Bosnia pledges to cut public sector, strengthen banking system to get IMF deal

Bosnia pledges to cut public sector, strengthen banking system to get IMF deal
By Denitsa Koseva in Sofia July 10, 2016

Bosnia & Herzegovina has pledged to undertake a number of reforms aiming to improve fiscal and banking stability in order to strike a new deal with the International Monetary Fund (IMF), according to the country’s letter of intent that is yet to be signed by two of three authorities.

The state-level government has many times refused to publish the letter, which was leaked by local media on July 8. It was published the day after the IMF said that its executive board is postponing a meeting at which it was expected to give final approval to the new 36-month deal, supported by a SDR443.04mn (about €550mn) Extended Fund Facility (EFF), with Bosnia as the country’s authorities had not yet sent a properly signed letter of intent.

The letter of intent has not been signed by two of the country’s three prime ministers – Fadil Novalic, the prime minister of Bosnia’s bigger entity the Muslim-Croat Federation, and Denis Zvizdic who heads the state-level government. They have reportedly refused to sign the letter until Republika Srpska agrees to the adaptation of the country’s Stabilisation and Association Agreement (SAA) with the EU.

According to the letter, Bosnia will lower the number of employees in the public administration, freeze their wages and cut some taxes by end-2016. At the same time, the country has to improve tax collection. The profit tax laws in the two entities should be unified and benefits for exporters cut, while encouraging investors.

The country’s budget deficit should be lowered to 0.3% of the GDP by 2019 from an estimated 0.9% for 2016. The public debt should also go below 40% of GDP in the mid-term.

Bosnia has also pledged to cut contributions in order to encourage companies to hire more people. At the same time, the long-delayed hike of excise duties on fuels and alcohol should be finalised.

Another area where Bosnia will have to brace for serious reforms is the banking sector. The country has pledged to revise the assets of the banking sector in each of the two entities with the deadline being set at end-June 2016 for the Federation and end-September for Republika Srpska. Banks with low capital adequacy ratios will be required to draft plans for improving them by either capital hikes or restructuring. The deadline for this step is end-August for the banks in the Federation and end-November for those in Republika Srpska.

The two entities are also required to draft new banking laws, which should meet the EU and Basel criteria. Those laws should secure better supervision and remove mandatory reserves on deposits of public sector. Also, the two entities should improve their legislation in order to reduce the share of non-performing loans.

According to the letter, the Federation has also pledged to restart the privatisation of state-owned companies, including selling state stakes in the blue-chip drug producer Bosnalijek and the insurance company Sarajevo Osiguranje by end-July 2016. Two other big companies – tobacco maker Fabrika Duhana Sarajevo and aluminium maker Aluminij Mostar - should be privatised by end-March, 2017.

In May, the IMF and Bosnia finally agreed on a new deal following a year of difficult negotiations after the country’s previous arrangement expired in June 2015. The new deal will help the governments of Bosnia’s two entities to patch their budget gaps and will give them some stability in the next three years. However, a disagreement between the national government and the Federation on the one hand and the Republika Srpska authorities on the other appears to have delayed the signing of the letter of intent.

A delay in finalising the deal between Bosnia and the IMF could seriously endanger the budgets of the Federation and Republika Srpska, and could also lead to a delay in additional financing that was expected to be provided to the country by the EU and the World Bank after the agreement with the IMF is finalised.

After the executive board’s session has been delayed, the governments of the two entities issued statements, explaining their positions. According to Republika Srpska, the entity is not responsible for the delay, while the Federation claims that it has acted responsibly by refusing to sign it.