)9.311.29.110.19.79.59.29.910.311.1
Gross investment (in percent of GDP)18.117.019.817.917.617.117.417.417.417.5
(Percent change)
Real GDP−1.22.50.71.12.12.22.32.32.42.5
CPI (period average)2.0−0.11.1−0.9−0.30.91.11.41.71.9
Money and credit (end of period)
Broad money3.47.93.67.35.63.12.62.63.33.6
Credit to the private sector2.82.33.21.82.01.62.02.83.23.9
(In percent of GDP)
Operations of the general government
Revenue46.345.345.145.946.546.947.047.147.447.6
Of which: grants2.22.42.52.62.62.72.82.82.92.9
Expenditure48.947.249.248.848.147.147.147.147.447.6
Of which: investment expenditure6.36.37.87.06.66.16.46.56.77.0
Net lending−2.7−1.9−4.1−3.0−1.7−0.20.00.00.00.0
Net lending, excluding interest payment−1.9−1.2−3.3−2.2−0.70.91.21.31.61.4
Total public debt43.641.646.244.845.544.542.841.239.537.6
Domestic public debt15.813.413.214.215.516.116.717.517.617.0
External public debt27.828.232.930.630.028.426.223.821.920.5
(In millions of euros)
Balance of payments
Exports of goods and services4,3124,5974,4124,7335,0375,2685,5455,8406,1636,528
Imports of goods and services7,4837,4147,9837,9438,2598,6389,1259,4659,84410,293
Current transfers, net1,8811,8761,9701,9931,9082,0222,0962,1752,2652,359
Current account balance−1,168−773−1,489−1,057−1,112−1,109−1,222−1,176−1,168−1,117
(In percent of GDP)−8.9−5.7−10.7−7.7−7.9−7.7−8.1−7.5−7.1−6.5
Foreign direct investment (+=inflow)260.3224.7256.6422.4368.4375.2382.3389.5420.7442.4
(In percent of GDP)2.01.71.93.12.62.62.52.52.62.6
Gross official reserves3,3403,6273,6214,0133,9013,9063,7823,6823,7163,860
(In months of imports)5.45.55.45.85.45.14.84.54.34.3
(In percent of monetary base)112.6107.1108.6112.1107.1106.4103.0100.0100.4101.6
External debt, percent of GDP52.252.254.651.954.653.351.149.449.149.7
Sources: BiH authorities; and IMF staff estimates and projections.
Sources: BiH authorities; and IMF staff estimates and projections.
Table 7.Bosnia and Herzegovina: Real Sector Developments, Passive Scenario 2012–20
201220132014201520162017201820192020
EstProj.
Real aggregates(Percent change)
Growth rates
GDP at constant 2010 prices−1.22.51.12.12.22.32.32.42.5
Domestic demand−2.30.63.22.22.62.92.12.32.5
Private−2.71.12.62.73.92.92.02.22.1
Public−1.0−1.35.50.1−2.32.62.82.83.9
Consumption−2.11.42.52.73.52.82.02.32.3
Private−2.52.42.42.84.43.22.12.32.3
Public−0.7−3.12.92.5−0.51.21.92.22.2
Gross capital formation−3.2−3.47.2−0.6−2.13.12.62.43.6
Private−3.8−7.23.92.60.81.21.11.20.8
Public−2.03.612.7−5.6−6.96.65.24.48.0
Net Exports
Exports of goods and services−1.48.24.65.13.55.66.06.46.9
Imports of goods and services−4.11.18.84.24.05.64.24.75.3
Contributions to real GDP growth(Year-on-year change over real GDP in previous year, in percent)
GDP at constant 2005 prices−1.22.51.12.12.22.32.32.42.5
Domestic demand−2.80.73.72.63.13.42.62.83.0
Private−2.51.12.42.53.72.81.92.12.0
Public−0.3−0.31.40.0−0.60.60.70.71.0
Consumption−2.11.42.42.73.52.92.12.32.3
Private−2.02.01.92.23.62.61.71.91.9
Public−0.1−0.60.50.5−0.10.20.30.40.4
Gross capital formation−0.6−0.71.3−0.1−0.40.60.50.40.6
Private−0.5−0.90.40.30.10.10.10.10.1
Public−0.10.20.9−0.4−0.50.40.30.30.6
Net Exports1.61.7−2.7−0.5−0.9−1.1−0.2−0.4−0.5
Exports of goods and services−0.42.31.41.51.11.82.02.22.4
Imports of goods and services−1.90.54.02.12.02.92.22.52.9
Deflators(Percent Change)
GDP1.1−0.30.80.21.31.62.22.22.3
Domestic demand2.1−1.00.8−0.31.11.51.81.71.9
Consumption1.9−1.11.0−0.70.71.31.71.61.8
Investment3.1−1.00.11.42.62.22.22.02.3
Exports of goods and services1.7−1.5−1.51.11.0−0.3−0.7−0.8−1.0
Imports of goods and services4.2−2.0−1.4−0.40.60.0−0.4−0.7−0.7
Nominal aggr egates
Nominal GDP (KM million)25,73426,28226,77927,38128,33629,44530,79732,22133,799
(In percent of GDP)
Consumption106.0104.0105.6105.4106.1106.4105.6105.0104.3
Private83.782.884.384.085.285.785.184.483.7
Public22.321.221.321.420.920.720.620.520.5
Gross capital formation18.117.017.917.617.117.417.417.417.5
Private11.810.610.911.011.011.010.810.710.5
Public6.36.37.06.66.16.46.56.77.0
National Savings9.311.210.19.79.59.29.910.311.1
Private7.08.37.25.74.53.84.64.54.9
Public2.32.92.94.05.05.45.35.86.2
Saving-Investment balance−8.9−5.8−7.7−7.9−7.7−8.1−7.5−7.1−6.5
Labor market(In percent)
Unemployment rate (ILO definition) 128.027.527.527.7
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 8.Bosnia and Herzegovina: Balance of Payments, Passive Scenario 2012–20 1/(In millions of euros, unless otherwise indicated)
201220132014201520162017201820192020
EstProj.
Current account−1,168−773−1,057−1,112−1,109−1,222−1,176−1,168−1,117
Trade balance−3,171−2,817−3,210−3,222−3,371−3,580−3,625−3,680−3,765
Goods−4,091−3,741−4,142−4,198−4,383−4,630−4,721−4,827−4,966
Export of goods (fob)2,9883,2863,3863,6173,7813,9854,2004,4384,709
Import of goods (fob)−7,079−7,027−7,528−7,815−8,164−8,615−8,922−9,265−9,675
Services (net)9219239329771,0121,0511,0961,1461,201
Exports1,3241,3111,3471,4201,4871,5611,6401,7251,819
Imports−404−388−416−444−475−510−544−579−618
Primary Income (net)122169160202239262274247289
Total credit445432473533558577604634666
Total debit−324−263−313−331−319−315−330−387−377
Of which, Interest payments−154−112−111−150−132−121−130−181−163
Secondary Income (net)1,8811,8761,9931,9082,0222,0962,1752,2652,359
Government (net)162169193228250275299324352
Workers’ remittances1,0421,0691,1321,0711,1631,2111,2671,3321,398
Other (NGOs etc.)757720761761761761761761761
Capital and Financial Accounts (excl. Reserves)1,0979741,2799561,1131,0991,0761,2031,260
Capital account172172264274293314335358365
Capital transfers (net)172172264274293314335358365
General government118122119122126130132135137
Other sectors5450145152168184203223228
Financial account−925−802−1,015−681−820−785−741−845−895
Direct investment (net)−260−225−422−368−375−382−390−421−442
Assets116−3101010101010
Liabilities261241419378385392400431452
Portfolio investment (net)86748202020202020
Other investment (net)−673−644−641−333−465−422−371−444−473
Assets (net)−192−100−298−105−105−105−105−105−104
Short-term−199−120−296−55−55−55−55−55−55
Banks−10818−15−10−10−10−10−10−10
Other sectors, excl. government and central bank−81−144−247−30−30−30−30−30−30
Medium and long-term619−1−51−51−51−50−50−49
Banks114−7−1−1−1−1−1−1
Other sectors, excl. government and central bank656−50−50−50−50−50−49
Liabilities (net)480543343228360317267340369
Short-term248176282164353387424364342
General government000000000
Banks21−7715044111417
Other sectors227254266164349383413350325
Medium and long-term−103114−201646−70−157−2427
Monetary authority000000000
General government00014−84−171−346−277−219
Disbursements of loans000261239273256242239
Project−121−226−355261239273256242239
Budget121226355000000
Amortization of loans000247323443601519459
Banks−1391−186−203031109152146
Other sectors36113−1670607080100100
Errors and omissions108161128000000
Overall balance−37−362−350156−4123100−34−143
Financing37362350−1564−123−10034143
Change in net international reserves (“+”=increase)37362350−1114−123−10034143
External financing gap (for budgets)45000
Memorandum items
Current account balance (in percent of GDP)−8.9−5.7−7.7−7.9−7.7−8.1−7.5−7.1−6.5
Trade balance (in percent of GDP)−31.1−27.8−30.3−30.0−30.3−30.8−30.0−29.3−28.7
Import of goods (change, percent)−0.1−0.77.13.84.55.53.63.84.4
Export of goods (change, percent)1.210.03.06.84.55.45.45.76.1
Transfers (in percent of GDP)14.314.014.613.614.013.913.813.713.6
Net foreign direct investment (in percent of GDP)−2.0−1.7−3.1−2.6−2.6−2.5−2.5−2.6−2.6
External debt/GDP (in percent)52.252.251.954.653.351.249.549.249.8
Private sector24.424.021.424.624.925.025.727.229.2
Public sector27.828.230.630.028.426.223.822.020.6
External debt service/GNFS exports (percent)11.914.215.115.816.918.719.319.87.2
Gross official reserves (in millions of Euro)3,3403,6274,0133,9013,9063,7823,6823,7163,860
(In months of prospective imports of goods and services)5.45.55.85.45.14.84.54.34.3
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 9.Bosnia and Herzegovina: General Government Statement of Operations, Passive Scenario 2012–20(Percent of GDP)
201220132014201520162017201820192020
Act.Proj.
Revenue46.345.345.946.546.947.047.147.447.6
Taxes23.022.222.123.123.423.523.623.823.9
Direct taxes3.63.63.43.63.83.83.83.93.9
Indirect taxes19.418.518.719.419.519.619.619.719.9
Other taxes0.00.10.00.10.10.10.10.10.1
Social security contributions15.815.516.015.615.615.615.615.715.7
Grants2.22.42.62.62.72.82.82.92.9
Other revenue5.35.25.25.25.25.25.15.15.0
Expenditure48.947.248.848.147.147.147.147.447.6
Expense42.640.841.841.541.040.740.540.740.5
Compensation of employees13.012.212.312.212.011.811.611.511.4
Use of goods and services10.810.410.510.610.410.310.410.410.5
Social benefits14.514.415.114.714.514.314.214.214.3
Interest0.80.70.80.91.11.31.31.61.4
Subsidies1.61.41.31.31.31.21.21.21.1
Other expense1.91.71.81.81.81.81.81.81.8
Net acquisition of nonfinancial assets6.36.37.06.66.16.46.56.77.0
Acquisition of nonfinancial assets6.56.57.26.76.26.56.76.87.1
Foreign financed capital spending3.34.24.84.14.24.44.44.34.2
Domestically financed capital spending3.22.32.42.62.02.12.32.52.9
Disposal of nonfinancial assets0.20.10.20.10.10.10.10.10.1
Gross / Net Operating Balance (revenue minus expense)3.74.44.14.95.96.36.66.77.0
Net lending/borrowing (revenue minus expenditure)−2.7−1.9−3.0−1.7−0.20.00.00.00.0
Net acquisition of financial assets0.60.60.20.20.20.30.30.40.4
Domestic assets0.60.50.20.20.20.30.30.40.4
Currency and deposits0.10.30.90.10.00.10.20.20.3
Loans0.40.1−0.60.20.20.20.20.10.1
Equity and investment fund shares0.20.1−0.10.00.00.00.00.00.0
Foreign assets0.00.10.00.00.00.00.00.00.0
Net incurrence of liabilities2.91.62.81.90.40.30.30.30.4
Domestic liabilities0.5−0.10.91.30.71.11.10.70.5
Currency and deposits0.00.00.00.00.00.00.00.00.0
Debt securities0.30.11.01.31.81.70.80.20.5
Government obligations under the Law on Internal Debt, issued guarantees, and other obligations from previous years−0.9−0.9−0.6−1.1−1.2−1.0−0.6−0.7−0.5
Loans0.70.20.51.20.10.40.91.20.5
Equity and investment fund shares0.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.0
Foreign liabilities2.41.82.00.5−0.4−0.8−0.8−0.4−0.1
Currency and deposits0.00.00.00.00.00.00.00.00.0
Loans2.41.82.00.5−0.4−0.8−0.8−0.4−0.1
Drawings3.74.14.42.31.92.12.01.81.7
Amortization1.22.32.41.72.22.92.82.21.8
Equity and investment fund shares0.00.00.00.00.00.00.00.00.0
Insurance, pensions, and standardized guarantee schemes0.00.00.00.00.00.00.00.00.0
Financial derivatives and employee stock options0.00.00.00.00.00.00.00.00.0
Other accounts payable0.00.00.00.00.00.00.00.00.0
Statistical discrepancy0.30.90.30.00.00.00.00.00.0
Memorandum items
Net lending excluding externally-financed operations−1.50.1−0.6−0.11.41.71.71.51.4
Structural balance (% of potential GDP)−1.0−0.7−1.50.01.4
Sources: BiH authorities; and IMF staff estimates and projections.
Sources: BiH authorities; and IMF staff estimates and projections.
Table 10.Bosnia and Herzegovina: General Government Statement of Operations, Passive Scenario 2012–20(KM million)
201220132014201520162017201820192020
Proj.
Revenue11912.411899.012282.212726.013297.013849.814502.415275.016074.6
Taxes5923.65832.25923.46318.76634.66919.17256.17659.28088.6
Direct taxes918.6943.2913.3977.21073.91120.41174.91254.31325.0
Indirect taxes4992.24873.45000.85316.95520.25756.76037.26358.96715.3
Other taxes12.815.79.424.640.542.044.046.048.3
Social security contributions4056.94084.54285.34266.14421.44594.54805.45052.55299.9
Grants570.2620.3690.4706.5758.9816.2868.2924.2984.7
Other revenue1361.81361.91383.11434.81482.01520.01572.71639.11701.5
Expenditure12595.512403.113076813177.913347.213860.714491.715265.116071.8
Expense10967.610734.211194.511375.111624.911984.212475.613119.013699.4
Compensation of employees3356.53206.53283.93344.43399.63477.33568.53707.43862.0
Use of goods and services2774.82734.52802.02906.82936.13036.03195.43358.13542.6
Social benefits3736.73771.64047.04023.14097.74210.84384.94581.34825.1
Interest193.2195.5209.8256.6307.3368.6402.3512.6484.5
Subsidies414.5377.0357.2358.3366.0362.2369.3376.8371.0
Grants18.116.413.313.313.714.314.915.616.4
Other expense491.8436.0478.2479.5511.7529.2555.3582.9614.2
Net acquisition of nonfinancial assets1627.9166891882.31802.71722.31876.52016.12146.12372.4
Acquisition of nonfinancial assets1670.21700.91934.01833.81754.51909.92051.02182.62410.7
Foreign financed capital spending849.81093.51280.81114.81176.81299.61347.71376.81420.5
Domestically financed capital spending820.4607.3653.1719.0577.7610.3703.3805.8990.2
Disposal of nonfinancial assets42.332.051.731.032.133.434.936.538.3
Gross / Net Operating Balance (revenue minus expense)944.91164.81087.71350.91672.11865.62026.82156.02375.3
Net lending/borrowing (revenue minus expenditure)−683.0−504.1−794.6−451.9−50.3−10.910.69.92.9
Net acquisition of financial assets142.8145.847.661.150.777.198.0120.3146.9
Domestic assets142.8126.247.661.150.777.198.0120.3146.9
Currency and deposits14.472.9238.114.5−3.324.247.872.098.0
Loans105.713.2−160.346.654.052.950.248.348.9
Equity and investment fund shares43.316.4−37.20.00.00.00.00.00.0
Foreign assets0.019.60.00.00.00.00.00.00.0
Net incurrence of liabilities753.1424.1762.3513.0101.088.187.4110.4144.0
Domestic liabilities123.4−36.7233.7366.9202.6319.9343.7236.5172.0
Debt securities87.721.6268.1351.2520.5490.5240.577.7164.7
Government obligations under the Law on Internal Debt, issued guarantees, and other obligations from previous years−237.7−231.2−159.2−303.7−352.1−282.5−170.7−220.6−159.0
Loans169.756.6133.4319.434.2111.9274.0379.4166.3
Foreign liabilities629.6460.8528.6146.1−101.6−231.8−256.3−126.1−28.0
Loans629.6460.8528.6146.1−101.6−231.8−256.3−126.1−28.0
Drawings947.71077.91173.0624.6526.1629.2619.7588.5571.6
Amortization318.0617.1644.4478.5627.7861.0876.0714.6599.6
Other accounts payable0.00.00.00.00.00.00.00.00.0
Statistical discrepancy72.8225.879.90.00.00.00.00.00.0
Memorandum items
Indirect revenues4992.24873.45000.85316.95520.25756.76037.26358.96715.3
Net lending excluding externally-financed operations−375.315.6−151.4−21.2390.7496.4515.3488.7466.2
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.

Income per Capita in PPP

(in percent of EU28 average)

Source: IMF staff estimates.

Staff Appraisal

40. The economy is showing welcome signs of recovery. Following last year’s devastating floods, activity recovered more quickly than anticipated, testament to the resilience of the population. The widening of external and fiscal imbalances, as well as the impact on the banking system, remained much more limited than had been feared, despite the substantial damage and hardship caused by the disaster.

41. The authorities have implemented sound macro-economic policies in the last several years. External and internal imbalances have been gradually reduced, mainly through fiscal consolidation and in an economic environment that was much more adverse than had been projected. The exchange rate appears to be broadly in line with fundamentals, but poor business conditions and skills mismatches restrain external dynamism and growth. The overall budget deficit has been substantially reduced, although the public sector remains large while the quality of public spending is poor. The banking system has weathered the global financial crisis and subsequent period of weak growth relatively well, but pockets of vulnerabilities exist and lending is stuck in low gear.

42. Much remains to be done if incomes are to catch up faster to the levels in more advanced European countries and if the very high level of unemployment is to be reduced. The authorities will need to implement an ambitious policy agenda to accelerate private sector growth and reduce unemployment, while maintaining macroeconomic stability. The authorities will need to mobilize adequate external financing so that fiscal policy can strike a balance between resuming consolidation, to place public debt on a firm downward path, and supporting the nascent recovery. Financial policies will need to address remaining vulnerabilities in the banking system, while creating a stronger financial sector safety net and enabling banks’ balance sheet repair. But most of all, strong progress will need to be made to complete the still largely unfinished structural reform agenda. Urgent action is needed to further improve the business environment and the functioning of the labor market to attract investment, raise potential output, and create more private sector jobs.

43. The adoption by the authorities of an ambitious and comprehensive Reform Agenda is a welcome and significant step, but what will matter is strong and sustained implementation. While there is broad support for the Reform Agenda and its implementation is off to a good start, reforms take time and the authorities will need to overcome strong opposition from vested interests. The uncertain and fragile domestic political situation poses considerable risks to the timely implementation of reform measures and continuation of sound macro-economic policies. Delays in reform implementation could also delay the availability of external support. On the other hand, strong implementation of reforms and sound economic policies would allow BiH to achieve faster growth and to make stronger progress on the road toward EU accession.

44. BiH has not accepted the obligations under Article VIII, Sections 2, 3, and 4, and maintains restrictions on the transferability of balances and interest accrued on foreign currency deposits, subject to Fund jurisdiction under Article VIII. Staff does not recommend approval of these restrictions.

45. It is recommended to hold the next Article IV consultation on the standard 12-month cycle.

Table 11a.Institutions of Bosnia and Herzegovina: Statement of Operations, 2012–15 1/(KM million)
2012201320142015
Dec.Mar.Jun.Sep.Dec.
Act.Act.Act.Proj.Proj.
Revenue924.4968.6971.6219.3481.0695.2950.7
Taxes750.0750.0750.0180.9367.7557.4750.0
Direct taxes0.00.00.00.00.00.00.0
Indirect taxes750.0750.0750.0180.9367.7557.4750.0
Other taxes0.00.00.00.00.00.00.0
Social security contributions0.00.00.00.00.00.00.0
Grants22.739.531.75.78.83.711.3
Other revenue151.7179.0190.032.7104.5134.2189.4
Expenditure882.1903.6904.7205.0410.5668.4944.5
Expense844.5848.6841.7193.1393.8619.2863.2
Compensation of employees628.3626.4627.9157.5315.6479.9640.4
Use of goods and services162.4172.3175.131.364.7118.7184.1
Social benefits11.55.33.20.30.71.73.2
Interest0.00.00.50.20.30.00.5
Transfers to other general government units19.513.116.50.83.60.56.5
Other expense22.831.518.53.09.018.428.5
Net acquisition of nonfinancial assets37.655.063.012.016.749.281.3
Acquisition of nonfinancial assets45.356.364.812.118.149.281.3
Foreign financed capital spending2.23.83.90.30.82.94.0
Domestically financed capital spending43.052.560.911.817.346.377.3
Disposal of nonfinancial assets7.71.41.80.21.40.00.0
Gross / Net Operating Balance (revenue minus expense)79.9120.0129.926.287.276.087.5
Net lending/borrowing (revenue minus expenditure)42.365.066.914.370.526.86.2
Net acquisition of financial assets8.0120.393.214.328.826.86.2
Domestic assets8.0100.893.214.328.826.86.2
Foreign assets0.019.60.00.00.00.00.0
Net incurrence of liabilities−34.056.226.50.00.00.00.0
Domestic liabilities−34.036.79.30.00.00.00.0
Foreign liabilities0.019.517.20.00.00.00.0
Debt securities0.00.00.00.00.00.00.0
Loans0.019.517.20.00.00.00.0
Drawings0.019.517.20.00.00.00.0
Amortization0.00.00.00.00.00.00.0
Other accounts payable0.00.00.00.00.00.00.0
Financing gap0.00.00.00.00.00.00.0
Identified financing0.00.00.00.00.00.00.0
IMF0.00.00.00.00.00.00.0
WB0.00.00.00.00.00.00.0
EU0.00.00.00.00.00.00.0
Other0.00.00.00.00.00.00.0
Unidentified financing0.00.00.00.00.00.00.0
Statistical discrepancy0.3−0.80.00.00.00.00.0
Memorandum items
Net lending excluding externally-financed operations44.568.870.814.671.329.710.2
Sources: BiH authorities; and IMF staff estimates and projections.

Tables 11a, 11c and 11e comprise central government according to international standards.

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

Tables 11a, 11c and 11e comprise central government according to international standards.

Table 11b.Federation of Bosnia and Herzegovina: General Government Statement of Operations, 2012–15 1/(KM million)
2012201320142015
Dec.Mar.Jun.Sep.Dec.
Act.Act.Act.Proj.Proj.
Revenue6896.66932.37138.61742.13578.45493.97399.7
Taxes3130.83156.73226.3777.21641.82535.83414.8
Direct taxes472.9485.4493.0137.2281.3379.0508.2
Indirect taxes2652.02659.42729.8638.91358.12156.12903.1
Other taxes5.811.83.41.22.40.83.5
Social security contributions2670.62707.22820.1680.21380.12087.72811.5
Grants354.1389.3427.9118.8210.4342.1467.1
Other revenue741.1679.1664.3165.8346.0528.3706.4
Expenditure7392.17330.77577.01715.43486.45561.97769.5
Expense6419.76247.36436.91504.33103.04951.76687.4
Compensation of employees1694.01602.91640.0411.5823.11267.01682.4
Use of goods and services1559.11531.11536.5361.6751.61295.11663.9
Social benefits2492.22485.42602.7633.21294.21933.12640.1
Interest105.597.5108.625.762.8100.5137.0
Subsidies256.3232.3223.523.854.2128.0226.0
Other expense312.6298.2325.548.5117.0228.0338.0
Net acquisition of nonfinancial assets972.31083.41140.1211.1383.5610.21082.2
Acquisition of nonfinancial assets983.21093.81159.1212.2386.5619.51095.5
Foreign financed capital spending530.8760.8846.797.8161.7334.8682.3
Domestically financed capital spending452.4333.0312.4114.3224.8284.7413.2
Disposal of nonfinancial assets10.910.419.01.13.09.213.3
Gross / Net Operating Balance (revenue minus expense)476.9685.0701.7237.8475.4542.2712.4
Net lending/borrowing (revenue minus expenditure)−495.5−398.4−438.426.792.0−68.0−369.8
Net acquisition of financial assets−26.2−100.9−135.7−55.9−117.9−27.7−43.8
Domestic assets−26.2−100.9−135.7−55.9−117.9−27.7−43.8
Currency and deposits22.0−68.222.6−46.1−59.80.00.0
Net incurrence of liabilities332.6115.0315.15.62.740.3267.4
Domestic liabilities29.0−144.410.538.367.679.2352.6
Debt securities101.630.1169.960.343.8636.7213.6
Foreign liabilities303.6259.4304.6−32.8−64.9−38.9−85.2
Currency and deposits0.00.00.00.00.00.00.0
Loans303.6259.4304.6−32.8−64.9−38.9−85.2
Drawings503.0663.7718.428.887.4162.2226.2
Amortization199.4404.3413.861.5152.3201.1311.4
Other accounts payable0.00.00.00.00.00.00.0
Statistical discrepancy / financing gap136.6182.5−12.5−88.2−212.60.058.6
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 11c.Federation of Bosnia and Herzegovina: Central Government Statement of Operations, 2012–15 1/KM million)
2012201320142015
Dec.Mar.Jun.Sep.Dec.
Act.Act.Act.Proj.Proj.
Revenue1809.11845.91930.1433.3882.91467.91982.9
Taxes1171.31262.51310.4289.3623.9960.41319.2
Direct taxes47.149.346.110.620.433.140.2
Indirect taxes1124.11213.01264.2278.7603.5927.31279.0
Other taxes0.10.10.00.00.00.00.0
Social security contributions0.00.00.00.00.00.00.0
Grants347.7380.4406.6114.0202.6342.1456.1
Other revenue290.1203.1213.130.056.4165.4207.6
Expenditure1881.82002.71827.8344.9697.11282.11875.0
Expense1377.71342.11353.1256.4546.4971.51426.9
Compensation of employees226.1224.9231.154.3110.4174.5236.3
Use of goods and services66.773.457.97.723.659.577.0
Social benefits460.5460.6465.4105.0223.1339.7475.4
Interest91.884.292.319.652.289.2120.3
Subsidies128.6126.2116.35.97.757.6116.3
Transfers to other general government units308.6317.0321.061.3123.0212.8340.8
Other expense95.455.869.12.66.338.360.8
Net acquisition of nonfinancial assets504.1660.6474.788.5150.8310.5448.0
Acquisition of nonfinancial assets505.7660.6480.188.5150.8310.5448.0
Foreign financed capital spending494.4647.7465.588.5150.3305.1429.3
Domestically financed capital spending11.212.914.60.00.45.418.7
Disposal of nonfinancial assets1.60.05.40.00.00.00.0
Gross / Net Operating Balance (revenue minus expense)431.4503.8577.0177.0336.5496.3556.0
Net lending/borrowing (revenue minus expenditure)−72.7−156.8102.388.5185.8185.8107.9
Net acquisition of financial assets48.1−84.3−79.4−56.3−110.0−27.7−63.8
Domestic assets48.1−84.3−79.4−56.3−110.0−27.7−63.8
Currency and deposits87.0−51.928.0−46.1−59.80.00.0
Foreign assets0.00.00.00.00.00.00.0
Net incurrence of liabilities122.072.8−171.3−126.2−288.2−213.5−230.3
Domestic liabilities13.5−78.1−77.1−34.9−71.824.7107.9
Debt securities100.430.1169.639.919.4636.7213.6
Foreign liabilities108.5150.9−94.2−91.3−216.4−238.1−338.2
Loans108.5150.9−94.2−91.3−216.4−238.1−338.2
Drawings302.1547.1337.2−25.6−52.2−37.0−26.8
For budget support155.3279.8278.20.00.00.00.0
For investment projects146.8267.359.0−25.6−52.2−37.0−26.8
Amortization193.6396.2431.465.8164.2201.1311.4
Other accounts payable0.00.00.00.00.00.00.0
Financing gap0.00.00.00.00.00.058.6
Identified financing0.00.00.00.00.00.058.6
IMF0.00.00.00.00.00.00.0
WB0.00.00.00.00.00.058.6
EU0.00.00.00.00.00.00.0
Other0.00.00.00.00.00.00.0
Unidentified financing0.00.00.00.00.00.00.0
Statistical discrepancy−1.2−0.3−10.4−18.5−7.60.00.0
Memorandum items
Net lending excluding externally-financed operations74.1110.6161.362.9133.6148.881.2
Sources: BiH authorities; and IMF staff estimates and projections.

Tables 11a, 11c and 11e comprise central government according to international standards.

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

Tables 11a, 11c and 11e comprise central government according to international standards.

Table 11d.Republika Srpska: General Government Statement of Operations, 2012–15 1/(KM million)
2012201320142015
Dec.Mar.Jun.Sep.Dec.
Act.Act.Act.Proj.Proj.
Revenue3850.63766.93951.61033.21830.93056.84133.7
Taxes1858.91745.01763.7608.9905.41531.91959.3
Direct taxes423.0434.9399.4100.8221.6333.3447.8
Indirect taxes1430.21307.31359.7480.5653.41185.41491.8
Other taxes5.72.94.627.630.413.219.7
Social security contributions1350.61341.61429.5322.5678.41023.61418.1
Grants194.4193.4231.12.54.8171.0228.1
Other revenue446.7486.8527.299.3242.3330.2528.3
Expenditure4148.93917.34348.3864.41779.73068.24255.0
Expense3536.23409.33687.8836.31690.42654.73634.9
Compensation of employees952.5901.1949.4235.5475.6704.8954.8
Use of goods and services978.7955.81020.1242.2458.2755.01005.6
Social benefits1232.91244.41397.7311.9640.1983.81347.2
Interest87.297.6100.519.958.780.7118.8
Subsidies146.4123.4110.19.725.244.6108.8
Other expense138.386.9110.117.132.685.899.7
Net acquisition of nonfinancial assets612.7508.1660.428.189.3413.5620.1
Acquisition of nonfinancial assets636.5528.3691.337.3107.4424.8637.8
Foreign financed capital spending316.7328.9430.24.262.5282.6428.4
Domestically financed capital spending319.8199.4261.133.144.9142.1209.3
Disposal of nonfinancial assets23.820.330.99.218.211.217.7
Gross / Net Operating Balance (revenue minus expense)314.5357.6263.7196.9140.5402.1498.8
Net lending/borrowing (revenue minus expenditure)−298.2−150.5−396.7168.851.2−11.5−121.3
Net acquisition of financial assets173.179.239.319.5−29.986.476.3
Domestic assets173.179.239.319.5−29.986.476.3
Currency and deposits−23.6−5.381.621.4−17.10.0−0.1
Net incurrence of liabilities462.7262.3413.3−147.1−95.897.8168.3
Domestic liabilities136.680.4214.4−160.7−67.713.424.9
Debt securities−13.8−8.698.113.844.3126.3137.5
Government obligations under the Law on Internal Debt, issued guarantees, and other obligations from previous years−117.4−109.6−19.3−16.4−0.4−108.2−177.3
Loans183.562.733.3−85.1−38.1−4.864.7
Other accounts payable84.4135.9102.2−73.0−73.50.00.0
Loans326.0181.9198.913.6−27.184.4143.4
Drawings444.7394.7430.852.867.2196.5310.5
For budget support78.1179.4154.30.00.00.00.0
For investment projects366.6215.3276.552.867.2196.5310.5
Amortization118.7212.8231.939.294.3112.0167.1
Other accounts payable0.00.00.00.0−1.00.00.0
Statistical discrepancy / financing gap8.6−32.622.8−2.114.60.029.3
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 11e.Republika Srpska: Consolidated Government Statement of Operations, 2012–15 1/(KM million)
2012201320142015
Dec.Mar.Jun.Sep.Dec.
Act.Act.Act.Proj.Proj.
Revenue1875.31808.21919.1423.2863.71418.11994.8
Taxes1437.31360.71374.3347.1711.41100.41484.7
Direct taxes345.1350.5324.284.7183.9274.1363.9
Indirect taxes1088.21007.91046.8235.0499.4814.11102.4
Other taxes4.12.43.327.328.112.118.4
Social security contributions0.00.042.617.737.00.00.0
Grants182.6190.2224.82.54.1171.0228.1
Other revenue255.0257.1267.055.4110.5146.7282.0
Expenditure1945.41777.12155.8342.8737.31421.52046.2
Expense1672.71524.01761.6339.8725.81160.71661.4
Compensation of employees722.6677.7718.0180.2362.7532.6724.0
Use of goods and services150.6156.9163.021.349.8101.4156.0
Social benefits247.7230.6327.551.9117.9178.6256.6
Interest64.664.668.415.341.855.686.0
Subsidies128.8112.899.87.422.238.298.3
Transfers to other general government units284.5242.7320.361.2121.3216.9307.2
Other expense73.838.764.72.510.137.433.3
Net acquisition of nonfinancial assets272.7253.2394.23.011.5260.8384.8
Acquisition of nonfinancial assets280.4259.9407.88.421.8260.8384.8
Foreign financed capital spending223.7209.5286.44.28.6223.6318.4
Domestically financed capital spending56.750.4121.44.213.237.266.5
Disposal of nonfinancial assets7.76.713.65.410.40.00.0
Gross / Net Operating Balance (revenue minus expense)202.6284.3157.583.4137.9257.4333.4
Net lending/borrowing (revenue minus expenditure)−70.131.1−236.880.4126.5−3.4−51.4
Net acquisition of financial assets344.0109.759.117.1−12.086.476.4
Domestic assets344.0109.759.117.1−12.086.476.4
Currency and deposits−33.812.769.021.4−15.10.00.0
Loans322.793.542.96.22.986.476.4
Equity and investment fund shares43.44.3−40.40.00.00.00.0
Net incurrence of liabilities407.574.2296.4−64.6−133.889.898.5
Domestic liabilities129.1−13.9165.1−77.3−113.161.865.2
Debt securities−14.1−3.9101.613.845.7126.3137.5
Government obligations under the Law on Internal Debt, issued guarantees, and other obligations from previous years−66.5−7.4−19.3−0.1−0.4−91.9−112.3
Loans148.411.515.2−15.1−29.927.440.0
Foreign liabilities278.488.1131.312.7−20.828.033.3
Drawings390.3296.7361.152.067.2140.0200.4
Amortization111.9208.6229.839.288.0112.0167.1
Financing gap0.00.00.00.00.00.029.3
Identified financing0.00.00.00.00.00.029.3
IMF0.00.00.00.00.00.00.0
WB0.00.00.00.00.00.029.3
EU0.00.00.00.00.00.00.0
Other0.00.00.00.00.00.00.0
Unidentified financing0.00.00.00.00.00.00.0
Statistical discrepancy−5.14.4−0.51.3−4.60.00.0
Memorandum items
Net lending excluding externally-financed operations−29.050.4−133.582.2131.049.238.9
Sources: BiH authorities; and IMF staff estimates and projections.

Tables 11a, 11c and 11e comprise central government according to international standards.

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

Tables 11a, 11c and 11e comprise central government according to international standards.

Table 12.Bosnia and Herzzegovina: Monetary Survey, 2012–15
2012201320142015
DecDecDecDec
Proj.
(Million KM, end of period)
Net foreign assets5,0926,0337,1117,271
Foreign assets9,0409,73110,47510,635
Foreign liabilities3,9473,6983,3643,364
Net domestic assets9,82110,06010,19111,033
Domestic credit15,41515,99116,45517,084
Claims on general government (net)204404581905
Claims on nongovernment15,21115,58715,87416,179
Other items (net)−5,594−5,931−6,264−6,051
Broad money (M2)14,91016,09417,27018,304
Narrow money (M1)6,1436,6967,3108,001
Currency2,4142,5422,8143,390
Demand deposits3,7284,1534,4964,611
Quasi-money (M1)8,7689,3999,95910,303
Time and savings deposits2,6733,0063,3772,954
Foreign currency deposits6,0956,3926,5827,349
(12-month change over broad money in same period last year, in percent)
Net foreign assets0.66.36.70.9
Net domestic assets2.81.60.84.9
Domestic credit5.13.92.93.6
Claims on general government (net)2.21.31.11.9
Claims on nongovernment2.82.51.81.8
Other items (net)−2.3−2.3−2.11.2
Broad money (M2)3.47.97.36.0
Memorandum items:
(Annual percent change)
Broad money (M2)3.47.97.36.0
Reserve money (RM)−0.810.39.43.8
Credit to the private sector2.82.31.82.0
(Percent)
Credit to the private sector (in percent of GDP)56.056.156.156.0
Broad money (in percent of GDP)57.961.264.566.8
Central bank net foreign assets (in percent of monetary base)112.6110.8112.1110.2
(Ratio)
Velocity (GDP/end-of-period M2)1.71.61.51.5
Reserve money multiplier (M2/RM)2.62.52.52.5
Source: CBBH and IMF staff estimates and projections.
Source: CBBH and IMF staff estimates and projections.
Table 13.Bosnia and Herzegovina: Financial Soundness Indicators, 2009–15(In Percent)
201020112012201320142015
Mar.
Capital
Tier 1 capital to risk-weighted assets (RWA)12.613.614.115.214.414.6
Net capital to RWA16.217.217.017.816.316.2
Quality of assets1
Nonperforming loans to total loans11.411.813.515.114.014.2
Nonperforming assets (NPAs) to total assets8.18.810.311.410.510.8
NPAs net of provisions to tier 1 capital46.126.130.431.527.928.1
Provision to NPAs40.868.267.468.071.371.4
Profitability
Return on assets 2−0.60.70.6−0.20.70.8
Return on equity 2−5.55.95.0−1.45.76.1
Net interest income to gross income60.163.863.762.361.561.5
Noninterest expenses to gross income109.086.387.2101.284.672.2
Liquidity
Liquid assets to total assets29.027.325.426.426.824.7
Liquid assets to short- term financial liabilities49.746.744.146.246.143.3
Short- term financial liabilities to total financial liabilities66.968.467.967.368.567.8
Foreign exchange risk
Foreign currency and indexed loans to total loans70.066.763.162.962.362.4
Foreign currency liabilities to total financial liabilities67.066.065.263.862.762.5
Net open position4.416.15.46.710.611.9
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 14.Bosnia and Herzegovina: External Debt Sustainability Framework, 2010–2020(In percent of GDP, unless otherwise indicated)
ActualProjections
20102011201220132014201520162017201820192020Debt-stabilizing non-interest current account 6/
1Baseline: External debt51.448.952.252.251.955.855.955.054.153.253.30.1
2Change in external debt−3.0−2.53.3−0.1−0.33.80.2−1.0−0.9−0.90.1
3Identified external debt-creating flows (4+8+9)9.78.114.94.79.99.38.88.27.57.06.0
4Current account deficit, excluding interest payments4.27.97.14.56.56.16.26.05.44.43.7
5Deficit in balance of goods and services22.024.224.121.023.522.823.022.521.620.519.4
6Exports16.019.419.721.621.722.923.924.324.624.724.6
7Imports38.043.643.842.545.245.746.946.846.145.244.0
8Net non-debt creating capital inflows (negative)2.12.62.01.73.12.62.62.62.62.72.7
9Automatic debt dynamics 1/3.3−2.45.9−1.50.30.60.0−0.4−0.5−0.2−0.4
10Contribution from nominal interest rate2.01.71.81.21.21.91.61.41.41.81.5
11Contribution from real GDP growth−0.5−0.50.6−1.2−0.5−1.2−1.6−1.8−1.9−2.0−2.0
12Contribution from price and exchange rate changes 2/1.8−3.73.4−1.5−0.4
13Residual, incl. change in gross foreign assets (2–3) 3/−12.6−10.7−11.6−4.8−10.2−5.5−8.7−9.2−8.3−7.8−5.9
External debt-to-exports ratio (in percent)321.6252.1265.9241.8238.9243.4234.0225.9220.1215.9216.7
Gross external financing need (in billions of US dollars) 4/3.14.03.53.54.04.04.34.75.03.92.3
in percent of GDP18.721.620.619.422.210-Year10-Year25.926.327.327.019.610.7
Scenario with key variables at their historical averages 5/55.856.256.758.159.964.00.4
Key Macroeconomic Assumptions Underlying BaselineHistorical

Average
Standard

Deviation
Real GDP growth (in percent)0.81.0−1.22.51.12.33.02.13.03.53.73.94.0
GDP deflator in US dollars (change in percent)−3.27.7−6.63.00.83.98.0−16.01.72.83.13.24.2
Nominal external interest rate (in percent)3.53.73.42.52.43.91.23.13.02.72.73.63.1
Growth of exports (US dollar terms, in percent)41.931.9−6.515.92.5−33.4200.7−9.69.28.48.07.58.1
Growth of imports (US dollar terms, in percent)5.224.7−7.42.68.211.835.7−13.37.56.25.45.05.4
Current account balance, excluding interest payments−4.2−7.9−7.1−4.5−6.5−7.53.6−6.1−6.2−6.0−5.4−4.4−3.7
Net non-debt creating capital inflows−2.1−2.6−2.0−1.7−3.1−1.85.1−2.6−2.6−2.6−2.6−2.7−2.7

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.

Box 3.Bosnia and Herzegovina: External Public Debt

Most of BiH’s external debt is public debt. Following the end of the wars in the region, the private sector gradually accumulated external debt as BiH integrated into the global economy. At the same time, small government borrowing needs led to the decline in public external debt. This picture changed after the global financial crisis, as the private sector’s access to international capital markets worsened, while government finances worsened and the public sector started to accumulate debt.

BiH has borrowed mostly from official creditors. Unlike other emerging economies, BiH has not accessed international capital markets. Multilateral and bilateral official creditors have provided substantial financial support for the country. The largest creditors are the World Bank (22 percent of public external debt), the European Investment Bank (18 percent) and the IMF (13 percent). As for the World Bank, BiH graduated to IBRD only status in 2014. In addition, BiH recently acquired credit ratings from Moody’s (B3) and Standard and Poor’s (B).

External Debt Developments

(in percent of GDP)
Table 1.Debt by Main Creditors(in million KMs, end-2014)
RSFBiH
EIB625.71837.57
WB IDA583.401,178.53
IMF383.00690.10
EBRD168.22550.87
Republic of Korea99.445 8.57
WB IBRD332.24364.20
Austrian government150.58
European Commission74.30150.60
Poland35.17
Spain3 .80138.60
Others438.661,150.44
Total2,894.525,119.48

The two entities (the FBiH and the RS) are the main borrowers, although they usually borrow with a guarantee of the Institutions of BiH. A large part of the loans are on-lent by the entity governments to local governments and public companies, such as the railways and the Highway Funds. Some of these companies have difficulties in servicing their external debts, requiring the entity governments to cover the debt service obligations from their budgets. External debt servicing obligations have a high priority in government payments, as included in each government’s budget law, and debt service obligations are set aside from collected indirect tax revenues before revenues are distributed for other uses.

Table 2:Debt by Level of Government in Entities(in million KMs, end-2014)
RSFBiH
New Debt (from 1995)2,260.414,145.90
Central Government1,232.981,857.55
Local Governments63.45365.05
SOEs963.981,923.30
Old Debt (before 1992)634.11973.58
Total2,894.525,119.48

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 baselin 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 ¼ standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2010.

Box 4.Bosnia and Herzegovina: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(in percent of GDP unless otherwise indicated)

Debt, Economic and Market Indicators 1/
ActualProjectionsAs of September 27, 2015
2004-2012 2/20132014201520162017201820192020Sovereign Spreads
Nominal gross public debt30.741.644.845.545.043.942.740.938.5EMBIG (bp) 3/n.a.
Public gross financing needs2.95.87.96.77.17.57.06.14.65Y CDS (bp)n.a.
Real GDP growth (in percent)2.82.51.12.13.03.53.73.94.0RatingsForeignLocal
Inflation (GDP deflator, in percent)3.6−0.30.80.21.51.72.12.42.5Moody’sB3Baa2
Nominal GDP growth (in percent)6.62.11.92.34.55.35.86.46.6S&PsBB
Effective interest rate (in percent) 4/2.41.81.92.12.52.72.63.12.9Fitchn.a.n.a.
Contribution to Changes in Public Debt
ActualProjections
2004-201220132014201520162017201820192020cumulativedebt-stabilizing primary balance 9/
Change in gross public sector debt1.6−0.13.20.8−0.5−1.1−1.2−1.8−2.4−6.3
Identified debt-creating flows−0.7−0.26.00.7−0.5−1.1−1.7−2.2−2.5−7.3
Primary deficit1.11.22.20.70.40.0−0.3−0.8−1.1−1.1−1.4
Primary (noninterest) revenue and grants46.245.345.946.547.047.147.247.447.5282.7
Primary (noninterest) expenditure47.346.448.047.247.447.146.846.646.4281.5
Automatic debt dynamics 5/−0.8−1.33.80.0−0.9−1.1−1.3−1.3−1.4−6.1
Interest rate/growth differential 6/−0.8−0.10.00.0−0.9−1.1−1.3−1.3−1.4−6.1
Of which: real interest rate−0.20.90.40.80.40.40.20.20.12.2
Of which: real GDP growth−0.6−1.0−0.4−0.9−1.3−1.5−1.5−1.6−1.5−8.3
Exchange rate depreciation 7/0.0−1.23.8
Other identified debt-creating flows−1.00.00.00.00.00.00.00.00.00.0
General Govt - Financing - Privatization−1.00.00.00.00.00.00.00.00.0
Contingent liabilities0.00.00.00.00.00.00.00.00.00.0
Please specify (2) (e.g., ESM and Euro0.00.00.00.00.00.00.00.00.0
Residual, including asset changes 8/2.20.1−2.80.10.00.00.40.30.11.0
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 projection 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 projection year.

Bosnia and Herzegovina: Public DSA – Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Box 5.Bosnia and Herzegovina: Risk Assessment Matrix Potential Deviations from Baseline1

Sources of risksRelative likelihoodPossible Impact if Risk RealizedPolicy Response
External Risks
1. Tighter or more volatile global financial conditions.Staff assessment: High
  • Slow and uneven growth as well as asymmetric monetary exit may lead investors to reassess underlying risk and move to safe-haven assets, triggering an abrupt surge in financial volatility.

Staff assessment: Medium
  • BiH is still quite dependant on external (bank) financing, especially from the EU, to support activity and finance the current account deficit. Given the CBA, lower availability of FX would constrain base money.

Sustained fiscal adjustment and progress in structural reforms, including financial sector reforms, will help safeguard the CBA and maintain financial sector stability.
2. Structurally weak growth in key advanced and emerging economies.Staff assessment: High
  • Lower-than-anticipated potential growth and persistently low inflation from a failure to fully address crisis legacies could lead to secular stagnation in advanced economies.

Staff assessment: High
  • With limited buffers to cushion the impact, spillovers on BiH could be sizeable, notably through trade, services, remittances and financial channels.

Allow automatic stabilizers to work on the revenue side of the budget, provided financing is available. Rationalizing public spending and taxation to make it more growth-friendly, while accelerating structural reforms to enhance competitiveness, boost private sector growth and FDI.
3. Geopolitical tensions surrounding Russia/Ukraine.Staff assessment: Medium
  • Depress business confidence and heighten risk aversion, amid disturbances in global financial, trade and commodity markets.

Staff assessment: Low
  • Direct trade and financial linkages are small but indirect spillovers could be sizeable.

  • One small Russian-owned bank operates in BiH.

Ensure macroeconomic stability and remain vigilant of indirect spillovers. Closely monitor Russian-owned banks.
4. Risks to energy prices.Staff assessment: Medium
  • Increased volatility in or persistently low prices

Staff assessment: Low
  • Low fossil fuel prices aid the current account and lower the overall price level.

Attract investment in the local energy sector to improve its efficiency and capacity.
Domestic Risks
5. Political gridlock may derail economic reforms and jeopardize fiscal sustainability.Staff assessment: High
  • Government access to financing becomes constrained.

Staff assessment: High
  • Official external support would be unavailable and governments will rely on increasingly more expensive domestic financing.

Move ahead with structural reforms to boost growth and job creation.
6. Further deterioration in the health of commercial banks.Staff assessment: Medium
  • Sluggish activity could increase NPLs and require bank recapitalization.

Staff assessment: High
  • Higher NPLs may call for additional provisions and capital, which may be difficult to obtain. Depositor confidence loss may ensue.

Need to safeguard financial sector stability and revamp regulatory and legislative frameworks, including for NPL resolution. May need support to recapitalize banks.
1 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (staff’s most likely scenario.

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