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

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