An IMF team led by Martin Petri conducted a virtual mission to Bosnia and Herzegovina (BiH) from October 19 to December 18, 2020. The team completed discussions on the 2020 Article IV consultation.
Agreement with the authorities on a new three-year Extended Fund Facility (EFF) has not yet been reached, owing to a lack of consensus on some reforms that are to be part of the program.
At the end of the mission, Mr. Petri issued the following statement: “BiH’s economy has been severely impacted by the COVID-19 pandemic. Following a pickup in activity in the summer, when the virus appeared contained, a new wave of infections in BiH and throughout Europe has led to renewed uncertainty and forced the authorities to reintroduce measures to contain the outbreak. We estimate that the economy will contract by 5½ percent this year, reflecting the severe impact of the pandemic on tourism, hospitality, transport, and manufacturing, among other sectors.
For 2021, we project a rebound in economic activity of 4 percent provided the authorities are able to maintain macroeconomic stability and contain health risks, and assuming a vaccine becomes widely available in the second half of the year.
The authorities reacted early and effectively to contain the pandemic and introduced measures to support the health system. This was helped by the accumulation of fiscal space in recent years, which allowed the authorities to support households and firms during the crisis. In the financial sector, loan moratoria provided relief to borrowers. The currency board arrangement continued to support the stability of the financial system. The IMF supported these policies with €333 million through the Rapid Financing Instrument (RFI), disbursed in April 2020.
The IMF mission engaged with the authorities to explore additional support through a new program, which would help BiH cope better with the COVID-19 crisis. In this context, the IMF could provide financing for additional spending to support the health system, firms and households and to protect the most vulnerable. The program envisages additional spending on health care, wage subsidies, and unemployment benefits, as well as support for loan guarantee funds to expand bank credit to cash-strapped businesses.
The IMF mission supports the authorities’ plans for next year’s budgets, which will help the economy recover. Discussions also covered reforms to lay the groundwork for faster, more inclusive growth and the mission reached understandings in important structural reform areas, including for public enterprise reforms, public financial management, pandemic spending oversight, and public procurement.
In two other areas, discussions have not yet been finalized. First, to promote a single economic space, reforms are needed with respect to digitalization, creating a single energy market, and promoting credit expansion including through better asset recovery. Second, to strengthen the financial stability framework, creating a bank resolution fund and strengthening cooperation at the entity and State levels are needed to anticipate and manage potential financial crises.
These reforms would bring significant economic benefits to the people of BiH while strengthening the resilience of the economy to potential crises.
The mission thanks the authorities for their productive engagement. Further discussions should take place in the near future to reach agreement on a program to support the BiH economy,” concluded Mr. Petri, said the IMF in a press release.