This Selected Economic Issues paper for Bosnia and Herzegovina reports that output, exports, and incomes have increased and inflation has stabilized. New modern banking laws have been passed in both entities, and the banking sector has been almost completely privatized, with the majority of assets now under foreign ownership. The reforms to the central bank and to the banking system have been aimed to secure stability and to build an efficient financial system.

Abstract

This Selected Economic Issues paper for Bosnia and Herzegovina reports that output, exports, and incomes have increased and inflation has stabilized. New modern banking laws have been passed in both entities, and the banking sector has been almost completely privatized, with the majority of assets now under foreign ownership. The reforms to the central bank and to the banking system have been aimed to secure stability and to build an efficient financial system.

X. Fiscal Sovereignty1

A. Introduction

1. Bosnia and Herzegovina (BiH) lacks an institution responsible for aggregate fiscal policy. Such a body would be charged to:

  • Secure fiscal sustainability, including management of total public debt and liabilities;

  • Determine the target aggregate annual fiscal balance and secure its realization;

  • Set the aggregate tax burden and its structure;

  • Determine policy on the economic composition of consolidated public expenditure;

  • Set policy on financing the annual consolidated fiscal balance, and the public debt structure

  • Publish data and reports on general fiscal developments and plans.

2. In other countries, these functions are typically assigned to “the” Ministry of Finance. But under its Dayton Constitution, Bosnia and Herzegovina has 14 autonomous and highly interdependent such Ministries (one in each of the State, the Entities, Brcko District, and the 10 Cantons) as well as some 140 municipalities, a plethora of independent extrabudgetary funds at most levels of government, and large “off budget” fiscal operations—notably donor funded projects. Policy on the five issues noted emerges as the “sum” of the actions of these various bodies. But the absence of disciplined coordination among them and the “free riding” behavior that this gives rise to, means that the “sum” is a poor reflection of public preferences on these key issues.2

3. Among the six issues noted, fiscal sustainability and aggregate fiscal balances are particularly susceptible to these free-riding distortions. But strong policy on them, while critical in its own right, also provides essential support to the monetary and exchange rate arrangement—in this case, the currency board. And given the currency board, policy on them constitutes the key discretionary macroeconomic instrument available to policymakers. Without a body to coordinate policy among all the ministries of finance on these two key matters, Bosnia and Herzegovina lacks control over macroeconomic policy making, a gap which has hitherto been filled by the Office of the High Representative and the IMF.

4. If Bosnia and Herzegovina is to gain both sovereignty and effective control over macroeconomic policy, it needs a coordinating body. This would coordinate its Ministries of Finance, municipalities, and so on—a “National Fiscal Council (NFC).” Like the philosophy underlying the ITA Board, this proposal pools rather than transfers sovereignty within the Dayton constitution. This Chapter discusses how such a body might be established.

B. Background

5. The kernel for such a body already exists, in the Board of the ITA and in various ad hoc arrangements in the annual budget cycle. The ITA Board is the first body in Bosnia and Herzegovina where the three main Ministers of Finance are obliged to work together—and actually do so—on matters of mutual interest, with the CBBH represented as an observer. A nascent macroeconomic analysis unit (MAU) is attached to it, with IMF technical assistance in support. Beyond the ITA, there is an implicit annual budget cycle for the consolidated fiscal structure inherent in the budget cycles of the two entities and the State, both of which are required to secure adoption of annual budgets by the end of each calendar year, with submission into parliament required usually one month prior, and into governments two months prior to that. And various ad hoc restrictions on borrowing rights of Cantons and Municipalities and extra budgetary funds along with their limited creditworthiness so far, allow a modicum of control over sub-Entity Central Governments.3 And the actual and planned transfers of functions to the State level—e.g. customs and indirect tax collection and security services—will implicitly secure greater coordination in these areas.4

6. But that is all. There are no arrangements in these calendars for formal coordination, even though the budgets are highly intertwined—notably regarding the administrative expenses of the State. As a result, budgets are typically adopted late (notably in the Federation and the State), and their preparation is rushed. Furthermore, current arrangements provide at best rudimentary macroeconomic assessments before budget policies are determined and similarly limited overviews of the financing implications of aggregate fiscal balances. There are no domestic arrangements covering monitoring and execution of consolidated fiscal policy. And Cantons are free to spend their privatization receipts—with Sarajevo Canton alone planning spending of some 0.4 percent of BiH GDP from this source in 2005, and Cantons and municipalities are increasingly creditworthy. All this makes supervision of the evolution of consolidated fiscal policy increasingly trouble prone.

7. Furthermore, the ITA Board, as currently operated, is not suited to oversee execution of the consolidated budgets. The authorities do not provide comprehensive monthly fiscal outturn data to each other, which compromises their ability to monitor aggregate fiscal developments, through the ITA Board or anywhere else. And even if they did, the ITA board is overly focused on internal technical and administrative issues, leaving insufficient time even for focus on indirect tax policy, let alone policy issues beyond that. Partly for these reasons, the Ministers of Finance represented on the ITA Board are prone to work there reflecting the narrow concerns of their Ministries, rather than acting as delegates on behalf of their whole governments. This behavior would need to change in order for the ITA board to adopt a wider aggregate budget surveillance remit. And it has limited authority vis-à-vis the State parliament, at least as this relationship is currently practiced. This is seen in the 2004-05 discussions over the VAT law and its implementation date and in decision-making procedures regarding adjustments to the regional Free Trade Area agreements. For this reason, the ITA Board is not yet a body which will attract the necessary political focus for it to secure a role as the core of Bosnia and Herzegovina’s efforts to implement oversight of consolidated fiscal policy.

8. And no domestic body is charged to execute oversight on critical overarching fiscal issues. So discussions regarding domestic claims, restitution, state building, or budget financing are left to ad hoc administrative arrangements between the various governments.5 This greatly reduces the effective voice of the authorities in these issues and delinks their resolution from the necessary grounding in budgets.

9. And just as there is no executive body monitoring overall fiscal policy, there is no parliamentary body doing so either.

10. For all these reasons, current practice requires considerable input from the OHR and the IMF to fill these many gaps. This is necessary to adhere to the budget calendars and to secure, albeit informally, both a prior macroeconomic assessment into budget preparation and mechanisms to break negotiating deadlocks between the various fiscal interests on issues such as determination of the annual State administrative expenditures, where coordination is required. And this external input is necessary to oversee execution of the consolidated fiscal balance through the year, and to secure appropriate adjustments to that consolidated budget policy in the event of unanticipated macroeconomic shocks or deviations of key budget variables from projections.

11. This reliance on external inputs weakens effective sovereignty over fiscal issues. At a time when all are seeking to reduce the role of the international community in Bosnia and Herzegovina’s internal affairs, and when ties with the European Union are being strengthened, fundamental corrections to these arrangements would be timely.

C. A National Fiscal Council

12. The core of our proposals, nested within Dayton, is that sovereignty over these issues could be pooled rather than transferred. Clearly, wider—and macroeconomically more attractive—options would exist were Dayton to be radically transformed.6 But until that prospect is imminent, improvements in fiscal management within the current constitution are appropriate and necessary so as to secure more effective sovereignty over these issues.

13. Several steps are envisaged. In sum, they imply that the two Entities and the State would jointly take control over the determination and supervision of aggregate fiscal policy.

Preparations of annual consolidated budgets

14. For this purpose, the Entities and the State will need to work to a strict integrated budget timetable. This will need to:

  • formally integrate all budget calendars;

  • incorporate a specific date for finalization of macroeconomic assessments for the year ahead;

  • a date for the derivation from those macro assessments of the associated consolidated budget balance target;

  • a date for the subdivision of that consolidated balance target into the budget balances for the various components of Bosnia and Herzegovina’s fiscal system;

  • a date for the determination of indirect tax policy changes so that these may be properly reflected in year ahead revenue projections;

  • a date by which the year ahead total administrative expenditures of the State are determined in order that this can be reflected in the State and Entity budgets;

  • And, as presently, dates for presentation of the Entity and State budgets to their respective governments and into Parliament.

15. Execution of these budget agreements through the subsequent year would be monitored through “mutual surveillance.” Thus, the three Ministries of Finance would monitor each others’ execution of their individual budgets, so as to provide assurance to all that each is adhering to their part of the package of policies which is aimed to secure the overall fiscal stance agreed at the start of the budget calendar cycle. This process will also be the means through which any necessary adjustments to either the aggregate budget targets or the targets for the individual components of the total are determined in a coordinated manner.

16. Securing adherence to the budget calendar and ensuring effective execution of agreed budgets requires suitable parliamentary oversight. Within the budget preparation calendar, and through the budget execution cycle, the NFC should provide full reports to a body representing the State and the two Entity parliaments—possibly drawn from the members of the Finance committees of the three parliaments, and to which they would report back in turn. This Joint Finance Committee (JFC) not only provides a means of accountability of the executive to the legislative within the Dayton framework. But this reporting requirement also constitutes a means of encouraging each of the Ministers of Finance to resolve any negotiating difficulties with their counterparts which may be jeopardizing the budget calendar or budget execution. And if the JFC is drawn from the three parliaments, this also provides all those parliaments with reassurance that they can exercise direct oversight over the NFC operations, rather than, as a counterexample, relying solely on the State Parliament or its Finance Committee to provide this key reassurance indirectly.

17. This sketch of the overall framework requires many supporting elements. These are highlighted in what follows.

18. First, a key issue is how to encourage adherence to the integrated budget timetable. The challenge is that adherence will require the resolution of many complex interrelated negotiations each year, which may often result in deadlock. As noted above, a key discipline on this is the requirement to report publicly on key stages within the budget preparation calendar to the JFC. This provides a “threat of embarrassment” incentive on the three Ministers of Finance to reach resolutions on key issues on time.

19. Given this role, the key stages at which the Joint Finance Committee (JFC) should receive public reports would seem to be

(i) the overall macro assessment and the related agreement on the appropriate overall fiscal balance for the year ahead.

(ii) Then, at a later date in the fiscal year, a report should also be submitted when agreement has been reached on the subdivision of the year ahead aggregate fiscal balance between the various parts of the fiscal system, and the agreement on the State administrative expenses should be submitted at the same time.

Both of these dates should be set to occur well before budgets for the Entities and State are submitted into their governments.

20. Within this calendar, what is required for effective determination of the target fiscal balance? The key needs are for good quality macroeconomic data on which sound macro assessments can be based. And then, sound assessments of those data are required. The former requires significantly improved quality of statistics from the statistics agencies. For this, we recommend that a plan be prepared to operate the three under a single budget. Sound analysis of those higher quality data requires strengthening the research capacity of the MAU in the ITA and similar analytical capacity in the CBBH. Further, a soundly based annual year ahead budget balance target should reflect assessments of the available financing, notably external financing. With donor conditionality on the latter still focused on compliance by all governments, in all respects, securing this requires the increase in formal coordination among the three governments in the NFC to ensure that all comply with all conditions. Once this compliance is secured, the MAU could simply collate anticipated disbursements from donors. And last, the scope for borrowing by each participant government in the NFC could usefully be circumscribed by overall borrowing ceilings for them set in their individual borrowing laws, as is now in principle envisaged in the draft State debt and Entity debt laws.

21. With the aggregate annual fiscal balance determined, what is required to subdivide it into the balances of the component governments effectively? Two matters seem critical to this.

  • There is need for effective control to be exercised from the central governments of each Entity over the consolidated balance of the Cantons, municipalities, extrabudgetary funds, and Brcko District.7 If the NFC is to function as an effective decision-making body, it is not possible to have the Ministers of Finance from all these bodies represented and empowered on it. So a rules-based system governing the balances of these other parts of consolidated general government is required certainly in order to render their consolidated balances predictable one year ahead. This could come in the form of requiring advance warning—given long in advance—of their intentions regarding their balance, or because this is unlikely to work well in practice, controls over their borrowing and their use of privatization receipts. The example of Sarajevo Canton in 2005 underscores the need for the latter. But this framework still leaves open risk that expenditure arrears accrued at cantonal and municipal levels could undermine the process of effective subdivision of the consolidated fiscal target. This latter risk could be addressed by rendering these levels of government subject to bankruptcy procedures, so that creditors can enforce their claims in court. This discipline on these levels of government will be a key underpinning of the process to subdivide the consolidated budget balance into balances for the component parts of consolidated government.

  • The current arrangement in the ITS law allowing the State to determine without consulting the Entities over its annual drawings from the single account needs to be reformed. Without a requirement for formal Entity approval of this, the State can in principle draw as much as it likes. But as the Entity budgets are substantially funded from this revenue source, if the “residual” which the State leaves to them is lowered sharply by a unilateral State decision—a case of pure free-riding—this prevents appropriate budget preparation at Entity level and undermines fiscal accountability at all levels. To avoid this risk of disorder in the determination of the annual budgets, and in the allocation of the agreed consolidated deficit among all components of government, State annual drawings from the Single account should require the formal prior approval of the entities.

22. But even with these elements in place, the arrangements may founder on unrealistic year ahead revenue projections. Put simply, an Entity government can reflect its agreed year ahead fiscal balance in a budget which artificially boosts revenue estimates. In this case, the balance outturn is likely to be weaker than the budgeted outturn. To address this risk, before it materializes, there would be a case to require the agreement on subdivision of the year ahead consolidated fiscal balance to also reflect precise estimates of the revenues of the budgets concerned. All three ministers of finance would jointly have to sign off both on the budget balance allocation and the revenue estimates in all budgets. This joint signing commitment could prove one—albeit not necessarily a failsafe—mechanism to check over optimism on revenue projections. Further, with such revenue projections also submitted to the JFC, along with a full explanation of why such revenue projections differ from those produced by the MAU, the JFC will have opportunity to scrutinize them in public and deliver their verdict publicly. Having done the latter, the JFC is then itself publicly accountable if the eventual outturn deviates significantly from the revenue estimates it “approved”. In this light, the JFC would need appropriate technical support to prepare the analysis of the proposed revenue estimates each year. A further support for appropriate budget setting would be for the CBBH to provide public assessments of the proposed fiscal stance, the revenue estimates, and the budget outturns at each of the critical stages of the budget preparation and implementation cycles.

23. How should inevitable negotiating disputes over the consolidated balance, its subdivision, state spending, and revenue estimates be resolved ? This may prove to be— as it is under current arrangements—the most difficult issue to address in Bosnia and Herzegovina’s fiscal architecture. A “strong” option—in spirit identical to the deadlock-breaking rules within the ITA Board—would provide that if a specific change from previous year’s agreement on the consolidated budget balance, its subdivision, and on the annual State drawings from the single account is not secured by a specific date, then old agreement from last year shall apply to the coming year—the identical KM numbers. This would also apply to the estimates used for year ahead revenue (excluding privatization). This approach is basic, but it would strongly encourage all parties to reach compromises with each other, thus breaking negotiating deadlocks, thus allowing preparation of budgets to proceed. And the suggested rule on “last year’s revenue estimate” means that this deadlock-breaking rule places a deficit consolidation and a counter-cyclical bias into the system. But it would require parallel commitments by all to leave the non-indirect tax structures to remain unchanged from the previous year also. This procedure would require clearly defined accounting rules, and would also be overseen by the JFC. Basic as such a deadlock-breaking procedure is, it is necessary to ensure that the budget preparation cycle is able to go ahead, reducing risk that, as in the past, fiscal years had long begun before the relevant budgets were adopted, with associated risk to disorder in payouts of entitlement and other spending.

24. An integrated budget calendar will also help medium-term fiscal planning. By rendering annual budget determination and management more stable than it now is, medium-term considerations will be able to play a greater role than now, reducing the current “ad hoc” nature of many of those annual decisions. So efforts recently to adopt a medium-term budget framework will be supported by these proposals. Similarly, the work of the Economic Policy Planning Unit, focusing on analysis of medium-term structural and public expenditure issues, can also find fuller expression in the more stable annual budget cycle.

25. Preparation of consolidated fiscal policy is uniquely challenging given the need to coordinate so many autonomous units. For this reason, there may even be need to consider shifting the fiscal year. It currently follows the calendar year. But, in practice, this has a significant drawback. With all officials and governments effectively out of the office during August each year, it proves impossible to realize all the necessary technical and political coordination work in time each year to meet the end-year budget adoption deadline. Were the budget year instead shifted to August 1 to July 31 each year, this would maximize the unbroken sequence of months at which all officials and Ministers are at work—from end-January when the RS returns to work, until end-July, when everyone leaves. And setting the deadline for adoption of annual budgets at July 31 each year would further increase the incentives on all involved to finalize the budgets in a timely basis—so that all can then depart on their planned summer vacations.

Execution of annual consolidated budgets

26. As with budget preparation, a number of requirements will need to be met. Prime among these is need for full data and policy transparency. Publication of detailed monthly fiscal outturn data from the treasury systems for all levels of government will be needed, on revenue, expenditure, and financing. The IMF has proposed a detailed template for this data. Transparency in this area will ensure that budget outturn data on all parts of government are available to each of the members of the NFC. That will allow them to complete detailed reviews of progress among their partners, and thereby to reassure themselves that their partners are indeed adhering to the overall budget framework agreed. This is a process of “mutual surveillance”. And this process should be buttressed by regular—perhaps quarterly—reports on all the outturns to be submitted to the JFC and subjected to cross questioning there.

27. The proposal of submission of these data and reports to the JFC is not a courtesy to it. If implementation of the annual budget agreements by one party relies solely on the threat that if they do not, then others will also break their parts of the agreements, then the fiscal system will be highly fragile. This is so because it implicitly relies on the threat that if one party is noncompliant, then others will follow suit, threatening macroeconomic disorder. Given this outturn, the threat may lack credibility on some occasions, and have to be carried through on others. Given all this, there is clear need to have “compliance enforcing mechanisms” introduced earlier into the process. If detailed outturn reports are submitted to the JFC regularly, and in a timely manner (quarterly) it can serve as a “whistle-blower” to the public in cases where deviations are occurring. And if the JFC fails to publicly announce such difficulties as they are occurring, then its failure in this regard will be evident to the public when budget outturns are eventually published. All this may provide some further discipline on governments to adhere to their annual budget commitments to their partners in the NFC.

28. How should standard fiscal shocks through the year be dealt with? These could include standard revenue shortfalls, new expenditure needs in individual or all budgets, and other such matters. The process of mutual surveillance is key. This will alert all NFC members to force majeure developments in each or all of their budgets, allowing appropriate adjustments to be determined and agreed by all. But given the complexities in coordinating the annual agreements, mid-course adjustments should be minimized. This underscores the need for cautious revenue estimates underlying the individual budgets. But if unexpected macroeconomic shocks are significant, there may be no option but to rebalance the whole consolidated budget framework—from the consolidated budget balance target, through to the drawings of the State from the ITA single account, to the allocation of the consolidated budget balance target among the component parts of general government. In this way, even the State would take its part in sharing the burden of such adjustments, in contrast to current arrangements.

The ITA Board

29. If the ITA Board is to do all this, it needs to radically change its current mode of business. Its current preoccupation with detailed minutiae of indirect tax administration, etc., needs to end. These matters would need to be addressed within the ITA administration rather than at its Board. This will allow the ITA board to focus on policy issues, including those of indirect tax policy.

30. Furthermore, these wider budget responsibilities would require that more organized political input into the Board’s deliberations is needed. Thus, whereas hitherto the Ministers of Finance have tended to act there in the interest of their ministries, they would need to act much more as delegates from their governments. To allow the appropriate discussion in component governments of fiscal matters for discussion at the NFC/ITA board, this would also require a formal process to determine the dates and agenda of meetings, so that member governments can debate the issues in advance and guide their Ministers of Finance accordingly.

31. If the NFC is lodged in the ITA, careful consideration would need to be given to membership of the NFC. These wide budget functions certainly go beyond the purposes for which the “experts” were appointed to the ITA board. So to the extent that the ITA board forms the nucleus of the NFC, the experts role may be appropriately restricted to indirect tax matters only, giving them no role in these wider fiscal matters. But otherwise, there is merit in lodging the NFC in the ITA because it already encompasses formal voting procedures which can be used to break deadlocks and to avoid further proliferation of fiscal institutions.

32. But there is also a case to avoid inclusion of the two Prime Ministers and the Chair of the Council of Ministers in the NFC. Given the many tasks of the NFC in aggregate fiscal policy, it is clear why these persons would like a formal voice in its deliberations. But the time consuming and technical nature of many of these NFC functions counsels against formal membership for them. And the body needs to be small enough to function. Furthermore, if the two Prime Ministers and the Chairman of the Council of Ministers are not represented on the NFC, they could constitute a “Court of final appeal” for the NFC in cases when it is unable to resolve negotiating deadlocks.

What legislative basis is needed for the NFC?

33. The NFC cannot be an informal body. Many of the steps in the calendar for preparation of integrated budgets need to be mandatory as do many steps in its execution. And for this to be effective, there should be no right of unilateral withdrawal from those obligations by any member of the NFC. Thus, the NFC members must make formal legal commitments to adhere to these processes. It requires transparency of data, so all must have a legal obligation to publish it in an agreed format, without right of unilateral suspension of those obligations. And it requires the JFC to provide essential discipline into the processes as well as parliamentary oversight of them. So the JFC will also require a legal basis.

34. All this seems to require that the NFC be established, with such rules, in State level law. But the competencies involved should only shift there on the basis that subsequent changes to the NFC law can only be adopted with formal prior Entity assent. This would prevent imposition of unilateral changes to the arrangements by the State parliament.

35. And more ambitiously, the NFC law could provide that the broader framework underpinning it could also only be amended with formal consent of the NFC. Thus, arrangements for borrowing rules at State and Entity levels, use of privatization receipts, bankruptcy arrangements for sub Entity Central government tiers, Entity or State budget calanders, data publication obligations, tax and expenditure assignments in the Entities or the State could only be altered with its formal prior assent. As with the proposed arrangements for the ITA governing board, these changes in the framework arrangements and procedures supporting the NFC could also require the approval of the State Parliament. This would assure that any changes in these areas, which fundamentally affect the way in which the NFC works, could not be made unilaterally.

Administration

36. The NFC will need the support of a bureaucracy. It is an open question if the NFC should have its own administration, growing out of the MAU, or if there should be a cooperative administrative structure set up between the three Ministries of Finance. A mix of both is likely best. But in any event, the unusually complex character of the fiscal architecture in Bosnia and Herzegovina underscores need to strengthen greatly the quality of the administrations in the three Ministries of Finance

Implementation

37. There is no need to implement all this at once. The system can and should be built over time, not least because many of its characteristics should be worked out through a further process of “learning by doing”—a process which has informed much of the preceding discussion.

38. However, some steps are urgent, regardless of the ultimate shape of the NFC and its supportive legislative and administrative structures. Key among these are:

  • The ITS law should be amended to provide that changes to indirect tax policy require the formal endorsement of both the ITA board and the State parliament;

  • The ITS law should also be amended to provide that annual drawings from the single account by the State require the formal prior approval of the Entity ministers of finance;

  • New laws governing the Cantons and municipalities are required, along with arrangements to control their discretion over use of privatization receipts; and

  • Cantons and municipalities should be rendered liable to bankruptcy proceedings.

D. Conclusion

39. This Chapter has laid out a framework to strengthen fiscal sovereignty within the Dayton framework. It embodies pooling of competencies, rather than shifts in them, in the spirit of the ITA. It has been designed with an eye to trying to ensure that the system has incentives to encourage its functioning even when political circumstances are adverse—when governments in one or more constituent parts of the fiscal system fall, during and after general elections, and when tensions between communities are high. But not all contingencies can be addressed in this way; a system like this will work better if the authorities determinedly coordinate with each other to make it work.

40. The ultimate intention is to secure effective domestic sovereignty over aggregate fiscal policy. But that comes at the price of a loss of unfettered sovereignty over components of that policy—so discretion of the Entities and the State will become subject to engagement by each other—with all voices expressed, within the mutually constrained framework, in the NFC.

41. And the NFC would not just be a “budget-making” body. It would also provide Bosnia and Herzegovina with a body with powers and technical support necessary to address issues of fiscal sustainability and broader fiscal matters.

42. The voice of the legislatures—also now absent in regard to consolidated fiscal policy—is also integrated into the proposals via the JFC. As noted, that is not a courtesy: their inclusion, along with a parallel role for the CBBH, is a key element of the system which will help the NFC system to work.

43. Success will not come easily. While non-cooperative behavior continues, no system can overcome it readily; a timetable certainly cannot by itself prevent such behavior, and if relations between the NFC and JFC sour, additional complications may arise. But unlike current fiscal structures, the NFC/JFC system at least “leans in the cooperative direction”, encouraging this attitude between the constituent governments on the NFC, and between the NFC and the JFC. And with TA support, notably for the MAU, the CBBH, the Ministries of Finance, and so on, administrative hiccoughs will be reduced over time, and the quality of input into fiscal deliberations and management will strengthen.

44. The NFC will be busy. In part, this is because it will take over some of these policy making functions now carried out by the OHR and the IMF. And so the burden of work on domestic authorities will increase. But there are offsets too. The workload now in running budgets is considerably aggravated by the lack of formal coordinating or deadlock-breaking mechanisms in the fiscal system. This renders budget making very much more difficult in practice than is the case in other countries, with other constitutional arrangements. In this context, increased coordination is essential. And if that increases workload for the domestic authorities, this is one of the prices of acquisition of sovereignty over these aggregate fiscal matters. In the Dayton context, this is how sovereignty on aggregate fiscal policy may be secured.

ANNEX: Issues for Discussion

Chapter II. Market Indicators of Confidence in the KM and the Banking System since 2000

  • Why is such a high proportion of bank lending still indexed?

  • Should indexation of loans be discouraged? If so, how?

  • Are households really so confident in the KM? Or is confidence increasing but still low? Do trends—however informally measured—in household holdings of Euro notes and coin shed any light on this?

  • Why has confidence in the KM not been shaken by elections or more recent political uncertainty?

  • Has confidence in the KM been secured?

  • Why have there been no bank runs in Bosnia and Herzegovina?

  • Is continued depositor confidence in banks consistent with the current pace of credit expansion?

  • What needs to be done to safeguard credit quality? Is there scope for further prudential regulation, such as on provisioning requirements?

Chapter III. International Experience with Credit Booms and Large Current Account Deficits

  • What comfort does international experience provide in regard to Bosnia’s credit boom and external deficit?

  • To what extent are concerns in Bosnia mitigated by underrecording of GDP, or are the same mismeasurements apparent in other countries also?

  • Is evidence of growing confidence in the KM and the banking system (see companion paper) inconsistent with this international evidence, or does it reflect the low public awareness of the macroeconomic imbalances?

  • What accounts for the uniqueness of Bosnia’s credit growth and external deficits among currency boards?

  • What about transition, or about Bosnia’s experience of transition, suggests that rapid credit growth and large external deficits are of less concern than they would be in other contexts?

Chapter IV. Corporate Sector Issues

  • Is the condition of the corporate sector as bad as suggested by the data, or is it worse?

  • Is there a need for a comprehensive corporate restructuring strategy, or is the ad hoc company-by-company approach adopted in recent years adequate?

  • Are there alternatives to bankruptcy for unprofitable companies?

  • Is excess and or fictitious labor the key impediment to rejuvenating enterprises? If so, how should it be tackled?

  • Is the current labor legislation and wage bargaining process a key impediment to realizing corporate revitalization?

Chapter VIII. State-Building

  • Will State-building, if implemented as in the past, undermine fiscal and macroeconomic sustainability?

  • Is the level of State remuneration rates per capita the key problem?

  • If State remuneration rates per capita are not lowered significantly, should State building aspirations be curtailed or delayed?

  • How can savings be found, within the Police and Defense reforms, given State level remuneration rates?

  • Which, in the view of the EU, are the three most important State institutions which must be fully functional by end 2006?

  • Should veterans benefits be the main focus of expenditures which are cut to offset the expansion of State activities? If not, what other spending should be cut, and at which levels of government?

  • Does fiscal stability without OHR supervision require prior Entity agreement on annual State administrative expenditures?

Chapter IX. Consolidated Cantonal and Municipal Fiscal Balances

  • How can arrears accumulation of cantons and municipalities be prevented? Through a tightening of bankruptcy procedures? Through provisions in the entity organic budget laws? Or in some other way?

  • How could an “early warning system” or direct controls over the use of escrow resources best be developed?

  • Is a rules-based approach to cantonal and municipal borrowing appropriate?

  • If yes, is a debt-service to revenue ratio the appropriate form of the limit?

  • What procedures should govern the appointment of a CMCB to ensure its technical effectiveness and political neutrality?

  • Should cantons and municipalities be treated differently in the transitional arrangements?

Chapter X. Fiscal Sovereignty

  • What are the three main problems in the current arrangements for budget design and execution?

  • Will the proposals in this note improve matters, or make them worse?

  • Sovereignty over aggregate fiscal policy requires a diminution in the autonomy now enjoyed by component governments. Is it worth it?

  • How can deadlocks in negotiations over fiscal matters be resolved without the intervention of the OHR or the IMF?

  • Will public scrutiny by the JFC and the CBBH be able to provide a useful discipline on budget preparation and execution?

  • What, apart from regular and complete fiscal data publication, is required to make “mutual surveillance” work?

  • What arrangements to control Cantonal, Municipal, and extrabudgetary funds deficits are necessary to ensure that the NFC has effective control over the consolidated fiscal balance of governments in Bosnia and Herzegovina?

  • What should the relative roles of the MAU and the EPPU be?

1

Prepared by Peter Doyle and John Norregaard.

2

IMF Country Report No. 04/54, March 9, 2004

3

See Chapter 9.

4

See Chapter 8.

5

See Chapters 6 and 8.

6

See Staff Report, Box 5.

7

See Chapter 9