Bosnia and Herzegovina - Fifth Review Under the Stand-By Arrangement and Request for Waivers of Applicability and Extension and Augmentation of the Arrangement (Electronic book text)

KEY ISSUES Stand-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) on September 26, 2012. The fourth review was completed on October 28, 2013 and SDR 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 challenging environment. All end-September 2013 performance criteria (PCs) and indicative targets were met. The fifth review was delayed to allow for the adoption of government budgets for 2014 and due to the dismissal-later suspended-of the Federation finance minister that temporarily interrupted the ministry's operations. Thus, the authorities are requesting waivers of applicability of the now controlling end-December 2013 PCs on the budget balances and accumulation of domestic arrears for the Institutions of BiH and the entity central governments for which data are not yet available and for which there is no evidence they were not observed. The 2014 budgets aim to preserve the gains made in fiscal consolidation. Despite some delays, sustained progress was made in meeting structural benchmarks, including the adoption of a new law on budgets in the Federation. Outlook and risks: A modest recovery in economic activity continues, supported by strong exports. Growth is estimated to have reached close to 1 percent in 2013 and is projected to pick up further in 2014 in line with developments in Europe. The banking sector is broadly stable but remains burdened by rising non-performing loans. Considerable downside risks loom ahead, including those stemming from general elections later this year. SBA: The authorities are also requesting a nine-month extension and augmentation of the 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 and their commitment to maintain sound economic policies, staff supports the request for waivers of applicability and recommends the completion of the fifth review. Staff also supports the request for an extension and augmentation of the arrangement, as it would address the additional financing needs and continue to provide an anchor for economic policies during the period of the elections and the formation of the next governments.