Bosnian leaders put economy ahead of politics to keep IMF deal

Bosnian leaders put economy ahead of politics to keep IMF deal
With a consensus already reached the excise tax reform is not expected to face any obstacles in parliament.
By Clare Nuttall in Bucharest March 22, 2017

In a rare moment of unity, politicians from Bosnia’s two entities have agreed to do their utmost to carry out reforms agreed with the International Monetary Fund (IMF) in time to ensure that the country does not lose its current arrangement with the fund.

The IMF confirmed on March 17 that Bosnia risks losing its loan agreement if it fails to complete a set of reforms including changes to the excise tax regime, but has given Sarajevo until the end of April to achieve this.

Earlier the IMF put the loan agreement on hold and in January, Francisco Parodi, the IMF’s resident representative in Bosnia, said that the fund could delay the disbursement of the second loan tranche worth BAM155mn (€79.3mn) to Bosnia.

“The authorities still need more time to complete the outstanding work to meet several remaining prior actions,” said Nadeem Ilahi, who led the IMF mission to Bosnia, in a statement.

“The mission hopes for strong progress in the implementation of these policies in the coming days – including by the parliaments – to pave the way for consideration of the first review by the IMF executive board by the end of April 2017.”

Progress has already been made, as at the latest session of the fiscal council ministers from Bosnia’s two entities - the Bosnian Federation and Republika Srpska - reached agreement on increasing excise taxes, the most contentious of the four prior actions required by the IMF.

“It seems they have still not agreed on the distribution coefficient between the entities, but most probably they reached a consensus that for the purpose of getting the prior action from the IMF they would push it through the parliament like this, and decide about the coefficient afterwards,” says Ivona Zametica, chief economist/head of research and advisory unit of Raiffeisen Bank dd Bosnia and Herzegovina.

MPs in the state-level parliament are due to vote on the agreement within days, but with consensus already reached it is not expected to face any obstacles.

In addition to raising excise tax, Sarajevo needs to make changes to the law on deposit insurance, while the authorities in the Bosnia Federation have to adopt amendments to the banking agency law and start due diligence at two local telecoms companies, BH Telecom and HT Mostar.

Positive signal

Bosnia and the IMF finally agreed on a new 36-month deal in September, supported by a SDR443.04mn (about €550mn) Extended Fund Facility (EFF). The country had been trying for almost a year to secure a new IMF deal after the previous arrangement expired in June 2015.

While the deal was not essential to financing the two entities’ budgets, it provides some long-term stability about their finances, and also sends out a positive signal to investors. On the other hand, the Bosnian authorities do have the option to tap local markets for funding if the arrangement is scrapped, as they have done in the past.

“In the worst case scenario, if the IMF arrangement fails, they have the back-up option of financing on the local market,” says Zametica. “This would be feasible for this year, taking into account the size of the deficits in the two entities, but it is not a viable long-term solution.”

The Bosnian Federation is planning a deficit of BAM763mn this year, of which it plans to finance BAM282mn with funds from the IMF and other international financial institutions (IFIs) such as the EU and the World Bank, whose funding decisions will depend on the IMF deal remaining in place. Meanwhile, Republika Srpska plans to borrow BAM220mn from IFIs to partly finance its planned BAM522mn gap.

The agreement reached at the fiscal council meeting seems to indicate a more conciliatory tone between politicians representing Bosnia’s entities and ethnic groups after a recent hike in tensions.

“Investors were disturbed by the recent political crisis, but tensions have abated and politicians have started to talk once more about reforms,”according to Zametica.

“The governments of both entities are relying on the IMF, and have sent clear messages that they would like to fulfill the rest of the prior actions agreed with the IMF by the deadline. There is a strong will on both sides, especially in Republika Srpska where the liquidity position is much more demanding than in the Bosnian Federation.”

Previously, politicians from the two entities and the state-level government had blamed each other for putting the IMF deal at risk.

They were also at odds over an attempt by Bakir Izetbegovic, the Bosniak member of the tripartite presidency, to launch an appeal against a 2007 judgment in a genocide case against Serbia. However, the International Court of Justice (ICJ), which made the original ruling, said on March 9 it had dismissed the appeal. Izetbegovic’s move was not approved by the other two presidents – Mladen Ivanic of the Serbs and Dragan Covic of the Croats – and angered many people within Bosnia.

Previously, politicians had clashed over the decision by the authorities in Republika Srpska to go ahead with a referendum on the celebration of its Republic Day holiday, despite this being banned by the state-level constitutional court. A further source of contention was a proposal to create a third entity for the Bosnian Croats.

In addition to helping Bosnia to hold onto its IMF deal, the agreement on excise tax could also unlock future growth in the country, especially in the Bosnian Federation, by paving the way for more investments in road infrastructure. Construction of Corridor 5c, which runs right across Bosnia, has been underway for years and has been progressing extremely slowly. Faster progress would help the Bosnian economy, both by creating employment during the construction phase and – when completed – by cutting transport times across the mountainous country.

The European Bank for Reconstruction and Development (EBRD) said in November it expected major infrastructure projects could considerably boost Bosnia’s GDP, though at the same time it slightly lowered its 2016 growth projection, citing delays to the IMF deal.