Bosnia And Herzegovina: Staff Report for the 2005 Article IV Consultations

Bosnia and Herzegovina’s 2005 Article IV Consultation reports that inflation has stabilized at industrial country rates, anchored by the currency board. About half of activity is accounted for by the private sector and banks have been almost completely privatized to nonresidents. The fiscal system, though fractured, has delivered a fiscal consolidation of 8 percentage points of GDP in four years, taking the balance to a deficit of 0.6 percent of GDP in 2004.

Abstract

Bosnia and Herzegovina’s 2005 Article IV Consultation reports that inflation has stabilized at industrial country rates, anchored by the currency board. About half of activity is accounted for by the private sector and banks have been almost completely privatized to nonresidents. The fiscal system, though fractured, has delivered a fiscal consolidation of 8 percentage points of GDP in four years, taking the balance to a deficit of 0.6 percent of GDP in 2004.

I. Background

1. Bosnia and Herzegovina has come a long way. Since Dayton in 1995, GDP has trebled and exports have risen almost 10 times (Figure 1). Inflation has stabilized at industrial country rates, anchored by the currency board. About half of activity is now accounted for by the private sector and banks have been almost completely privatized to non-residents. And the fiscal system, though fractured, has delivered a fiscal consolidation of 8 percentage points of GDP in 4 years, taking the balance to a deficit (excluding bank recapitalization) of 0.6 percent of GDP in 2004 (Figure 2).1 This progress has been supported by international peacekeepers, the Office of the High Representative (OHR), external debt forgiveness, two Stand-By Arrangements, and extensive technical assistance (TA) from many donors, including the Fund (Text Box 1, Appendix 1). In this context, Bosnia and Herzegovina aspires to eventual EU membership.

Figure 1.
Figure 1.

Bosnia and Herzegovina: Key Economic Developments Since 1995

Citation: IMF Staff Country Reports 2005, 199; 10.5089/9781451804898.002.A001

Sources: Data provided by Bosnian authorities, and staff estimates.1/ Excluding the IMF.
Figure 2.
Figure 2.

Bosnia and Herzegovina: Selected Indicators by Entity

(1999-2005)

Citation: IMF Staff Country Reports 2005, 199; 10.5089/9781451804898.002.A001

Sources: Data provided by Bosnian authorities; and IMF staff estimates.1/ Projections.

The 2002–04 SBA

The 2002–04 SBA targeted fiscal consolidation of 3.3 percent of GDP between 2001 and 2003, a 3.8 percent of GDP reduction of the current account deficit, reforms to indirect tax structures, and the development of a plan to restructure the large domestic claims on government.

The program achieved fiscal consolidation of 3.6 percent between 2001 and 2003, above the target. In addition, the Indirect Tax Administration—centralizing administration of most indirect taxes—was established. And framework laws to restructure government domestic liabilities from over 200 percent of GDP to an NPV of 10 percent of GDP were passed in both entities. However, an unexpected credit boom raised demand and imports, increasing the current account deficit in 2003 by 1 percentage point of GDP from its level in 2001.

2. Progress continued in 2004.

  • In the context of strong regional export market growth and recent large enterprise restructurings, GDP grew an estimated 5¾ percent, led by mining, manufacturing and energy and exports rose over 15 percent (Text Figure 1, Tables 1a-1b).

  • But growth also reflected credit-fueled demand which spilled into imports (Text Table 1, Tables 2a-2c). So despite strong exports, the external current account deficit strengthened by only ½ percentage point to 17¼ percent of GDP (tables 3a-3d).

  • Inflation continues to be low, and averaged 0.4 percent in 2004 (Figure 2).

  • And the fiscal stance firmed, albeit by less than targeted (Text Table 2, Tables 4a-4i). Disappointing revenues, particularly customs and excises, and slow progress on demobilization required various offsetting adjustments, with investment and operations and maintenance spending bearing the brunt. With these corrections, the 2004 consolidated fiscal balance strengthened by 0.7 percentage points to a deficit of 0.6 percent of GDP, excluding bank recapitalization of ½ percent of GDP.

  • International reserves continued to increase, reaching 6 months of imports by end-2004 (Figure 3).

Text Figure 1.
Text Figure 1.

Trade Data, 2002-05

(In Euros, Seasonally adjusted)

Citation: IMF Staff Country Reports 2005, 199; 10.5089/9781451804898.002.A001

Source: Data provided by Bosnian authorities.
Table 1a.

Bosnia and Herzegovina: Selected Economic Indicators, 2000-05 1/

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Sources: Data provided by the authorities; and IMF staff estimates.

Data refer to the entire country.

Based on weighted averages for the Federation and Republika Srpska.

Data have been adjusted to correct for a structural break caused by the takeover of old bank claims on RS enterprises by the RS govt.

2004 data includes one-time payments for military severance. Also, in 2004 KM 68 million of expenditure (0.5 percent of GDP) represents the cost of recapitalizing a state owned bank.

2005 expenditure projections assume the authorities take measures, in addition to those already budgeted, to deliver a primary surplus of one percent of GDP

Excludes the large stock of domestic claims on government, pending court decisions on the parameters for restructuring the claims.

Table 1b.

Bosnia and Herzegovina: Selected Economic Indicators for the Entities, 2000-05

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Sources: Data provided by the authorities; and IMF staff estimates.
Text Table 1.

Credit and Import Growth

(In percent, Q/Q-1, s.a., annualized)

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Adjusted for reclassification of loans in mid-2004.

Table 2a.

Bosnia and Herzegovina: Monetary Survey, 2001-2005

(In millions of KM)

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Sources: Central Bank of Bosnia and Herzegovina; and IMF staff estimates.

Not adjusted for reclassification. In June 2004, the RS government took over KM 463 million of old bank claims on RS enterprises, reducing bank credit and the associated foreign liabilities accordingly.

Table 2b.

Bosnia and Herzegovina: Monetary authorities’ balance sheet 2001-2005

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Sources: Provided by the monetary authorities; and IMF staff estimates.
Table 2c.

Bosnia and Herzegovina: Survey of Domestic Money Banks, 2001-05

(In millions of KM)

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Sources: Provided by the monetary authorities; and IMF staff estimates.

In June 2004, the RS government took over KM 463 million of old bank claims on RS enterprises, reducing bank credit and the associated foreign liabilities accordingly.

Starting in June 2003, cash in vaults are excluded from assets eligible to meet reserve requirements.

Adjusted to correct for the structural break due to the RS government’s takeover of bank claims on enterprises.

Table 3a.

Bosnia and Herzegovina: Balance of Payments, 2002-10 1/

(In millions of U.S. dollars; unless otherwise indicated)

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Sources: Data provided by Bosnian authorities; and IMF staff estimates and projections.

Partner country data for non-reconstruction imports are lowered by 5 percent to reflect imports of non-residents to BiH.

These are non-debt-creating capital inflows. The projections may include private transfers from abroad.

Table 3b.

Bosnia and Herzegovina: Balance of Payments, 2002-10 1/

(In millions of euros; unless otherwise indicated)

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Sources: Data provided by Bosnian authorities; and IMF staff estimates and projections.

Partner country data for non-reconstruction imports are lowered by 5 percent to reflect imports of non-residents to BiH.

These are non-debt-creating capital inflows. The projections may include private transfers from abroad.