IMF executive board approves €553.3mn loan deal with Bosnia

IMF executive board approves €553.3mn loan deal with Bosnia
By Denitsa Koseva in Sofia September 8, 2016

The International Monetary Fund (IMF) said late on September 7 it has approved a three-year extended arrangement with Bosnia & Herzegovina for an amount equivalent to SDR443.042mn (€553.3mn). The IMF will immediately disburse around €79.2mn to Bosnia, and the remainder will be available in 11 installments subject to quarterly reviews.

The new arrangement under the Extended Fund Facility (EFF) will unlock much-needed fresh funds for the governments of Bosnia’s two entities after more than a year of often tense negotiations. On September 6, Bosnia’s government decided to initiate procedures to draw the first tranche of the loan and hopes to get it on September 9.

The new deal with the IMF will also bring Bosnia fresh cash from the European Union. The country is expected to get around €2bn in funding from the EU in the next four years. The condition for unlocking those funds was the successful completion of the deal with IMF.

Bosnia and the IMF agreed the parameters of the new agreement in May, almost a year after the country’s previous arrangement expired in June 2015. The new deal will help the governments of the Muslim-Croat Federation and Republika Srpska to patch their budget gaps and will give them some stability in the next three years.

Two months ago, Sarajevo came close to losing the new agreement with the IMF as Bosnia missed the technical deadline to send its letter of intent to the Fund amid an internal dispute. The prime minister of the Federation, Fadil Novalic, and the head of the state-level government, Denis Zvizdic, declined to sign the letter until Republika Srpska finally agreed to the adaptation of the country’s Stabilisation and Association Agreement (SAA) with the EU and agreed on a mechanism for working coordination with the EU. On July 18, the country initialed the SAA adaptation. At the end of July, Bosnia finally sent a properly signed letter of intent.

The new loan deal will be focused on three main objectives: structural reforms, fiscal policy and the financial sector. The IMF will help Bosnia raise its growth potential and boost private sector employment.

“The recovery of the economy of Bosnia and Herzegovina after the global financial crisis has been on a good track,” Tao Zhang, IMF deputy managing director and acting chair of the executive board, was quoted as saying following the discussions on the new deal with Bosnia.

Zhang also urged Bosnia to speed up structural reforms in order to achieve faster growth.

“The recent adoption of the entity labour laws is welcome, but continued progress is needed to improve private sector incentives for job creation, including by addressing the very high labour tax wedge,” he said.

The country should speed up structural reforms that improve the business environment and attract investment in order to raise employment. Bosnia has one of the highest unemployment rates in the world. According to the latest data from the country’s labour and employment agency, it stood at 41.6% at end-June.

The IMF will also support Bosnia in improving the composition and quality of public spending, while gradually lowering public indebtedness. The IMF said in the statement that Bosnia should reduce current spending to create room for much needed infrastructure investment.

“The authorities’ commitment to reduce public sector employment is appropriate. Together with improved targeting of social spending and the envisaged pension and health care reforms, this will help put the debt-to-GDP ratio on a gradual downward path,” Zhang said in the statement.

The country will also have to revive bank lending and credit growth while safeguarding financial stability through financial sector reforms. “It will be critical to closely monitor bank vulnerabilities, while improving efficiency and effectiveness of banking supervision, including through better coordination and cooperation among the regulatory agencies,” Zhang said.