Bosnia to lose out on new IMF deal after failing to send letter of intent

By bne IntelliNews July 22, 2016

Bosnia & Herzegovina failed to send a properly signed letter of intent to the International Monetary Fund (IMF) by the deadline that expired on July 21, losing the chance to sign a new agreement with the fund, daily Nezavisne Novine reported.

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. Earlier in July, Francisco Parodi, the IMF’s resident representative in Bosnia, warned that if Bosnia failed to send the letter "within days", the IMF would require a new round of talks and revise the macroeconomic scenario for the country. This process would take months.

The new deal would have helped the governments of Bosnia’s two entities – the Muslim-Croat Federation and Republika Srpska – 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.

The delay will put at risk the fiscal stability of Bosnia’s two entities as they are relying on a fresh deal with the IMF. It 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.

Bosnia’s state-level Prime Minister Denis Zvizdic and the head of the government of the Federation declined to sign the letter until Republika Srpska to the adaptation of the country’s Stabilisation and Association Agreement (SAA) with the EU and agrees on a mechanism for working coordination with the EU. On July 18, the country initialed the SAA adaptation, but the coordination mechanism is yet to be adopted.

The SAA entered in force on June 1, but was signed in 2008, before Croatia’s entry to the union. Before Croatia’s entry to the EU, Bosnia was one of its main export markets. After joining the bloc in July 2013, Croatia had to leave the Central European Free Trade Agreement (CEFTA) and temporarily lost its customs tariffs privileges. As a consequence, its exports to Bosnia fell significantly. Republika Srpska declined to sign the SAA adaptation, claiming that it would severely damage its agricultural sector, although ultimately, the entity agreed to ink it.

The coordination mechanism has also been criticised by Republika Srpska’s authorities. In February, before the country filed its EU membership application, the state-level government announced it had adopted the mechanism. However, this angered officials in Republika Srpska, who said they had not been consulted on the move. The entity’s government demanded the mechanism be cancelled and a new one be adopted with its input.

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