2015 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR BOSNIA AND HERZEGOVINA
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2015 Article IV consultation with Bosnia and Herzegovina, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its October 23, 2015 consideration of the staff report that concluded the Article IV consultation with Bosnia and Herzegovina.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on October 23, 2015, following discussions that ended on September 23, 2015 with the officials of Bosnia and Herzegovina on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on October 9, 2015.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for Bosnia and Herzegovina.
The document listed below has been or will be separately released.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
Bosnia and Herzegovina (BiH) has made considerable progress in the last few years in reducing internal and external imbalances. Moreover, after several starts and stops since the global financial crisis the economic recovery is showing signs of taking a firmer hold. Growth is expected to rebound to over 2 percent this year, up from just over 1 percent last year when the country was hit by massive floods.
The country still faces major challenges, however. Convergence to European Union (EU) income levels has been slow for both cyclical and structural reasons. Weak activity in Europe has hurt activity in BiH and last year’s floods caused major damage. A lack of progress in structural reforms—partly reflecting the country’s complex constitutional set-up—has held back private investment, limiting potential output and keeping unemployment high, especially among the youth.
Policies should focus on accelerating private sector growth and job creation, while ensuring sustainability. A gradual recovery in Europe and low oil prices will aid growth in BiH. With deflation imported via the currency board arrangement, fiscal policy will need to strike a balance between supporting growth and returning public debt to a downward path, although room for policy maneuver will also depend on available financing. Financial policies will need to address banking sector vulnerabilities and aim to resuscitate bank lending. Attracting investment will require accelerating reforms to improve the business environment and labor market outcomes.
The authorities recently adopted a comprehensive Reform Agenda—prepared in cooperation with the EU and the International Financial Institutions (IFIs)—aiming to accelerate reforms and to move forward on the path toward EU accession. The authorities are also seeking to mobilize financial and technical assistance to assist with the implementation of the Reform Agenda. Strong reform implementation, combined with external support, would help accelerate income convergence and job creation.
Significant domestic political risks continue to weigh on the outlook, as the fragile and complex political situation poses risks to the timely implementation of policies envisaged in the Agenda. Delays in reform implementation would also delay official external financing and force a tighter fiscal stance. On the external side, risks are more balanced, as stagnation in Europe, possible financial market strains, or geopolitical tensions could dampen growth, while a faster recovery in Europe would support it.
Jörg Decressin (EUR) and Masato Miyazaki (SPR)
A staff team comprising Messrs. van Rooden (head), Llaudes, and Qu (all EUR), Ms. Benedek (FAD), and Ms. Maslova (SPR) visited Banja Luka and Sarajevo during April 28–May 12, June 10–24, and September 21–23, 2015. Mr. Atoyan (resident representative) and Ms. Jankulov (local economist) assisted the mission. Ms. Muñoz (MCM) joined some of the discussions in May to present the findings of the Financial System Stability Assessment. Mr. Manchev (OED) attended some of the policy discussions. The team met with: at the State level: Chairman of the Council of Ministers Zvizdić, Minister of Finance and Treasury Bevanda, Central Bank Governor Kozarić; in the Federation of BiH: Prime Minister Novalić and Finance Minister Milićević; and in the Republika Srpska: Prime Minister Cvijanović and Finance Minister Tegeltija. Staff also met with other senior officials, and representatives of the main political parties, the business sector, labor unions, and the diplomatic community. Ms. Samuel and Ms. Niman (both EUR) assisted with the preparation of this report.
ECONOMIC DEVELOPMENTS: WEAK GROWTH AND HIGH UNEMPLOYMENT
B. A Steady Reduction in External and Internal Imbalances since the Global Crisis and Signs of an Economic Recovery
C. But Lagging Reform Implementation has held Back Incomes and Employment
POLICY DISCUSSIONS: ACCELERATING GROWTH WHILE MAINTAINING MACROECONOMIC STABILITY
A. Supporting a Vibrant Private Sector
B. Fiscal Policies: Ensuring Sustainability, While Supporting Growth
C. Safeguarding Financial Sector Stability and Reviving Bank Lending
OUTLOOK AND RISKS
1. Implementation of Recommendations of the 2012 Article IV Consultation and Performance under the 2012–14 SBA
2. Financial System Stability Assessment—Key Findings and Recommendations
3. External Public Debt
4. Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario
5. Risk Assessment Matrix Potential Deviations from Baseline
1. Selected Economic Indicators
2. Structural Weaknesses
1. Selected Economic Indicators, Active Scenario 2012–20
2. Real Sector Developments, Active Scenario 2012–20
3. Balance of Payments, Active Scenario 2012–20
4. General Government Statement of Operations, Active Scenario 2012–20
5. General Government Statement of Operations, Active Scenario 2012–15