Bosnia and Herzegovina: Selected Economic Issues

This paper assesses the extent to which data unreliability could alter the assessment of the macroeconomic challenges ahead. The contributions of the indirect tax authority (ITA) in remedying the flaws are highlighted, and the architectural agenda is discussed. Fiscal sustainability and the government’s bold initiatives to secure it by restructuring the domestic claims have been assessed and key implementation issues in realizing the government’s plans noted. A survey of selected tax policy issues in Bosnia and Herzegovina is also included in the paper.

Abstract

This paper assesses the extent to which data unreliability could alter the assessment of the macroeconomic challenges ahead. The contributions of the indirect tax authority (ITA) in remedying the flaws are highlighted, and the architectural agenda is discussed. Fiscal sustainability and the government’s bold initiatives to secure it by restructuring the domestic claims have been assessed and key implementation issues in realizing the government’s plans noted. A survey of selected tax policy issues in Bosnia and Herzegovina is also included in the paper.

I. Overview

1. Bosnia and Herzegovina (BiH) has made significant economic progress since 1995. Output has trebled and exports have increased more than ten fold. The currency board has become firmly entrenched, inflation has stabilized at industrial country levels, and the banking system has been almost completely privatized.

2. But major challenges still lie ahead. GDP growth has slowed markedly even though output is still well below pre-war levels, reconstruction aid inflows will continue to decline and therefore the external current account balance will have to decline sharply, and there is a significant reflux of refugees from abroad—a trend which signals a welcome restoration of stability, but one which, in the short term, compounds unemployment.

3. This paper focuses on four issues which will inform policymakers’ responses to these challenges in coming years:

  • Chapter two assesses the extent to which data unreliability could alter the assessment of the macroeconomic challenges ahead. It concludes that key data—estimates for nominal GDP, the current account balance, unemployment etc—are unreliable. But even on the most “optimistic” of the plausible estimates of these numbers, the central thrust of staff policy recommendations—need for major corporate restructuring supported by a strong fiscal stance—remains firm.

  • Chapter three assesses the ways in which the architecture of the fiscal system will need to be strengthened if the fiscal side of this policy recommendation is to be realized. In particular, it highlights the contributions which the Indirect Tax Authority (ITA) will make to remedying some of the flaws, and notes the architectural agenda which still lies ahead.

  • Chapter four describes how the large claims of citizens on their governments also needs to be resolved if fixed investment, necessary for economic revitalization, is to be increased. It assesses fiscal sustainability, welcomes the authorities’ bold initiatives to secure it by restructuring the domestic claims, and notes key implementation issues in realizing the authorities’ plans.

  • Chapter five concludes with a survey of selected tax policy issues, from the perspective of need to secure the necessary strong fiscal stance and render tax structures consistent with the corporate restructuring agenda. It notes key next steps towards replacement of the sales tax system with a VAT and suggests a time-line for them and points to key issues in direct taxation. And it surveys issues related to external tariff policies.

Bosnia and Herzegovina: Selected Economic Issues
Author: International Monetary Fund