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Bosnia-Herzegovina Economy Briefing: Report: Keeping up with the Reform Agenda in 2019 Ivica Bakota

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Bosnia-Herzegovina Economy Briefing: Report: Keeping up with the Reform Agenda in 2019 Ivica Bakota ISSN: 2560-1601 Vol. 14, No. 2 (BH) January 2019 Bosnia-Herzegovina economy briefing: Report: Keeping up with the Reform Agenda in 2019 Ivica Bakota 1052 Budapest Petőfi Sándor utca 11. +36 1 5858 690 Kiadó: Kína-KKE Intézet Nonprofit Kft. [email protected] Szerkesztésért felelős személy: Chen Xin Kiadásért felelős személy: Huang Ping china-cee.eu 2017/01 Report: Keeping up with the Reform Agenda in 2019 The second Bosnian four-year plan? In October 2018, German and British embassies organized a meeting with Bosnian economic and political experts, main party economic policy creators, EBRD and the WB representatives away from Bosnian political muddle in Slovenian Brdo kod Kranja to evaluate the success of the Reform Agenda and discuss the possibility of extending reform period or launching the second Reform Agenda. Defining an extension or a new reform agenda which in the next four years should tackle what was not covered in the first Agenda was prioritized on the meeting and is expected to become topical in the first months of the new administration. Regardless of the designed four- year timeframe, the government is expected to continue with enforcing necessary reforms envisioned in the (current) Reform Agenda and, according the official parlance, focuses on tackling those parts that haven’t been gotten straight. To make snap digression, the Reform Agenda was a broad set of social and economic reforms proposed (but poorly supervised) by German and other European ‘partners’ in order to help Bosnia and Herzegovina to exit from transitional limbo and make ‘real’ progress on the EU integrations track. European partners characterized the Agenda as a model which should promote economic growth, incite social cohesion, fight chronic corruption and deep-rooted patronage networks by comprehensive set of reforms in welfare sector, public administration, labor market and ease of doing business. Four years after the launch of the Reform Agenda (2015-18), Bosnian public is fairly divided in evaluating its overall success in implementing necessary reforms. There are some theoretical observations concerned with hypothesis that fighting informal rent-seeking networks introduces too much unconstrained free market economy that is not subject to state control. However, majority of objections simply point out against well-designed, but poorly enforced plans to reboot Bosnia economy. Many comments point out partial or total failure in implementing anti-corruption and measures to cut down administration and curb party clientelism. Acting Chairman of the Council of Ministers Denis Zvizdic, on the other hand, said the government has so far completed more than 90% of the obligations under the current Reform 1 Agenda, while the central and entity governments have accomplished around 70% of envisaged obligations. Most government and party officials likewise claim that the Agenda was a success. The fact that the idea to keep up with the Agenda in the next four-year period, according to some polls, enjoys popular and political support says itself about its overall success, at least on declarative level. Agenda 2.0 As media reported, the Brdo meeting should be followed by a document with clear objectives for the next four years. In two days of discussions, all parties have reached agreement that the reform agenda is still needed and the main political parties agreed to support reforms no matter who will form the government. Although a new series of meetings were announced to work out Agenda 2.0 and draft the priority points for the first 100 days of the new government, most of the media refer to the Brdo meeting in predicting the first economic moves (and probably only moves to expect in 2019) of the new government. According to several sources, Agenda 2.0 will contain 34 specific measures within four priority areas, i.e. health sector reform, decreasing of tax burden to private sector through fiscal easing, building transport infrastructure and energy sector reform. Health and pension systems await structural reforms that haven’t been implemented properly in the last four years. Prioritizing employment policy, but also corruption and political clientelism played a big role in delaying painful and unpopular measures to include more diverse social categories in welfare reform, but also to cut off some of the users that have illegitimately acquired their social benefits and entitlements. (Think of various war veteran categories.) According to “first aid” measures agreed on the Brdo meeting, the government should first maintain the stability of pension funds by giving direct fiscal stimuli or assurances for preserving current rate of spending on social safety net. Later on, some measures are envisaged to adjust welfare spending with decreased tax rate. Least spoken remained tax reform agenda. Some Bosnian experts proposed straightforward solutions including the increase of VAT and “Pikettyesque” ideas on introduction of a wealth tax with very low rates, tax on capital and other inequality-decreasing measures. While potential increase of VAT would negatively affect those with lower income, economic experts also complain VAT increase as a main instrument of fiscal policy does not touch the main source of unequal distribution of wealth, i.e. those “transitional NEPmen” who 2 do not live from salaries or work. Bosnia and Herzegovina has one of the lowest corporate income tax in Europe, and given political unwillingness or inability to measure tax on wealth and cut on grey economy profits, this will probably remain one of the crucial issues to be systematically approached in the next tax reform. By adopting a set of excise laws at the end of last year, Bosnia and Herzegovina is been given a fresh start for big infrastructure projects. According to drafted documentation and financial plans, existing road and highway projects (Sarajevo-Doboj highway) should be completed within four years. In addition, the government plans to prioritize the construction of highway between Sarajevo and Belgrade, modernization of vital domestic railroad infrastructure and expanding capacity for air traffic (modernization of Sarajevo Airport, building Bihac Airport, etc.) These plans are also linked with the development of tourism that is experiencing rather spontaneous growth in the last five years. However, in order to sustain a great construction momentum in the infrastructure sector, the government has to prepare documentation in following year. Although it was promised that these projects will not be affected with delays in forming the government, it is hard to imagine that this work could be done without the government coordination. Important emphasis will be given to energy sector. According to talks that followed Brdo meeting, federal government will put the building of Bloc 7 (Tuzla thermal power plant) on priority list together with the reconstruction of several coal mines in the Federation. Crucial point that has been left out in the previous agenda is setting up a number of institutions in charge of supervising and controlling finances of state-owned enterprises, especially those generating loss and under debt reprograming. In addition, federal government envisaged opening Public Procurement Office, which, if solving ubiquitous problem of fixed tenders sounds too optimistic, should at least make a first step in imposing control over public spending. Agenda pros and cons Despite claims that the Agenda is directly responsible for economic growth and relative increase of the main economic indicators (FDI, export rate, production), first reactions on announcements of Agenda 2.0, just like criticisms of the Agenda 1.0, were not very optimistic. In terms of pros, DPC, Berlin based think-tank says that the continuation of the Reform Agenda should enhance discipline in public spending and consolidate the public budget, which all matters for deeper structural reforms that should occur in the next period. 3 Majority of opinions, however, agree with Adnan Huskic, political analyst from Sarajevo who says that the problem with the Reform Agenda is that it completely failed in giving anything but declarative support in the field where the reforms were most needed - public administration. “Our political elites have proven to be extremely skilled when it comes to avoiding tackling these problems, "Huskic says. As some experts pointed out, BIH does not need so much of plans for reforms as it needs political will, strong and independent institutions to carry out a few crucial reforms. In this sense, some foreign correspondents and representatives in Sarajevo raised concerns that the government might again spend more time in targeting, defining and drafting strategies than on their implementation. Some accounts stressed the problem of implementing imported model with too “demanding” set of measures to fight swelling of administration and rampant corruption. Nothing in the Reform Agenda says about “less radical and more feasible” addressing of party`s interference in public employment, eradicating party turfs in the administration sector simultaneously against all ethno-parties and stimulating employment based more on merit than mere equality. These ‘blind spots’ of the Reform Agenda are as important for the final success as the measures directly mentioned in the Agenda. On the other hand, critics favoring more European say in the reform implementation complain on the lack of willingness or courage on the European side to use financial conditioning in stimulating further reforms. The
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