Bosnia and Herzegovina: Fifth Review Under the Stand-By Arrangement and Request for Waivers of Applicability and Extension and Augmentation of the Arrangement

KEY ISSUESStand-By Arrangement (SBA): The Board approved Bosnia and Herzegovina's (BiH)request for a two-year SBA with access of SDR 338.2 million (200 percent of quota) onSeptember 26, 2012. The fourth review was completed on October 28, 2013 andSDR 211.375 million (125 percent of quota) has been disbursed so far. SDR 42.275 million(25 percent of quota) would become available after completion of the fifth review.Program performance: Policy implementation remains strong despite a challengingenvironment. All end-September 2013 performance criteria (PCs) and indicative targetswere met. The fifth review was delayed to allow for the adoption of government budgetsfor 2014 and due to the dismissal—later suspended—of the Federation finance ministerthat temporarily interrupted the ministry's operations. Thus, the authorities arerequesting waivers of applicability of the now controlling end-December 2013 PCs on thebudget balances and accumulation of domestic arrears for the Institutions of BiH and theentity central governments for which data are not yet available and for which there is noevidence they were not observed. The 2014 budgets aim to preserve the gains made infiscal consolidation. Despite some delays, sustained progress was made in meetingstructural benchmarks, including the adoption of a new law on budgets in the Federation.Outlook and risks: A modest recovery in economic activity continues, supported bystrong exports. Growth is estimated to have reached close to 1 percent in 2013 and isprojected to pick up further in 2014 in line with developments in Europe. The bankingsector is broadly stable but remains burdened by rising non-performing loans.Considerable downside risks loom ahead, including those stemming from generalelections later this year.SBA: The authorities are also requesting a nine-month extension and augmentation ofthe arrangement. Access would be increased by SDR 135.28 million (80 percent of quota)to meet additional financing needs that arise mainly in late 2014.Staff's view: Given the authorities' strong track record of policy implementation andtheir commitment to maintain sound economic policies, staff supports the request forwaivers of applicability and recommends the completion of the fifth review. Staff alsosupports the request for an extension and augmentation of the arrangement, as it wouldaddress the additional financing needs and continue to provide an anchor for economicpolicies during the period of the elections and the formation of the next governments.