Bosnia Flirts with Fiscal Responsibility

Faced with a choice between bankruptcy and loss of political support, Bosnia’s Federation authorities move to make massive budget cuts that could cost them the October election, which would be a milestone for the country, Anes Alic writes for ISN Security Watch.

The authorities of the Bosniak and Bosnian Croat-dominated Federation entity in Bosnia and Herzegovina have possibly made their very first economically savvy move in the last three years, though politically it could trigger a backlash of anger and cause a loss of support ahead of October elections.

In late February, the Federation Parliament passed the amendments to the law on war veterans, a main condition for the release of the next tranche of a €1.2 billion stand-by arrangement with the International Monetary Fund (IMF) and additional funding by the World Bank and the European Commission. The international funding is seen as key to avoiding the entity’s bankruptcy and vital for maintaining the country’s fiscal stability.

The war veterans’ bill amendments aim to reduce social spending on war veterans and their families and to introduce a census to determine how many people truly are in need of state aid. It is a highly controversial, but fiscally necessary move.

Under obligations to the IMF, the Federation must make massive cuts and reduce spending by some €211 million. And there was no room for compromise.

The choices were indeed tough: bankruptcy or unpopular budget cuts. While the first option would be in no one’s interest, the second could undermine reelection chances. And it is only fair the second option be pursued, as those parties currently governing the entity are responsible for the fiscal crisis.

After expecting a close election race in the 2006 polls, Bosniak and Bosnian Croat ruling parties quickly passed a law guaranteeing €80 per month to unemployed, demobilized soldiers. The move saved the elections for both, but the budget could not sustain it.

According to the new amendments, which will be put in place as of 1 May, the Federation government will suspend the 2006 social package under the Demobilized Soldiers Law. On the same day, it will begin a new census of war veterans and the disabled, which will be followed by a massive revision of those who qualify for veteran and disabled status.

Furthermore, in the next couple of months, authorities will also review the amount of benefits received by war veterans and the families of people killed during the war, and a new benefits payment scheme will be implemented in 2011.

Had Bosnian authorities failed to move on these measures, the IMF threatened to freeze its standby arrangement, while the World Bank threatened to withdraw all loans it had already pledged and the European Commission threatened to withhold €100 million.

The country has already received €202 million of the IMF loan, but the disbursement of the remainder will depend on the adoption of spending cuts legislation. The second tranche was due to be released in January this year, but the IMF postponed the release when the Federation government failed to pass the necessary laws. The threat, it seemed, worked.

It is now expected that the next tranche of the IMF loan, some €100 million, could come through in about 20 days. The first €202 million helped the governments pass a rebalanced 2009 budget in August. The move also allows for the release of €82 million in loans from the World Bank and €100 million from the European Commission.

Bosnia's other entity, the Bosnian Serb-dominated Republika Srpska, has already met the conditions for the standby arrangement Bosnia and Herzegovina clinched last year with the IMF.

Social unrest, saving grace

Without the IMF and WB cash injections, Bosnia's two regions would have had to slash their respective 2010 budgets, potentially triggering massive social unrest in an election year. But nevertheless, social unrest is inevitable.

Most of the IMF money is intended to ease Bosnia’s foreign debt, while some is earmarked for funding capital investments, with an unknown amount set to be used for filling budget gaps. The IMF has ruled out the possibility of using the money for social spending, such as on war veterans and invalids. This may sound harsh, and indeed the IMF is often criticized for such moves, but the situation in Bosnia is more complicated than it would seem on the surface.

This particular social group – war veterans, war disabled, those with military decorations and the families of those killed during the war – is currently comprised of some 184,000 people, representing the single biggest area of spending for the entity and some 40 percent of the annual budget.

On several occasions, Federation authorities have had to seek help from commercial banks in order to meet their spending obligations in this area thanks to unrealistic election promises. 

According to the government’s estimate, there are more than 30,000 people who have no right to these costly social benefits and have been cheating the system. However, previous attempts to conduct a revision of who is receiving these benefits have failed miserably, and even led to government collapse.

This time around, and with October elections in mind, the Federation government has taken pains to assure the public that the new amendments are not specifically targeting former soldiers and the disabled, but that the cuts are necessary in order to secure the existence of the entity.

Of course, war veterans and the disabled disagree strongly and have issued repeated threats to bring down the government should any move be made to decrease their benefits. The Federation Cabinet is under particular strain since the veterans and invalids make up the largest welfare category and account for a large part of the electorate.

These groups are seeking the removal from office of Federation Minister for Veterans’ Issues Zahid Crnkic who recently opined in public that “a man, allegedly unemployed, cannot come to the bank to draw social welfare, driving a brand new car.”

President of the Federation’s Union of War Invalids Safet Redzic told ISN Security Watch that the union plans to hold massive protests blocking all major streets and institutions in the Federation in late April.

“Even though we have agreed that we can accept the wage cut if it is cut for everybody, the authorities fooled us and suddenly passed this law under pressure from international financial institutions. We can’t accept that we are the only group whose payments are going to be cut,” Redzic said, adding that his and other groups would be boycotting the ruling parties.

Indeed, an army of some 100,000 people are preparing for joint strikes if the government goes through with the cuts. That includes employees from public service sectors and state-owned companies.

The authorities envisage 10 percent wage cuts for public sector workers, according to the Emergency Law passed last year. But for time being, the government has managed to avoid larger scale social unrest by prolonging the implementation of the decision.

Labor unions say the Emergency Law violates a number of regulations, including provisions for a collective bargaining agreement. When the labor unions threatened to join mass protests, the government withdrew from talks.

“If the government fails to show more respect for workers, there is a risk of social radicalization. October general elections are not that far off, and we will be careful for whom we cast our votes,” head of the Federation Civil Servant Trade Union Salih Kruscica told ISN Security Watch.

Kruscica said that if the government chose to proceed with its plans to cut wages later in the year if revenue targets are missed, the union is going to urge its members not to vote for the current parties.

In the end, the newly found, or rather forced, fiscal responsibility may actually turn out to be Bosnia’s saving grace should it lead to a change in leadership.

JavaScript has been disabled in your browser