IMF delays new €550mn loan deal with Bosnia

By bne IntelliNews July 7, 2016

The executive board of the International Monetary Fund has postponed 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 & Herzegovina as the country’s authorities have not yet sent a properly signed letter of intent (LOI).

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 – 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 goverment and the Federation on the one hand and the Republika Srpska authorities on the other appears to have delayed the signing of the LOI.

“The elements of the programme and the content of the LOI had been agreed by the IMF mission and BiH authorities in May 2016. To date, the IMF has not received a duly signed LOI,” Francisco Parodi, the IMF’s resident representative in Bosnia, said in a statement emailed to bne IntelliNews by the country’s central bank.

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.

According to daily Nezavisne Novine, the letter of intent has not been signed by two of the country’s three prime ministers – Fadil Novalic, the PM of Bosnia’s bigger entity – the Muslim-Croat Federation – and Denis Zvizdic who is heading 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.

At the end of June, Bosnia’s tripartite presidency delayed voting on the adjustment of the SAA, as Republika Srpska rejected the changes.

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.

As Bosnia had not adjusted its SAA, the EU froze the country’s trade privileges at the beginning of 2016. In March, EU enlargement commissioner Johannes Hahn urged Sarajevo to adopt by early May a working coordination mechanism and adjust its SAA in line with Croatia’s entry to the bloc in order to give its membership application credibility.

Adoption of the SAA adjustment, approval of a working coordination mechanism and publication of the 2013 census results by July 1 are three key conditions that the country must meet so that its EU membership application gets the approval of the EU foreign ministers. So far, the country has only published the census results, but they are also objected to by Republika Srpska, which refuses to acknowledge them.

In June, the head of the EU delegation to Bosnia, Lars-Gunnar Wigemark, said that if Bosnia does not adopt the SAA adjustments and the coordination mechanism, the foreign affairs council of the European Union will not accept its membership application in July. Bosnia formally applied for EU membership in February and hopes to get  candidate status next year.

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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