1. High Representative
Imposes Package of Laws to Boost Economic Reform in BiH
On November 12 and December 20, the High Representative imposed
a wide-ranging package of laws and amendments designed to ensure
Bosnia and Herzegovina maintains the momentum of economic reform
that are so vital to all citizens' future well-being and security.
The standstill in government activities following the elec-tions
in Bosnia and Herzegovina and the urgency of economic reform persuaded
the High Representative to take decisive ac-tion and impose these
laws and amendments. A consistent legal framework based on market
economy criteria and Euro-pean practise will send a positive signal
to foreign and domes-tic investors and business persons.
The laws and amendments meet long-established deadlines and
accession criteria for the country's eventual integration into
European structures. They also meet the demands of the inter-national
financial institutions working in Bosnia and Herze-govina and
will ensure continued access to international fund-ing. Reflecting
this progress, the IMF approved the next tranche of the Stand
By Credit on December 22.
Dismantling of the Payment Bureaus:
The Peace Implementation Council (PIC) called for the elimination
of the payment bureaus at its Madrid meeting in 1998 and repeated
this call when it met in Brussels in May 2000. The payment bureaus
made financial transac-tions in BiH cumbersome and operated in
a non-transparent manner, deterring potential investors. Their
abolishment is also one of the requirements of the "EU Road Map",
the ful-filment of which is the condition for a feasibility study
with regard to a Stabilisation and Association Agreement between
Bosnia and Herzegovina and the EU. Lastly, the payment bu-reausı
elimination is one of the measures Bosnia and Herzego-vina must
take to qualify for membership in the Council of Europe.
As part of this dismantling process, the International Ad-visory
Group for Payment Bureaus and Payment System Transformation, which
is chaired by the United States Agency for International Development
(USAID) and also comprises the US Treasury, the World Bank, the
International Monetary Fund (IMF), the EU, the Customs and Fiscal
Assistance Of-fice (CAFAO) and the Office of the High Representative,
has been working closely with the BiH authorities. However, some
legislation necessary for a smooth transition within the appropriate
legal framework and the establishment of an opera-tional banking
sector was still outstanding. At the request of the International
Advisory Group, the High Representative imposed the laws and amendments
which were missing:
The RS Law on Payment Transac-tions will regulate
rights and responsibilities of all participants in the payment
system.
The RS Law on the Internal Payments Sys-temwill
regulate in-ternal operations within the payment system and
define impor-tant governance and management issues.
The RS Law on Financial Opera-tionsestablishes
a clear legal foundation for payment operations by businesses
in RS.
Amendments to three Federation Privatization Laws (first,
to the Law on Claims in the Privatization Process that are based
on the dif-ference between pension amounts received and pension
amounts to be received by beneficiaries of the rights stemming
from the Pension and Disability Plan, second, the Law on Recording
and Settlement of Citizensı Claims in the Privati-zation Process
and third, the Law on Privatization of Enter-prises) will transfer
payment bureausı responsibilities in the area of privatization
to the Federation Privatization Agency.
Amendments to the Federation Law on Wage Taxwill
give the Tax Administration greater powers to enforce tax collection
and strengthen budgets in cantons and municipalities.
Amendments to the Federation Law on Con-tributions
will boost the powers of the Tax Administration to collect contributions
for social security funds and improve the financial health of
the social safety net.
These Laws and Amendments complete the legal frame-work of
the payment bureausı transformation. The new pay-ments system,
via commercial banks, began operations on 5th January 2001.
It is essential that all organisations and busi-nesses open
a bank account to enable them to carry out pay-ments from this
date. They are now responsible for paying taxes themselves and
pro-actively. The tax administrations will control and enforce
the collection of taxes.
Customs
Amendments to the BiH Law on Customs Policy
will update customs regulations to be consistent
with current EU customs policies and procedures and thereby facilitate
trade between Bosnia and Herzegovina and the EU. They will also
enable refugees to return to BiH without having to pay customs
duties on their personal belongings, or having to show at the
border detailed lists of these belongings previously approved
by BiH Consulates. This should support returns to Bosnia and Herzegovina,
an OHR priority. In addition, the Amendments will close a series
of duty free shops at border crossing points to crack down on
smuggling and improve the collection of revenues. The continued
reform of the customs system was also a requirement of the PIC
Brussels Declaration of May of last year. The IMF, the World Bank
and CAFAO had encouraged the BiH authorities to adopt these amendments
for over a year, but they were shuffled between the Council of
Ministers and the BiH Parliament without resulting in their adoption.
Fi-nally, these international organizations asked the High Repre-sentative
to impose the Amendments.
Employment
The Federation Law on Job Placement and Social Security
of the Unemployed is part of
a package aimed at bringing BiH labor legislation in line with
European market economies. It will put the Federation Employment
Bureau on a proper legal footing and do away with inefficiency
and non-transparency in the unemployment benefit system. The Law
is the last piece of a series of requirements in the field of
labor and social legislation, which BiH needed to meet in order
to qualify for the World Bank Social Sector Adjustment Credit
of 20 million USD. As in the case of the other laws and amendments,
the PIC had urged for a broad-based reform of the labor legislation
in Bosnia and Herzegovina. The need for the Federation Law on
Job Placement had been discussed with the Federation Labour Ministry
for two years, but the proposal was withdrawn from the agenda
of the Federation House of Representatives in mid-October following
heated debate, and not re-submitted due to the election void.
The BiH Law on Assets of the Employment Bureau of Bosnia
and Herzegovina enables the
transfer of assets from the former Socialist Republic of BiH Employment
Bureau to the Federation Employment Bureau and the Cantonal Employ-ment
Services for the proper exercise of their competence and the preservation
of an Employment Bureau at the State-level. This package brings
economic reform in Bosnia and Her-zegovina yet another step forward.
The so-called "soft big bang" strategy developed by OHR in order
to create a busi-ness-friendly environment is now completed. The
OHR and its international community partners will continue to
push for economic reform as Bosnia and Herzegovina must urgently
become economically self-sustaining. An attractive business climate
with an appropriate legal framework is now either in place or
in sight. BiH can now be considered as a place worth considering
for investors. The High Representative also issued a Decision
extending by three months the validity of his 27 April 2000 Decision
that banned the re-allocation of socially owned real property,
in particular socially owned land. The 27 April 2000 Decision
would have expired on 31 December and will now remain in force
until 30 March 2001.
2. New Standardization, Metrology and Accreditation
System in BiH
On November 12, 2000, the High Representative issued six Decisions
on the establishment of a four-pillar system of accreditation,
standardization, me-trology, and certification/testing for BiH
industrial products. This system is a precondition for the normal
functioning of industry and trade, and especially for the export
of BiH prod-ucts. Although the European Union liberalized imports
from Bosnia and Herzegovina, FYROM (Macedonia), Albania and Croatia,
exporters in these countries must still pass the con-formity assessment
procedure to prove their products comply with existing EU product
legislation and standards.
The set of six laws (on accreditation, standardization, metrology,
measur-ing units, the establishment of the Institute for Accreditation
and the Institute for Standards, Metrology and Intellectual Property
Protection) will create a quality system in BiH which is in line
with European Union regulations. These state level institutes
will provide service to all com-panies in BiH. Companies will
be provided with all necessary information on product regulations
in the European Union and the Accreditation Institute will certify
their products in the fu-ture. Only with this certification will
the European Union and the world markets be open to BiH products.
The existing En-titiesı institutes for standardization, metrology
and patents will become part of the new system, and financing
will be provided by the state budget and by revenues generated
by the Institutes. Currently the export levels of BiH products
are a mere fraction of the pre-war level and cover only 25 to
30% of im-ports, according to official statistics. The recent
decisions will remove the technical obstacles for BiH exports.
Export promo-tion is urgently needed in BiH, and it is up to BiH
companies to use their creativity and flexibility to open the
gate to Euro-pean Union markets.
3. Public Utilities
and Implementation of Annex 9 High Level Coordination Continues
The five-member BiH Commission on Public Corporations (CPC)
meets regularly every 2-3 months, last meeting on October 12.
The two Entity Prime Ministers and the Federation Deputy Prime
Minister represent the Entity governments, while Principal Deputy
High Representative Ambassador Ralph Johnson (Chairman), and Joseph
Ingram, Resident Representative of the World Bank in BiH, represent
the IC. International members are appointed by the President of
the EBRD. While the Commissionıs main function is to implement
Dayton Annex IX (i.e., to help reunite the countryıs utilities
and infrastructure), it has increasingly recognized that creating
joint utility enterprises must fit in with or -- even better --
support market sector reform and contribute to creating the BiH
common economic space. Annex IX public corporations can play a
role by taking on responsibility for natural monopoly components
of network infrastructure sectors such as the gas and power transmission
trunk lines traversing BiH.
4. Railway Sector
Trying to Regain Market Share
A recent review of the railway sector in BiH carried out on
behalf of the CPC concluded that despite the fact that much reconstruction
of the network has been completed, railways in BiH have not been
able to recover their transport market share or improve their
financial performance. Prime Ministers intend to request their
respective Entity railways to develop plans to significantly improve
marketing and financial performance, including rationalization
measures such as sale of assets no longer needed. The ongoing
Swedish SIDA-sponsored railway management development program
can assist BiH railways improve their economic performance.
5. Roadworks:
Progress and Detours
All activities envisaged under the World Bankıs Second Emergency
Transport Reconstruction Project (SETRP) will be completed by
December 31, 2000. The project has included the rehabilitation
of bridges across the Otoka, Ygar and Crna Rijeka rivers and the
Sanski Most bridge. At the same time, the SETRP Completion Report
states that several sections on the main road network have seriously
deteriorated. Damage includes potholes, cracks, deep rutting and
increasing surface roughness. Among the main causes are inadequate
maintenance, non-respect of axle load limits and a dramatic increase
in traffic volumes (2-3 times higher than pre-war levels) near
the larger cities, while road capacity has virtually stagnated.
Given this background there is a clear need to improve road network
maintenance and target physical improvements to improve road traffic
safety. The situation in the Federation is particularly critical,
requiring that the government urgently allocate at least KM 30
million in 2001 to road maintenance. BRIC, the new Joint Road
Infrastructure Public Corporation, is expected to play a crucial
role in setting and enforcing common road standards, coordinating
road management between Entities and joint planning of network
development. The World Bankıs Aide-Memoire for a Possible New
Road Project (Transport III) recommends that BRIC focus on improving
maintenance and safety on corridor roads of significant economic
importance to BiH.
6. Progress in
Telecommunications Privatization
A new Telecommunications Policy for BiH that promulgates privatization
and staged liberalization of the sector was approved by the BiH
Presidency and the Council of Ministers in late November 2000.
The implementation plan calls for the immediate liberalization
of the market for non-voice, with domestic fixed telephone services
two months later. The market for public mobile services will accommodate
four operators between now until December 2002, at which time
it will be further liberalised. The existing, fully publicly owned
GSM operators will be awarded radio licences immediately. International
voice telephony is to be liberalized no later than 2005. The BiH
Telecommunications Regulatory Agency (TRA) is expected to take
a strong leadership role in enabling the telecom sector reform,
and the EBRD is providing technical assistance to TRA in developing
the necessary legal and administrative tools. The World Bank intends
to assist by providing privatization advisors. Furthermore, the
role of the TRA will expand in the near future to include the
broadcasting regulatory functions of the Independent Media Commission
(IMC).
7. Energy Sector
Electricity Law Delay Continues
Energy sector market reform has not yet begun. While the new
policy calling for the creation of a separate joint-power-grid
transmission company and of an independent energy sector regulator
has been approved by the Federation, the RS has not yet acted.
The submission of new Electricity Laws to Entity Parliaments is
a key condition, both for the successful launch of the reform
process in BiH and to obtain approval of the proposed World Bank
(IDA) Power III Loan Project worth US $230 million. NORAD of Norway
has offered to support the drafting of a first BiH, State-level
Electricity Law. Co-financing for Power III is expected to come
from EBRD, EIB and bilateral donors such as Germany, France, Netherlands,
Greece and Canada. Given the delays already encountered, it appears
doubtful that first tenders will be published before May 2001.
8. Tax Reform
Underway
An International Advisory Group on Taxation was established
in July 2000, comprised of representatives from OHR, IMF, WB,
US-Treasury, USAID, GTZ and CAFAO. The IAGTıs goal is to address
the deficiencies of the pre-sent tax system, move toward medium
term sustainability of the public finances and create an environment
conducive to private sector development. One of the most urgent
objectives is to eliminate all types of double taxation. Longer
term rec-ommendations include broadening the bases of various
taxes in order to facilitate reductions of the very high rates
currently in force and move towards a value added tax.
The IMF has recently presented a feasibility study regarding
VAT, pointing out that there are three possible levels for implementing
the tax. A decision will have to be made to determine on which
level the VAT should be implemented, recognizing that intro-duction
of a value added tax cannot be implemented before July 2003. The
World Bank is evaluating the social contribu-tion system and will
make recommendations, while noting that a change in this area
will take up to two years. GTZ will be responsible for evaluating
and providing recommendations regarding personal income taxes
and corporate taxes. In parallel with changes to the legal framework,
the US Treasury, CAFAO and GTZ are assisting the two Entities
in modernizing their tax administrations. This includes establish-ing
a proper tax registration system, computerization, efficient control
and enforcement of taxes and an education system both of tax employees
and tax payers.
9. Bank Privatization
Moving Forward
Republika Srpska
- After almost three years of intensive work in the area of RS
bank privatization, the first concrete results are emerging: The
fourth tender published on August 21 for the sale of state shares
(65% in total capital) in Agroprom Bank ended successfully as
three different bidders bought together 31.61% of the bankıs capital,
increasing the percentage of private capital in this bank to 51.23%
(in addition to a 15.38 % stake of cooperatives and a further
state share of 33.39 %). Negotiations are currently ongoing for
the sale of the 90% state stake (in addition to 6% cooperatives
and 4% private shares) in Privredna Banka, Doboj, also with international
bidders. Furthermore, there are several national and interna-tional
bidders for the sale of Kristal Bank which was pub-lished on October
23 and substantive negotiations are expected soon. On the other
side of the ledger, the sale of the state capital in Privredna
Banka, Serb Sarajevo, was proclaimed unsuccess-ful due to the
inability of interested parties and the Bank Pri-vatization Unit
to agree upon the selling price, and the tender for Banjaluka
Banka, Banja Luka, did not attract any inter-ested bidders.
Federation
There has been a significant step forward for the Privredna
Banks-related group. In late Decem-ber, the BPU Director, SITA
Advisor and a strategic interna-tional investor negotiated with
the holder of the Czech credi-torıs position on defaulted guaranties
(75% of amount). They agreed on a substantially reduced cash payment
in lieu of prior agreements. A similar deal will be offered to
the other credi-tors. This should clear the way for strategic
international inves-tor(s) to take over the Federation Governmentıs
interest in the remaining PBS-related banks (Privredna Bank
Sarajevo, Central Profit Bank, Una Bank Bihac, Gospardska
Mostar and Travnicka Bank Travnik). The investor would then
complete the plan for the payment of the defaulted debt, priva-tization
plan and restructure the bank(s) determined to be sol-vent. A
number of obstacles remain, but these now appear more manageable
and this progress is likely to result in all/part of these banks
being tendered for privatization in late March or April. Banks
or portions not privatized by June 30, 2001 are to go into liquidation
in July 2001. This leaves two PBS-debt related banks that self-privatized
with obstacles to overcome on their own in order to be viable
and competitive. They need outside investors to provide capital
for competitive operations. A tender Offer on Union Bank is projected
for February. Post Bank has been re-tendered, while Sipad Bank
was tendered in November.
10. New Start
for Pension Funds in Bosnia and Herzegovina
Previous articles have described the rationale and urgency for
approving the policy amendment package on the Law on Pension and
Disability Insurance. Tying current pension payments to available
resources was one of the prerequisites to: achieve regular pension
payments; avoid the accumulation of further arrears; protect the
elderly by guaranteeing a minimum pension; and, ensure the release
of outstanding credits of relevant International Financial Institutions
(IFIs). Despite extensive meetings involving senior OHR, IMF,
WB, Federation and Pensioners Association officials to under-score
the urgency of adopting this package of amendments, both the House
of Representatives and the House of Peoples failed to do so. In
the RS a rather unclear text was adopted which did not reflect
the recommendations of the relevant IFIs.
The High Representative was thus compelled to issue a number
of Decisions on 12 November 2000, including Amendments to the
Federation Pension and Disability Insur-ance Law; Federation Law
on Pension and Disability Insur-ance Organization (which provides
for the merging of the Sara-jevo and Mostar Pension Fund), and
Amendments to the Re-publika Srpska Law on Pension and Disability
Insurance. The impact of the implementation of those amendments
and Law is yet to be measured as respectively a period of twenty-one
days and six months is foreseen to allow the pen-sion structures
to make the required necessary administrative changes. Even so,
pensioners in both entities are actively op-posing implementation
of the provisions.
It is worth noting that protests in the RS began well before
the Decisions of the High Representative were issued. While there
is no escaping the fact that the condition of the Federation and
Republika Srpska pension funds is serious, it is clear that the
BiH authorities of both entities are fully re-sponsible for regular
and fair payments of pensions -- not the International Community.
To ensure the economic viability of BiH it is necessary to eliminate
the gray economy, black em-ployment and the exempted social categories
such as soldiers and police officers, as well as to enforce strict
control mecha-nisms for collecting contributions. It is also imperative
for the government to identify alternative revenue sources for
the payment of outstanding debts of unpaid pension claims. The
Decisions of the High Representative do not address past ar-rears.
Only by starting to implement these measures will it be possible
to utilize new alternative funds, i.e., privatization cash proceeds
and others to be identified.
11. Foreign Trade:
Bilateral Free Trade Agreement with Croatia to Boost Trade
The most significant development in BiHıs efforts to develop
its foreign trade sector has been the signing of a Free Trade
Agreement with Croatia, its dominant trading partner. Originally
scheduled for signature at the Zagreb Summit in November, the
treaty was stalled by Croatian reservations concerning a proposed
new BiH tariff schedule. Following additional negotiations, the
BiH Ministry of Foreign Trade and Economic Relations agreed to
withdraw this proposal and retain the existing schedule. Both
industrial and agricultural products are included in the agreement,
slated to enter into effect on January 1, 2001. Bosnian products
imported into Croatia will be immediately exempt from duties,
while Croatian imports into Bosnia will be reduced by 30 percent
in 2001 and be gradually eliminated by 2004. Officials express
the hope that this agreement will reverse the decline in commercial
exchanges over the past two years. In addition to the bilateral
agreement, in November the BiH Council of Ministers adopted the
basic BiH negotiating position for its membership application
to the World Trade Organization. An observer since 1999, the Government
will now assume a more active posture in the application process,
although no target date for membership has been announced..
12. Privatization
of Enterprises Proceeding Apace
In both Entities, the enterprise privatization process has finally
gathered momentum after a long period of uncertainty and delay.
Small scale privatizations have progressed with approximately
200 companies sold through auctions, tenders or direct sales in
the FBiH and approximately 80 companies sold through auctions
and direct sales in the RS. This means that, so far, about two-thirds
of the small scale companies have been sold in the FBiH and one-third
in the RS. Considering that direct sales are always possible after
other methods have failed, it is expected that the privatization
of this type of companies would be completed by mid-2001 in both
Entities. This also means that among the companies that will not
find investors, many will have to be liquidated and their assets
sold separately. In the group of large scale enterprises, the
pace of privatiza-tion has definitely been slower and only 12
companies have been partly privatized in the RS and 70 in the
FBiH to date. This is due to:
a) the complex mix of vouchers (RS), claims (FBiH) and cash
to be used for the acquisitions;
b) the diffi-culty of finding key solid investors ready to support
the ex-pansion phase of the company after privatization;
c) the uncer-tainty concerning the existing company liabilities
and their evolution in time;
d) the virtual absence of local banking in-stitutions ready
to provide the necessary credit or capital de-velopment after
a takeover. Within the group of large scale enterprises a category
of strategic large corporations has been created in order to attract
possible foreign investors. They are designated as IAGP (In-ternational
Advisory Group on Privatization)
Tender List companies in which international advisors have been
(or will be) actively preparing the prerequisite financial and
legal struc-tures for an equitable privatization. There are 52
such corpora-tions in this list in the RS and 86 in the FBiH at
the mo-ment. Together, these companies represent approximately
two-thirds of the potential country privatization proceeds and
there-fore require the greatest attention. The recent introduction
of Private Investment Funds (PIF) in both Entities should be a
decisive step toward creating a financial liquidity indispensable
for the proper functioning of a market economy. The PIFs play
a key role by grouping the interests of small voucher- (RS) or
claim- FBiH) bearers and enabling them to become shareholders
of the newly instituted investment bankers (or rather portfolio
managers) at this stage. So far, about 6 PIFs in RS have managed
to meet the re-quirements for operating and 9 in FBiH.
13. Economic Data
BiH for 3rd Quarter 2000
Source: RS and FbiH Statistical Offices
| Indicator |
Federation of BiH |
Republica Srpska |
Index of Industrial Production
1-9/2000 compared to av.of 1999
1-9/2000 compared to 1-9/1999 |
+ 5,0 %
+ 10,1 %
|
+ 4,0 %
+ 7,0 %
|
|
Retail Price Index
1-9/2000 compared to av.of 1999
1-9/2000 compared 1-9/1999
|
+ 0,9 %
+ 0,6 %
|
+ 11,0 %
+ 13,0 %
|
Average Net Salary 9/2000
Average Gross Salary 9/2000
|
428,42 KM
630,03 KM
|
289 KM
405 KM
|
Registered Unemployed
Employment |
265.954 persons
412.767 persons
|
154.656 persons
(data not available) |
No. of pensioners
Average pensions |
273.728 persons (9/2000)
177,33 KM (9/2000) |
169.822 persons (4/2000) 145,06 KM (4/2000) |
Imports 1-9/2000
Exports 1-9/2000
Trade deficit 1-9/2000
Import/Export coverage
|
3,2 billion KM
0,9 billion KM
2,3 billion KM
28 %
|
1,3 billion KM
0,5 billion KM
0,8 billion KM
38 % |
The Agency for statistics of Bosnia Herzegovina released recently
the Statistical Bulletin 3/2000, which gives an extensive overview
on the Gross domestic product of BiH of 1996 to 1999.
| |
1996 |
1997 |
1998 |
1999 |
| Gross Domestic Product of BIH, current prices in million
KM |
4,192 |
6,367 |
7,244 |
8,014 |
| Change in percent to previous year |
|
+ 51,9 |
+ 13,8 |
+ 10,6 |
|
