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IMF Reaches Staff-Level Agreement with BiH on the First Review under the Extended Fund Facility

SARAJEVO – An International Monetary Fund mission, led by Nadeem Ilahi, visited Bosnia and Herzegovina during November 9-22, 2016 to conduct discussions on the first review of BiH’s Extended Fund Facility. At the conclusion of the visit, Mr. Ilahi made the following statement:

“Bosnia and Herzegovina’s economic program remains on track. IMF staff and the BiH authorities have reached agreement, subject to approval by the IMF Executive Board on the policies needed to complete the first review under the EFF. Consideration by the Board would follow the implementation of a number of measures.

The economy continues to recover. Growth is expected to accelerate to above 3 percent in 2017, following estimated growth of 2.6 percent in 2016. The consumer price index is expected to drop by almost 1 percent this year, but inflation is expected to turn positive in 2017 reflecting the Euro area inflation forecast imported though the currency board arrangement. The unemployment rate remains unacceptably high, especially among the youth. While the banking system is liquid and adequately capitalized at the aggregate level, vulnerabilities remain.

Improving the business environment to attract investment, create private sector jobs, and raise the growth potential is of paramount importance. The authorities are in the process of improving the functioning of the labor market by shifting the tax burden away from labor and by continuing to implement new labor legislation. Restructuring and privatization of state owned enterprises will help improve economic governance and competition. Raising excise taxes on fuel will generate resources to construct highway Corridor Vc, which will improve connectivity, competitiveness, and thus raise growth.

Fiscal performance in the third quarter of 2016 was broadly in line with program targets. The authorities have prepared 2017 budgets that are consistent with improving the quality of public spending and reducing the public debt to GDP ratio over the medium term. It will be critical to continue to strengthen tax administration and to strictly limit expenditures to meet program targets. We support the authorities’ efforts to harmonize tax laws to lower the administrative burden on businesses.

Financial stability has been maintained. International reserves held by the Central Bank of Bosnia and Herzegovina provide strong backing to the currency board arrangement. Credit growth is recovering but remains low, affected by high-non performing loans and subdued credit demand. Banking sector agencies have taken actions to address vulnerabilities in banks and strengthen cooperation among them. The mission welcomes the authorities’ plans to enact new banking legislation at the entity and state levels that is in line with international best practice.

The Executive Board of the IMF is expected to discuss the first review in the first quarter of 2017. Approval of the review would enable the disbursement of SDR 63.4125 million (about euro 80 million). Bosnia and Herzegovina’s 36-month EFF arrangement was approved on September 7, 2016.“

The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will result in a Board discussion.

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