Bosnia and Herzegovina: Fourth Review Under the Stand-By Arrangement and Request for Modification and Waivers of Applicability of Performance Criteria

KEY ISSUES

Stand-By Arrangement (SBA): The Board approved Bosnia and Herzegovina's (BiH)request for a two-year Stand-By Arrangement (SBA) with access of SDR 338.2 million(200 percent of quota) on September 26, 2012. The third review was completed in Juneand SDR 169.1 million (100 percent of quota) was disbursed so far. SDR 42.275 million(25 percent of quota) would become available upon completion of the fourth review.

Program performance: Despite a challenging environment, steady progress has beenmade in meeting program objectives. All end-June performance criteria (PCs) andindicative targets were met, and steady progress has also been made in observingstructural benchmarks. However, as the fourth review was delayed to allow for adiscussion of the policies that would allow meeting the end-2013 fiscal targets, theauthorities are requesting waivers of applicability of the now controlling end-SeptemberPCs on the budget balances and accumulation of domestic arrears for the Institutions ofBiH and the entity central governments for which data are not yet available and for whichthere is no evidence that these were not observed. Furthermore, and owing to weakerthan expected indirect tax collection, the authorities are requesting a modification of theend-December 2013 PCs on the budget balances to allow a modest reallocation of fiscalspace between the Institutions of BiH and the entities.

Outlook and risks: A modest recovery in economic activity is taking hold, supported bystrong exports. Growth is now expected to reach close to 1 percent this year and isprojected to pick up further in 2014. Considerable downside risks weigh on this outlook,including those stemming from next year's general elections. The latter pose a significantrisk to the timely implementation of policies envisaged under the program.

Staff's view: On the basis of the authorities' strong performance so far and theircommitment to sound economic policies for the remainder of 2013 and early 2014, asoutlined in the attached supplementary Letter of Intent, staff recommends thecompletion of the fourth review. Staff also supports the requests for modification andwaivers of applicability of performance criteria.October 11, 2013