Bosnia and Herzegovina From Recovery to Sustainable Growth

124 Pages·5.6 MB·English

Bosnia and Herzegovina
FromRecoverytoSustaimibleGnM't/i
AWORLDBANKCOUNTRTSTUDY
Bosnia and Herzegovina
FromRecoverytoSustmnabkGrowth
TheWorUBank
Washington,D,C.
Copyright©1997
TheInternationalBankforReconstruction
andDevelopment/THBWORLDBANK
1818HStreet,N.W.
Washington,D.C.20433,U.&A.
Allrightsreserved
Mam^MrturedinfiieUnitedStatesofAmerica
RxstprintfaigMay1997
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Coveri^iotographsbySFORphotogn^herinBosniaandHerzegovixuL
ISSN:0253-2123
LibraryofCongressCataloging-in-PublicationData
Bosniaapn.dHcemr.z—ego(vAiWnoarl:dfrBoaimirkeccoouvnetrryytsotsuudsyt)ainaiilegrowth,
Includesbibliographicallefennoes.
ISBN0^213^922-2
1.Bosniaa—ndHerzegovina—economicpolicy. 2.Bosniaand
-HReerczoengsotvriuncationE—coBnoosmniicacaonnddiHteiroznes.govi3.naY.ugoLslWaovrWladr,Ba1n9k9,1-
n.Scries.
HC402.5.B665 1997
338.949742—dc21 97-3134
cn>
1•1•1•
Contrato
Preface vU
Abstract ix
Acknowledgnwiits xi
AbbreviatiouandAcronyaif xii
ExecutiveSummary xiii
PartOne: BuildingaFrameworlEforMao-oeconomicMjuu^meat 1
Chapter1: RecentDevelopmentsandChallengesfor
MacroeconomicManagement 3
TheWarBroughtNear-TotalEconomicCourse: 1992-93 3
liilllilkinofRccoMlroctktitftoguuuStartedEooaomlcRecovcfy: 1996..................... .6
FatarcEflbrtsSboaldFocosonBuildingComniCMiTnititntioMandSrotfahwWePoHciei 8
ChapterII: MonetaryInstitutionsandPoliciesforPostwarStability 9
TheNewCentralBankWillFunctionasaCurrencyBoard 9
TheCqtrency-BogdAmmgementCreatesSeveralChallengei 10
UidfyfaigtihePlQraMntsSystemIsEssential 12
ChapterHI: FiscalManagementandPolicy 13
FiscalDevelopmentsin1996 14
BspeaatoreandTaxPoliciesMtoBeRefonnedtoAddeveSostiinsble
FiscalManagement , 16
ThreeStepsAreRequiredtoEstablishaViableInstitutionalFramework
forFiscalMnagameot :....22
ChapterIV: ExternalDebtManagement 31
DaytonAgreementLaidOutaBroadFrameworicforExternalBorrowing 31
SettingUpaNewDebt-ManagementSystemattheStateLevelIsCritical 34
ChapterV: ForeignTtradeandCnitomsAdmiiiiitratioB 35
CreatingaLiberalandTransparentTradeRegimeIsaHighPriority 35
TheTwoEntitiesHaveAdoptedDifferentPoliciesandProcedures .........36
TradePoliciesMmtBeRefaa^ratedandRefanned 37
iv
PartTwo: MovingTowardAMarketEconomy 39
ChapterVI: PrivatizationandPrivate-SectorDevelopment 41
TheWarHadFarReachingEffectsonIndustiy 42
PrivadziiigEnterprisesandRedefiningtheGoveniment'sRole 43
HieBosinenEnvironmentNeedsToBebqnoved 48
ChapterVII: RestructuringandPrivatizingtheBankingSector 51
BankingSectorisInsolventandDominatedbySocialOwnership 53
RestractnriogsodPrivatizingBanks 58
MainbaMsaadOiaUeogBSintheIndiumTern. 62
PartThree: CreatingFiscallySustainableSocialAssistancePrograms 65
ChaptarVni: Labor-MarketReform 67
LaborMarketSuffersfromtheWar:uidTooManyRestrictiaas. 67
PromotingEnqiloymentGenerationbyLiberalization 71
ChapterK: SocialProtectionPrograms 75
TheSocialSafetyNetMustBeRestnicttned 75
OldAge,Disability',andSurvivorPensionsAreUnsustainable 76
EnsuringMinimumPensionandBetterTargeting
Shoit'TennPrioritiesforPensionRelbnu 79
SustainableHealth-CareFinancingRequiresaNewApproach 81
SocialAssistanceProgramsShouldBeReexaminedandRestructured 83
PartFour; RebniidingEsientialPiiysicalInfrastructure 85
ChapterX: Power,Transport,andTelecommunications 87
InfirastnictureSectorsShareSeveralWeaknesses 87
RebuildmgthePowerSector 90
DevelopingaNewTransportationSystem 92
BuildingViableTeleconununicationsInfiastructuie 94
PartFive: NormaliaingExternalFlowsOvertheMediumTerm 97
ChapterXI: Medinm-TermEconomicOutlookandExternal
FinancingRequirements 99
TheMacroeconomicOutlook; ProspectsforGrowth 99
ExternalFinancingRequirementsAreEnormous 101
TheExtenialDebtProblemMustBeAddressed 101
AaBhislntiveScenarioforExternalFinandng 102
Bibliography 105
Map: IBRDNo.28578
Copyrightedmatsrial
V
listofTables,Figures,andBoxes
TABLES
1.1 MainEconomicIndicators: Pre-Dayton 4
1.2 EamoinicTrendsiniheFederation,1996 7
1.3 EconomicTrendsinRepublikaSrpska,1996 8
3.1 FiscalRevenuesinBosniaandHerzegovina,1995and1996 14
3.2 FiscalExpoiditaresinBosniaandHoTi^ovina,1995and1996 15
3.3 RecommendedAssignmentofPublicFunctions 26
3.4 SummaryofSuggestedTaxAssignments 29
5.1 SimpleAverageTariffRateintheEntitiesofBiH,end1996 36
6.1 BosniaandHerzegovina: IndustrialStiuctlire,1990 41
6.2 PrivatizableEntoprisesbyCanton 44
7.1 ProfileofBosniaandHerzegovina'sBankingSystem,1996 54
7.2 EstimatedImpactofWriteoffsontheBankingSystem 57
8.1 LaborMaricetIndicatorsinBosniaandHerzegovina 68
9.1 KeyPensionSystemIndicators 77
9.2 IndicatorsofPensionSystemFinances: JanuarytoSq)ten)ber1996 78
11.1 SelectedKeyEconomicIndicators:1990-2005 100
11.2 EstimatedExternalDebtbyCreditor,end-1995 101
11.3 ExternalHnandogRequirements:1995-2000 104
FIGURES
3.1 InternationalComparisonofPayrollTaxRates,mid-1990s 21
3.2 BosniaandHerzegovina:FiscalStructure 25
6.1 TimetablefortfieImplemoitationofPrivatizationintheFederation 46
8.1 AverageMonthhNetWageinBosniacArea,Dec.1991-Oct.1996 70
8.2 BoaiiaandHerzegovina; PrewarRealWageIndex,1976-1990 70
9.1 BosniaandHerzegovina:PeosicmDependencyRatios,1975-91 77
BOXES
1.1 BosniaandHerzegovina'sPrewarEconomy 5
3.1 PrivatizationandResolutionofOutstandingClaims 19
3.2 RevenueneutralTaxReform 20
3.3 FiscalStructureunderdieDaytonAgreement 23
4.1 BosniaandHerzegovina: ConstitutionalProvisionsonExtenialBomnving. 31
6.1 ChallengesinDealingwithLargeConglomerates 47
10.1 IncreasingRevenuesinUtilitySectois. 88
10.2 TheCommissiononPublicCorporations 89
10.3 InfrastructureConcessionstothePrivateSector 90
10.4 ElectricityTariffsinBosniaandHerzegovina 91
10.5 OrganizationoftheRailways 94
10.6 TariffsforLocalCalls 95
Copyrightedmaterial
vii
Preface
BosniaandHerzegovinahasexperienceditsfirstyearofpeaceandthebeginningsof
political,economic,andsocialrecovery. WhilelifeisstilldifficultformanyBosnianfamilies,
tiieleoonstnictioiiefibithasalreadybornesignificantfiuit Eomomicgrowdiin 1996has
reached50percent,andunemployment,ahfaougjhpainfullyhighatoverSOpercent,hasdeclined
from itspostwarhigh of90 percent. Many schools and health clinics have reopened, and
Sar^evoairportonce again beganlimitedcommercial operations. Repairstoinfrastructure,
essentialtoeconmnicrevival,areunderway,andconunereeispiddi^iqs,wiftthehelpofdonoi^
financedlinesofcredit. Finally,theestablishment,inJanuary1997,oftheCouncilofMinisters
andtheEntitygovenunentsisanimportantmilestoneontheroadtoastablepoliticalfuturefor
thecountry.
Whilethesesuccessesareencouraging,thechallengein1997istobuilduptheDayton-
mandatedinstitutionsandtomaketheeconomicrecoverysustainable BosniaandHerzegovina
mustgraspthisopportunitytobecomeatrulypeacefulcountry,opentoEuropeandwithafree
madcBttfiatcantkbxprosperityandabetterlifeforallitscitizensandensurefinsedomof
religiousandculturaltraditions.
Prosperityandcreditworthinessarestilladistantvision,butonethattheexperienceof
otterpostwarcountriesdiowsusiswittinreach,wittstronginternationalsiqqxntandsound
domesticpolicies InBosnia,theremustbegoodcooperationbetweentheEntities,rapidand
effectiveinstitution-building,goodmacroeconomicmanagement,andsustainablesectorpolicies.
The international community, in turn, mustprovide adequate, well-coordinated, and timely
assistanceonconcessionaltrams.
Whiletherewillbeupsanddownsinanypeaceprocess,thefactthattangiblebenefits
havealreadyreadiedthepeopleofBosniaandHerz^ovinagivesustcsihopeandenergyforthe
future. HieWoridBanklenuunscommittedtoIfaetaskofmakingpeacesustainablendof
helpingcreateabetterandmoreprosperousfutureforallttepeoplesofBosniaandHeraegovina.
ChristineWallich
CountiyDirector
BosniaandHerzegovina
ix
Abstract
Peace and reconstruction in 1996 dramatically altered the landsc^e ofBosniaand
Herzegovina(BiH)andbroughtmanytangiblebenefitstoitspeople. Sustainingandbroadening
the positive developments ofthe past year will be the key task forthe countiy and the
internationalcommunityin1997-98. TMslepoitlooksattheneaMeimlefimnissuesHvAare
essentialtogeneratingemploymoitandprovidingafinninstitutionalandpolicyfinindatioiifor
reconstruction and sustained economic growth Kc\' areas offocus include policies and
expenditurereforms,includinginstitutionsformacroeconomicmanagement,bankandenterprise
privatization,andpensionsandthesodalsafetynet.
Policies and Institiitinn-huilding for Macroeconomic Management. Bosnia must
maintain its tight fiscal policy through cash-balanced budgets, in spite ofthe expenditure
pressuresarisingfromreconslniction,employmentgeneration,andsodalpolides. Thecuirmcy
boardapproachtomonetarypolicy,mandatedbytheDaytonAgreement,willprovideessential
credibilitytothecash-balancedfiscal polic>. andhelpbuildconfidence inthenew domestic
currencymorerapidly. CreatingtheCentralBankandadoptingviablebudgetsatalllevelsofthe
govenunait are instituticHial prerequisites for macroeconomic management Other key
requiranoits for effective macroeoon(»nic management include a dear assignment of
expenditureresponsibilitiesandtaxesacrossdiflFerentlevelsofthegovernment;unificationof
customstariffsandtradesystemsofthetwoEntities,andinstitutionofaviablemechanismfor
externalborrowinganddebtservice.
Privalizatinn ofEnterprises and Banks. The task ofreconstruction and economic
recoveryinBosniaandHerzegovinaistoovastforthepublicsectortoundertakealone. Akey
requirementforeconcmiicrevival,dierefore,isthetransitimtoaprivate-sectordominatedmaricet
economy. Simultaneouseffortisneededinthreecriticdandlinkedareas: (a)privatizationof
socially-and state-owned assets; (b) developmentofa supportive business environmentfor
existingandnewprivatefirms,and(c)developmentofadisciplinedandcompetitivefiiiancial
sector. TheEntity-4evdgovernmentswillplaytheprimaryroleindwseareas,aMiou^some
cooidinationmechanismsforinter-Entityissuesaredeariynecessary.
ReformsoftheLabor-marketandSocialSafetyNet. Unemploymenttiiroughoutthe
countiyisextremelyhighandwill,intheshortterm,remainsoinfaceofagrowingnumberof
demobilized soldiers and returning refiagees. Public policy should focus on encouraging
employmentbyreducinghightaxesonlabor,stimulatingthedevelopmentofsmallbusinesses,
andreplacingobsoletelaborHmaiketr^ulationswhichnowdiscourageemployersfiomhiring.
Intheshortterm,availableresourcesarenotsufficienttoprovideunemploymentbenefitsand
other social benefits according to the prewar benefit formula. Direct assistance to the
unemployed,totheoldanddisabled,andtothepoorwillhavetobetaigetedandcoordinated
acrossprograms,sodiattheveiylimitedresourcesareusedtoensureminimumcoverageto
alleviate povertyamong these groups In orderto dotflis,di^trilityforb«iefits mustbe
restricted,therevenuebase shouldbe broadened, andanyrevenuegrowthintheshoitterm
shouldbeusedtoincreaseminimumlevelsofprotection.
xi
Acknowledgments
HiislepoitwaspreparedbyWeiDiagandKhaledSherif,withIfaesiqjpoitofateamofWould
Bankstaffandconsultants. ChristineWallich,Countn'DirectorforBosniaandHenegovina,and
MichelNoel,ChiefoftheCountryOperationsDi\ision.CentralEuropeDepartmentoftheWorld
Baak,providedoverallguidanceontheconceptualizationandorganizationoftheReport. Roiy
O'SuIUvan,IKrectorofiheBank'sRendoitMissioninBosniaandHerzegovina,participatedinkey
meetingsandprovidedvaluablelldptotheteam. OtherWoridBank staffandconsultantswho
contributedsignificant!) tothe report include Sebnem Akkaya, Emily Andrews, Charles Blitzer,
MichaelBorish,XavierDevictor,WilliamFox,AprilHarding,BaitKaminski,SaumyaMitra,Robert
Palados,andSergeiShatalov. AdditionalcontributionswereleoravedfiomPedroRodriguez,Loiena
Alcazar,GeoigeClarice,JohnCrihfield,Andrew Ewing,LukeHaggarty, Ste^Kawalec, Philip
Keefer,RandiRvlerman.andKomelisWalraven. Theteamwouldalsoliketothankthefollowing
individualsfortheirinvaluablecomments: AndrasHorvai.MoniqueKoning,BaelhacyMeighcNib,
andKfaiySiedianofAcWouldBank;SwedervanWijnbetgeaoftiieLondonScfaodofBconiwiics
andIliBUuveraityofAmstetdam,SoottBrown,RussellKiriove,andtiieircolleaguesatllieIMF;
EgbertGerken,ThomasSchillerandGar\'O'CallaghanoftheOfficeoftheHighRepresentative;
AllanJensenoftheEuropeanCommissionCustomsandFiscalAssistanceOffice;DickSklar,the
^ledalRq»esentativeofdiePresidentoftheUnhedStales;USTVeasuiyandUSADDoflBdalsand
advisoisindudingDavkiLqiton,KatieBuddingloo,SonalShah,CiaigBuck,JeanTesdie,Midiad
Maricels,andThomasP.Briggs;JolyDixonandJoanPearceoftheEuropeanCommission,andPaul
MonnoryandJoshuaTanakaoftheEBRD. ErlindaIngUsintheWoridBankwasresponsibleforthe
finalproductionofther^rt
TheBankteamisindebtedtothemanygovemmentofficialsandnongovernmentalexperts
whoprovidedinvaluablehelp. KeyministersandofficialsintheState,Federation,andRepublika
Sipska governments who deserve special thanks include Stijepo Andrijic, Zdenko Aiapovic,
ZbdcoBari^ Envor Badcovid, Mhihamed B^edevid^ Diago Bilandfija, Pero BosniiS, Manif
Bumazovic,ZoranColic,SeadDelic,GojkoDursun,AvdijaFetahovic,SubhijaGavranovic,Fadil
Haveric,SefikaHafisovic,ZlatkoHurtic, IzudinKapetanovic, Mirsad Kikanovic, Novak Kondic,
VinkoKondic,BozoLjubic,MladenLoncar,PetraMarkovic,LjiljanaMarjanovic,HasanMuratovic,
AnkaMusa,KasimOaaiSewt,ObiadPiljak,JadiantoPriid»MaricoPej2inovid,SlavicRakovid,
RadomirSalid,AsimSuvalqa,NevenTomid,MesudSabitDvid,BerinaSelimovid-Mdunedbaiid,
AsfanSakofvid,RadovanSkxiko,andIbsanZolid.
xii
AbbreviationsandAcronyms
I
I
BiH BosniaandHerzegovina
BHL) BosniaandHerz^ovinadinar/Bosniandinar
DM DeutscheMark
CountryEcaaotnicMemorandum
bBKD EuropeanBankforReconstructicmandDevelopment
FRY FederalRepublicofYugoslavia
GDP GrossDomesticProduct
ffiRD lutenutionalBankforReconstructionandDevdopmeut
IMF InteniationalMonetaryFimd
NBBH NationalBankofBosniaandHerzegovina
NBRS NationalBankofRepublikaSrpska
OECD OrganizationforEconomicCooperationandDevelopment
RS RqroblikaSipska
SFRY SocialistFederalRepublicofYugoslavia
USAID UnitedStatesAgencyforInternationalDevelopment
VAT Value-AddedTax
FiscalYear
January1-December31
Copyrighledmaterial