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Bosnia and Herzegovina: Basic Data I/
Acril June Estimate Estimate 1990 1991 1992 1993 1994 1995 1996
GDP (millions of U.S. dollars) 10,471 8,670 2,265 2,500 . . . Population (millions) 27 4.37 4.38 4.24 4.11 4.14 4.12 . . . Per capita GDP 2,396 1.979 547 607 Industrial production 3/ (index 1991 * 100) 112 100 25 2 1 5 8 9 Employment, end-period 37 535.066 143,952 220,396 236,051 (Percent change, annual average or annualized from end-1995)
Real GDP -9 -20 7
CPI 4/ 394 114 73,109 44,069 780 -12 7 7
(Percent change, end-of-period)
M2 in the Federation 57 67 ...... 33 122 Money 67 ...... 45 119 Currency 6/ ...... 595 309 Demand deposits €/ ...... 35 105 Quasi -money 6/ -12 138
M2 in the Republika Srpska <&/ 7/ ...... -24 -20 Money ...... -21 -89 Currency ...... Demand deposits 6/ ...... -36 -80 Quasi -money 6/ ...... -25 9
(In millions of DM)
Consolidated government £/ Revenue ... 557 1,043 Expenditures ... 896 1,313 Balance ... -339 -270
(In millions of U.S. dollars)
External current account balance 9/ . . . -506 -511 Exports 107 1,990 2,120 495 7 91 152 Imports 107 1,953 1,673 429 60 894 1,082 Net invisibles 9/ ...... 299 419
Gross official international reserves 3/ ...... 17 66 111
Memorandum items : Exchange rate (period average) BiH dinar per dautsche mark 117 ...... 100 100 100 Yugoslav dinar per deutsche mark 127 ...... 1.16 2.72 3.5 3.5 Gross official reserves 137 ...... 0.23 0.79
Sources: State Statistics Institute, National Bank of BiH, Ministries of Finance, and staff estimates. I/ Data refer to the entire country, unless otherwise indicated. Note that for Republika Srpska during 1995, industrial and agricultural output fell by 15 percent and 30 percent, respectively; inflation was 204 percent. 27 Data from 1993 on include refugees overseas. 37 Data for the Bosniac-majority area. 4/ 1992-93 data for the Bosniac-majority area; post-1993 data for Federation. 5/ M2 is defined as domestic currency, plus demand deposits and time and savings deposits (in Bosnian dinar and foreign currency). 6/ 1996 estimates are annualized changes from end-1995. !_/ M2 is defined as demand deposits and time and savings deposits (in Yugoslav dinar). 87 Excludes municipal and district government operations. Excludes military expenditures financed by external grants. Includes international interest arrears. 97 Excluding official transfers. .107 Data for 1992-93 are based on limited customs data for the Bosniac-majority area. 1994 and 1995 data are rough estimates for the whole territory of Bosnia and Herzegovina. 117 Official rate. Parallel rate not collected by the National Bank of BiH. 127 Parallel rate in the Federal Republic of Yugoslavia. 137 In months of merchandise imports.
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I. Summary and Overview
This is the first report on Recent Economic Developments in Bosnia and Herzegovina. Bosnia and Herzegovina became a member of the International Monetary Fund on December 20, 1995, succeeding to a share of the membership of the former Socialist Federal Republic of Yugoslavia (SFRY) in the IMF; on the same day it also became the first member to make use of IMF resources under its new policy on emergency assistance for post-conflict countries. Only one week earlier the Presidents of Bosnia and Herzegovina, Croatia, and the Federal Republic of Yugoslavia (Serbia/Montenegro) (FRY) signed the Dayton/Paris Treaty, ending the war that had begun shortly after the country declared its independence in March 1992.
The economic and social situation of Bosnia and Herzegovina is distressing. As indicated in Chapter II, most of the prewar population of 4.4 million has been displaced; over one million are refugees overseas; roughly 250,000 are dead or missing; and many more have been injured. The education and health systems are barely functional in most of the country, deficient water and sanitation pose a looming health threat, and there are an up to four million land mines—more than the remaining population—which will require immense efforts to detect and remove. With real GDP at only about 20-25 percent of its prewar level and unemployment estimated at over 50 percent of the labor force, governments in Bosnia and Herzegovina lack fiscal resources to address these urgent needs. External humanitarian aid provided a lifeline for an estimated 2.4 million residents last year, and is continuing to play an important role in peacetime. However, the authorities recognize that the resolution of these problems will depend primarily on the efforts of the country itself.
In addition to the damage inflicted by the war, Bosnia and Herzegovina faces two other major handicaps—its political fragmentation, and the structural imbalances inherited from the former SFRY. The strategy for reconstruction and economic recovery will need to be based in large part op measures to overcome these problems. Under the Dayton/Paris Treaty, economic policy responsibilities are to be shared among the State government and those of the two Entities—the Bosniac-Croat Federation and the Republika Srpska—with most of the implementation of fiscal policy, as well as many structural issues, in the hands of the Entities. The design and implementation of a program to address the country's difficult economic situation will thus require cooperation among all regions. So far there has been only slow progress in establishing such cooperation in either the political or the economic sphere. The Federation is not yet fully operational, even though its Constitution became effective 2V£ years ago, and there is little cooperation between the Federation and the Republika Srpska. It is to be hoped that this situation will improve following country- and Entity-wide elections, scheduled for September 14, 1996.
The authorities' economic program will need to promote financial discipline and market-oriented structural reform; and if it is to succeed, strong efforts on the part of Bosnia and Herzegovina will need to receive strong technical and financial support from the
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international community. A broad range of structural measures is required to complete the transition, including banking and enterprise reforms; price, exchange, and trade liberalization; and establishment of the legal and institutional framework for a market economy, in areas such as ownership of enterprises and land, contracts, domestic and foreign investment, labor relations, accounting and auditing, bankruptcy, and regulatory policies.
Chapter III describes the monetary arrangements that have evolved in the Federation and Republika Srpska, and summarizes recent financial developments. Four currencies are widely used in various parts of Bosnia and Herzegovina—the German mark (DM) throughout the country, the Bosnia and Herzegovina dinar in the Bosniac-majority area, the Croatian kuna in the Croat-majority area, and the Yugoslav dinar (the currency of the FRY) in the Republika Srpska. Through tight restraint on the expansion of domestic credit, the National Bank of Bosnia and Herzegovina has brought about rapid disinflation and currency stability in the Federation. The Republika Srpska has also tightened policy within the limits imposed by its monetary union with the FRY, with beneficial results particularly evident in 1996. The Dayton/Paris Treaty envisages the establishment of a new, country-wide Central Bank, operating as a currency board and issuing a new domestic currency.
Efforts to promote monetary discipline have been underpinned by the elimination of government borrowing from the banking system in the Federation, and the reduction of such borrowing in the Republika Srpska. Chapter IV summarizes the new fiscal arrangements that are to be put in place in the Federation and State governments, as part of the implementation of the peace treaty. It also describes the technical assistance recommendations that have been provided to the Federation on several aspects of fiscal federalism and tax reform, which are broadly applicable to the treatment of the same issues by the Republika Srpska and State government.
Chapter V provides an overview of recent balance of payments developments and the external financing requirements associated with the authorities' priority reconstruction program. An fuller presentation of the reconstruction program can be found in "Bosnia and Herzegovina—The Priority Reconstruction and Recovery Programs: The Challenges Ahead," prepared in April 1996 for the Second Donor's Conference by the World Bank, EU Commission, and European Bank for Reconstruction and Development. This chapter also describes the exchange rate and trade systems of the two Entities. At present these systems are highly restrictive—a relic of the war and of economic sanctions that were imposed on the Republika Srpska until end-February 1996.
Finally, Chapter VI contains an assessment of macroeconomic statistics in Bosnia and Herzegovina and a summary of IMF technical assistance activities. The statistical system was weakened by the war and, like other public institutions, divided among the regions. As a result, the limited coverage and quality of economic statistics undermines the capacity for policy implementation and monitoring. A determined and cooperative effort by the authorities, supported by external technical assistance, is required to address this problem.
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This document presents a great deal of statistical information on Bosnia and Herzegovina which was not available previously. In particular, estimates of real GDP growth since 1994, monetary data, and much of the information on fiscal and balance of payments developments have been compiled only recently by the Fund staff, in collaboration with the authorities in all regions of the country. These series will be subject to revision as the effort to develop economic statistics proceeds.
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n. The 1996 Economy of Bosnia and Herzegovina in Perspective1
By the middle of 1996, economic conditions in Bosnia and Herzegovina (BiH) were substantially better than in December 1995, when three and one-half years of devastating armed conflict officially ended. Unfortunately, the country's political situation remained difficult, with weak of cooperation among the three major administrations (those of the Bosniac-, Croat-, and Serb-majority areas) threatening the sustainability of economic recovery, support from international donors, and the peace process. This chapter seeks to: (1) describe historical factors that help to explain the slow pace of reintegration and provide context for the discussion on Bosnia and Herzegovina's transition to a market economy; and (2) provide a snapshot of the economy at mid-1996.
The historical issues fall into four broad categories:
* the diverse backgrounds and incongruent interests which led to the breakup of the former Socialist Federal Republic of Yugoslavia (SFRY);
* the economic and political legacies of the SFRY to Bosnia and Herzegovina;
* the institutional vision of the country embodied in the Washington Agreements and Dayton/Paris Peace Treaty, and the implementation of the peace process; and
* the economic impact of the war;
A. Bosnia and Herzegovina as Part of the Ottoman Empire, the Austro-Hungarian Empire, and the "Kingdom of Serbs, Croats and Slovenes"2
In this section, the differing backgrounds and interests of Bosnia and Herzegovina's three main ethnic groups are examined to provide historical perspective to the ethnic tensions within present-day Bosnia and Herzegovina. In 1946, the SFRY was divided into six Republics—Slovenia, Croatia, Serbia Proper, Montenegro, Bosnia and Herzegovina and Macedonia—and two autonomous Provinces inside Serbia—Vojvodina and Kosovo (see map). Post-World War n migration within the SFRY, including substantial movement from rural
1 Prepared by Michael Marrese.
2 This section borrows heavily from T. M. Poulsen, "Yugoslavia in Geographical Perspective/' in J. B. Allcock, J. J. Horton, and M. Milivojevic (eds.), Yugoslavia in Transition (Berg Publishers Limited, Oxford) 1992: 42-45.
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villages to urban areas, had tended to increase the ethnic homogeneity of most regions.3 By 1981, all republics and autonomous provinces other than Bosnia and Herzegovina and Vojvodina had clear ethnic majorities (Table 1), with the majorities becoming larger in the following decade. In political life this meant that the interest of a region often coincided closely with the interests of the region's dominant ethnic group. In contrast, according to the last prewar official census, the 1991 population of Bosnia and Herzegovina had an extremely diverse ethnic composition: 44 percent ethnic-Bosniac (Muslim), 31 percent ethnic-Serb, 17 percent ethnic-Croat and 8 percent of others. Thus, to a considerable degree, Bosnia and Herzegovina was itself a "mini-Yugoslavia."
1. Before 1918
Strikingly different religious, cultural and economic backgrounds characterize the peoples of Yugoslavia. The Slovenes and Croats adopted Roman Catholicism, while the Serbs, Montenegrins and Macedonians followed the Eastern Orthodox rite. Bosnia and Herzegovina was part of the line dividing the influence of Roman Catholicism from that of the Eastern Orthodox religion.4 Far from both religious centers, a Bosnian Church emerged in the twelfth century and developed its own variant of Christianity—Bogomil—which the papacy and Hungarians called heretical.5 The Bosnians enjoyed independence in the thirteenth and fourteenth centuries. However, the Turkish expansion in the Balkan Peninsula during the fourteenth century swept Bosnia and Herzegovina under its control. Most Bogomils adopted Islam rather quickly, and until 1878—when Bosnia and Herzegovina was seized by the Austro- Hungarian Empire—Bosnian Muslims flourished within the Ottoman Empire.6 The status of the Bosnian Muslims in the Ottoman Empire was perceived as being elevated by many other southern Slavs—especially the Serbs who engaged in protracted revolts to gain independence. The Croats—never part of the Ottoman Empire—were under Hungarian rule from the end of the eleventh century to the Battle of Mohace (1463), and thereafter until 1918 became part of the Habsburg (then Austro-Hungarian) Empire.
3 Poulsen (1992, p. 48).
4 This dichotomy reflects the division of the Roman Empire in AD 396—Rome governing the western part and Byzantium the eastern part.
5 J. V. A. Fine, Jr., The Late Medieval Balkans (The University of Michigan Press, Ann Arbor) 1987: 146.
6 Those landowners who adopted Islam were allowed to retain ownership of their estates.
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2. 1918-1946
At the end of World War I, the Ottoman and Austro-Hungarian Empires disappeared. The victorious Allies supported the Serbian idea to unite southern Slavs.7 Under these circumstances, the "Kingdom of the Serbs, Croats and Slovenes'* emerged in 1918, composed of two previously independent states—Serbia (which included present-day Macedonia) and Montenegro—and three parts of the now defunct Austro-Hungarian Empire—Croatia, Slovenia and Bosnia and Herzegovina. The country was mainly rural, with about three-quarters of the population classified as agricultural throughout 1921-45 (Table 2).
From the outset, separatist tendencies were prominent in the Kingdom because of the widely diverging interests and levels of development of its constituent parts. Croatia and Slovenia-the most industrialized regions—had enjoyed a good deal of independence and prosperity as part of the Austro-Hungarian Empire, and argued strongly for outward orientation and a decentralized federal structure.8 Serbia, which gained autonomy within the Ottoman Empire in 1830 and became fully independent in 1882, was hindered in its economic development by the protracted struggle for independence and isolation from the rest of Europe. They advocated a centralized state in which they would play the dominant role. The southern part of the Kingdom was predominately agricultural, and even less developed than Serbia. Violence between Croats and Serbs became increasingly widespread, and in 1929 King Alexander I declared the country a royal dictatorship and renamed it Yugoslavia.
During World War II, the Germans and Italians divided Yugoslavia: Serbia was put under German administration; the State of Croatia—including the non-coastal part of Croatia and all of Bosnia and Herzegovina—was established under heavy German influence; coastal Croatia became part of Italy; Slovenia was divided between Germany and Italy; Montenegro became a kingdom under Italian domination; and Macedonia was annexed by Bulgaria. An estimated 11 percent of the population was killed during the war, many by other Yugoslavs
7 Ironically, a Serbian nationalist had ignited World War I when on June 28, 1914 he assassinated Archduke Francis Ferdinand, heir apparent to the Austro-Hungarian throne in Sarajevo. One month later, the Austro-Hungarian Monarchy declared war on Serbia after Serbia refused to meet the Monarchy's demands.
* Pre-World War I national income per capita was 73 percent higher in Slovenia and 47 percent higher in Croatia than the average of what became the "Kingdom of the Croats, Serbs and Slovenes" L. Madzar "The Economy of Yugoslavia/'in J. B. Allcock, J. J. Horton, and M. Milivojevic (eds.), Yugoslavia in Transition (Berg Publishers Limited, Oxford) 1992: 73.
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during the ensuing civil war among supporters of the occupation forces, Communists, and royalists. Inter-ethnic conflict was particularly intense between the Croats and Serbs inside the State of Croatia and German-occupied Serbia. The Communist-dominated partisans, led by Marshal Tito, won the civil war, freed the country from foreign occupation, and faced the challenge of rebuilding a heavily damaged country.9
B. Bosnia and Herzegovina as Part of the Socialist Federal Republic of Yugoslavia
This section briefly recounts Yugoslav economic developments in the post-World War n era. Its primary focus is on how the Yugoslav experience has influenced the agenda for economic reforms and the prospects for reintegration of present-day Bosnia and Herzegovina.
1. Yugoslav economic growth
This section summarizes the main factors that explain the SFRY's economic growth experience, thus provides background for the discussion of institutions and policies. The growth figures below are annual averages from official sources: gross social product (GSP) is based on constant 1972 prices; agriculture refers to agricultural production (and thus ignores inputs).10
1946-48 Rapid industrial reconstruction based on Soviet-style central planning and the efforts of a highly motivated population.11 The state had a monopoly in foreign trade, and the SFRY had close ties with the Soviet bloc.
9 Almost one-quarter of the population was left without shelter, B Horvat, The Yugoslav Economic System: The First Labor-Managed Economy in the Making (ME. Sharpe, Armonk, New York) 1976: 6. Madzar (1992, p. 75) cities the following losses: 36 percent of industrial capacity, 52 percent of standard gauge railways, and 33 percent of narrow gauge railways.
10 GSP differs from GDP in two major ways: (1) excludes education, health and government administration; and (2) incorrectly incorporates intermediate inputs into the calculation of economic activity. In the SFRY, these differences tended to offset one another. GSP includes gross fixed capital formation. Note that in the SFRY and Bosnia and Herzegovina, GSP is simply referred to as Social Product. Unless otherwise stated, statistics are from the Statistical Yearbook of Yugoslavia. 1991.
11 Industrial production increased by 50 percent in 1947, Madzar (1992, p. 76).
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1949-53: Slow growth: Soviet-bloc trade and financial ties disappeared, the SFRY received no Marshall-Plan assistance and agricultural output was low due to resistance to forced collectivization. Agricultural growth: 0.6 percent.12
1954-64 Rapid growth (except for 1962) due to accelerating export growth and to shifting labor from low-productivity agricultural activities to high-productivity industrial activities (Table 2). In 1955, relations with the Soviet Union were restored. In addition, in the 1950s the SFRY received grants and concessional loans from the West, especially from the United States. There was a significant improvement in terms of trade. The latter years saw signs that the extensive growth strategy of the 1950s was coming to an end as industry no longer was able to absorb the labor outflow from agriculture. Growth rate of GSP, 7.9 percent; agriculture, 5.0 percent; exports, 17.0 percent (of which, export volume up 13.8 percent); imports, 12.9 percent (of which, import volume up 11.5 percent) and terms of trade, 1.4 percent.
1965-73 Rapid growth during a period of economic reform, worldwide expansion of exports, and migration of surplus labor to Western Europe. Modest improvement in terms of trade. Growth rate of GSP, 7.1 percent; agriculture, 1.8 percent; exports, 13.8 percent (export volume up 7.7 percent); imports, 14.6 percent (import volume up 8.8 percent) and terms of trade, 0.4 percent.
1974-79 Rapid growth financed by heavy borrowing from abroad with a tremendous deterioration in the trade balance. The industrialized world shifted to a much slower growth path due to the two oil shocks; the SFRY's terms of trade declined; and poor macroeconomic policy decisions failed to trim domestic consumption. Growth rate of GSP, 6.2 percent; agriculture, 2.2 percent; exports, 15.1 percent (but with export volume up only 2.0 percent); imports, 20.2 percent (import volume up 5.4 percent); terms of trade, -1.1 percent.
1980-89 Economic stagnation due to: (1) restricted access to external financing following the emergence of debt-servicing problems; (2) a deep recession among its major trading partners; and (3) failure to adjust structurally to the new economic circumstances. Growth rate of GSP, 0.7 percent; agriculture, 0.7 percent; exports, 7.3 percent (export volume up 3.2 percent); imports, 0.9 percent (import volume down 3.0 percent); terms of trade, -0.1 percent.
12 Forced Soviet-style collectivization was introduced in January 1949, then abandoned in 1953, Horvat (1976, pp.14, 89-90).
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2. Yugoslavia: In search of an equitable institutional structure amid ethnic divergence
From 1946 through 1990, the institutional orientation was altered repeatedly to reach a political and economic balance between the SFRY's socialist ideal of equality and the demands of regions with starkly different levels of economic development. As described above, a trend toward growing ethnic homogeneity in the regions—other than Bosnia and Herzegovina and Vojvodina—meant that regional interests were increasingly identified with those of particular ethnic groups.
Yugoslavia's initial institutional choice was to follow the Soviet model in which central planning blended with the propagation of centrally dictated educational and cultural values designed to be free of ethnic prejudices.13 Soon nationalization eliminated most private ownership from all areas except agriculture, and even there constraints on private land ownership were imposed.14 In addition, relative prices favored heavy industry and were disadvantageous to agriculture, which disproportionally penalized the less industrialized parts of the country. In 1946-48, Yugoslavia, enjoying strong trade and financial connections with Soviet-bloc countries, pursued a policy of high investment and meager consumption. Industrial output soared. This growth surge was interrupted by a period of stagnation (1949-53) characterized by a sharp fall in exports and low agricultural production.15 The
13 For a comprehensive overview of the Soviet model, see J. Kornai, The Socialist System: The Political Economy of Communism (Princeton University Press, Princeton, New Jersey) 1992.
14 Madzar (1992, pp. 75-76) describes the waves of nationalization and the two agrarian reforms. In the second agrarian reform of 1953, private agricultural holding was restricted to no more than 10 hectares.
15 Exports were, on average, 23 percent below their 1948 level during 1949-53, Horvat (1976, p. 189).
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fortner was caused by the country's isolation from the world—Marshal Tito broke with the Soviet Union in 1948 and had yet to establish close ties with the West.16 The latter was connected to the negative reaction of peasants to forced collectivization.17
To counteract shortcomings in the Soviet model and in response to pressure to find a better balance among the aspirations of ethnic groups, Yugoslavia in the early 1950s formally dismantled central planning and adopted a system of self-management in which workers began to participate directly in enterprise management.18 Workers' councils gained some control over the daily management of the firm, but until the 1960s had no control over investment policies and the distribution of "surplus income."19 In 1955, trade ties between the SFRY and Soviet-bloc countries were restored. Also, trade with the West improved as the country's non-aligned status allowed it to serve as a bridge between East and West.
A number of problems emerged in the first half of the 1960s that set off the country's first open debate (1962-65) on the optimal balance between plan and market in a socialist country.20 First, the 1962 recession highlighted the country's awareness of its dependence on
16 In 1947-48, about 50 percent of the SFRY's exports and 42 percent of its imports were exported to and imported from Soviet-bloc countries. In 1949, these levels declined to one- third the 1947-48 levels and in 1950 a total boycott put a temporary halt to all such trade. At the same time, the SFRY did not receive assistance from the Marshall Plan and remained outside GATT, Horvat (1976, p. 189).
17 Madzar(1992,p.77).
18 Under the Basic Law on the Management of State Economic Enterprises by Worker Collectives (1950), self-management was defined as granting to all citizens equal access to "social capital" in the form of both the right to work in socially-owned enterprises and the right of workers to manage their own enterprises. At end-1951, the Law on Planned Management of the National Economy replaced detailed central plans with planning of the economy's basic proportions—rate of accumulation and distribution of investment. Other changes, including the 1953 constitution, were introduced during the next two years.
19 Madzar (1992, p. 79); D. PleStina, "From 'Democratic Centralism' to Decentralized Democracy? Trial and Tribulations of Yugoslavia's Development," in J. B. Allcock, J. J. Horton, and M. Milivojevic (eds.), Yugoslavia in Transition (Berg Publishers Limited, Oxford) 1992: 132.
20 Plegtina (1992, pp. 132-136).
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investment-led growth, much of which was foreign financed.21 Yet foreign financing was becoming more expensive as credits were replacing the grants received in earlier years. Second and more importantly, a consensus emerged that the investment choices themselves were often inappropriate because of excessive reliance on development of heavy industry. Third, with the industrial sector fully employed, it became evident that the transfer of labor from low productivity agricultural pursuits to higher productivity industrial activity would no longer be a major source of growth. A new outlet for surplus agricultural labor needed to be found. Fourth, high inflation combined with centralized price-setting had a particularly negative impact on producers of relatively rigidly priced raw materials and agricultural goods.22 Fifth, the country's goal of narrowing income differentials across regions had failed. In fact, an examination of both the cross-regional trend in gross social product per capita and unemployment (Tables 3 and 4) show that the relative positions of Montenegro, Bosnia and Herzegovina, Macedonia and Kosovo deteriorated sharply between 1952 and 1965, in good part because of the capital-intensive heavy-industry bias of the country's developmental strategy.23
The debate on the balance between plan and market took the following form:24 Croatia and Slovenia favored increased reliance on the market and increased decentralization, meaning that self-management was to be expanded to nonproductive spheres such as education and medical care. Serbia favored continued reliance on central planning and opposed expansion of decentralization. Croatia and Slovenia portrayed the Serb position as indicative of Serbia's hegemonic aspirations. Eventually Bosnia and Herzegovina, Macedonia and Kosovo—though unenthusiastic about reliance on markets—sided with Slovenia and Croatia, in part lured by the prospect of receiving developmental assistance based on clearly defined, need-based criteria.25
21 The Director of the Federal Planning Bureau estimated that one-third of productive investment in the SFRY during the 1950s was financed by foreign grants and soft loans, much of which came from the United State, PleStina (1992, p. 132). 22 Inflation was high because consumption was not curtailed to counteract the impact of capital inflows. Moreover, fiscal deficits were used as a means of boosting consumption, which added to inflationary pressure. 23 PleStina (1992, p. 133). 24 PleStina (1992, pp. 134-137). 25 Only Montenegro among the less developed regions consistently received more than the national average of grants-in-aid. This was due to the heavy-industrial bias of the developmental strategy. Plestina(1992, p. 136).
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A great deal of decentralization occurred from the mid- to late-1960s. On the economic front, enterprises gained control over their "surplus income" and worker collectives faced much clearer incentives to maximize "'surplus income per worker." Price subsidies were reduced and controlled prices were adjusted up to world market levels, partly to realign the economy away from heavy industry. Banks, which before 1965 distributed centrally allocated investment funds according to the national economic plan, began to mobilize and allocate their own investment funds.26 The Yugoslav dinar was devalued and the economy became more open to foreign competition as the system of multiple exchange rates was replaced by a single exchange rate. The assets of heretofore centrally managed investment funds were transferred to banks, which were to be managed by large firms and government agencies and would now make all of the investment decisions. In addition, the so-called "Federal Fund" was set up to channel resources from developed regions to less developed ones, while allowing the less developed regions more control over how these resources could be utilized (see Chapter IV). Finally, under the pressure of increasing unemployment (the industrial sector no longer was able to absorb the labor outflow from rural areas) the political leadership completely changed its attitude toward external migration. By 1966, external employment legally became a normal form of employment and was even encouraged.27
These reforms had some beneficial impact—real GSP grew by 5.8 percent between 1965 and 1970. In addition, less developed regions received aid from the Federal Fund, and their capital formation as a share of their gross social product was generally much higher than the national average during 1966-85 (Tables 5 and 6).
However, the 1960s witnessed a change in political consciousness, driven both by economic trends and the growing identity of regional and ethnic interests. The ideal of universal opportunity throughout the country gave way to a belief that each region needed to
26 Centrally managed investment funds ceased to function, and their assets were transferred to banks, which were to be governed by its founders (large firms and sociopolitical bodies). The taxes that previously supported the centrally managed investment funds were eliminated, J. P. Burkett, "The Yugoslav Economy and Market Socialism," in M. Bernstein (ed.), Comparative Economic Systems: Models and Cases (Irwin, Homewood, IL) 1989: 236. 27 M. Mesic, "External Migration in Post-War Yugoslavia," in J. B. Allcock, J. J. Horton, and M. Milivojevic (eds.), Yugoslavia in Transition (Berg Publishers Limited, Oxford) 1992: 178.
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fight for its own economic interest.28 Moreover, the stated goal of full employment was pushed far into the background with the huge outflow of Yugoslav migrants seeking temporary work in Western Europe.29
On the political front, power moved from the state level to the regional level. Vojvodina and Kosovo were given their own separate constitutions and the same rights as the six republics. All regions were given the right to appoint their own mid-level political functionaries. Regional communist party congresses took on greater importance than the all- Yugoslav party congress. A political scientist specializing in regional development summed up the situation as follows:
By devolving power from the federal centre to the republics and regions; the Yugoslavs sought to remove the major source of conflict; in the process they also removed the only agent of cooperation and compromise. By 1969, nine distinct units had been created whose consensus was required for most policy decisions.30 The problem was that with the existing differences in social, political and economic development of the republics and regions both the problems facing them and the general outlook were likely to differ. Furthermore, the correspondence between levels of development and national territorial boundaries meant that the solution to regional problems could and often did take on a nationalist garb.31
Institutional changes of the 1970s had two traits in common—they were designed to mollify regional (ethnic) interests and at the same time find a third way between plan and market. For example, Croatian dissatisfaction with what they perceived as Serbian control of the financial system led to nationalist and student uprisings in 1971. This, in turn, prompted the Yugoslav leadership to revitalize the country-wide League of Communists and to pass the 1974 Constitution that both strengthen Federal control of the economy and ruled out layoffs of workers except in cases of bankruptcy. Other economic institutional changes were introduced in 1974: Inter-Republican agreements became important instruments of policy implementation; and enterprises were organized into Basic Organizations of Labor, which, acting together under Self-Management Agreements, took joint investment and marketing
28Plestina (1992, p. 137) notes that in December 1966 Bosnia and Herzegovina appealed to the Federal Assembly charging that its allocation from the Federal Fund was inadequate. This was considered the first that a region openly fought to protect its own economic interests. 29 By 1971, over a million Yugoslavs had found temporary work in Western Europe, with the greatest outflow occurring during 1968-71. Mesic (1992, p. 180). 30 Six republics, two autonomous provinces, and a representative of the army. 31 Plestina (1992, pp. 139-140).
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decisions. The impact of these institutional changes was not immediately apparent because inexpensive foreign loans (easily available after the first oil crisis when oil producers were recycling their newly found wealth) financed the growing trade deficit. The policy of borrowing from abroad along with macroeconomic policy mistakes at home allowed economic agents to delay adjustment to the new international environment—significantly altered relative prices and the shift by industrial countries to a slower growth path.
3. Stagnation and collapse
The 1980s proved to be a decade of economic stagnation—GSP grew by only 0.5 per cent annually—and the undoing of the SFRY. Many factors contributed to these two developments. The first and second oil crises of the 1970s significantly increased the country's import bill and its debt burden. The oil crises contributed to slow growth in Western Europe, and Yugoslav migrant workers began to return from Western Europe in large numbers.32 Tito died in 1980. Shortly thereafter, the Federal Executive Council-the strongest political body in post-Tito Yugoslavia—failed to pass its vision of how development funds were to be allocated to less developed regions.33 Latter in the decade communism collapsed in Central and Eastern Europe, and preparations were made in the SFRY for a radical reform package which would have abolished social property. However, the republics began to move toward independence before this package could be implemented.
The year 1990 saw free elections and republics adopting new constitutions confirming their right to secede. During June 1991-April 1992, Slovenia, Croatia, Bosnia and Herzegovina, and the Former Yugoslav Republic of Macedonia declared their independence. The independence of Croatia, Slovenia, and Bosnia and Herzegovina was challenged militarily by the Yugoslav National Army and—in the cases of Croatia and Bosnia and Herzegovina—by local Serb militias.
For Croatia and Slovenia, the decision to become independent was not unexpected. Croatians and Slovenes historically were part of the Austro-Hungarian Empire; tend to be Roman Catholics; and had a different economic philosophy from Serbs. Both also had no intention of continuing to supply developmental assistance to the less developed areas of the former SFRY, and were mistrustful of what they perceived to be the hegemonic aspirations of the Serbs. In addition, violent conflict between the Croats and the Serbs had been a frequent historical occurrence.
32 Estimated at 220,000 returnees during 1980-84. Mesic (1992, p. 195).
33 In the late 1970s, three different visions were written on how development funds were to be allocated—one by Croatia and Slovenia, another by Serbia Proper, and a third by the less developed regions (though Vojvodina chose not to participate). None of the versions passed, and conflict among regions focused on regional development. PleStina (1992, pp. 145-146).
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From a strictly economic point of view, the decision of Bosnia and Herzegovina and the Former Yugoslav Republic of Macedonia to secede requires more of an explanation. Within the SFRY, Macedonia had a virtually unchanged relative position with regard to gross social product per capita (based on constant 1972 prices, Table 3) from 1952 to 1989, while Bosnia and Herzegovina's relative position declined from the early 1950s to the early 1970s, thereafter remained relatively stable—roughly two-thirds of the national average, equal to that of Macedonia, and almost 50 percent less than the Croatia level. In terms of net personal income per worker, Bosnia and Herzegovina and Macedonia also had stable relative positions from 1965 to 1983 (Table 7). With regard to social, health and educational indicators, however, Bosnia and Herzegovina and Macedonia made substantial progress. Their positions relative to other regions improved with regard to the availability of hospital beds and physicians (Table 8), life expectancy (Table 9), and educational attainment (Table 10). Moreover, both republics were major recipients of aid from the Federal Fund during 1966-90 (Table 5). However, Bosnia and Herzegovina and Macedonia faced a less encouraging situation if Croatia and Slovenia—the two richest republics— were to choose independence. The prospect for receiving future developmental assistance in the new, smaller "Yugoslavia" did not appear as favorable, and Serbia would have exercised greater control in the smaller "Yugoslavia" than it had in the SFRY.
C. Economic and Political Legacies from the Pre-War Period
The former SFRY was a socialist economy in which government decision makers at the Federal, regional, local and enterprise levels were accustomed to ignoring the verdict of the market. Yet at the same time, reforms had a longer history in the SFRY than in other transition economies—price liberalization had begun earlier, the monobank system had been abandoned in the mid-1960s, the country's trade regime was more open toward the West than that of other socialist countries, and the role of foreign capital within the county was relatively large.34 Nonetheless, Bosnia and Herzegovina and other republics inherited a highly distorted incentive structure with an inflationary bias from the former SFRY:
* Property rights under the system of self-management were particularly confusing. Several levels of government, managers, and workers all perceived partial ownership of enterprise assets. This dispersion of property rights resulted in decisions biased toward short-term payoffs, thus distorted investment choices. Over time poor investment decisions led to widespread enterprise losses.
34 For a summary of reform efforts in the SFRY, see M. Uvalic, "How Different is . Yugoslavia," in European Economy: The Path of Reform in Central and Eastern Europe (Commission of the European Communities, Brussels) 1991: 201-213.
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* The presence of widespread enterprise losses usually did not result in bankruptcy since many enterprises faced soft budget constraints. Many Yugoslav banks were owned and controlled by enterprises—especially by the larger conglomerates—which would pressure banks to lend them credit to cover their losses. In turn, the National Bank of Yugoslavia could normally be counted on to rediscount passively commercial bank credit to the enterprise sector, culminating in the monetization of enterprise losses.
* Given poorly defined property rights and soft-budget constraints, domestic decentralized innovation and flexible adaptation to the trends and demands of the international market never became widespread. Consequently, increases in productivity remained low.
Three political legacies also stand out:
* Unrealistic expectations of the population: The population had become accustomed to a relatively high standard of living, including a vast array of social benefits and job security. Yet the population did not realize the extent to which such prosperity had been financed from abroad.
* The more developed regions of the SFRY had developed an aversion to funding the less developed regions. This attitude carried over to Bosnia and Herzegovina where relatively prosperous regions now scrutinize economic policy decisions for their redistributive implications, impeding the transfer of fiscal resources to the areas most damaged by the war.
* Mistrust among ethnic groups has remained high. This has meant that ethnic quotas are a normal occurrence at any level of government which represents significant numbers from more than one ethnic group.
D. The Peace Process and the Economic Impact of the War
1. The economy before the war
Bosnia and Herzegovina spans 20 percent of the former SFRY's total land area, and had a somewhat lower share of its population (Table 3). In 1990 using current prices, Bosnia and Herzegovina's GDP per capita equaled US$2,400~60 percent of the average for the SFRY (US$4,000), 47 percent of that of Croatia (US$5,100) and 37 percent of that of Slovenia (US$6,500). In 1990, industry and mining's share of Bosnia and Herzegovina's GDP was 40 percent and agriculture's share 6 percent.
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Bosnia and Herzegovina had not yet started its transition from social ownership to private ownership, as was the situation with the rest of the SFRY. Most economic activity took place in labor-managed enterprises, which often faced soft budget constraints and ran large quasi-fiscal deficits. Economic linkages among the republics were reinforced by locating separate stages of a unified production process across regional boundaries, and through the national electricity grid and transport networks.
2. Armed conflict
Bosnia and Herzegovina declared its independence from the SFRY in March 1992, well after Slovenia and Croatia had made that decision and immediately after two-thirds of the population voted for the creation of a separate state called the Republic of Bosnia and Herzegovina. Most Bosnian Serbs boycotted the referendum, and then refused to recognize that the new Republic had any jurisdiction over them. However, the Republic of Bosnia and Herzegovina received international recognition from the United Nations and most nations in the months following the referendum.
Shortly after declaring independence, the Republic of Bosnia and Herzegovina's existence was challenged by the Yugoslav National Army and local Serb militia, resulting in a war that continued until the cease-fire of October 10, 1995. During this conflict, the Republika Srpska (RS) was established within the Republic of Bosnia and Herzegovina on the territory controlled by Bosnian St. b forces. Starting in early 1993, the Army of the Republic fought not only against the armed forces of the RS but also against the Bosnian Croat defense forces (HVO)—heretofore allies against the Bosnian Serbs. The armed conflict between the Army of the Republic and the HVO ended with the cease fire of February 25, 1994.
An estimated 250,000 are dead or missing as a result of the war. Out of a pre-war population of 4.4 million, some 3 million people were displaced during the war—1.2 million abroad and 1.8 million internally. Further internal migration occurred after the war, reinforcing the already substantial wartime "ethnic cleansing."
3. The peace process
The Washington Agreements of March 1994 ended the conflict between the HVO and the Army of the Republic. It provided for the merger of the Bosniac- and Croat-majority areas into the Federation of Bosnia and Herzegovina, under the newly approved Federation Constitution. This constitution envisioned three levels of government: the Federation, cantons, and municipalities. Before the signing of the Dayton/Paris Peace Treaty (described below), the Federation was intended to have exclusive responsibility for foreign affairs, defense, monetary policy (including a domestic currency), planning and reconstruction in the Federation, energy policy, Federation police, allocation of electronic frequencies, and "citizenship, refugees and displaced persons", along with the fiscal authority to cany out these responsibilities. In June 1996, the Federation Constitution was amended to be consistent with
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the subsequent Dayton/Paris Treaty, which gave to the newly formed State all of the responsibilities listed above except for defense, planning and reconstruction, and certain policing duties. The Federation is to share responsibilities with cantons in areas such as transportation and communications infrastructure and internal affairs, while cantons and municipalities have been given a complex mix of responsibilities over education, health care, local social welfare and most other local services (see Chapter IV). An important reason for the degree of decentralization embedded in the Washington Agreement and later reaffirmed in the Dayton/Paris Treaty has been the presumption that tensions among ethnic groups could be limited by allowing localities with different ethnic majorities to make many of their own economic decisions.
The Dayton/Paris Treaty ended the war between the Bosniac-Croat alliance and the Republika Srpska. Initialed in Dayton, Ohio on November 21, 1995, it was signed in Paris on December 14, 1995. The treaty included a new constitution, which confirmed the country's continued existence within its internationally-recognized borders, and that it consists of two constituent Entities—the Bosniac-Croat Federation of Bosnia and Herzegovina (holding 51 percent of all territory) and the RS (holding the remaining 49 percent). A new and collective Presidency and Parliamentary Assembly with balanced representation of all three major ethnic groups (Bosniac, Croat, and Serb) are to be constituted following national and Entity elections, scheduled for September 14, 1996. 3S In addition, a country-wide central bank is to be established, issuing a new domestic currency under a currency board arrangement (see Chapter HI).
The Dayton/Paris Treaty provided procedures and a timetable for implementation of the peace process, including the deployment of an international peacekeeping force (IFOR), the withdrawal of each Entity's armed forces behind the inter-Entity boundary line, partial demobilization of the armies, and temporary quartering of the remaining forces. The June 1996 meeting of the Peace Implementation Council in Florence, Italy, concluded that implementation of military aspects of the peace process had largely proceeded on schedule, but civilian aspects of the peace process had proceeded less satisfactorily. It noted that
35 Two-thirds of the Parliamentary Assembly is to be elected from the Federation and one- third from the RS. All parliamentary actions will be by majority vote, provided the majority includes at least one-third of the votes from each Entity (there are also other provisions intended to ensure balanced representation of the three major ethnic groups in decision- making bodies and to safeguard minority interests). The shares of representation in the Presidency are to be the same. Decisions by the Presidency will be taken by majority vote, except when one-third or more of the members disagree and declare the decision to be destructive to the interest of the Entity or Entities from which the dissenting members were elected. Under those circumstances, the matter would be referred to the appropriate Parliament(s). If any Parliament confirms the dissenting position by a two-thirds majority vote, the challenged decision will not take effect.
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widespread abuses of human rights continued to occur throughout the country. Entity and national elections are scheduled to be held on September 14, 1996, after which the three major ethnic groups are expected to put in place the central institutions of the new State government. Institution building through mid-1996 had been slow and uneven. The Federation had not yet become a functioning Entity and there had been little inter-Entity cooperation toward establishing new State institutions.
4. The war's economic impact
No part of the country was prepared for the fiscal consequences of financing a war. The first reaction was to monetize government budget deficits. Quasi-fiscal deficits of enterprises added to inflationary pressure. Finally, wartime shortages also caused considerable price increases. The net effect was the hyperinflation of 1992-93. *
Discussion of inflation in the country has been complicated by the use of multiple currencies (see also Chapters IV and V). The deutsche mark (DM) has been used throughout the country, yet hyperinflation in DM terms was never an issue though prices for most goods rose many-fold in DM during 1992-93 because of shortages caused by supply bottlenecks. In the Bosniac-majority area (the territory controlled by the Army of the Republic of Bosnia and Herzegovina), the BH dinar issued in Sarajevo by the National Bank of Bosnia and Herzegovina (NBBH) was used as the domestic currency. Price stability in BHD began with the issuance of new redenominated banknotes in August 1994 and the tightening of fiscal and credit policies. In the Croat-majority area (the territory controlled by the HVO), the kuna issued in Zagreb by the Central Bank of Croatia has been widely used. Since introduction of the October 1993 stabilization program, the domestic currency of the Republic of Croatia has been very strong.37 In the RS, the National Bank of Republika Srpska (NBRS) began issuing RS dinar in 1992, but this currency lost all standing during 1993 and was withdrawn from circulation in early 1994. Since then the new Yugoslav dinar (YUD) issued in Belgrade by the National Bank of the Federal Republic of Yugoslavia officially has been the legal tender of the RS. Its stability has been dependent on the fiscal and monetary policies of the Federal Republic of Yugoslavia.
36 In the Bosniac-majority area, the index of retail prices rose over 730-fold in 1992 and 440-fold in 1993. In the RS, the index of retail prices rose over 73-fold in 1992 and over two thousand trillion times in 1993. Price developments in the Croat-majority area likely followed developments in the Republic of Croatia, where prices rose over 9-fold in 1992 and over 11-fold in 1993. 37 In October 1993, the domestic currency of the Republic of Croatia was the Croatian dinar. The kuna was introduced on May 30, 1994 at the rate of 1,000 Croatian dinar per kuna.
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The war's disruption of transportation and dislocation of much of the population, the hyper-inflation of 1992-93, the destruction of industry in the Bosniac-majority area, the Bosnian Serb siege of Sarajevo, and the imposition of international economic sanctions in mid-1994 against the RS brought economic activity throughout the country to a virtual standstill by mid-1994. Preliminary estimates indicate that GDP in 1994 was less than 20 percent of its 1990 level in real terms, with GDP in the Federation down 83 percent and in the RS down 78 percent.38 For 1994, industrial production in the Bosniac-majority area was only 1 percent of its 1991 level—many large enterprises were destroyed, while the remainder was idled by lack of demand or inputs. Civilian employment in the Bosniac-majority area was roughly 25 percent of its 1991 level.39 Industrial production also collapsed in the Croat- majority area, and civilian employment was roughly 20 percent of its 1991 level—reflecting both the collapse in demand and movement of employees off official employment rolls to the underground economy.
For 1995, preliminary estimates for the entire economy indicate that GDP increased by 7 percent—to reach 20 percent of 1990 GDP in real terms. GDP in the Federation rose 28 percent and in the RS declined 23 percent.40 The upturn in the Federation was fueled by the renewal of the Bosniac-Croat alliance that translated into better Bosniac access to imported supplies (even though Bosnian Croats still controlled the customs border crossings) and higher inflows of international assistance. The cumulative effect of international sanctions was largely responsible for the sharp drop in the RS.
Table 11 describes the movement of physical indices of industrial production in Bosnia and Herzegovina, based on preliminary data and estimates of the State Institute of Statistics in Sarajevo. These data show that growth has resumed to the largest extent in electric power, extraction of nonmetallic metals, fabricated metal products, electrical machinery and equipment, leather and fur processing, foodstuffs, beverages, tobacco, and printing..
38 In this section, all statistical discussion of the Federation and the RS conforms to the post- Dayton territorial definitions of these Entities. 39 Civilian employment data do not include those in the armed forces or police, or those individually employed (in small-scale agriculture or services, or as artisans), yet include those employed abroad by a domestic firm (in the pre-war period, this involved construction projects abroad). 40 The following is based on preliminary information. For the Federation, 1995 growth rates of selected physical indices are: industrial output, 18 percent (within which, electricity usage, 15 percent); sawn lumber, 53 percent; wheat, 68 percent; rye; 107 percent; barley, 32 percent; vegetable output much higher; and fodder output generally higher. 1995 growth rates went the other way in the RS: industrial output, -13 percent; crop output, -28 percent; animal product output and trade both -50 percent; construction, and -40 percent
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Social issues will burden the economy for years to come. The extent of human displacement means that a large portion of the population is living in the homes of other people. At end-1995, it was estimated that some 3.4 million people were within the country (2.4 million in the Federation, 1 million in the RS), from which some 1.5 million (1.2 million in the Federation and 0.3 million in RS) were living outside their own homes or in refugee camps. Sorting out the various property claims will take decades. In addition, a survey completed in July 1995 revealed that 63 percent of all housing units in the Federation had some damage, with 18 percent of Federation housing having been completely destroyed (more than 60 percent damaged).41
Land mines have created an environmental nightmare. Estimates on the number of land mines in the country range from 1.5 million to 4 million.42 In addition, the deficient water and sanitation systems pose a serious threat to public health.
Children have lost almost four years of schooling, and the still standing education and health systems function quite poorly. Resources to help the handicapped and traumatized are inadequate. Those who were disabled will need training for alternative employment, and many widows need to become better qualified to support their dependents.
£. Snapshot of the Economy in mid-1996
As of mid-1996, all areas of Bosnia and Herzegovina were quite far from overcoming the economic problems caused by the war. In the Federation, the economic conditions in the Bosniac- and Croat-majority areas continued to be significantly different, primarily because of less war damage and greater access to external trade and financing flows in the latter. In the Republika Srpska, economic problems stemmed to a considerable extent from the economic sanctions imposed in mid-1994.
1. Bosniac-majority area
In the Bosniac-majority area, the reconstruction process began shortly after the Dayton/Paris Peace Treaty was signed, yet proceeded more slowly than anticipated due to delays in the disbursement of international assistance. Industrial production during the first six months of 1996 was 70 percent higher than during the same period of the previous year (Table 12), reaching 8 percent of the average 1991 level (see Basic Data). Because of labor hoarding during the war, increases in employment have been modest relative to industrial growth-up 50 percent during 1995 and another 10 percent during the first half year of 1996
41 Bosnia and Herzegovina! Priorities for Recovery and Growth, Sectoral Annexes, Discussion Paper #2, World Bank and European Bank for Reconstruction and Development, Decembers, 1995:152-154. 42 Bosnia and Herzegovina: Priorities for Recovery and Growth. Sectoral Annexes (1995, p. 167).
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(Table 13). Average net wages (after wage taxes and contributions to social funds) have roughly quadrupled from mid-1995 (DM 40 per month) to May 1996 (DM 158 per month) (Table 14). Each officially employed person also received a DM 50 food monthly supplement (in cash or a contribution to a workplace dining hall), which was raised to DM 80 in June 1996. Wage growth accelerated during 1996—almost doubling between February and May- reflecting foreign budgetary support given to the Bosniac-majority administration and international assistance for the repair of infrastructure and the rebuilding of housing. In May 1996, civilian unemployment was estimated at about 65 percent of the labor force. In the Federation, consumer prices fell 12 percent in 1995 (40 percent December/December), mirroring alleviation of wartime transport bottlenecks, and rose only 4 percent from December 1995 to June 1996 (Table 15).
Besides price decreases due to much better access to imported goods, financial policies also contributed to favorable inflation performance and supported the fixed exchange rate arrangement. Since 1994 monetary policy on the whole was restrictive—net credit to government declined reflecting a build-up of deposits that more than offset a modest expansion of central bank financing (see Chapter ID). Budgetary expenditures were curtailed to be roughly in balance with cash revenues (see Chapter IV). However, large actual and potential arrears to civil servants, pensioners, soldiers, and military suppliers remained worrisome for the macroeconomic outlook.43
2. Croat-majority area
In the Croat-majority area reconstruction and unemployment were somewhat less problematic than in the Bosniac-majority area, even though there were wide regional disparities in war damage. Annual data—the only available data—show that growth rates in the real sector during 1995 were quite high: index of industrial production, 27 percent (of which, electricity, 28 percent), official employment, 69 percent, and the average net wage (in DM) of those officially employed, 35 percent. Output of construction material soared; for instance, production of concrete increased more than 13-fold. As in the Bosniac-majority area, the budget was approximately balanced in 1995, but at a higher level of per capita expenditure. The average net monthly wage of those officially employed during 1995 was DM 260. In addition, each employee received a food supplement of DM 50 per month (in cash or as a contribution to a workplace dining hall). Civilian unemployment was estimated at 50 percent of the labor force at mid-1995.
43One example of potential arrears: Bosniac officials in April 1996 announced a scheme of issuing to "those who have served in the army in the Republic of Bosnia and Herzegovina9' bank savings books for their back pay, calculated at DM 400 per month. The amount involved would be about DM 4-5 billion, a large multiple of annual fiscal revenues.
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As in the Bosniac-majority area, the budget was balanced on a cash basis in 1995 and early 1996, but at a higher level of per capita expenditures.
3. Republika Srpska
In the Republika Srpska. industrial and agricultural output declined in 1995 by about 15 percent and 30 percent, respectively, largely as a result of sanctions which restricted access to imported inputs, export markets, and financing. GDP in the Republika Srpska is estimated to have declined by 23 percent. The civilian unemployment rate reportedly approached that in the Bosniac-majority area, and average net monthly wages in April 1996 were equivalent to DM 35 per month (Table 16). Officially employed individuals also received a food supplement, and in some cases a transportation supplement as well.
Inflation in the RS was largely dependent on developments in the Federal Republic of Yugoslavia (FRY), even after FRY's imposition of sanctions on the RS in August 1994. During 1995 (December/December) the RS inflation rate was about 200 percent. To a considerable extent this reflected the effects of sanctions and the 67 percent depreciation of the Yugoslav dinar. Inflation in January was 17 percent, in February 4 percent, then—with the lifting of sanctions—supply conditions improved and prices dropped steadily (Table 15). In June 1996 prices were 11 percent below the December 1995 level.
For 1995, the fiscal deficit on a cash basis was about 1 percent of the RS's GDP. Domestic arrears for public-sector wages, pensions, and wartime obligations to enterprises accumulated in 1995.
4. Balance of Payments
Rough staff estimates of the balance of payments for the whole territory of Bosnia and Herzegovina show a current account deficit of US$500 million (excluding official transfers) for 1995, equivalent to about 20 percent of GDP (see Chapter V). At end-1995, the country's total external public and publicly guaranteed debt was estimated at US$3.4 billion, of which about US$2.0 billion was in arrears.
Preliminary data for the first four months of 1996 show continued growth in foreign exchange net inflows on a cash basis, primarily due to sizeable receipts of unrequited transfers and exports of services. As a result, gross official reserves of the National Bank of Bosnia and Herzegovina grew to reach US$97 million by end-April—an increase of US$31 million from end-1995. The lifting of sanctions also led to net inflows of foreign exchange in the RS.. Preliminary data suggest that the gross reserves of the National Bank of Republika Srpska grew by US$9 million over the first four months of 1996, reaching US$14 million at end- April.
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IIL Financial System and Monetary Developments44
A. Overview
The financial system of Bosnia and Herzegovina was deeply segmented following independence. The National Bank of Bosnia and Herzegovina (NBBH), located in Sarajevo, was and is the internationally recognized central bank of the country as a whole. However, it has never been able to exercise these functions in the Republika Srpska (RS), which established its own central bank, the National Bank of the RS (NBRS), in 1992. In addition, by early 1993 a separate financial system was put in place in the Croat-majority area of the Federation, supervised by the regional Ministry of Finance.
As of mid-1996 a number of steps had been undertaken to reintegrate the financial systems of the Bosniac-Croat Federation, although considerable elements of separateness persisted. The RS financial system remained isolated from the rest of the country, and closely linked to that of the Federal Republic of Yugoslavia (Serbia/Montenegro). Accordingly, this chapter discusses financial developments of the Federation and the RS separately.
B. The Future Central Bank of Bosnia and Herzegovina
Under the new Constitution enacted as part of the Dayton/Paris Treaty, many important economic policy responsibilities are to be carried out by the Entities, particularly in the area of fiscal policy. In contrast, the State will exercise sole responsibility for monetary policy, through a new country-wide Central Bank issuing a new domestic currency.
The Constitution Article VII stipulates that the Central Bank will be the only authority for monetary policy and issuing currency in Bosnia and Herzegovina, functioning as a currency board for the first six years. It will thus issue currency only in exchange for purchases of foreign exchange, at a fixed exchange rate between the new domestic currency and a convertible foreign currency (most likely the DM), and will not provide credit to any part of the economy.
The Bank's Governing Board will consist of a Governor and three other members, all appointed by the Presidency. The Governor will be recommended by the Management of the IMF, and may not be a citizen of Bosnia and Herzegovina or any neighboring state. Two of the remaining members will be from the Federation (a Bosniac and a Bosnian Croat), and the third will be from the RS. The two members from the Federation will share one vote in the Governing Board, the member from the Republika Srpska will have one vote, and the
4Prepared by Jurgen Odenius
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Governor may cast a tie-breaking vote. After the mandatory six-year period, the Parliamentary Assembly may decide to leave the Central Bank a currency board, or to change its responsibilities. Its Governing Board will be widened at that time to include five members.
The parties to the Dayton/Paris Treaty chose a currency board arrangement primarily because it would permit the country to achieve economic stability while relying on very simple rules for exchange rate and monetary policy. If, instead, the Central Bank were to have discretion in these areas, there would be a need for decisions to be taken frequently on matters of great political and economic sensitivity, which could be a contentious and divisive process. In addition, the experience with discretionary monetary and exchange rate policy in the former Socialis Federal Republic of Yugoslavia (SFRY) suggested that the end-result might not be favorable. The six-year period of the currency board will permit this decision to be re-examined once the transition to a market economy is well underway.
The establishment of the new Central Bank will be a cooperative endeavor among all regions of Bosnia and Herzegovina. Given the slow development of inter-Entity economic cooperation, it has not been possible to make significant progress during the pre-election period.
C. Financial System and Monetary Developments in the Federation
1. The evolution of the financial system
The financial system of the Federation remains substantially divided, some 2l/2 years after the signing of the Washington Agreements that ended the conflict between the Army of the Republic of Bosnia and Herzegovina and the Bosnian Croat defense forces (HVO). While the NBBH is the internationally recognized central bank of Bosnia and Herzegovina as a whole, it effectively exercises authority over the financial sector of the Bosniac-majority area of the Federation. Preparations have been underway in recent months toward the establishment of a Federation Bank Agency and unified Federation payments system.
Upon declaration of independence in March 1992, Parliament of the Republic of Bosnia and Herzegovina adopted mutatis mutandis the financial sector regulations of the former SFRY. The Sarajevo branch of the National Bank of Yugoslavia was assigned central banking responsibilities in the interim period leading up to the establishment of the NBBH on January 15,1993. The NBBH is responsible for designing and implementing monetary and exchange policies and ensuring currency stability and liquidity of the payments system.45 The NBBH does not enjoy full independence in policy making, since monetary policy objectives are subject to approval by Parliament. The NBBH also is responsible to Parliament for its
45See Law on the NBBH, January 13, 1993.
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operations and is obliged to disclose annual profit statements and to provide semiannual policy reports. The Board of Governors comprising the governor, two vice governors, and four experts is appointed by Parliament for a term of four years.46
The NBBH first issued a domestic currency, the Bosnia and Herzegovina dinar (BHD), on August 18, 1992. However, hyperinflation induced mainly by central bank financing of war activities quickly eroded the value of the currency. In addition, many parts of the area under control of the Army of the Republic were isolated by the hostilities, leading to diverse ad hoc local arrangements. In mid-1994, the authorities began the process of restoring financial discipline, with the re-centralization of many aspects of fiscal policy, attempts to avoid domestic borrowing by the government, and a currency reform. A new BHD was issued in August 1994, pegged to the deutsche mark (DM) at 100 BHD per DM. There is an illegal but tolerated parallel market, in which the discount has been large at times but currently about 5-10 percent. The DM is a legal tender in the Bosniac-majority area for most transactions, except those identified on a short list, including wage payments and most tax obligations. In the Croat-majority area both DM and Croatian kuna are legal tenders.
The licenses of the banks operating in the Croat-majority area were canceled by the NBBH, following the eruption of the Bosniac-Croat conflict in early 1993. Supervisory functions were assumed shortly thereafter by the Ministry of Finance of the Croat-majority area; since January 1996, these banks have reported to the Federation Ministry of Finance. The Federation Parliament enacted legislation in June 1996 to establish a Federation Bank Agency, charged with delegated authority from the NBBH for Federation-wide licensing and supervision of banks. Since then further action has been taken to appoint the senior staff and board of directors and it is hoped that the Agency will become operational in the near future.
The payments system in the Federation also remains segmented, although the complete separation of the payments systems of the Bosniac-majority and Croat-majority areas has been overcome. In November 1995 the two systems were linked and, since then, net balances have been cleared once a week in cash. Transactions between residents in the different areas are carried out exclusively in DM. Before the linking of the payments system, interarea transactions had to be settled through correspondent banks abroad, or in cash. Transactions within the payments system of the Bosniac-majority area are carried out in BHD and DM and those within the payments system in the Croat-majority in Croatian kuna and DM. Legislation establishing a unified Federation payments system was enacted in February 1996 and senior staff have been appointed. At end-July, active discussions were underway to resolve differences in view on the settlement currency or currencies, which had delayed making the Federation-wide payments system operational.
"The NBBH law also includes provisions relating to war-time operations. Article 83 states that "in the event of war or immediate threat of war, operations under the authority of the board of governors shall be performed by the governor of the NBBH.11
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The functions and procedures of the payments systems in the two majority areas are virtually identical. Their primary task is the effecting of payments between resident legal entities comprising enterprises, banks, and various levels of government. All transactions between legal entities are carried out through a network of giro accounts, which provides the basis for central control of the financial sector; the payments bureaus also play a central role in tax administration and fiscal expenditure, servicing in the latter respect partly as treasury.
All legal entities in the Bosniac-majority area are obliged to maintain BHD denominated accounts with that area's payments bureau, and all legal entities residing in the Croat-majority area are obliged to maintain Croatian kuna denominated giro accounts with their payments bureau. In addition, legal entities in either area have the option to hold DM denominated giro accounts. Legal entities (excluding government) when opening an account with the payments bureau assign a commercial bank to make payments on their behalf47 To make a payment, a legal entity in general places a payment order with its commercial bank, which in turn instructs the payments bureau to debit the account of the legal entity placing the order and to credit the account of the recipient at the payments bureau. At this stage, the payments bureau transfers the balance to the recipient's account with the assigned commercial bank.
Besides effecting transactions, the payments bureaus hold banks' required reserves. In case a bank places a payments order exceeding its giro account balance held with the payments bureau, required reserve holdings are used to cover the overdraft, as discussed below. In addition, the payments bureau in the Bosniac-majority area is closely involved in the release of BHD into the economy, mainly through redemption of giro balances against BHD cash. The payments bureau in the Bosniac-majority area is subordinated to the NBBH, which includes these accounts on its balance sheet. Accordingly, the monetary authority of the Bosniac-majority area comprises the NBBH and the payments bureau. For accounting purposes the concept of the monetary authority of the Federation is defined to include the NBBH and the payments bureaus in the two majority areas.
2. Evolution of monetary and credit aggregates
Financial sector assets of the Federation grew significantly during 1995, largely due to an accumulation of foreign assets by the monetary authorities. Total financial sector assets strengthened by DM 91 million during 1995, reaching DM 418 million by year-end (Table 17). Net foreign assets increased by DM 214 million, largely owing to the improved foreign asset position of the monetary authorities. This improvement was mainly due to a resumption of economic activity, particularly in the Croat-majority area, and inflows of foreign aid, which
"The requirement to designate a commercial bank carrying a legal entity's account with the payments bureau was introduced in the Bosniac-majority area on July 13, 1995 by decree 01-0241-4736/95 published in the Official Gazette No. 26.
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strengthened the international reserves of the NBBH. Nonetheless, the stock of net foreign assets of the financial sector remained highly negative at end-1995, indicative of the legacy of the former SFRY.
The increase of foreign assets was largely offset by a contraction of domestic credit by DM 123 million, to DM 2,130 million at end-1995. This decline was primarily due to declining net credit to the government (DM 83 million). Other factors driving the decline of domestic credit included repayments of credit by the private sector (DM 17 million) and repayment of short-term credit (mostly trade financing) by enterprises (of DM 23 million).
On the liability side, broad money expanded by DM 68 million during 1995. This increase was driven by a drastic increase in money (DM 73 million), as BHD in circulation strengthened (DM 17 million; 595 percent) in parallel with increasing confidence of the public in the dinar and the onset of a recovery in the Bosniac-majority area, following the ceasefire agreement in October and the conclusion of the Dayton peace negotiations in November 1995. In addition, the nascent recovery in the Croat-majority area induced a replenishing of demand deposits held by the enterprise sector and various institutions of the general government, including municipalities and social security funds.
3. Monetary policy in the Federation48
Since the introduction of the BHD in August 1994, the NBBH adopted a policy stance intended to lay the foundation for currency stability. There are indications that this policy translated into a strengthening of confidence in the BHD, including its wide acceptance in the Bosniac-majority area as a means of payments and declining parallel market rate differentials.
A key element of this policy was the drastic limitation of central bank financing of the government, in spite of the fiscal needs resulting from a continuation of armed conflict. Net credit to the government declined by 77 million in 1995, reflecting an increase in government deposits which more than offset central bank credit of DM 11 million, largely owing to a build-up of interest arrears (Table 18). In addition, the NBBH provided only limited credit to the banking sector, less than DM 2 million in 1995—mostly selective lending in the latter half of the year to facilitate imports of basic goods following the ceasefire agreement. On the whole, net domestic assets fell by DM 70 million to negative DM 62 million at end-1995, setting the stage for a rapid build-up of international reserves. Foreign assets increased sharply during 1995 to DM 228 million by year-end, or DM 155 million above their end-1994 level. Gross international reserves increased by DM 68 million, to DM 95 million at end-
48Strictly speaking, there has not been a monetary policy function in the Croat-majority area of the Federation since early 1993, as all financial transactions involved the use of foreign currencies. However, the Federation Finance Ministry levies reserve requirements on commercial banks in that area.
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1995, largely owing to foreign aid inflows. Excluding foreign exchange liabilities of the NBBH to the central government, "narrow" international reserves increased almost eightfold to DM 78 million by year-end, drastically improving the reserve backing of the BHD.
One indicator of reserve backing is the relationship of reserve money to "narrow" international reserves. While reserve money exceeded "narrow" international reserves by 172 percent at end-1994, this margin declined to 22 percent by end-1995.49 Similarly, the reserve backing of currency in circulation has improved drastically during 1995. Broadening the measure of currency in circulation to include highly liquid BHD giro deposits with the payments bureau, this measure of currency in circulation represented 34 percent of "narrow" international reserves at end-1995 as opposed to 46 percent at end-1994. During the first four months of 1996, foreign assets of the NBBH rose by DM 115 million, strengthening international reserves by DM 53 million. "Narrow" international reserves increased in line with reserve money, leaving reserve backing of the BHD roughly unchanged relative to end- 1995.
4. The evolution of the banking sector in the Federation50
The banking sector in Bosnia and Herzegovina is burdened with the legacy of the past. Bank ownership under the former SFRY was in the hands of socially-owned enterprises, leading to questionable lending practices and the accumulation of nonperforming loans. The National Bank of Yugoslavia for its part passively rediscounted credits to the enterprise sector, inducing an automatic monetization of enterprise losses. In an attempt to move towards a market economy, commercial banks were broken up and reorganized as joint stock companies in 1989 as an integral part of the Markovic plan, and their shares were placed with the State government and enterprises. In addition, new banking laws were passed setting a new regulatory framework and facilitating market entry by new banks. However, the beneficial aspects of these changes were not realized, due to the breakup of the SFRY and ensuing war.
49Legal entities' DM holdings at the payments bureau are included in the overall definition of reserve money. However, there are excluded from reserve money for the purpose of assessing the reserve backing of the BHD. tanking sector data for the Federation are generally weak, due in part to difficulties in communication.
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The banking sector in the Bosniac-majority area comprised 29 deposit money banks at end-May 1996 and the state was a majority shareholder of 14 of these banks.S1 In addition, a bank located in the Croat-majority area was licensed by the NBBH in early June. Commercial banks dating back to the pre-war period typically are burdened with frozen claims on the NBBH pertaining to foreign exchange deposits. Under the former SFRY, commercial banks routinely transferred foreign exchange deposits to the National Bank of Yugoslavia, via the republican branches of the National Bank. These deposits were frozen by the National Bank of Yugoslavia at the outbreak of war. The NBBH subsequently assumed the liability for these claims (estimated at DM 2.3 billion), but their magnitude has precluded the NBBH from servicing them.52 In addition, descendant banks of the formerly socially-owned banks are burdened with nonperforming enterprise credits, which were largely financed by foreign borrowing at the time. Most of these claims are held by the four largest banks of the Bosniac- majority area, which accounted for approximately 95 percent of total assets of the banking sector at end-1995 (including counterpart claims pertaining to frozen foreign exchange deposits).53 The NBBH estimates that potential losses of these banks would exceed their capital by a multiple, leaving these banks and the banking system at large insolvent and in need of restructuring.
The banking sector in the Croat-majority comprised eight banks at end-May 1996. Hrvatska Banka Mostar, by far the largest bank in terms of assets, and Hrvatska Postanska Banka previously were branch banks and since the breakup of the former SFRY have been owned by shareholders residing in the Republic of Croatia, including large commercial banks.54 In addition, there are two banks which previously were branch banks of Privredna Banka Sarajevo, while four banks were founded only recently.55
"Excluding Kamel Banka Tesanj, whose license was cancelled on March 29, 1996. The ownership status of Ljublanska Banka remains unresolved.
52The government of the Republic of Bosnia and Herzegovina paid out DM 31 million to depositors in 1992.
53These banks are Privredna Banka Sarajevo, Union Banka Sarajevo, Central Banka Sarajevo, and Tuzlanska Banka Tuzla. The state holds nearly 100 percent of the shares of these banks.
S4Hrvatska Banka assets represented 72 percent of total banking sector assets of the Croat- majority area at end-1995; the corresponding figure for Hrvatska Postanska Banka is 9 percent.
55LT Komercijalna Banka Livno and Gospodarska Banka Mostar were branch banks of Privredna Banka Sarajevo, while Neretvanska Banka Capljina, Posavska Banka Orasje, Srednjebosanska Banka Kiseljak, and Promdei Banka are newly founded banks.
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Despite their commonality, there are stark differences between the banking sectors in the two majority areas. The bad loans problem, and the impending foreign debt problem, are exclusively problems of the banking sector in the Bosniac-majority area. The role of descendant banks of the SFRY in the Croat-majority area was limited to branch banking, which shielded these banks from involvement in large scale enterprise sector financing and incurring foreign liabilities. Second, reconstruction resumed in most of the Croat-majority shortly after the signing of the Washington Agreement in March 1994, inducing a gradual recovery of banking sector assets. Fighting, however, continued in the Bosniac-majority area stalling economic activity—and much more—until late-1995.
These differences are reflected in the developments in the banking sectors of the two areas during 1995 (Tables 19-21). While the banking sector assets further declined during the third year of war in the Bosniac-majority area, banking sector assets in the Croat majority area recovered in 1995, leaving the banking sector assets of the Federation on the whole largely unchanged. In the Bosniac-majority area, domestic assets declined by DM 59 million to DM 2,168 million at end-1995, largely due to a reduction in claims on nonfinancial enterprises and a reduction in claims on the private sector. There was also a DM 35 million reduction in domestic liabilities mainly reflecting a reduction in demand and savings deposits as households reduced remaining balances following the ceasefire with a view to improving living conditions and initiating reconstruction. Net foreign assets increased moderately (DM 24 million) during 1995. During the first four months of 1996, banking sector assets recovered by DM 149 million, reflecting a gradual resumption of economic activities. Foreign assets increased by DM 54 million, largely owing to a strengthening of banks' holdings of correspondent accounts, indicative of a growing level of activities with foreign countries. Domestic assets recovered by DM 95 million from their 1995 decline, mainly resulting from a revitalization of enterprise credit, mostly used as short-term trade financing. In the process, enterprises rebuilt demand and savings deposits.
Banking sector assets of the Croat-majority area increased by DM 72 million (60 percent), during 1995. Foreign assets declined by DM 5 million to DM 48 million at end- 1995 as banks reduced their foreign exchange holdings in part providing the financing for the expansion of domestic assets by DM 77 million to DM 145 million at end-1995. Domestic asset expansion was primarily driven by increasing enterprise credit, private sector credit, and a build-up of banks' reserves. Foreign liabilities increased moderately to DM 12 million during 1995, while in parallel domestic liabilities increased by DM 67 million to DM 181 million at end-1995. The increase in domestic liabilities was driven by a sharp build-up of demand and savings deposits by enterprises and households. Banking sector assets grew further by DM 11 million in the first four months of 1996. This was driven by an accumulation of foreign assets, while domestic credit remained virtually unchanged from end-1995; enterprises and households continued replenishing their deposits with the banking system.
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5. Monetary policy instruments of the NBBH
The current NBBH policy instruments are similar to those that were originally adopted mutatis mutandis from the former National Bank of Yugoslavia. These instruments were designed with a view to providing centralized control over the financial system, including the directing of credits to specific end-users and providing subsidies to activities deemed socially desirable. Following the signing of the Dayton/Paris Treaty, the NBBH has begun taking steps to shift to indirect monetary control. On April 1, 1996, the NBBH eliminated its selective lending facility, which previously channeled credits to end-users in the agro-industrial sector and the export and import sector at low interest rates determined by the NBBH.
The principal policy instruments of the NBBH are foreign exchange market intervention, setting of reserve and liquidity requirements, and interest rate policy (Appendix I). Foreign exchange market intervention by the NBBH was relatively infrequent and ad hoc. The NBBH sold DM IS million in cash in May 1996, following an internal dispute over the currency to be used for Federation tax payments. The exchange crisis subsided when it became clear that the BHD had substantial foreign exchange reserve backing and would continue to be used in domestic transactions, including the settlement of tax obligations.
The NBBH differentiates reserve requirements according to maturity the maturity of deposits, as described in detail in Table 17. DM deposits are not subject to the reserve requirements and there are numerous other exemptions for humanitarian purposes.56 BHD deposits subject to exemption were approximately BHD 3 million at end-April 1996. Other exemptions that had existed since mid-1995 for deposits relating to agricultural purposes were phased out as of April 1, 1996, in attempt to streamline the reserve requirement policy. In case a bank fails to fulfill its reserve requirements, it can access the NBBH discount window and draw overdraft credit. During the first four months of 1996, 15 banks drew overdraft credit at least once, which is indicative of the overall weak financial state of the banking sector.57 While overdraft credit is outstanding, banks are prohibited from engaging in additional lending or investments and banks are obliged to allocate income upon receipt towards repayment of overnight credit.
56Exemptions include DM deposits by natural persons which are not subject to a de-facto liquidity requirement.
57In 1995, there were two instances where overnight credit provided the NBBH exceeded the limits set by regulations, and banks subsequently failed to repay the loan on time (within ten days).
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The NBBH also sets liquidity requirements defining a floor on banks' holdings of cash and NBBH promissory notes.51 The NBBH liquidity requirements exclusively apply to short- term BHD deposits and exemptions include DM deposits and BHD denominated deposits relating to reconstruction and humanitarian purposes. In addition, there has been a de-facto liquidity requirement of 100 percent for legal entities' DM deposits since the introduction of the BHD in August 1994, limiting commercial banks' DM lending to deposits received from natural persons." This requirement was introduced largely with a view to limiting the potential for commercial bank lending and reducing the possibility for a liquidity crisis resulting from poor lending operations. The potential of such a liquidity crisis was seen as a serious threat to the stability of the newly introduced currency. A relaxation of this requirement would seem appropriate at some point in the future in the context of a broad overhaul of the instruments of monetary policy, following a sufficient strengthening of banking supervision and capacity of the commercial banking sector for risk analysis.
Following the elimination of selective lending, interest rates on commercial bank lending have been set in the market place without interference by the NBBH. The NBBH base rate primarily serves as a reference point for setting interest rates on central bank credit. In the absence of open market operations, the rate is largely illustrative in nature and has no direct impact on interest rates determined in the market. Markets rates generally exceeded the NBBH base rate in April 1996 by large margins and varied widely across banks, indicative of prevailing market imperfections (Tables 22-23).
In the Croat-majority area reserve requirements only apply to deposits in Croatian kuna. As in the Bosniac-majority area, there has been a de-facto 100 percent liquidity requirement for legal entities' DM deposits.
D. Financial System and Monetary Developments in the Republica Srpska
1. The evolution of the financial system
Following the outbreak of war, the National Bank of the Republica Srpska (NBRS) was established in May 1992 with headquarters in the northern town of Banja Luka. Its organizational structure largely aimed at maintaining close links with the National Bank of the
5iNBBH Decision 17/96.
59Law 16/94.
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Federal Republic of Yugoslavia (Serbia/Montenegro) (NBFRY).60 The NBRS began to issue its own currency, the RS dinar, in 1992 with a view to steering policy developments and cementing financial autonomy. Hyperinflation, however, quickly eroded the value of the RS dinar, following central bank financing of war activities. Accordingly, the currency was withdrawn from circulation and the RS further cemented its financial ties with the Federal Republic of Yugoslavia (Serbia/Montenegro) (FRY) through the adoption of the Yugoslav dinar (YUD) as legal tender on February 19, 1994. YUD banknotes have been supplied by the NBFRY to the NBRS as an interest free loan with indeterminate maturity.
A new NBRS law was enacted by Presidential decree in April 1996.61 The law limits the independence of the NBRS and provides for involvement of the Government in establishing the goals of monetary policy.62 The NBRS is responsible for submitting to Parliament an annual report of its operations and semi-annual reports examining developments in the financial system. The 1996 law provides for a board of governors consisting of seven members, including the Governor as member ex-officio. The Governor and the government are each to nominate three members, who are appointed by Parliament for a five-year term. The law states that the Governor is appointed to a five-year term, but does not specify who is to appoint the Governor. The authorities clarified that it is current practice that the Governor is nominated by the President of the RS and appointed by Parliament.6B
The NBRS is responsible for designing and implementing monetary and exchange polices, ensuring liquidity of the banking sector, and regulating the money supply. In addition, the NBRS is charged with ensuring the stability of the currency, which, however, is a function that falls to the NBFRY under the current monetary arrangement. Article 48 of the 1996 law generically defines the dinar-rather than the YUD currently used as legal tender-as the
60The 1992 bylaws of the NBRS assign the responsibility for day-to-day operations of the NBRS to the Governor of the NBFRY. Article 11 of the bylaws states that the "Governor of the National Bank of Yugoslavia shall convene meetings of the Board of Governors, shall propose the meeting agenda, shall chair meetings and sign decisions of the Board of Governors.11 Section X of the bylaws sets out "Functions Pertaining to the Nationwide Defense and Social Self-Protection,11 including the adoption by the Board of Governors of regulations and measures in preparation of wartime operations (Article 55). 61The law was envisaged to be adopted by the Parliamentary Assembly of the RS during the summer of 1996.
62See Law on the NBRS, April 1996, Article 23.
^In June 1996 the 1992 bylaws of the NBRS were still in effect, although conflicting on various grounds with the 1996 NBRS law. The new NBRS law is supposed to take precedence over the NBRS bylaws.
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monetary unit of account, possibly providing a legal basis for issuance of another RS currency in the future. Further functions of the NBRS include setting interest rate policy, controlling and supervising DMBs, and monitoring of export and import transactions.
The financial system of the RS comprises besides the NBRS, 11 commercial banks, a Savings Bank, and other financial institutions, including 5 insurance companies. The payment bureau was subordinated by the new central bank law to the NBRS. Its functions and procedures are largely similar to those of the payments bureau in the Federation, and legal entities are obliged to hold YUD denominated giro accounts with the payments bureau. The RS payments system is linked with the payments system in the FRY.
2. Evolution of monetary and credit aggregates
Monetary developments in the RS in 1994-96 have been overshadowed by political and economic developments in the FRY, where economic activities virtually ground to a halt under the burden of the war and United Nations (UN) sanctions. The FRY joined other nations in August 1994 in imposing UN mandated sanctions on the RS. The sanctions intensified the isolation of the RS from the outside world, imposing an embargo on foreign trade, blocking telecommunications, and mandating a freezing of financial accounts. The YUD was devalued as of November 26, 1995 to YUD 3.3 per DM, from the previous peg of YUD 1.0 per DM. The market exchange rate of the YUD, which was used for most RS transactions, had already gradually depreciated to that level.
Continued war activities, the increasing isolation of the RS, and the devaluation of the YUD caused a sharp contraction of financial sector assets from DM 328 million at end-1994 to DM 111 million at end-1995 (Table 24). During the first half of 1995, the foreign liabilities of the RS increased substantially, contributing to a decline of net foreign assets (by DM 145 million) by end-June. Net foreign assets recovered by year-end, reflecting the impact of the devaluation on YUD-denominated foreign liabilities and reduced foreign borrowing. The emission of YUD-constituting a foreign liability of the NBRS to the NBFRY-came to an abrupt halt by end-1995 (in YUD terms) and declined by two thirds in DM terms from end- September (Table 25)." Banks repaid DM 142 million in the third quarter due to an apparent lack of refinancing, inducing a sharp decline of the banking sector's foreign liabilities in 1995 (Table 26).
The abrupt halt of foreign financing undermined the financial sector's capacity to extend domestic credit. During the course of the year, domestic credit fell by DM 224 million to DM 425 million at end-1995, mainly owing to a drastic reduction in credit to nonfinancial
"The circumstances surrounding the increase of YUD emission in 1995 are not entirely clear. One possibility would be that the NBRS was drawing down YUD notes received from the NBFRY prior to the imposition of sanctions.
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public enterprises (by DM 230 million). Net credit to the government increased somewhat in 1995 (by DM 7 million). On the liability side, broad money (measured in DM) declined during 1995 by DM 73 million, reflecting a contraction of money (DM 10 million) largely resulting from the devaluation and a reduction of quasi-money (DM 62 million).63 The fall in quasi- money was driven by a reduction in time and savings deposits as enterprises repaid commercial bank credit.66
No firm data are available regarding foreign currency in circulation, including YUD. However, YUD in circulation reportedly contracted to help finance a massive trade deficit with neighboring FRY. YUD holdings of legal entities with the payments system provide one broad measure of YUD in the hands of the public. These balances fell from DM 40 million at end-1994 to DM 1 million at end-September, and declined further during the remainder of the year.67 In an attempt to counter the ongoing demonetization, the authorities introduced on April 13, 1995 a supplementary domestic currency, commonly referred to as cashiers checks. Cashiers checks were issued by commercial banks on behalf of accountholders and had to be fully backed by giro account balances.68 These checks circulated as legal means of payments and holders of cashiers checks would either redeem checks (with a commercial bank) or would use checks for transactions purposes. Circulating cashier's checks reached a total of DM 17 million at end-June, DM 20 million (YUD 20 million) at end-September and DM 8 million (YUD 25 million) at end-1995, indicative of the prevailing and increasing shortage of YUD banknotes.
The RS financial sector has shown initial and fragile signs of recovery, following the signing of the Dayton/Paris Treaty and the suspension of sanctions at end-February. Total assets rebounded to DM 137 million at end-April 1996, or DM 25 million above their level at end-1995. Net foreign assets increased marginally (DM 1 million), reflecting increases in both foreign assets and liabilities as foreign financing resumed. Domestic credit expanded (DM 24 million) by end-April 1996, in large part owing to a resumption of commercial bank lending to nonfinancial public enterprises and a modest increase of net credit to the government (DM 1 million). Broad money continued its decline during the first four months
*5Broad money measured in YUD increased during 1995 by approximately YUD 22 million to YUD 321 million.
"The devaluation had no impact on quasi-money, as time and savings deposits were denominated in foreign currencies other than YUD.
67Data are based on the NBRS balance sheet and remain to be reconciled with data reported by banks. The decline in YUD balances at the payments bureau could have been caused to some extent by an increase in cash holdings in the hands of the public.
**The denominations of cashiers checks were YUD 5, 10 and 20.
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of 1996 falling by DM 16 million to DM 210 million. This contraction largely reflected a halving of public enterprises' demand deposits and the redemption of all outstanding cashiers checks on February 29, 1996. Quasi-money, however, grew somewhat due to a strengthening of time and savings deposits of public enterprises and households.
3. The RS banking system
All DMBs operating in the RS are licensed to carry out standard banking operations within the RS. With regard to foreign transactions, there are three categories of licenses: (i) universal banking operations with foreign countries; (ii) limited banking operations with foreign countries; or (iii) no transactions with foreign countries. Most DMBs are authorized to carry out limited banking operations with foreign countries; only Banja Luka Banka, the largest RS bank, is licensed for universal banking operations.
The financial state of the RS banking sector is generally weak. Banks1 assets are undermined by nonperforming loans resulting in part from the war and economic sanctions. While no estimates quantifying the extent of the problem are available, most long-term loans to nonfinancial public enterprises are reportedly nonperforming. These loans stood at DM 361 million and represented 75 percent of banking sector assets at end-April, 1996. As in the Federation, the RS banking sector is also burdened with liabilities relating to frozen foreign exchange deposits. Commercial banks' balance sheet indicate that these claims amounted to DM 1.4 billion at end-April 1996, or approximately three times total assets of the consolidated banking sector (excluding assets representing the counterpart to frozen foreign exchange deposits).69
In March and April 1996 the banking sector turned temporarily illiquid, following the redemption of outstanding cashiers' checks (DM 5 million) at end-February. The NBRS responded by providing liquidity credit, which more than doubled general purpose credit to banks (to DM 17 million) at end-April from the end-1995 base. In addition, the NBRS eliminated all reserve requirements as of April 1, 1996.
4. Policy instruments of the NBRS
The NBRS relies on policy instruments that are largely similar to those of the NBBH, including for reserve requirements and liquidity requirements. In addition, the NBRS provides liquidity credit, selective credit, and dinar advances to the banking sector. Key characteristics of these instruments are provided in Appendix EL The NBRS does not engage in open market operations and interest rates in the RS banking sector in general are freely determined. The
"Commercial banks' claims relating to frozen foreign exchange deposits remain to be reconciled with data from the monetary authorities and are highly tentative in all parts of Bosnia and Herzegovina.
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NBRS base rate mainly serves as a reference rate for setting the cost of capital for various NBRS credit facilities, including for required reserve holdings which are remunerated at one half of the base rate (Table 27). Commercial bank credit rates varied between 14 percent per annum and 242 percent per annum for enterprise credit in March 1996 (Table 28), indicative of prevailing market imperfections.
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IV. Public Finance70
A. Overview of recent fiscal developments and arrangements
At mid-1996, there were effectively five separate fiscal systems within Bosnia and Herzegovina: the wartime administrations of the Bosniao and Croat-majority areas of the Federation; the Republika Srpska; and some elements of the new Federation and central ("State") governments. The authorities in each of the three wartime governments tightened fiscal policy in mid-1994, as part of their attempts to bring inflation under control. As a result, during 1995 both of the administrations in the Federation ran balanced budgets on a cash basis, enabling them to avoid the use of domestic credit, while the fiscal deficit of the Republika Srpska was reduced significantly (Table 29). Budgets for 1996 were adopted by the Federation and State governments, based on the principle of avoiding any domestic borrowing requirement; but implementation was difficult since these fiscal systems were not yet fully operational. Moreover, the steps that had been been taken to establish the Federation had disrupted the functioning of the separate administrations of the Bosniac- and Croat- majority areas. The international community has been seeking to assist the relevant authorities to make Federation and State administrations fully functional as soon as possible.
As described below, the implementation of the Dayton/Paris Treaty will entail a significant restructuring of public administration, including the merging of the two separate administrations in the Federation. While the resulting arrangements will still be relatively decentralized, for economic policy to be effective there will need to be a high degree of consistency and coordination among the various regions and levels of government. In particular, many indirect taxes (customs duties, sales, and excise taxes) are more efficiently administered at a central level; and there would be high costs to attempts to maintain significant differences in the bases and rates of certain taxes among regions.
The fiscal systems that evolved during the war depended almost exclusively on indirect taxes and levies on government wages, the latter at extremely high rates, due to the comparative ease of administration (Table 30). Indirect taxes will continue to be the most important source of revenue in the near future, but direct taxes—which are typically more elastic—will need to make a growing contribution in the years to come. Tax reforms, which should also be coordinated between the Entities, will need to focus on lowering the current
70Prepared by Russell Krelove.
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high rates of taxation on labor income (in order to reduce disincentives for employment), broadening tax bases, and simplifying and harmonizing the existing systems of indirect taxes— especially import duties (see also Chapter V).71
The wartime fiscal revenue bases differed widely among the three regions, reflecting the differing degrees of physical damage, economic sanctions that were maintained by the international community against the Republika Srpska and the Federal Republic of Yugoslavia (Serbia/Montenegro) until end-February 1996, and the effective control of much of the border with Croatia by the Croat-majority area. As a result, the policy of running balanced or nearly- balanced budgets on a cash basis resulted in much lower levels of per capita expenditure in the Bosniac-majority area and the Republika Srpska, compared with the Croat-majority area. The largest item of expenditure shown in the budget for each area in 1994-95 was military expenditures; even so, the reported figures are considered likely to understate actual military spending by a considerable margin, due to reliance on unreported domestic and external resources (Table 31). During 1994-95 there was a substantial accumulation of expenditure arrears, which continued in early 1996 in the Bosniac-majority area. For the current fiscal stance to be maintained, it will be important to bring expenditure commitments (and not just cash expenditures) in line with available revenues, and to utilize nonbudgetary mechanisms (such as privatization vouchers) to help liquidate outstanding arrears.
The fiscal systems of the Croat-majority area and the Republika Srpska were both relatively centralized, with tax policy and tax administration entirely under the control of the region's central government. The division of fiscal responsibilities in the Bosniac-majority area was more complex, with some devolution of tax policy to district and local levels. All three areas depended heavily on their official payments bureaus for the collection of fiscal revenues, as had been traditional in the former SFRY.
Another legacy of the SFRY to each of the three administrations was a system of social funds for pensions, health, and employment, with resources based on wage-based contributions at high rates. The prewar system quickly became inoperative, due to lack of resources and destruction of records and facilities. Successor systems in each region maintain some semblance of the prewar structure, but with widely varying actual operations. None of the pension funds attempted to restore a contribution- or income-based system of benefits, opting instead for uniform per capita benefits (at end-1995, equivalent to DM 70 per pensioner in the Croat-majority area, and DM 10-15 in the Bosniac- and Serb-majority areas) (Table 32). The revenues collected by the health fund covered only minimal levels of services, which were augmented mainly by external assistance; and the employment funds were
71There were some initial steps to reduce the taxation of labor income, with reductions in the overall rate in early 1996 to 50 percent of gross wages in the Bosniac-majority area and 42 percent in the Republika Srpska. The rate in the Croat-majority area remained at 50 percent.
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essentially inoperative. During the first half of 1996, the authorities relied on the donor community to supplement their limited capacity to finance such social expenditures, including through systems of cash grants under various World Bank projects. A comprehensive review and reform of the system of social funds is planned for 1997.
The remainder of this chapter describes the legal basis of the future fiscal arrangements of Bosnia and Herzegovina and discusses a number of considerations that will be crucial to the design of the fiscal system in the Federation, based on extensive discussions during technical assistance missions to the Federation. Similar considerations will need to guide the evolution of fiscal relations between the Federation and the Republika Srpska, and between the two Entities and the State, to the extent that these have not already been spelled out in the Constitution.
B. Institutions
The major policy thrust shaping the fiscal system of the State of Bosnia and Herzegovina (BiH) is strong decentralization. This principle is manifested in the Constitution of BiH and in the Constitution and other documents of the Federation. These Constitutions emerged from two key milestones in the peace process—the Dayton/Paris Treaty of December 1995 and the Washington Agreements of March 1994, respectively—which specified many important parameters of the post-war political and economic systems. The Washington Agreements created the Federation as a political union of the Bosniac- and Croat-majority regions of the country. The Dayton/Paris Treaty provided a broad blueprint for reintegration of the whole country, comprising the Federation and the Republika Srpska, the Bosnian Serb- majority area.
1. Constitution of Bosnia and Herzegovina
Under the Constitution of the State, Bosnia and Herzegovina comprises two Entities, the Federation of Bosnia and Herzegovina and the Republika Srpska (Anicle I). The following matters are the responsibility of the State: foreign policy; foreign trade policy; customs policy; monetary policy; finances of the institutions and for the international obligations of Bosnia and Herzegovina; immigration, refugee, and asylum policy and regulation; international and inter-Entity criminal law enforcement; communications; regulation of inter-Entity transportation; and air traffic control (Anicle III-l). All governmental functions and powers not expressly assigned to the institutions of BiH are assigned by the State Constitution to the Entities (Article HI-3(a)). The Entities may agree through negotiation to assign to the State other areas of responsibility, including utilization of energy resources and cooperative economic projects (Article in-5(a)). In addition, the Presidency of the State may decide to facilitate inter-Entity coordination on matters not within State responsibilities as provided in the Constitution, unless an Entity objects in any particular case (Anicle III-4).
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Under the Constitution, the State Parliamentary Assembly is to prepare an annual budget covering the expenditures required to carry out its responsibilities. The Federation is required to provide two-thirds, and the Republika Srpska one-third, of the revenue required by the budget, except insofar as revenues are raised as specified by the Parliamentary Assembly (Article VIII). For 1996, the State Budget passed by Parliament calls for some own-revenue raised from various consular fees, and in addition a share of the customs revenue raised in the Federation.
The Constitution of BiH protects the free movement of persons, goods, services, and capital throughout BiH. It specifies that neither Entity shall establish controls at the boundary between the Entities (Article 1-4).
2. Federation Constitution
The Washington Agreements of March 1994 led to the formation of the Federation of Bosnia and Herzegovina, with a newly-introduced level of government—the cantons—as the major constituent part. The Federation Constitution (as amended in June 1996 to be consistent with the subsequent Dayton/Paris Agreement) outlines the division of responsi- bilities between the Federation government, the cantons, and their municipalities. While several functions are assigned exclusively to one level of government, others are jointly exercised. Specifically, the responsibilities of the central government of the Federation include: defense; economic policy, including planning and reconstruction within the Federation; refugees and displaced persons; and tax and customs administration (Part III, Article 1). The Federation and cantons exercise joint responsibility for health; environmental policy; infrastructure for communications and transport; social welfare policy; interior affairs; and several other areas (Article 2). In exercising its responsibilities in these are^s, the Federation government is committed to respect cantonal prerogatives, the diversity of the cantons, and the need for flexibility in implementation when enacting laws and regulation binding throughout the Federation (Article 3). The cantons, in their turn, must act with respect for intercantonal comity and for coordinated approaches to intercantonal matters (Article 3).
Under the Federation Constitution, the canton governments are exclusively responsible for all other matters not granted explicitly to the Federation (Article 4). These responsibilities include: education; culture; housing; public services; local land use; and social transfer expenditures. Each canton is authorized to delegate its responsibilities to the municipalities within its territory. The municipalities are granted self-rule on local matters. Practically, the new cantonal governments will decide, in coordination with the already existing municipalities, the division of labor between them in terms of policy formulation and the implementation of service delivery. Until then, the municipalities are assumed to continue to perform their current assignments, mainly: local utilities; maintenance of local infrastructure; local social welfare; municipal courts; education (specifically, the maintenance of school building, meals, and transportation for students); and the prevention of and response to local calamities. For
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those municipalities with a majority population that is different from that of the canton as a whole, the Federation Constitution specifies that the canton must delegate all responsibilities to the municipal government (including in particular for education, culture, tourism, local business, charitable organization, and radio and television). In mixed cantons, these functions have to be delegated by the canton upon a municipality's request.
On November 9, 1995, as part of the Dayton negotiations, Federation representatives reached agreement on a number of issues. First, the expenditure responsibilities embodied in the Federation constitution were reaffirmed and clarified to an extent. Second, an initial assignment of tax revenue sources to levels of government was specified. The Federation government was assigned revenue from customs and excise taxes, with a position to be channelled to the state budget. All other tax revenues were initially assigned to the cantons and the municipalities. These included in particular sales taxes, as well as direct taxes on corporations and individuals. These assignments were considered potentially adequate for 1996, but will need to be reviewed for 1997 and subsequent years, as better information on the magnitude and nature of expenditures and revenues within the Federation and their distribution across the level of governments becomes available.
C. Challenges in Federation Fiscal Institution-Building
The Constitutions of the State and Federation, as well as the other agreements reached in Dayton, sought to establish a decentralized structure of government in order to protect local identities and aspirations. Although the agreements addressed a number of issues associated with the creation of the Federation, several others were left unresolved. These include, inter alia, many details associated with the assignment of revenue and expenditure across the different levels of government in the Federation, as well as the institutional responsibility for policy implementation in a number of areas. The process of transition in the creation of the fiscal federal system was also not addressed. This section addresses a number of issues in fiscal institution building and the design of the system of intergovernmental fiscal relations in the Federation.
1. Establishing the fiscal administrative infrastructure
For each of the levels of government in the Federation, carrying out responsibilities requires both the creation of new structures and the elimination or transformation of existing ones. In particular, in the Federation certain institutions and events have been identified as central to its ability to fulfill its fiscal responsibilities. These include: all the canton governments and their administrations; unified Federation customs and tax administrations, along with the removal of internal fiscal borders; the creation and staffing of the Federation Ministries; the adoption of budget procedures and budgets for the Federation and the cantons; and reform of the tax laws. Progress was made in all of these areas since the Dayton/Paris Treaty was signed, but in some cases not as quickly as had originally been expected. The
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Federation received a great deal of fiscal technical assistance from international organizations and donors, in particular to design and implement the customs administration, to design the Federation tax administration and draft new procedures, to determine the assignment of revenue and expenditure responsibilities between the Federation and the cantons, to reorganize the Federation Ministry of Finance to improve its monitoring and planning capacity, to draft budget procedure legislation, to set up mechanisms for the management of public expenditures and for public debt management, to reform the pension systems, and to reform the tax policy of the Federation.
2. Lower-level government borrowing
The minimum objective of fiscal arrangements, from the point of view of conducting an economic policy conducive to economic stability and sustained growth in Bosnia and Herzegovina, is the ability to set limits on the overall borrowing requirement of the public sector and to determine effective mechanisms to enforce them. The current and proposed monetary arrangements of Bosnia and Herzegovina place utmost priority on avoiding the use of domestic credit by Government. Accordingly, the Federation government undertook to ensure that its 1996 budget will be financed through Federation Government revenue sources and external financing. No domestic borrowing is anticipated. With regard to the cantons and municipalities, it is expected that their operations in 1996 will also require no domestic borrowing. However, the Federation Constitution (Part HI, Articles 1 and 4) gives both the Federation Government and the cantons the possibility of financing their activities through borrowing.
For the longer term, therefore, the question arises concerning the need for explicit restrictions on borrowing by governments. In many industrialized countries, subfederal government access to debt financing is restricted. There are several reasons for this. First, the central government may want to use debt financing as a stabilization tool; therefore, lower level governments should not be a position to counter its policies. In fact, the constitutional assignment of fiscal policy to higher level governments in Bosnia and Herzegovina implies that cantonal governments should not be in a position to use borrowing as a counter-cyclical tool. Second, local borrowing may crowd out private sector borrowing. Third, cantonal government borrowing may become an implicit contingent liability of the Federation Government, to the extent that the latter would wish to avoid bankruptcy of the cantonal government. Fourth, in countries in transition in particular, credible programs of fiscal adjustment generally need to include a hardening of the budget constraints on subnational governments, through effective limits and controls on their borrowing. Controls on lower- level government borrowing help to ensure that their actions cannot offset the retrenchment at the center.
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It is important to note that if controls are to be imposed on borrowing, the limits must apply not only to the direct budget deficits of various levels of government, but also to the various quasi-fiscal deficits that governments can induce. Experience in the SFRY and in other countries has shown that governments attempt to subvert budget limits through a variety of means, including: resort to off-budget operations; innovative financing techniques, such as sale-and leaseback arrangements; borrowing through state-owned enterprises; the rectification of expenditures; shifting fiscal functions to the central bank or state-owned commercial banks; and expenditure arrears. In fact, it needs to be borne in mind that all levels of government of the former SFRY were required to have balanced budgets. These balances were, however, chronically undermined by large quasi-fiscal deficits.72
There are four main approaches to enforcing budget discipline with regard to borrowing: (a) sole or primary reliance on market discipline; (b) cooperation by different levels of government in the design and implementation of debt controls; (c) rules-based controls set by law; and (d) controls dictated by the central government. Each approach has advantages and disadvantages, so that the best approach in any country will depend on particular circumstances.73 For Bosnia and Herzegovina, for example, sole reliance on market discipline, while appealing in principle, is unlikely to be appropriate at this time on account of informational and other imperfections in the market. In addition, the high degree of decentralization of spending and revenue-raising responsibilities may come into conflict with a system of direct control by the central government.
Thus, a rules-based approach, specified in the constitution or in laws, thus has a number of advantages, including transparency and certainty. Rules can set limits on absolute indebtedness, allow borrowing tied to specific types of expenditures (e.g., investment projects), be related to debt-serving capacity of the jurisdiction, or related to other economic variables, such as GDP or tax revenue, the intent of which could be to mimic market discipline. To avoid encouraging quasi-fiscal deficits, this approach must be supported by clear and uniform accounting standards and good monitoring ability. Such an approach could be complemented by cooperation of all levels of government in containing the growth of public debt. A multilateral forum for discussion of budget policies of various levels of government could help expose problems in the existing system of inter-governmental fiscal
72See D. Mihaljek (1993), "Intergovernmental Fiscal Relations in Yugoslavia, 1972 - 1990," in V. Tanzi, ed., Transition to Market (IMF, Washington, D.C.) 1993: 197-201.
73An overview of different approaches to controls on borrowing by regional and local governments in a broad range of industrial countries is given in T. Ter-Minassian, "Borrowing by Subnational Governments: Issues and Selected International Experiences," PPAA/96/4, IMF, April, 1996.
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relations, and lead to timely agreement on effective reforms.74 More reliance could possibly be placed on market discipline to assess borrowing capacities of cantons as administrative powers of cantonal governments improve, and the informational imperfections in the market lessen.
3. Intergovernmental transfers
Only nominal intergovernmental transfers from the Federation to the cantons and municipalities are envisaged in the Federation budget in 1996. Over the medium term, a system of Federation intergovernmental transfers will potentially assume greater importance as the nature and incidence of vertical and horizontal imbalances within the Federation becomes clearer (viz, as the economy substantially recovers and the dependence on external assistance is lessened.)75 Grants can offset these fiscal imbalances. For example, if the assignment of revenue responsibilities were to allocate a disproportionate amount of revenue to one level of government, a well-designed revenue-sharing formula can transfer an agreed share of tax collections to other levels. While grants can play a useful role in priniciple, it would be important, that the assignment of taxes minimize the size of this transfer so that each level of government could be reasonably in control of its operations. This promotes accountability and responsibility in government. Grants can also be useful in achieving policy objectives set by the Federation authorities and legislature.
Significant regional disparities in production, growth and standards of living are likely to persist for some time across the Federation. This disparity mirrors to a significant extent the territorial division of the two principal ethnic groups. With full decentralization of fiscal authority to the cantons, this would result in substantial differences across cantons in terms of the available fiscal capacity as well as the standard of public services that is financially feasible. The Federation government may perceive a need to ensure certain minimal standards for certain services throughout the Federation, and this would necessitate some form of redistributive policies, either by the Federation government, or directly among the cantons. Even in certain areas that are the exclusive responsibility of the cantons and municipalities (e.g., education), the Federation government may nevertheless have an interest in defining certain minimal standards or objectives for services (e.g., a national curriculum, access to primary education for all).
74This is the approach favored by Ter-Minassian, in "Borrowing by subnational governments: Issues and Selected International Experiences.11
75Vertical imbalances are defined as the difference between own revenue and expenditures net of transfers for each level of government. Horizontal imbalances arise when the own fiscal capacities of various subfederal governments differ. In such a case, citizens in different areas will receive unequal service levels for a given level of taxation.
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The design of intergovernmental transfer programs in the Federation may benefit from the experience in the former SFRY. The former SFRY had an extensive system of intergovernmental fiscal transfers. These comprised republic contributions to the budget of the federal government; transfers from the Federal Development Fund to the less developed regions and republics;76 grants-in-aid from the federal budget to help finance social services such as education and health care in republic and provinces with inadequate resources; and transfers from republic budgets to the less developed regions within the republics.
It has been observed that the grants system in the former SFRY had three serious flaws: they created adverse incentives; they were poorly targeted; and that the system itself lacked accountability and transparency.77 In particular: the reliance of the Federal government on transfers from the republics contributed to macroeconomic instability; they focussed too much on the accumulation of physical capital; the criteria for underdevelopment were never formally defined; the lack of clarity in the criteria led to overreliance on intergovernmental negotiation and discretionary decision in the allocation of transfers; and the competency of governments was compromised, as grant conditions contributed to a blurring of responsibilities of different levels of government.
Thus, one legacy of the former SFRY is that many groups within the Federation do not have confidence that redistributive policies from the center to the cantons will be administered fairly. Distrust is compounded by the recent military conflicts among the regions of Bosnia and Herzegovina. This can be mitigated only by an intergovernmental transfer system for redistribution in the Federation that is transparent, well-targeted, and is based on clear and objective criteria that satisfy widely-held concepts of fairness.
It is premature to attempt to make recommendations on the appropriate policies for intergovernmental transfers. First, for 1996, one must recognize the special character of the current situation, reflected in the dramatic changes that are likely to arise in political, economic, demographic and institutional terms. Second, it is the case that external assistance (project and humanitarian aid) will be the driving force in the economy during the short term and that such assistance is presently being assumed to finance a large part of the public outlays of Federation governments. The locus of such expenditures within the territory of the
76The Federal Development Fund was an extrabudgetary fond designed to finance investment in the Province of Kosovo, and in the three less-developed republics of Bosnia and Herzegovina, Macedonia, and Montenegro. The Fund was financed by taxes on enterprises in the richer regions, and revenues reached up to 1.5 percent of GDP. Funds were transferred in the form of loans, but these were seldom repaid. A large portion of the funds went directly to enterprises in qualifying regions. See D. Hewitt and D. Mihaljek, "Fiscal Federalism," in V. Tanzi, ed., Fiscal Policies in Economies in Transition (IMF, Washington, D.C.) 1992.
77.See D. Mihaljek (1993).
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Federation and the impact this is likely to have on the availability and level of services in specific areas cannot be determined yet. In looking to the future, however, international experience, both in federations and in unitary states, demonstrates that there will be scope in the Federation for the use of some mechanisms of intergovernmental transfers.
4. Federal Commission on Intergovernmental Fiscal Relations
As preceding sections have indicated, a number of significant problems can arise in federal systems. The multilateral agencies have recommended that a Commission on Intergovernmental Fiscal Relations, with representatives from all the regions and governments, be established to address these problems. This commission would advise and make recommendations to the Federation government and parliament on intergovernmental issues in the current transition period, including on tax sources, revenue assignments, expenditure responsibilities, intergovernmental transfer mechanisms, administrative practices, and cantonal-municipal fiscal relationships.
For the longer term, decentralized arrangements should be flexible over time, to respond optimally to new circumstances. For this reason, consideration should be given to the establishment of an Advisory Standing Commission. It responsibilities would be to monitor, assess, and report on the state of the cantons and on intergovernmental financial relations in general. Other potential roles for the Commission include: to establish a process for the periodic (but not too often) review and reform, if needed, of intergovernmental fiscal relations; as a forum for the cooperative determination of subfederal borrowing policy, if borrowing were determined to be desirable at some point in the future, and in setting agreed limits on the financing requirements of individual subnational jurisdictions; and as the author and defender of a Code of Conduct for governments that is designed to identify and promote the subfederal level policies that secure the economic integration within the Federation. This code of conduct would proscribe cantonal tax measures that discriminate in favor of canton residents, and other cantonal policies having a substantially similar effect to discriminatory tax measures. In this way, barriers to the free movement of capital, goods, and labor will be minimized, thus ensuring the allocation of resources within the Federation to their most productive uses.
D. Aspects of Direct Tax reform in the Federation78
Both constituent regions of the Federation have direct taxes, on individual and enterprise incomes, in place. The rates of these taxes are relatively high, giving rise to adverse incentives for job creation, work effort, and tax compliance. This section considers the need to
"This section draws heavily on technical assistance studies prepared by the IMF and by other international agencies. Many of the principles discussed are also applicale to reform of indirect taxes, and to tax reform in the Republika Srpska.
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reform and integrate the direct tax regimes within the Federation. Such reforms should seek to facilitate economic recovery, mobilize revenues efficiently and with low rates, and achieve an essential fairness in the distribution of the tax burden.
Another issue is whether the assignment of revenues that is appropriate now will be appropriate in future years. The Federation will take on increased expenditure responsibilities, in particular in the areas of defense and certain social programs, which will need to be financed. Moreover, the taxes currently assigned to the Federation—customs and excises- tend to be inelastic, in that their share falls as GDP grows. In response to these factors, the Federation may need to occupy partially the direct tax field in the years beyond 1996. Similarly, while cantonal budgets are expected to derive largely from sales tax revenue initially, it is envisaged that revenue from the income taxes can become a more important cantonal revenue source over time.
The staff has proposed an approach that would leave the cantons with limited autonomy in formulating personal and enterprise income tax policy. The Federation would establish a policy framework within which cantons can operate, involving the establishment of substantially common tax bases and a permissible range of tax rates. Some harmonization of income tax policies will be important in order to avoid both tax exporting and tax competition, as well as to economize on administration and compliance costs. This is particularly relevant in view of the small size of the country and the extreme openness of the lower-level entities, which would imply the likelihood of a high degree of inter-cantonal mobility for most tax bases.
The income tax policy framework established at the Federation level should embody tax provisions that are fair and efficient, and are matched to the requirements of a modern market economy. This would involve in particular the consolidation of taxes on different types of personal income into a single Federation personal income tax. For the enterprise tax, the harmonized base should involve simplified treatment of depreciation, relief from double taxation, limited inflation adjustment of both assets and liabilities, and the elimination of most targeted investment incentives.
1. Personal Income Tax
Table 33 summarizes the systems of personal income taxes (PIT) prevalent in the Bosniac and Croat-majority areas of the Federation. Besides social insurance contributions for pensions, health, and employment, the relevant taxes in the Bosnia-majority area are the wages tax, levied on gross wages at the flat rate of 10 percent; a reconstruction tax, which is a tax on net wages, at the rate of 10 percent; the tax on small business, at 36 percent of earnings; the tax on farming, levied on land register income at locally-determined rates; the tax on rental income, at a locally determined rate, a tax on gambling winnings, generally at
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15 percent; and finally a tax on total personal income, which specifies taxation of high incomes at progressive rates that can reach 50 percent. The base for the latter tax includes income from royalties, patents, and other similar types of income, in addition to labor income.
The Croat-majority area levies a tax on wage income, at the flat rate of 23 percent of net wages (equivalent to 14.3 percent of the gross wage); taxes on income from self- employment, farming, forestry and also property and royalty income; and a tax on gambling income at the rate of 10 percent. Beyond the flat tax on wage income, there is also a progressive tax on higher net salaries, with rates that reach 25 percent. There is also another progressive tax on high incomes, whose revenue accrues to the municipalities, but there were no payers of this tax in 1995.
The two tax systems are reasonably similar, as they are based on structures both regions inherited from the former SFRY. While they have many good qualities, they suffer from two fundamental flaws: they are essentially schedular, so that different types of income are taxed at highly variable rates, and they have relatively high tax rates. One way to address these problems is that the Federation of Bosnia and Herzegovina adopt a global income tax with only a few schedular features.79 A broad base for the tax would treat most incomes symmetrically, and would allow a lowering of the tax rates. Such a tax will meet the criteria of equity, administrative simplicity, revenue productivity and income neutrality (so very essential for developing a market economy and for a well-functioning federation).
Such a global PIT would have the following main elements. The base of the tax should include employment income (including fringe benefits provided in the form of automobiles and accommodation), profits from self employment and unincorporated business, rental incomes, social transfers, royalties, fees and commissions, and incomes from foreign sources. Initially, interest and dividends should be taxed through separate "final" withholding taxes levied at the source. Deductions could include all reasonable expenses incurred to earn incomes, (e.g., business expenses, should be allowed) but deductions for personal expenditures, such as mortgage interest, education expenditures, charitable contributions, social security contributions, should not be allowed. Deductions for investment in government securities and other investment incentives also should not be allowed. Tax rates should be low and not excessively progressive.
2. Corporate income tax
Table 34 summarizes the provisions of the corporate income taxes (CIT) of the two parts of the Federation. A new CIT law was introduced in Bosniac-majority area in early 1995, which is comprehensive and self-contained. The Croat-majority area continues to tax
79Alternatively, the present existing global personal income taxes can be redesigned and harmonized, and converted into the major tax on personal incomes.
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the income of companies under the profits tax provisions of a schedular system that remains very similar to that of the former SFRY (with some amendments, in particular with regard to depreciation allowances). Both regions have nearly identical tax rates (36 percent and 35 percent, respectively), but there are differences in the definition of the tax base. A new Federation Accounting Law has been drafted, embodying modern concepts, that provides the basis for a definition of income for the purposes of taxation. Allowable depreciation is similar in the two regions, with straight-line depreciation rates set out in regulations for about 1,000 separate categories of assets. The two laws provide three main kinds of investments incentives—tax reductions for the initial years of a business, investment deductions, and exemptions for certain activities. In addition, the Bosniac-majority area provides an incentive that the Croat-majority area does not, in the form of accelerated depreciation (at up to 25 percent of the standard rate) for fixed assets used for pollution control, research and training, and for computers. The law of the Bosniac-majority area also provides for a number of adjustments to take account of general inflation, in particular through periodic revaluation of the book value of assets, and of capital gains and losses, when prices have increased by 10 percent since the previous revaluation.
Thus, the Bosniac-majority already has a modern CIT law which, with certain modifications, can provide an excellent basis for a unified Federation approach. In particular, it provides a comprehensive framework for the taxation of the income of legal entities, based on a modern accounting system, but with the specific adjustments that must be made for tax purposes clearly set out. Its provisions cover many problem areas, including the treatment of capital gains, the taxation of banks and financial institutions, the treatment of intercorporate dividend payments and receipts, and transfer pricing.
However, the law has some weaknesses that should be addressed. In particular, it could be improved by introducing the following amendments. First, depreciation allowances could be simplified greatly by limiting the number of tax depreciation rates, preferably to three, and by introducing grouped or pooled depreciation accounts. This would not only help curtail unnecessary paperwork for taxpayers but would greatly reduce the workload of tax administrators and remove the need for die taxation of capital gains when a used asset is sold or transferred. Second, while generous rates of tax depreciation allowances are justified as an incentive to encourage investment, other investment incentives (corporate income tax holidays and reliefs and special incentives to enterprises employing disabled workers) could be eliminated. They do not achieve the intended objectives and are readily abused. Third, there is a need for improved inflation adjustment provisions, for both assets and liabilities of companies. Fourth, it would be useful to introduce a final withholding tax on interest and dividends paid by a company, but with protections to avoid significant double taxation.
3. Local autonomy and revenue sharing arrangements
There are two basic questions which must be addressed when a system of federal- cantonal tax arrangements is to be established: (a) what should be the degree of cantonal
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autonomy over the tax base and the tax rate? (b) which level(s) of government should receive the revenue from the tax? Table 35 presents a general framework that shows how the answers to these two questions can, theoretically, define a multitude of different taxation arrangements.80 While the discussion in this section focuses on direct taxes, many of the same principles apply in the case of indirect taxes.
The possible level of tax policy autonomy of the lower or cantonal level of government ranges from no influence whatsoever, with the tax base and the tax rate fully centralized, i.e., determined at the federation level (system 1), to a system where lower levels of government can determine completely both the tax base and the tax rates (system 4). In between these two extremes, Table 35 identifies systems whereby the local governments can determine their own tax rates on a federation wide or centralized base, either with limitations on the possible rate variation or full freedom to set the local rates (systems 2 a and b); and systems which leave more autonomy to the local governments both to determine their own tax rates and to define their own tax base—either with limitations or without limitations (systems 3 a and b).
The term autonomy refers to a situation in which distinct levels of government exercise some discretion in levying taxes on similar bases. In Germany and Russia, for examp the VAT revenues are shared between the federal and state government in fixed proportions, with rate and base set by the federal government: the states have no real tax policy powers, and so this is not an example of autonomy. On the other hand, in Russia, Canada and the U. S., both federal and state governments tax corporate income, with each exercising some discretion in the rate of taxation; this is concurrent taxation. There may be restrictions on the tax powers of either of the levels: in Russia, for example, there is an upper bound on the profit tax set by the states. There may be linkages between federal and state taxes: in the U.S., state corporate taxes are deductible against federal taxes. It is the existence of some core margin of discretion at each level that characterizes tax autonomy.
Independent of the decision to let cantons enjoy more or less tax policy autonomy, the revenues from the tax can be allocated to either level—or to both in a revenue-sharing arrangement. The table distinguishes between three broad possibilities in this regard: the revenue can be allocated solely to the central or local level (traditionally called a system of "tax assignment11); or revenues can alternatively be divided between the two levels of government in a sharing arrangement (traditionally called a system of "revenue-sharing").
'"This discussion disregards practical aspects of tax administration and tax collection. Thus, independently of which level has autonomy over rate and base and receives the revenue, the tax may be administered at either the central or cantonal level. Mainly for reasons of efficiency, the staff has recommended that there be a high degree of centralization in tax administration.
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If all or part of the revenue should accrue to the cantonal level, two alternative methods may be applied. First, the revenue may be allocated to the different cantons independently of how much tax may have been collected within each canton. In such a case, the allocation can take the form of a grant to each canton. Grants may be distributed according to one or more of the following criteria: a per capita grant; grant based on some measure of expenditure needs; grant inversely related to the level of taxable capacity. Second, each canton may receive the amount of tax actually collected or derived from within its borders. This is generally labeled as revenue allocation on a derivative basis. This may be done under a tax-sharing arrangement if only one of the two levels can determine the tax rate, or by so-called "piggybacking,11 with the federal and local levels both levying a tax on the same base; or—if all revenue accrue to the cantonal level—through tax assignment.11
In case the decision is made to allocate the revenue to the cantons on a derivative basis, a technical problem arises in measuring precisely the part of the tax base that derives from each canton. This poses fewer problems in the case of the PIT, where the allocation of the income tax base in the majority of countries is measured based on the residence of the taxpayer. This method is in harmony with the basic principles of decentralization, since the majority of local services (health, education, etc.) provided to individuals are based on their residence. Hence, the basis of the provision of services goes in tandem with financing responsibilities, and because of this close benefit-financing link, residence-based PIT comes close to satisfying the principles of benefit taxation.*2 In the case of the CIT, however, the problem is more serious, especially in situations where the activity of an enterprise is spread
"Piggybacking may be implemented either by using separate tax rates on the same base, as is done, for example, in the Scandinavian countries, or by the local governments applying a surcharge to the federation revenues collected in each canton (as it is done, for example, in Canada).
^Although a prerequisite for this to work is that a good equalization system is in place.
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over a number of cantons. There are different ways of addressing this problem, but a frequently used approach is to apply a simple and transparent apportionment formula, which approximates the profits generated by the enterprise in each canton.83
4. Criteria for choosing among alternatives
There are five basic criteria or considerations which are important to the choice of local autonomy and revenue-sharing arrangements appropriate for Bosnia and Herzegovina:
• The mobility of the tax bases in question may significantly affect the choice. The more mobile are the bases of the local taxes, the larger is the risk that interjurisdictional differences in tax policy (tax bases and/or rates) will affect the savings, investment, and consumption behavior of consumers and enterprises, particularly regarding their location. This can result in tax-induced distortions and loss of welfare. This would happen unless the rate variations in question clearly reflected variations in service levels provided by the local governments (so that a "high" level of local service was accompanied by a similar "high" tax rate). In this case, tax rates would be measures of the price of the services actually received, and thus should not distort the locational decisions of enterprises and individuals. Although an ideal, this situation would only rarely occur in practice, and would require a very high degree of equalization of expenditure needs and taxable capacities. Priority should, therefore, be given to maximum possible reliance on local reliance on tax bases that are immobile. This explains why particularly land and property taxes as well as taxes on the incomes of individuals are frequently applied at the sub-federal level of government.
83Examples of systems being applied in OECD countries are as follows: With regard to the PIT, fully federal or centralized systems will all revenues going to the center exist in Australia, France, Germany, Ireland, Italy, Mexico, the Netherlands, New Zealand, Spaiin, Turkey, and the United Kingdom. Different types of "piggybacking" systems are operated in Belgium, Canada, Denmark, Finland, Sweden, and Swizterland. In Japan, Norway, and the United States, there are generally some differences in the definition of the central and local tax bases. Fully (or nearly fully) local PIT systems are rare (apart from in some transition economies and developig countries such as China and Nigeria), but in Sweden, almost all PIT revenues accrue to local governments. With regard to the CIT, fully centralized or federal systems exist in Australia, France, Greece, Ireland, the Netherlands, New Zealand, and the United Kingdom, whereas most other countries operate different types of "revenue sharing arranagements," typically with limited or no local authority. Exceptions to this are the big federal countries such as Canada and the United States, where the provinces/states levy their own corporate taxes.
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• The availability of administrative resources and capabilities may significantly influence the system chosen, particularly because the more decentralized the system is, the more resources are required for its administration. Conversely, the more centralized and homogeneous is the tax system, generally the more simple it is to administer.
• The revenue needs which follow the assignment of expenditures may also importantly affect the warranted system of revenue allocation. Even in a country without the unfortunate recent history of Bosnia and Herzegovina (Chapter II), there are good reasons to try to minimize the so-called vertical imbalances which follow if, for example, local governments are assigned large expenditure responsibilities, but are given only limited financing autonomy. Large vertical imbalances will necessitate the establishment in many cases of politically contentious grant systems, which furthermore (by distorting the perception of the true costs of the services for the local electorate) may reduce the level of local accountability. In the case of Bosnia and Herzegovina, where mutual confidence across regions is at a low level and fiscal balance is required at all levels, it will be essential to design the system to avoid vertical imbalances, and to act quickly to remedy any such imbalances that may emerge.
• A fourth consideration relates to the degree of local expenditure autonomy: independently of the magnitude of expenditure responsibilities assigned to the local level, in most cases it is desirable to let the local governments have an important say in regard to the determination of the local service levels and variations therein. The local governments should also be given some flexibility with respect to financing means, in order to accommodate the service levels autonomously determined. The wider importance of this consideration follows from the fact that the potential efficiency gains of a decentralized system can be realized if— and only if—locally determined service variations are financed by local taxation, with the tax burden "internalized" on the local population.
• The last consideration, which may significantly influence the choice of system of revenue allocation, relates to the political, ethnic, constitutional, and other legal factors which constrain the universe of acceptable systems.
The situation is complicated by the fact that the different criteria or considerations listed above seem to favor different systems of revenue allocation models: whereas the considerations pertaining to the mobility of tax bases as well as required administrative resources in most cases would favor systems characterized by a fairly high degree of centralization and homogeneity, the criteria relating to expenditure assignment and to the political and legal constraints posed by present agreements and constitutions appear strongly to favor a system characterized by a substantial degree of local or cantonal responsibilities and financing. The success of the future financing system hinges, inter alia, on the degree to which it is possible to strike the right balance between these competing considerations.
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Balancing these considerations, it may be appropriate that "tax assignment1' govern the CIT, and that "piggybacking11 characterize the PIT. In particular, PIT in the Federation could be designed with the following features: The rules for the assessment of the base of PIT for the entire Federation should be determined substantially at the Federation level, with the cantons enjoying a large degree of autonomy in terms of establishing tax rates on taxpayers, who are identified according to residence. Cantons could also enjoy freedom in terms of providing personal tax credits to taxpayers. If desired, there could be a Federation-level tax, the proceeds of which could be used to meet Federation expenditures, or alternatively could be allocated to cantons based on an equalization grant formula.84
Given that the base of CIT is more mobile than the base of PIT, a more rigid application of the rules of a Federation-level CIT across the Federation may be appropriate. All revenues from the CIT could still accrue to the cantonal budgets. In particular: The tax would apply to the Federation-wide base, and at a uniform rate; the entire revenue could be allocated to the cantons on a derivative basis, possibly using formula apportionment.85 Over time, as the relative expenditure needs of the Federation and the cantons change, the assignment of CIT revenue could be re-examined.
84 When the system of expenditure and revenue assignment has been established, the grant system sould equalize differences in "objective" expenditure needs and taxable capacities across cantons (and municipalities). The simplest possible expenditure equalizaion grant (which, however, also has important elements of tax capacity equalization) would be a per capita grant. If the data are available, an expenditure need measure could be based on a few key objective indicators, such as number of schoolchildren in a given canton as a proportion of the total number of schoolchildren in the Federation; the proportion of elderly people in the canton, etc. Each individual indicator could then receive a weight based on the budgetary importance of the respective areas (i.e., existing budgets would be used to measure expenditure "norms"). The expenditure equalization grant could then be allocated to cantons (municipalities) which have a calculated expenditure need (measured per capita) exceeding the Federation "average." Similarly, cantons and municipalities with a taxable capacity per capita below the Federation "average" would receive a tax equalization grant, calculated as some proporation of the "missing" taxable capacity per capita in that canton, relative to the Federation "average." The tax equalization grant could be calculated using the Federation- wide "average tax rate." 85 Formula apportionment is used, for example, to determine state and provincial corporate income tax bases in Canada and the United States. The formula apportionment should be made as simple as possible and be based on — depending on the availability of data — a weighted average of, for example, cantonal sales, payroll and capital for the enterprises in question.
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V. External Sector Developments and Policies
A. Overview of Balance of Payments Developments
Rough staff estimates of the balance of payments of Bosnia and Herzegovina show current account deficits of about US$500 million annually (excluding official transfers) for 1994-95, equivalent to about 20 percent of GDP (Table 36). Since most export capacity had become inoperative by 1994, due to the war, and much of the country was dependent on emergency humanitarian imports for survival, the size of the current account deficit was largely a passive reflection of the availability of external assistance and the capacity for accumulation of arrears on external interest obligations.
Imports grew rapidly in late 1995 due to the improvement in security conditions, with over 40 percent comprising goods donated by humanitarian organizations. Higher private and official transfers, coupled with growth in exports of services (including local spending by UN and IFOR forces and aid agencies), financed this import growth while also contributing to an increase of US$50 million in the gross official reserves of the National Bank of Bosnia and Herzegovina. Arrears of about US$400 million on external debt obligations, including late interest, accumulated in 1995. This brought total external public and publicly guaranteed debt to about US$3.4 billion at end-1995, of which about US$2.0 billion was arrears.
Preliminary data for the first four months of 1996 showed continued net inflows on a cash basis, primarily due to sizeable receipts from unrequited transfers and services (including the local expenditures of UN and other donor agencies and IFOR). As a result, gross official reserves of the National Bank of Bosnia and Herzegovina grew by about US$40 million, to US$111 million, by end-April 1996; foreign exchange reserves of the NBRS increased by US$9 million over the same period.
The balance of payments estimates cover the entire territory of Bosnia and Herzegovina, and were compiled by the Fund staff based on information from a variety of sources. The most complete information was available for the Bosniac-majority area, including merchandise trade data from the Statistics Institute, surveys by the National Bank of Bosnia and Herzegovina, and information from external donors and creditors. The Ministry of Finance of the Croat-majority area provided partial data on the foreign exchange transactions of banks in that region. Estimates for the Republika Srpska are based on NBRS data for international reserves, and otherwise mainly on information from donors.
The World Bank and EU Commission have taken the lead in mobilizing external assistance for Bosnia and Herzegovina. As a key step in this process, a priority reconstruction program, requiring external financing of US$5.1 billion during 1996-99, was formulated by
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these institutions in cooperation with the EBRD.16 At donor meetings in December 1995 and April 1996, the staff joined in encouraging donors to support this effort, and roughly US$1.9 billion was committed for the first year. Disbursements so far have been modest in relation to pledges, due in part to administrative weaknesses which compound the inherently difficult task of starting up such a large project pipeline. In discussions with the authorities and donors, the Fund and Bank staffs have stressed that assistance will be most effective if it is extended within the framework of the reconstruction program; otherwise, the authorities will face unnecessary administrative burdens and priority activities are more likely to be underfinanced. In order to make the process more agile, coordination of the planning and execution of reconstruction projects takes place mainly in the field, through the authorities1 interaction with a network of agencies1 local representatives, in cooperation with the Office of the High Representative.
B. External Debt
The outstanding external debt of Bosnia and Herzegovina, including arrears, is estimated at US$3.4 billion as of end-1995 (Table 37), equivalent to over 130 percent of GDP. These estimates have been computed by the Fund staff on the basis of partial data provided by the National Bank of Bosnia and Herzegovina and the State Ministry of Finance, supplemented by information from creditors, and are subject to wide margins of uncertainty. In particular, virtually all of the external debt represents loans entered into by the former SFRY or its sub-units prior to the indpendence of Bosnia and Herzegovina. The portion that would now constitute obligations of Bosnia and Herzegovina is subject to continuing discussions with creditors and among the former Yugoslav republics. For instance, in the case of debt to commercial banks, the estimates are based on data from the New Financing Agreement of 1988 with the SFRY, and include debt that has been allocated to Bosnia and Herzegovina plus a portion of the unallocated SFRY debt (based on the Fund "key" for Bosnia and Herzegovina, under which it accepted a 13.2 percent share of the assets and liabilities of the former SFRY in the IMF). However, in recent negotiations between other former Yugoslav republics and their commercial bank creditors, the shares eventually assumed by the Republics have not necessarily corresponded with the Fund "key."
The authorities have indicated their intention to normalize relations with external creditors, on terms consistent with the country's extremely difficult economic circumstances. In the context of its succession to membership in the international financial organizations, Bosnia and Herzegovina has already cleared its arrears to the IMF (December 1995), and the World Bank (June 1996). Virtually no debt service was paid by Bosnia and Herzegovina
^'Bosnia and Herzegovina-The Priority Reconstruction and Recovery Programs: The Challenges Ahead/' April 2, 1996, prepared by the World Bank, European Commission, and EBRD for the Second Donor's Conference.
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between the start of the war in April 1992 and the clearance of arrears to the IMF in December 1995. As a result, arrears of about US$2.0 billion (including estimated late interest) accumulated.
Roughly 20 percent of the outstanding debt at end-1995 was owed to multilateral institutions, mainly the World Bank. Debt to Paris Club creditors (including a share of the unallocated debt of the former SFRY) is estimated at 24 percent of the total, with over 90 percent being pre-cutoff date debt. Of the remainder, 33 percent was to London Club creditors, 15 percent to other commercial creditors, and 7 percent to nonconvertible currency creditors. Bosnia and Herzegovina has had initial contacts with the Paris Club Secretariat, pending a future request for debt restructuring. In addition, the authorities held preliminary discussions with commercial bank creditors in June. At that time Bosnia and Herzegovina received a waiver of the "joint and several liability" clause under the New Financing Agreement with the former SFRY (similar to those also provided to Croatia, Slovenia, and the former Yugoslav Republic of Macedonia) and undertook to reach agreement in principle on a restructuring of London Club debt by end-June 1997, to be finalized by end-1997.
C Foreign Exchange and Trade Sstems
As noted in Chapter n, four different currencies are used within Bosnia and Herzegovina, with the common denominator for all regions being the German mark (DM). The only domestic currency is the Bosnia and Herzegovina dinar (BHD), which is issued by the National Bank of Bosnia and Herzegovina. This currency is used only in the Bosniac- majority area of the Federation; the DM is also legal tender for a variety of purposes in that area. In the Croat-majority area of the Federation, the Croatian kuna has served as the unit of account and the DM also circulates widely. The official currency of the Republika Srpska is the Yugoslav dinar, the currency of the Federal Republic of Yugoslavia (Serbia/Montenegro), and the DM also plays a significant, though unofficial, role.
The foreign exchange regimes of the Federation and the Republika Srpska are described in detail in Appendices m and IV, respectively. While the regimes differ in many respects, each includes restrictions on payments for current international transactions and capital transactions, as well as export surrender requirements.
Both Entities maintain lists of imports subject to quantitative restrictions and some quantitative restrictions on exports. The Federation has adopted the same import tariff regime as Croatia, under which the average effective tariff rate is slightly over 12 percent, and maintains a customs union under which imports of Croatian origin are subject only to a processing fee of one percent. The RS has adopted the system of the Federal Republic of Yugoslavia (Serbia/Montenegro), which is complex and has a high average tariff.
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VL Economic Statistics and IMF Technical Assistance
A. The Status of Economic Statistics
The statistical situation in Bosnia and Herzegovina has been unusually chaotic, even relative to that of most transition economies. As a result of the war and the effective fragmentation of public administration:
* statistical data generally have not been available for the entire country. No national statistical bureau exists, and the three agencies responsible for statistics do not always use the same methodologies, and usually information. Moreover, the geographical area covered by each agency shifted during the course of the war;
* budgetary reporting remains in disarray throughout Bosnia and Herzegovina;
* and many important data-reporting units for the post-war public administration (cantonal governments, Federation government, State government, Federation Pension Fund) were only recently established, or have not yet begun to operate.
Moreover, the war had detrimental effects on the capacity of the country's statistical institutes; the state statistical offices were severely understaffed;87 data processing capacity deteriorated as equipment either aged or became nonoperative; " and the informal sector expanded more rapidly than would have been the case in peacetime.
1. Real sector
National accounts estimates are not prepared on a systematic basis anywhere in the country; a one-time exercise for 1994 was prepared for RS in late 1995. The current index of industrial production for the Bosniac-majority area seems to be well-constructed, and a similar index is published in RS. Price indices for the Federation are based on 1991 household expenditure patterns, which underestimate the current weight of necessities in family budgets, and coverage of services is inadequate; new household surveys are urgently needed. An examination of the quality of price statistics in RS has not yet been undertaken.
87Before the war, the staff of the State Institute of Statistics (SIS) totaled 280, of which 200 were in Sarajevo, with the remainder in subunits. At end-1995, SIS had 90 employees (53 in Sarajevo); the statistical office for the Croat-majority area had 14 employees; and the statistical office for the RS had 46 employees.
88For instance, the SIS is dependent on an IBM mainframe that is seven years old. Moreover, the SIS has relatively few personal computers.
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2. Balance of payments
Comprehensive balance of payments statistics for the whole territory of BiH are not available on a basis consistent with the Fifth Edition of the Balance of Payments Manual. At present, customs-based statistics for merchandise trade are available for the Bosniac-majority area only, on a monthly basis. The authorities plan to widen the coverage to include the whole territory of the Federation in the coming months. The National Bank of Bosnia and Herzegovina (NBBH) conducts a monthly survey of foreign exchange cash flows in the banking system of the Bosniac-majority area. These data plus other information-debt data from the NBBH, data provided from an ad hoc survey of foreign exchange cash flows in the Croat-majority area, information on the foreign reserves of the RS, and supplementary estimates provided by the UNHCR on humanitarian aid—are used as the basis for rough IMF staff estimates of the balance of payments.
3. Government finance
The quality and timeliness of the data on government finance have varied across the three parts of the country. Generally, revenue data for the central governments are of good quality and timely, but less so for local bodies (canton, district and municipal). Expenditure data have been of poor quality at all levels. Systematic accounting for government expenditure arrears has not yet been undertaken, and conceptual problems in the classification of revenue and expenditure persist in reporting at all levels. Reconciliation with monetary information on financing has not been possible due to problems with both fiscal and monetary data. Data on public enterprise operations are not available. Revenue and expenditure data from the social funds in the Federation are generally reliable and timely, and less so in the Republika Srpska.
4. Monetary accounts
Following intensive technical assistance from the Fund, monetary data are available from all three parts of the country, although its quality varies. For the Bosniac-majority area, the NBBH prepares balance sheets for the monetary authorities and deposit money banks. The former have been adjusted to reflect international standards wherever possible (see below), while the latter still require further work with regard to classification of accounts. Monetary data for the Croat-majority area have been compiled by IMF staff based on balance sheets received from the Federation Ministry of Finance. Initial examination of these data suggest broad compatibility with international standards, though there are a number of problems with classification. The preparation of standard monetary aggregates also has been initiated in RS following STA technical assistance and EU1 missions. While the quality of available information from the National Bank of Republika Srpska is generally good, in some instances branch banks operating abroad are included in RS accounts.
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Monetary statistics for the Federation have improved significantly since November 1995, though some serious problems still exist. Reliable data for currency in circulation exist for BUD in circulation, while data for DM and kuna in circulation are not available—thus this monetary aggregate is underestimated by the amount of DM and kuna held in the hands of the population. Balance sheet data for commercial banks operating in the Bosniac-majority area exhibit key weaknesses. For example, commercial bank data relating to claims and liabilities to the NBBH remain to be reconciled with corresponding NBBH data, including for frozen foreign exchange deposits.
Monetary statistics in the Republika Srpska face problems similar to those in the Federation. For example, there are no data for foreign currency in circulation and broad money therefore is underestimated.
B. IMF: Technical Assistance
This section provides a summary of IMF technical assistance activities in Bosnia and Herzegovina, including tentative plans for additional assistance in the next 6-12 months. The latter depend on both the authorities1 requests and budgetary approval. Whenever relevant and possible, missions work with officials of the State and both Entities. In most areas the strategy for cooperation with other providers of technical assistance (such as the World Bank, EU, and bilaterals) envisages a lead role for the IMF in the areas enumerated below, but with maximum utilization of resources from other agencies in carrying out recommendations and strategies in those areas. The most fully elaborated case of cooperation of this nature has been in the area of fiscal policy. In the many (mainly structural) areas not discussed here, the lead role has been played by the World Bank or, in some cases, bilateral agencies. A listing of IMF technical missions through mid-1996 is provided in Table 38.
1. European 1 Department
The primary responsibility for overall planning and coordination of the technical assistance strategy falls to the EU1 mission team. In addition, EU1 has provided assistance directly in the areas of monetary statistics, linkage of the payments systems, and (with MAE) the establishment of the new Central Bank.
2. Fiscal Affairs Department
In December 1995, an FAD diagnostic mission produced a detailed assessment of the fiscal technical assistance that is likely to be needed in the Federation, from all sources, over the next few years. Followup has been coordinated closely with other providers, particularly the World Bank, US, and EU Commission. Since then, FAD missions have provided advice on income tax policy, customs and tax administration, and associated legislation (the latter also with LEG). While it has not yet been possible to schedule FAD missions to the
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Republika Srpska, many of the recommendations, particularly in the areas of tax policy and administration, will also be relevant to the situation in the RS and were shared with the authorities there.
Given the substantial demands on the Fund's technical assistance resources and the present difficulties of coordination among regions, it is not yet clear which missions will be fielded by FAD in the coming year. The first three of the following missions appear to have the highest priority for direct FAD involvement, while the other three may be provided by other agencies in close collaboration with the IMF: (i) introduction of a value added tax; (ii) a multipurpose diagnostic mission to RS; (iii) design of a system of intergovernmental grants and revenue sharing in the Federation; (iv) development of an Organic Budget Law; (v) establishment of a macro fiscal unit in the Federation Ministry of Finance; and (vi) an advisor to assist in the introduction of a taxpayer identification system.
3. Monetary and Exchange Affairs and Legal Departments
An MAE team visited Sarajevo in December 1995 in order to gain an overall sense of the technical assistance needs of the central bank, offer advice on banking legislation, and explain the modalities of a currency board. Subsequently LEG, in consultation with MAE and several departments at the World Bank, drafted a new Central Bank Law and a law covering commercial banking and the establishment of a Federation Agency for Bank Licensing and Supervision. MAE and LEG stand ready to assist the authorities with further refinement of these laws. In cooperation with EU1, MAE began participating in inter-Entity technical discussions of the new Central Bank in late June.
Pending clarification of the legal and institutional situation and the involvement of other agencies, MAE is prepared to provide further technical assistance in the areas of bank supervision, improving the payments system, management of international reserves, internal organization of a central bank, and monetary analysis, with particular emphasis on the implications of a currency board.
The Legal Department could be in a position to provide assistance in other areas relating to the establishment of the legal framework for a market economy, such as bankruptcy law.
4. Statistics Department
A staff member from the Statistics Department (STA) conducted a diagnostic mission in December 1995 as part of the Fund's premembership activities, and assisted the authorities with compilation of balance of payments and monetary statistics. Money and banking statistics missions in April and June provided assistance in establishing harmonized statistical procedures for the monetary authorities and commercial banks, assessing the suitability of available data for the compilation of reliable monetary statistics, and assisting in the
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compilation of initial estimates. A follow-up monetary statistics mission is envisaged in late 1996. The highest priorities for additional assistance are on balance of payments statistics and the consumer price index.
5. IMF Institute/Joint Vienna Institute
The IMF Institute has planned for a mission to Sarajevo during the second half of 1996 to conduct a course on macroeconomic and financial policies at the National Bank, in order to familiarize policy makers with the underlying framework of financial programming. The Institute will also seek to establish cooperative exchanges of material and ideas with institutions within BiH at which government officials are trained.
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Table 1. Bosnia and Herzegovina: Structure of Population in Republics and Provinces of the SPRY by Ethnic Nationalities, 1981 I/
(In percent)
Serbs Croats Muslims Slovenians Albanians Macedonians Montenegrins Other 2/ Total
Slovenia 2.2 3.0 0.7 90.5 0.1 0.2 0.2 3.2 100.0
Croatia 11.6 75.1 0.5 0.5 0.1 0.1 0.2 11.8 100.0
Vojvodina 54.5 5.4 0.2 0.1 0.2 0.9 2.1 36.6 100.0
Serbia Proper 3/ 85.4 0.6 2.7 0.1 1.3 0.5 1.4 8.1 100.0
Montenegro 3.3 1.2 13.4 0.2 6.5 0.2 68.5 6.8 100.0
Bosnia and Herzegovina 32.0 18.4 39.5 0.1 0.1 0.1 0.3 9.5 100.0
Macedonia 2.4 0.2 2.1 0.1 19.7 67.0 0.3 8.4 100.0
Kosovo 13.3 0.6 3.7 -- 77.5 0.1 0.2 3.2 100.0
Yugoslavia 36.3 19.7 8.9 7.8 7.7 6.0 2.6 10.9 100.0
Source: Statistical Yearbook of Yugoslavia. 1990.
I/ Socialist Federal Republic of Yugoslavia. 2/ Including persons uho did not declare ethnic nationality or who declared themselves as Yugoslavs. 3/ Excluding Vojvodina and Kosovo.
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Table 2. Bosnia and Herzegovina: Agricultural Population and Income in the SFRY, 1890-1971 I/
Agricultural Agricultural population Agricultural share population, as a share of total, of national income, in millions in percent in percent
1890 8.9 83.8 1910 10.5 81.0. • • • 1921 9.9 78.8 43. 2 2/ 1931 11.1 76.6 46.9 3/ 1939 12.1 75.1 47.3 4/ 1945 11.3 75.0 ... 1948 10.6 67.2 35.9 5/ 1953 10.3 60.9 30.3 1961 9.2 50.5 25.4 1971 7.4 36.4 23.7 6/
Source: B. Horvat, The Yugoslav Economic System: The First Labor-Managed Economy in the Making (M.E. Sharpe, Armonk, New York) 1976: 77.
i/ Socialist Federal Republic of Yugoslavia. U 1926-29. 3/ 1930-35. 4/ 1936-39. 5/ 1947-52. 6/ 1969.
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Table 3. Bosnia and Herzegovina: Size, Population and Gross Social Product for the SFRY I/
Population Gross Social Gross Social Product Per Caoita 27 Total Area (1991) Product (1989) 1952 1965 1974 1980 1989
(Percentage share) (SFRY • 100)
Slovenia 7.9 8.4 17.1 171 184 200 198 198
Croatia 22.1 20.3 25.1 114 121 125 127 127
Vojvodina 8.4 8.6 10.1 84 112 116 113 118
Serbia Proper 3/ 21.9 24.5 25.4 97 96 96 98 103
Montenegro 5.4 2.6 2.0 83 76 68 79 73
Bosnia and Herzegovina 20.0 18.6 12.6 90 72 66 66 68
Macedonia 10.1 8.7 5.8 67 67 68 67 66
Kosovo 4.2 8.3 1.9 44 36 32 28 25
SFRY 100.0 100.0 100.0 100.0 100 100 100 100
Source: SFRY Statistical Office.
I/ Socialist Federal Republic of Yugoslavia. 2/ Based on constant 1972 prices. 3/ Excluding Vojvodina and Kosovo.
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Table 4. Bosnia and Herzegovina: Regional Unemployment Rates of the SFRY I/
(Percentage of economically active population) 2/
1952 1965 1974 1980 1989
Slovenia 1.8 1.7 1.4 1.4 3.2
Croatia 2.9 5.6 4.8 5.2 8.0
Vojvodina 2.9 4.5 8.9 12.4 13.6
Serbia Proper I/ 2.5 7.4 11.3 15.8 15.6
Montenegro 3.2 5.1 12.7 14.7 21.5
Bosnia and Herzegovina 1.5 4.8 9.7 14.1 20.3
Macedonia 6.3 13.5 19.7 21.5 21.9
Kosovo 2.6 15.2 21.0 27.6 36.4
Coefficient of variation 0.46 0.61 0.56 0.55 0.58
SFRY 2.6 6.1 9.0 11.9 14.9
Source: SFRY Statistical Office.
I/ Socialist Federal Republic of Yugoslavia. 2/ Men between 15 and 64 years old; women between 15 and 60. 3/ Excluding Vojvodina and Kosovo.
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Table 5. Bosnia and Herzegovina: Recipients of Aid from the Federal Fund of the SFRY I/
(Percentage share)
1966-70 1971-75 1976-80 1981-85 1986-90 1966-90
Montenegro 13.1 11.4 10.8 9.4 7.7 10.0
Bosnia and Herzegovina 30 . 7 32.4 30.6 28.3 26.3 29.3
Macedonia 26.2 22.9 21.6 21.1 16.6 20.8
Kosovo 30.0 33.3 37.0 41.2 49.4 39.9
Total 100.0 100.0 100.0 100.0 100.0 100.0
Source : Statistical Yearbook of Yugoslavia . different years .
I/ Socialist Federal Republic of Yugoslavia.
©International Monetary Fund. Not for Redistribution Table 6. Bosnia and Herzegovina: Gross Fixed Capital Formation in the SFRY I/
(As a percentage of regional gross social product) 2/
1961-65 1966-70 1971-75 1976-80 1981-85 1986-89 1961-89
Slovenia 27.4 24.4 29.3 29.9 15.8 17.4 24.3 Croatia 30.5 28.5 28.0 31.5 18.9 14.2 25.6
Vojvodina 24.8 23.3 25.5 33.8 17.7 13.3 23.4
Serbia Proper 3/ 34.9 33.6 27 A 29.5 18.4 16.6 27.1
Montenegro 56,9 39.6 48.8 53.0 37.0 17.4 43.0
Bosnia and Herzegovina 33.8 32.4 41.4 40.9 24.6 16.5 32.1
Macedonia 64.4 40.9 34.4 37.4 18.0 10.9 35.1
Kosovo 51.4 53.0 49.2 61.7 37.5 20.3 46.4
SFRY 33.5 30.4 30.6 33.5 19.5 15.5 27.6
Coefficient of variation 0.36 0.27 0.27 0.29 0.36 0.17 0.25
Source: Statistical Yearbook of Yugoslavia, different years.
I/ Socialist Federal Republic of Yugoslavia. 2/ At constant 1972 prices. I/ Excluding Vojvodina and Kosovo.
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Table 7. Bosnia and Herzegovina: Net Personal Income Per Worker in the Socialized Economy of the SFRY JL/
(As a percentage of national averaged
1995 1970 1975 1980 1983
Slovenia 124 117 115 119 115
Croatia 104 106 106 118 109
Vojvodina 92 92 99 95 102
Serbia Proper 2/ 93 95 96 95 96
Montenegro 89 89 88 90 84
Bosnia and Herzegovina 96 95 95 91 95
Macedonia 82 84 86 83 83
Kosovo 83 82 89 81 81
Coefficient of variation, in percent 13.2 11.4 9.6 14.0 12.3
Ratio of the highest income to lowest income region 151 143 134 147 142
Sources: H. Flakierski. The Economic Svstem and Income Distribution in Yugoslavia (M.E. Sharpe, Armonk , New York) 1989: 40.
I/ Socialist Federal Republic of Yugoslavia. 2/ Excluding Vojuodina and Kosovo.
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Table 8. Bosnia and Herzegovina: Social Indicators for the SFRY, 1989 I/
Public Expenditure Per Capita for: (1983) Hospital Beds Per Physicians Per (Index SFRY =100) 1.000 Inhabitants 1.000 Inhabitants All Social Eduction Health 1960 1988 1960 1968
Slovenia 197 198 201 7.5 7.4 0.9 2.6
Croatia 125 116 138 6.0 7.6 0.8 2.6
Vojvodina 100 108 138 5.0 6.1 0.6 2.4
Serbia Proper 2/ 100 92 94 4.8 6.5 0.8 2.8
Montenegro 88 86 85 6.1 8.5 0.5 1.9
Bosnia and Herzegovina 71 76 68 3.6 4.5 0.4 1.8
Macedonia 68 69 64 4.4 5.3 0.5 2.4
Kosovo 41 61 37 2.7 3.1 0.3 1.2
Socialist Federal Republic of Yugoslavia 100 100 100 5.0 6.1 0.7 2.3
Source: SFRY Statistical Office.
I/ Socialist Federal Republic of Yugoslavia. 2/ Excluding Vojvodina and Kosovo.
©International Monetary Fund. Not for Redistribution Table 9. Bosnia and Herzegovina: Health Indicators for the SFRY I/
Life Expectancy Life Expectancy Deaths Per 1,000 Live Births Per male) C Female) Inhabitants 1.000 Inhabitants 1952-54 1980-82 1952-54 1980-82 1950-54 1985-89 1950-54 1985-89
Slovenia 63.0 67.3 66.1 75.1 10.9 10.1 22.8 13.2
Croatia 59.0 66.6 63.2 74.1 11.7 11.3 23.2 12.8
Vojvodina 58.3 67.1 62.1 74.1 12.4 12.0 23.2 12.1
Serbia Proper 2/ 59.1 69.4 61.1 73.9 11.4 10.2 26.1 12.5
Serbia 57.1 68.0 58.8 72.7 11.7 9.7 27.4 15.7
Montenegro 58.4 71.9 59.9 76.4 10.0 6.1 32.7 16.4
Bosnia and Herzegovina 52.6 67.9 54.8 73.0 12.0 6.7 38.2 15.9
Macedonia 54.9 68.1 53.0 71.8 14.5 7.1 38.4 18.6
Kosovo 48.6 68.1 45.3 71.5 18.0 5.7 43.5 30.0
SFRY 56.9 67.6 59.3 73.2 11.8 9.2 28.8 15.2
Coefficient of variation 0.07 0.02 0.09 0.02 0.19 0.26 0.25 0.34
Coefficient of variation excluding Kosovo 0.05 0.02 0.07 0.02 0.11 0.28 0.22 0.14
Source: SFRY Statistical Office.
I/ Socialist Federal Republic of Yugoslavia. £/ Excluding Vojvodina and Kosovo.
©International Monetary Fund. Not for Redistribution - 81 -
Table 10. Bosnia and Herzegovina: Indicators of Educational Attainment for SFRY I/
(SFRY = 100)
School Enrollment Mean Years of Ratio, First and School Enrollment Schooling Literacy Rate Second Level Ratio. Third Level 1971 1986 1960 1989 1960 1989 1960 1989
Slovenia 130 113 108 122 110 107 123 130
Croatia 106 102 109 104 109 108 105 134
Vojvodina 105 106 111 104 108 102 59 101
Serbia Proper 2/ 98 99 96 98 101 102 173 132
Montenegro 98 105 98 100 103 100 31 49
Bosnia and Herzegovina 86 94 84 96 86 96 40 54
Macedonia 95 98 94 99 99 91 132
Kosovo 81 93 73 91 87 93 20 79
SFRY 100 100 100 100 100 100 100 100
Coefficient of variation 0.14 0.06 0.15 0.05 0.09 0.06 0.61 0.33
Source: Statistical Yearbook of Yugoslavia, different years.
I/ Socialist Federal Republic of Yugoslavia. 2/ Excluding Vojvodina and Kosovo.
©International Monetary Fund. Not for Redistribution - 82 -
Table 11. Bosnia and Herzegovina: Indices of the Physical Scope of Industrial Production in Bosnia and Herzegovina, 1992-95
Structure 1992 1993 1994 1995 1993 1994 1995 1991 1991 1991 1991 1991 1992 1993 1994
Total Industry 100.0 33.2 8.6 9.0 10.8 25.8 108.4 117.9
Capital goods 4.05 23.0 7.7 8.9 15.7 33.7 114.4 117.2 Immediate goods 64.67 33.1 8.7 9.0 9.2 26.2 103.7 102.2 Consumer goods 30.85 31.1 9.8 9.1 11.4 31.4 93.8 125.0 Unassigned 0.43 16.1 - 1.4 3.2 6.9 127.8 230.6 Electric power industry 12.54 48.0 22.1 22.4 25.8 46.0 101.4 115.3 Coal mining 5.72 40.8 10.4 12.4 14.8 25.5 119.5 118.8 Coal processing 0.19 26.6 ------Petroleum refineries 1.92 3.9 0.6 0.6 0.4 2.4 98.6 69.3 Iron ore mining 0.37 59.1 ------Iron and steel basic industries 3.76 39.0 0.6 1.1 0.9 1.6 171.2 85.2 Nonferrous ore mining 0.99 14.9 3.7 1.0 1.2 24.8 28.4 111.7 Nonferrous metal basic industries 2.11 30.0 3.4 2.5 0.5 11.3 75.0 18.7 Smelting, alloying and refining of - nonferrous metals 0.26 23.3 - 2.6 5.7 - 220.0 Extraction of nonmetallic minerals (except building materials) 1.29 35.7 5.7 4.0 10.9 16.0 70.1 273.5 Manufacture of nonmetallic mineral products (except building materials 0.66 25.4 1.1 1.3 1.8 4.2 125.1 135.5 Manufacture of fabricated metal products 9.19 25.1 6.1 6.5 11.8 24.4 106.3 181.9 Manufacture of machinery 2.88 36.4 5.3 6.3 5.6 14.7 117.8 89.8 Manufacture of transport equipment (except shipbuilding) 5.04 28.4 0.9 1.8 3.2 3.2 193.6 176.8 Manufacture of electrical machinery and equipment 2.73 25.7 5.8 14.2 14.5 22.5 245.4 101.9 Manufacture of basic chemical products 2.95 30.1 4.8 2.1 1.1 15.9 44.4 53.8 Processing of chemicals 3.58 26.0 1.6 2.3 2.7 6.1 143.4 117.6 Stone quarrying, gravel and sand pits 1.00 18.6 3.5 4.9 7.1 18.9 138.0 147.2 Manufacture of building materials 2.65 19.4 1.7 2.2 2.6 8.7 133.7 115.4 Sawmills and manufacture of wood boards 3.59 36.6 13.2 12.5 8.2 36.2 94.4 65.7 Manufacture of finished wood products 6.50 27.4 6.7 7.6 5.5 27.8 70.4 103.4 Manufacture of paper and paper products 2.44 31.7 4.2 2.3 1.9 13.3 54.2 63.1 Manufacture of textile yarn and fabrics 1.38 32.4 5.5 6.3 4.6 16.9 115.3 72.1 Manufacture of finished textile products 8.82 25.9 5.2 4.5 5.7 20.0 87.4 125.8 Manufacture of leather and fur 0.44 36.2 8.5 11.6 11.7 23.5 138.3 99.5 Manufacture of leather footwear and fancy goods 2.56 22.5 6.5 9.8 11.3 28.9 150.7 115.3 Manufacture of rubber 0.29 10.8 1.5 1.8 3.1 14.1 115.8 117.0 Manufacture of foodstuffs 8.48 35.5 17.1 14.7 17.1 48.2 85.7 116.6 Manufacture of beverages 1.74 29.0 13.2 15.8 14.5 45.5 119.7 91.7 Manufacture of animal feed 0.43 35.6 11.7 12.0 9.6 33.7 98.2 79.9 Tobacco products 1.73 24.9 13.1 22.2 28.0 89.2 59.1 126.2 Printing 1.42 35.9 5.2 5.5 11.2 15.4 93.9 202.3 Finishing, processing, and manufacture of raw materials from waste 0.32 27.4 5.3 4.5 4.4 16.3 118.5 98.1 Manufacture of miscellaneous products 0.05 32.5 " 0.3 1.6 ~ ~ *"
Source: Data provided by State Statistical Institute.
©International Monetary Fund. Not for Redistribution Table 12. Bosnia and Herzegovina: Monthly Index of Industrial Production II
Republika Srpska Bosniac-majority area Dec 1994 = Monthly Percent change Percent change, Dec 1994 = Monthly Percent change Percent change, 100 precent relative to year to date 100 precent relative to year to date change year before verus previous change year before verus previous year to date year to date
1994 Jan 98.5 41.5 Feb 114.2 15.9 43.1 3.7 Mar 171.5 50.2 61.4 42.6 Apr 172.6 0.6 60.1 -2.1 May 160.5 -7.0 43.1 -28.3 Jun 162.5 1.2 69.5 61.3 Jul 142.7 -12.22 31.0 -55.4 Aug 132.7 -7.0 106.7 244.2 Sep 110.3 -16.9 80.9 -24.2 Get 103.8 -5.9 82.4 1.9 Nov 106.3 2.4 111.9 35.8 Dec 100.0 -5.9 100.0 -10.7 1995 Jan 80.1 -19.9 -18.7 -18.7 93.7 -6.3 125.7 125.7 Feb 103.2 28.9 -9.6 -13.8 115.5 23.3 168.3 147.4 Mar 115.5 11.9 -32.6 -22.2 161.3 39.6 162.6 153.8 Apr 122.0 5.6 -29.3 -24.4 189.8 17.7 215.9 171.9 May 137.9 13.0 -14.1 -22.1 244.7 28.9 468.0 223.1 Jun 115.1 -16.5 -29.1 -23.4 221.0 -9.7 218.1 222.0 Jul 95.0 -17.5 -33.4 -24.8 409.3 85.2 1220.1 310.5 Aug 135.6 42.8 2.2 -21.7 409.3 0.0 283.6 304.2 Sep 108.9 -19.7 -1.3 -19.9 356.9 -12.8 341.4 309.8 Get 99.3 -8.8 -4.4 -18.7 425.1 19.1 415.8 323.9 Nov 112.8 13.6 6.1 -16.9 575.1 35.3 413.8 337.7 Dec 152.6 35.2 52.6 -12.5 464.7 -19.2 364.7 340.9 1996 Jan 129.1 -15.4 61.2 61.2 501.9 8.0 435.6 435.6 Feb 147.1 13.9 42.5 50.6 569.1 13.4 392.6 411.8 Mar 156.5 6.4 35.5 44.8 600.4 5.5 272.3 351.1 Apr 170.5 8.9 39.7 43.3 599.8 -0.1 216.0 305.3 May 176.4 3.5 28.0 39.5 619.6 3.3 153.2 259.1 Jun 649.3 4.8 193.8 245.0
Sources: Data provided by State Statistical Office and Statistical Office of Republika Srpska.
I/ Based on preliminary, non-seasonally adjusted data.
©International Monetary Fund. Not for Redistribution - 84 -
TablelS. Bosnia and Herzegovina: Bosniac—Majority Area: Average Monthly Employment
Material Nonmaterial Total Sphere Sphere I/
1994 Nov 133,154 105,733 27,421 Dec 143,952 113,701 30,251 1995 Jan 156,056 122,460 33,596 Feb 168,749 134,460 34,289 Mar 188,666 147,542 41,124 Apr 196,726 153,405 43,321 May 199,379 155,380 43,999 Jun 200,225 155,691 44,534 Jul 202,297 156,392 45,905 Aug 209,840 162,950 46,890 Sep 217,052 170,276 46,776 Oct 217,656 170,687 46.969 Nov 218,866 171,252 47,614 Dec 220,396 172,085 48,311 1996 Jan 221,171 172,466 48,705 Feb 227,059 177,080 49,979 Mar 233,645 182,407 51,238 Apr 236,051 183,838 52,213 May 241,366 188,241 53,125
Source: Data provided by State Statistical Office.
II Includes government administration, education, health care, and other social services.
©International Monetary Fund. Not for Redistribution - 85 -
Table 14. Bosnia and Herzegovina: Bosniac-Majority Area: Average Monthly Gross and Net Wages
(In deutsche marks)
Gross Monthly V/age Net Monthly Wage Material Nonmaterial Material Nonmaterial Total Sphere Sphere 11 Total Sphere Sphere I/
1994 Nov 21.5 25.0 15.3 14.1 16.4 10.0 Dec 31.3 30.8 32.3 20.5 20.2 21.1 1995 Jan 55.9 51.7 72.3 31.8 29.5 41.2 Feb 48.0 40.3 69.0 27.4 23.0 39.3 Mar 67.2 62.8 77.2 38.3 35.8 44.0 Apr 62.8 57.6 93.9 35.8 32.8 53.5 May 81.1 72.7 115.1 46.2 41.4 65.6 Jun 70.0 62.7 96.5 39.9 35.7 55.0 Jul 68.9 61.7 96.7 39.3 35.2 55.1 Aug 78.1 76.8 82.6 44.5 43.8 47.1 Sep 80.7 79.1 86.4 46.0 45.1 49.2 Oct 86.9 85.3 90.9 49.6 48.6 51.8 Nov 102.4 90.7 126.6 58.4 51.7 72.1 Dec 104.4 99.1 113.6 59.5 56.5 64.8 1996 Jan 129.3 112.7 174.1 73.7 64.2 99.2 Feb 146.5 136.1 167.2 83.5 77.6 95.3 Mar 211.8 168.0 330.1 120.4 95.8 188.2 Apr 224.8 194.8 322.2 128.1 111.0 183.7 May 157.8 136.7 219.9
Source: Data provided by State Statistical Institute.
I/ Includes government administration, education, health care, and other social services.
©International Monetary Fund. Not for Redistribution - 86 -
Table 15. Bosnia and Herzegovina: Price Developments II
Federation Republika Srpska Dec. 1994 Monthly Percent Dec. 1994 Monthly Percent = 100 percent change = 100 percent change change relative to change relative to year before year before
1993 Dec 35.5 1994 Jan 48.0 35.4 Feb 56.9 18.5 Mar 61.3 7.7 70.4 Apr 59.8 -2.4 73.1 3.8 May 68.1 13.9 78.0 6.6 Jun 89.4 31.1 75.7 -2.9 Jul 109.9 22.9 75.8 0.1 Aug 135.2 23.0 77.8 2.6 Sep 112.2 -17.0 80.2 3.1 Oct 107.3 -4.4 83.0 3.5 Nov 90.5 -15.6 89.4 7.8 Dec 100.0 10.5 181.9 100.0 11.8 1995 Jan 109.7 9.7 128.4 108.9 8.9 Feb 97.1 -11.5 70.7 115.0 5.6 Mar 85.8 -11.6 40.1 128.7 11.9 82.7 Apr 81.6 -4.9 36.4 144.4 12.2 97.4 May 85.5 4.8 25.5 152.0 5.3 94.9 Jun 87.2 2.0 -2.4 157.8 3.8 108.4 Jul 95.8 9.9 -12.8 165.2 4.7 118.0 Aug 85.5 -10.8 -36.7 180.6 9.3 132.2 Sep 70.5 -17.5 -37.1 197.2 9.2 145.9 Oct 67.0 -5.0 -37.5 212.1 7.6 155.6 Nov 66.7 -0.4 -26.3 231.6 9.2 159.0 Dec 60.5 -9.3 -39.5 304.4 31.4 204.4 1996 Jan 59.8 -1.2 -45.5 354.0 16.3 225.1 Feb 59.6 -0.3 -38.6 367.8 3.9 219.8 Mar 59.8 0.3 -30.3 293.7 -20.1 128.2 Apr 62.0 3.6 -24.1 283.1 -3.6 96.0 May 63.0 1.7 -26.3 276.7 -2.3 82.0 Jun 62.7 -0.5 -28.1 271.5 -1.9 72.1
1991 1992 1993 1994 1995
Memorandum items (annual percent change): Federation 21 114 73,109 44069 780 -12 Republika Srpska 3/ 114 7,461 2.2 xlO16 1,061 133
Sources: Data provided by State Statistical Institute and Statistical Office of Republika Srpska.
i/ Non-seasonally adjusted. 21 1991 data are for all of Bosnia and Herzegovina; 1992-93 data for the Bosniac-majority area post-1993 data for Federation. 3/ 1991 data for all of Bosnia and Herzegovina; 1994 and 1995 figures and March through December comparisons because no price data are available for January and February 1994.
©International Monetary Fund. Not for Redistribution - 87 -
Table 16. Bosnia and Herzegovina: Republika Srpska: Average Monthly Gross and Net Wages
(In deutsche marks) II
Gross Monthly Wage Net Monthly Wage Material Nonmaterial Material Nonmaterial Total Sphere Sphere 21 Total Sphere Sphere 21
1994 Jan 37.2 36.2 44.5 17.3 16.8 20.6 Feb 56.0 54.5 64.6 27.1 26.4 30.7 Mar 54.2 49.6 72.5 28.9 27.1 36.2 Apr 67.3 62.0 86.6 34.1 32.2 41.1 May 78.9 71.5 103.2 34.7 32.2 42.8 Jun 100.4 88.9 170.7 47.5 43.1 74.1 Jul 115.8 109.0 140.9 55.9 54.0 62.9 Aug 115.1 105.7 156.2 55.2 51.8 70.7 Sep 114.6 106.8 153.9 54.0 51.6 66.5 Oct 103.2 94.7 136.8 48.9 46.1 59.9 Nov 100.0 95.6 117.9 48.9 47.5 55.0 Dec 92.9 88.0 111.5 45.5 44.3 50.2 1995 Jan 78.3 72.4 102.9 38.2 36.3 46.0 Feb 75.2 68.9 91.9 36.8 35.0 41.7 Mar 67.9 65.2 78.2 33.0 32.4 35.5 Apr 62.7 58.4 77.6 30.8 29.6 35.0 May 62.5 57.7 84.7 30.8 29.4 36.9 Jun 58.9 54.6 70.5 28.9 27.9 31.8 Jul 56.5 54.1 63.5 27.8 27.5 28.7 Aug 55.0 51.9 62.9 26.9 26.1 28.8 Sep 53.2 49.3 68.7 26.1 24.9 30.6 Oct 53.7 51.6 59.1 25.8 25.5 26.6 Nov 45.0 43.1 50.8 21.9 21.4 23.2 Dec 45.5 43.4 54.5 22.5 22.0 24.4 1996 Jan 48.3 44.5 58.0 24.4 22.1 30.4 Feb 53.6 48.3 67.0 26.3 24.5 30.9 Mar 61.8 57.1 71.7 32.2 30.4 36.2 Apr 66.6 62.7 76.1 35.2 33.8 38.7
Source: Data provided by Statisical Office of the Republika Srpska.
I/ Based on the average monthly parallel market exchange rate between the YUD and DM. 21 Includes government administration, education, health care, and other social services.
©International Monetary Fund. Not for Redistribution - 88 -
Table 17. Bosnia and Herzegovina: Monetary Survey of the Federation, 1994-96 I/
(In millions of deutsche mark; end of period)
1994 1995 1996 Dec. Mar. June Sep. Dec. Apr.
Assets 327.2 384.7 376.4 430.6 418.0 596.0
Foreign assets (net) (1,926.4) (1,798.8)(1,801.1)(1,704.4)(1,712.3) (1,588.7) Foreign assets (MA) 85.0 95.5 121.1 234.7 298.1 424.9 Foreign assets (DMB) 487.2 517.6 499.9 508.1 462.3 527.1 Foreign liabilities (MA) (56.8) (55.4) (57.0) (57.2) (69.2) (75.5) Foreign liabilities (DMB) (2,441.7) (2,356.4)(2,365.0)(2,390.1)(2,403.5) (2,465.3)
Domestic credit 2,253.6 2,183.4 2,177.4 2,135.0 2,130.2 2.184.7 Claims on central government (net) (2.4) (11.0) (9.4) (78.7) (85.3) (102.8) Monetary authorities (6.6) (13.6) (8.5) (75.5) (83.9) (103.2) Deposit money banks 4.2 2.6 (0.9) (3.2) (1.4) 0.3 Claims on noncentral government 1.0 1.0 1.0 0.3 0.0 0.0 Claims on nonfmancial enterprises 21 2.143.8 2,075.0 2,070.5 2,089.0 2,121.1 2,190.6 Claims on private sector 111.2 118.4 115.3 124.5 94.3 97.0 Nonbank financial institutions 0.1 0.0 0.0 0.1 0.4 0.4 Nonprofit organizations 6.6 7.7 8.1 8.3 9.1 7.8 Households 10.4 10.2 10.6 24.5 24.7 25.0 Other 94.0 100.5 96.6 91.6 60.1 63.7
Liabilities 327.2 384.7 376.4 430.6 418.0 596.0
Broad money 206.9 252.3 267.3 315.8 275.2 358.8
Money 163.1 207.7 218.7 255.8 236.5 307.2 Currency outside banks 3/ 3.0 5.9 11.1 13.6 20.6 32.9 Demand deposits of noncentral government 12.2 12.7 17.8 22.4 16.4 20.3 Demand deposits of nonfmancial enterprises 21 78.4 117.9 109.7 137.1 130.9 172.4 Demand deposits of the private sector 69.5 71.3 80.0 82.7 68.7 81.5 Nonbank financial institutions 1.2 1.2 0.9 1.5 1.7 2.5 Nonprofit organizations 6.8 9.3 13.3 14.8 21.9 27.4 Households 50.3 50.4 53.3 54.6 33.6 38.9 Other 11.2 10.4 12.5 11.8 11.5 12.6
Quasi— money (Time, savings and foreign exchange deposits) 43.8 44.5 48.6 59.9 38.7 51.7 Nonfmancial enterprises 1.4 2.3 1.8 2.2 6.3 13.9 Private sector 42.5 42.3 46.9 57.7 32.4 37.8 Nonbank financial institutions 0.2 0.2 0.2 0.2 1.8 2.7 Nonfinancial private enterprises and cooperatives 3.3 4.9 7.3 12.0 12.2 17.0 Nonprofit organizations 1.1 1.0 1.0 4.7 4.4 2.7 Households 34.8 35.5 36.0 36.7 13.4 15.2 Other 3.1 0.7 2.4 4.1 0.7 0.1
Other items (net) 120.3 132.4 109.1 114.8 142.7 237.2
Sources: Data provided by the National Bank of Bosnia and Herzegovina and Federation Ministry of Finance; and staff estimates.
I/ At official exchange rate of 100 Bosnia and Herzegovina dinars per DM, and market exchange rate of Croatian kuna. 21 Including public and private enterprises. 3/ Excluding foreign currencies.
©International Monetary Fund. Not for Redistribution - 89 -
Table 18. Bosnia and Herzegovina: Balance Sheet of the National Bank of Bosnia and Herzegovina, 1994-96 I/
(In millions of decusche mark: end of period)
1994 1995 1996 Dec. Mar. June Sep. Dec. Apr.
Assets 96.4 111.6 124.7 215.0 264.4 374.0
Foreign assets 73.5 82.0 94.3 180.0 228.2 343.0 Holdings of SDR 0.0 0.0 0.0 0.0 10.8 9.1 Foreign exchange in vaults 53.4 68.6 90.5 103.3 147.7 238.1 Short— term claims on nonresident banks 20.0 13.4 3.7 76.6 69.7 95.8
Domestic assets 23.0 29.7 30.4 35.0 36.2 31.0 Claims on central government 21.0 26.7 29.0 32.1 32.1 26.8 Claims on private sector 2.0 2.9 1.4 2.9 3.5 4.2 Short-term 1.9 2.9 1.3 2.9 3.5 4.1 Claims on deposit money banks 1.4 2.4 0.9 2.4 3.0 3.7 General purpose credit 0.0 0.0 0.0 0.0 0.0 0.0 Selective lending 0.0 0.0 0.0 1.3 1.8 1.9 Dinar advances 1.2 2.1 0.6 0.9 0.3 1.2 Other 0.3 0.3 0.3 0.2 0.9 06 Households 0.4 0.4 0.4 0.4 0.4 0.4 Long-term 0.1 0.1 0.1 0.1 0.1 0.1
Liabilities 96.4 111.6 124.7 215.0 264.4 374.0
Foreign liabilities 56.8 55.4 57.0 57.2 69.2 75.5 Short-term 56.8 55.4 56.9 57.2 69.2 70.4 Use of Fund Credit 0.0 0.0 0.0 0.0 69.2 70.4 Overdue obligations to the Fund 56.8 55.4 56.9 57.2 0.0 0.0 Long-term 0.0 0.0 0.0 0.0 0.0 5.1
Domestic liabilities 39.6 56.2 67.8 157.8 195.2 298.5 Reserve money 75.7 98.6 125.5 167.0 227.8 3412 Currency outside monetary authorities 21 3.3 6.3 11.5 14.2 21.2 34.6 Deposits of deposit money banks 3/ 72.5 92.3 114.0 149.3 206.6 306.6 Demand deposits of public enterprises 0.0 0.0 0.0 3.5 0.0 0.0 Of which: Currency outside banks 21 3.0 5.9 11.1 13.6 20.6 32.9 Central government deposits 15.8 28.4 23.8 80.7 98.6 112.7 Other items (net) 4/ (51.8) (70.7) (81.5) (90.0) (131.1) (155.4)
Memorandum items: Claims on former National Bank of Yugoslavia for frozen foreign exchange deposits 5/ 2,328.3 2,311.4 2,312.1 2,324.0 2,325.1 2,334.4 Legal entities' DM deposits with payments bureau 46.7 58.4 68.9 92.7 133.1 194.6 Gross international reserves 26.8 23.6 25.4 87.3 95.1 148.4 Of which: liabilities to central government 6/ 16.1 6.9 0.7 51.0 17.5 30.6 Narrow international reserves 10.7 16.7 24.7 36.3 77.7 117.7 Currency in circulation plus BHD balances at payments bureau in percent of narrow international reserves 45.8 51.0 59.5 50.4 33.6 34.9 Reserve money in percent of narrow international reserves 272.2 240.8 229.1 204.7 121.9 124.5
Sources: Data provided by the National Bank of Bosnia and Herzegovina; and staff estimates.
I! At official exchange rate of 100 Bosnia and Herzegovina dinars per DM. 21 Excluding foreign currencies. 3/ Including foreign currency deposits with payments bureau. 4/ Including assets and liabilities relating to frozen foreign exchange deposits. 5/ NBBH holds liabilities to commercial banks over the same amount on account of frozen foreign exchange deposits. This includes a residual claim over DM 31 million repaid by the Republic government in 1992 to citizens holding frozen foreign exchange accounts. 6/ On account of foreign exchange deposits and NBBH income; preliminary data.
©International Monetary Fund. Not for Redistribution - 90 -
Table 19. Bosnia and Herzegovina: Consolidated Balance Sheet of Commercial Banks in the Federation, 1994-96 II (in Millions of stach:e end of period
1994 1995 1996 Dec. Mar. June Sep. Dec. Apr.
Assets 2,781.6 2,755.4 2,755.3 2,811.0 2,775.2 2,935.4
Foreign assets 487.2 517.6 499.9 508.1 462.3 527.1 Short -term 184.6 215.1 197.2 205.4 172.4 235.3 Long— term 302.6 302.4 302.7 302.7 290.0 291.8
Domestic assets 2,294.4 2,237.8 2,255.4 2,302.9 2,312.9 2,408.3 Claims on general government 12.5 13.1 12.4 11.3 8.3 7.9 Of which: Central government 11.5 12.1 11.4 11.0 8.3 7.9 Claims on nonfinancial enterprises 21 2,143.8 2,075.0 2,070.5 2,089.0 2,120.6 2,190.5 Of which: Short-term 2,143.8 2,075.0 2,070.5 2,089.0 2,120.6 2,190.5 Claims on private sector 110.7 117.9 114.8 124.0 93.8 96.5 Of which: Short-term 110.7 117.9 114.8 124.0 93.8 96.5 Reserves 27.4 31.8 57.7 78.7 90.1 113.3 Domestic currency in vaults 0.3 0.4 0.3 0.6 0.6 1.7 Required deposits with monetary authorities 13.0 17.6 22.6 27.9 30.4 31.8 Other deposits and claims 14.1 13.8 34.8 50.2 59.1 79.8
Liabilities 2,781.6 2,755.4 2,755.3 2,811.0 2,775.2 2,935.4
Foreign liabilities 2,441.7 2,356.4 2,365.0 2,390.1 2,403.5 2,465.3 Short-term 73.1 75.2 74.8 86.9 94.7 117.5 Long— term 2,368.7 2,281.1 2,290.3 2,303.2 2,308.8 2,347.7
Domestic liabilities 339.9 399.0 390.2 421.0 371.7 470.1 Central government demand deposits 7.3 9.5 12.3 14.2 9.7 7.6 Other demand deposits 160.1 201.8 207.5 238.7 215.9 274.3 Other general government 12.1 12.7 17.8 22.4 16.4 20.3 Nonbank financial institutions 1.2 1.2 0.9 1.5 1.7 2.5 Nonfinancial enterprises 21 78.4 117.9 109.7 133.6 130.9 172.4 Nonprofit organizations 6.8 9.3 13.3 14.8 21.9 27.4 Households 50.3 50.4 53.3 54.6 33.6 38.9 Other 11.2 10.4 12.5 11.8 11.5 12.6 Other time, savings, and foreign currency deposits 43.8 44.5 48.6 59.9 38.7 51.7 Nonbank financial institutions 0.2 0.2 0.2 0.2 1.8 2.7 Public enterprises 1.4 2.3 1.8 2.2 6.3 13.9 Nonfinancial private enterprises and cooperatives 3.3 4.9 7.3 12.0 122 17.0 Nonprofit organizations 1.1 1.0 1.0 4.7 4.4 2.7 Households 34.8 35.5 36.0 36.7 13.4 15.2 Other 3.1 0.7 2.4 4.1 0.7 0.1
Other items (net) 3/ 128.6 143.2 121.8 108.1 107.3 136.6
Sources: Data provided by the National Bank of Bosnia and Herzegovina, the Federation Ministry of Finance and deposit money banks; and staff estimates.
I/ Banks reporting to the National Bank of Bosnia and Herzegovina and the Federation Ministry of Finance. 21 Including public and private enterprises. 3/ Including assets and liabilities relating to frozen foreign exchange deposits.
©International Monetary Fund. Not for Redistribution - 91 -
Table 20. Bosnia and Herzegovina: Consolidated Balance Sheet of Commercial Banks Reporting to the NBBH, 1994-96 I/ (In Millions of deduction Mark end of period)
1994 1995 1996 Dec. Mar. June Sep. Dec. Apr.
Assets 2,660.6 2,577.1 2,577.9 2,619.6 2,582.2 2,731.4
Foreign assets 433.9 429.5 432.6 453.0 414.4 468.8 Short— term 131.3 127.1 130.1 150.5 124.6 177.2 Long-term 302.6 302.4 302.6 302.6 289.8 291.6
Domestic assets 2,226.7 2,147.6 2,145.2 2,166.5 2,167.8 2,262.5 Claims on general government 7.6 6.5 6.4 6.3 4.5 4.0 Of which: Central government 7.6 6.5 6.4 6.3 4.5 4.0 Claims on nonfinancial enterprises 21 2,110.1 2,030.9 2,019.2 2,034.4 2,059.3 2,127.0 Of which: Short-term 2,110.1 2,030.9 2,019.2 2,034.4 2,059.3 2,127.0 Claims on private sector 100.2 100.7 102.5 108.9 79.2 82.8 Of which: Short-term 100.2 100.7 102.5 108.9 79.2 82.8 Reserves 8.8 9.6 17.0 16.8 24.8 48.7 Domestic currency in vaults 0.3 0.4 0.3 0.6 0.6 1.7 Required deposits with monetary authorities 2.4 2.5 4.8 5.0 9.2 8.8 Other deposits and claims 6.1 6.7 11.9 11.3 14.9 38.2
Liabilities 2,660.6 2,577.1 2,577.9 2,619.6 2,582.2 2,731.4
Foreign liabilities 2,434.3 2,346.4 2,356.4 2,381.7 2,391.3 2,452.4 Short-term 72.0 71.6 72.0 84.8 88.3 111.0 Long— term 2,362.3 2,274.8 2,284.4 2,297.0 2,303.0 2,341.4
Domestic liabilities 226.3 230.7 221.4 237.8 190.9 279.0 Central government demand deposits 1.4 1.4 1.9 3.5 1.5 1.4 Other demand deposits 78.7 80.6 97.3 111.8 93.5 149.3 Other general government 0.0 0.0 0.0 0.0 0.0 0.2 Nonbank financial institutions 0.1 0.1 0.2 0.2 0.4 0.7 Nonfinancial enterprises 21 30.8 31.8 42.7 57.9 58.4 105.3 Nonprofit organizations 1.6 2.9 6.4 5.9 9.9 16.5 Households 37.7 36.6 37.3 37.9 14.8 16.0 Other 8.4 9.4 10.8 9.9 10.1 10.6 Other time, savings, and foreign currency deposits 37.0 36.1 37.3 40.3 17.1 26.6 Nonbank financial institutions 0.2 0.2 0.2 0.2 1.8 2.7 Public enterprises 0.3 1.2 0.7 1.2 1.7 4.6 Nonfinancial private enterprises and cooperatives 0.6 1.1 1.3 1.8 5.7 9.5 Nonprofit organizations 0.0 0.0 0.0 0.0 0.5 0.7 Households 32.7 32.8 32.9 33.0 6.7 9.0 Other 3.1 0.7 2.1 4.1 0.7 0.1 Credit from monetary authorities 1.4 2.4 0.9 2.4 3.0 3.7 General purpose credit to banks 0.0 0.0 0.0 0.0 0.0 0.0 Selective lending to banks 0.0 0.0 0.0 1.3 1.8 1.9 Dinar advances 1.2 2.1 0.6 0.9 0.3 1.2 Other 0.3 0.3 0.3 0.2 0.9 0.6 Other items (net) 3/ 107.8 110.2 84.1 79.8 75.7 98.0 Of which: Capital accounts 273.1 273.0 287.3 292.1 306.8 354.7
Memorandum item: Claims on NBBH for frozen foreign exchange deposits 2,542.2 2,512.1 2,512.2 2,535.2 2,506.4 2,369.5
Sources: Data provided by the National Bank of Bosnia and Herzegovina and deposit money banks; and staff estimates.
17 Banks operating in general in the Bosniac—majority area. 21 Including public and private enterprises. 3/ Including assets and liabilities relating to frozen foreign exchange deposits.
©International Monetary Fund. Not for Redistribution - 92 -
Table 21. Bosnia and Herzegovina: Consolidated Balance Sheet of Commercial Banks Reporting to the Federation Ministry of Finance, 1994-96 I/
(In millions of deutsche mark; end of period")
1994 1995 1996 Dec. Mar. June Sep. Dec. Apr.
Assets 120.9 178.3 177.4 191.5 193.0 204.0
Foreign assets 53.2 88.0 67.2 55.1 47.9 58.2 Short-term 53.2 88.0 67.1 54.9 47.8 58.1 Long-term 0.0 0.0 0.2 0.1 0.1 0.1
Domestic assets 67.7 90.2 110.2 136.4 145.1 145.8 Claims on general government 4.9 6.7 6.0 5.0 3.8 3.9 Of which: Central government 3.9 5.7 4.9 4.7 3.8 3.9 Claims on nonfinancial enterprises 21 33.7 44.1 51.3 54.6 61.4 63.6 Of which: Short-term 33.7 44.1 51.3 54.6 61.4 63.6 Claims on private sector 10.5 17.2 12.3 15.1 14.6 13.7 Of which: Short-term 10.5 17.2 12.3 15.1 14.6 13.7 Reserves 18.6 22.3 40.7 61.8 65.4 64.6 Required deposits with monetary authorities 10.6 15.1 17.8 22.9 21.3 23.0 Other deposits and claims 8.0 7.1 22.9 39.0 44.1 41.6
Liabilities 120.9 178.3 177.4 191.5 193.0 204.0
Foreign liabilities 7.4 10.0 8.6 8.4 12.2 12.9 Short-term 1.0 3.6 2.8 2.1 6.4 6.6 Long-term 6.4 6.4 5.9 6.2 5.8 6.3
Domestic liabilities 113.5 168.3 168.8 183.1 180.8 191.1 Central government demand deposits 5.9 8.0 10.4 10.7 8.2 6.2 Other demand deposits 81.4 121.2 110.2 126.9 122.4 125.0 Other general government 12.1 12.7 17.8 22.4 16.4 20.1 Nonbank financial institutions 1.1 1.1 0.8 1.3 1.3 1.8 Nonfinancial enterprises 21 47.6 86.1 67.0 75.7 72.5 67.1 Nonprofit organizations 5.2 6.4 6.9 8.9 12.0 10.9 Households 12.6 13.9 16.0 16.7 18.8 23.0 Other 2.8 1.0 1.7 1.9 1.4 2.0 Other time, savings, and foreign currency deposits 6.9 8.5 11.3 19.7 21.6 25.1 Public enterprises 1.0 1.0 1.0 1.0 4.6 9.3 Nonfinancial private enterprises and cooperatives 2.8 3.8 5.9 10.2 6.4 7.5 Nonprofit organizations 1.0 1.0 1.0 4.7 3.9 2.0 Households 2.1 2.7 3.1 3.8 6.7 6.2 Other 0.0 0.0 0.3 0.0 0.0 0.0 Other items (net) 3/ 19.4 30.6 36.8 25.9 28.6 34.9
Sources: Data provided by the Federation Ministry of Finance and deposit money banks; and staff estimates.
I/ Banks operating in the Croat-majority area. 21 Including public and private enterprises. 3/ Including assets and liabilities relating to frozen foreign exchange deposits.
©International Monetary Fund. Not for Redistribution Table 22. Bosnia and Herzegovina: Selected Interest Rates of the National Bank of Bosnia and Herzegovina, 1994-96
(Average in each period; in percent per annum)
1994 1995 1996 01 02 03 04 01 02 03 04 Ql Apr. -May [/
NBBH lending rates
Base rate 7849.7 7849.7 6288.2 5257.8 791.6 404.3 46.4 46.4 46.4 20.0 Selective loans 21 ... 42.6 12.6 12.6 12.6 6.0 Penalty rate 735482.8 735482.8 251043.4 26363.7 2229.8 1026.7 74.9 74.9 74.9 30.0 Credit to the government 249.8 249.8 225.2 206.5 101.2 86.7 21.6 21.6 21.6 10.0
NBBH deposit rates
Required reserves Sight deposits and fixed term deposits with maturity up to 3 months 987.2 987.2 853.3 745.2 79.6 49.4 10.4 10.4 10.4 2.0 Other fixed term deposits 1501.2 1501.2 1015.3 745.2 79.6 49.4 10.4 10.4 10.4 2.0
Promissory notes 3/ Required holdings Maturity up to 3 months 151.8 145.8 60.1 37.8 8.2 8.2 8.2 2.5 Maturity over 3 months 4/ 213.8 205.1 79.6 49.4 10.4 10.4 10.4 3.0 Voluntary holdings Maturity up to 3 months 213.8 205.1 79.6 49.4 10.4 10.4 10.4 3.0 Maturity over 3 months 4/ 289.6 277.3 101.2 61.9 12.6 12.6 12.6 3.5
Sources: Data provided by the National Bank of Bosnia and Herzegovina; and staff estimates.
]/ NBBH decision 16/96. 21 Selective lending was introduced by decree April 12,1995 and abolished April 1,1996. 3/ Issued after July 30,1994. 4/ Maximum maturity 12 months.
©International Monetary Fund. Not for Redistribution - 94 -
Table 23. Bosnia and Herzegovina: Selected Interest Rates of Commercial Banks Reporting to the National Bank of Bosnia and Herzegovina, 1995-96 II
(In percent per annum)
Dec. 31, 1995 April 30, 1996 Min. Max. Min. Max.
Deposits
Households' demand deposits BH dinar 12.68 79.59 1.45 79.59 Foreign currency 2.06 6.17 10.03 42.58 Households' time and savings deposits BH dinar 26.82 79.59 2.92 79.59 Foreign currency 2.43 42.58 10.03 19.56
Enterprises' demand deposits BH dinar 12.68 39.94 125.22 Foreign currency 6.17 6.17 42.58 Enterprises' time and savings deposits BH dinar 26.82 399.84 8.73 79.59 Foreign currency 12.68 42.58 9.77 42.58
Credits
Short-term credits to households BH dinar 79.59 213.84 51.11 60.10 Foreign currency 12.68 12.68 10.03 791.61 Long-term credits to households BH dinar 42.58 213.84 42.58 213.84 Foreign currency ...... 2.92 11.75
Short-term working credits to enterprises BH dinar 26.82 289.60 19.56 151.82 Foreign currency 26.82 213.84 12.68 60.10 Long-term working credits to enterprises BH dinar 42.58 213.84 2.92 125.22 Foreign currency 42.58 101.22 2.43 151.82
Investment credits to enterprises BH dinar 60.10 289.60 2.92 125.22 Foreign currency 26.82 101.22 2.43 60.10
Sources: Data provided by the National Bank of Bosnia and Herzegovina; and staff estimates.
i/ Maximum and minimum interest rates reported by commercial banks; average interest rate data not available.
©International Monetary Fund. Not for Redistribution - 95 -
Table 24. Bosnia and Herzegovina: Monetary Survey of the Republika Srpska, 1994-96 II
(In millions of deutsche mark: end of period)
1994 1995 1996 Dec. Mar. June Sep. Dec. Apr.
Assets 328.1 162.0 197.2 150.9 111.4 136.8
Foreign assets (net) (320.4) (463.2) (465.0) (375.1) (313.2) (312.0) Foreign assets (NBRS) 55.4 41.0 29.0 17.3 7.2 21.2 Foreign assets (DMB) 40.4 42.0 44.4 37.4 50.9 56.0 Foreign liabilities (NBRS) 21 (34.2) (61.5) (54.3) (87.7) (29.0) (40.2) Foreign liabilities (DMB) (382.1) (484.7) (484.2) (342.1) (342.3) (349.0)
Domestic credit 648.5 625.2 662.2 526.0 424.6 448.7 Claims on central government (net) 16.8 7.1 24.3 51.9 23.5 24.2 NBRS 48.9 35.7 58.7 76.2 58.2 54.8 Deposit money banks (32.1) (28.6) (34.4) (24.2) (34.7) (30.6) Claims on noncentral government 0.0 0.0 0.0 0.0 0.0 0.0 Claims on nonfinancial enterprises 3/ 631.1 617.5 637.3 473.4 400.8 424.1 Claims on private sector 4/ 0.7 0.6 0.6 0.6 0.2 0.4
Liabilities 328.1 162.0 197.2 150.9 111.4 136.8
Broad money 299.6 289.4 330.6 283.6 226.2 210.2
Money 52.3 48.5 91.7 96.0 41.3 19.8 Currency outside banks 5/ 0.0 0.0 17.4 19.6 7.7 0.0 Demand deposits of noncentral government 0.0 0.0 0.0 0.0 0.0 0.0 Demand deposits of nonfinancial enterprises 3/ 49.2 44.6 64.1 71.1 31.5 15.9 Demand deposits of the private sector 4/ 3.0 3.9 10.2 5.3 2.1 3.9
Quasi-money (Time, savings and foreign exchange deposits) 247.3 240.9 239.0 187.7 184.9 190.4 Nonfinancial enterprises 3/ 77.3 72.9 70.5 18.1 13.9 18.7 Private sector 4/ 170.0 168.0 168.5 169.5 171.0 171.8
Other items (net) 6/ 28.5 (127.4) (133.5) (132.7) (114.8) (73.4)
Memorandum item: Legal entities' YUD holdings with payments bureau in millions 40.3 16.9 12.8 3.6 1.8 7.1 YUD cash emitted into the economy 7/ 34.2 61.5 54.2 87.3 28.8 40.0
Sources: Data provided by the National Bank of the Republika Srpska; and staff estimates.
I/ At official exchange rate of Yugoslav dinar (YUD) 1 per DM until November 26,1995 and YUD 3.3 per DM thereafter; YUD is the legal lender of the Republika Srpska. 21 Including YUD cash on loan from the National Bank of the Federal Republic of Yugoslavia. 3/ Including public and private enterprises. 4/ On account of households. 5/ Negotiable YUD denominated cashiers checks constituting domestic currency were introduced April 13,1995 and withdrawn February 29,1996; excluding foreign currencies. 6/ Including assets and liabilities relating to frozen foreign exchange deposits. 7/ Liability to the National Bank of the Federal Republic of Yugoslavia; interest free short-term loan with indeterminate maturity.
©International Monetary Fund. Not for Redistribution - 96 -
Table 25. Bosnia and Herzegovina: Balance Sheet of the National Bank of the Republika Srpska, 1994-96 I/
(In millions of deutsche mark; end of period')
1994 1995 1996 Dec. Mar. June Sep. Dec. Apr.
Assets 113.7 124.1 166.0 167.1 85.9 102.1
Foreign assets 55.4 41.0 29.0 17.3 12 21.2 Foreign exchange in vaults 48.2 38.2 26.5 14.6 4.6 18.5 Short—term claims on nonresident banks 7.0 2.6 2.3 2.7 2.7 2.7
Domestic assets 58.3 83.1 137.0 149.8 78.7 80.9 Claims on central government 55.2 67.4 92.6 103.8 63.6 63.6 Claims on private sector 3.1 15.6 44.3 45.9 15.1 17.2 Short - term claims on deposit money banks 3.1 15.6 44.3 45.9 15.1 17.2 General purpose credit 2.8 12.1 21.5 20.1 7.4 16.8 Selective lending 0.0 3.3 5.2 6.1 0.0 0.3 Dinar advances 0.3 0.3 0.3 0.3 0.1 0.1 Other 0.0 0.0 17.4 19.6 7.7 0.0 Long-term 0.0 0.0 0.0 0.0 0.0 0.0
Liabilities 113.7 124.1 166.0 167.1 85.9 102.1
Foreign liabilities 34.2 61.5 54.3 87.7 29.0 40.2 Short-term 34.2 61.5 54.3 87.7 29.0 40.2 Nonresident deposits and credits 0.0 0.0 0.2 0.4 0.2 0.2 Other 21 34.2 61.5 54.2 87.3 28.8 40.0 Long— term 0.0 0.0 0.0 0.0 0.0 0.0
Domestic liabilities 79.5 62.6 111.7 79.4 57.0 61.9 Reserve money 18.5 11.6 58.1 51.1 24.3 0.0 Currency outside monetary authorities 3/ 0.0 0.0 17.4 19.6 7.7 0.0 Deposits of deposit money banks 4/ •18.5 11.6 40.8 31.6 16.6 0.0 Of which: Currency outside banks 0.0 0.0 17.4 19.6 7.7 0.0 Central government deposits 6.3 31.7 33.9 27.7 5.4 8.8 Time, savings and foreign currency deposits 5/ 2.0 3.4 4.2 4.8 1.8 3.4 Other items (net) 52.6 15.9 15.4 (4.1) 25.4 49.7
Sources: Data provided by the National Bank of the Republika Srpska; and staff estimates.
I/ At official exchange rate of Yugoslav dinar (YUD) 1 per DM until November 26,1995 and YUD 3.3 per DM thereafter; YUD is the legal tender of the Republika Srpska. 21 Liabilities to the National Bank of the Federal Republic of Yugoslavia on account of YUD cash emitted into the economy. 3/ Negotiable YUD denominated cashiers checks constituting domestic currency were introduced April 13,1995 and withdrawn February 29,1996; excluding foreign currencies. 4/ Including foreign currency deposits; banks depicted deposits in April 1996 resulting from temporary illiquidity. 5/ Excluding foreign currency deposits of deposit money banks.
©International Monetary Fund. Not for Redistribution - 97 -
Table 26. Bosnia and Herzegovina: Consolidated Balance Sheet of Commercial Banks in the Republika Srpska, 1994—96 \J
(iN mILLION OF DEUCTION MARK: END OF PERIOD
1994 1995 1996 Dec. Mar. June Sep. Dec. Apr.
Assets 696.2 676.2 735.5 559.6 469.1 484.8
Foreign assets 40.4 42.0 44.4 37.4 50.9 56.0 Of which: Short— term 40.4 42.0 44.4 37.4 50.9 56.0
Domestic assets 655.8 634.3 691.1 522.2 418.3 428.8 Claims on general government 1.5 1.6 5.0 9.0 1.9 1.1 Of which: Central government 1.5 1.6 5.0 9.0 1.9 1.1 Claims on nonfinancial enterprises 631.1 617.5 637.3 473.4 400.8 424.1 Short— term 75.3 90.7 111.1 137.1 57.7 62.7 Long— term 555.8 526.8 526.2 336.3 343.1 361.3 Claims on private sector 0.6 0.6 0.6 0.6 0.2 0.4 Of which: Short— term 0.4 0.4 0.4 0.5 0.2 0.2
Reserves 22.6 14.7 48.2 39.2 15.3 3.3 Domestic currency in vaults 0.0 0.0 0.0 0.0 0.0 0.0 Required deposits with monetary authorities 2.8 4.8 7.4 8.2 1.1 0.2 Other deposits and claims 19.7 9.9 40.9 31.1 14.2 3.1
Liabilities 696.2 676.2 735.5 559.6 469.1 484.8
Foreign liabilities 382.1 484.7 484.2 342.1 342.3 349.0 Short-term 1.3 1.9 2.2 0.4 1.1 0.8 Long— term 380.8 482.8 482.0 341.7 341.2 348.2
Domestic liabilities 314.1 191.6 251.4 217.5 126.8 135.8 Central government deposits 33.6 30.1 39.4 33.2 36.6 31.7 Demand deposits 17.1 12.9 16.9 16.1 5.3 2.6 Time, savings and foreign currency deposits 16.6 17.2 22.5 17.1 31.3 29.1 Other demand deposits 52.3 48.5 74.3 76.4 33.6 19.8 Public and private enterprises 49.2 44.6 64.1 71.1 31.5 15.9 Households 3.0 3.9 10.2 5.3 2.1 3.9 Other time, savings, and foreign currency deposits 245.3 237.5 234.8 182.9 183.1 187.1 Public and private enterprises 75.6 70.1 67.0 14.1 12.4 15.5 Households 169.7 167.4 167.7 168.8 170.7 171.6 Credit from monetary authorities 3.2 11.0 35.4 37.4 12.4 7.9 General purpose credit to banks 3.2 5.5 5.6 6.0 1.8 5.2 Selective lending to banks 0.0 5.5 12.4 11.9 2.9 2.7 Other 21 0.0 0.0 17.4 19.6 7.7 0.0 Other items (net) 3/ (20.3) (135.6) (132.5) (112.4) (138.9) (110.6) Of which: Capital accounts 172.2 185.3 192.6 256.9 127.6 194.8
Sources: Data provided by the National Bank of the Republika Srpska; and staff estimates.
I/ At official exchange rate of Yugoslav dinar (YUD) 1 per DM until November 26,1995 and YUD 3.3 per DM thereafter; YUD is the legal tender of the Republika Srpska. 21 Liability to monetary authorities on account of cashiers checks. 3/ Including assets and liabilities relating to frozen foreign exchange deposits.
©International Monetary Fund. Not for Redistribution Table 27. Bosnia and Herzegovina: Selected Interest Rates of the National Bank of the Republika Srpska, 1994-%
(Average in each period: in percent per annum)
1994 1995 1996 Ql 11 Q2 Q3 Q4 Ql Q2 Q3 Q4 Ql Apr. -May
NBRS lending rates
Base rate 2/ 99.9 7.3 8.4 9.0 9.0 9.0 9.0 9.0 42.0 111.0 Selective loans 7.3 8.4 9.0 9.0 9.0 9.0 9.0 42.0 111.0 Penalty rate 14.5 16.8 18.0 18.0 18.0 18.0 18.0 69.6 177.6 Credit to the government 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0
NBRS deposit rates
Required reserves 5.0 5.0 5.0 5.0 5.0 5.0 5.0 21.4 55.5 Promissory notes 3/ 5.0 5.0 5.0 5.0 5.0 5.0 5.0 21.4 55.5
Sources: Data provided by National Bank of the Republika Srpska; and staff estimates.
I/ Monthly rate. 21 Base rate charged for liquidity loans. 3/ Held by commercial banks in fulfillment of liquidity requirement.
©International Monetary Fund. Not for Redistribution - 99 -
Table 28. Bosnia and Herzegovina: Selected Interest Rates of Commercial Banks Reporting to the National Bank of the Republika Srpska, 1996 I/
(In percent per annum)
March, 1996 Min. Max.
Deposits
Households' demand deposits 2.9 30.0 Households' time and savings deposits 21 5.9 70.4
Enterpises' demand deposits 3.0 3.0 Enterprises' time and savings deposits 21 5.9 70.4
Credits
Short-term credits to households 3/ 71.5 213.8 Long-term credits to households 4/ 44.1 44.1
Short-term working credits to enterprises 5/ 13.8 242.4 Long-term working credits to enterprises 61 42.6 242.4
Investment credits to enterprises 42.6 242.4
Sources: Data provided by National Bank of the Republika Srpska; and staff estimates.
I/ Maximum and minimum interest rates reported by commercial banks; average interest rate data not available. 21 Time deposits with maturity of up to 1 or more years. 3/ Including consumption loans. 4/ Including housing loans. 5/ Including loans for manufacturing, agricultre, mining, and tourism. 6/ Including loans for exports of manufactured goods, construction of housing and utilities, and reconstruction.
©International Monetary Fund. Not for Redistribution - 100 -
Table 29. Bosnia and Herzegovina: Fiscal Outcomes, 1994-95 If
(In millions of deutsche marks 1
1994 1995 Bosniac- Croat- Republika Bosniac- Croat- Republika Consolidated Majority Majority Srpska Consolidated Majority Majority Srpska Area 2/ Area Area Area Area Area
Total Revenue 611.7 47.9 352.6 211.1 1042.8 454.4 400.4 188.0
Tax revenue 366.9 26.5 209.0 131.4 573.7 177.4 258.6 137.6 Sales taxes 251.6 15.3 151.0 85.3 200.7 49.6 67.1 84.0 Excise taxes 3/ 3.5 3.5 117.7 36.4 81.2 Enterprise tax 2.7 — 1.5 1.2 20.2 5.7 4.7 9.8 Wage lax 44.7 12.9 31.9 77.5 5.2 44.8 27.4 Reconstruction tax — — 4.6 4.6 Customs duties 63.1 7.2 42.9 13.0 111.4 42.7 52.3 16.4 Property tax 0.2 — 0.2 Other taxes 1.1 0.6 0.6 41.7 33.2 8.5 Social security contributions 141.4 3.1 66.4 71.9 244.3 54.3 141.7 48.3 Nontax revenue 27.4 18.3 1.2 7.8 56.3 54.2 2.2 Grants 76.0 76.0 168.5 168.5
Total Expenditure 4/ 668.4 63.9 356.5 248.0 1051.4 454.2 400.1 197.0
Wages and contributions 59.5 0.2 40.1 19.3 87.0 9.3 53.4 24.3 Goods and services 441.2 55.0 229.3 156.8 580.3 256.7 200.7 123.0 Military 5/ 335.4 16.2 199.0 120.2 461.9 219.7 154.6 87.7 Education 38.5 0.7 21.5 16.3 69.6 16.7 38.8 14.1 Interior Affairs 7.1 1.0 6.1 19.1 11.9 7.2 Other 60.2 37.2 2.7 20.3 29.8 8.6 21.2 Interest expense 6/ — — 0.8 0.8 137.2 5.1 64.9 67.2 217.3 58.4 112.3 46.6 Road maintenance 9.7 3.6 1.4 4.7 6.9 5.3 1.6 Unallocated and other 20.8 20.8 159.1 129.8 27.7 1.5
Balance -56.7 -15.9 -3.8 -37.0 -8.6 0.1 0.2 -8.9
Financing 56.7 15.9 3.8 37.0 8.6 -0.1 -0.2 8.9 Domestic financing 56.7 15.9 3.8 37.0 8.6 -0.1 -0.2 8.9
Memorandum items (percent of GDP): Revenue 16.6 4.5 32.9 13.6 29.5 36.7 33.0 17.4 Expenditure 18.2 6.1 33.3 16.0 29.8 36.7 33.0 18.2 Of which: Military 5/ 9.1 1.5 18.6 7.7 13.1 17.7 12.8 8.1 Balance -1.5 -1.5 -0.4 -2.4 -0.2 0.0 0.0 -0.8
Sources: Data provided by authorities; and Fund staff estimates.
I/ Coverage excludes local and district government operations. Some military expenditure and associated external grant financing is also excluded for all jurisdictions due to lack of data. 21 Excludes isolated regions and regions under occupation. 3/ For Republika Srpska, excises are included under sales taxes. In Croat-majority area, excises were introduced in July 1994. Revenue is included under sales taxes. 4/ Cash basis. 5/ Military expenditure includes only reported cash expenditures that were carried on the budgets. 6/ Unpaid external interest expense totalled DM 287 million and DM 258 million in 1994 and 1995, respectively.
©International Monetary Fund. Not for Redistribution Table 30. Bosnia and Herzegovina: Re venue Shares, 1994-95 I/
(In percent of total revenue)
1994 1995 Bosniac- Croat- Republika Bosniac- Croat- Republika Consolidated Majority Majority Srpska Consolidated Majority Majority Srpska Area2/ Area Area Area Area Area
Total Revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Tax revenue 60.0 55.2 59.3 62.2 55.0 39.1 64.6 73.2 Sales taxes 41.1 31.9 42.8 40.4 19.2 10.9 16.8 44.7 Excise taxes 3/ 0.6 7.2 0.0 0.0 11.3 8.0 20.3 0.0 Enterprise tax 0.4 0.0 0.4 0.6 1.9 1.2 1.2 5.2 Wage tax 7.3 0.0 3.6 15.1 7.4 1.1 11.2 14.6 Reconstruction tax 0.0 0.0 0.0 0.0 0.4 1.0 0.0 0.0 Customs duties 10.3 14.9 12.2 6.2 10.7 9.4 13.1 8.7 Property tax 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 Other taxes 0.2 1.2 0.2 0.0 4.0 7.3 2.1 0.0 Social security contributions 23.1 6.5 18.8 34.1 23.4 11.9 35.4 25.7 Nontax revenue 4.5 38.3 0.4 3.7 5.4 11.9 0.0 1.2 Grants 12.4 0.0 21.5 0.0 16.2 37.1 0.0 0.0
Sources: Data provided by authorities; and Fund staff estimates.
I/ Coverage excludes local and district government operations. Some military expenditure and associated external grant financing is also excluded for all jurisdictions due to lack of data. 21 Excludes isolated regions and regions under occupation. 3/ For Republika Srpska, excises are included under sales taxes. In Croat-majority area, excises were introduced in July 1994. Revenue is included under sales taxes.
©International Monetary Fund. Not for Redistribution Table 31. Bosnia and Herzegovina: Expenditure Shares, 1994-95 I/
(In percent of total expenditure)
1994 1995 Bosniac- Croat - Republika Bosniac- Croat - Republika Consolidated Majority Majority Srpska Consolidated Majority Majority Srpska Area2/ Area Area Area Area Area
Total Expenditure 3/ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Wages and contributions 8.9 11.2 7.8 8.3 2.0 13.4 12.3 — Goods and services 66.0 86.2 64.3 63.2 55.2 56.5 50.1 62.4 Military 4/ 50.2 25.4 55.8 48.4 43.9 48.4 38.6 44.5 Education 5.8 1.1 6.0 6.6 6.6 3.7 9.7 7.2 1.1 1.6 1.7 1.8 2.6 1.8 0.0 Interior Affairs — Other 9.0 58.2 0.8 8.2 2.8 1.9 0.0 10.8 Interest expense 5/ ------— — — — — Social Fund expenditure 20.5 8.0 18.2 27.1 20.7 12.9 28.1 23.7 1.4 5.6 1.9 0.7 0.0 1.3 0.8 Road maintenance — Unallocated and other 3.1 *"" «— 5.8 ~~ — 15.1 28.6 6.9 0.8
Sources: Data provided by authorities; and Fund staff estimates.
II Coverage excludes local and district government operations. Some military expenditure and associated external grant financing is also excluded for all jurisdictions due to lack of data. 2/ Excludes isolated regions and regions under occupation. 3/ Cash basis. 4/ Military expenditure includes only reported cash expenditures that were carried on the budgets. 5/ Unpaid external interest expense totalled DM 287 million and DM 258 million in 1994 and 1995, respectively.
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Table 32. Bosnia and Herzegovina: Operation of Pension Funds, 1994-95
(In millions of deutsche marks')
Bosniac—majority area Croat-majority area 1994 1995 1994 1995
Revenue 7.31 37.03 33.43 58.57 Contributions for pensions I/ 7.31 37.03 33.43 58.57 Other revenue
Expenditure 17.50 27.72 32.78 53.10 Net pensions paid 15.35 24.32 23.97 36.89 Health contributions for pensioners 21 2.15 3.40 7.32 9.59 Administrative and other expenditure 1.48 6.63
Balance -10.19 9.31 0.66 5.47
Memorandum items: Number of pensioners 175,000 177,757 34,571 43,096 Number of contributors 3/ 73,256 113,555 34,870 43,350 Ratio of pensioners to contributors 2.4 1.6 1.0 1.0 Average net pension (DM) 4/ 7 11 58 71
Sources: Data provided by authorities; and staff estimates.
I/ Payroll tax in Bosniac—majority area was 34 percent of gross wage (divided equally between employee and employer). Contribution rate is 17.5 percent of gross wage in Croat—majority area. 21 In Bosniac-majority area, equal to 14 percent of pensions. For Croat—majority area, transfer equalled 30 percent and 25.5 percent of net pensions in 1994 and 1995, respectively. 3/ Estimated using data on paid employment. 4/ Average monthly pension in DM, averaged over the period.
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Table 33. Bosnia and Herzegovina: Features of Present Personal Income Tax Structures
BosniaoMaiority Area Croat-Majority Area I. Schedular Income Taxes
1. Employment General: A centrally established tax on residents, on General: A centrally established tax on residents, on income tax their world-wide employment incomes, and non- their world-wide employment incomes, and non- residents, on their local source employment income. residents, on their local source employment income. The taxpayer is the individual and not family. The taxpayer is the individual and not family. Tax base: The tax is levied on gross income realized Tax base: The tax is levied on net income realized from employment and includes wages and salaries as from employment and includes wages and salaries as well as fringe benefits paid in cash, coupons or well as fringe benefits paid in cash, coupons or certificates. Perdiem for official travel, in excess of set certificates. Perdiem for official travel, in excess of limits, compensations for annual vacation and set limits, compensations for annual vacation and severance pay at retirement are included. The gross severance pay at retirement are included. The net income can not be less than the average gross pay of income can not be less than the average net pay of employees in similar jobs. employees in similar jobs.
Not subject to tax are incomes of disabled, child Not subject to tax are incomes of disabled, child allowances, unemployment compensation, social allowances, unemployment compensation, social assistance, life and health insurance benefits, assistance, life and health insurance benefits, scholarships, etc. Also, not subject to tax are scholarships, etc. Also, not subject to tax are employment incomes of foreign diplomats and employment incomes of foreign diplomats and international organizations' officials. international organizations1 officials.
• No deductions and allowances are permitted towards • No deductions and allowances are permitted earning employment income. towards earning employment income.
• No personal refunds and incentives are offered to • No personal refunds and incentives are offered to employment income earners. employment income earners.
Tax rates: 10 percent on gross cash incomes. In Tax rates: 23 percent before net cash incomes are addition, there is a reconstruction tax (see below). paid and progressive tax rates of 2 to 25 percent of net incomes in excess of 200 DEM per month or 2,400 DEM per annum.
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Bosniac-Majority Area Croat-Majority Area Other aspects: Employees also contribute to social Other aspects: Employees also contribute to social security systems on the same tax base at the following security systems on the same tax base at the following rates: rates: • for pensions: 17 percent of gross (cash) salary. • for pensions: 35 percent of net (cash) salary • for health insurance: 14 percent of gross (cash) • for health insurance: 25 percent of net (cash) salary. salary. • for unemployment insurance: 2 percent of gross • for unemployment insurance: 2 percent of net (cash) salary. (cash) salary. • for education and welfare: 15 percent of net (cash) salary.
Receipts from social security contributions are not Receipts from social security contributions are not shared with lower levels of government shared with lower levels of government
(These are separate employer's contributions as well.) (These are no separate employers' contributions)
• The employment income tax is withheld by the • The employment income tax is withheld by the employer. employer.
• 26 percent of the revenue of this tax is shared with • 50 percent of the revenue of this tax is shared the lower-level governments. with the lower-level governments.
• Residents earning incomes abroad are allowed • Residents earning incomes abroad are allowed foreign tax credit up to the limit of domestic tax due. foreign tax credit up to the limit of domestic tax due. 2. Tax on General: A centrally established tax, on residents, on General: A centrally established tax, on residents, on business profits world-wide income, and nonresidents, on their local world-wide income, and nonresidents, on their local and incomes of source income. The taxpayer is the individual and not source income. The taxpayer is the individual and self-employed family. not family. Tax base: The tax is levied on the difference between Tax base: The tax is levied on the difference between the value of assets and liabilities at the beginning and the value of assets and liabilities at the beginning and end of the tax (calendar) year. All costs incurred to end of the tax (calendar) year. In practice earn income are allowed. The costs also include a simplified accounts are accepted. All costs "notional" wage cost (which is taxed separately as incurred to earn income are allowed. These costs employment income), currently 425 DEM. For small also include a "notional" wage cost (which is businesses, the notional wage cost is 60 percent of the taxed separately as employment income), average salary. On this amount social security currently 2,400 DEM. contributions (both of the employee and the employer) are also payable. • No deductions and allowances other than costs incurred to earn income are permitted. • No deductions and allowances other than costs incurred to earn income are permitted. • There are no personal reliefs or incentives for self- employed or individuals earning business profits. • There are no personal reliefs or incentives for self- employed or individuals earning business profits. Tax rates: 36 percent of taxable profits and 10 percent of notional wage and salary. In addition, there is a reconstruction tax (see below).
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Bosniac-MajorityArea Croat-Majority Area Other Aspects: The self-employed must contribute to social security system on their presumed wages and salaries, as employees (at the rates noted above) as well as employer's at the following rates:
• for pensions: 7.5 percent of presumed amount None • for health insurance: 5.5 percent of presumed amount • for unemployment insurance: 1 percent of presumed amount
• The income tax is to be paid monthly based on • The income tax is to be paid monthly based on monthly balance sheet. Even the smallest monthly balance sheet. For smaller establish- establishment must keep books of account. ments, earning less than DEM 4,800 per annum, the municipalities levy lump-sum amounts.
• Residents earning incomes abroad are allowed • Residents earning incomes abroad are allowed foreign tax credits up to the limit of domestic tax due. foreign tax credits up to the limit of domestic tax due. 3. Reconstruct General: A centrally established temporary tax to tiontax finance reconstruction. The taxpayer is the individual and not family.
Tax base: The tax is levied on employment income of None employees, net of scheduler employment income tax and employee social security contributions.
The tax is also levied on presumed wage and salary of a self-employed and business profit earner, net of scheduler employment income tax due, employee social security contributions due and employer social security contributions due. Tax rates: 10 percent of net amounts from employment income and notional wages of the self-employed. 4. Other taxes General: A central tax levied on income realized from General: A central tax levied on income realized from a. Tax on leasing of land, buildings, and movables. leasing of land, buildings, and movables. property incomes Incomes realized from dividends and securities are Incomes realized from dividends and securities are also considered property incomes. Residents are taxed also considered property incomes. Residents are on world-wide incomes, and nonresidents only on local taxed on world-wide incomes, and nonresi-dents only source incomes. on local source incomes.
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Bosniac-Majority Area Croat-Majority Area Tax base: The tax is levied on incomes net of costs Tax base: The tax is levied on incomes net of costs incurred to realize the incomes. Costs to be allowed incurred to realize the incomes. Costs to be allowed are amounts prescribed by a representative body of the are amounts prescribed by a representa-tive body of municipality where the taxpayer resi-des, unless the the municipality where the taxpayer resides, unless taxpayer can justify higher amounts. For house rents, the taxpayer can justify higher amounts. For house 30 percent is the "norm." rents, 30 percent is the "norm."
• Interest earnedfro mbanks , government securities • Interest earned frombanks , government securities and other institutions, or capital gains from the sale of and other institutions, or capital gains from the sale of residence owned for 2 years are not included in the residence owned for 2 years are not included in the tax tax base. base. Tax rates: 24.5 percent Tax rates: • for rental incomes: determined by the municipality • for dividends: determined by the central administration. b. Tax on Tax base: Fanners pay tax (as well as employee social Tax base: Farmers pay tax (as well as employee farm security contributions) on the potential value of their social security contributions) on the potential value of incomes land, as estimated in the cadastre. There is an extra tax their land, as estimated in the cadastre. There is an if the land is kept idle. They also pay tax on any extra tax if the land is kept idle. They also pay tax on employment income they may have. any employment income they may have. Tax rates: Determined by lower-level govem-ments, Tax rates: Determined by lower-level governments generally up to 5 percent of the value of land, if utilized • 10 percent of the value of land, if kept idle • 32 percent (without employee social security contributions) if they also earn employment income • 64 percent (without employee social security contributions) if they also earn employment income and keep their land idle c. Tax on Tax rates: 8 percent Tax rates: None royalties d. Tax on Tax rates: Rates prescribed by lower-level Tax rates: 10percent gambling governments, generally 15 percent
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Bosniac-Majority Area Croat-Majority Area II. Global General: This tax is in addition to the scheduler taxes General: This tax is in addition to the scheduler taxes Income tax noted above and is levied based on the filing of the tax noted above and is levied based on the filing of the return aggregating all incomes. Once again, individual tax return aggregating all incomes. Once again, is the taxpayer and a resident is taxed on his world- individual is the taxpayer and a resident is taxed on wide income. his world-wide income. Tax base: The tax is levied on aggregate incomes net Tax base: The tax is levied on aggregate incomes net of all scheduler taxes and social security contributions. of all schedular taxes and social security It also excludes pensions, social insurance, etc. contributions. It also excludes pensions, social insurance, etc. • The taxpayer is allowed deductions for mortgage interest, medical expenses, education expenses, • The taxpayer is allowed deductions for mortgage charitable contributions, and other specified interest, medical expenses, education expenses expenditures, as well as investment in government (equivalent to 20 percent of total taxable income), securities, without any statutory limits. charitable contributions, and other specified expenditures, as well as investment in government securities, without any statutory limits.
• The taxpayer enjoys personal and family reliefs as • The taxpayer enjoys personal and family reliefs as follows: follows: • personal: 4 times average salary (currently DEM • personal: 3 times average net salary 425) (currently DEM 2,400) • each child: 60 percent of personal relief (no limit • children: None on number of children). Tax rates: Determined by the municipality. For Tax rates: Set *>y the central authority. Currently, Sarajevo the rates range between 5 percent to the rates range between 3 percent and 25 percent. 50 percent Other aspects: All revenues from this tax accrue to Other aspects: All revenues from this tax accrue to municipalities. In 1995, virtually no revenue was municipalities. In 1995, virtually no revenue was collected from this tax. collected from this tax.
Differences in two Federation tax systems are shown in bold.
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Table 34. Bosnia and Hereegovina: Comparison of Profit Tax Laws in the Federation
Bosniac-Majority Area Corporate Income TAX Article Croat-Maturity Area Profit! Article Tax 1. Taxpayers Corporations selling for profit 1 Legal entities and self- 17 employed 2. Territorial scope • Residents World-wide profit 2 • Nonresidents Profit earned in BH 3
3. Taxable income As in accounts, after adjustment (New accounting law in 5 As in accounts, after 16 1995) adjustment (Simplified 28 accounts for self-employed) a. Expenditure adjustments • "Cost of sales" Average price method 7 • Profit sharing Disallowed 8 • Pcrdiems, etc. Allowed, up to regulated amount 8 Allowed, up to regulated 18 • Entertainment 9 amount 50 percent disallowed 18 • Depreciation As prescribed by government As prescribed by government 18 • Depreciation method Proportional, functional or degressive 9 • Asset revaluations As prescribed by government 10 • Social expenditures Allowed, up to 0.5 percent of income 11 • Reserves Revaluation and other reserves allowed 12 • Interest Allowed (but may be reduced by a transfer pricing 12 • Fines and penalties adjustment) 13 • Fees, charges etc. Disallowed Allowed b. Sectoral provisions • Banks and financial Provisions for loan losses etc. allowed up to 15 percent of 14 institutions income Provisions for claims allowed up to 15 percent of income 14 c. Revenue adjustments • Work in progress Production costs may be included in value of inventories 17 • Capita] gains - Computation Selling price less book value (as revalued in the accounts) 18 • Inclusion Reduced to 50 percent for sales of stocks and bonds held 20 for - Loss set-off over one year 21 • Intercorp div. receipts Against gains in the same or future years without limit - From tax income: 42 Exempt 18 - From untaxed income: Exempt 44 Distributor pays 50 percent of net dividend in tax 45 Recipient company taxable on distribution (including tax paid), but receives tax credit d. Miscellaneous adjustments: Transfer prices Taxpayer declares all transactions with "related persons" 46 Special tax on low-interest and 47 loan receipts (fringe benefit arms-length transaction values 48 tax) arms-length value based on market price, or cost plus customary margin 49 Arms-length interest less actual interest is treated as a dividend
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Bosniac-Majoriry Area Corporate Income Tax Article Croat-MATJority Area Profit* Article Tax 4. Tax rates
a. General rate 36 percent 26 Determined by municipalities 22-3 (35 percent)
b. Foreign/joint ventures If share > 20 percent, tax reduction for 5 years in 34 17.5 percent proportion to c. Individuals foreign share Presumptive tax set by 20 (not applicable) municipalities for small enterprises (< 5 employees) 21 Tax on each supply to legal entity 5. Business losses Carried forward up to 5 years 22 6. Incentives Given by no other law 28 a. Accelerated depreciation By regulation, up to 25 percent for anti-pollution, 29 scientific 30 research, training, and computer equipment b. Tax reductions (initial 31 years) New firm or cooperative for 3 years: tax relief 100,70, New companies and shops for 24 30 percent-in underdeveloped areas: 100 percent for 3 3 years tax relief 100,50, years. Free trade zone: 100 percent for 5 years. 25 percent c. Deductions Investment, up to 15 percent of income 33 Enlargement/modernization 26 (maximum amount: in vestmcnt-dcpm.) Repair of war damage (max. 24 amount investment-deprn, already given) d. Exemptions Training, placement etc. for disabled 35 Prison workshops, enterprises 25 with invalids over 40 percent of employees 7. Special situations a. Mergers and takeovers Prc-merger losses disallowed 23 b. Liquidations Surplus treated as a dividend 25 c. Foreign tax Credit up to maximum BH tax 36 • Paid by foreign branch Credit for foreign tax, if holding >~25 percent of stock 37-8 d. Groups Optional consolidation return if control >*90 percent 39 39 8. Withholding taxes Dividends, interest, and royalties 4 paid to nonresidents only • Rates 15 percent 27
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Table 35. Bosnia and Herzegovina: Possible Systems of Federal-Cantonal Tax Arrangements
Receivers of Final Revenue 1. Federal 2. "Shared" 3. Cantonal alone alone Degree of Autonomy a, Transfer 2/ b. Derivative J/ a. Transfer b. Derivative Over Base and Rate 1. Fully centralized Tax Grant Tax sharing Grant Tax base and rate assignment assignment 2. Centralized base, cantonal autonomy over own tax rate!/
a. With limitations Piggy-backing 4/ Tax b. Full autonomy Piggy-backing assignment over its own tax Tax rate assignment 3. Centralized base with respect to central tax, decentralized base and rate with respect to cantonal tax:
a. Limited Piggy-backing autonomy with respect to base b. Full autonomy with respect to base 4. Fully decentralized Tax sharing 5/ Tax base and rate assignment
I/ This can be expressed as an own local rate, or as a surcharge on central revenue. Different variants exist of deducibility of taxes paid at other levels of government. 2/ This refers to approaches under which the amount of revenue allocated to a canton would be independent of the amount of revenue derived within its borders. 3/ This refers to approaches in which a canton receives only the revenue derived within it sown borders. 4/ With this amount each level of government would levy a tax on the same base. 5/ For example, 10 percent of revenue raised at the cantonal level could flow "up" to the federal level.
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Table 36. Bosnia and Herzegovina: Balance of Payments, 1994-95
fin millions of US dollars^
1994 1995 Est. Est.
Trade balance -803 -930 Exports, f.o.b. 91 152 Imports, f.o.b. -894 -1082 Humanitarian (in -kind) -561 -459 Other -333 -623
Services, net -88 -23 Receipts 103 229 Expenditure -191 -252
Income, net -177 -183 Interest due I/ -177 -183
Unrequited transfers, net 879 1002 Receipts 888 1073 Official 315 377 UN agencies 300 297 Other 15 80 Private 573 696 Expenditure -9 -71
Current account balance -189 -134 Excl. official transfers -504 -511
Capital transfers (for reconstruction) - - - - Foreign investment — — Multilateral and Paris Club creditors -110 -130 Disbursements — — Amortization -110 -130 Other creditors -139 -127 Disbursements — — Amortization -139 -127
Capital account balance -248 -257
Errors and omissions -1 106
Overall Balance -438 -285
Financing 438 285 Gross reserves (increase,-) 6 -143 Central bank 15 -50 Commercial banks -9 -93 Net use of Fund resources -4 7 Purchases/loans -- 45 Repurchases/repayments -4 -38 Short-term liabilities (reduction,-) 7 19 Arrears (reduction,-) 429 402
Sources: Data provided by the Bosnian and Herzegovina authorities; and Fund staff estimates.
I/ Includes late interest.
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Table 37. Bosnia and Herzegovina: Estimated External Debt at end-1995 I/ 2/
(In millions of U.S. dollars)
Total Debt Of which: Arrears I/
Total debt outstanding 3,361 1,987
Existing debt (disbursed by end-1995) 3,361 1,987 Multilateral 711 471 IMF 49 World Bank 625 447 Other 37 24 Paris Club 803 614 Pre- cutoff date 737 550 Post-cutoff date 66 64 London Club 1,112 384 Other creditors 4/ 498 305 Nonconvertible currency debt 237 212
Source: Data provided by Bosnia and Herzegovina authorities; and Fund staff estimates.
I/ Excludes about US$100 million of payments arrears at end-1995 for gas supplied from the Russian Federation, which is in dispute. Also excludes about US$200 million of claims on banks for guarantees provided for construction work not completed, which is in dispute. Includes nonallocated debt of the former Socialist Federal Republic of Yugoslavia (SFRY) allocated on the basis of the Fund key of 13.2 percent of the nonallocated debt of the former SFRY; the authorities have not yet agreed to such an allocation. Includes public and publicly guaranteed debt only. 2/ The authorities reported that BiH had claims amounting to about US$1.2 million at end-1991 on other countries (excluding states of the former SFRY) mainly in the Middle-East and North Africa. In addition, BiH has a potential claim on the former SFRY's foreign exchange reserves. 3/ Includes late interest on overdue obligations. 4/ Mainly commercial creditors (i.e., supplier and trade creditors).
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Table 38. Bosnia and Herzegovina: IMF Technical Assistance to Bosnia and Herzegovina, 1995-96
Department Timing Purpose
FAD December 1995 Diagnostic
February 1996 Income tax policy
February 1996 Customs and tax administrations
April-May 1996 Tax administration
LEG May 1996 Tax administration law
LEG/TRE/SEC December 1995 Assistance with succession to membership
MAE December 1995 Institution-building and banking legislation
MAE/EU1 June 1996 Discussion of new Central Bank
MAE/LEG January/February 1996 Assistance from headquarters drafting legislation for new Central Bank and bank agency
STA November 1995 Diagnostic participation in premembership mission
April 1996 Money and banking statistics
June 1996 Money and banking statistics
Source: IMF Staff.
©International Monetary Fund. Not for Redistribution