Bosnia and Herzegovina: Extended Fund Facility—Press Release; Staff Report; and Statement by the Executive Director for Bosnia and Herzegovina

The economy of Bosnia and Herzegovina (BiH) continues to recover. Growth was 3.2 percent in 2015, despite fiscal consolidation forced by financing constraints, and is expected to be at about the same level this year. External and internal imbalances have eased substantially in the past year. However, since the global financial crisis, economic convergence with advanced European economies has lagged. Unemployment, especially among the youth, is high and persistent, and creates incentives for emigration. There are important challenges in the areas of improving the business environment, reorienting fiscal policy to support growth while ensuring sustainability, promoting credit while safeguarding financial stability, and ensuring the fragmented governance structure does not affect the single economic space.


The economy of Bosnia and Herzegovina (BiH) continues to recover. Growth was 3.2 percent in 2015, despite fiscal consolidation forced by financing constraints, and is expected to be at about the same level this year. External and internal imbalances have eased substantially in the past year. However, since the global financial crisis, economic convergence with advanced European economies has lagged. Unemployment, especially among the youth, is high and persistent, and creates incentives for emigration. There are important challenges in the areas of improving the business environment, reorienting fiscal policy to support growth while ensuring sustainability, promoting credit while safeguarding financial stability, and ensuring the fragmented governance structure does not affect the single economic space.

Recent Developments, Outlook, and Risks

1. Growth has begun to pick up recently and external and internal imbalances have eased (Figure 1). Production and exports recovered faster than anticipated after floods in 2014. Growth reached 3.2 percent in 2015, despite a stronger-than-expected fiscal consolidation brought about by a financing shortfall. The budget was close to balance and current account deficit narrowed. Inflation remained negative, largely reflecting low inflation in the Euro area imported through the currency board arrangement.

Figure 1.
Figure 1.

BiH: Recent Developments

Citation: IMF Staff Country Reports 2016, 291; 10.5089/9781475535556.002.A001

Sources: BiH authorities; World Bank, World Development Indicators; and IMF staff estimates and projections.

Real GDP Growth


Citation: IMF Staff Country Reports 2016, 291; 10.5089/9781475535556.002.A001

1/ Regional peers include ALB, HRV, UVK, MKD, MNE, and SRB.

2. Notwithstanding the recent uptick, economic performance has been lackluster over the past few years. Growth and income convergence with advanced Europe have lagged since the onset of the global financial crisis, and per capita income today is only one-quarter of EU level. Low private investment has slowed potential output growth and private sector job creation. High youth and long-term unemployment, which encourage emigration, are particularly worrisome. The quality of the business environment is below par, and, over the past two decades, Bosnia and Herzegovina (BiH) has trailed regional peers in implementing growth-enhancing structural reforms.


GDP per Capita in PPP

(Index, EU28 = 100)

Citation: IMF Staff Country Reports 2016, 291; 10.5089/9781475535556.002.A001

Source: Eurostat.

3. The near term outlook is relatively positive. In line with pick up in the region, growth in 2016 is expected to remain at 3 percent, as public investment recovers following financing and implementation problems in 2015. As the recovery in Europe continues and structural reforms are successfully implemented, growth could increase to 4 percent over the medium term. Prices are expected to continue to fall in 2016, with inflation picking up in later years. The current account deficit will fall over the medium term after peaking in 2017.

4. There was limited progress on structural reforms and improvements in the quality of government spending under the previous program. The previous Stand-By Arrangement helped support macroeconomic stability, and there was progress in strengthening public financial management. But there was little improvement in the quality of government spending—ad hoc dismissals from public employment were later overturned by courts, and thus did not result in sufficient fiscal savings. Business climate and labor market reforms generally lagged in large part because reforms to modernize labor laws and harmonize regulations and taxation across entities remained unaddressed. Coordination and cooperation among various arms of government was also subpar1.

5. In 2015, the authorities adopted a comprehensive Reform Agenda which promises perhaps the most significant reorientation of the BiH economy since the time of the Dayton Accords. The Agenda builds on the lessons learnt from earlier performance, namely the need to reform labor laws and improve the composition of government spending. It also emphasizes the need to harmonize rules and regulations and to improve intra-governmental coordination.

6. IFIs and the EU have pledged to provide financial and technical assistance to support strong implementation of the Reform Agenda. The EU has asked for meaningful progress in implementation of the Reform Agenda as a precondition for accepting BiH’s application to be a candidate for EU membership, and the international partners, including the IMF, have been coordinating efforts to align, to the extent possible, their individual programs with the Agenda. Over the past year, all governments have drawn up action plans and have taken significant steps towards implementation.

7. The outlook is subject to considerable risks. Intra-governmental cooperation and collaboration is weak and is exacerbated by the complex post-Dayton institutional setup. The upcoming municipal elections in October 2016 pose risks to the timely implementation of policies envisaged under the program. Vested interests, often operating along ethnic lines, pose a threat to restructuring and reorientation of the economy. Economic prospects in BiH are closely linked with advanced Europe, and the risks for secular stagnation in the latter could affect growth prospects. The financial sector could also be a source of risk.

Program Objectives and Policy Discussions

8. The proposed three-year extended arrangement under the EFF will fill BiH’s balance of payments need. The availability of IMF financing will allow the release of compression in public capital spending and fill the balance of payments need over the three years. It will also support policies for boosting economic potential and maintaining macroeconomic stability. The program’s three main objectives are:

  • Raise the economy’s growth potential and boost private sector employment by intensifying structural reforms that improve the business environment and attract investment;

  • Improve the composition and quality of public spending, while gradually lowering public indebtedness;

  • Revive bank lending while safeguarding financial stability through financial sector reforms.

An important cross-cutting intermediate objective is to preserve and strengthen the single economic space in BiH through improved coordination and cooperation (see Box 1).

BiH: Improving National Policy Coordination

BiH has a complex constitutional setup that makes it difficult to make policy changes and implement reforms. Improving national policy coordination is therefore key.

BiH has a state level central government—the Institutions of Bosnia and Herzegovina—two regional entities with high degree of autonomy—the Federation of Bosnia and Herzegovina (FBiH) and the Republika Srpska (RS)—and a small district, Brcko. Furthermore, the FBiH is comprised of ten highly autonomous cantons. The two regional entities have municipalities as well.

The program envisages the following measures:

  • Harmonize regulations and tax laws across entities;

  • Preserve the integrity of the system of indirect taxes and review the system of revenue allocation of indirect taxes among the various levels of government—including within entities—with a view to simplifying it and making it more automatic;

  • Enhance revenue collection through information sharing among the four tax agencies;

  • Strengthen controls over lower levels of government and extra-budgetary funds, including by adopting a new Law on Public Revenue Allocation in the FBiH;

  • Document the stock of arrears in lower levels of government, including by establishing a reporting system for capturing arrears;

  • Improve national level oversight of systemic risks and coordination among financial sector regulatory agencies and introducing cross-participation in executive boards; and

  • Introduce new banking laws that are harmonized across the two entities.

A. Structural Reforms to Boost Growth and Create Jobs

Successful implementation of ambitious structural reforms is essential to improve the business environment and labor market outcomes.


9. There is a large unfinished agenda of reforms needed to improve business climate though there has been some progress in recent years. The World Economic Forum ranks BiH as the least competitive economy in the region, at 111 out of 140 countries globally, largely because of a poor business climate. Fund staff see severe labor market rigidities, including a large tax wedge on employment. The public sector is large and inefficient, with significant government involvement in a broad range of sectors, including pharmaceuticals, aluminum, tobacco, insurance. Many public utilities (telecoms and railways) are loss making or, are seeing a secular decline in profits. Structural reforms face heavy resistance from vested interests, often along ethnic lines. Not surprisingly, critical structural reforms have either stalled or have progressed slowly over the past two decades. More recently, however, there has been some progress. Both entities adopted new labor laws over the last year that are more conducive to creating jobs than before. The Federation of Bosnia and Herzegovina (FBiH) has launched a new employment program to increase first time employment of young workers.


Global Competitiveness Ranking

Citation: IMF Staff Country Reports 2016, 291; 10.5089/9781475535556.002.A001

1/ 2007-08 ranking are used when 2006-07 rankings are not available.Source: World Economic Forum (2015)


10. Planned reforms should help improve the business climate and enable the private sector to contribute to growth, including through creating jobs. The authorities plan to:


Total labor cost at average wage, percent

Citation: IMF Staff Country Reports 2016, 291; 10.5089/9781475535556.002.A001

Sources: Eurostat and IMF staff calculations.Note: EU data refers to 2013, while Western Balkan (WB) data refers to 2014.
  • Reduce the labor tax wedge. The high overall tax burden on labor, especially in the FBiH, needs to be lowered. An important element is reducing the social security contribution (SSC) rate in both entities, while broadening the Personal Income Tax (PIT) and SSC bases by taxing all work-related income (including allowances; effective from January 2017). The authorities will lower SSC in a deficit neutral manner. Improvements in tax administration will also help make up for the SSC rate reduction;

  • Enhance the functioning of the labor market. Following the adoption of the new entity labor laws, new collective bargaining agreements will need to be negotiated. The new labor laws will need to be supported by stepped-up labor inspections, and by strengthening the system of unemployment benefits and active labor market policies;

  • Lower the administrative burden on businesses, including by harmonizing regulations between the entities and reducing para-fiscal fees at all levels of government. In line with lowering the tax burden on labor, the solidarity contribution in the Republika Srpska (RS) and the special contribution against natural disasters in the FBiH will be eliminated. The entities will also simplify business regulations, including by introducing one-stop-shop solution for company registration in FBiH and aligning this process across the entities;

  • Improve corporate governance and efficiency of SOEs. The FBiH government will restart the privatization process, with the objective of improving competitiveness and reducing risks to public finances. It has classified SOEs and public companies into those that are strategic, those requiring minor or major restructuring, and those in which the government holds a minority share. Minority shares of several companies will be sold. The status of the remaining SOEs will be addressed either through restructuring and possible privatization or bankruptcy/liquidation. The FBiH government will complete the financial and operational due diligence for the strategically important BH Telecom and HT Mostar (structural benchmark, SB), and discuss options of either making these companies profitable and/or privatizing them. The entity governments will adopt restructuring plans for railways by end-December 2016 (SB), and for power and gas sector utilities in 2017 (LOI ¶10);

  • Improve the bankruptcy and legal dispute resolution processes. The FBiH government has started to reform its commercial dispute resolution framework, and will adopt a new bankruptcy legislation by end-September 2016. The RS parliament approved a new bankruptcy law in February 2016. The FBiH will conduct a feasibility study on whether it should establish specialized commercial courts, while the RS will improve the functioning of commercial courts to speed up the processing of commercial and labor disputes.

  • Finalize the process of WTO accession and resolve trade issues with the EU.

B. Employing Fiscal Policy to Support Growth While Ensuring Sustainability

Fiscal policy will create the space to improve the quality and efficiency of public spending while ensuring medium-term sustainability.


11. There is need to strike a balance between ensuring medium-term sustainability on the one hand and creating space to reorient spending while supporting the nascent recovery with a more efficient allocation of spending on the other. Following an increase in the overall budget deficit to 3 percent of GDP in 2014 because of natural disaster (floods), there was a strong fiscal consolidation in 2015 induced by financing constraints with the budget in near balance. This led to an unwarranted compression in public investment spending. With the economy still operating below potential a balanced structural position would be warranted over the next few years to ensure a gradual decline in public indebtedness


Composition of Expenditure


Citation: IMF Staff Country Reports 2016, 291; 10.5089/9781475535556.002.A001

Source: BiH authorities and IMF staff calculations.1/ Net acquisition of nonfinancial assets2/ Expense

12. The focus of fiscal policy should be on reducing current spending and improving the composition and quality of government spending. To boost potential growth, it is necessary to reduce the excessively large current spending, mainly comprising a heavy wage bill, so as to reorient resources from public to private sector and increase investment spending.

13. A number of key structural fiscal challenges remain. There is a need to strengthen coordination and cooperation among intergovernmental revenue institutions. There are deficiencies in tax policy and revenue administration and regulation is fragmented between the entities.

14. Fiscal risks. Specific risks emanate from SOEs, including an uncertainty about the size of unpaid social security obligations (estimated to amount to as much as 1.9 percent of GDP). Fiscal buffers are also warranted to mitigate any systemic risks in the financial sector, fiscal indiscipline in lower levels of government and uncovered liabilities of extra-budgetary funds. The stock of arrears in the public sector is unknown and also poses risks to fiscal sustainability. However, the public DSA indicates that debt ratios would remain stable in the event of lower growth.


15. The authorities will aim for a balanced structural position in 2016 and beyond to allow space for high priority spending. Accordingly, the nominal fiscal deficit-GDP ratio is expected to rise slightly to 0.8 percent in 2016 to make room for public investment, as financing constraints are eased. Over the medium term, a balanced structural fiscal position would allow growth to continue to recover and the output gap to close while gradually lowering the debt-GDP ratio by the end of the program period to 40 percent—a level generally deemed appropriate for an emerging economy with a currency board and limited access to international markets.

16. The transition from current to capital spending envisaged in the 2016 budgets will be maintained. The 2016 entity and state budgets restrained the total wage bill while allocating resources for foreign and domestically financed capital spending.2 This should continue going forward, augmented by a sustainable reduction in public sector employment. The authorities will sustain the effort, over the program period, to shrink current spending—lowering its share in GDP to 37 percent in 2019 from 40 percent currently. There would be an increase in the allocation and execution of domestically financed capital investment.

17. Comprehensive fiscal reforms are needed to underpin the fiscal strategy. Main measures include:

  • Strengthen revenue collection and administration and intra-government coordination by: (i) adjusting the allocation coefficient and settle claims of indirect taxes (quarterly SB); (ii) enabling the automated exchange of bulk taxpayer information across the four tax agencies to improve compliance (prior action); (iii) implementing a risk-based approach for compliance activities by all tax agencies; and (iv) increasing efforts to collect outstanding tax debts—through better focus and by pursuing all legal options to enforce collection. Going forward, to improve the transparency and stability of public finances, the authorities will adopt a more simplified and automatic system for revenue allocation of indirect taxes among the various levels of government—including within entities, in line with IMF staff recommendations, by end-December, 2016 (SB).

  • Improve tax system efficiency by: (i) preserving the integrity of the system of indirect taxes by refraining from introducing new exemptions, to ensure continued high level of budget revenues (quarterly indicative targets are set for gross indirect tax revenue collection); (ii) adopting new entity corporate income tax (CIT) laws that foster consistency, avoid double taxation between the entities and harmonize tax rules to enhance the business climate and improve fiscal sustainability, and eliminate tax exemptions from domestic tax codes (LOI ¶15, 2nd bullet; SB).

  • Reduce the public wage bill, sustainably. This would entail: (i) beginning to implement public administration reform, including through a strategic plan to restrain wages and reduce overall employment in the public sector in both entities and the Institutions of BiH level (prior actions) and the introduction of a moratorium on public sector wage increases (continuous SB); (ii) developing registries of public employment including all levels of government; and (iii) operationalizing the strategic plans on reducing public sector employment based on the registries (SB). In addition, quarterly indicative targets are set for current spending of the entity and state central governments (see Annex I.).

  • Improving the quality of social spending and making it sustainable. The FBiH will establish a centralized database of beneficiaries by end-September 2016, and would prepare a report and plan, based on these data, to improve the targeting of social transfers by December 2016 (SB). In addition, to contain the costs of war veterans benefits, the first stage of the audit process confirming the eligibility for war veterans benefits in the FBiH will be completed by end-December 2016, and all stages will be completed by end-June 2017 (SB). To improve the targeting in the RS starting in this year, agricultural subsidies will only be paid to those farmers who register and remain current on their SSC.


Share of Indirect Taxes and C-efficiency 1/

Citation: IMF Staff Country Reports 2016, 291; 10.5089/9781475535556.002.A001

1/ C-efficiency is tax efficiency of VAT, measured as the ratio of VAT revenue to consumption, divided by the standard VAT rate.

General Government Wage Bill, 2015

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 291; 10.5089/9781475535556.002.A001

18. To lower fiscal risks a number of other reforms will be implemented over the program period:

  • State enterprise reform. Some loss-making SOEs have accumulated a sizable stock of unpaid social security contributions and taxes and the FBiH is currently preparing legislation to address the issue of unpaid pension contributions of former SOE employees that are about to retire. The World Bank has indicated it will continue to support this reform, including through a possible financing operation, if the legislation is consistent with the new pension law in the FBiH, and its fiscal cost is kept under control.

  • Pension reform. The FBiH authorities are working with the World Bank on reforming the pension system and the new Law on Pension and Disability Insurance (PIO) and the Law on the Organization of the PIO Fund will be adopted in October 2016. The new set of regulations will improve the sustainability of the pension system, including by increasing the number of contributors, raising the effective retirement age, and broadening the contributions base.

  • Health care reform. The entity authorities are working to improve the sustainability, quality, and efficiency of the health care system. The authorities’ reforms, in which the World Bank is assisting, will address the debts of the health sector and strengthen the financial accountability, controls, and management of health facilities.

  • Strengthening controls over lower levels of government and extra-budgetary funds to fully account for and stop the increase in uncovered liabilities. The FBiH Fiscal Coordination Body, which includes sub-national representatives, is expected to meet at least semi-annually. To strengthen control over lower levels, the FBiH government will amend the Law on Debt, Borrowing, and Guarantees by end-December, 2016 (SB) and adopt the new Law on Public Revenue Allocation by end-March 2017. The entity governments are working with the World Bank to document the stock of arrears in lower levels of government, including by establishing a reporting system for capturing arrears. The authorities are also expanding their treasury systems to lower levels of government, including health centers in the RS and budget management systems in cantons in the FBiH, by end-March 2017 (SBs). The FBiH government will introduce an incentive program for cantons to facilitate the reduction of overall employment and wage bill.

C. Safeguarding Financial Stability While Promoting Credit Growth

The key objectives for financial sector policies are safeguarding financial sector stability, including by strengthening the single economic space, and reviving bank lending to support growth.


19. The currency board arrangement (CBA) has been an anchor of macroeconomic stability in the BiH. While earnings from managing the official foreign reserves at the Central Bank of Bosnia and Herzegovina (CBBH) have been declining due to the low interest rate environment globally, the foreign reserves at the CBBH have been increasing steadily and reached €4.4 billion by end March 2016. The reserves coverage of the monetary base has remained above 110 percent in recent years, which demonstrates the authorities’ continued commitment towards the CBA.

20. The banking system is broadly stable, but vulnerabilities remain. The ratio of non-performing loans (NPLs) to total loans is elevated, and growth in loans to the private sector is still low. A few banks need to improve their capital positions and undergo deeper restructuring of their balance sheets to restore long-term viability. The entity banking agencies have instructed these banks that were under enhanced supervision in 2013 to take remedial measures to address shortcomings identified in the Asset Quality Reviews (AQRs), including by submitting recapitalization plans to the agencies. Two small banks that failed to raise new capital were closed and insured deposits were paid out. Public sector deposits, which are not covered by deposit insurance and which have generally been placed in banks on interest earning criterion, are likely to suffer substantial losses depending on the asset recovery under liquidation. The entity development banks have increasingly engaged in financial sector activities and are not adequately supervised; they pose significant risks to both financial stability and public finance.

21. Deficiencies in the banking sector regulatory framework prevent effective supervision and pose risks to financial stability. Banking oversight in BiH remains fragmented because of insufficient cooperation and coordination among the regulators—the entity-level banking agencies, the Deposit Insurance Agency (DIA), and the CBBH. Insufficient information sharing among the relevant authorities also undermines effective monitoring and mitigation of systemic risks. Furthermore, there are significant shortcomings under the current banking legislations regarding supervisory powers, consolidated supervision, and the bank resolution framework. Strategic deficiencies in the anti-money laundering and combating the financing of terrorism (AML/CFT) standards have also been identified by the Financial Action Task Force (FATF). In the context of a significant presence of foreign banks in the BiH, the banking agencies have enhanced the supervisory framework by signing Memoranda of Understanding (MoUs) with the European Banking Authority and the Austrian Financial Market Authority that would allow for closer cooperation and exchange of information.


22. The authorities are planning to take the following measures to mitigate financial sector risks and revive banking lending:

  • Safeguarding the CBA. The authorities will continue adhering to the CBA as constituted under the law (a continuous SB). To maintain the independence of the CBBH, foreign reserves will not be used for any budgetary or public investment purposes, and there will be no ad-hoc transfers of foreign reserves to the public sector (a continuous performance criterion; LOI¶18). The CBBH will also modernize its practices regarding management of foreign reserves investments with assistance from IMF staff.

  • Addressing weaknesses in the banking sector. Banks that have been under enhanced supervision in 2015 or that experienced excessive credit expansion relative to the market in 2012–14 (i.e., with an average annual credit growth rate greater than 10 percent over that period) and that have not already conducted AQRs need to hire internationally reputable external auditors to conduct detailed AQRs (a prior action). Based on these reviews, the banking agencies will assess the banks’ ability to address any capital shortfall and restore overall soundness, and will take prompt actions to address identified vulnerabilities (SBs; LOI¶20). Public backstops will be put in place for any systemic cases. For the remaining banks in the system, AQRs will be conducted in 2017.

  • Modernizing banking legislation. First drafts of the new banking laws have been completed with assistance of IMF and World Bank staffs. The new laws and needed amendments to the related legislations, once adopted by the respective parliaments (SB; LOI¶21, 1st bullet), will strengthen supervisors’ corrective and enforcement powers, and introduce consolidated supervision of banking groups, and a comprehensive bank resolution framework.

  • Strengthening coordination, cooperation and information exchange among the banking agencies, the DIA, and the CBBH.

    • The new banking laws will include harmonized definitions of systemically important banks (SIBs), determined according to a commonly agreed methodology.

    • The banking agencies, the DIA, and the CBBH will sign a comprehensive Financial Stability Memorandum of Understanding (MoU) that will provide for SIBs a regular exchange of information, joint inspections of the SIBs and quarterly offsite information.

    • The Banking Coordination Group and the Standing Committee for Financial Stability will hold regular meetings to discuss appropriate mitigating measures for systemic risks. Relevant conclusions and policies implemented will also be published in the Financial Stability Report in the reference period (LOI¶21, 2nd bullet).

    • To further facilitate coordination among the financial sector authorities, the governing board meetings of the banking agencies and the DIA will allow participations of senior management from other agencies (LOI¶21, 2nd bullet).

  • Improving the framework for recovering and resolving NPLs. This will include, inter alia: (i) provisions in the new banking laws to support the purchase and sale of NPLs; (ii) a clarification by the Indirect Tax Authority (ITA) that NPL sales by banks are not subject to VAT; and (iii) to analyze possibilities of adopting guidelines for out-of-court restructuring. The authorities will encourage voluntary restructuring of loan agreements between the banks and borrowers, and will refrain from imposing mandatory conversion of any foreign currency-denominated loans into local currency (a continuous SB).

  • Introducing Liquidity Coverage Ratios and raising reserve requirements for banks to rebuild liquidity buffers. The reserve requirement will also be tailored for prudential purposes. The holding period to allow banks under stress to breach the reserve requirements will be increased, and will be supplemented with minimum holding thresholds and higher penalty rates for a breach before more severe sanctions are applied.

  • Improving governance and transparency of the entity development banks. The laws on entity development banks will be amended to clarify developmental objectives and to limit permissible activities including by removing channels to lend directly to the private sector. The banking agencies will subject the development banks to appropriate supervision and regulation. The governance structure of the development banks will be aligned with international best practice and their operations will be kept at arm’s length from the governments (SB; LOI¶23, 24). IMF and World Bank staffs are expected to provide technical assistance.

  • Enhancing standards for placing public deposits. In light of the likely losses to public deposits in the banks under liquidation, amendments of relevant public procurement legislations and public investment standards will be introduced to safeguard public resources.

  • Implementing the outstanding items in the action plan agreed with the FATF. Timely adoption of additional regulatory and legislative changes is needed to prevent the FATF to call its members to apply measures that could hinder cross-border transactions.

Figure 2.
Figure 2.

BiH: Program Objective, Key Policy Areas and Key Measures

Citation: IMF Staff Country Reports 2016, 291; 10.5089/9781475535556.002.A001

Note: lines highlighted with red indicate measures that improve coordination and cooperation among the authorities to preserve a single economic space.

Program Modalities and Risks

23. Staff proposes a three-year extended arrangement under the EFF to help address BiH’s balance of payments financing needs. Given BiH’s high external debt service obligations and limited access to financing, combined with the need for fiscal policy to support growth, there is a balance of payments gap estimated at about 5½ percent of GDP through 2019. In addition to covering the Balance of Payment (BoP) need, IMF financing will allow for fiscal space, consistent with the projected growth path and the need to carry out structural reforms. Within the context of BiH’s currency board arrangement, the financial support will be channeled to the entity central government budgets.3 Over the course of the program, structural and fiscal reforms are expected to boost growth, with rising contribution from the private sector, and this together with improved fiscal sustainability is expected to close the BoP gap.

24. The new Fund-supported program would also help elicit support from the EU and IFIs. Both the EU and the World Bank have confirmed their readiness to provide budget support in parallel with a new Fund arrangement. The EU would shift funding under its Instrument for Pre-Accession Assistance from project to budget support. It is also considering a Macro-Financial Assistance (MFA) program in later years. The World Bank is likely to disburse a Development Policy Loan (DPL) later this year and is planning further support. Each institution is expected to provide about €100–150 million in budget support (together covering about one-third of the financing needs) over the three years. Financing assurances for the first year of the program are in place and the prospects for the remaining period of the program are good.

25. Access of 167.06 percent of quota (SDR 443.042 million, equivalent to about €557 million) would provide sufficient financing to cover the remaining financing gap. The proposed access would cover nearly two-thirds of the financing needs and provide nearly SDR 150 million in net financing during the program period. Access is somewhat frontloaded to allow a release compression in public capital spending brought about by financing constraint. IFI and EU project lending is sizable but outside of direct budget financing, and BiH’s lack of access to international bond markets necessitates high share of Fund budget financing. IFIs may fill contingent budget financing needs, in case risks materialize.

26. The program will be monitored through quarterly reviews, based on: (i) quantitative performance criteria focused on fiscal, monetary and external objectives; (ii) indicative targets on current expense, domestic arrears, general government net lending, stock of accounts payable and gross revenue collection of indirect tax revenues; (iii) structural benchmarks focused on structural, fiscal and financial sector reforms (LOI, Tables 1 and 2). The high degree of fragmentation and lack of coordination in policymaking in BiH argue for conducting program reviews on a quarterly basis. Structural benchmarks are macro-critical or pick up on earlier unfinished reforms. They focus on intra-government coordination, fiscal and financial system risks, reorientation of the economy and important public financial management (PFM) measures.

Table 1.

Bosnia and Herzegovina: Selected Economic Indicators, 2012–21

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Sources: BiH authorities; and IMF staff estimates and projections.
Table 2.

Bosnia and Herzegovina: Real Sector Developments, 2012–21

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Source: BiH, FBiH and RS Statistical Agencies, and Fund staff estimates.Notes: Nominal and real GDP series are based on the production approach.

Based on the BiH Labor Survey. The unemployment rate based on the number of unemployed persons registered in Unemployment Offices is significantly higher.

27. BiH is expected to be able to meet its obligations under the proposed arrangement. The country has a good record in servicing its Fund obligations. Furthermore, the program would lay the foundations for BiH’s return to a sustainable medium-term growth path, thus providing assurances that BiH will be able to discharge its Fund obligations in a timely manner. By the end of the proposed EFF, Fund credit outstanding is projected to be 3.2 percent of GDP or 10.0 percent of gross reserves (Table 10). External debt is projected to decline steadily from 63.7 in 2015 to 59.5 percent of GDP by the end of the program, providing an important buffer in case program performance is weaker than anticipated. Public external debt accounts for slightly less than half external debt through the duration of the program and is projected to decline from 30.3 in 2015 to 28.5 percent of GDP in 2019. The external DSA shows that a real depreciation shock of 30% would bring challenges to debt sustainability, but that is a rather unlikely scenario given the authorities’ commitment to the currency board arrangement.

Table 3.

Bosnia and Herzegovina: Balance of Payments, 2013–21 1/

(In millions of euros, unless otherwise indicated)

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Sources: BiH authorities; and IMF staff estimates and projections.

Based on BPM6.

Table 4.

Bosnia and Herzegovina: General Government Statement of Operations, 2012–21

(Percent of GDP)

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Sources: BiH authorities; and IMF staff estimates and projections.
Table 5.

Bosnia and Herzegovina: General Government Statement of Operations, 2012–17

(KM Million)

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Sources: BiH authorities; and IMF staff estimates and projections.

A share of the financial assistance from the IMF and World Bank in 2014 is disbursed to Brcko District.