Bosnia’s IMF Arrangement Shelved

Sarajevo | 23 June 2009 | Srecko Latal

Bosnian and IMF officials during their May negotiations

The International Monetary Fund, IMF, has put on hold Bosnia’s €1.2 billion stand-by arrangement after the country failed to implement the agreed cuts to its ‘excessive’ public spending.

The next round of negotiations could start in September, but only if Bosnia and Herzegovina goes back to the initial agreement and undertakes “difficult but necessary” cuts to its public spending, including benefits to war veterans and invalids, Bosnian officials said on Tuesday.

Losing available IMF support, failing to make good on crucial reform promises and caving in to lobbying from social groups will spell certain financial collapse and social and political chaos in Bosnia, experts told Balkan Insight on Tuesday.

Bosnia’s delegation met with IMF and World Bank officials in Vienna on Monday afternoon, in an attempt to get their approval for reforms completed so far. Approval would enable payment of the first of three planed tranches of the new stand-by agreement, which the country negotiated with the IMF in May.

Yet IMF refused approval after the government of Bosnia's Bosniak- (Bosnian Muslim) and Croat-dominated Federation entity last week caved in the face of violent protests by influential war veterans and invalids. The Federation government promised war veterans that their benefits would not be reduced, although that was initially agreed with the IMF.

The Federation government is attempting to appease the IMF instead by making budget cuts elsewhere, but the world lending body is refusing to back down from the original agreement. As a result, the June 29 session of the IMF Board of Directors, which was supposed to ratify the new deal for Bosnia, has been postponed until the Federation fulfills its obligations, officials said after the meeting.

The Federation’s Deputy Finance Minister, Emir Silajdzic, told the media on Tuesday that after the “very difficult” Vienna meeting, a new round of negotiations with the IMF could be expected in September at the earliest. Talks could resume only once Bosnia gets back to the initial agreement outlined in its letter of intent to the IMF.

According to the agreement, all administrative levels in Bosnia were to undergo drastic cuts by the end of the month. Of the country's two entities, the Federation was required to make the largest spending cuts, around 207 million euros, which is some 10 per cent of its entity, cantonal and municipal budgets. The Serb-dominated entity of Republika Srpska would have to reduce spending by 73 million euros. The budgets of the state government and the separate administrative District of Brcko would be reduced by 20 million euros and 5 million euros, respectively.

Republika Srpska Finance Minister Aleksandar Dzombic said after the meeting in Vienna that Bosnian Serb officials had fulfilled their part of the agreement. Dzombic said that he had asked the IMF to provide financial support to Republika Srpska now, and to the Federation once it meets its requirements. The IMF has refused that request on legal grounds.

“The Federation of Bosnia and Herzegovina has not fulfilled obligations from the letter of intent, in relation to the veterans’ population which managed to secure by force that they are removed from this adjustment package and that is a huge problem,” Bosnia’s State Finance and Treasury Minister Dragan Vrankic said after the meeting.

“This is unacceptable and the Federation of Bosnia and Herzegovina government will have to address this issue,” he added.

Despite warnings from local and international experts that war veteran benefits were poorly targeted and imbalanced, local media before the Vienna meeting reported that some Federation officials were ready to even forsake the IMF agreement rather reduce social payments to war veterans and invalids.

These associations are seen as among the most influential lobbying groups, and have already threatened to bring down the Federation government should their benefits be reduced.

Also before the meeting in Vienna, Federation Finance Minister Vjekoslav Bevanda warned that “politics have got entangled with the IMF arrangement”.

Bevanda also warned that losing the IMF agreement would mean “financial collapse, that is, equal to a suicide.” He predicted that should Bosnia lose the agreement, the Federation budget could be bankrupt by September or October.