An International Monetary Fund (IMF) mission, led by Ron van Rooden, visited Banja Luka and Sarajevo during November 6-20, 2013, to discuss recent economic developments and policies for the fifth review under Bosnia and Herzegovina’s Stand-By Arrangement (SBA). At the conclusion of the visit, Mr. van Rooden made the following statement:

“Growing external demand and reduced financial market stresses in Europe, together with prudent economic policies, have helped Bosnia and Herzegovina (BiH) to sustain the modest recovery that started earlier this year. Exports have continued to lead the recovery, and high frequency indicators suggest that the pick-up in economic activity is becoming more broad-based. Real GDP is expected to expand by around 1 percent in 2013 and is projected to pick up further in 2014 to around 2 percent, in line with developments in Europe. Inflation is expected to remain low.

“The authorities continue to make steady progress under the SBA, and program targets for end-September 2013 were met with considerable margins. Steps are being taken to ensure that, despite lower-than-expected indirect revenue collection, end-2013 budget balance targets will be achieved, and that the overall budget deficit for BiH will be contained to about 2 percent of GDP this year. Achieving these objectives, however, will require continued strict expenditure control and improved tax collection.

“The mission reached understandings on government budgets for 2014 that would preserve the gains made so far in fiscal consolidation and place public debt firmly on a downward path. These budgets have been based on prudent revenue assumptions and keep the spending envelopes broadly unchanged from this year’s levels, aiming to achieve an overall budget deficit of just under 2 percent of GDP. Nevertheless, even with strict spending control and efforts to improve revenue collection, it is expected that additional financing needs will arise in late 2014 due to lower one-off revenues and high debt service obligations. To avoid a sharp fiscal contraction that would cause substantial social hardship and undermine the still fragile economic recovery, the authorities request to extend the current arrangement and request additional financial support to help address these financing needs. In addition, the program extension would ensure that the SBA will continue to provide an anchor for the authorities’ economic policies during the election period and the formation of the next governments.

“The mission also made significant progress in discussing the authorities’ structural reform agenda for the remainder of the program, including the period of the requested extension. Policies will build on the progress made so far and be geared toward: (i) continued gradual and sustainable fiscal consolidation, with an increasing focus on improving revenue performance, streamlining the public sector, and preserving the gains from entitlement reforms; (ii) safeguarding financial sector stability through strengthening the legislative and regulatory framework; and (iii) fostering the development of a vibrant private sector that can provide more jobs by improving the business environment and advancing labor market reforms.

“The mission expects to resolve outstanding issues in the coming days, and looks forward to the timely adoption of the 2014 government budgets by the respective parliaments, which would pave the way for consideration of the fifth review under the SBA and the authorities’ request for the extension and augmentation of the current arrangement by the IMF Executive Board before the end of the year.”