Bosnia and Herzegovina (BiH)

1. Scenarios of Development in the Adriatic-Balcanic Area 8th and 9th March 2010 Forum, Gorizia Bosnia and Herzegovina (BiH) “National financial instruments in support of international projects in Bosnia”

2. Country Presentation • PPP - International Projects Funding • A) Fiscal Policy Measures • 1. Stand-By Arrangement • 2. Guarantees • 3. Privatisation Plan • 4. Meeting financial and credit needs of BiH 4.1. Achievement of the lowest financing cost with an acceptable risk level 4.2. Activities on the development of the domestic capital market • 5. Two development investment banks • B) Financial sector and monetary policy

3. Country Presentation Bosnia and Herzegovina is a small and open economy 51,209 sq km (coastline 26sq km) Total population in 2008. is 3.841 million Population with working ability in BiH accounts for around 2.6 million Employment structure according to the activities indicates that 21.2% persons are employed in agriculture, 31.5% in non-agricultural activity, and 47.3% in service related industry

4. International Projects Funding • IMF • EBRD • World bank • EIB • USAID • EU financial instruments CARDS, IPA, TAIXE • Other donors

5. National cofinancing component - IPA 2008 • Financial Agreement between EC and BiH • E.g. CBBH 10% - 100.000,00EUR in 1 mil EUR project paralel cofinancing • Resource: CBBH budget, State Budget Cofinancing Committment

6. Fiscal PolicyMeasures • One part is aiming to introduce savings at all levels with the goal to reduce public spending, currently at 44%, to below 40%, which would be in accordance with EU standards. • The second part of measures is devoted to continuation of projects funding, especially in the domain of infrastructure projects, as well as, in projects from the energy, transportation, banking, agriculture, and private enterprise sectors. There are multiple benefits coming from this – jobs will be preserved and the economy will be prevented from cooling off during the recession and have it ready for the next investment cycle. • New Stand-by Arrangement with the IMF worth EUR 1,2 billion, which will be delivered during the next three years.

7. 1. Stand-By Arrangement • 1.2 Million EUR for the period of three years • Stand-By Arrangement. Adjustment measures aimed at the control of current expenditures will provide space for a bigger allocation of limited revenues to infrastructure projects, which will contribute to alleviation of the negative impacts of the economic crisis. • Preparing the budget of the BiH institutions the BiH Ministry of Finance and Treasury was guided by the following priorities: Development of state functions related to requirements of the European Partnership. This requires the establishment of new institutions and strengthening of the existing ones. The European Partnership 2008 document stated that a key short-term objective of BiH is to “ensure that the Ministries and institutions at the State level be adequately financed, functional, especially in terms of premises and staff.»

8. 2. Guarantees • Bosnia and Herzegovina has completed its negotiations with the European Bank for Reconstruction and Development to sign two Guarantee Contracts. • One of the contracts is related to the credit line whose borrower is the Deposit Insurance Agency of Bosnia and Herzegovina. • The second Guarantee Contract is related to the credit line whose borrower is the International Airport of Sarajevo designated to expand the passenger terminal and modernisation

9. 3. Meeting financial and credit needs of BiH • Achievement of the lowest financing cost with an acceptable risk level • Activities on the development of the domestic capital market

10. 3.1. Achievement of the lowest financing cost with an acceptable risk level • SWAP arrangements • change of a floating interest rate into the fixed oneand change of the interest rate into the floating rate in the agreed currency LIBOR +1% • 2.78% thus achieving the 126.5 million KM saving It is known that Bosnia and Herzegovina signed the Official Record on Consolidation and Rescheduling of the BiH Debt with creditors from the Paris Club whereby 67% of the debt was remitted (Naples conditions). The Official Record included agreements and principles based on which bilateral negotiations will be held with creditor countries. Following the above, and based on the Agreement on Consolidation and Rescheduling of the Debt between the Governments of BiH and the Federal Republic of Germany, Bosnia and Herzegovina was given an opportunity of having the debt written off under the condition of financing the agreed projects. • Two special agreements have been signed in relation to the debt conversion between KfW and Bosnia and Herzegovina

11. 3.2. Activities on the development of the domestic capital market • The development of the capital market in Bosnia and Herzegovina, as an alternative to the traditional way of financing through banks, is paid more attention, because the development and improvement of the financial market, particularly the capital market, is one of the key assumptions for a successful reform of pension insurance. • Establishing voluntary pension funds, as significant institutional investors at the capital market, increase demand for high quality securities, which is why successful companies are stimulated to quote their shares at the stock exchange thereby financing their projects as an alternative to borrowing from banks. For that reason, special attention should be paid to a continuous improvement of corporate management.

12. Date Purpose Amount in million KM Due date Grace period Interest rate 22.07.2009 War claims 190.67 15 10 2.5% 26.10.2009 Old foreign currency savings 346.52 5 - 2.5% Total: 537.19 Review of the emission of bonds of FBiH for settlement of the internal debt in millions of KM in 2009

13. Date Purpose Amount Due date Grace period Interest rate 31.12.2007 General liabilities 1,735,962.- 15 5 1.5% 28.02.2008 Old foreign currency savings 209,742,717.- 5 - 2.5% 30.06.2008 War damage 40,764,772.- 15 5 1.5% 15.12.2008 General liabilities 542,293.- 15 5 1.5% 15.12.2008 War damage 27,868,713.- 15 5 1.5% 22.12.2008 Court verdicts 2,908,047.- 15 5 1.5% 28.08.2009 Old foreign currency savings 6,621,416.- 5 - 2.5% 30.10.2009 War damage 80,545,470.- 14 4 1.5% Total: 370,729,390.- Review of the emission of bonds in RS for settlement of the internal debt

14. 4. Two development investment banks • Development bank of FBiH • Investment and Development Bank of RS (IDBRS)

15. 4.1. RAZVOJNA BANKA FEDERACIJE    BOSNE I HERCEGOVINE Uslovi kreditiranja za industriju, zanatstvo i usluge› Rok otplate do 7 godina › Grace period do 12 mjeseci › Kamata 4,00 % (2,00% za RB FBiH i 2,00 % za poslovnu banku) › Naknada za obradu zahtjeva: 1,50 % jednokratno ( od čega 1,00 % za poslovnu banku) Uslovi kreditiranja za poljoprivrednu proizvodnju› Rok otplate do 7 godina › Grace period do 24 mjeseca › Kamata 3,00 % (1,50% za RB FBiH i 1,50 % za poslovnu banku) › Naknada za obradu zahtjeva: 1,00 % jednokratno ( od čega 1,00 % za poslovnu banku) › Kreditiranje podsticanja zapošljavanja. Maksimalan iznos kredita nije ograničen, ali je limitiran iznosom kredita po novouposlenom radniku.

16. 4.2. Investment and Development Bank of RS • Development and Employment FundRepublic of Srpska’s Development and Employment Fund, Joint Stock Company Banja Luka, was founded by Decree of the Government of the Republic of Srpska for the purpose of implementing development projects financed by the World Bank, Government of the Republic of Srpska and other international and domestic organizations and institutions. Objective of establishment of the Development and Employment Fund is to provide support to development projects with reference to the following: • Increase in employment rate and support to functioning of the labour market in the Republic of Srpska, • Construction of infrastructural facilities, • Export-oriented production, • Improvement of corporate governance and capital market, • Micro, small and middle entrepreneurship, • Environmental protection, • Even regional development, • Improvement of agricultural production,   • International promotion of investment possibilities in the Republic of Srpska, • Improvement of the functioning of self-governance bodies and services • The Funds’ resources are generated by the World Bank loans, other local and international institutions and organizations, local and international donations, issues of securities, Republic of Srpska’s budget and municipal budgets and other sources of financing.

17. Overview of BiH banking sector • The banking sector dominates BH financial sector, having more than 80% of the share in the total financial sector. Stable environment under the Currency Board Arrangement has made possible rapid development of this sector, attracting the large share of foreign investments. • Currently, there are 30 commercial banks operating in BH: • 28 of those are private owned, • 21 are in foreign ownership, • 7 are in domestic ownership and • 2 are state owned. • 97% of the total structure of ownership is private and only 3% is state owned. Share of the foreign private capital in the total capital is 84%. • 24 commercial banks are members of insurance deposit program. The amount of insured deposit for physical persons is KM 20,000. • Banks in BH, due to more conservative approach, have good capitalization indicators. Our indicators, which measure the ratio of the amount of equity and assets amounted to 16%. • However, since September 2008, the story has changed little bit.

18. The banking sector in Q2 - 2009. Credit activities Slowdown of credit activities also continued in the course of the second quarter of 2009, so the annual growth rate declined by 5.5%, which is lower by 8.2 % compared with the end of the previous quarter. Deposits with commercial banks At the end of the second quarter of 2009, total deposits amounted to KM 11.68 billion, which constituted a decrease by KM 88.9 million or 0.8% Interest Rates In the course of the second quarter of 2009, lending interest rates of commercial banks in BH recorded continued growth trend. The weighted average of all lending interest rates amounted to 8.70%. In the same period, the difference between lending and deposit interest rates including only term and savings deposits was increased and amounted to 4,27%

19. BiH Sovereign Credit Rating • S&P - B+ with stable outlook • Moody’s – B2 with stable outlook

20. Inflation • Viewed at the annual level, deflation in June 2009 was recorded at 1.8%, at the same time, prices, viewed at the monthly level, in June increased by 0.1% for the first time after October 2008. • Annual inflation rate in June 2009, compared with euro zone was lower by 1.7 %, while compared with EU 27 it was lower by 2.4 % • In the structure of consumer prices indices it can be noted that prices decline at the annual level was mostly caused by prices decline of services and commodities. Namely, prices of services decreased by 1.9 %, while prices of commodities decreased by 1.6%.