1. 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

2. Recent Macroeconomic Performance
Main Economic Indicators,
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

3. 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

4. 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

5. 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

6. Medium Term Macroeconomic Outlook

7. 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.

8. 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.

9. 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

10. 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

11. 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 ?)

12. 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

13. 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

14. 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

15. 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