The International Monetary Fund (IMF) said on May 24 it has reached an agreement with Bosnia & Herzegovina on new 36-month deal, supported by a SDR443.04mn (about €550mn) Extended Fund Facility (EFF).
Bosnia has been trying for almost a year to secure a new IMF deal after the previous arrangement expired in June 2015. The new deal will help 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.
“The arrangement will play a catalytic role in mobilising international financial assistance. The European Union and the World Bank are planning to also provide additional financing,” Nadeem Ilahi, who led an IMF mission to Bosnia that ended on May 24, said in a statement.
However, the agreement, which should be approved by the IMF’s executive board in July, must be followed by a number of measures to improve the business environment in order to attract investment, create private sector jobs and raise the economy’s growth potential. The measures, agreed by the country’s authorities and the fund, include improving the functioning of the labour market, privatisation and restructuring of state-owned firms and easing the tax burden for companies.
Bosnia will have to also take steps to ease public indebtedness through gradual fiscal consolidation. Tax collection should be improved and the control over lower levels of government, extra-budgetary funds, and state-owned enterprises must be strengthened.
The third area of reforms required by the IMF is in the banking sector. This was the most sensitive of all topics during the negotiations with the fund and provoked a series of investigations of banks in Republika Srpska, Bosnia's smaller entity, which led to a number of arrests earlier this year.
According to the IMF’s requirements, Bosnia will have to take measures to keep its central bank independent, develop comprehensive strategies to address vulnerabilities in banks, and strengthen operations and oversight of development banks in the two entities. The country is also required to modernise its banking legislation, strengthening cooperation among the financial sector agencies and addressing the high level of non-performing loans (NPLs).
Sarajevo has been eager to sign a new IMF deal. In April, Prime Minister Denis Zvizdic said somewhat prematurely that he had reached an agreement with the fund following talks with IMF and World Bank officials in Washington.
Raiffeisen Bank financial analyst Srebrenko Fatušić told bne IntelliNews in early May that lack of IMF funds had not so far caused any major fiscal problems. "[B]oth entities are still able to cover the entity deficits by issuing debt securities on local markets. Therefore, the signing of the [stand-by arrangement] SBA agreement is still not a matter of urgency but according to both entity governments, the new SBA is the best way to provide the fiscal stability of the country in the medium-term (three years) emphasising strong commitment to further cooperation with the IMF," Fatušić said.
During its previous visit in June 2015, the IMF concluded that Bosnia needed more time to complete a number of policies in several areas, including measures to improve the functioning of the labour market, strengthen tax collection, enhance bank oversight, and improve the business environment, in order to quality for a new agreement. The previous agreement expired at end-June, 2015. In January 2015, the IMF decided to delay the disbursement of a loan tranche because of lack of reforms.
Bosnia economy is expected to grow by 3.0% in 2016, slowing from an estimated 2.8% in 2015, the IMF said on April 12 in the spring edition of its World Economic Outlook report, confirming its October forecast. The IMF also projected that GDP growth will accelerate growth to 3.2% in 2017 and will further strengthen to 4.0% in 2021.