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 authorities of Bosnia and Herzegovina (BiH) very much appreciate the informative and constructive dialogue with the Fund. They would like to express their gratitude to the IMF team, headed by Mr. van Rooden, for its dedicated work and good advice in the recent years. The authorities broadly agree with the staff’s assessment and policy recommendations provided in the report and accompanying selected issues paper. These, together with the substantial technical assistance by the Fund and other donors, have contributed to the adoption by the authorities of a comprehensive Reform Agenda earlier this year.
Continuous discussions with the international community have helped the authorities to steadily frame the adequate policy measures needed to boost the growth and resilience of the economy, and safeguard the macro-financial stability and fiscal sustainability going forward. The external and internal imbalances have been gradually reduced in the recent years, mainly through fiscal consolidation and some progress in structural reforms. A firm budget deficit reduction under the recent Fund-supported program was achieved despite a worsened external economic environment, a complex domestic institutional setup and political situation, and last year’s devastating floods. The economic recovery is under way, and growth is expected to rebound to over 2 percent this year, and to reach 3 percent in 2016.
The authorities stand ready to use every window of opportunity and further progress with the necessary reforms to unleash the economic potential of the country. They have been working on a possible successor arrangement with the Fund. The new governments keep focusing on structural reforms to support private sector development and job creation, while its near-term plan includes two main pillars: (1) sustainable further fiscal consolidation and a more efficient management of public finance resources; and (2) strengthening financial stability through system-wide legal amendments and institutional enhancements in line with the recent FSAP recommendations.
The governments at every level that came to office following the general elections in October 2014 recognize the urgent need to step up the pace of economic reforms to accelerate economic growth and create more jobs, and to improve the living standards of the people of BiH. The Reform Agenda adopted in July this year sets out the main plans of the BiH Council of Ministers and the governments of the Federation of Bosnia and Herzegovina (FBiH) and the Republika Srpska (RS) for socio-economic reforms in the coming years. Through the new Reform Agenda implementation, efforts to ensure fiscal and financial sustainability will be augmented by measures to strengthen the rule of law and the fight against corruption, and to invigorate administrative capabilities and increase the efficiency of public institutions at all levels of government. The authorities are confident that steadfast implementation of their Reform Agenda will also help them on the road toward accession to the EU. However, the highly uncertain and volatile environment, both external and domestic, poses challenges and makes it difficult to achieve the needed broad political and social consensus for smooth and timely policy implementation.
Important steps have been made in the last two years under the Fund-supported program to improve the business environment. In line with the WB recommendations a one-stop shop for business registration was established in the RS to make it easier to start and operate a business. Similarly, in the FBiH, the Law on Business Registration was amended, and a new Law on Inspections and a Law on Companies were adopted. The authorities work to further reduce the administrative burden on businesses, with a particular emphasis on harmonizing regulations between the entities. They also aim to improve the commercial dispute resolution framework, including by adopting new entity bankruptcy legislation developed with the assistance of the WB, and to enhance the court system. Based on the achievements, the authorities expect to complete the process of WTO accession in the coming year and to resolve the remaining trade issues with the EU. With the assistance of the EBRD, restructuring plans for the energy sector, public utility companies and railways are in the process of preparation, focused on increased efficiency, costs savings, and tariff adjustment to provide full cost recovery and sustainable commercial operations.
Unemployment reduction is the top priority of the BiH authorities. The country failed to significantly benefit from employment gains during the boom years while it still registers significant job losses in the aftermath of the global crisis. In this regard, the authorities welcome the staff paper that devotes more attention to this main challenge for economic policymaking and provides valuable policy recommendations on the labor market reforms. The FBiH has already adopted a new Labor Code in line with the WB recommendations, and the parliament of the RS will soon consider the new Labor Code. These new laws will be supported by stepped-up labor inspections, active labor market policies, including by expanding training and education opportunities, and reform in the system of unemployment benefits.
To make fiscal consolidation sustainable, the authorities will continue to implement fiscal reforms, which aim to improve revenue collection, contain current non-priority spending to create room for investment in infrastructure, and improve the efficiency of public finances. They are committed to preserving the integrity of the system of indirect taxation and broadening the base at the state level in order to ensure the continued high level of budget revenues delivered by indirect taxes. In line with the staff advice, amendments at the entity level will be made to the corporate and personal taxation to strengthen budgetary revenues.
The public administration reform, which is implemented with the EU assistance, remains critical to contain current non-priority spending to create room for investment in infrastructure, and improve the efficiency of public finances. It is supported by an attrition rule in public administration hiring and stringent control over the public sector wage increases. The authorities also strive to improve the targeting of social assistance to protect the most vulnerable, and to strengthening controls over lower levels of government, extra-budgetary funds, and state-owned enterprises. The implementation of a more efficient spending control is facilitated by the progressive expansion of the treasury systems to lower levels of government.
Financial stability and sustainability
The authorities firmly believe that the Currency Board Arrangements (CBA) remains the appropriate anchor for all its policies in the long run and until the potential EU accession and eventual euro adoption. The CBA, however, needs to be continuously supported by the other policies in line with the recent FSAP recommendations. Given that the model of financial supervision set at the entities level in BiH is unique among the world supervisory practices, the authorities have established a high-level Standing Committee for Financial Stability to coordinate, and especially to better sequence and synchronize the financial sector oversight and supervision. The authorities are committed to steadily increase the institutional capacity of all supervisors and their enforcement power.
The recent FSSA concluded that the financial system at the aggregate level is liquid, adequately capitalized and resilient to shocks, although some pockets of vulnerability exist. Bosnia and Herzegovina’s economy and financial system are still dealing with the aftershocks of the global financial crisis and underlying vulnerabilities arising from sluggish growth, tight macroeconomic conditions, slow credit growth, high NPLs and weakened profitability of financial institutions. Against this background, the authorities are committed to further developing systemic liquidity management in a conservative manner and strictly observing the limitations of the legal framework underpinning the CBA. They work on broadening the scope of the 2014 Contingency Plan. In the current juncture, one of the most pressing issues for the authorities remains the creation of a credible, transparent and effective bank restructuring and resolution mechanism. The authorities also envisage signing Memoranda of Understanding (MoUs) with the remaining home country supervisors of the systemically important banks, and extending the coverage of existing MoUs.
Finally, the authorities have made progress with addressing the AML/CFT issues through the enactment of a new AML/CFT Law and amendments to the Criminal Code. To enhance implementation of the existing AML/CFT action plan, the authorities envisage improvements in coordination and cooperation among the various agencies at the state and entity levels.