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Bosnia and Herzegovina: Staff Report for the 2017 Article IV Consultation, First Review Under the Extended Arrangement Under Extended Fund Facility, Requests for Extension of the Arrangement, Rephasing of Purchases, and Waiver of Nonobservance of Performance Criterion—Informational Annex

Author(s):
International Monetary Fund. European Dept.
Published Date:
February 2018
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Fund Relations

(As of December 31, 2017)

Membership Status: Joined December 14, 1992; Article XIV

General Resources Account:SDR MillionPercent Quota
Quota265.2100.00
Fund holdings of currency519.84196.02
Reserve Tranche Position0.090.03
SDR Department:SDR MillionPercent Allocation
Net cumulative allocation160.89100.00
Holdings0.660.41
Outstanding Purchases and Loans:SDR MillionPercent Quota
Stand-by Arrangements191.2972.13
Extended Arrangements63.4123.91

Latest Financial Arrangements:

Date ofExpirationAmount ApprovedAmount Drawn
TypeArrangementDate(SDR Million)(SDR Million)
EFFSep 07, 2016Sep 07, 2019443.0463.41
Stand-BySep 26, 2012Jun 30, 2015558.03422.75
Stand-ByJul 08, 2009Jun 30, 20121,014.60338.20

Projected Payments to Fund

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

Forthcoming
20182019202020212022
Principal122.6068.7010.5710.57
Charges/Interest4.892.782.302.202.04
Total127.4971.482.3012.7912.61

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

The 2017 update of the safeguards assessment found that the CBBH legal framework safeguards the bank’s autonomy. The bank’s internal audit mechanism and financial reporting continue to adhere to international standards. The Governing Board is fully constituted, but the independence of its oversight needs to be strengthened. The CBBH has started taking steps to strengthen oversight, in particular on the delineation between executive and non-executive functions for members of the Governing Board. Further steps are needed to address the recommendations from the assessment. The CBBH has implemented all recommendations from the 2014 assessment.

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 23, 2015 (IMF Country Report No. 15/298).

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 2012–2017

DepartmentTimingPurpose
FADSeptember 2012Revenue Administration
February 2013Public Financial Management
April 2014, July–August 2014,Revenue Administration (ongoing)
September 2014
April 2015Tax Policy
April 2015Public Financial Management with regional
peripatetic advisor
July 2015Macro-forecasts
November 2015Compliance Management
March 2016Deliver Training in Electronic Audit
March 2016Reform of the Fiscal Decentralization
Framework
March 2016Improving the Intergovernmental Revenue
Allocation and Public Financial
Management System in the Federation
March 2016Improve Performance of ITA; Improve
Performance of the FBiH Tax
Administration
April 2016, January 2017Risk Management of ITA
June, August 2016PFM Reform Advisory
October 2016Improving Indirect Audit Methods
October 2016Fiscal Oversight of the Development Banks
December 2016Follow-up on FY15 General Tax Policy
December 2016Evaluation of Indirect Tax Revenue System
and Sharing Mechanism
January 2017Supporting Tax Compliance with Rules-
Based Risk Modeling
April 2017Reviewing Administration of Taxpayer
Reporting on Final Consumption
February, May, August 2017IT Modernization of ITA
FINNovember 2012Safeguard Assessment of the Central
Bank of Bosnia and Herzegovina
October 2016Safeguard Assessment of the Central
Bank of Bosnia and Herzegovina
LEGApril 2013Non-performing loans
October 2013Corporate income legislation
March 2014, June 2014,Law on banks and banking resolution
December 2014
March 2014Out of court restructuring
MCMMay 2012, September 2013,
February 2014
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)
July 2016Foreign Exchange Reserve Management
September 2016Supervisory Cooperation
October 2016Crisis Management
September 2017Crisis Prevention and Systemic Risk
Oversight
STAJanuary 2012Government Finance Statistics
June 2012–2014Real sector statistics advisor
June 2013Price statistics
April 2014Government Finance Statistics
April 2015Government Finance Statistics
February, May, June,
October 2016,Government Finance Statistics
February, March, April,
August, September 2017Government Finance Statistics

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 World Bank’s Country Partnership Framework (CPF) for Bosnia and Herzegovina for the period 2016-2020 was approved in December 2015 in support of reforms in three areas: (1) increasing public sector efficiency and effectiveness; (2) creating conditions for accelerated private sector growth; and (3) building resilience to natural shocks. The CPF includes a cross-cutting theme of inclusion that informs the choice and design of specific interventions under the strategy, to ensure that reforms are socially sustainable, and that vulnerable groups are not left behind as new opportunities open. The CPF was prepared on the basis of extensive consultations with a range of stakeholders at all levels of government and in civil society, academia, private sector and international community. It reflects a consensus of stakeholders on the reform process and a shared understanding of development priorities and challenges facing the country.

  • The CPF envisions around US$ 750 million of new lending from the World Bank through 2020, depending on the scope and pace of reform implementation.

  • The current portfolio of Bank-supported operations in Bosnia and Herzegovina consists of 10 projects totaling $496.08 million. Areas of support include public finances, irrigation development, energy efficiency, employment support, environment, local infrastructure and services, real estate registration and banking sector strengthening.

  • Under the CPF, the Bank’s planned activities in Bosnia and Herzegovina covering structural reform areas will be supported primarily through a series of three Development Policy Loans (DPLs). The first of these planned operations was approved in March 2017. The operation supported the policy efforts of the authorities to strengthen public finances, in particular to: (1) improve the management and transparency of public resources through reforms related to debt management, public investment management, public arrears and the 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. The DPL under preparation deepens to focus on strengthening public finances. It provides continued support to the design and implementation of reforms targeting three key objectives: (1) improving the composition and quality of spending through measures to control the public wage bill and enhance the efficiency of social spending; (2) reducing fiscal risks and strengthening fiscal sustainability by better managing expenditure arrears, strengthened SOE performance and governance; and (3) increasing revenue potential and the efficiency of tax policy through interlinked reforms related to the legislative frameworks for social security and income tax.

  • Bosnia and Herzegovina became a shareholder and member of IFC in 1996. Since then, IFC’s long term finance investment in Bosnia and Herzegovina totaled $398.3 million, including $23.1 million mobilized from our partners, in 46 projects across a variety of sectors. In addition, IFC has supported trade flows of $52 million through its trade finance program. As of June 30, 2017, IFCs committed investment portfolio in Bosnia and Herzegovina is $60.70 million.

Bosnia and Herzegovina Bank Active Portfolio as of November 22, 2017
Project nameEffectiveClosingOriginal commitment (US $m)
Banking Sector Strengthening ProjectNot yet effective12/31/202060.00
BiH Employment Support ProgramNot yet effective10/01/202155.80
Federation Road Sector Modernization10/04/201712/31/202164.60
Irrigation Development03/29/201311/30/201940.00
Real Estate Registration09/23/201301/31/202034.10
Sustainable Forest and Landscape Management06/09/201405/31/20195.58
Floods Emergency Recovery09/15/201412/31/2018100.00
Drina Flood Protection05/21/201512/31/201924.00
Energy Efficiency05/27/201512/31/201932.00
Public Finances DPLnot yet effective03/31/201880.00
10 ACTIVE PROJECTS496.08
Indicative lending for FY18–FY19
ProjectTotal ($M)Bank Approval
BiH Business Environment (RBL)60FY19
Bosnia and Herzegovina: Public Finances (DPL)80FY18
Bosnia and Herzegovina Employment Support Program (IPF)50FY17
Federation Railways Sector Restructure Project in RS (IPF)60.6FY18
Bosnia and Herzegovina: Fiscal Reform (DPL)50FY19
Total300.6

Statistical Issues

(As of November 30, 2017)

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 is 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.

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.

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.

Appendix Table 1.Bosnia and Herzegovina: Table of Common Indicators Required for Surveillance(As of November 30, 2017)
Date of latest observationDate receivedFrequency of Data7Frequency of Reporting7Frequency of publication7Memo Items:
Data Quality – Methodological soundness8Data Quality – Accuracy and reliability9
Exchange Rates11/30/1711/30/17DDD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities109/201710/2017MMM
Reserve/Base Money09/201711/2017MMMO, O, LO, OO, O, O, O, O
Broad Money09/201711/2017MMM
Central Bank Balance Sheet09/201710/2017MMM
Consolidated Balance Sheet of the Banking System09/201711/2017MMM
Interest Rates210/201711/2017MMM
Consumer Price Index09/201710/2017MMMLNO, NO, LNO, LOLNO, LO, LNO, LO, LO
Revenue, Expenditure, Balance and Composition of Financing3 – General Government4Q3/201711/2017QQQO, LNO, LO, LOLNO, O, O, O, O
Revenue, Expenditure, Balance and Composition of Financing3 - Central Government510/201711/2017MMM
Stocks of Central Government and Central Government-Guaranteed Debt6Q3/201711/2017QQQ
External Current Account BalanceQ2/201710/2017QQQO, O, LO, LOLNO, O, LO, O, LO
Exports and Imports of Goods and Services10/201711/2017MMM
GDP/GNPQ2/201710/2017QQQO, LNO, LO, LOLNO, LNO, LO, LO, LO
Gross External DebtQ3/201710/2017QQQ
International Investment Position201609/2017AAA

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.

Only quarterly data is available for FBiH.

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 8, 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.

Only quarterly data is available for FBiH.

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 8, 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.

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