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Macroeconomic constraints on public spending in BiH: recent trends and medium-term outlook

This report analyzes the recent macroeconomic performance in Bosnia and Herzegovina (BiH), focusing on fiscal achievements and challenges for sustainable public spending. Following significant fiscal consolidation in 2001 and 2002, the paper discusses the need for a transition towards export-oriented growth, improved fiscal management, and strategies to increase public savings. Key areas of reform include expenditure rationalization, addressing domestic debt issues, and managing the pressures of returnee benefits and infrastructure needs. A comprehensive strategy is essential for achieving fiscal sustainability and external viability.

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Macroeconomic constraints on public spending in BiH: recent trends and medium-term outlook

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  1. 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

  3. Fiscal Performance: Large Fiscal Consolidation In 2001 And 2002

  4. 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. Federation Central Government Republika Srpska (RS) Central Government Cantons (10) Municipalities (84) Municipalities (53) BiH’sFiscal House: Today I.C. Brcko District State EBFs Pension Fund Health Fund Employment Fund EBFs Pension Fund Health Fund Child Fund Employment Fund 3

  15. Federation Central Government Cantons Municipalities BiH’s Fiscal House: The Future ? I.C. guest apartments State EBFs RepublikaSrpska Central Government Municipalities EBFs Brcko District

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