To properly address the Medical Emergency and large Output Contraction, a Fiscal Expansion is needed

April 25, 2020 3:00 PM

 

The Executive Board of the International Monetary Fund (IMF) today approved SDR 265.2 million (about US$361 million or €333 million, 100 percent of its SDR quota) in emergency assistance for Bosnia and Herzegovina (BiH) under the Rapid Financing Instrument (RFI). It will help the country meet an urgent balance-of-payments need due to the global outbreak of the COVID-19 pandemic.

The RFI provides rapid and low-access financial assistance to member countries facing an urgent balance of payments need, without the need for a full-fledged economic program or reviews. It can provide support to meet a broad range of urgent needs, including those arising from commodity price shocks, natural disasters, conflict and post-conflict situations. Financial assistance under the RFI is provided in the form of outright purchases.

The near-term economic impact in BiH is expected to be substantial, generating a rapid deterioration of external accounts and urgent balance of payment needs. Economic growth is expected to decline by 5 percent in 2020 and recover to around 3.5 percent in 2021.

The RFI will support the authorities’ efforts to increase spending for containing COVID-19 human costs and mitigating its economic impact. The BIH governments are planning a significant fiscal expansion to ramp up health and social spending. This IMF financing will play a vital role in catalyzing emergency assistance from the international community, in particular the EU’s.

The IMF will continue to monitor Bosnia and Herzegovina’s situation closely and stands ready to provide policy advice.

Following the Executive Board discussion, Mr. Tao Zhang, Deputy Managing Director and Acting Chair, issued the following statement:

“Bosnia and Herzegovina’s economy has been suffering from the COVID-19 pandemic, which has created an urgent balance of payments need.

“Given the large and rapid deterioration of external accounts, the Rapid Financing Instrument will help provide support for scaling up priority spending on health and social assistance, while preserving debt sustainability.

“To properly address the medical emergency and large output contraction, a fiscal expansion is needed. In the short run, to mitigate the health and economic impact of the pandemic, the priority is to increase health-related spending, expand unemployment and social benefits, and provide support to firms for maintaining employment. The authorities have committed to return to a fiscal stance that stabilizes debt once the situation normalizes.

“Preserving the currency board arrangement and raising the resilience of the banking system play a crucial role for restoring external and internal balances. High frequency monitoring of the banks, including their liquidity positions and asset quality, is crucial at this juncture.

“Donor and other IFI emergency assistance is needed to close the remaining balance of payments gap.”

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