Bosnia and Herzegovina : Fourth Review Under the Stand-By Arrangement and Request for Modification and Waivers of Applicability of Performance Criteria

KEY ISSUES Stand-By Arrangement (SBA): The Board approved Bosnia and Herzegovina’s (BiH) request for a two-year Stand-By Arrangement (SBA) with access of SDR 338.2 million (200 percent of quota) on September 26, 2012. The third review was completed in June and SDR 169.1 million (100 percent of quota) was disbursed so far. SDR 42.275 million (25 percent of quota) would become available upon completion of the fourth review. Program performance: Despite a challenging environment, steady progress has been made in meeting program objectives. All end-June performance criteria (PCs) and indicative targets were met, and steady progress has also been made in observing structural benchmarks. However, as the fourth review was delayed to allow for a discussion of the policies that would allow meeting the end-2013 fiscal targets, the authorities are requesting waivers of applicability of the now controlling end-September PCs on the budget balances and accumulation of domestic arrears for the Institutions of BiH and the entity central governments for which data are not yet available and for which there is no evidence that these were not observed. Furthermore, and owing to weaker than expected indirect tax collection, the authorities are requesting a modification of the end-December 2013 PCs on the budget balances to allow a modest reallocation of fiscal space between the Institutions of BiH and the entities. Outlook and risks: A modest recovery in economic activity is taking hold, supported by strong exports. Growth is now expected to reach close to 1 percent this year and is projected to pick up further in 2014. Considerable downside risks weigh on this outlook, including those stemming from next year’s general elections. The latter pose a significant risk to the timely implementation of policies envisaged under the program. Staff’s view: On the basis of the authorities’ strong performance so far and their commitment to sound economic policies for the remainder of 2013 and early 2014, as outlined in the attached supplementary Letter of Intent, staff recommends the completion of the fourth review. Staff also supports the requests for modification and waivers of applicability of performance criteria. October 11, 2013