Financial Folly

Originally published at - http://www.transconflict.com/News/2009/June/Financial_Folly.php

The Federation of Bosnia and Herzegovina's failure to implement public spending reductions is jeopardizing the country's stand-by agreement with the IMF.

By Ian Bancroft

Following the Federation of Bosnia and Herzegovina's failure to implement a series of reforms designed to curb public spending, particularly social transfers, the International Monetary Fund (IMF) has delayed a decision on granting Bosnia and Herzegovina the first tranche of its much-needed €1.2 billion stand-by arrangement. The delay stems primarily from the IMF's refusal to approve the Federation's revised 2009 budget, which sought to extract savings from administrative expenses rather than by enacting a ten percent cut in welfare payments to war veterans, following a wave of protests.

Supported by trade unions, protests by around four thousand war veterans, the largest welfare category and one of the most influential lobbying groups, forced the Federation government, still reeling from the resignation of former prime minister, Nedzad Brankovic, to confirm that planned ten percent welfare payment reductions would not apply to war veterans and their families. In doing so, the Federation violated its agreement with the IMF, with its Finance Minister, Vjekoslav Bevanda, warning that "politics have got entangled with the IMF arrangement".

Under the strict conditions stipulated by the IMF, Bosnia and Herzegovina's respective levels of government must reduce their consolidated budgets by a combined total of €348m, with the Federation, which will received two-thirds of the intended support, expected to contribute the bulk of the savings, equivalent to more than one-fifth of its 2009 budget, Republika Srpska shedding €73m, the state some €20m and Brcko District around €5m. The head of the IMF mission to Bosnia and Herzegovina, Costas Christou, previously warned that achieving this would require a "decisive package of measures".

Republika Srpska, meanwhile, proposed a revised 2009 budget that meets the IMF's requirements by reducing spending by four percent to 1.6 billion marka (approximately €818m). The finance minister of Republika Srpska, Aleksandar Dzombic, stated that savings of 70 million marka (approximately €36m) were achieved through cuts in grants and internal debt, eliminating the need to reduce pensions and veterans' welfare payments.

The IMF, which has explicitly stated that 'the loan is possible only under agreed terms', was due to ratify the agreement with Bosnia and Herzegovina at its June 29th session of the IMF Board of Directors, however this session has now been postponed until the Federation fulfils all its obligations. In light of the Federation's failure to fulfil their part of the agreement, Republika Srpska requested immediate support from the IMF, who rejected the request on legal grounds.

With the IMF forecasting a three per cent economic contraction this year, followed by zero growth in 2010, Bosnia and Herzegovina, whose unemployment rate is around forty percent, is facing a wave of social protests and associated political tensions that bring into question its ability, and the Federation government's willingness, to implement the IMF's conditions. Bevanda has predicted that without the IMF's stand-by agreement, the Federation would be bankrupt by the autumn. Failure to secure vital IMF assistance because of political wrangling in, and the dysfunctionality of, the Federation would only further add to Bosnia and Herzegovina's growing crisis of legitimacy.