REALISING BOSNIA AND HERZEGOVINAS EUROPEAN POTENTIAL: FROM WAR ECONOMY TO CREDITWORTHINESS AND SUSTAINABILITY MACRO AND FISCAL FRAMEWORK Ljerka Marić, Minister of Finance and Treasury - BiH International conference on development of Bosnia and Herzegovina CG Meeting on Bosnia and Herzegovina Sarajevo, September 22 and 23, 2004

2 In the first half of this year BiH Council of Ministers together with FBiH Government and RS Government adopted Mid-Term Development Strategy BiH (PRSP) for period It is a first strategic document agreed and approved by the BiH authorities without involvement of the international community. Prior to the approval of the PRSP, wide consultation process was organized with participation of NGOs, youth, private sector, trade unions, academics, donors, and ordinary citizens. 2

3 by end – 2007, achieve 70% of GDP from 1991 by end – 2007, restore a partial creditworthiness on the international capital markets create economic preconditions for faster integration of BiH into EU BASIC GOALS OF MEDIUM-TERM DEVELOPMENT STRATEGY ARE: 3

4 Reduction of unemployment rate by 20% relative to the current unemployment rate Reduction of poverty rate by 20% relative to the current poverty rate Signing Stabilization and Association Agreement with the EU CRITERIONS FOR SUCCESS OF MEDIUM TERM DEVELOPMENT STRATEGY (PRSP) ARE DEFINED AS: 4

5 Preservation of macro-economic stability; Implementation of fiscal reform; Faster growth of private sector; Implementation of anti-corruption strategy; Strengthening of financial sector; Implementation of labor market reforms; Implementation of public administration reform; Implementation of several sectoral reforms, among them the most important being: IMPLEMENTATION OF MEDIUM TERM DEVELOPMENT STRATEGY REQUIRES REALIZATION OF THE FOLLOWING PRIORITIES: 5

6 Liberalization of electricity market To continue liberalization of telecom market To implement reform of higher education To implement reform of health system financing To establish adequate system of social protection To start reform of pension system To adopt and implement new legal and institutional framework for forestry management To provide adequate support for agricultural production To define industrial policy of the country To introduce system of electronic relations with citizens (e-government) To implement National Environment Protection Plan To improve road construction management and road maintenance management To continue reconstruction of railways 6

7 REAL GDP GROWTH TARGETS Source: BiH Medium-Term Development Strategy - PRSP 7

8 CPI PROJECTION 8

9 FISCAL DEFICIT PROJECTIONS Source: BiH Medium Term Development Strategy - PRSP 9

10 REDUCTION OF PUBLIC EXPENDITURE SHARE OF GDP Source: BiH Medium-Term Development Strategy – PRSP (Data for 2002) 10

11 PUBLIC EXPENDITURE PROJECTIONS Source: BiH Medium Term Development Strategy - PRSP 11

12 PUBLIC EXPENDITURES REDUCTION PLAN 1 Source: BiH Medium-Term Development Strategy - PRSP 12

13 DEFENSE EXPENDITURES AS % OF GDP Source: SOR FBiH and RS 13

14 PUBLIC SECURITY EXPENDITURES AS % OF GDP Source: SOR FBiH and RS 14

15 PUBLIC EXPENDITURES REDUCTION PLAN 2 Source: BiH Medium-Term Development Strategy - PRSP 15

16 Establishing of Indirect Taxation Introduction of VAT; Establishing of common framework of public procurements; Reform of direct taxes; Strengthening of budget planning system; Strengthening of public revision system. 16 Apart from rationalization of public expenditures, important areas of fiscal reform will be:

17 PROJECTION OF PUBLIC REVENUE GROWTH Source: Mid-Term Development Strategy BiH - PRSP 17

18 CURRENT ACCOUNT BALANCE PROJECTIONS Source: BiH Medium Term Development Strategy - PRSP 18

19 INCREASE EXPORTS – REDUCE IMPORTS Source: BiH Medium-Term Development Strategy - PRSP 19

20 PRIVATE SAVINGS GROWTH PROJECTION Source: BiH Medium-Term Development Strategy - PRSP 20

21 FDI PROJECTION GROWTH Source: Mid-Term Development Strategy BiH - PRSP 21

22 PRIVATE INVESTMENT PROJECTION Source: BiH Medium Term Development Strategy - PRSP 22

23 REDUCTION OF PUBLIC DEBT Source: BiH Medium Term Development Strategy - PRSP 23

24 EXTERNAL DEBT SERVICING PROJECTIONS Source: BiH Medium Term Development Strategy - PRSP 24

25 Realization of Medium Term Development Strategy is underway. The implementation rate of the planned measures to date is around 84 percent Positive trends in terms of inflow of foreign investments greater than expected, high levels of exports, higher level of lending to corporates, give reasons for optimism that in this year planned economic growth rates will be achieved. 25

26 In order to realize goals from Miedium Term Development Strategy of BiH (PRSP), it will be necessary for the period of to get around 1.2 billion of foreign aid in form of favorable credits and grants. The largest part of this aid would be used for realization of BiH Public Investment Program, which will be presented to you tomorrow, as well as for realization of structural reforms in the area of: Corporate restructuring Public administration External financing gap will be presented by the end of the conference. 26