Prepared by Geert Almekinders.
Appellate case No. 28/01 dated June 22, 2001.
For instance, successive budget laws in the RS appear to have virtually ruled out government arrears. These laws stated that, to the extent that budgetary assets were not available, sublegal regulations (such as the labor law or the pension law) could not create obligations of the government. Similarly, the pension laws in both entities indicate that average monthly pensions are to be adjusted to the financial means available to the pension fund in a given month.
See “Public Debt in Emerging Markets: Is it Too High?”, Chapter III in the IMF’s World Economic Outlook of September 2003
In the very long run, BiH’s external debt will be rolled over into debt instruments with a market-based interest rate and real growth will have converged to industrial country levels.
The assumption of a 2-percentage point differential between real growth and real interest rates is important. If that differential was 4 percentage points, either because growth was weak or risk premia were high or both, BiH sustainability considerations would plead for settling even less of the domestic claims. However, the case for basing an assessment on a 4-percentage point differential between interest and growth rates is not strong. If long run growth was 3 percent, this differential would imply nominal KM rates of 9 percent, compared with euro rates currently around 4.2 percent. This spread of 450-500 bps compares with spreads for Bulgaria and Romania, countries with risk profiles similar to Bosnia, of around 250 bps.
In the privatization of housing, individuals may make up to 100 percent of their payment in certificates.
ANNEX I Frozen Foreign Currency Deposits in Croatia and Serbia and Montenegro
1. In Croatia, the government assumed responsibility for the foreign currency denominated-deposits in 1992. At the time, they amounted to about US$3 billion. The government issued to the banks “counterpart bonds” which were denominated in domestic currency and indexed to the German mark. In order to prevent the withdrawal of these deposits from the banking system—which would have precipitated the failure of the banks—these deposits were blocked for a period of three years (until July 1995), and thereafter unfrozen at the minimum rate of 20 semi-annual installments.1 The government also issued bonds (called JDA and JDB bonds) to finance the first two installments of principal of the counterpart bonds. The stock of frozen deposits was reduced considerably early on, partly due to the fact that banks were permitted to reduce the deposits more rapidly at their own discretion, but mainly due to budgetary repayments, which have amounted to about ½ percent of GDP per annum. Interest payments on these deposits have been made twice annually, and in a timely fashion
2. In Serbia and Montenegro, the government suspended withdrawals from households’ foreign exchange balances with domestic banks in 1991. The deposits were redeposited with the central bank of Serbia and Montenegro, whose foreign reserves were run down. A 1998 law converted the deposits into public debt, capitalized the interest (based on a government-set interest rate of 2 percent per annum) and established an ambitious repayment schedule for these deposits. The total public debt assumed by this law amounted to DM 7.4 billion, equivalent to 35 percent of GDP in 2001. Based on this law, the repayment started in 2000 and the federal government issued a decree in January 2001 on two special state bonds to be issued to the holders of such deposits. The servicing of these bonds would have placed a heavy burden on the budget starting in 2005. With a view to alleviating these pressures, the federal and Serbian governments decided to modify the original repayment schedule to ensure that annual payments would be limited to no more than 0.9 percent of projected GDP in 2005 and subsequent years, compared to over 2 percent of projected GDP in 2005-11 on average under the original repayment schedule. Uncertainty arose over the overall size of the obligation as withdrawals were more limited than expected.
ANNEX II Bosnia and Herzegovina—External Debt Sustainability Analysis
At end-2003, the EBRD’s and the EIB’s lending portfolio to the private sector amounted to €38.7 million and €12.5 million, respectively. BIS data suggests that private sector credit from foreign commercial banks has been available mostly only to BIH’s commercial banks.
The governments of BiH have not yet issued any domestic debt instruments. General government debt to the banking system, which is denominated in domestic currency, amounted to less than ¼ percent of GDP at end-2003
The stress tests consider the impact on medium-term debt sustainability of a hypothetical government takeover of sizable contingent liabilities; the experiment is a standardized one and not tailored to the estimated size of domestic claims on the governments or other contingent liabilities.
The agreement with the London Club group of creditors stipulates that of the total amount of restructured obligations (€357 million) a “basic amount” equivalent to 37.5 percent of the total will be subject to servicing over 20 years with 7 years grace and graduated amortization payments, with interest rates starting at 2 percent per year during the first four years, 3½ percent per year during the next three years, and LIBOR plus 13/16 thereafter. For the “performance amount”, equivalent to the remaining 62.5 percent of the restructured obligations to the London Club group of creditors, bonds will be issued to the creditors if GDP per capita exceeds US$2,800 (measured at 1997 prices) in two consecutive years by 2017. This would therefore add €223 million to BiH’s external debt (Text Table 6). The staff presently estimates per capita GDP at US$1,822. Adjusted for inflation, the threshold now amounts to about US$3,000.