IMF Concerned About High Youth Unemployment Rate

The Executive Board of the International Monetary Fund (IMF) has approved a three-year extended arrangement under the Extended Fund Facility (EFF) in the amount of SDR 443.042 million (approximately EUR 550 million or 167.06 percent of quota) for Bosnia and Herzegovina (BiH) to support the country's economic reform program.

The Executive Board's decision will enable an immediate disbursement of SDR 63.4125 million (approximately EUR 79.2 million), with the remainder to be made available in 11 installments, subject to the completion of quarterly reviews.

Tao Zhang, Deputy Managing Director and Acting Chair, stated that Bosnia and Herzegovina's economic recovery following the global financial crisis is on the right track, with growth reaching 3.2 percent in 2015 despite fiscal consolidation.

- However, income convergence with advanced European economies still lags, and unemployment, particularly among youth, remains at a very high level. The country still faces significant challenges in improving the business climate, enhancing fiscal policy, and preserving financial sector stability. To achieve faster economic growth and create new jobs, greater efforts will be needed to decisively move forward with the structural reform agenda. The recent adoption of labor laws at the entity level is welcome, but continuous progress is needed to strengthen incentives for job creation in the private sector, including by addressing the issue of very high labor taxation.

Redirecting the budget to achieve a more growth-friendly fiscal policy will be crucial, by reducing current spending to make room for much-needed infrastructure investments. The authorities' commitment to reducing public sector employment is appropriate.

Together with improved targeting of social benefits and planned reforms of the pension and healthcare systems, this commitment will contribute to a gradual reduction in the debt-to-GDP ratio. The authorities are working on comprehensive financial sector policies aimed at preserving financial sector stability and reviving bank lending. However, careful monitoring of bank vulnerabilities, while improving the efficiency and effectiveness of bank supervision, including through better coordination and cooperation among regulatory agencies, will be crucial. The Bosnian authorities' program, supported by the Extended Fund Facility, provides a significant opportunity to address challenges in a sustainable manner while preserving macroeconomic and external stability. It will also enable financial support from other international partners.

Economic growth in Bosnia and Herzegovina (BiH) has recently begun to gain momentum, and external and internal imbalances have eased. In 2015, growth exceeded 3 percent despite financial constraints that led to stronger fiscal consolidation than expected. However, economic performance in recent years has been insufficient, and since the outbreak of the global financial crisis, growth and income convergence with advanced European economies have lagged. In 2015, the budget was nearly balanced, and the current account deficit narrowed. Inflation was negative, largely reflecting low inflation in the Eurozone, which is transmitted to BiH through the currency board arrangement.

High youth unemployment, as well as long-term unemployment, which fuels emigration, is particularly concerning. The quality of the business environment is below average, and over the past two decades, Bosnia and Herzegovina (BiH) has lagged behind other countries in the region in implementing structural reforms that contribute to stronger growth. Short-term economic prospects are relatively positive. In line with the recovery of economic activity in the region, growth is expected to remain at 3 percent in 2016, as public investment recovers after financing and implementation problems in 2015.

As the recovery in Europe continues and structural reforms are successfully implemented, growth could increase to 4 percent in the medium term. Prices are expected to continue to fall in 2016, with a slight increase in inflation in later years. After reaching its highest level in 2017, the current account deficit is expected to decrease in the medium term. In 2015, the authorities adopted a comprehensive Reform Agenda that promises the most significant shift in BiH's economic direction since the Dayton Agreement. The Agenda builds on lessons learned from past experience, particularly the need to improve labor market functioning and the structure of government spending. It also emphasizes the need to harmonize rules and regulations and improve coordination within governments. The international community has pledged financial and technical assistance to support the decisive implementation of the Reform Agenda. Over the past year, all governments have prepared action plans and taken significant steps in their implementation.

Program Summary

The new three-year program supported by the IMF aims to address BiH's medium-term balance of payments needs, and the availability of IMF financial resources will allow capital expenditure to no longer decline. The program will also support policies to strengthen economic potential and maintain macroeconomic stability. The three main objectives of the program are: Structural Reforms: Increase the economy's growth potential and stimulate private sector employment by intensifying structural reforms that improve the business environment and attract investment. Fiscal Policy: Improve the structure and quality of public spending, while gradually reducing the level of public sector debt. Financial Sector: Revive the lending activity of the banking sector, while preserving financial stability through financial sector reforms. The arrangement will also help improve coordination and cooperation among BiH authorities to strengthen the single economic space.