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Bosnia/Herzegovina: Two Entities Now Work Together, Says IMF

Washington, 15 July 1998 (RFE/RL) -- The two entities of Bosnia and Herzegovina have finally begun to show signs of working together as one country, says the Executive Board of the International Monetary Fund (IMF).

But in its first ever annual consultation with Bosnia, the IMF Executive Directors said that to continue, the country must push ahead quickly with a whole range of major reforms, assuring that they are implemented on a "consistent basis" in all areas of the Federation and Republika Srpska.

The 24 Executive Directors, representing the larger countries individually and the smaller member nations in groups or constituencies, make the day-to-day operating decisions of the IMF.

They conduct an annual review and consultation with each of the fund's 183 member nations, called Article Four consultations. If the country involved agrees, a report on the review is released.

The IMF directors noted that the economic and social situation in Bosnia is difficult and that economic recovery has been based largely on the reconstruction effort, financed heavily with external assistance. A background report prepared by the fund's staff noted that while Bosnia's real GDP (gross domestic product) grew by 50 percent in 1996 and 30 percent in 1997, it remains only about half what it was in 1990.

The staff noted that the pickup in economic activity has been stronger in the federation than in Srpska because the federation has greater access to foreign aid. Unemployment remains at around 40 percent of the labor force country wide.

The report also notes that while public implementation of the Dayton peace accords has been on schedule, implementation of civilian aspects of the treaty has been "slow and incomplete."

Still, the Executive Directors say, adopting the currency board to stabilize the country's economy was a major factor in helping leaders from both entities begin working more closely to develop a country-wide economic strategy designed to curb inflation and resume growth. Recent measures adopted to ensure that the national bank can no longer pose risks to the currency board were especially welcomed by the IMF executive directors.

At the same time, the directors said, the currency board form of central bank demands fiscal discipline, wage moderation and continued structural reforms. They said it is "essential" that banking reform in both entities be pushed ahead as quickly as possible.

While welcoming the progress made so far in putting the new fiscal structures into place, the IMF Executive Directors stressed the importance of making the various aspects of the peace treaties fully operational, eliminating the vestiges of "temporary wartime administrations."

They also noted the "urgent need" for harmonizing tax policies and customs administration while restructuring pension and health systems, developing a more effective and targeted social safety net, and taking measures to avoid further domestic arrears.

The directors also warned about problems with governance, such as tax and customs fraud and the diversion of revenues, saying these posed risks to implementation of the entire reform program. The directors urged authorities to intensify their efforts to promote transparency, improve the legal framework, and detect and prosecute official corruption.

The directors noted that Bosnia still faces a substantial balance of payments financing need, which requires reconstituting the country's foreign exchange reserves and normalizing relations with external creditors. However, for now, Bosnia must depend on aid from external donors, and assistance pledged so far this year has fallen short of what the country needs.