IMF Reaches Staff-Level Agreement with Bosnia and Herzegovina on an Arrangement under the Extended Fund Facility
At the conclusion of the visit, Mr. Ilahi made the following statement:
“IMF staff and the BiH authorities have reached agreement, subject to approval by the IMF Executive Board, on an economic program to be supported by a 36-month SDR 443.04 million (about €550 million or 262 percent of quota) Extended Fund Facility (EFF). Consideration by the Board, expected in July 2016, would follow the implementation of a number of measures.
“The economy is showing firmer signs of recovery. Growth is expected to reach 3.0 percent this year. Inflation has been low, largely reflecting low euro area inflation imported through the currency board arrangement. External and internal imbalances have eased gradually in recent years. While the banking system is liquid and adequately capitalized at the aggregate level, vulnerabilities remain.
“The economic program supported by the EFF would have three main objectives.
“First, improve business environment to attract investment, create private sector jobs, and raise the economy’s growth potential. The following measures are envisaged:
- Improving the functioning of the labor market, including through implementation of the recently approved labor laws.
- Restarting the privatization and restructuring process of state owned enterprises in the FBiH , to help improve economic governance and competition, and reduce fiscal risks.
- Shifting the tax burden away from labor and harmonizing regulations and tax laws between the entities to lower administrative burden on businesses and avoid double taxation.
“Second, ease public indebtedness through gradual fiscal consolidation, while reducing the size of government and improving the quality of government spending. The following measures are envisaged:
- Transitioning away from high levels of public wage bill and employment.
- Improving tax collection through better cooperation among tax agencies, while allocating more revenues for infrastructure investment and improving targeting of social assistance to the vulnerable, including pension reform in the FBiH.
- Strengthening controls over lower levels of government, extra-budgetary funds, and state-owned enterprises.
“Third, safeguarding financial sector stability and reviving credit growth. Some measures include:
- Maintaining the currency board arrangement to anchor policies and to safeguard central bank independence.
- Developing comprehensive strategies to address vulnerabilities in banks, and strengthening operations and oversight of entity development banks.
- Passing laws to modernize banking legislation, strengthening cooperation among the financial sector agencies and addressing the high level of NPLs.
“The Arrangement will play a catalytic role in mobilizing international financial assistance. The European Union and the World Bank are planning to also provide additional financing.”