Denitsa Mukova in Sofia -

Bosnia’s smaller entity, Republika Srpska, is to borrow $300mn from US-based investor Global Bancorp Commodities & Investment (GBCI) to finance its 2015 and 2016 budgets.

The news is surprising since the Republika Srpska has not previously indicated that it needs to borrow money to patch its budget, although Bosnia and Herzegovina has so far failed to secure a new loan arrangement with the International Monetary Fund (IMF) after the previous arrangement expired in June.

Little is known about GBCI, a Florida-registered entity without a website that first gained publicity when Radio Slovenia reported in March that it had emerged as a potential bidder for Slovenia’s second largest bank Nova KBM, though the bank was sold to US investment firm Apollo Global Management and the European Bank for Reconstruction and Development in June.

GBCI’s director Francesco Biasi said in a statement distributed to the Slovenian press via an unnamed law firm that it planned to create a “multifaceted corporation” spanning several sectors and to use NKBM for investments in the Balkans. The other name associated with GBCI is one Alexander Vasiliev, leading to speculation in the Slovenian media that the firm could be a front for Russian investors seeking to circumvent EU sanctions.

Local news service Capital.ba reported on October 15, quoting a publication in the entity’s state gazette that Banja Luka will borrow $300mn from Global, to be drawn in several tranches in order to avoid raising its debt to 60% of GDP. The repayment period of each tranche will be three years from the date it has been drawn, while the interest rate will be 3%.

The funding is expected to be used for the budget, although it could also be used to raise the capital of state-owned development bank IRB. No government statement has been issued on the deal so far.

Bosnia’s loan agreement with the IMF expired in June and the fund did not provide the final loan tranches of the last agreement, or sign a new deal because of insufficient reforms by Bosnian state institutions.

So far, however, the Republika Srpska has not indicated it will need to borrow money for its budget, although on October 9 its Finance Minister Zoran Tegeltija said the budget may be revised to transfer funds to sectors where they are needed.

“The reason [for the planned revision] is that some sectors will need more funds, while others will not spend what has been planned,” Tegeltija said according to Capital.ba.

According to the 2015 budget, the entity is expected to post a surplus of BAM32mn (€16.4mn) this year. Total budget spending is planned at BAM2.033bn, which is a 5.7% decrease compared to the 2014 revised budget. Revenues from own sources are set at BAM1.588bn.

Recently, the government has been trying to improve its fiscal discipline and cut spending. At the end of August, the government adopted a law on fiscal responsibility, which aims to boost the entity’s public finances management and to raise the responsibility of the public institutions. The law defines the entity’s fiscal framework and limits the public spending. It also aims to improve the efficiency of budget spending and help improving the control and supervision system. According to the new bill, the entity should set up a fiscal council to monitor the spending of state institutions.

Earlier this week the Republika Srpska’s President Milorad Dodik visited Moscow, raising speculation that he could be trying to revive talks on a commercial loan of up to $700mn previously discussed with the Russian government. Following the visit, he announced that Russian VTB Bank - which has previously provided budget loans - is ready to expand its operations to the republic.

Bosnia’s larger entity, the Muslim-Croat Federation, is also seeking to borrow money to compensate for the lack of IMF funding. The federation needs BAM200mn (€102.3mn), which it hopes to obtain from commercial banks. The government has said it is close to striking a deal for the funding, but has not so far named any bank.

Typically, both Bosnian governments adopt balanced budgets, including the costs/incomes for financing the deficits in the total revenue and expenditures accounts.