The authorities of Bosnia and Herzegovina have clinched a new two-year 415 million euro loan with the International Monetary Fund (IMF) in order to fill budget gaps to pay off a previous loan that will mature next year.
In May, the IMF cut its growth forecast for Bosnia’s economy to zero from 0.7%, citing alarming first-quarter economic data and the impact of the crisis in Europe.
The final decision on a new stand-by arrangement will have to approved by the IMF in September, and if granted the money should be available next year. Until then, Bosnian authorities must reduce public spending and do some painful rebalancing of entity budgets.
Bosnia’s Federation entity will have to make savings of 4 million euro in its budget, reducing spending on salaries and benefits to public sector employees. Federation authorities have already announced they would be cutting salaries by 4% in the public sector, where the wages are the highest, but experts claim that cuts must be 20% at least if they are to be effective.
Federation authorities will also be tasked with reducing state subsidies by 10 million convertible marks (KM—approximately 5 million euros) and with stepping up the revision of entitlements given to war veterans. The Republika Srpska entity is expected to suspend new hiring in the public sector until the end of this year.
Both entities have expressed a commitment to conduct various reforms in the public sector, such as audits and better targeting of social benefits, as well as pledging to launch reforms of pension and health funds.
If the authorities fail to meet the IMF’s demands and the new loan is not approved, the country will also face the loss of 100 million euros in loans from the European Commission and 160 million euros in loans from the World Bank.
According to official statements, authorities have agreed to meet IMF demands by September. While the authorities’ track record on fulfilling such promises is poor, with local elections looming, they are likely to move as quickly as possible to ensure the granting of the IMF loan and to quell social unrest. There probability of social unrest at this point is greater without a new IMF loan than it is in the face of the reforms required to receive the IMF loan.
Bosnia and the IMF sealed a similar arrangement in 2009, for 1.2 billion euros, but so far, the country has withdrawn only one-third of the loan amount as they have failed to implement conditions demanded by the IMF.
With the new loan, of the total amount, all is earmarked for the entity governments and none will be directed to state institutions.
Without the new loan, entity governments would be unable to begin repaying the previous loan and would be unable to fill in budgetary gaps. The estimates are that Federation entity will be 175 million euros in deficit, while Republika Srpska will short some 120 million euros.
Bosnia’s entities spend more than half of their budgets on wages and welfare handouts, mainly to veterans and other groups with claims related to the 1992-95 war. Most of the remainder is directed to the huge administration. The country has 180 ministers and far more developed countries like Germany could not financially bear such administrative expenses.
Unless the authorities drastically revamp budget spending to reform the administration and its social politics, any further loans will only provide temporary solution and longer-term problems, particularly due to the fact that the entity governments have no strategy for repaying the loans.
by Anes Alic for ISA Intel. Copyright 2012 ISA Intel. All rights reserved