Strategy Outline
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DOCUMENT OF THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT STRATEGY FOR BOSNIA AND HERZEGOVINA 2010 - 2013 As approved by the Board of Directors at its meeting on 28 September 2010 TABLE OF CONTENTS LIST OF ABBREVIATIONS.................................................................................................. 3 EXECUTIVE SUMMARY...................................................................................................... 4 1. THE BANK’S PORTFOLIO................................................................................................... 6 1.1 OVERVIEW OF BANK ACTIVITIES TO DATE .............................................................. 6 1.2 IMPLEMENTATION OF PREVIOUS COUNTRY STRATEGY .......................................... 7 1.3 TRANSITION IMPACT OF THE BANK’S PORTFOLIO AND LESSONS LEARNED........... 8 1.4 PORTFOLIO RATIO..................................................................................................... 9 2. OPERATIONAL ENVIRONMENT.......................................................................................... 9 2.1 THE GENERAL REFORM ENVIRONMENT .................................................................. 9 2.1.1 Political Developments......................................................................................... 9 2.1.2 Legal Reform ...................................................................................................... 10 2.1.3 Environment ....................................................................................................... 11 2.2 PROGRESS IN TRANSITION AND THE ECONOMY’S RESPONSE............................... 11 2.2.1 Business Environment........................................................................................ 11 2.2.2 Macroeconomic Environment........................................................................... 11 2.2.3 Transition successes and challenges ................................................................. 12 2.3 ACCESS TO CAPITAL AND INVESTMENT REQUIREMENTS ..................................... 14 3. STRATEGIC ORIENTATIONS............................................................................................. 14 3.1 BANK’S PRIORITIES FOR THE STRATEGY PERIOD.................................................. 14 3.2 SECTORAL CHALLENGES AND OPERATIONAL PRIORITIES .................................... 15 3.2.1 Infrastructure .................................................................................................. 15 3.2.2 Financial Sector .............................................................................................. 17 3.2.3 Industry, Commerce and Agribusiness sector................................................ 19 4. OTHER IFIS AND MULTILATERAL DONORS .................................................................. 19 ANNEX 1 – POLITICAL ASSESSMENT..................................................................................... 20 ANNEX 2 - LEGISLATIVE AND EXECUTIVE BODIES OF BIH ................................................. 25 ANNEX 3 – COMMERCIAL LAWS OF BOSNIA AND HERZEGOVINA ....................................... 26 ANNEX 4 – ENVIRONMENTAL AND SOCIAL DEVELOPMENTS............................................... 35 ANNEX 5 - BOSNIA AND HERZEGOVINA PORTFOLIO TREND ............................................... 39 ANNEX 6 – CUMULATIVE BUSINESS VOLUME AS OF SEPTEMBER 2010............................... 40 ANNEX 7 - PROJECTS SIGNED IN THE PERIOD JANUARY 2007 – SEPTEMBER 2010 ............. 43 ANNEX 8 - SELECTED ECONOMIC INDICATORS.................................................................... 45 ANNEX 9 - OTHER IFIS, MULTILATERALS AND BILATERAL DONORS................................. 46 1. MULTILATERAL ORGANISATIONS ............................................................................... 46 2. BILATERAL ASSISTANCE ............................................................................................. 49 ANNEX 10 - TECHNICAL COOPERATION PROJECTS ............................................................. 58 ANNEX 11 - TAM/BAS ACTIVITY IN BOSNIA AND HERZEGOVINA ..................................... 63 2 LIST OF ABBREVIATIONS BAS Business Advisory Services BEEPS Business Environment and Enterprise Performance Survey BiH Bosnia and Herzegovina CEB Council of Europe Development Bank ECT Energy Community Treaty EIB European Investment Bank EU European Union EUSR European Union Special Representative FBH Federation of Bosnia and Herzegovina FDI Foreign Direct Investment FOPIP Financial and Operation Improvement Programme GDP Gross Domestic Product ICT Information and Communication Technologies IDP Internally Displaced Persons IFI International Financial Institution IMF International Monetary Fund LEF Local Enterprise Facility MEI Municipal and Environmental Infrastructure MFI Microfinancial Institution MSME Micro, Small and Medium-sized Enterprise NBFI Non-Bank Financial Institution OHR Office of the High Representative RES Renewable Energy Sources RS Republika Srpska SEECP South East Europe Cooperation Process SBA Standby Agreement SME Small and Medium-sized Enterprise TAM Turn-Around Management WBIF Western Balkans Investment Framework WeBSEDFF Western Balkans Sustainable Energy Direct Financing Facility WeBECLF Western Balkans Sustainable Energy Credit Line Facility Currencies KM Konvertibilna Marka (BiH currency) US$ United States Dollar EUR Euro, European Union Currency Exchange Rate 1 € 1.95583 KM 3 EXECUTIVE SUMMARY Bosnia and Herzegovina (BiH) continues to fulfil the conditions specified in Article 1 of the Agreement Establishing the Bank. The Dayton-Paris peace agreement ended the 1992-95 war and paved the way to peace and stability in BiH. At the same time, the complex Dayton constitutional set up has generated a fragmented policy-making apparatus in BiH. This is additionally complicated by the fact that ethnic-based political parties continue to dominate the political scene in the country’s two Entities, the Federation of BiH (FBH) and Republika Srpska (RS). The major challenge remains constitutional reform, without which further progress towards a more efficient state, implementation of a comprehensive reform agenda and EU approximation will be difficult to achieve. This process is sensitive and may take time. After several years of robust growth, as a result of the economic crisis, BiH economy entered a sharp decline in late-2008, in common with other countries of the region, and output fell significantly in 2009. The authorities have taken some commendable steps to preserve macroeconomic stability. The currency board remains the key anchor of macroeconomic policy and the annual inflation rate fell to below zero in late-2009. The central bank took prompt action to preserve confidence in banks at the height of the crisis and played an active role in securing a “Vienna Initiative” agreement among the six largest foreign-owned banks to maintain their exposure in BiH. Confidence in banks has also been enhanced by a significant increase in the deposit insurance limit. On the fiscal side, some control was restored to public finances in late-2009 after earlier slippages, and the authorities concluded a new three-year Standby Arrangement (SBA) in July 2009 with the IMF to the value of around €1.1 billion. Economic growth in 2010 and 2011 is likely to be positive but modest. Given the low starting point, the economy should have potential for stronger growth over the medium term. However, this will require a firm commitment by the authorities at all levels to a major structural reform agenda. This commitment has been lacking in recent years. A number of key reforms, including privatisations, have been blocked or on hold for some time. Bosnia and Herzegovina ranks behind its neighbours in south-eastern Europe on a number of reform and business climate indicators, including the EBRD transition scores, the World Bank’s ease of doing business indicator, and Transparency International’s corruption perceptions index. There are also substantial investment needs in a number of infrastructure sectors. The global crisis is likely to have a significant medium-term effect on Bosnia and Herzegovina (and the wider region), highlighting the need for an expanded level of activities by the Bank in the coming years, as crisis response and in support of the recovery process. In addition, the country faces medium or large transition challenges across all major sectors of the economy. The Bank will promote transition in Bosnia and Herzegovina by continuing and enhancing its efforts to meet the following key challenges: develop and implement a comprehensive long-term reform programme in all infrastructure sectors, enabling a more commercial approach to the provision of services and greater involvement of the private sector, and in view of the need to achieve better infrastructure integration both regionally and within the country; foster greater financial intermediation, especially in the non-bank financial sector, to ensure sustainable lending to enterprises and households; and provide support for the large-scale privatisation process and attract investment into key export-oriented sectors such as agribusiness, industrial, property and tourism, wood and metals processing, and support further developments in the SME sector. 4 The Bank’s focus over the next three years, both through the provision of financing and through intensive policy dialogue, will be on the following operational priorities: Infrastructure and energy In the transport