Newsletter Economic Reform and Reconstruction in Bosnia and Herzegovina (BiH) Sarajevo, April 1998, Vol. 1, Issue 2 Economic Task Force Secretariat OHR in co-operation with IMG International Management Group Economic Indicators BiH (*) * This month all data refer to the Federation, next month we will cover both RS and Federation. Dec-97 Jan-98 Feb-98 Last 12 months Average net wage (DM) 308 300 N/A 22.6% Retail price growth 0.1% 0.5% 0.7% 9.5% Cost-of-living growth 0.9% 0.8% 1.2% 8.4% Real wage growth 6.7% -3.4% N/A 14.3% Industrial Production growth 9.5% -19.7% 11.2% 24.6% Real effective exchange rate -7.2% (Source: Federation Statistical Institute & OHR Estimates) Although nominal wages are low, there has been strong real wage growth over the past year. Recovery in the official level of industrial production continues into early 1998. There has been appreciation of the real exchange rate in 1997, by roughly 7% (calculated using data for major trade partners of the Federation, excluding Slovenia and Croatia). Foreign Investment Number of foreign companies investing: Company: one owner shareholding 1996 297 297 1997 272 304 Declared investments (in DM): One owner company in kinds & rights in cash 1996 1,525,218 1,091,980 1997 1,297,358 411,000 Shareholding company 1996 7,879,472 2,132,588 1997 18,500,536 3,521,790 Note: Most of Foreign Investments in Canton 10, Canton 8 and in part of Canton 7, are not included in the above figures. (Source: Ministry of Foreign Trade and Economic Relations) Economic Policy and Reform 1998 Budgets near Completion In the Republika Srpska (RS), the 1998 budget (DM 468 million) was adopted by the National Assembly on 14 March 1998. The draft budget (DM 917 million) of the Federation of BiH (Federation) was adopted by the House of Peoples and will now be discussed by the House of Representatives. The State budget (DM 183 million) for 1998 has been approved by the Council of Ministers and forwarded to the Presidency. According to the Constitution, it is now up to the Presidency to forward it to the Parliamentary Assembly for discussion and adoption. The three budgets are presented as an insert to this issue together with budgets for 1997. All three budgets have significantly increased. For both the RS and the Federation, substantial increases in tax revenues and external financing are expected. State budgetary expenditures are expected to rise by more than 70%. In 1997, however, Entities provided very few resources for the State budget, and the international community had to finance the gap. The budgets presented here do not give a completely accurate picture of the fiscal position of BiH. First, there is probably substantial amount of off-budgetary expenditure. Second, the RS government has not gained full control over the disposition of its customs revenues. Third, the accounts of publicly-owned enterprises are not incorporated into these budgets. Finally, differences in the fiscal-federal structures of the Federation and the RS complicate comparison of their budgets. Many revenues and expenditures in the Federation go through the budgets of cantonal authorities, a level of government that is not existent in the RS. Table 1. Budget of the Federation of BiH (millions KM/DM) Table 2. Budget of the Republika Srpska (millions KM/DM) 1997 1998 1997 1998 Revenues 610 822 209-259 /3 365 Customs and Excise Taxes 565 766 Customs and other import taxes 63-73 92 Other sales and excise taxes 100 158 Income taxes 28-68 87 Non tax revenue 45 56 Other tax and non tax revenue 18 28 Expenditures 641 917 209 /3 468 Wages 70 88 Wages 25 * 107 Materials and services 19 33 Materials and services 31 38 Military 245 /1 343 /1 Military 73 * 86 Reconstruction 18 30 Reconstruction 9 14 Transfers to invalids 176 257 Transfers to invalids 15 51 Social Fund 6 15 Transfers to State budget 30 95 Transfers to State budget 0 60 Other 74 71 Other 50 61 Financing 31 95 0 or -50 103 Domestic 15 /2 Domestic 0 or -50 0 External grants and concessional loans 31 80 External grants and concessional loans 0 103 Source: Federation Ministry of Finance and draft 1998 budget Source: Republika Srpska Ministry of Finance and 1998 budget. The budgeted figure for 1998 is only slightly larger than the estimated wage bill for the new, professional army of the Federation and does not take into account dedicated external assistance for the "Train and Equip" program. Privatization revenues. Revenue estimates for 1997 are considered highly incomplete. The lower figures correspond with information reported to the new government, and corresponds mainly to revenues received on taxes levied in Yugoslav dinars. Taxes levied in foreign exchange have much lower amounts than could be expected. The higher revenue estimates serve as a base for assessing likely developments in 1998, with revenue administration better under control. The expenditure figures marked with an asterisk (*) are considered those most likely to be understated. Table 3. Bosnia and Herzegovina - State budget (in millions of KM/DM) 1997 Budget 1997 Estimate 1998 Budget Expenditures 136 110 183 Administrative 40 35 57 Debt service 96 75 126 Revenues 136 50 173 Fees 20 20 20 Transfers from Entities 116 30 153 External financing 0 60 10 Initial Agreement on IMF Credit to BiH Bosnian authorities have reached understanding with the IMF on a program that could be supported by an IMF stand-by arrangement. The financing available under the program would be $82 million. The agreement was possible after the last obstacle, the approval of liquidation of the National Bank, was removed. The Letter of Intent for the proposed stand-by arrangement will now be reviewed by IMF management. If approved, the letter can be signed by local authorities, after which the IMF executive board will make a final decision in May. The program will cover a range of macroeconomic and structural policy commitments, involving both the common BiH institutions and those of the two Entities, in order to achieve the framework for sustained economic growth in BiH. In addition, the signing of the Letter of Intent could open the possibility for an agreement regarding two World Bank projects: the Public Finance Structural Reform Project, and the Enterprise Privatization and Bank Restructuring Project. If an agreement is reached, these projects will provide both technical assistance and initially over DM 200 million of budgetary support from the World Bank to the Entities. Difficulties in Implementation of Customs Tariffs Last month's newsletter announced the implementation of the Customs Tariff Law as of 13 March. Initially, neither the RS nor the Federation implemented the Law. Both Entities have now instructed their respective customs administrations to start applying the new tariffs. However, previously established import duties and preferential trade agreements are still in place. The special duties as well as the preferential agreements must be abolished since they are in violation of the unified customs policy for BiH. Progress in Privatization The RS is ready for a newly designed privatization program after nullifying previous legislation. The High Representative considered that the privatization process, initiated by the former government, is unconstitutional. The new program is currently being developed with help from several international organizations. A State Law on Privatization has also been drafted. The law is sent to the Council of Ministers, but so far it has failed to discuss the law. The purpose of the law is to create a secure legal environment for the privatization process to be carried out by the Entities. Restored Trade Flows expected soon The OHR recently took the initiative to establish a working group in order to remove existing obstacles to trade between the Entities. Existing trade barriers conflict with the principle of free movement of persons, goods and services throughout the whole of BiH, as stipulated in the Constitution. The working group is chaired by the OHR and consists of representatives from the RS and the Federation, supported by international experts. The first step is for the Entities to recognize each other in their respective trade legislation. The Entities need to accept the fact that BiH is one economic space and have to act accordingly. Following this recognition, the parties can start to work on harmonization of taxes, which will benefit both parties since it will decrease tax evasion. US Support to the RS Budget In addition to the budgetary support for the RS government that was announced last month, the United States have decided to provide an additional amount of $5.0 million (DM 9.3), which totals more than DM 27 million of direct support from the donor community. The funds from the US will be implemented by the OHR within the next few days. Organization of Public Services BiH Public Corporations The framework for an optimal organization of public utilities in BiH is laid out in Annex 9 of the General Framework Agreement for Peace in BiH (GFAP). A Commission on Public Corporations has been established by both Entities, and is chaired by Mr. Monnory, Director for BiH of the European Bank for Reconstruction and Development (EBRD). The task of the Commission is to examine the establishment of BiH Public Corporations to operate joint public facilities, such as transport, energy, postal and communication facilities. In particular, the Commission will look into the internal structure of such Corporations, as well as the necessary conditions for ensuring their successful, permanent operation and the best means of procuring long-term investment capital. Following encouraging results on the railways, the High Representative wishes to see the major sectors reorganized before the end of 1998; electricity, telecommunications, post and (other) transportation. Preliminary meetings have started in electricity and telecommunications. Railway Corporation Established The Bosnia and Herzegovina Railway Public Corporation was established on Monday 6 April by the Prime Ministers of both Entities. This is a major step in the re-organization of the railway sector. The Corporation will carry out three types of tasks: the organization of traffic in the country (allocation of train paths), the harmonization and construction of infrastructures and equipment and the representation of railways for international matters. Donors are encouraged to contact the Corporation to prepare and implement their railway projects. The Board of Directors of the Corporation elected its chair on 6 April; the Chairman is Pavo Boban, the Vice-Chairman is Marinko Bilijanovic, the Secretary is Narcis Dzumhur. Four tasks remain before completion of the reorganization of railways in BiH: to pass a railway law in the Federation and establish the Federation railway company, to amend the RS law on railways, to agree on the share of the debt and rolling stock, to liquidate ZTP Sarajevo company, the previous BiH railway company. Mail Delivery between Entities will resume On 6 February, the first post-war delivery of mail from Sarajevo to Banja Luka took place. Further negotiations have led to an agreed text for a Memorandum of Understanding (MoU), to be signed on 23 April by representatives of the State and the two Entities. According to the MoU, the parties will initially establish three mail transports per week between Sarajevo and Banja Luka, on a reciprocity basis. Furthermore the parties recognized the need to examine urgently the options for restructuring the post sector in accordance with Annex 9 of the GFAP. Telephone Links in BiH Re-established Recently, a total of 90 telephone lines between the two Entities became operational. There are three links of 30 lines each: Sarajevo-Bijelina, Tuzla-Bijelina, and Trebinje-Mostar. Negotiations led by the OHR will result in an additional -temporary- 30 lines between Banja Luka and Sarajevo. The resumption of telephone operations was possible after the completion of a DM 9 million EC Phare project to reconstruct the backbone of the RS telecommunications infrastructure. Status of Reconstruction Coming Donor Conference should increase Help to the RS The fourth donor conference for BiH will be held in Brussels on 7 May 1998. The purpose of the conference, hosted by the World Bank and the European Commission (EC), will be to confirm the 1998 tranche of the $5.1 billion target set after the signature of Dayton agreement for four years (1996 to 1999 inclusive). The three previous conferences (1995, 1996 and 1997) resulted in donors pledging close to $3.4 billion. The conference will have a special focus on the reconstruction needs for return of Refugees and Displaced Persons. The High Representative will also strongly recommend to the donor community to increase their effort in the RS, including the eastern part. As a result of the former political situation in RS, only a small fraction (estimated at 5 to 10%) of the total aid was directed towards the RS. It is the opinion of the High Representative that the standard share of 2/3 for the Federation of BiH and 1/3 for the RS should apply in the long term. This would require an immediate share of 50% in the RS for 1998, to make up for the past. Sector Status Summary Report on Reconstruction in BiH (as per April 1998)*1 Sector Type Agriculture 100,619,310 Education 86,426,286 Energy 288,628,282 External Debt Service 44,595,306 Finance & Trade 30,077,213 Government Institution Building 68,569,995 Health 145,929,288 Housing 292,606,519 Industry & Industrial Finance 302,133,168 Landmine Clearing 37,197,155 Multi-Sector 8,318,343 Other 4,018,082 Peace Implementation Activities 101,433,377 Social Support 134,394,201 Telecommunications & Communications 19,871,624 Transport 227,078,047 Water & Waste Water Management 101,861,053 Grand Total 1,993,757,251 For further information concerning this publication please contact: Paul Hulshoff, IMG - tel.: 666 273 Clement van de Coevering, OHR - tel.: 447 275 Donor Status Summary Report (as per April 1998)*1 Figures in DM Country Completed In Imple- mentation Not Specified Total Contracts (NOT SPECIFIED) 12,620,781 0 771,000 13,391,781 Australia 75,000 0 75,000 Austria 31,968,222 22,244,323 2,113,223 56,325,768 Belgium 407,508 4,366,162 0 4,773,671 Bosnia and Herzegovina 11,210,500 2,289,000 13,499,500 Canada 117,000 0 117,000 Council of Europe Social Development Fund 66,460 0 66,460 Czech Republic 1,148,871 1,374,000 2,522,871 Denmark 314,364 314,364 628,727 Dutch Trust Fund 50,188,204 12,448,395 48,710 62,685,309 EBRD 18,409,709 18,409,709 European Commission 118,343,223 77,867,961 43,360,346 239,571,529 Finland 1,476,926 4,241,779 220,912 5,939,617 France 3,842,223 3,842,223 Germany 11,262,908 8,523,000 23,483,350 43,269,258 Greece 3,492,930 8,732,325 12,225,255 Iceland 0 1,222,525 0 1,222,525 IFAD 9,553,789 0 9,553,789 IFC 0 8,800,000 0 8,800,000 International NGO 340,000 0 340,000 Islamic Development Bank (IDB) 4,133,848 13,686,772 0 17,820,620 Italy 20,380,225 10,215,768 5,073,604 35,669,598 Japan 5,944,574 37,387,723 660,631 43,992,927 Jordan 202,912 0 202,912 Malaysia 292,642 17,288,463 11,726,096 29,307,201 Muli Country Trust Fund 68,630,267 38,784,779 2,071,089 109,486,135 NATO 25,697,430 10,585,522 36,282,952 Netherlands 6,561,846 11,922,722 5,613,488 24,098,055 Norway 25,585,585 3,672,888 873,232 30,131,706 Qatar 3,040,762 0 3,040,762 Saudi-Arabia 30,740,773 20,519,669 5,063,557 56,323,999 Slovenia 3,103,332 0 3,103,332 Soros Foundation 804,537 1,435,516 2,240,053 Sweden 9,261,726 150,000 1,309,849 10,721,575 Switzerland 1,861,240 516,746 1,441,555 3,819,541 Taiwan 142,000 0 0 142,000 Tunis 384,222 0 0 384,222 Turkey 3,169,359 0 3,169,359 UN Trust Fund 50,000 0 50,000 UNDP 657,899 4,289,768 1,520,734 6,468,401 UNHCR 25,211,588 16,183,037 102,194,399 143,589,025 UNICEF 2,387,660 0 2,387,660 United Kingdom 32,459,545 1,635,263 42,631,109 76,725,917 United States 119,903,816 117,362,612 137,135,006 374,401,434 World Bank 211,916,455 262,426,701 8,289,716 482,632,872 World Vision International 305,000 0 305,000 Grand Total 837,273,768 713,899,218 442,584,265 1,993,757,251 Source of information: RCM Database *1: Figures include all contracts since June 1996. *2: Figures include all contracts both completed and in implementation. In the RCM Database, "Contract" is defined as a signed agreement between the Donor or intermediate Agency and the final executor of the works. Column "Completed" specifies funds for works completed only. Column "In Implementation" specifies funds for works underway only. Column "Not Specified" specifies funds for which no milestones have been provided, therefore the status could not be determined. Note: This report is based on information provided by Implementing Agencies and other participants willing to contribute to the RCM Database. Therefore, the ETF Secretariat nor the RCM Database can take any responsibility for incorrect or incomplete information potentially contained within this report. Original values are converted to DM based on average exchange rates for 1997. Office of the High Representative