Bosnia: The IMF Money Crunch

After nearly a month of negotiations, Bosnian authorities and the International Monetary Fund (IMF) have agreed on a €1.2 billion ($1.6 billion) stand-by deal over three years to fight the effects of the global economic crisis.

Two-thirds of the €1.2 billion IMF loan (at an interest rate of 1.5 percent) will go to the Federation entity and one-third to the Republika Srpska entity.

However, the IMF loan did not come without certain conditions of accountability and responsibility, which could lead to social unrest and undermine already low confidence in the government.

One condition set by the IMF is that the Bosnian state government and its two separate entity governments (the Bosniak- and Bosnian Croat-dominated Federation entity and the Bosnian Serb-dominated Republika Srpska entity) must reduce their total public spending by at least €350 million.

The IMF demanded that the entities make significant budget cuts by June, when the first tranche of €200 million is expected to land. By that time, the Federation must save €211 million, or more than one-fifth of this year’s budget, while Republika Srpska must cut €74 million from its €852 million budget. The central government must realize €21 million in cuts for its draft 2010 budget.

The IMF made clear it would not allow the funds to be used to cover excessive administration salaries and social benefits. It also announced that the loan was not intended for development projects, as Bosnia already has loans approved from the EU and international financial and development organizations to the tune of around €1 billion. However, those funds are tied up due to the ongoing dysfunction and internal quarreling among Bosnia’s leaders. The funds have not been withdrawn and the country has paid thousands of euros in penalties.

Since 1998, Bosnia has had three stand-by arrangements with the IMF, worth $240 million, but most of the funds went to cover administrative expenses. Bosnia’s foreign debt stands at around $3 billion, or some 17 percent of its GDP.

Unprepared or incompetent?

Svetlana Cenic, former Republika Srpska finance minister, told ISN Security Watch that the IMF loan came too late to prevent recession and that Bosnian officials had been unprepared for the negotiations, having no idea how much they needed or how they would spend it.

“Our officials were assuring us that the recession wouldn't hit Bosnia, and even if it did, they would be prepared. But we can see that they either lied or are just incompetent, and I bet on the second option. We have an unsustainable system with […]  huge public spending, stalled reforms and insufficient attractiveness to foreign investors, and these could no longer be justified amid the global recession,” Cenic said.

Recession pending, experts have warned that Bosnia’s massive administration and the costs of maintaining a state government and two separate entity governments would bankrupt the country.   

Bosnia’s administration is complex, indeed. Moreover, the business environment is lagging behind other countries in the region, privatization lacks transparency, public spending is almost 50 percent of the GDP and unemployment is up to 35 percent.

The worst situation is with the Federation entity, which in addition to the high salaries and benefits it hands out for a huge administration, has spent excessively on war veterans and invalids, who comprise a majority of the electorate.

Local analysts say that an attempt to curb spending on war veterans and invalids may bring down the already shaky federal government and trigger major social unrest, should the government heed the IMF’s demands. In the first three months of this year, more than 25,000 workers, mostly in the textile and metal industries, were fired. That number is expected to double by the end of the year.

Experts largely agree that these social payments will have to be reduced sooner or later: In the long run, they are not sustainable.

Spending on war veterans, invalids of the war, those with military decorations and the families of those killed during the war - a total of 184,000 people - represents the single biggest area of spending for the entity. Authorities in the Federation entity, for instance, allocated nearly 40 percent of the 2008 budget of €912 million for social welfare.

Administratively, the Federation is comprised of 10 cantons, leaving the country with more than 100 ministers and other administrators, which the budget can ill afford. A very large portion of the entity’s budget has gone toward administrative expenses to maintain dozens of governments and parliaments, and hundreds of ministers and their deputies.

In April, the Federation government decided to borrow some €80 million from commercial banks to fill the budget deficit of more than €130 million accrued last year. Federal authorities said that they would use the IMF money to cover its budget deficit and that loans secured at commercial banks would be replaced with IMF funds immediately.

The country's other entity, Republika Srpska, is in a relatively better situation due to privatization revenues achieved in the past two years, but these are starting to run out. The Bosnian Serb government said it would use the IMF funds as a reserve in the case of a bigger crisis.

Recently, the government of Republika Srpska sold its telecommunication company, Telekom Srpske, to the Serbian state operator. It also sold its petroleum and oil industry to Russian investors. Some NGOs, such as Transparency International (TI), warned that these privatization moves were bad for the entity’s economy and in violation of the basic principles of public procurement processes.

As the result of the IMF demands, the two entity governments prepared a series of “savings measures”  in order to soothe the impact of the global economic crisis. However, it seems that these measures are mostly cosmetic and will not yield positive results, other than to temporarily appease lending officials.

The Bosnian Serb government decided to freeze wages in the administration and cut public expenditures, but with salaries in this entity 10 times larger than average, the move is not likely to amount to much. In addition, public expenditures are currently under scrutiny from the Bosnian state prosecutor's office for misuse of funds.

For its part, the Federation entity passed “antirecession measures”  on both the cantonal and entity levels, but it is clear now that those measures will prove fruitless. A day after the deal was signed, war veterans and demobilized soldiers threatened to hold mass protests should the government cut their benefits in accordance with IMF conditions.
Federation authorities will not have the political strength to reduce spending on social aid recipients, and as such, cuts are likely to be made instead on culture, sports, education and health institutions.

Srdjan Blagovcanin, executive director of the Bosnian branch of Transparency International, told ISN Security Watch that authorities will save the money on the usual institutions, which are unlikely to protest or have any effect on future election results.

“It will be very difficult to achieve the appropriate saving measures, especially in a short period of time, such as in three or six months. The Federation government does not have the capacity and integrity to implement this. They would rather risk bankruptcy and leave the future generations in debt than to face the problem, which could cost them votes,” Blagovcanin said.

Regarding the IMF demand to cut administration expenses, Federation authorities are considering some temporary measures that will not affect long-term sustainability. The government has moved to freeze salary and benefit increases, which have risen 300 percent in the last two years. Furthermore, the government has not set any deadline for implementation of its planned measures, so there is no guarantee that they will in fact be adopted.