IMF demands limiting public sector wage growth, avoiding extraordinary pension increases, and raising interest rates

(Patria) - The International Monetary Fund (IMF) has requested Bosnia and Herzegovina to halt wage and pension increases in order to curb inflation.

It demands a halt to public sector wage growth as well as the minimum wage increase.

"It is necessary to curb expansionary fiscal policy in 2023 to limit inflationary pressures and financing needs. Given the limited monetary policy instruments, fiscal policy must be used to fight inflation by limiting current spending. The authorities should identify possible savings in current spending for 2023 and avoid reducing already low public investments that contribute to growth.

With spending on wages and pensions already among the highest in the region, public sector wages should be limited and extraordinary pension increases avoided. If inflationary pressures intensify, the authorities should consider reversing the public sector wage increases from 2022-23.

In the coming period, a review of public sector employment and wages would help identify redundancies and reduce wage spending. A dividend tax could help mobilize additional revenue. IMF staff see a need to return to a fiscal surplus in the medium term, but could also support a more gradual reduction of the fiscal deficit from 2024 onwards, provided that this allows for higher capital spending and social benefits," the IMF report states.

The IMF also demands an increase in interest rates, although the banking sector is stable, as well as an increase in electricity prices.

Part of the report also criticizes anti-corruption reforms in Bosnia and Herzegovina, which are stalled, while public perception of corruption continues to worsen in a situation of a complex political and legal system, entrenched patronage networks, and generally low accountability.

"Weak institutional solutions and laws, as well as weak implementation of measures, hinder the independence and effectiveness of anti-corruption and anti-money laundering agencies and facilitate money laundering of proceeds from corruption," it states.

The authorities should prioritize amendments to laws aimed at strengthening the framework for combating conflicts of interest, access to information, and preventing money laundering and terrorist financing in line with international standards and best practices, but also ensure greater independence and integrity of the judiciary and prosecution. They should also improve supervisory activities in the area of preventing money laundering and terrorist financing by strengthening measures for identifying and monitoring politically exposed persons and focusing on the transparency of obligated entities. Efforts to investigate and prosecute high-level corruption and money laundering cases need to be strengthened, including by prioritizing digitalization and interconnection of relevant registers and databases.

BiH needs a more competitive and transparent public procurement framework. Public procurement data warns of corruption and indicates that public procurement procedures often lack true competitive conditions. Although on average a high share of the total procurement value in all of BiH is awarded based on competitive procedures, more than half is awarded based on procedures in which only one (45 percent) or two bids (14 percent) participated. BiH lags behind other Western Balkan countries in the share of open procedures by contract value and has the highest level of procurement awarded in procedures with only one bid. Furthermore, bidders are not required to submit beneficial ownership data.