Conference on Public Expenditure Reform Macroeconomic constraints on public spending in BiH: recent trends and medium-term outlook Valeria Fichera - IMF Conference on Public Expenditure Reform Sarajevo, March 4, 2003

Recent Macroeconomic Performance Main Economic Indicators, 1999 - 2002 1999 2000 2001 2002     Est. Real GDP (percent change) 9.6 5.4 4.5 3.8 CPI (period average, percent change) 3.4 5.1 3.1 0.3 Fiscal Balance -9.1 -10.0 -5.8 -4.1 External current account (percent of GDP) -8.2 -12.5 -15.5 -19.0 Reserves (months of imports) 1.9 2.0 5.0 4.9 Sources: Authorities, and IMF staff estimates

Fiscal Performance: Large Fiscal Consolidation In 2001 And 2002 General Government (in percent of BIH GDP) 1999 2000 2001 2002   Est. Revenue 61.3 56.1 51.8 Expenditure on a commitment basis 70.4 66.0 57.6 54.9 Balance on a commitment basis -9.1 -10.0 -5.8 -4.1 of which net change in stock of arrears 3.4 4.0 0.9 -0.3 Sources: Ministries of Finance, and IMF Staff estimates

Progress in harmonizing indirect taxes Fiscal Achievements Progress in harmonizing indirect taxes Major fiscal consolidation in 2001 and 2002: Strengthened tax administration: new laws in both Entities, tax stamps, TIN Better expenditure control through Treasuries at State and Entity central government levels Large demobilization operation in 2002

Macroeconomic challenges: Reinvigorate growth and lower unemployment Reduce the current account deficit to achieve external sustainability Further fiscal consolidation and a strategy to address the large stock of domestic claims on government is needed to achieve fiscal sustainability in support external viability

Medium Term Macroeconomic Outlook

Necessary Reforms To boost the export sector and maintain external viability, BiH has to move from postwar reconstruction into transition to export oriented private sector activity. For that it needs investment of the right kind financed from national savings.

Where can additional national savings come from? They can come from higher private saving, mainly resulting from increased corporate profits; and/or They can come from increased public savings.

A Strategy For Increasing Public Savings: Rationalizing expenditure and government activity Address the issue of domestic debt and claims: payment arrears, frozen deposits, war-related claims Improving fiscal management through more coordination, and reforming revenue and expenditure assignments and inter-governmental transfers

Expenditure Rationalization Further cut in unproductive expenditure (e.g. defense) Rationalize benefits system (e.g. war veterans) Streamlining government: reduce overlap and duplication within and across Entities, and between State and Entities Restructure civil service employment and reduce the consolidated government wage bill Reform the pension and health systems

Expenditure Pressure Points And Risks Return of refugees: pressure on benefit systems and infrastructure State activities expand – can Entity governments shrink? “Enlargement Pressure:” EU roadmap requires new functions (e.g. competitition policy, more effective border services) Costs of enterprise/bank restructuring and privatization ? Contingent liabilities: (calling guarantees ?)

Dealing With Debt and Claims In addition to known public debt of 50 percent of GDP (mostly external) governments face other claims on its resources: Payment arrears estimated at about 8.5 percent of GDP Frozen foreign-currency denominated deposits: estimated at about KM 2.6 billion (24 percent of GDP) Other war-related claims, material and non-material of yet uncertain magnitude

Debt and Claims - What To Do ? Prepare a comprehensive strategy on outstanidng claims on government Use succession money and privatization proceeds in escrow to settle claims

BiH’s Fiscal House: Today I.C. Brcko District State Federation Central Government Municipalities (84) Cantons (10) Republika Srpska (RS) Central Government Municipalities (53) EBFs Pension Fund Health Fund Employment Fund In terms of fiscal consolidation an putting the fiscal house in order, here is where we are. EBFs Pension Fund Health Fund Child Fund Employment Fund 3

BiH’s Fiscal House: The Future ? I.C. guest apartments State EBFs Federation Central Government Cantons Municipalities Republika Srpska Central Government And here is where we need to go Municipalities EBFs Brcko District