Statement by the IMF Staff Representative on Bosnia and Herzegovina

This paper discusses the request from the Bosnia and Herzegovina authorities for a Stand-By Arrangement. The global financial and economic crisis hit Bosnia and Herzegovina when the overheating was already raising doubts about the sustainability of the economic expansion. The authorities’ comprehensive financial sector strategy aims at strengthening the banking sector and improving crisis preparedness. IMF staff supports the authorities’ plans to enhance the monitoring of financial stability by establishing a standing committee in charge of crisis prevention and management, and by signing a formal memorandum of understanding on cooperation.

Abstract

This paper discusses the request from the Bosnia and Herzegovina authorities for a Stand-By Arrangement. The global financial and economic crisis hit Bosnia and Herzegovina when the overheating was already raising doubts about the sustainability of the economic expansion. The authorities’ comprehensive financial sector strategy aims at strengthening the banking sector and improving crisis preparedness. IMF staff supports the authorities’ plans to enhance the monitoring of financial stability by establishing a standing committee in charge of crisis prevention and management, and by signing a formal memorandum of understanding on cooperation.

July 8, 2009

1. This statement provides information that has become available since the issuance of the staff report on June 17. The new information does not alter the thrust of the staff appraisal.

2. Macroeconomic developments. High-frequency economic indicators are broadly in line with the program’s baseline scenario. Industrial production has been declining in the Federation (by 10 percent during January-May 2009 compared with the same period of last year) and increasing in Republika Srpska (by 17 percent over the same period) solely due to the startup of a large refinery in late 2008. Negative trends in exports and imports continue—both declining by 23.4 percent and 25.5 percent, respectively over the same period—raising the possibility of a smaller current account deficit in 2009 compared to the program. May data point to low core inflation (1.6 percent year-on-year), while, on account of declines in food and energy prices, headline inflation has turned negative (-1 percent year-on-year).

3. Fiscal measures. The authorities have adopted all prior actions for Board consideration of their Stand-By Arrangement request. Besides the approval of rebalanced budgets by the Entity governments, Federation cantons also approved restrictive budgets.

4. European Bank Coordination Initiative. Following a meeting in Vienna on June 22, the parent institutions of the six largest foreign banks incorporated in Bosnia and Herzegovina signed a statement reaffirming their commitments to take action to support their subsidiaries in the country. Specifically, they committed to: (i) maintaining their exposures to their subsidiaries in Bosnia and Herzegovina; and (ii) ensuring adequate capitalization of their subsidiaries as assessed under stress tests to be conducted by the Central Bank of Bosnia and Herzegovina (CBBH). Individual commitment letters are expected to be sent to the CBBH in the coming weeks.

Bosnia and Herzegovina: Request for Stand-By Arrangement: Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Bosnia and Herzegovina
Author: International Monetary Fund