IMF Executive Board Concludes 2017 Article IV Consultation with Bosnia and Herzegovina

IMF Executive Board Concludes 2017 Article IV Consultation with Bosnia and Herzegovina

IMF Executive Board Concludes 2017 Article IV Consultation with Bosnia and Herzegovina

The FINANCIAL -- On February 9, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bosnia and Herzegovina.

Macroeconomic conditions in Bosnia and Herzegovina have remained stable. BiH has made progress in reducing internal and external imbalances in recent years, thanks to a prudent fiscal position, and a strong monetary anchor provided by the currency board. However, job creation has been limited, unemployment has remained high, particularly among the youth, and the income convergence with the EU has stalled.

Fiscal stability has been maintained, mainly through continued restraint on current government spending. Progress in improving budget composition has been limited and reforms of state enterprises have not progressed as envisaged. While current spending has declined as share of GDP, capital spending has not risen as expected, largely due to financing constraints. The authorities have also undertaken measures to strengthen and safeguard financial stability include modernization of banking sector legislations and addressing banking weakness indicated by asset quality reviews, according to IMF.

The authorities have made some progress in improving the business environment and enhancing the functioning of labor market. However, institutional weaknesses and weak coverage and quality of public infrastructure remain the key factors undermining private sector development and foreign investment. The recent increase in excise duties will facilitate the implementation of key infrastructure projects.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the progress under the Fund‑supported program, which has contributed to macroeconomic and financial stability. However, Directors noted that significant challenges and risks remain. They emphasized that strong ownership and commitment to the program objectives and targets is essential to enhance job creation, boost growth, and achieve income convergence with the European Union.

Directors welcomed the progress in strengthening the business environment and reforming the labor market. However, they noted that stronger reforms are needed to address the remaining weaknesses. They underscored that priority should be given to upgrading physical infrastructure, lowering the fiscal and administrative burden on businesses, further reforming the labor market, improving governance of State‑Owned‑Enterprises, and enhancing competition.

Directors welcomed the authorities’ efforts to maintain a prudent fiscal position. They welcomed the plan to scale up public investment and emphasized that fiscal policy should continue to focus on rebalancing current spending to growth‑enhancing capital expenditures in a sustainable manner. Directors emphasized the importance of strengthening the public finance management framework to mitigate fiscal risks and agreed that decisive measures are needed to tackle the issue of public sector arrears.

Directors commended the authorities for the progress in modernizing and harmonizing banking sector legislations. They underscored that continued efforts are needed to safeguard financial stability and to improve the regulatory framework. In this context, Directors encouraged prompt passage of the new deposit insurance law. They also highlighted the need to reform development banks.