Bosnia and Herzegovina Toward Economic Recovery

100 Pages·4.7 MB·English

Bosnia and Herzegovina
TowardEconomicRecovery
r 1
Bosnia
and Herzegovina
TowardEconomcRecovery
SPrmefpairtemdbBymthkefWoorrlRdKBamn»k,mtHhemEumrioipeDaevneCloompmmiesistiton,andthe
TheWbrUBank
WasUagfoH,D.C.
CopyrightedmateriEil
Copyright©1996
HieInternationalBankforReconstruction
andDevelopment/theworldbank
1818HStreet,N.W.
WaahingtOKVD.C20433.U.&A.
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]SSN:Q2S3-2123
m•••
CONTENTS
Preface v
Acknowlegements vii
AcronymsandAbbreviations viii
Introdnetioa ix
EzecutiyeSnranuury viii
I. BackgroundandRecentDevelopments 1
DescentintoWarandEconomicColl^se 1
TheFedoationisFonnedand SotRqpublkisOmKdklaled 2
TheDayton-ParisPeaceAgreement 4
n. TowardReconstructionandRecovery 9
MeasuringtheDamageandQuantifyingtheReconstnictionProgram 10
PrioritiesandOrganizationofReconstruction 11
EmploymeiitGenention,ReseOkmentofRefugeesamiDemobiliatioa 12
FoodAidandSocialSecurity 13
ProniotingTndeandReactivatingFunctknuqgAssets 15
TheMacioecoiiomicsofEc(MioiiucRecovery 17
III. BuildingaViableStructureforEconomicManagement 20
EvolutionofMoaetaiyandI^scalManagementbetween1992-95 20
BuildingGovenmeatInstittitionswithindieFnmewoikofdie
Dayton-ParisAgreement 28
TowardaViableFiscalStructure 33
rv. TowardSettingupaMarketEconomy 44
NewRolefortheGoveinment 44
EnterpriseandBankingSectorReform 51
v. Medium-TermProspectsandFinancingRequiremails 61
AddressingtheExternalDebtProblem 61
ExternalFinancingRequiremenls 63
MacroeconomicOudo(dc 66
Copyrightedmaterial
.
iv
ListofBoxes
1.1 Territoryandpopulation
1.2 Theprewareconrany
1.3 TheCooBttatioiialdiviskmofgovernmentleqwpgibilities
1.4 PrincyalelementsoftheDayton-ParisPeaceAgreements
ListofTables
3.1 Consdidaled^yvenuneotleveniesin1995
3.2 RecoramendedassignmentoffniblicfimctionsintheFederation
3.3 SummaryofrecommendedtaxassignmentsfortheFederation..
5.1 Estimatedtotalexternaldebtbycreditor;end-1995
5.2 Externalfmancing,1995-2000
5.3 Selectedeconoaiicindicators.1991-20QS
V
Preface
ThisvohimewaspreparedinFdmuuy/March1996asabackgrounddoaimenrofthe
seconddoommeetinginsiq>poitofBoiniaandHerzegovina,heldinBursselson^^iril12-13,
1996.Vlcontainsananalysisoftheeconomicpoliciesandmstinitianalchallengesfacxagthe
peacemakersinBosniaandtheinternationalcommunity.
Despite all tibe difficulties, inchiding die need to clarify re^Kmsibilities. to build
transparentandreliablechamielsfxdieinternationalaideffortanddieneedinBosniatowork
simultaneouslyonreconstruction,reconciliationandtransitiontowardsthemarketeconomy,a
goodstarthasbeenmadeinthefourmonthsfollowingthesigningofthepeaceagreement.
Projects have been designed and negotiated, compromises have been reached between the
variouslevelsofgovernmentssothatresponsibilityandaccountabilitycouldbeclarified,and
terriblydifficultdecisions<mwhatare die highest priorities are beginning to be made.
ReconsttoetkiBinallitsdilnf*fiiffk?ffThasneverhappenedovernight•ndcannotbeachievedina
matterofonlyweeksormonthsinBosnia. Ittookyearsafterotherwars,eveninthemost
successful cases. Reconstruction is different from humanitarian aid because it has to be
sustainable,ithastogeneratehigheconomicreturnsand,ofcourse,itrequiresresourcesofa
largerorderofmagnitude. Thankstostrongsupportfromtheinternationalconununityanda
greateffortIqfBosnianpolicymakers,anddeqritediedifferencesdiattheyarestilltryingto
overcome,agoodstarthasbeenmade. Butitisonfyastart Thiskatialworkwillleadto
realreconstructionoverthecomingmonthsifthepartiesinBosniacanreachcompromisesand
makethenewinstitutionsfunction,andiftheinternationalcommunityreallyfollowsuponthe
pledges made and strongly coordinates the assistance effort so that it can be targeted
strategicallyattheprioritiesidentified. Itisachallengethatcanaixishouldbemet.
Ijointheauthorsinhopingdud:dieirworiccanoontributBtowardspeaceandrecovery
inBosniaandHerz^ovina.
VicePntident
Copyrighledrnaterial
vu
ThereportwasdraftedbyateamofBankstaffandconsultantsledbyWeiDingunderthe
general guidance of Christine Wallich, Acting Director, Central Europe Department, the
WorldBank. MichelNoel,Chief,CountryOperationsDivision,helpedtoconceptualizethe
report andprovided invahiable cmnmenfs on successive dnfls. Tbe report is based oo
discussionswidigovenuneotoflBcialstbatstartedinWarsawinearly 199Sandcoa&medin
BosniaandHerzegovinainthecontextofseveralmissionsforgeneralpolicydiscussions,and
preparationoftheEmergencyRecoveryandStrucmralAdjustmentCreditsoverthecourseof
1995-1996.TheBankteamisindebtedtothemanygovernmentofficialsandexpertsoutsideof
governmentwhoprovidedinvaluablehelp. Governmentofficialsandkeyministersandtheir
staffintheIftate, Federation, andSerbRepublic governmentstowhomspecialdianlBare
owedinchideZtadooBars,Env^ersBackovic,DragoBilandzija,PuarBosnic,BoinaSdimovic-
Mehmedbasic, Despotovic, Gotovusa, Sefika Hafisovic, Zlatko Hurtic, Mimevar
Imamovic, Faruk Ismailbegovic, Izudin Kapetanovic, Mirsad Kikanovic, Novak Kondic,
MladanLoncar, KasimOmicevic, Obrad Piljak, Jadranko Prlic, Slavisa Rakovic, Radovan
Skolko, Bozo Ljubic and Neven Tomic. The Bank staffand consultants include Sebnem
AUaya,EmilyAndrews,MichaelBoriSh,MilanCvikl,WilliamFox,EgbeitGerken,Ulricfa
Ladder, Michael Mertaugji, Pedro Rodriguez, Luis Alvaro Sanchez, and Sweder van
Wijnbergen. The team would also like to thank the EBRD, and the many staffofdie
European Commission, in particular Ed Kronenburg, Joly Dixon and Joan Pearce who
providedbothinputsandadvice. TheteamisalsoindebtedtoScottBrownandothersofthe
IMFforinvaluablecomments. ThephotographonthecoveriscourtesyofWorldVision.
vm
CURRENCYEQUIVALENT
100Bosniandinars—iDeutschemarie
ACRONYMSANDABBREVIATIONS
BH BosniaandHoz^ovina
BHD BosniaandHerzegovinadinar
BIS BankforInternationalSctflements
DM DeutscheMark
EU EuropeanUnion
FRY FedeialRepublicofYugoslavia
GDP Grossdomesticproduct
IBRD InternationalBankforReconstructionandDevdopmeat
IDA InternationalDevelopmentAssociaticm
IFC InternationalFinanceCorporation
IMF InternationalMonetaryFund
JCC JointCivilianCommissian
NATO NorthAtlanticTreatyOrganization
NBBH NationalBankofBosniaandHerzegovina
OECD OrganizationforEconomicCo-operationandDevelopment
RPA RegionalPrivatizationAgencies
SFRY SocialistFederalRepublicofYugoslavia
UN UnitedNations
USSR UnionofSovietSocialistRepublics
FiscalYear
January1-December31
ix
Introduction
ThreemonthsaftathesigningoftheDaytonandParis accords, thebeginnings of
nonmllifearestirringinBosnia,andeconomicrecoveryisbeginning. Compliancewiththe
militaryaspectsoftheaccordshasbeengood. Despiteinitialdifficultiesandinclementwinter
conditions,NATO'sImplementationForcesweredeployedontheground. Thewithdrawalof
thethreeparties' forcesbehindazoneofseparationtookplaceclosetoschedule, asdidthe
removalofheavyweapons. Mostprisonershavebeenexchangedandthedemobilizationof
soldiersisunderway.
Progress has been slower on the civilian side. This is to be expected given the
complexityofthetaskstobeachieved:theorganizationoffreeandfairelections,protectionof
humanrights,establishmentofafairandeffectivepoliceforce, buildingofdemocraticand
phnalisticinstitutioos,returnofdisplacedpersonsandrefugees,andprovisionofhumanitarian
andreoonstcuctiooassistance.
However, much more progress is needed, particularly on job creation, economic
integrationandinstimtio—nbuilding. AworkingFederationhasyettobesetup,andthereis
stillalackofconfidence evennow,twen^-fourmondisafterdieWashingtonagreementsof
March1994'-l)etweenthetwoFederationpartners.WhilethereiseitheraBosniacorBosnian
Croatminisleranddepatymimsterineveryministry,teamworkisstillwanting,andinefifect
theysti—llreporttoseparateconstituencies.Thereisevengreaterlack—oftrustamongthethree
parties the Stateandtwo Entities withinBosniaandHerzegovina andthenq)prochen]ent
withtheSerbRepublichasbeenslow.
FtillreimegratioiiofaUparties,aswellascloserrat^ratimiwithintheFederation,will
likelybealengthyprocess. Thereasonsforslowprogressontheciviliansidearecomplex
andinterlinked. Forexample, theability ofrefugeestoreturntotheirhomes is intertwined
withtheongoingworkofthew—arcrimestribunal. Thedifficultiestodate inestablishinga
FederalCustomsAdministration thelinchpinofaFederationbudget—relateto,amongother
things, thefidhuetohtfegratefbtfederalpoliceand, morefundamentally, to sharepcvwer
withinHacFedeiatixm,andbetweentheFedoationandtheState.Thedifficultiesencountered
inreachingagreementonthejointprovisionofutilitiessuchaswaterandpower, oronthe
reintegrationofroadandrailnetworksreflectasimilarlackoftrustatthelocal andEntity
levels. Perhaps, givenhowrecent, bitter, anddestructivethewarhasbeen, moreprogress
couldnothavebeenexpected.
Whatiscertain is that a stnmgreconstructionefforttbatquickly rebuilds Bosnia's
economic capacities is critical for peace. Only economic progress that visibly improves
peoples' lives will demonstrate thatpeace and reintegration bring more benefits than war.
Fundamental to economic recovery and to peace will be the creation of employment
X
opportunities for those who have been without jobs and hope during the war. Such a
reconstruction effort will however require a strong, concerted effort on the part of the
attemitioiialdonoroommu^
Evenwith stronginternationalsupport, theprocessofreintegrationwillnotbeeasy,
andtheinternationalcommunitymustbeawareofthedifficultiesandrisksthatlieahead. As
therecentexperienceoftheWestBankandGazashows,therewillbeupsanddownsinthe
peaceprocess.ToexpectotherwiseinBosniawouldbeunrealistic. Still, thereisnorealistic
alternativeto'act^vedonoirsappoit.WMwiitaconcerteddoomrefiforttfaerecanbenohopefor
ieo(»struction, econofnicrecovery, orreconciliation. Widioutadurablepeace, Bosniawill
remaintroubled andpotentiallyunstable, andblighttheproqsectstotapeaioefulfutureand
economicprogressforallcountriesintheBalkanregion.
TheWorldBaidc,incoopoationwiththeEuropeanUniooandodmmuhOaieialand
bihrteralagencies,beganitswoikonBosniaandItozi^govinainthespringof199S,whenit
initiated discussions withthe Republic ofBosnia and Herzegovina and the Federation of
Bosnia and Herzegovina on a range ofeconomic policy issues, including the needs for
reconstruction of war damages, institution building, and economic reforms. Discussions
followed, later, with the Serb Republic. Two reports were prepared, "Bosnia and
Herzfig(Mna:PrioritiesforRecoveryandGrowth,*and*BoBuaandHerzegovina:Priorities
forRecoveryandGrowtit—SectmaiAnnexes,''andpresentedtodieFirstDonorsConference,
heldhiBrusselsinDecember1995andchairedjointlybydieWorldBankandtheEuropean
UmoiL
SincethentheBankandthe£UhaveopenedfieldofficesinSarajevoandstartedto
provide conoete financial sappoA to the reconstcuction efSnt on tbt ground, in close
cooperationwithotherdonors.OnApril1,diemembershq)ofBosniaandHerzegovinainthe
World Bank, IDA and IPC was announced, effective February 25, 1993, the date of
successiontothemonbershipoftheSPRY.
Thispieseotreport,preparedfbrdiesecondDonors'Conferencejointlysp(»soredby
theEuropeanUnionanddieWorid BankmApril, 1996, serves twopurposes. Fhst, it
provides a frameworkforunderstandingdiechallenges facingBosniaintbecriticalperiod
aheadas itseekssimultaneouslytoreconstructitsdevastatedeconomy, strengtheneconomic
management, andundertakethetransitionfromsocialismtoamarketeconomy. Second, it
providesbackground informationonthenew State andEntity structures thathaveemerged
since the signing ofthe Dayton and Puis accords; it provkles an update on Bosnia's
maooeconomic situation, policies, and recmteconomic performance; and outlines poliqr
optionsforstructuralreformsinthepublicsectorandintheenterpriseandbankingsystems.
While this report presents a comprehensive view of the challenges facing the Bosnian
authoritiesoverthenextthreeyears,italsoacknowledgestheconsiderabledifficultiesfacedin
Copyrrghledmaterial