REALISING BOSNIA AND HERZEGOVINA’S 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 HerzegovinaCG Meeting on Bosnia and Herzegovina

Sarajevo, September 22 and 23, 2004

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 2004-2007. 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.

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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:

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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:

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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:

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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

REAL GDP GROWTH TARGETS

4,0%

5,5% 5,5% 5,5% 5,5%

0%

2%

4%

6%

2003 2004 2005 2006 2007

Source: BiH Medium-Term Development Strategy - PRSP 7

0,9%

1,8%2,0%

2,2%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

2004 2005 2006 2007

Source: BiH Medium-Term Development Strategy - PRSP

CPI PROJECTION

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FISCAL DEFICIT PROJECTIONS

0,4%

-0,1%

-0,7%-0,8%

-0,6%

-1,0%

-0,5%

0,0%

0,5%

2003 2004 2005 2006 2007

Source: BiH Medium Term Development Strategy - PRSP 9

REDUCTION OF PUBLIC EXPENDITURE SHARE OF GDP

31,4%35,6% 36,6%

41,9% 42,6% 43,6% 43,8%

50,4%

0

20

40

60

80

Albania Romania FYRoM Bulgaria Poland Slovenia CzechRep.

BiH

%

Source: BiH Medium-Term Development Strategy – PRSP (Data for 2002) 10

PUBLIC EXPENDITURE PROJECTIONS

46,3% 46,0%45,4%

44,3%

43,1%

35%

37%

39%

41%

43%

45%

47%

49%

2003 2004 2005 2006 2007

in %

GD

P

Source: BiH Medium Term Development Strategy - PRSP 11

PUBLIC EXPENDITURES REDUCTIONPLAN 1

Source: BiH Medium-Term Development Strategy - PRSP

Defense(%GDP)

5,1%

2,7%

1,9%2,3%

0%

1%

2%

3%

4%

5%

6%

FBiH RS

Public Security & Law Enforcement

(% GDP)

4,5% 4,5%3,9%

3,5%

0%

1%

2%

3%

4%

5%

6%

FBiH RS

2003 2006

Salaries in publicadministration

(% GDP)

16,0%

10,0%

12,3%

7,8%

0%

5%

10%

15%

20%

FBiH RS

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DEFENSE EXPENDITURES AS % OF GDP

5,10%

3,00%

2,70%

2,50%

1,80%

1,80%

1,70%

1,70%

1,30%

1,10%

1,00%

0,00% 1,00% 2,00% 3,00% 4,00% 5,00% 6,00%

FBiH

Croatia

RS

Bulgaria

Czech Republic

Slovenia

Romania

Slovakia

Poland

Albania

Hungary

Source: SOR FBiH and RS 13

PUBLIC SECURITY EXPENDITURES AS% OF GDP

4,50%

4,50%

2,80%

2,10%

2,10%

2,10%

2,00%

1,80%

1,60%

1,60%

1,60%

0,00% 1,00% 2,00% 3,00% 4,00% 5,00%

FBiH

RS

Croatia

Albania

Bulgaria

Romania

Czech Republic

Poland

Hungary

Slovakia

Slovenia

Source: SOR FBiH and RS 14

PUBLIC EXPENDITURES REDUCTIONPLAN 2

Source: BiH Medium-Term Development Strategy - PRSP

Social Assistance (% GDP)

18,9%

14,7%13,5%

17,8%

0%

5%

10%

15%

20%

FBiH RS

Health Care (% GDP)

6,9%6,4%

6,7%

5,9%

0%

1%

2%

3%

4%

5%

6%

7%

FBiH RS

2003 2006

Education (% GDP)

6,8%

4,7% 4,5%

5,6%

0%

1%

2%

3%

4%

5%

6%

7%

FBiH RS

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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.

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Apart from rationalization of public expenditures, important areas of fiscal reform will be:

PROJECTION OF PUBLIC REVENUE GROWTH

2907

3023

3166

3312

3486

2600

2800

3000

3200

3400

3600

2003 2004 2005 2006 2007

in m

illio

n €

Source: Mid-Term Development Strategy BiH - PRSP 17

CURRENT ACCOUNT BALANCE PROJECTIONS

-17,7%

-15,6% -15,0%-13,6%

-11,3%

-20,0%

-15,0%

-10,0%

-5,0%

0,0%

2003 2004 2005 2006 2007

in %

GD

P

Source: BiH Medium Term Development Strategy - PRSP 18

INCREASE EXPORTS – REDUCE IMPORTS

13,0%14,0%

15,0%

12,0%

5,4%6,5% 6,5%

22,0%

0%

5%

10%

15%

20%

25%

2004 2005 2006 2007

%

Exports Imports

Source: BiH Medium-Term Development Strategy - PRSP 19

PRIVATE SAVINGS GROWTH PROJECTION

0,5% 0,3%

3,5%

5,0%

7,0%

0%

2%

4%

6%

8%

2003 2004 2005 2006 2007

Source: BiH Medium-Term Development Strategy - PRSP 20

FDI PROJECTION GROWTH

342

453

577

716

0

100

200

300

400

500

600

700

800

2004 2005 2006 2007

in $

mill

ion

Source: Mid-Term Development Strategy BiH - PRSP 21

PRIVATE INVESTMENT PROJECTION

15,5%16,3% 16,9% 17,2%

0,0%

5,0%

10,0%

15,0%

20,0%

2004 2005 2006 2007

% o

f G

DP

Source: BiH Medium Term Development Strategy - PRSP 22

REDUCTION OF PUBLIC DEBT

59,7%56,2%

52,5%48,5%

0,0%

20,0%

40,0%

60,0%

80,0%

100,0%

2004 2005 2006 2007

% o

f G

DP

Source: BiH Medium Term Development Strategy - PRSP 23

EXTERNAL DEBT SERVICING PROJECTIONS

8,6%

7,2% 7,0%

6,1%

4,4%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

2003 2004 2005 2006 2007

% o

f G

DP

Source: BiH Medium Term Development Strategy - PRSP 24

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.

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In order to realize goals from Miedium Term Development Strategy of BiH (PRSP), it will be necessary for the period of 2004-2007 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.

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