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IMF Executive Board 2020 Article IV Consultation with Bosnia and Herzegovina

February 26, 2021

Washington, DC: On February 24, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Bosnia and Herzegovina (BiH).

Before the start of the COVID-19 pandemic, the macroeconomic situation was stable, and the outlook was favorable. BiH was able to achieve macroeconomic stabilization and improve internal and external imbalances. Some important structural reforms were implemented under the government program supported by the 2016 EFF. Growth in economic activity was nearing its potential, supported by rising public infrastructure investments and external demand. But economic growth was below the pace needed to speed up convergence with the European Union. The unemployment rate, while declining, remained high among youth and women.

The pandemic has had severe adverse effects on the economy and the population. Following stabilization of daily cases during pervious summer, daily infections have been at high levels since the onset of the second wave, and the death rate has been particularly high. Economic activity has been severely impacted by the health restrictions put into place to contain the pandemic, which led to a substantial contraction in demand. Tourism has been brought to a standstill and remittances from abroad have plummeted.

Fiscal buffers accumulated in recent years enabled a rapid and strong fiscal response to the pandemic and its aftermath. Related measures included substantial support to the health sector, sizable financial support to severely affected firms, and increased unemployment spending. In addition, loan moratoria were introduced to ease liquidity constraints and credit guarantees have been put in place to help reduce borrowing costs and ensure continued flow of bank credit to hard-hit sectors.

The authorities have made some progress in improving the business environment and enhancing the functioning of labor market. However, institutional weaknesses particularly at the State level, a weak rule of law, poor, public infrastructure quality, and delays in implementing key regional connectivity projects remain the key factors undermining the country’s attractiveness to private sector development and foreign investments.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for their policy response to contain the pandemic and mitigate the crisis by supporting households and firms. Economic growth is expected to rebound this year, although uncertainty related to vaccinations tempers the outlook. Looking ahead, determined policy and reform efforts, building on political consensus, will be crucial to foster a sustainable recovery.

Directors welcomed the budgetary easing adopted to mitigate the economic fallout from the pandemic. Fiscal accommodation should continue but as the recovery gains traction, support should increasingly target the most affected sectors and vulnerable households. Budget composition should gradually transition to controlling current spending and creating space for physical and human capital investments. Directors encouraged the authorities to scale up public infrastructure spending and implement PIMA recommendations. Directors noted the importance of coordinating fiscal policy to ensure its effectiveness.

Directors took positive note of the authorities’ strong commitment to maintain the currency board and safeguard financial stability. They underscored the need to modernize the reserve requirement framework and welcomed the authorities’ consideration of staff’s recommendations in this area. Directors noted the resilience of the banking sector thus far and emphasized the need to continue to closely monitor banks’ balance sheets, as increasing NPLs may require substantial loan-provisioning. They urged the authorities to improve the effectiveness of the loan guarantee programs and make progress on the resolution framework, including by creating a Financial Stability Fund. Directors also recommended enhancing banking supervision and regulation, crisis management, and systemic risk oversight, as well as further strengthening the AML/CFT framework, including by establishing a single account registry for individuals.

Directors pointed to the need to strengthen the single economic space, address high informality, and improve governance, noting the importance of capacity development in strengthening institutions. Adoption of legislation on procurement and electronic identification and enhancing public financial management will help advance these goals. Directors also highlighted the need to strengthen the oversight and governance of public enterprises.

Directors urged the authorities to initiate the transition to a low-carbon economy by implementing policies and legislation consistent with those in the EU. They also encouraged accelerating reforms to address structural unemployment and increase labor-force participation particularly among women and young people.

Bosnia and Herzegovina: Selected Economic Indicators

2017

2018

2019

2020

2021

Est.

Proj.

Nominal GDP (KM billion)

31.4

33.4

35.3

33.2

34.8

Gross national saving (in percent of GDP)

16.2

17.7

18.5

18.4

16.5

Gross investment (in percent of GDP)

21.1

21.1

21.6

21.9

21.5

(Percent change)

Real GDP

3.2

3.7

2.8

-5.5

3.5

GDP Deflator

1.7

2.7

2.6

-0.4

1.1

CPI (period average)

0.8

1.4

0.6

-0.6

1.2

Money and credit (end of period)

Base Money

12.4

10.3

6.9

0.3

6.2

Broad Money

9.5

8.8

8.7

1.1

6.3

Credit to the private sector

7.3

5.6

6.3

-1.2

6.4

(In percent of GDP)

Operations of the general government

Revenue, of which:

42.3

42.7

41.7

41.0

41.0

Taxes

22.3

22.9

23.0

21.9

21.8

Social security contributions

14.9

15.1

15.1

15.9

15.7

Expenditure

40.5

41.0

40.4

46.6

45.4

of which : Investment expenditure

3.5

3.6

3.5

4.8

4.7

Net lending

1.8

1.7

1.4

-5.6

-4.5

Net lending, excl. interest payment

2.6

2.4

2.1

-4.8

-3.6

Total general government debt

39.2

34.3

32.4

38.3

38.6

Domestic general government debt 1/2/

13.3

9.8

9.4

12.2

13.6

External general government debt

26.0

24.5

22.9

26.2

25.0

Balance of payments

(In percent of GDP)

Exports of goods and services

41.0

42.4

40.5

37.8

39.1

Imports of goods and services

57.3

57.2

55.2

50.5

53.5

Trade balance

-16.2

-14.7

-14.7

-12.7

-14.4

Current transfers, net

12.2

12.0

11.7

9.3

9.7

Current account balance

-4.8

-3.3

-3.1

-3.5

-4.9

Foreign direct investment (+=inflow)

3.4

2.9

1.9

1.4

1.3

Gross official reserves (Euro million)

5,411

5,956

6,455

6,730

6,530

(In months of imports)

6.6

7.2

9.0

8.5

7.9

(In percent of monetary base)

112.2

112.0

113.5

118.0

107.9

(In percent of IMF ARA metric)

101.8

102.8

107.2

118.1

110.7

External debt 3/

72.0

64.4

64.3

76.0

69.5

Memorandum Items:

Unemployment rate (national definition)

20.5

18.4

15.7

--

--

GDP per capita (in euros)

4,784

5,146

5,467

5,181

5,445

Output gap (in percent of potential GDP)

0.0

0.5

0.4

-3.1

-2.9

REER (Index 2000=100)

85.6

86.5

85.1

84.6

--

NEER (Index 2000=100)

110.8

113.0

112.9

114.8

--

Sources: BiH authorities; and IMF staff estimates and projections.

1/ On average, half of the domestic debt stock is indexed to the Euro.

2/ The stock of general government domestic debt does not include domestic arrears and those of public enterprises.

3/ Includes inter-company loans in private external debt.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Wafa Amr

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson

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