Bosnia and Hercegovina

COUNTRY REPORT

November 2000

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising conferences and roundtables. The firm is a member of The Economist Group.

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ISSN 1462-673X

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK Bosnia and Hercegovina 1

Contents

3 Summary

4 Political structure

6 Economic structure 6 Annual indicators

7 Outlook for 2001-02 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

23 Economic policy

25 The domestic economy 25 Output and demand 26 Employment, wages and prices

28 Foreign trade and payments

List of tables

10 BiH: international assumptions summary 11 BiH: forecast summary 13 BiH: Nov 2000 elections, BiH House of Representatives 13 RS: Nov 2000 elections, president & vice-president slate 14 RS: Nov 2000 elections, National Assembly 14 Federation: Nov 2000 elections, House of Representatives 15 Federation: Nov 2000 elections, cantons 26 BiH: industrial production 27 BiH: labour statistics, 2000 28 BiH: retail prices 29 Federation: trading partners, Jan-Aug 30 BiH: current account, Jan-Jun 2000

List of figures

12 BiH: gross domestic product 12 BiH: current-account balance 28 BiH: retail prices

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Bosnia and Hercegovina 3

Summary

November 2000

Outlook for 2001-02 The third post-war general election in Bosnia and Hercegovina (BiH) on November 11th 2000 marks the return to power in the Republika Srpska (RS) of the nationalist Serbian Democratic Party (SDS), which has captured the presidency. Nationalist parties have secured a presence in BiH’s parliaments for the next four years, and will probably take part in the RS government, although in the Federation and the BiH parliament the non-nationalist Social Democratic Party (SDP) may share power with other parties. The elections may lead to a rethink of the West’s strategy. The EIU has revised its forecast slightly downwards, to 7.5% real GDP growth in 2001 and 7% in 2002, mainly owing to a likely slowdown in both gross fixed investment and in public consumption. The current-account deficit should narrow in 2001 after widening in 2000, as the trade deficit falls with broadly favourable external factors over the forecast period.

The political scene The November 2000 elections showed that many Bosnians were still prepared to vote for nationalist parties, although the moderate SDP made gains in the BiH and Federation parliaments. The outgoing RS prime minister, Milorad Dodik, was defeated for the RS presidency by the candidate for the SDS, which also performed well in the RS parliamentary election, and the party looks set to return to power after several years in opposition. For Western officials, Bosnian Croat “defiance” has been a particular concern: the Croatian Democratic Union of BiH (HDZ BiH) held a parallel referendum on changing the Dayton dispensation. There has been increasing evidence of international impatience with BiH politics.

Economic policy Strengthening the central BiH state has had budget implications. The high representative, Wolfgang Petritsch, has imposed a solution on pension reform. BiH now has a State Court. The IMF has delayed disbursing the next tranche of its stand-by credit. Privatisation in the Federation has resumed.

The domestic economy Federation industrial output growth has slowed down, and construction growth has levelled off. Household demand in the Federation is still strong. Inter-entity trade has slackened. Unemployment has increased throughout BiH as employment has stagnated. Wages have continued to increase, and retail prices have edged higher.

Foreign trade and The trade deficit is still large. Switzerland is taking most Federation exports, payments and Croatia supplies most Federation imports. A trade agreement has been reached with Croatia. The current-account deficit should increase in 2000 before falling again. Foreign investment is set to rise.

Editors: Michael Taylor (editor); Gavin Gray (consulting editor) Editorial closing date: November 20th 2000 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report November 2000 © The Economist Intelligence Unit Limited 2000 4 Bosnia and Hercegovina

Political structure

Official names Bosnia and Hercegovina (BiH) has legal existence within the boundaries of the former Yugoslav republic of the same name. It comprises two entities: the Federation of Bosnia and Hercegovina (which is often referred to simply as the Federation), set up by the Washington Treaty of March 18th 1994, and the Republika Srpska (RS)

Form of state BiH has the following limited responsibilities under the Basic Principles agreed in Geneva and New York in September 1995, and confirmed at Dayton, US, on November 21st: the establishment of a Constitutional Court, a Commission for Displaced Persons, a Human Rights Commission, a central bank, public corporations to manage and operate transport and telecommunications, a Commission to Preserve National Monuments, and a system of arbitration between the two entities. Foreign trade is also supposed to be managed by the government of BiH

Legislatures BiH has a bicameral parliament comprising the House of Representatives and the House of Peoples, two-thirds of whose members are elected from the Federation and one-third from the RS. A valid majority requires the support of at least one-third of the members representing each entity. The Federation and the RS have their own parliaments

National elections November 11th 2000. Next elections: parliamentary, November 2004; presidential, by September 2002

Head of state BiH has a rotating collective presidency of three, elected on September 12th-13th 1998: Zivko Radisic (current chairman), Ante Jelavic and Halid Genjac (acting pending the election of a successor to Alija Izetbegovic, who resigned on October 14th 2000)

National government The Council of Ministers as reorganised in April 2000 comprises six ministers, one of whom is appointed chairman (prime minister) on a rotating basis for eight months at a time. The current government was approved on June 22nd 2000, with a rotation of chairman on October 18th. The entities have their own governments

Main political parties Croatian Democratic Union of BiH (HDZ BiH); New Croatian Initiative (NHI); Party of Democratic Action (SDA); Party for BiH (SzBiH); Social Democratic Party (SDP); Democratic Socialist Party (DSP); Party of Democratic Progress (PDP); Party of Independent Social Democrats (SNSD); Serbian Democratic Party (SDS); Serbian People’s Alliance (SNS); Serbian Radical Party of Republika Srpska (SRSRS); Socialist Party of Republika Srpska (SPRS)

International involvement The Dayton agreement called for the appointment of a high representative, a senior foreign diplomat charged with monitoring the implementation of the agreement and co-ordinating the activities of international organisations operating in BiH. The high representative is advised by the Peace Implementation Council (PIC), which includes all the signatories to the Dayton agreement. Since December 1997 the high representative has been able to impose decisions in cases of disagreement and to dismiss officials who obstruct the Dayton agreement

National governmenta Chairman & human rights & refugees Martin Raguz (Croat) Civil affairs & communications Tihomir Gligoric (Serb) European integration Bisera Turkovic (Muslim) Foreign affairs Jadranko Prlic (Croat) Foreign trade & economic relations Mirsad Kurtovic (Muslim) Treasury minister Spasoje Tusevljak (Serb)

Central Bank governor Peter Nicholl

High representative Wolfgang Petritsch

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Federationa President Ejup Ganic Vice-president Ivo Andric Luzanski Prime minister Edhem Bicakcic Deputy prime minister & minister of finance Dragan Covic

Key ministersa Defence Miroslav Prce Education, science, culture & sports Fahrudin Rizvanbegovic Energy, mining & industry Mirsad Salkic Environment Ramiz Mehmedovic Health Bozo Ljubic Interior Mehmed Zilic Justice Barisa Colak Social affairs, refugees & displaced persons Sulejman Garib Trade Branko Ivkovic Transport & communications Besim Mehmedic

Republika Srpskaa President vacant Vice-president Mirko Sarovic Prime minister Milorad Dodik

Key ministersa Defence Manojlo Milovanovic Education Nenad Suzic Energy & mining Vladimir Dokic Finance Novak Kondic Foreign economic relations Savo Loncar Health Zeljko Rodic Industry & technology Djuradj Banjac Interior Sredoje Novic Justice Cedo Vrzina Trade & tourism Nikola Kragulj

a Outgoing. Mr Dodik had led a caretaker administration in Republika Srpska since the September 1998 election.

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Economic structure

Annual indicators

1996 1997 1998 1999a 2000a GDP at market prices (KM m) 412,463b 6,367b 7,244b 8,043b 8,988 GDP (US$ bn) 2.7 3.4 3.9 4.4 4.4 Real GDP growth (%) 69.0 30.0 12.0 10.0c 8.5 Retail price inflation (av; %) Federation –24.5 10.8 5.1 –0.3c 2.0 Republika Srpskad 17.0 –7.0 2.0 14.1c 9.0 Population (year-end; m) 4.2e 4.2e 4.2e 4.3 4.3 Exports of goods fob (US$ m) 336f 575f 817f 973f 950 Imports of goods fob (US$ m) 1,882f 2,333f 2,526f 2,388f 2,450 Current-account balance (US$ m) –1,306f –1,482f –1,234f –947f –875 Foreign-exchange reserves excl gold (US$ m) 235 80 175 475c 500 Total external debt (US$ bn) 3.6f 4.1f 3.0f 3.2f 3.4 Exchange rate (av; KM:US$)g – – 1.76 1.83c 2.10

November 10th 2000 KM2.27:US$1; KM1.96:¤1

Origins of gross domestic product 1998 % of total Components of gross domestic product 1998 % of total Agriculture, fisheries & forestry 16.0 Consumption 100.4 Industry & utilities 22.5 Gross investment 38.0 Construction 5.7 Exports of goods & services 35.1 Services 55.8 Imports of goods & services –73.5 Total 100.0 Total 100.0

Main destinations of exports 1999 % of total Main origins of imports 1999 % of total Federation Federation Croatia 24.9 Croatia 28.3 Switzerland 14.7 Slovenia 16.5 Italy 13.1 Germany 11.8 Germany 10.8 Italy 9.0 Republika Srpska Republika Srpska Yugoslavia (Serbia-Montenegro) 43.2 Yugoslavia (Serbia-Montenegro) 23.1 Italy 16.6 Slovenia 11.1 Germany 4.7 Italy 9.6 Slovenia 3.2 Hungary 7.6 a EIU estimates. b Source: Central Bank of Bosnia and Hercegovina (CBBiH). c Actual. d KM-based index. e Source: European Bank for Reconstruction and Development; includes refugees abroad. f IMF and authorities’ estimate. g Convertible marka (KM) introduced in June 1998 and fixed at KM1:DM1.

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Outlook for 2001-02

Political outlook

Domestic politics The third post-war general election in Bosnia and Hercegovina (BiH) on November 11th 2000 disappointed those who had expected a decisive turning away from nationalism. Parliaments have been elected for BiH and its two entities for the next four years, so the West will have to adjust to the con- tinuance of the politics of ethnic division for some time to come.

Support for the nationalists continues to be strong, particularly in the Republika Srpska (RS) and among Bosnian Croats. On the basis of incomplete results on November 19th, the candidate of the Serbian Democratic Party (SDS, which led the wartime Bosnian Serb statelet), Mirko Sarovic, is set to win the RS presidency, and the party is likely to lead a coalition government with other parties. The SDS, formerly led by Radovan Karadzic, who has been indicted for war crimes by the International Criminal Tribunal for former Yugoslavia (ICTY) in The Hague, claims to have undergone a transformation, although many observers harbour serious doubts about the party’s orientation and intentions. The ethnically based Croatian Democratic Union of BiH (HDZ BiH) still has no serious challenger in the Federation cantons with a Croat majority. However, it appears that no party in either of BiH’s two entities has won an outright majority at both the entity and the state level. This could give some help to the peace-building process in BiH, where economic reform and democratisation has been blocked by the nationalist parties. Given time, the West’s tactic of changing the electoral system to encourage local politics may eventually overcome ethnically based politics, but the changes came too late for the 2000 elections, which have set the tone at least for the short term.

The struggle between the nationalist parties and the opposition could be tight in the Federation parliament, where a possible coalition between the moderate Social Democratic Party (SDP) and the Party for BiH (SzBiH) could challenge, or at least dilute, the dominance of the HDZ BiH and the third main nationalist party, the Party of Democratic Action (SDA; Muslim).

There is a risk that the West’s attempts to manipulate politics in BiH to produce governments more to its liking, backed by economic inducements, will backfire. Relations have already become highly strained between the West’s representatives in BiH and the HDZ BiH (see The political scene). On November 17th ten seats in canton assemblies won by HDZ BiH candidates were declared vacant as a punishment for the holding of a referendum on election day that was not to the West’s liking. In the RS, US officials said that the SDS itself should have been disqualified from taking part in the elections. Such attitudes put the West on a collision course with BiH politicians, who have considerable support in their own communities. The West has become increasingly impatient with the BiH political class, having spent about US$5bn on rebuilding BiH since 1995 to little apparent effect. A rethink of Western strategy in BiH may come, although it is not obvious what new strategy might be applied. However, one factor in the West’s favour is that the Bosnian Serb

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and Croat nationalists now have little support among their former patrons in Serbia and Croatia.

International relations Continuing international support will remain indispensable for another few years—in the form of an international military presence as well as financial and technical assistance. However, there may be a worsening of the atmosphere. After the November 2000 elections relations are particularly bad between the HDZ BiH and the West’s representatives in BiH, and it is unlikely that relations with the Bosnian Serbs will be good either.

The HDZ BiH has been provocative in calling for revision of the 1995 Dayton agreement that produced the current constitutional set-up. Croatia, although affording the party some support in its complaints against changes in the election rules it sees as detrimental to Bosnian Croats’ interests, still wants them to accept that their place is in a BiH state. It is unclear what the Bosnian Croats, finding themselves thus isolated, will do next. It may be that the furore over the elections will turn out to be just a ploy to rally Croats to the party; or it may be that the situation in the Croat areas will become highly volatile, and Croats’ anger may be directed at Western officials and peacekeepers.

Normalisation in BiH depends in part on political developments in its immediate neighbours, Croatia and Yugoslavia. Croatia has made it plain that it does not intend to interfere in internal BiH affairs, despite the ethnic ties with the Bosnian Croats. The ousting of Mr Milosevic who, together with the late president of Croatia, Franjo Tudjman, was the main instigator of the war in Bosnia and Hercegovina, could open a new chapter in relations between the two countries. During Mr Milosevic’s reign events in the RS were largely driven by his political calculations, with a destabilising effect on BiH. How relations between the two countries will ultimately shape up may depend as much on developments after the elections in the RS as on the course the government in Yugoslavia takes once it consolidates power. In principle, the task facing Yugoslavia’s government is so immense that it is plausible to expect it will have little time to interfere in BiH’s affairs.

Economic policy outlook

Policy trends Economic reform will be the centrepiece of the international community’s strategy in BiH over the next two years. It will focus on accelerating tax reform, enhancing the tax administration system, completing reform of the payment system, strengthening the financial sector and speeding up privatisation. Labour market regulations will also undergo a thorough overhaul, and reform of the banking sector will have to be accelerated.

Reform of the pension system should follow now that the high representative has imposed a pensions law. Failure by the Federation parliament to adopt the law held up the disbursement of the fourth tranche of the IMF’s stand-by loan. However, the loan is unlikely to be deferred indefinitely. Further personal income tax cuts may be expected in 2001, an important area where pressure will come from the international community, in an effort to facilitate job

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creation. There will also be pressure to introduce a value-added tax (VAT) as soon as possible.

Reform of the financial system is likely to speed up now that the Central Bank of BiH (CBBiH) is more involved. The abolition of the payment bureaux, the first major step in the reform, is scheduled for December 2000. The difficult reform of the banking sector has got under way, as new banking regulations are rigorously implemented and the banks prepare for privatisation. An additional incentive for bank restructuring will come from increasing competition from foreign banks, six of which now operate in BiH. A number of private banks will benefit from technical support provided by various international sources, which will help to improve the range and quality of banking services to bring the sector closer to the standards of a market economy.

The currency board regime underpinning BiH’s currency, the convertible marka (KM), has so far performed well. The currency in circulation has been fully backed up by foreign currency reserves, which according to the CBBiH have been growing, albeit unevenly. An encouraging sign is that foreign currency reserves grew in the first three quarters of 2000, in spite of a much slower inflow of official transfers, which strongly boosted reserves in 1999. The main reason is an increase in private flows, primarily from the deposits of the foreign banks that have started operations in BiH. Official transfers have declined because of the problems with the IMF. However, the CBBiH forecast of KM1bn (US$440m) in foreign currency reserves by end-2000 may prove overambitious. Continuing successful implementation of the currency board regime depends crucially on generous donor support, as well as on the fiscal policies adopted by the local authorities.

Fiscal policy We expect the fiscal situation to remain precarious in 2001. The central state budget and the budget of the Federation have had to be revised upwards in the course of 2000, as the result of a major fiscal crisis. In order to reduce the budgetary gap, the RS had to resort to major cuts in defence and pledged to undertake a range of measures to improve tax collection; it also received emergency budgetary support. The Federation had to adjust its budget twice in 1999.

This grave fiscal situation is attributable to the governments’ failure to conduct necessary reforms, particularly in labour and pension legislation. Entity governments have also paid lip service to improving tax collection. According to the EU’s Customs and Fiscal Assistance Office (CAFAO), BiH loses about KM500m annually from tobacco smuggling alone, causing a KM300m deficit in the RS budget and a KM200m deficit in the Federation budget. External support, which is of critical importance for sustaining the budgets, will only be released if there is a major push forward regarding the necessary legal reforms, including a decisive fight against corruption.

Economic forecast

International assumptions In 2001 EU economic growth should moderate from the fast rate of 3.5% seen in 2000, but will remain relatively strong at 3%, slowing to 2.6% in 2002. This

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will benefit the BiH economy, which conducts much of its trade with the EU. Price inflation for some of BiH’s main imports should ease, putting downward pressure on both inflation and the trade deficit. The main risk to our forecast continues to be that of a sharp slowdown in the US economy, brought on by a steep stockmarket correction.

BiH: international assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth OECD 2.9 4.1 3.1 2.7 EU 2.3 3.5 3.0 2.6 Exchange rates (av) US$:¤ 1.07 0.93 0.95 1.05 Financial indicators Euro 3-month interbank rate 2.97 4.38 5.19 4.70 US$ 3-month Libor 5.42 6.63 6.78 5.48 Commodity prices Oil (Brent; US$/b) 17.9 29.1 25.4 19.1 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.1 4.2 10.1 Industrial raw materials (% change in US$ terms) –4.3 14.9 8.7 2.3

Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP) exchange rates.

Economic growth We have revised our forecast downwards slightly, to 7.5% real GDP growth in 2001 and 7% in 2002, mainly because of a likely slowdown in both gross fixed investment and in public consumption, both of which rely on external support. The slowdown in reconstruction-related activities, which will remain the main source of growth over the forecast period, is likely to depress gross fixed investment.

Private investment, inhibited by a lack of domestic savings and sluggish foreign investment, remains modest and unable to compensate significantly for the reduction in donor-financed investment projects. Government consumption is bound to slow under the IMF’s concerted pressure on the entity governments to balance their budgets. There should be an acceleration in exports, as the free-trade agreement with Croatia enters into force, and on the assumption that at least some of BiH’s enterprises will seize the opportunity offered by the EU’s asymmetric reduction of trade barriers to almost all agricultural and industrial exports from BiH. Normalisation of relations with Yugoslavia (Serbia-Montenegro) should also contribute to an increase in exports.

Real GDP growth in 2000 will be slower than we previously forecast, mainly because of Federation industrial output figures for January-September, when there was a significant slowdown in the rate of growth, to 10.1% year on year (compared with growth of 15.3% in January-June), and slackening growth in the construction sector. In the absence of up-to-date figures for the RS, and on the basis of anecdotal evidence, it is plausible to assume that industrial output in that entity has also been slowing down. However, an important

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development in the Federation has been an increase in services output—in January-August 2000 the output of all categories of services increased compared with the same period of 1999, which should partly offset slower industrial output growth.

Inflation A slight increase in prices is expected in 2001, when VAT will probably be introduced. However, the CBBiH remains firmly in control of the currency board arrangement, which will continue to act as a brake on imported inflation.

In June 2000 the Federation retail price inflation started accelerating after a long period of falling prices. There were several tax increases in the course of the year; for fuel alone tax was raised three times in January-September. Full-year inflation is likely to climb to around 2%, a marked change from 1999, when annual average retail prices in the Federation contracted by 0.3%. The inflation rate in the RS, although falling, will remain higher than that in the Federation.

Exchange rates The convertible marka, now widely accepted throughout BiH, is defended by a currency board and fixed at parity with the D-mark. It has fallen along with the euro against the US dollar in 1999-2000. We estimate that it will average KM2.10:US$1 in 2000, firming to KM2.07:US$1 in 2001 and KM1.86:US$1 in 2002.

External sector The current-account deficit should narrow in 2001, primarily as a result of a continuing fall in the trade deficit. Over the next couple of years the upturn in regional economic activity and EU trade liberalisation should bring about an increase in exports. Imports should fall as external reconstruction aid tails off. However, external support from international financial institutions will continue to be necessary, since other sources of financing—notably foreign direct investment (FDI)—although increasing as the security situation improves, will remain low.

BiH: forecast summary (% change year on year unless otherwise indicated) 1999a 2000a 2001b 2002b Real GDP 10.0c 8.5 7.5 7.0 Industrial output 10.5 11.5 10.0 12 Retail prices (av) Federation –0.3c 2.0 2.5 2.5 Republika Srpska 14.1c 9.0 3.5 3.0 Exports fob (US$ m) 973 950 1,000 1,100 Imports fob (US$ m) 2,388 2,450 2,350 2,200 Current-account balance (US$ m) –767 –875 –750 –650 % of GDP –17.4 –20.5 –15.6 –11.1 Exchange rate (year-end; KM:US$) 1.95c 2.20 1.93 1.79

a EIU estimates. b EIU forecasts. c Actual.

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The political scene

Many Bosnians still vote for Nationalist parties did well in the elections in Bosnia and Hercegovina (BiH) nationalist parties on November 11th, according to incomplete results based on 97% of the votes counted, and released by the Organisation for Security and Co-operation in Europe (OSCE) on November 19th. The three leading wartime parties—the Party of Democratic Action (SDA; Muslim), the Croatian Democratic Union of BiH (HDZ BiH) and the Serbian Democratic Party (SDS)—still command considerable support. However, the non-nationalist Social Democratic Party (SDP) has improved its vote, building on the gains it made at the municipal elections in April (May 2000, pages 11-13), although not by as much as some observers had hoped. It is possible that potential SDP supporters have been disappointed that it has not achieved more on the basis of the power it won at the local level earlier in the year. The OSCE put the turnout at about 65%, similar to the level in April.

Elections were held at the level of the common BiH state, at the level of the BiH’s two entities—the Federation of BiH and the Republika Srpska (RS)—at the canton level in the Federation, and in one municipality, Srebrenica. The RS president and vice-president were also elected.

SDP makes gains in the BiH The vote for the BiH House of Representatives was by entity. In the Federation parliament vote, the SDP, which in the 1998 election gained 15.4% of total ballots cast, according to the results of November 19th was just ahead of its main rival with 27.2% to the SDA’s 27.1%. The Croatian Democratic Union of BiH (HDZ BiH) was third with 19.4%, similar to its 1998 percentage (19.7%). The Party for BiH (SzBiH) came fourth.

In the RS vote the SDS, which in 1998 had been beaten by the Sloga coalition led by the RS prime minister, Milorad Dodik, this time polled more than its main rivals combined: 40.1% against 15.5% for Mladen Ivanic’s Party of Democratic Progress (PDP) and 10.8% for Mr Dodik’s Party of Independent Social Democrats (SNSD), which stood in an electoral coalition with the

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Democratic Socialist Party (DSP). The Socialist Party of the RS (SPRS), which had been part of the Sloga coalition but then fell out with Mr Dodik (with members defecting to form the DSP), only gained 5.7%. It was probably damaged in voters’ eyes by the split, and it may also have lost votes because of its association with the former ruling Socialists in Serbia, now that Slobodan Milosevic has fallen from power in Yugoslavia.

BiH: Nov 2000 elections, BiH House of Representatives (Partial results as at November 19th; 97% of vote counted) Total votes % Federation Social Democratic Party (SDP) 228,262 27.2 Party of Democratic Action (SDA) 226,885 27.1 Croatian Democratic Union of BiH (HDZ BiH) 162,694 19.4 Party for BiH (SzBiH) 130,703 15.6 Republika Srpska Serbian Democratic Party (SDS) 244,721 40.1 Party of Democratic Progress (PDP) 94,876 15.6 Party of Independent Social Democrats (SNSD)- Democratic Socialist Party (DSP) 65,783 10.8 Source: OSCE Mission to Bosnia and Hercegovina.

Mr Dodik is defeated for The RS presidential election was a personal defeat for Mr Dodik, the SNSD the RS presidency candidate. The SDS candidate, Mirko Sarovic, a former RS vice-president, was clearly in the lead on November 19th, with just over half the votes, whereas Mr Dodik polled about one-quarter and the PDP’s Momcilo Tepic trailed in third place. The presidency has been vacant since March 1999, when Nikola Poplasen was removed from office by the then international high representative, Carlos Westendorp. Mr Sarovic said on November 15th that he hoped to appoint a prime minister within the stipulated 40 days.

RS: Nov 2000 elections, president & vice-president slate (Partial results as at November 19th; 97% of vote counted) Total votes % Serbian Democratic Party (SDS) Mirko Sarovic & Dragan Cavic 309,487 50.3 Party of Independent Social Democrats (SNSD) Milorad Dodik & Dobroslav Cuk 159,628 25.9 Party of Democratic Progress (PDP) Momcilo Tepic & Perica Bundalo 53,675 8.7 Source: OSCE Mission to Bosnia and Hercegovina.

SDS takes the lead in the RS In the RS National Assembly the SDS took more than one-third of the votes, parliament too more than the SNSD and PDP combined. The Muslim SDA led the rest of the field with around 7%. In the 1998 election the SDS received less than one- quarter of the votes; this time, however, it probably gained a considerable number of votes that would otherwise have been cast for the extreme right Serbian Radical Party of the RS, which came fourth in 1998, but was disqualified this time for openly campaigning against the Dayton agreement. The future shape of the government in the RS is unclear; what is clear is that the SDS will be the dominant force in RS politics. Among Mr Dodik’s allies, the

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Serbian People’s Alliance (SNS) of a former RS president, Biljana Plavsic, only managed 2.3% of the vote.

RS: Nov 2000 elections, National Assembly (Partial results as at November 19th; 97% of vote counted) Total votes % Serbian Democratic Party (SDS) 223,088 36.5 Party of Independent Social Democrats (SNSD) 80,305 13.2 Party of Democratic Progress (PDP) 75,531 12.4 Source: OSCE Mission to Bosnia and Hercegovina.

SDP breaks SDA-HDZ BiH In the Federation’s House of Representatives the SDA was just ahead of the SDP dominance in Federation on November 19th; both took about one-quarter of the votes. For the SDP this was a considerable improvement on its 1998 vote, when it received 13.7%. The HDZ BiH’s vote fell from 19.9% in 1998 to 17.5%. If the SDA and HDZ BiH are to dominate the Federation’s lower house, as they did after 1998, they will need to find a third partner. Equally, the SDP could form a government; it has said it will not form a coalition with any nationalist party, which rules out both the other leading parties.

Federation: Nov 2000 elections, House of Representatives (Partial results as at November 19th; 97% of vote counted) Total votes % Party of Democratic Action (SDA) 226,198 26.8 Social Democratic Party (SDP) 220,086 26.1 Croatian Democratic Union of BiH (HDZ BiH) 147,860 17.5 Party for BiH (SzBiH) 124,945 14.8 Source: OSCE Mission to Bosnia and Hercegovina.

HDZ BiH wins easily in its In the vote for the assemblies of the Federation’s ten cantons, results counted “own” cantons by November 19th indicated that the HDZ BiH had gained over 50% in its heartlands, Western Hercegovina and Livno-Tomislavgrad. It was in the lead in another three cantons, Hercegovina-Neretva, Posavina and Central Bosnia, although not by much in Central Bosnia. Most Bosnian Croats voted for the party; the best the HDZ BiH’s main rival, the New Croatian Initiative (NHI), could manage was third place in Posavina. There was a drop in the HDZ BiH share of the vote in all five cantons, ranging from nearly 11 percentage points in Western Hercegovina (where it could afford to lose some of its enormous support) to less than 1 point in Hercegovina-Neretva, but only in Posavina was this significant: the drop of nearly 8 percentage points brought the HDZ BiH vote below 50%, as the SDP came from 4% in 1998 to more than 18% this time, and the NHI, which had not been in existence in 1998, came third.

The SDP was in the lead in Tuzla and Sarajevo, and neck and neck with the SDA in Gorazde, where the electorate is small. The SDP usually does well in the more cosmopolitan capital and Tuzla was a byword for anti-nationalism during the 1992-95 war. The SDA led in Una-Sana and Zenica-Doboj.

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Federation: Nov 2000 elections, cantons (Partial results as at November 19th; 97% of vote counted) Total votes % Una-Sana Party of Democratic Action (SDA) 41,198 42.2 Social Democratic Party (SDP) 16,774 17.2 People’s Democratic Union of BiH (DNZ BiH) 16,513 16.9 Party for BiH (SzBiH) 13,848 14.2 Posavina Croatian Democratic Union of BiH (HDZ BiH) 7,042 46.6 Social Democratic Party (SDP) 2,827 18.7 New Croatian Initiative (NHI) 2,598 17.2 Party of Democratic Action (SDA) 1,336 8.8 Tuzla Social Democratic Party (SDP) 65,160 43.6 Party of Democratic Action (SDA) 50,483 33.8 Party for BiH (SzBiH) 15,228 10.2 Croatian Democratic Union of BiH (HDZ BiH) 3,324 2.2 Zenica-Doboj Party of Democratic Action (SDA) 49,809 34.4 Social Democratic Party (SDP) 43,506 30.0 Party for BiH (SzBiH) 23,606 16.3 Croatian Democratic Union of BiH (HDZ BiH) 8,474 5.8 Gorazde Social Democratic Party (SDP) 3,403 31.4 Party of Democratic Action (SDA) 3,391 31.3 Party for BiH (SzBiH) 3,329 30.7 Central Bosnia Croatian Democratic Union of BiH (HDZ BiH) 32,974 30.8 Party of Democratic Action (SDA) 28,091 26.3 Social Democratic Party (SDP) 20,586 19.3 Party for BiH (SzBiH) 13,803 12.9 New Croatian Initiative (NHI) 4,379 4.1 Hercegovina-Neretva Croatian Democratic Union of BiH (HDZ BiH) 50,368 48.7 Party of Democratic Action (SDA) 16,407 15.9 Social Democratic Party (SDP) 12,791 12.4 Party for BiH (SzBiH) 11,639 11.3 Western Hercegovina Croatian Democratic Union of BiH (HDZ BiH) 19,615 70.7 Radom za Boljitak 2,220 8.0 Croatian Party of Rights of BiH (HSP BiH) 1,345 4.8 Sarajevo Social Democratic Party (SDP) 54,332 36.6 Party for BiH (SzBiH) 38,555 26.0 Party of Democratic Action (SDA) 33,389 22.5 Livno-Tomislavgrad Croatian Democratic Union of BiH (HDZ BiH) 18,076 56.0 Party of Democratic Action (SDA) 2,247 7.0 Party of Independent Social Democrats (SNSD) 2,095 6.5 Croatian Party of Rights of BiH (HSP BiH) 1,688 5.2 Croatian Christian Democratic Union (HKDU) 1,540 4.8 Source: OSCE Mission to Bosnia and Hercegovina.

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Nationalist successes Preliminary results of the elections were discussed in the UN Security Council dismay Western officials on November 14th. The under-secretary-general for peacekeeping, Jean-Marie Guehenno, expressed regret that the results had not brought to the fore politicians with whom the international community might work construc- tively. The US deputy ambassador to the UN, James Cunningham, said he was disappointed that the SDS, which had expressed “virulent opposition” to the Dayton agreement of 1995 that set up the current structure of BiH, seemed to have won the RS presidency, and said that the US would try to keep out of power those politicians it saw as obstacles to peace. International officials in BiH may resort to disqualifying some of those elected from taking office.

Croat “defiance” is a Mr Guehenno said that the HDZ BiH had consolidated its support among the particular concern Bosnian Croats “under a banner of fierce criticism and open defiance of the international community”. He said that the OSCE and the high representative, Wolfgang Petritsch, were considering action against the HDZ BiH leader, Ante Jelavic. One clear result of the elections has been to put the Bosnian Croats at odds with the international community.

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Western officials objected to the HDZ BiH election slogan, “Commitment or extinction”, and an election advertisement depicting marauding Muslim horsemen. However, they were particularly angered that the HDZ BiH con- ducted its own referendum on election day, to garner support for a Declaration on the Rights and Position of the Croat People, issued by a meeting of Bosnian Croats summoned by the HDZ BiH in Travnik on October 28th.

At the meeting the HDZ BiH managed to secure the support of seven Bosnian Croat parties and proclaimed the establishment of a Croatian People’s Assembly, to act as the permanent and highest political institution of Croats in BiH. The declaration says full equality for all three constituent nations in BiH “can only be realised through the identical constitutional and administrative- territorial internal set-up of the whole of BiH”, which has been interpreted as another attempt by the Croats to get back their own statelet, Herceg-Bosna. However, the declaration also speaks of strict operation of the joint BiH institutions on the basis of consensus, equal participation and rotation of leading positions, and Mr Jelavic has since claimed that it does not amount to a call for a third, Croat, entity in BiH. The declaration may in fact be intended to mean different things to different people.

Mr Jelavic made a number of highly provocative statements during the election campaign, such as that the Muslim-Croat Federation was a prison for the Croats, that the Federation was dead, and that he no longer recognised the authority of the international high representative, Mr Petritsch, the OSCE head in BiH, Robert Barry, or the head of the UN mission, Jacques Klein.

Croats proclaim successful The referendum went ahead unofficially. Its organisers proclaimed a 71.02% referendum turnout of registered Bosnian Croat voters and a communist-style 98.96% vote in favour.

The political temperature had risen among Croats in the month before the election over changes to the electoral rules. Under the old rules, members of the BiH House of Representatives, the Federation House of Representatives and the RS National Assembly represented a single state- or entity-wide constituency, and were elected from party lists. Under the new rules, the single constituencies are broken up into many multi-member constituencies so that members now represent distinct geographical units throughout BiH. This change is accompanied by an “open list” system, first applied at the municipal elections, whereby voters select whom they want to vote for on the party list rather than having their votes allocated to the higher names on the list. Any parties underrepresented as a result of application of the system will receive “compensatory seats” on the basis of the total vote.

The OSCE says the purpose is to end the overrepresentation of Sarajevo, Mostar and Banja Luka under the old system, and to increase political responsibility by linking members to a local electorate. It is also clearly intended to break party discipline by allowing voters to prefer members further down party lists to those at the top who are the favourites of their respective party machines. It also strikes at the ethnic election principle, whereby each

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ethnic group maximises its influence by voting as a single block across the country for its own representatives on ethnic grounds.

Because the BiH parliament failed to adopt the rules, Mr Barry imposed them at the request of the Peace Implementation Council (the international body that oversees the working of the Dayton agreement). This is the first step towards adapting BiH’s election system in response to changes pending in the entity constitutions, following a Constitutional Court ruling that all three of BiH’s main ethnic groups are constituent groups in both entities (August 2000, page 7).

Croats fear losing influence The HDZ BiH’s leadership called an emergency meeting in Kiseljak on October 15th. They accused the international community of denying Bosnian Croats their legal and legitimate right to choose their own representatives, and demanded that the decision be revoked, threatening to boycott the elections. The HDZ BiH argues that in six Federation cantons with a Muslim majority (including Hercegovina-Neretva canton, which is formally mixed but has a slight Muslim majority), the Muslims will have a say in which Bosnian Croat candidates are elected, whereas in the three cantons in which the Bosnian Croats are in the majority they will have little impact on the choice of Muslim representatives. The HDZ BiH also argues that when the House of Representatives chooses the 30 Muslim, 30 Croat and (under the new rules) 20 “Other” members of the Federation’s upper house, the House of Peoples, non- Croats will be voting for Croat members. Their argument is therefore one about preserving the traditional ethnic block vote, and ultimately the fear that Bosnian Croats will lose any separate identity and be swallowed up into a single multi-ethnic “civic” state. In letters to the Croatian president, the prime minister and the parliamentary assembly speaker, as well as to the UN Security Council, Mr Jelavic appealed for help in opposing the decision.

The call in Travnik in late October for a referendum was the culmination of a campaign that the HDZ BiH had been orchestrating ever since it performed worse than expected in the April elections. The idea of a separate entity has never really lost its appeal for many Bosnian Croats, and the HDZ BiH has toyed with it continuously, sometimes overtly and sometimes more discreetly. When Herceg-Bosna, the Bosnian Croat para-state, was abolished under the Dayton agreement, Bosnian Croats established the Croatian Community of Herceg-Bosna as a framework to support Bosnian Croat parallel institutions. The HDZ BiH has insisted on redrawing the boundaries of some of the Federation municipalities, in particular Zepce and Travnik, to create new municipalities with a Bosnian Croat majority that might be integrated with the rest through the Herceg-Bosna institutions. Similarly, it has asked for an ethnic demarcation within the two mixed cantons—Hercegovina-Neretva and Central Bosnia—and the creation of new cantons with a clear ethnic majority.

Party leaders fears for The fact that the HDZ BiH campaigned for a referendum so uncompromisingly, HDZ BiH election prospects and in defiance of the international community (which immediately said it was illegal), is a sign of its serious concern over the outcome as the November elections approached. The language of hatred and ethnic separation was used repeatedly to spread fear among the Bosnian Croats that, if any party other

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than the HDZ BiH won, their interests would suffer. At the party convention in mid-July (August 2000, pages 16-17) Mr Jelavic said that one of his priorities was to work towards the implementation of the Dayton agreement. However, at a party meeting in Mostar in July to set up the HDZ BiH central committee, he said that, in view of the Constitutional Court’s decision on constituent peoples, the Dayton agreement was out of date and it was time for constitutional change.

Mr Prlic leaves the HDZ BiH Recent events clearly indicate that the hardliners within the party have gained the upper hand and the HDZ BiH is worried about its future. In September Jadranko Prlic, the BiH foreign minister and one of the HDZ BiH’s most prominent members, left the party. Mr Prlic, who had been the wartime prime minister of Herceg-Bosna and was widely perceived as one of the masterminds behind the Bosnian Croat para-state, now wants to dissociate himself from the HDZ BiH, which has failed to transform itself in the light of the political changes both in BiH and the region. However, his efforts to make the HDZ BiH remould itself have failed. He was not elected into the leadership at the party’s convention in July, amid accusations that he was too submissive to pressures from the international community.

The event that eventually triggered his departure was the dismissal of the chancellor of Mostar University, Marko Tadic, said to be close to Mr Prlic. Academics from the university in favour of a separate Bosnian Croat state, of which Mostar University is a key symbol, reproached Mr Tadic for damaging Bosnian Croat interests. They objected to his request that photographs of Bosnian Croat and Croatian wartime leaders be removed from the university buildings and to his readiness to co-operate with the university in the Muslim- dominated part of Mostar. (Before the war there was one university in Mostar, but as the city was partitioned during the war, so was the university.) Mr Tadic’s dismissal was seen as an attack on Mr Prlic, who is president of the Mostar University council and opposed his sacking.

Mr Prlic left the party after electoral registration had been completed, so ostensibly he contested the elections as a member of the HDZ BiH, although in reality he stood as an independent candidate to the Federation parliament. As regards his political future, Mr Prlic has said he wants to establish an association to promote BiH’s integration into European structures; the association will, at least initially, be non-political and open to individuals from all of BiH’s ethnic groups. Kresimir Zubak, another defector from the HDZ BiH and leader of the NHI, has hinted at possible co-operation with Mr Prlic.

Mr Zubak offers Croats The NHI, the main Bosnian Croat opposition party, criticised the referendum an alternative campaign. Mr Zubak said it was irresponsible of the HDZ BiH to try to intimidate the international community. Such attempts to win support from the electorate, Mr Zubak said, were harmful to Bosnian Croats. He pointed out that the changes to the election rules do not in any way undermine the status that the Bosnian Croats have been given under the Dayton agreement: the role of the House of Peoples remains unchanged; the Muslim-Croat ethnic balance stays the same; and the principle of consensus in decision-making is upheld.

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At a news conference in Mostar—where as recently as in 1999 his party had to suspend its activities alleging threats and intimidation by members of the HDZ BiH—Mr Zubak announced that his party would consider entering a post- election coalition with the SDP in the Federation, as well as with the SNSD and the PDP in the Serb entity.

The SDA objects to the The main Muslim party, the SDA, also objected strongly to the changes in the electoral rules electoral rules. Their chief objection was that the ethnic quotas for Federation cantons would not allow Muslims from the Livno-Tomislavgrad and Posavina cantons to be represented in the Federation House of Peoples, but only Bosnian Croats. The SDA currently has one deputy from each of the two cantons in the Federation’s upper house.

The election rules were imposed not long after Mr Petritsch, the high representative, had amended a recently adopted law on the BiH presidential succession. The SDA, which is the largest party in the outgoing BiH lower house, hurried the law through parliament in response to Alija Izetbegovic’s resignation from the state presidency, in order that the current parliament might elect Mr Izetbegovic’s successor. The procedure was framed in such a way that there was a high probability, should the House of Representatives fail to agree on a candidate, that the decision would be taken by the House of Peoples alone. The amendment imposed by Mr Petritsch annulled this proposition and ruled instead that the House of Representatives of the new parliament would propose Mr Izetbegovic’s successor. The SDA fears that it will not have a majority in that parliament and could thus end up with little influence over the choice of the Muslim representative on the BiH presidency.

The SDA too has accused the international community of waging a campaign against it, referring to a recent statement by Mr Barry that the SDA, like the HDZ BiH, was using scare tactics against the voters because it feared losing its grip on power.

Government faces In the RS opposition to the Western-backed prime minister, Mr Dodik, no-confidence vote in RS intensified after the departure of the Socialist Party of the RS (SPRS) from the ruling Sloga coalition. In September members of this party and the SDS initiated a no-confidence vote in the government. The National Assembly rejected a report on the work of the government and implementation of the January-June 2000 budget. It accused Mr Dodik of letting the international community rule in the Federation’s favour over Brcko (May 2000, pages 16- 17). The SDA-led Coalition for a Single and Democratic BiH, which held the balance of power in the National Assembly, abstained. However, the National Assembly asked the government to continue in office under close scrutiny until the elections, requiring it to consult parliament before taking any action.

Mr Dodik clings to his post Mr Dodik remained defiant and said initially that he would ignore the no- confidence motion, declaring his intention to carry on replacing the leaderships of companies that are of strategic interest for the RS, which was the immediate reason for the parliament’s move. He then changed his position and asked the Constitutional Court to rule on the constitutionality of the

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parliament’s decision; the court ruled in Mr Dodik’s favour, providing him with the legal backing to continue as prime minister. Mr Dodik loses The international community helped Mr Dodik to power and has helped him international support to remain there for the past three years. There are signs that it is losing patience with Mr Dodik, who has failed to honour several of his promises, particularly regarding the return of refugees. The high representative recently warned him that he could no longer put off a decision on rebuilding the Banja Luka mosques destroyed during the war by Bosnian Serbs. Restoring the mosques would indicate that the RS government favoured multi-ethnic communities on its territory. The international community has stepped up its contact with Mladen Ivanic of the PDP, which suggests that Mr Dodik might not be considered indispensable any more for securing the implementation of the Dayton agreement that his predecessors obstructed.

The Kostunica effect works The effect of the removal of Slobodan Milosevic from the presidency of against Mr Dodik Yugoslavia (Serbia-Montenegro) on the RS electorate may have hindered Mr Dodik’s prospects in the elections. Mr Dodik had been a vocal supporter of the Democratic Opposition of Serbia (DOS) before the Yugoslav elections on September 24th. When the Milosevic regime shut down the independent media in Serbia, some moved to the RS and continued working from there. Bosnian Serbs feel strongly about maintaining ties with Serbs in Yugoslavia, and this was made difficult in the last years of Mr Milosevic’s rule because of the rupture between him and Mr Dodik. Several members of the DOS coalition were present at an SNSD election rally in Bijeljina, but it appears that Mr Dodik is not on good terms with Vojislav Kostunica, the newly elected president of Yugoslavia, which may have harmed his bid for the RS presidency.

When Mr Kostunica visited the RS in October, it was to attend the ceremonial reburying of a Serb poet, Jovan Ducic, at Trebinje. Mr Kostunica attended at the invitation of the SDS, which he appears to favour above other Bosnian Serb parties. He has scorned Mr Dodik as a puppet of the international community.

SDS look set to return Mr Dodik may also have lost support because of his poor running of the RS to power government, and his failure to bring economic recovery or crack down on corruption. Mr Sarovic claims that the SDS is a renewed party, and that its former leader Radovan Karadzic, in hiding from an indictment for crimes committed during the 1992-95 war by the International Criminal Tribunal for former Yugoslavia (ICTY) at The Hague, has had no influence over it for four years. Haris Silajdzic of the Party for BiH (SzBiH) played into the hands of Serb nationalist parties before the elections by calling for the abolition of the Serb entity.

Immediately after the first results started showing that the SDS had done well, Mr Sarovic began sketching out what an SDS-led government would do. He has spoken of acceptance of the Dayton arrangements, co-operation with the international community, tolerance, and the need for economic recovery and to fight crime. However, he also remarked that if the international community allowed the Kosovo Albanians a referendum on independence from Serbia, the Bosnian Serbs should be allowed to vote on setting up their own separate state.

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His supporters paraded on the streets on post-election night displaying pictures of Mr Karadzic, who is still popular with them, if not with the SDS leadership. Brcko events show strength Recent events in the north-eastern town of Brcko indicate that nationalist of Serb nationalism feeling in the RS continues to run high, and that nationalist politicians continue to wield influence. After Brcko was proclaimed a neutral district under the jurisdiction of the central BiH state in March 1999, a multi-ethnic administration was installed and efforts stepped up to speed the return of its non-Serb pre-war residents. Officially, Serbs seemed to have given in and to have accepted reduced authority over the town; however, obstruction has continued on the ground and in various forms. In October a group of Muslim schoolchildren was attacked after the death in unexplained circumstances of a 20-year-old Serb student, Gojka Pavlovic. Serb schoolchildren, their parents and teachers staged a large and at times violent protest for several days, demanding that Serb and Muslim pupils have separate schools (Muslims had attended in the morning and Serbs in the afternoon). NATO forces and riot police had to be called in.

Just before the elections International Crisis Group (ICG; a non-governmental political research organisation) issued a report naming 75 Bosnian Serbs implicated in wartime atrocities but who still occupy posts in the RS police, military, and civil service or continue to wield political influence. The report said Mr Karadzic was still active and influential in SDS circles. ICG called on the international community to exclude the SDS from the November elections, and to weed out war criminals from public life.

Internationals threaten to The high representative and other prominent international representatives in withdraw aid BiH denounced the Brcko incidents and said that if nationalists won in the RS economic aid to the entity would be reduced. In 1995-97 the RS had been penalised for obstructionism by the then SDS-led government, and received just 2% of the total aid disbursed to BiH.

In spite of international backing for the more co-operative Dodik government, the elections show that the nationalists have substantial support among the local population. The international community has put a lot of effort in the past year into bringing to the attention of the local population the issues of corruption, economic deprivation and the local authorities’ inability to take responsibility for the economic and political future of the country, in an effort to shift discourse away from ethnic politics. However, the international community is using economic instruments for essentially political goals, and even Mr Dodik’s government has succeeded in extracting substantial funds without fulfilling promises either to the international community or the electorate. As incidents such as those in Brcko and violence against returning refugees indicate, ethnic animosities still run high and insecurities persist. Pleas from Mr Petritsch and leading Western politicians in the run-up to the elections that Bosnians rethink their political allegiances seem largely to have fallen on deaf ears.

Economic policy

Stronger central state has On October 23rd the upper house of the Bosnia and Hercegovina (BiH) budgetary implications parliament, the House of Peoples, increased central state budget expenditure for 2000 by KM15m (US$6.6m), including KM11m to finance the BiH state border service. The three new ministries (May 2000, pages 15-16) of the treasury, European integration, and human rights and refugees, take the remainder. The 27% increase in the state 2000 budget, compared with 1999, reflects the efforts of Wolfgang Petritsch, the international community’s high representative, to strengthen the central state institutions; reorganising the BiH Council of Ministers and establishing a state border service are both part of that initiative.

The central state budget depends almost entirely on contributions from the two entity budgets. The fiscal position of both entities has been precarious (August 2000, pages 19-20), forcing readjustment in their respective budgets. Both entities have undertaken a range of measures to balance revenue and expenditure, the latest increases in taxes on petrol, cigarettes and alcohol in the Federation being announced at the end of September. However, much of the KM15m increase is to come from foreign donations, indicating BiH’s continuing dependence on foreign aid.

Mr Petritsch imposes a Since January 2000 the international community has been urging the Muslim- solution on pension reform Croat entity, the Federation of BiH, into resuming pension system reform (August 2000, page 20), in order to build sustainable public finances in BiH. The Federation parliament repeatedly failed to adopt the Law on Pensions, thus putting at risk the implementation of several World Bank projects, as well as the IMF’s BiH programme, worth a total of US$435m. The key change in the draft Law on Pensions, proposed by the World Bank, was that pensions would be paid according to the amount of revenue collected. This would eliminate current practice, in which regulations inherited from the socialist era have resulted in months-long pension arrears and a non-viable pension system. The other entity, the Republika Srpska (RS), passed a pension law that did not meet the standards agreed with the World Bank.

The true reasons for the obstruction to the law are political. The two largest parties in the Federation parliament, the Party of Democratic Action (SDA; Muslim) and the Croatian Democratic Union of BiH (HDZ BiH), oppose the unification of the two separate pension funds, one in the Muslim-dominated and the other in the Bosnian Croat-dominated part of the Federation. Both parties have used the pension funds, administered by political appointees, for their own purposes and are reluctant to relinquish control over them. For the HDZ BiH in particular, merging the two funds was perceived as a risky move before the November elections, since a separate pension fund is seen as important for preserving Bosnian Croat autonomous structures.

Mr Petritsch finally imposed the laws on pensions and disability insurance in both the Federation and the RS as part of a package of five laws and amendments decreed on November 12th, in order not to miss an EU funding deadline. The law provides for a minimum pension of KM117 (US$52) in the

Federation and of KM80 in the RS. The entity governments are to improve the collection of contributions and clamp down on evasion by those taking illegal employment. They are also responsible for funding payments of arrears.

BiH gets a State Court The package also included a Law on the State Court, in order to address the anomaly that BiH citizens had no recourse in law in matters such as inter- entity crime, trade and investment. The Office of the High Representative (OHR) says that the court is vital for foreign investment, which is deterred if there is no means of settling trade disputes.

IMF delays disbursing its The IMF announced on November 3rd that disbursement of the fourth tranche stand-by credit of its US$126m stand-by arrangement, due in September, would be postponed until December. The main reason given for the delay is the failure of the BiH authorities to meet a number of conditions relating to entity and state budgets, reform of the sales tax, the spending of privatisation proceeds, and in particular the failure to pass the pension law. Three out of five tranches, amounting to US$87m, have been disbursed so far. The arrangement is due to expire by March 2001.

Financial sector reform Most of the necessary legislation pertaining to financial sector reform has been needs speeding up completed, but implementation has been slow. This has prompted the Central Bank of BiH (CBBiH) to take a more proactive role, particularly with regard to payment system reform. The payment bureaux, through which all payment transactions had to pass in the socialist period, are to be abolished by end- 2000. The CBBiH has taken over some activities normally performed by commercial banks, including the establishment of independent clearing houses, which are scheduled to start operating in January 2001. The commercial banks will become joint owners of the clearing houses at a later stage. Peter Nicholl, the CBBiH governor, has said that the CBBiH was eager to support competition with foreign banks and bank privatisation. Six foreign banks have begun to operate in BiH, which should significantly improve the quality of banking services in the country as well as force local banks to restructure. The foreign banks have already reported an increase in savings, an important development in a country where the public long ago lost confidence in banks.

International assistance has focused on private banks and has taken various forms. The European Bank for Reconstruction and Development (EBRD) has bought a stake in several BiH banks, and this has been important in attracting foreign banks to BiH. Market banka was the first BiH bank to be bought by a foreign bank—the Austrian Raiffeisen Group (August 2000, page 28), which is believed to be interested in acquiring at least one more bank in the Federation. The US government has announced an US$8.15m technical assistance programme for three selected banks in 2001-02. The three banks, all from the Federation, will be offered in-bank advisory services, formal training in strategic planning and a range of treasury functions, as well as training in bank management and information technology. This is expected to contribute significantly to improved performance and rising standards in banking services in BiH. As far as the majority state-owned banks are concerned, the main focus

is on assistance to privatisation, which has been delayed, particularly in the Federation. The majority state-owned banks, burdened with large non- performing portfolios, still dominate the banking sector, and their privatisation is one of the crucial elements in building a sound banking sector in BiH.

Privatisation in the After the tender programme was suspended in April (August 2000, pages 20-21), Federation resumes privatisation resumed in the Federation in October. Shares in some 550 firms were offered in exchange for privatisation vouchers. Individuals will also be able to buy shares through one of nine privatisation investment funds. The sale of small and medium-sized companies, which began in May 1999, had been expected to end by June 2000. The sale of large companies, which had been temporarily halted, is likely to continue for at least another year. The Federation Privatisation Agency (FPA) has made the changes demanded by the international community in order for privatisation of large companies to resume. One of the changes was an increase in the size of stake on offer to strategic investors from 51% to 67%; the remaining 33% will be offered to the public.

Privatisation has proceeded at a much slower pace than initially envisaged because of lack of interest, as well as obstruction from local political structures. According to the PFA, of more than 1,000 small enterprises proposed for privatisation only 200 were sold between May 1999 and September 2000. Political resistance is strongest where disposal of state ownership of strategic companies is concerned, notably the telecommunications and power sectors, which are controlled by political “oligarchies”. The government may have intended to delay privatisation by proposing that these companies be restructured before they can be offered for sale. The US Agency for International Development (USAID) announced in September that it would resume the financial assistance programme for Federation privatisation, which it suspended in 1999 because of a lack of progress.

The domestic economy

Output and demand

Federation industrial For the first nine months of 2000 industrial output in the Federation rose by output growth slows 10.1% year on year, continuing the trend of decelerating industrial output growth observed in the first six months of 2000—from 18.8% growth in the first quarter to 15.3% in the first half. However, in September 2000 industrial output was still only 35% of the Federation’s 1991 output.

Following strong year-on-year growth in the second quarter of 10.9%, industrial output slowed in the third quarter, to 4.5%. The slowdown was attributable to reduced output in electricity and in manufacturing, where much of the decline was in turn owing to falling output in base metals, which in 1999 became the second single most important industry in BiH after electricity.

In the Republika Srpska (RS) the sharp oscillation in industrial output recorded in the first half of the year continued in the third quarter.

BiH: industrial production (% change, year on year) 1999 2000 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Federation 15.3 16.3 9.1 21.9 19.9 14.6 6.4 14.2 12.2 1.4 5.0 7.2 Republika Srpska 0.6 –17.6 –7.3 –1.6 7.4 11.1 n/a 20.8 24.2 9.5 n/a n/a Sources: Federal Institute of Statistics, Statistical Data on Economic and Other Trends; Office of the High Representative, Economic newsletter.

Construction growth After peaking in May, growth in construction activity in the Federation has levels off slowed down. The number of workers in construction in August 2000 was 11% higher than in August 1999. However, the value of completed work in January-August fell by some 1.3% year on year. In August the total hours worked, which in May had grown by 18% year on year, were at the same level as a year earlier. Work on new buildings accounted for some 53% of the value of completed work in January-August, the rest being accounted for by reconstruction, repair and maintenance of existing buildings, another indicator of an overall slowdown in construction activity.

Consumer demand is strong Retail sales in the Federation picked up in the second quarter of 2000, rising by 36.3% year on year. In January-June retail sales grew by 30% year on year, indicating that, in spite of high unemployment and an easing in wage increases, consumer demand remains strong.

Inter-entity trade slackens Inter-entity trade, which was expanding rapidly in the first half of 2000, faltered during the third quarter. Federation sales to the RS rose by 95.7% year on year in July, to KM10.4m (US$4.6m), but fell sharply, to KM6.6m, in August. In September sales amounted to KM7.4m, a fall of 8.2% year on year. Purchases from the RS in July were worth KM3.1m, a 1.3% rise year on year. After a slight drop in August, purchases stood at KM2m in September, a fall of 46.8% year on year, owing to falling purchases of foodstuffs—the largest single item in the total value of goods purchased from the RS— chemicals and non-metal construction materials. The drop in the value of goods purchased primarily reflects supply problems in the RS, particularly in chemicals and non-metal construction materials. However, the amounts involved are minuscule.

Employment, wages and prices

Unemployment increases as The BiH Federal Institute of Statistics has resumed publishing data on employment stagnates unemployment for the whole of BiH. There were 412,611 people registered unemployed in June, an increase of 3.4% compared with June 1999; 264,585 were registered as unemployed in the Federation and 157,026 in the RS. Although the number of unemployed increased only slightly in the Federation, the rise in registered unemployment in the RS was much higher, reflecting the RS’s comparatively poorer economic performance. In August unemployment in the Federation rose to 268,172.

BiH: labour statistics, 2000

Jan Feb Mar Apr May Jun Jul Aug BiH Unemployment (persons) n/a n/a n/a n/a 418,692 421,611 n/a n/a Federation Employment (persons)a 411,020 411,199 411,595 411,821 412,708 412,726 n/a 412,760 Unemployment (persons) 263,028 264,602 264,828 265,236 264,665 264,585 n/a 268,172 % 42.5 42.5 n/a n/a 42.4 42.3 39.3 39.4 Net wage (KM) 381 398 399 410 406 408 410 418 RS Employment (persons) n/a n/a n/a n/a n/a 228,834 n/a n/a Unemployment (persons) n/a n/a n/a n/a 154,027 157,026 154,027 n/a Net wage (KM) 222 237 291 272 272 259 285 n/a a Registered employment; includes workers “on stand-by”, not actually working. Sources: Federal Institute of Statistics, Statistical Data on Economic and Other Trends; Office of the High Representative, Economic newsletter; Reuters.

Conditions differ in Employment in the Federation stood at 412,760 employed in August, an Federation cantons increase of 1.2% on the 1999 average employment level. Sarajevo canton, the largest of the Federation’s ten cantons, recorded a fall of 1.8% in the number of employed between February and August. A fall, although on a much smaller scale, was also recorded in the number of employed in two other large cantons, Tuzla and Zenica-Doboj. Employment increased in Western Hercegovina canton (in the south-west of the Federation) and Una-Sana canton (in the north-west) by 3.8% and 1.5%, respectively, over the same period. These two cantons have for some time reported lively investment activity, particularly in small-scale projects in the food-processing and wood industries.

Employment series for the RS are not available; according to some estimates, there were 220,000 employed in August 2000, which would suggest a higher rate of unemployment (40%) than in the Federation. Public-sector employees are estimated to account for almost one-third of the total number of employed in the RS.

BiH’s post-war recovery has had a modest job generation record. Before the war a small number of large conglomerates were BiH’s main employers. They were hit by the combined effects of the dissolution of the Socialist Federal Republic of Yugoslavia (SFRY) and the 1992-95 war. However, international support for industry has focused on assistance to small and medium-sized enterprises. In September 2000 the World Bank opened a regional centre of the Balkan Enterprise Facility in Sarajevo—a project aimed at assisting small and medium-sized enterprises in BiH, Albania, Macedonia and Kosovo. The World Bank claims that a previous similar project created 75,000 jobs in BiH. However, this has hardly addressed the high unemployment rate that will remain BiH’s burning problem in the medium term.

Wages continue to increase Average net wages in the Federation picked up in August by 11.5% year on year, slightly below the rate of growth in 1999, when wages rose by 14% in annual terms.

In the RS in July the average net wage stood at KM285 (US$125); although this is still much lower than in the Federation, the gap has narrowed, owing to stronger wage growth in the RS.

Retail prices edge higher Retail price inflation in the Federation, which began rising in June after more than a year of uninterrupted decline, accelerated in the third quarter to 2.7% year on year. Inflation is likely to continue after tax increases on a range of products, including petrol, tobacco and alcohol.

BiH: retail prices (% change) 1999 2000 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Federation Month on month –0.5 0.2 0.5 0.4 0.8 –0.3 –0.6 0.3 0.1 0.6 0.0 1.5 Year on year –0.9 –0.9 –1.0 –1.1 –0.3 –0.8 –0.3 –0.6 0.6 2.2 2.3 3.5 Republika Srpska Month on month 3.3 0.9 0.4 1.0 2.6 0.1 0.6 0.6 1.0 1.1 n/a n/a Year on year 15.7 15.0 14.0 10.8 14.1 13.5 13.2 13.2 11.0 10.0 n/a n/a Sources: Federal Institute of Statistics, Statistical Data on Economic and Other Trends; Office of the High Representative, Economic newsletter; Reuters.

Foreign trade and payments

The trade deficit is The Federation exported goods worth US$317m in January-August and still large imported goods (cif) worth US$1.26bn, a deficit of US$940m. However, the trade deficit fell by 24.5% compared with the year-earlier period, since although exports fell by 0.6%, there was a much larger drop of 19.7% in imports. The January-August trade deficit declined by 14.5% year on year in convertible marka terms, confirming the narrowing trade deficit, even though downward pressure is being exerted by the strong US dollar and weak euro. This is in line with the overall slowdown of the economy in the past few years, compared with the immediate post-war period, when the large-scale

reconstruction effort sucked in massive imports and export capacity was limited.

Despite a decline in overall exports, exports of base metals increased by 28% in January-August year on year, with exports of wood and wood products increasing by around 10%.

In the Republika Srpska (RS) the trade deficit amounted to KM566m (US$249m) in January-June. It widened considerably in May and June; compared with the first quarter, both exports and imports increased. The ratio of exports to imports in the first six months, although low in both entities, was more favourable in the RS—31.1% compared with 23.5% in the Federation—owing to the much larger value of imports in the Federation.

Switzerland takes most The strong growth in the Federation’s exports to Switzerland recorded in the Federation exports first half of 2000 has continued. In January-August exports to Switzerland amounted to US$54.4m, some 17% of total Federation exports. Most of the expansion was attributable to an increase in aluminium exports and in textiles. Although exports to Italy contracted by 30%, it was still the second most important destination for Federation exports, ahead of Germany. Exports to Germany were up by 10% over the same period.

Federation: trading partners, Jan-Aug (US$ ‘000 unless otherwise indicated) 1999 2000 % change Exports Switzerland 33,328 54,356 63 Italy 73,420 51,378 –30 Germany 39,378 43,363 10 Yugoslavia 9,821 39,970 306 Croatia 76,921 32,034 –58 Slovenia 28,612 31,368 10 Imports Croatia 375,976 224,267 –40 Slovenia 196,048 202,992 4 Germany 192,084 183,573 –4 Italy 294,962 136,479 –54 Austria 67,086 61,288 –9 Hungary 58,297 50,730 –13 Source: Federal Institute of Statistics, Statistical Data on Economic and Other Trends.

Outside the EU, and more recently Switzerland, the Federation trades most with its immediate neighbours. Exports to Yugoslavia (Serbia-Montenegro) in January-August 2000 were four times those in the year-earlier period. Exports to Croatia more than halved in annual terms, as a consequence of the unfavourable trade regime between the two countries. Until May 1999 Croatia was one of the Federation’s most important export markets.

Croatia supplies most of The bulk of imports in January-August came from Croatia, with imports worth the Federation imports US$224m, although there was a 40% decline in annual terms. Imports from Slovenia increased by 4% over the same period, reaching US$203m. Imports from Italy continued to decline, falling behind those from Germany.

Agreement on a free-trade regime between Croatia and BiH was reached at the A trade agreement is meeting of the inter-governmental co-operation committee in Zagreb on reached with Croatia October 4th. Negotiations over the new trade accord had continued since the preferential trade agreement between the Federation and Croatia, in place since 1996, was revoked by BiH in May 1999. The IMF insisted that the preferential treatment of imports from both Croatia and Serbia be stopped so that BiH’s new customs law could be implemented. As a result trade volumes with Croatia, BiH’s main partner under the previous trade regime, plummeted. The change in government in Croatia in January 2000 improved the climate for negotiations, allowing for a resolution of a number of contentious issues between the two parties.

Under the new agreement, which comes into force on January 1st 2001, Croatia will abolish duties on imports from BiH, and duties on Croatian exports to BiH will be phased out over a three-year period. This is likely to boost trade volumes between the two countries.

Imports of mineral fuels recorded the sharpest increase of all the SITC sectors covered by the Federation’s foreign trade statistics. This was largely because of an increase in oil prices.

The current-account deficit The most recent available data provided by the Central Bank of BiH (CBBiH) should increase on the current account are for January-June. They show the current-account deficit reaching US$796m in January-June, a 7.7% increase year on year. The main reason behind the current-account deficit was the large trade deficit of US$829m. Unlike in 1999, when there was a surplus in services, there was a deficit on this account in the first half of 2000. The income account recorded a deficit of US$13m, primarily owing to interest repayments on foreign debt. The surplus in current transfers was under one-fifth of 1999 net transfers, in line with the decline in foreign assistance.

Projecting a full-year current-account deficit is difficult, as the CBBiH itself warned that coverage of the accounts is only partial. However, a large January- August trade deficit in the Federation, coupled with a worsening on the income and services accounts, would suggest that the full-year current-account deficit could be larger than initially projected.

BiH: current account, Jan-Jun 2000 (US$ m) Exports of goods fob 295 Imports of goods fob –1,124 Trade balance –829 Services balance –29 Income balance –13 Current transfers 77 Current account balance –796 Source: Central Bank of BiH.

Foreign investment is set Comprehensive statistics on foreign direct investment (FDI) in BiH are not to rise available, but according to European Bank for Reconstruction and

Development (EBRD) estimates, this totalled US$60m in 1999 (excluding capital transfers for reconstruction). Slow progress in economic reform, opaque legislation and widespread corruption have deterred potential investors, who are generally cautious given the perceived high political risks in the wider region. One of the most prominent developments was the establishment of the Bosna International Bank by three foreign banks—the Islamic Development Bank, the Dubai Islamic Bank and the Abu Dhabi Islamic Bank. The new bank already has the largest chartered capital among BiH’s private banks. However, this display of interest from Middle Eastern sources is probably for political reasons.

Privatisation of large companies is another potential channel for attracting foreign investment. According to the head of the Federation Privatisation Agency (FPA), several Croatian companies have expressed interest in buying stakes in 50 companies scheduled to go up for sale by end-2000; these would include Pliva buying into BiH’s only pharmaceutical company, Bosnalijek, and a leading Croatian food manufacturer, Podravka, purchasing a stake in Vispak, based in the town of Visoko. Croatia has been one of the major investors in BiH in terms of number of projects, whereas Kuwait remains by far the largest in terms of actual size of foreign investment. Another important investor has been Italy; an Italian fashion company, Benetton, was recently reported to be finalising negotiations to buy Sarajevo’s largest department store, Sarajka. Austria’s Raiffeisen Zentralbank Österreich is reported to be in negotiations over the purchase of another bank, following its first acquisition in mid-2000 (August 2000, page 28).

The removal from office of Slobodan Milosevic, the president of Yugoslavia (Serbia-Montenegro), reduces political risk for BiH and could open up opportunities for doing business in the region, ending years of isolation. Yugoslavia, with a population of some 10m and an economy in need of wholesale reconstruction, is an attractive market, which could also benefit BiH. The projects under the Stability Pact for South-eastern Europe are also likely to gain momentum, now that the prospect of including Serbia has opened up.

EBRD will finance power The EBRD has agreed a US$42.9m loan to finance reconstruction of BiH’s network reconstruction electricity grid and its reconnection with the main European power network. Unlike previous projects, which focused on repair of wartime damage, this project will help to improve the reliability of electricity supply throughout the country and improve efficiency of the energy supply sector. Some ¤14m (US$12m) of the loan has already been released.