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Bosnia And herzegovina: Staff Report for the 2015 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund. European Dept.
Published Date:
October 2015
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Fund Relations

(As of September 30, 2015)

Membership Status: Joined December 14, 1992; Article XIV

General Resources Account:

SDR MillionPercent Quota
Quota169.10100.00
Fund holdings of currency596.05352.48
Reserve Tranche Position0.050.03

SDR Department:

SDR MillionPercent Allocation
Net cumulative allocation160.89100.00
Holdings2.631.63

Outstanding Purchases and Loans:

SDR MillionPercent Quota
Stand-by Arrangements426.98252.50

Latest Financial Arrangements:

Type Date of ArrangementExpiration DateAmount Approved (SDR Million)Amount Drawn (SDR Million)
Stand-BySep 26, 2012Jun 30, 2015558.03422.75
Stand-ByJul 08, 2009Jun 30, 20121,014.60338.20
Stand-ByAug 02, 2002Feb 29, 200467.6067.60

Projected Payments to Fund

(SDR Million; based on existing use of resources and present holdings of SDRs):

Forthcoming
20152016201720182019
Principal10.5767.64136.34143.7468.70
Charges/Interest2.314.313.371.660.37
Total12.8871.95139.70145.3969.07

Implementation of HIPC Initiative: Not Applicable

Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable

Implementation of Catastrophe Containment and Relief (CCR): Not Applicable

Safeguards Assessment

An update of the safeguards assessment of the Central Bank of Bosnia and Herzegovina (CBBH) was conducted in August 2014 in connection with the Stand-By Arrangement (SBA) augmentation and extension approved on June 30, 2014. The last safeguards assessment for the CBBH was completed in March 2013. The update found that the CBBH continues to maintain a robust governance structure and that all key recommendations from the March 2013 assessment have been implemented. External audit oversight has increased, and the legal function has been strengthened. Additionally, while controls in reserve management, currency operations and transactions with government were deemed adequate, the assessment noted that a comprehensive risk management framework has yet to be established.

Exchange Rate Arrangements

Bosnia and Herzegovina’s exchange rate arrangement is a currency board. The currency of Bosnia and Herzegovina is the convertible marka (KM), introduced on August 11, 1997. On September 5, 2002, the Parliament of Bosnia and Herzegovina approved an amendment to the CBBH law that changes the peg of the KM from the Deutsch Mark to the Euro under a currency board arrangement. The KM is pegged to the euro at KM 1 = 0.5113 euro. Bosnia and Herzegovina (BiH) has not accepted the obligations under Article VIII Sections 2, 3, and 4 and therefore avails itself of the transitional arrangements under Article XIV. BiH no longer maintains restrictions under the transitional provisions of Article XIV. It maintains restrictions on the transferability of balances and interest accrued on frozen foreign-currency deposits, subject to Fund jurisdiction under Article VIII. An Article VIII mission by LEG and MCM took place in October 2012 to address pending Article VIII issues.

FSAP and ROSC Assessment

An FSAP mission took place in November 2014; and the Executive Board discussed the Financial System Stability Assessment in June 2015 (IMF Country Report No. 15/164). The authorities approved publishing the FSSA and all technical notes. A data ROSC mission was held in November 2007 and the ROSC Data Module was published in February 2008 (IMF Country Report No. 08/43).

Last Article IV Consultation

The last Article IV consultation was concluded on October 05, 2012 (IMF Country Report No. 12/282).

Resident Representative

The IMF has had a resident representative office in Bosnia and Herzegovina since 1996. Mr. Francisco Parodi assumed his position as a resident representative in August 2015.

Technical Assistance 2010–2015
DepartmentTimingPurpose
FADMarch 2010,

July 2010,

November 2011,

December 2012,

January 2013
Public Financial Management with regional peripatetic advisor
August 2010Reform and modernization of tax administration
April 2011Revenue Administration
September 2012Revenue Administration follow-up
February 2013Public Financial Management
April 2014, July–August 2014,

September 2014
Revenue Administration (ongoing)
April 2015Tax Policy
April 2015Public Financial Management with regional peripatetic advisor
July 2015Macro-forecasts
FINNovember 2012Safeguard Assessment of the Central Bank of Bosnia and Herzegovina
LEGApril 2013Non-performing loans
October 2013Corporate income legislation
March 2014, June 2014,

December 2014
Law on banks and banking resolution
March 2014Out of court restructuring
MCMMarch–April 2010,

June 2010, May 2012,

September 2013, February 2014
Contingency planning (multiple TAs)
January 2012Stress Testing
April 2013Non-performing loans
May 2013Bank Resolution
March 2014Law on banks
June 2014FSAP (scoping mission)
November 2014FSAP (primary mission)
May 2015FSAP (report presentation)
STAApril 2011Monetary and Financial Statistics
January 2012Government Finance Statistics
June 2012–2014Real sector statistics advisor
June 2013Price statistics
April 2014Government Finance Statistics
April 2015Government Finance Statistics
September 2015National Accounts

IMF-World Bank Collaboration

The Bank and the Fund country teams in Bosnia and Herzegovina maintain close collaboration, coordinate the two institutions’ activities and plans, and harmonize policy recommendations.

Key Areas of World Bank Involvement

  • The current World Bank program in Bosnia and Herzegovina was based on the Country Partnership Strategy (CPS) adopted in 2011, and focusing on three pillars: (i) competitiveness, (ii) social inclusion, and (iii) environmental sustainability. In support of the competitiveness agenda, the World Bank provided two Development Policy Loans (DPLs) supporting macroeconomic stability and business environment Additionally, the Bank portfolio includes investment lending in irrigation and land registration, and has provided access to finance for small and medium enterprises via financial intermediaries. The International Financial Corporation (IFC) also provides support through advisory services in the areas of regulatory reform and regulatory simplification, as well as investment policy work. Under social inclusion, the Bank program supports improvement in targeting social benefits, more effective job-brokerage services, expanded access to primary health care, and improved access to basic public services. To promote environmental sustainability, the Bank supports projects to respond to past disasters and prepare for a growing risk of floods and droughts, and to improve the energy efficiency of public buildings. The Bank’s Country Partnership Strategy also actively promotes the EU accession agenda and this represents a cross-cutting theme of the strategy.

  • The current portfolio of Bank-supported operations in Bosnia and Herzegovina consists of 13 projects totaling $590.82 million. Areas of support include agriculture and irrigation services, health and social protection, environment, local infrastructure and services, real estate registration, and support for small and medium enterprises.

  • BiH is also a member of the IFC, which has invested about $385.1 million since starting operations there in 1996. The IFC portfolio in BiH is currently $92.8 million and focuses on improvements in the country’s investment climate, manufacturing, agribusiness, infrastructure, and climate change. IFC is also focusing its efforts in BiH on supporting private sector participation in infrastructure development in roads, health, and renewable energy.

  • The Bank is currently preparing its new Country Partnership Framework for the five-year engagement in Bosnia and Herzegovina. The proposed CPF structure focuses on: (i) increasing public sector performance; (ii) creating conditions for accelerated private sector growth; and (iii) building resilience to natural shocks, with Inclusion as the cross-cutting theme.

  • The Bank’s planned activities in BiH covering structural reform areas will depend on the outcome of the CPF discussions with governments in BiH. One of the first planned operations under the new CPF is Public Finance Development Policy Loan (DPL) which is currently under preparation. This operation will support the policy efforts of the government of Bosnia and Herzegovina to strengthen public finances, in particular, (1) improve the management and transparency of public resources through interlinked reforms related to debt management, public investment management, public arrears and financial sector; and (2) improve the efficiency of government spending by tackling labor rigidities in public employment and increasing the efficiency of health and social protection spending.

Bosnia and Herzegovina Bank Active Portfolio as of September 15, 2015
Project nameEffectiveClosingOriginal commitment (US $m)
Water Quality Protection11/18/200502/28/20168.90
Agriculture and Rural Development02/26/200806/30/201621.00
Second Solid Waste Management10/23/200902/28/201635.74
Sarajevo Waste Water07/15/201011/30/201535.00
Enhancing SME Access to Finance08/16/201007/31/2016190.00
Social Safety Nets and Employment Support10/07/201010/31/201514.50
Irrigation Development03/29/201312/31/201740.00
Real Estate Registration09/23/201307/31/201834.10
Sustainable Forest and Landscape Management06/09/201405/31/20195.58
Floods Emergency Recovery09/15/201412/31/2018100.00
Drina Flood Protection05/21/201512/31/201924.00
Energy Efficiency05/27/201506/30/201832.00
Business Environment DPLnot yet effective12/31/201550.00
13 ACTIVE PROJECTS590.82
Indicative lending for FY16–FY17
ProjectTotal ($M)Bank Approval
BiH Business Environment (RBL)60FY17
Bosnia and Herzegovina: Management of Fiscal Resources for Growth (DPL)50FY16
Bosnia and Herzegovina Health Project (IPF)22FY16
Bosnia and Herzegovina Employment Support Program (IPF)50FY16
Federation Road Sector Modernization Project (IPF)55FY16
Total237

Statistical Issues

(As of September 2, 2015)

I. ASSESSMENT OF DATA ADEQUACY FOR SURVEILLANCE
General: Data provision has some shortcomings but is broadly adequate for surveillance. The accuracy, timeliness, and publication of economic statistics has improved, but weaknesses in national accounts, government finance, and balance of payment statistics need to be addressed.
Real Sector: BiH has made efforts to improve the real sector statistics. The country has benefited from extensive technical support from the IMF and the European Union. With the assistance of the IMF resident real sector statistics advisor, BiH started compiling and publishing quarterly national accounts as of mid-2014. Additional efforts have been invested into closing the gap between the production and expenditure-based GDP estimates and in the improvement of coverage of GDP, mainly with an ongoing review of the calculations of the non-observed economic activities (NOE). Outstanding issues are the need for further improvements to the annual and quarterly compilation of GDP by expenditure at the country level.

Price statistics: A consumer price index (CPI), based on internationally-recommended practices, has been implemented. This CPI was released in 2007, and consistent series are available monthly countrywide and for each entity, with the series starting in January 2005. The CPI weights are derived from the household budget survey, conducted since 2004. Also, producer price indices (PPI) are available for both Entities and countrywide. The Industrial Production index at the country level has been made available in 2009 with historical time series going back till 2006. Both the industrial production index and the producer price index are compiled and disseminated at the national and entity level based on harmonized methodology. The annual Labor Force Survey follows international methodological standards and provides data for the country and the entities since 2006.
External Sector: Balance of payments statistics are compiled by the CBBH. Stating from 2012, BOP are completed in line with sixth edition of the Balance of Payments Manual (BPM6) and is of good quality. To improve the compilation of services the implementation of new surveys will be required that follow BPM6. The compilation of remittances relies heavily on estimates. Export and import data are produced from customs records, but on a special trade basis rather than on a general trade basis. Trade data may also be subject to incomplete coverage and under-invoicing.
Government Finance Statistics: The CBBH compiles government finance statistics (GFS) in accordance with the definitions and concepts of the Government Finance Statistics Manual 2001. While the institutional coverage of the GFS is broadly consistent with international guidelines, its scope does not cover all economic stocks (balance sheet data) and flows. To address this issue and with help of the IMF TA, the CBBH has been preparing the balance sheet and debt data for general government. However, the data have not been published yet. In addition, the GFS does not include full transactions related to projects directly financed by international donors, and quarterly statistics exclude all transactions in financial assets and liabilities due to incomplete quarterly source data. Transactions are recorded on a mixed accrual/cash basis.1 External government debt data are published quarterly; however work remains to be done on compiling and publishing public sector debt statistics. Authorities have made an effort to improve the quality of the GFS prepared by ministries of finance. More work is required to improve the quality of consolidated general government data.
Monetary and Financial Statistics: The CBBH reports monetary accounts to the Fund on a countrywide and Entity basis. As of 2011, the CBBH reports monetary data to the Fund in the Standardized Report Forms developed by STA that embody the methodology of the Monetary and Financial Statistics Manual. The CBBH collects data using the standardized report forms. As of 2002, interest rate statistics compiled and published by the CBBH produces harmonized data on level of the average weighted lending and deposit nominal interest rates of commercial banks in BiH, presented at the annual level. Finally, the CBBH extended the coverage of its annual financial sector statistics to encompass approximately 98 financial institutions (investment funds, insurance companies, microcredit institutions, leasing companies, brokerage houses, and stock exchanges).
II. DATA STANDARDS AND QUALITY
BiH is subscriber to the Fund’s General Data Dissemination Standard (GDDS) since April 2013.
Appendix Table 1.Bosnia and Herzegovina: Table of Common Indicators Required for Surveillance(As of September 3, 2015)
Date of latest observationDate receivedFrequency of Data6Frequency of Reporting6Frequency of publication6Memo Items:
Data Quality – Methodological soundness7Data Quality – Accuracy and reliability8
Exchange Rates09/01/1509/02/15DDD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities106/201508/2015MMM
Reserve/Base Money06/201508/2015MMMO, O, LO, OO, O, O, O, O
Broad Money06/201508/2015MMM
Central Bank Balance Sheet07/201508/2015MMM
Consolidated Balance Sheet of the Banking System06/201508/2015MMM
Interest Rates206/201507/2015MMM
Consumer Price Index07/201509/2015MMMLNO, NO, LNO, LOLNO, LO, LNO, LO, LO
Revenue, Expenditure, Balance and Composition of Financing3 – General Government4Q2/201508/2015QQQO, LNO, LO, LOLNO, O, O, O, O
Revenue, Expenditure, Balance and Composition of Financing3 – Central Government07/201508/2015MMM
Stocks of Central Government and Central Government-Guaranteed Debt5Q2/201507/2015QQQ
External Current Account BalanceQ1/201507/2015QQQO, O, LO, LOLNO, O, LO, O, LO
Exports and Imports of Goods and Services07/201508/2015MMM
GDP/GNPQ1/201507/2015QQQO, LNO, LO, LOLNO, LNO, LO, LO, LO
Gross External DebtQ2/201507/2015QQQ
International Investment Position201408/2015AAA

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Reflects the assessment provided in the data ROSC or the Substantive Update (published on February 2008 and based on the findings of the mission that took place during March 13–28, 2007) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).

Same as footnote 7, except referring to international standards concerning (respectively) source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Reflects the assessment provided in the data ROSC or the Substantive Update (published on February 2008 and based on the findings of the mission that took place during March 13–28, 2007) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).

Same as footnote 7, except referring to international standards concerning (respectively) source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

At the State level, some earmarked revenues are not recorded until the corresponding expenditure takes place. In the Federation, expenditures are not entered into the Treasury payment system if there are no available funds to pay them out or if obligations exceed the budgeted amounts.

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