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Bosnia and Herzegovina

Author(s):
International Monetary Fund
Published Date:
April 2004
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I.1. Abbreviations

ABD / HBS

Anketa o budžetu domaćinstava / Household Budget Survey

ASYCUDA

Automated SYstem for CUstoms Data / sistem za obradu podataka u carinskim upravama

BAC

Bussiness Environment Adjustment Credit / Kredit za prilagođavanje poslovnog okruženja

BEEPS

Business Environment and Enterprise Performance Survey / Anketa ocjene poslovnog okruženja i konkurentnosti kompanija (u zemljama u tranziciji)

BH JŽK

Bosanskohercegovačka javna željeznička korporacija / BiH public railroad corporation

CAFAO

Customs and Fiscal Assistance Office / Ured za pomoć pri carinskim i poreskim

CEE

Central and East Europe / Zemlje Centralne i Istočne Evrope

CERD

Committee on the Elimination of Racial Discrimination / Konvencija o eliminaciji svih oblika rasne diskriminacije

CIPS

Citizens Identity Protection System / Projekat izdavanja osobnih dokumenata

CORINE

Program EU

CRC

Children’s Rights Convention / Konvencija o pravima djeteta

CRA

Communications Regulatory Agency / Agencija za regulative komunikacija

CRPC

Commission for Real Property Claims of Displaced Persons and Refugees / Komisija za imovinske zahtjeve raseljenih lica i izbjeglica

CSR

Centar za socijalni rad / Centar for Social Work

CTF

Consultative Task Force / Konsultativno radno tijelo

DERK

Državna regulatorna komisija za električnu energiju / State Regulatory Agency for Electricity

DEI

Direkcija za evropske integracije / Directorate for European Integration

DFID

Department for International Development / Odjel za međunarodni razvoj Vlade Velike Britanije

DOT

Digital Opportunity Task Force / Radne grupe za digitalne mogućnosti

EBRD

European Bank for Reconstruction and Development / Evropska banka za obnovu i razvoj

EC

European Commission / Evropska komisija

EEA

European Economic Area / Evropski ekonomski prostor

EIB

European Investment Bank / Evropska investicijska banka

ESI

European Stability Initiative / Evropska inicijativa o stabilnosti

EUPM

European Union Police Mission / Policijska misija Evropske unije

FAO

Food and Agriculture Organization / Organizacija za hranu i poljoprivredu

FDI

Foreign Direct Investments / Direktne strane investicije

FIAS

Foreign Investment Agency Services / Savjetodavna grupa za strane investicije

FIPA

Foreign Investment Promotion Agency / Agencija za promociju stranih investicija

FTA

Free Trade Agreement / Sporazum o slobodnoj trgovini

GDP

Gross Domestic Product / Bruto domaći proizvod

GDLC

Global Distance Learning Center / Globalni centar za učenje na daljinu

GIS

Geography Information System / Geografski informacioni sistem

GTZ

Deusche Gesellschaft fur Technische Zusammenarbeit

HDI

Human Development Index / Indeks ljudskog razvoja

IBHI

International Bureau for Humanitarian Issues / Međunarodni biro za humanitarna pitanja

ICAO

International Civil Aviation Organization

IC/MZ

International Community / Međunarodna zajednica

I(C)T

Information-(communication) technologies / Informaciono-(komunikacijske) tehnologije

ICVA

International Council of Voluntary Agencies / Međunarodno vijeće volonterskih organizacija

IDA

International Development Agency / Međunarodna razvojna agencija

IGA

Investment Guarantee Agency / Agencija za garanciju investicija

IGTF PAR

Inter – governmental Task Force for Public Administration Reform / Vladina radna grupa za reformu javne uprave

ILO

International Labour Organization / Međunarodna organizacija rada

IMAS

International Mine Actions Standards / Međunarodni standardi za uklanjanje mina

IS

Informational Society / Informatičko društvo

ISP

Internet servis provajder / Internet service provider

LSMS

Living Standard Measurment Study / Anketa o ispitivanju životnog standarda

MBA

Master in Business Administration

MDG

Millenium Development Goals / Milenijski ciljevi razvoja

MG

Monitoring groups / Monitoring grupe

MIGA

Multilateral Investment Guarantee Agency / Multilateralna agencija za garanciju investicija

MOU

Memorandum of Understanding / Memorandum o razumijevanju

MTEF

Middle-Term Expenditure Framework / Srednjoročni okvir rashoda

MVTEO/MFTEO

Ministry of Foreign Trade and Economic Relations / Ministarstvo vanjske trgovine i evropskih integracija

NGO/NVO

Non-government Organizations / Nevladine organizacije

NHDR

National Human Development Report / Izvještaj o humanom razvoju

NEAP

National Environment Action Plan / Nacionalni akcioni plan u oblasti zaštite okoliša

NEHAP

National Environment Health Action Plan / Nacionalni akcioni plan u oblasti zdravstva

NISP

National Information Society Policies / Nacionalne politike o informatičkom društvu

NORAD

Norvegian Agency for Development Cooperation

OECD

Organization for Economic Cooperation and Development / Organizacija za ekonomsku saradnju i razvoj

OHR

Office of the High Representative / Ured Visokog predstavnika

OSCE

Office of Security and Cooperation in Europe

PDV

Porez na dodanu vrijednost / Value Added Tax (VAT)

PIC

Peace Implementation Council / Vijeće za implementaciju mira

PIF

Privatization Investment Fund / Privatizacijski investicioni fond

PIU

Project Implementation Unit / Jedinica za implementaciju projekta

PRSP

Poverty Reduction Strategy Paper / Srednjoročna razvojna strategija BiH

REFA

German Association in charged for organization and development of enterprises/Njemačko Udruženje koje se bavi organizacijom i razvojem preduzeća

SAA

Stabilization ad Association Agreement / Sporazum o stabilizaciji i pridruživanju

SAP/SSP

Stability and Association Process / Proces stabilizacije i pridruživanja

SEED

Southeast Europe Enterprise Development

Sida

Swedish International Development Corporation Agency

SMEs/MSP

Small and Medium Enterprises / Mala i srednja preduzeća

SOR

Srednjoročni okvir rashoda / Middle-Term Expenditure Framework

SOTAC

Social Sector Technical Assistant Credit / Projekat tehničke pomoći za socijalni sector

TI BiH

Transparency International BiH

TTI

Transport Training Institute / Institut za transportni trening

UNDP ICT

Forum United Nations Development Project Information communication Technologies / Forum UNDP-a za informaciono-komunikacijske tehnologije

UNMAC

United Nations Mine Action Center / UN-ov centar za uklanjanje mina

UPOV

The International Union for the Protection of New Varieties of Plants / Međunarodna organizacija za zaštitu biljnih vrsta

VAT/PDV

Value Added Tax / Porez na dodanu vrijednost

VE

Vijeće Evrope / Council of Europe

VM

Vijeće ministara BiH / Council of Ministers BiH

WTO

World Trade Organization / Svjetska trgovinska organizacija

WG

Working groups / Radne grupe

WHO/SZO

World Health Organization / Svjetska zdravstvena organizacija

WTO

World Trade Organization / Svjetska trgovinska organizacija

I.2. THE GENESIS OF THE BiH MEDIUM-TERM DEVELOPMENT STRATEGY (PRSP)

The preparation of the BiH Medium-Term Development Strategy (PRSP) started in April 2002 and lasted approximately eighteen months. The preparation of the strategy was initiated by the previous governments, which developed its two earlier versions, while the final text was defined by the present governments. BiH Council of Ministers, Federation Government and RS Government adopted the final version of the Strategy. BiH Presidency also extended its support to the final version of the strategy, while BiH Parliament emphasized its support for implementation phase and requested from BiH Council of Ministers every six months to submit a progress report of the status of implementation of PRSP.

The long duration of the PRSP preparation was the result of the determination of the BiH Council of Ministers and the two entity governments to develop the strategy in consultation with the civil society and other segments of the public. To this end, over 300 round tables were held around the country, with several thousand participants. Three drafts of the PRSP were submitted for public debate, and in keeping with this three cycles of public consultations were organized. All three drafts of the strategy were presented to the competent committees in the BiH Parliamentary Assembly and to the entity parliaments. The media campaign was organized to inform the citizens with the drafts of the strategy and to encourage them to participate in public debates and in this way contribute to the definition of final priorities.

The government structures at all levels led the preparation of the BiH Medium-Term Development Strategy. The Coordination Board for Economic Development and EU Integrations, composed of the Chairman of the BiH Council of Ministers (as the Board’s Chair), BiH Minister of Foreign Trade and Economic Integrations, BiH Minister of Finance and Treasury, BiH Minister of Foreign Affairs, prime ministers of both entities, finance ministers of both entities, the Director of the BiH Directorate of European Integrations and the Mayor of the Brčko District. The Coordination Board was in charge of defining the final priorities on the basis of the debates conducted and of the results of the activities of the working groups. During the preparation phase, the Coordination Board met 18 times. The task of technical coordination of the strategy’s preparation was entrusted to the Office of the BiH Coordinator for Preparation of PRSP and to entity PRSP preparation offices.

Definition of proposals of priorities and of the strategy itself was the task of 20 working groups, composed of the representatives of the Council of Ministers and of the entity governments, as well as of the lower levels of government (Brčko District, cantons, municipalities). The working groups covered the following sectors: macroeconomic and fiscal framework, business environment, privatization, financial sector, labor market, the combat against corruption, foreign trade regime, public administration reform, statistics, education, social protection, health care, agriculture, forestry, water management, environment, infrastructure, energy, information technologies, mine action and industry.

In keeping with the decision of the BiH Council of Ministers that the PRSP was to be developed through broad public consultations, the working groups included representatives of the non-governmental organizations from both entities, as well as business associations. A particular emphasis was laid on involvement of the youth organizations from around the country. The young people demonstrated a very keen interest and took an active part in the development of the strategy, and the same was the case with the trade unions from both entities. The representatives of foreign investors in our country also contributedt to the preparation of the strategy through their association. Involvement of the representatives of civil society into the work of governmental working groups for the preparation of the PRSP provided an opportunity to this organizations to directly influence the definition of priorities.

The preparation of the PRSP required active engagement of the scholars and experts. To this end, the Council of Scholars for the Preparation of PRSP was established, chaired by the chancellors of the Sarajevo and Banjaluka universities. The Council was composed of 22 eminent scholars from universities around the country. The task of the Council of Scholars was to provide expert support to working groups in the development of priorities, through expert reviews, participation in the deliberations of the working groups, participation in public debates and providing advice. In addition to the scholars, a 28-member expert team was formed with the task to perform research for the need of the working groups, collect the statistical data, revise the drafts and, together with the scholars, provide advice concering definition of priorities.

In view of the necessity to secure additional donor funds for the implementation of the PRSP, representatives of donors and international organizations were consulted during the preparation of the document. It is, however, pertinent to note that the representatives of international organizations took no part in the work of the working groups.

A total of 213 representatives of governments at all levels, civil society representatives, scholars and experts participated in the process of defining the priorities of the BiH Medium-Term Strategy. It is important to note that only local scholars and experts were involved and that the strategy represents the product of domestic institutions and domestic expertise.

Bearing in mind that the preparation of the strategy was initiated by the previous governments, and that it was completed by the new governments, as well as the fact that local scholars, experts and civil society representatives were involved, that extensive public consultations were held, with the involvement of the parliaments, PRSP should rightly be seen as not only the strategy of the governments in BiH, but of the entire society of Bosnia and Herzegovina, which had been the goal from its very inception.

In this respect Section I.3. of the Strategy contains a list of all 216 Members of the Coordination Board, of PRSP Teams, Working Groups, Academic Advisory Board and Team of Experts who directly participated in preparation of the BiH Medium Term Development Strategy – PRSP.

I.3. List of Members of the Coordination Board, of PRSP Teams, Working Groups, Academic Advisory Board and Team of Experts Who Participated in Preparation of the BiH Medium Term Development Strategy – PRSP

Members of the Coordination Board for Economic Development and European Integrations:

  • 1. Adnan Terzić, Chairman, BiH Council of Ministers
  • 2. Dr. Ahmet Hadžipašić, FBiH Prime Minister
  • 3. Dr. Dragan Mikerević, RS Prime Minister
  • 4. Dr. Mladen Ivanić, BiH Foreign Minister
  • 5. Ljerka Marić, BiH Minister of Finance and Treasury
  • 6. Dragan Doko, BiH Minister of Foreign Trade and Economic Relations
  • 7. Osman Topčagić, Director, BiH Directorate for European Integrations
  • 8. Dragan Vrankić, FBiH Minister of Finance
  • 9. Branko Krsmanović, RS Minister of Finance
  • 10. Branko Damjanac, Mayor, Brčko District
  • Representatives of the BiH Council of Ministers and of other state-level institutions:
  • 11. Orhan Pašalić, Office of the Chairman of the BiH Council of Ministers
  • 12. Dragana Tadić, BiH Ministry of Foreign Affairs
  • 13. Dušanka Basta, BiH Ministry of Foreign Trade and Economic Relations
  • 14. Šefik Rizvanović, BiH Ministry of Civil Affairs
  • 15. Mario Nenadić, BiH Ministry of Human Rights and Refugees
  • 16. Medžid Lipjankić, BiH Ministry of Human Rights and Refugees
  • 17. Jusuf Kumalić, BiH Ministry of Finance and Treasury
  • 18. Maja Križanović, Directorate for European Integrations
  • 19. Saša Leskovac, Office of the State Coordinator for Public Administration Reform
  • 20. Jakob Finci, BiH Agency for Civil Service
  • 21. Jozo Bagarić, BiH Veterinary Office
  • 22. Darvin Lisica, MAC BiH
  • 23. Sahrudin Sarajčić, BiH Statistics Agency
  • 24. Dr. Hasan Zolić, BiH Statistics Agency
  • 25. Slava Popović, BiH Statistics Agency
  • Representative of the BiH Central Bank
  • 26. Dragan Kovačević, Vice Governor of the BiH Central Bank
  • PRSP offices
  • 27. Zlatko Hurtić, BiH Coordinator for PRSP
  • 28. Srećko Bogunović, RS Coordinator for PRSP
  • 29. Marinko Božić, FBiH Coordinator for PRSP
  • Members of working groups at the level of the entities and Brčko District
  • 30. Adila Hodžić, FBiH Ministry of Labor and Social Policy
  • 31. Adnan Pašalić, Brčko District
  • 32. Ahmed Duranović, FBiH Ministry of Agriculture, Water Management and Forestry
  • 33. Aida Bogdan, RS Ministry of Economic Relations and Coordination
  • 34. Aleksandar Kosić, MAC RS
  • 35. Aleksandra Simić, RS Ministry of Finance
  • 36. Alija Tihić, FBiH Civil Defense Directorate
  • 37. Anita Čemažar, RS Ministry of Finance
  • 38. Anka Šeranić, RS Ministry of Health and Social Protection
  • 39. Ante Nikolić, RS Ministry of Finance
  • 40. Asim Zečević, FBiH Ministry of Labor and Social Policy
  • 41. Aziz Čomor, FBiH Ministry of Agriculture, Water Management and Forestry
  • 42. Bakir Mujić, FBiH Pension Insurance Fund
  • 43. Borislav Jakšić, RS Ministry of Regional Planning, Construction and Environment
  • 44. Borjana Krišto, FBiH Ministry of Justice
  • 45. Borovčanin Snježana, RS Employment
  • 46. Boško Stojković, RS Ministry of Education and Culture
  • 47. Božo Stanimirović, RS Ministry of Economy, Energy, and Development
  • 48. Brane Simanić, RS Pension Insurance Institute
  • 49. Branislav Žugić, RS Ministry of Economic Relations and Coordination
  • 50. Branko Grabež, RS Civil Defense
  • 51. Branko Vukadinović, RS Ministry of Refugees and Displaced Persons
  • 52. Čedo Aleksić, RS Ministry of Health and Social Protection
  • 53. Danica Spasov, RS Ministry of Regional Planning, Construction and Environment
  • 54. Danijela Mandić, RS Ministry of Health and Social Protection
  • 55. Darija Sejmanović, RS Ministry Finance
  • 56. Derviš Đurđević, FBiH Statistics Institute
  • 57. Deva Uzelac, RS Ministry of Economy, Energy, and Development
  • 58. Donald Prohaska, RS Statistics Institute
  • 59. Dr. Momir Đelić, RS Ministry of Education and Culture
  • 60. Dr. Radoslav Grujić, RS Ministry of Education and Culture
  • 61. Dragan Kokanović, RS Ministry of Transport and Communications
  • 62. Dragan Milojčić, RS Ministry of Regional Planning, Construction and Environment
  • 63. Dragana Kalabić, RS Ministry of Economy, Energy, and Development
  • 64. Drago Bijelić, RS Ministry of Economy, Energy, and Development
  • 65. Dunja Pejić-Hadžić, RS Ministry of Trade and Tourism
  • 66. Duško Radošević, RS Ministry of Finance
  • 67. Džemaludin Mutapčić, FBiH Ministry of Justice
  • 68. Đorđe Gatarić, RS Agricultural Institute (representing RS Government)
  • 69. Đuro Grbić, RS Ministry of Economy, Energy, and Development
  • 70. Emina Pandžo – Hasanbegović, FBiH Ministry of Education and Science
  • 71. Emir Silajdžić, FBiH Ministry of Finance
  • 72. Ermina Gežo, FBiH Tax Administration
  • 73. Esad Osmanbegović, FBiH Ministry of Transport and Communications
  • 74. Fadil Suljić, FBiH Employment Office
  • 75. Fani Majkić, FBiH Ministry of Health
  • 76. Filip Šarić, FBiH Ministry of Finance
  • 77. Frano Dogan, FBiH Customs Administration
  • 78. Fuad Čerkez FBiH Securities Commission
  • 79. Gojko Mirjanić, RS Agricultural Institute (representing RS Government)
  • 80. Gojko Savanović, RS Ministry of Education and Culture
  • 81. Gordan Jelić, RS Ministry of Health and Social Protection
  • 82. Gordana Đurić, Agricultural Faculty (representing RS Government)
  • 83. Gordana Gardašević, RS Ministry of Governance and Local Governance
  • 84. Gordana Opačić, RS Ministry of Economic Relations and Coordination
  • 85. Izet Ćigić, FBiH Ministry of Energy, Mining and Industry
  • 86. Jadranka Stojanović, RS Ministry of Trade and Tourism
  • 87. Jela Radišić, RS Banking Agency
  • 88. Kasema ćatović, FBiH Ministry of Energy, Mining and Industry
  • 89. Kemal Čaušević, FBiH Ministry of Finance
  • 90. Kutlija Dragan, RS Civil Service Agency
  • 91. Ljiljana Sokolić, RS Ministry of Transport and Communications
  • 92. Ljuban Krnjajić, RS Ministry of Health and Social Protection
  • 93. Ljubo Glamočić, RS Ministry of Economy, Energy, and Development
  • 94. Marinko Biljanović, RS Ministry of Transport and Communications
  • 95. Mehmed Cero, FBiH Ministry of Regional Planning and Environment
  • 96. Mervana Hadžimurterzić, FBiH Ministry of Agriculture, Water Management and Forestry
  • 97. Mevla Softić, FBiH Statistics Institute
  • 98. Milan Srdić, RS Ministry of Economy, Energy, and Development
  • 99. Milan Šicar, RS Ministry of Economy, Energy, and Development
  • 100. Mile Srdanović, FBiH Ministry of Energy, Mining and Industry
  • 101. Milena Mandić, RS Employment Office
  • 102. Miodrag Babić, RS Ministry of Finance
  • 103. Mira Bradara, FBiH Ministry of Finance
  • 104. Mirko Dobrnjac, RS Ministry of Economy, Energy, and Development
  • 105. Miro Maksimović, RS Ministry of Agriculture, Water Management and Forestry
  • 106. Miroslav Rogić, RS Ministry of Governance and Local Governance
  • 107. Mirsad Hromić, FBiH Development Planning Institute
  • 108. Mirsad Nikšić FBiH Ministry of Energy, Mining and Industry
  • 109. Mirsad Pekić, RS Ministry of Economic Relations and Coordination
  • 110. Mladen Čabrilo, FBiH Ministry of Development, Entrepreneurship and Trades
  • 111. Mladen Radivojević, RS Ministry of Governance and Local Governance
  • 112. Mladen Vasić, FBiH Ministry of Agriculture, Water Management and Forestry
  • 113. Mustafa Brkić, FBiH Banking Agency
  • 114. Nada Rajković, FBiH Ministry of Agriculture, Water Management and Forestry
  • 115. Namik Bukvić, FBiH Ministry of Labor and Social Policy
  • 116. Nedjeljko Babić, FBiH Ministry of Trade
  • 117. Nedžad Branković, FBiH Ministry of Transport and Communications
  • 118. Nemanja Drašković, RS Ministry of Economic Relations and Coordination
  • 119. Nermina Eminović, FBiH Ministry of Finance
  • 120. Nešet Muminagić, FBiH Development Planning Institute
  • 121. Olivera Kunjadić, RS Ministry of Labor and Protection of Veterans and the Disabled
  • 122. Ostoja Kremenović, RS Pension Insurance Institute
  • 123. Ostoja Travar RS Ministry of Finance
  • 124. prof. Milan Popović, RS Securities Commission
  • 125. Radmila Kostić, RS Ministry of Regional Planning, Construction and Environment
  • 126. Radomir Graonić, RS Ministry of Health and Social Protection
  • 127. Radovan Vignjević, FBiH Ministry of Labor and Social Policy
  • 128. Rajko Kličković, RS Ministry of Labor and Protection of Veterans and the Disabled
  • 129. Ramiz Mehmedagić, FBiH Ministry of Regional Planning and Environment
  • 130. Ranka Kostrešević, RS Ministry of Economy, Energy, and Development
  • 131. Ranko Krsman, RS Ministry of Finance
  • 132. Saša Trifković, RS Ministry of Governance and Local Governance
  • 133. Slaven Pekić, RS Ministry of Justice
  • 134. Slavica Bogdanović, RS Ministry of Economy, Energy, and Development
  • 135. Slavko Šobot, RS Statistics Institute
  • 136. Snježana Marjanac, RS Ministry of Finance
  • 137. Snježana Rudić, RS Ministry of Finance
  • 138. Sreten Blagojević, RS Ministry of Transport and Communications
  • 139. Stanimir Stamenković, RS Health Institute
  • 140. Stevan Jović, RS Ministry of Health and Social Protection
  • 141. Strahinja Ćurković, RS Ministry of Justice
  • 142. Tina Radonjić, RS Ministry of Economic Relations and Coordination
  • 143. Tomo Lučić, FBiH Ministry of Health
  • 144. Trivo Marinković, RS Customs Administration
  • 145. Velinka Topalović, RS Ministry of Agriculture, Water Management and Forestry
  • 146. Zada Gabela, FBiH Ministry of Finance
  • 147. Zaim Hećo, FBiH Ministry of Transport and Communications
  • 148. Zdravko Marjanović, RS Ministry of Education and Culture
  • 149. Zijad Pašić, FBiH Ministry of Education and Science
  • 150. Zlata Jukić, FBiH Ministry of Finance
  • 151. Zlatan Dedić, FBiH Privatization Agency
  • 152. Zoran Došen, RS Privatization Agency
  • 153. Zoran Kovačević, RS Ministry of Agriculture, Water Management and Forestry (Agriculture Project Coordination Unit)
  • 154. Zoran Stjepanović, RS Ministry of Economic Relations and Coordination
  • 155. Zrinka Simić, FBiH Ministry of Finance
  • 156. Željko Vaško, RS Ministry of Agriculture, Water Management and Forestry (Agriculture Project Coordination Unit)
  • Representatives of NGOs, trade unions, private sector and the young people:
  • 157. Aldin Međedović, representative of the Youth organization of BiH (KOM)
  • 158. Bojana Škrobić, representative of the Youth organization of BiH (KOM)
  • 159. Fikret Zuko, NGO representative
  • 160. Idriz Čilić, NGO representative
  • 161. Igor Stojanović, NGO representative
  • 162. Samir Haljeta, NGO representative
  • 163. Sulejman Hrle, BiH Trade Unions
  • 164. Tomislav Grizelj, private sector representative of FBiH
  • 165. Damir Miljević, private sector representative of RS
  • 166. Duljko Hasić, representative of Chamber of Commerce of BiH
  • Academic Advisory Board:
  • 167. Dr. Alija Lekić, Member of the BiH Academy of Arts and Sciences
  • 168. Dr. Anto Domazet
  • 169. Dr. Aziz Šunje
  • 170. Dr. Azra Hadžiahmetović
  • 171. Dr. Boris Tihi, Member of the BiH Academy of Arts and Sciences
  • 172. Dr. Božidar Matić, Member of the BiH Academy of Arts and Sciences
  • 173. Dr. Dragoljub Mirjanić
  • 174. Dr. Dušan Šušević
  • 175. Dr. Ešref Gačanin
  • 176. Dr. Hasan Muratović
  • 177. Dr. Jovo Stojičić
  • 178. Dr. Midhat Uščuplić, Member of the BiH Academy of Arts and Sciences
  • 179. Dr. Mirko Puljić
  • 180. Dr. Muris Čičić
  • 181. Dr. Mustafa Omanović
  • 182. Dr. Nedeljko Bilić
  • 183. Dr. Rajko Tomaš
  • 184. Dr. Salih Fočo
  • 185. Dr. Sead Kreso
  • 186. Dr. Zlatko Bundalo
  • 187. Dr. Žarko Papić
  • 188. Dr. Željko Šuman
  • Team of Experts:
  • 189. Amir Hadžiomeragić, Privatization, Financial Sector
  • 190. Azemina Vuković, Education
  • 191. Azra Ferizović, Infrastructure
  • 192. Belma A. Ejupović, Implementation and Monitoring, Human Rights
  • 193. Boris Hrabač, Health Care
  • 194. Dr. Radomir Marinković, Single Economic Space
  • 195. Dr. Tarik Kupusović, Water Management
  • 196. Dragiša Mekić, Foreign Trade
  • 197. Duljko Hasić, Industry
  • 198. Ervin Zolić, Statistics
  • 199. Haris Mešinović, Social Sector
  • 200. Ismet Muratagić, Industry
  • 201. Ivan Bagarić, Health Care
  • 202. Kemal Kačapor, IT
  • 203. Kenan Rašidagić, Social Sector
  • 204. Lamija Kozarić, Financial Sector
  • 205. Milenko Krajišnik, Fiscal Sector
  • 206. Mladen Rudež, Environment
  • 207. Muhamed Hodžić, Forestry
  • 208. Rasim Kadić, Labor market
  • 209. Reuf Hadžibegić, Energy
  • 210. Sabrija Šerifović, Regional Integration
  • 211. Sead Jeleč, Agriculture
  • 212. Seid Jažić, Industry
  • 213. Senad Kikić, Agriculture
  • 214. Senada Spahić, Business Environment, Anticorruption
  • 215. Šefika Hafizović, Fiscal Sector
  • 216. Željko Račić, Fiscal Sector

I.4. GOALS OF THE BIH MEDIUM-TERM DEVELOPMENT STRATEGY (PRSP)

1. Create conditions for sustainable and balanced economic development

Through implementation of the macroeconomic reform scenario of the Medium-Term Development Strategy, BiH should, by end-2007, restore a partial creditworthiness on the international capital markets, establish functioning market economy and strengthen the capacity of domestic companies to compete in external markets, particularly in the EU market. In view of existing variations in the level of economic development between different parts of the country, creation of preconditions for balanced development of all parts of BiH is also crucial.

2. Reduce poverty

One in five inhabitants of BiH may be considered poor.1 The implementation of the BiH Medium-Term Development Strategy (PRSP) requires acceleration of structural reforms, which in the short term may cause job losses, and consequently an increase in poverty. Therefore, over the coming medium-term period, all levels of government will implement such economic policy measures that will prevent the increase in poverty and will lower the poverty rate by 20% from the present level.

3. Accelerate EU integrations

Integration of BiH into the EU is a generally accepted goal of all governments and all segments of BiH society. However, to attain this landmark goal, the BiH society must demonstrate that it shares the EU values.2 In the course of preparation of the BiH Medium-Term Development Strategy (PRSP), in cooperation with the BiH institutions, and particularly with the BiH Directorate for European Integrations, the issues of relevance for achievement of this goal have been integrated into this document. Therefore, the implementation of the Strategy will contribute to accelerated integration of the country into the EU, and the focus was placed on signing and implementation of the Stabilization and Association Agreement (SAA).

In view of the complementarity with SAA, the PRSP strategy will be taken into account on the occasion of the preparation of the National Plan for Adoption of the ‘Acquis communautaire’ (NPAA), as a fundamental document for the European integration process. The implementation of the PRSP Strategy will contribute to meeting of the second and third Copenhagen Criteria, i.e. existence of a functioning market economy able to endure on the EU market (Criterion 2) and the ability to assume obligations arising from the membership (Criterion 3).

General priorities for attainment of the goals of the BiH Medium-Term Development Strategy (PRSP):

  • Achieve a general consensus in the society regarding the reform program to be implemented in the coming period
  • Maintain macroeconomic stability
  • Implement fiscal system reform
  • Secure faster growth of the export-oriented private sector, which will require:
    • a) enhancement of the business environment for domestic and foreign investment and the suport to the development of entrepreneurship,
    • b) acceleration of the privatization process,
    • c) reduction of the corruption in the society and implementation of the judiciary reform,
    • d) maintaining stability of the financial markets and faster development of capital markets,
    • e) implementation of the labor market reform,
    • f) further liberalization of the foreign trade in the region,
    • g) support to exports.
  • Implement the public administration reform
  • Establish an adequate system of social assistance
  • Implement sectoral reforms, in particular:
    • a) education reform
    • b) liberalization of the electric power market,
    • c) liberalization of the postal and telecommunications market
    • d) securing greater support for agricultural production
  • Conclude the Stabilization and Association Agreement with EU, which should result from the implementation of the above reforms
  • Achieve full membership in the WTO.

These priorities are developed in more detail in other parts of the BiH Medium-Term Development Strategy (PRSP).

Notes

1LSMS findings.
2‘The Report of the EC to the Council on Preparations of BiH to Start negotiations on the Stability and Association Agreement with the EU’ (EC Feasibility Study), Brussels, 18 November, 2003.

I.5. EXECUTIVE SUMMARY OF BiH MEDIUM-TERM DEVELOPMENT STRATEGY (PRSP)

POVERTY PROFILE

To permit successful planning and conduct of poverty reduction activities, it was indispensable to determine the number of the poor, their territorial distribution and the most vulnerable categories of the population. In measuring poverty, the BiH Medium Term Development Strategy (PRSP) relied on the data collected in the Living Standard Measurement Survey. This survey found that the general poverty line, i. e. the total annual spending below which a person is considered poor is KM 2,198. When this line was applied to the LSMS results, it was determined that some 19.5% of the BiH population is below the poverty line (16% in FBiH and as much as 25% in RS). Moreover around 30% of the population is located very close to poverty line. Although it should be noted that, because it is based on a survey, and not on a list, these figures must be considered as rough, with the confidence interval of ± 3.6% around the base figure.

Another important conclusion in the poverty analysis was that it is widespread among the population and that the poor are a heterogeneous group. Nonetheless, children, people with low level of education, elderly and disabled, classical social cases and rural population are most frequently below the poverty line. Poverty risk is most marked for children, particularly below the age of five, displaced persons and returnees, unemployed and people with low education.

Analysis performed for the needs of the PRSP also pointed to close links between (dis) respect for human rights and poverty, level of education and poverty, gender equality and poverty, as well as to higher vulnerability of rural inhabitants and to differences in poverty levels between members of different ethnic groups in BiH.

MEDIUM TERM MACROECONOMIC FRAMEWORK

Basic goals of the macroeconomic framework of the Mid-term Development Strategy BiH (PRSP) are the achievement 70% of the pre-war GDP and realization of country’s limited creditworthiness at the international capital market by the end of 2007. In this context, a Reform scenario is defined and it stipulates that GDP is to grow in the coming four years on the basis of the real growth rate of 5 to 5,5 %. Other significant pre-requisites for the realization of Reform scenario are:

  • To maintain inflation at the level from 1 to 2 %. The orientation towards preservation of the Currency Board in the future will present the basic ground for the accomplishment of such pre-requisite;
  • To reduce the overall public expenditures from 46% of GDP, to 43% by 2007;
  • To lower the public debt to around 49 percent of GDP by 2007;
  • To bring the current account deficit to the sustainable level of 11% of GDP, by 2007; The realization of this pre-requisite will largely depend on having the export growth in coming years in compliance with the projected rates from 13 to 15%;
  • To ensure larger scale of foreign investments inflow – up to around $2 billions, by the end of 2007;
  • To increase the level of private savings by 2007 for 7 times;
  • To ensure new cycles of donor’s assistance in the amount of $1,5 billions.

FISCAL REFORM

A fiscal reform goal within the Mid-term Development Strategy BiH (PRSP) is to reduce the public expenditures and achieve greater sustainability through the fiscal consolidation. Given the ongoing trend of decreasing donor’s assistance it will be necessary to ensure bigger participation of the domestic public revenues in the public expenditure financing. Fiscal reform is also related to the Mid-term macroeconomic framework and the following measures will be implemented:

  • More efficient mechanism for public revenues collection will be established with the focus at the strengthening of the Indirect Taxation Authority of BiH, bringing in the VAT and establishment of the single Custom Administration at BiH level;
  • An adequate allocation of public revenues will be ensured between various levels of authorities in BiH. Strengthening of the state level will initiate the follow-up of the state budget strengthening. In the context of realizing the poverty reduction activities, it will be necessary to strengthen the fiscal revenues of local communities. Bearing in mind the complexity of the BiH state structure, it is necessary to ensure an adequate VAT allocation between the various levels of governments in the country;
  • Sector’s expenditure will be brought at the more sustainable level. This primarily refers to the expenditures in the field of education, health, social transfers, defense and police;
  • An institutional framework for preparation of consolidated fiscal account at BiH level will also be established;
  • The transparency in public revenues collection and spending will be strengthened;
  • Treasury operations will be brought in and applied at all levels of authorities as well as in all out-off-budget institutions of governments;
  • The public debt will be reduced from 67% of GDP to 50%, by the end of 2007.
  • Foreign borrowing strategy will be based on the continuation of concessional borrowing, while the commercial borrowing will be possible only at the end of 2006 or in 2007.

PRIVATE SECTOR GROWTH – STRUCTURAL REFORMS

Business environment for domestic and foreign investors

Mid-term Development Strategy BiH (PRSP) has paid due attention to the promotion of business environment, local and foreign investments and development of entrepreneurship. In order to complete the process of creating the single economic space in BiH (which is still divided by differences in regulations/provisions between entities) it will be necessary to harmonize the provisions regulating the freedom of movement of goods, services, capital and persons with EU laws and regulations. It will also be necessary to establish the legal and institutional framework, which is to guarantee the free competition and protection of consumers and also provide the mutual recognition of technical standards for goods from both entities.

The establishment of a single public procurement system, bringing in the VAT and strengthening the coordination in managing the public infrastructure will additionally promote the business climate. The implementation of already harmonized labor legislation in the entities must ensure the elimination of all forms of discrimination in employment, which is to contribute to larger scale of labor force mobility. The continuation of applying the model of regional development will have a significant role in facilitation of economic development and there must be a defined strategy for this and suitable laws and regulations must be approved for this purpose. In this regard, it is important to strengthen the network of regional development agencies.

The activities of eliminating the administrative obstacles for local and foreign investments will be continued with, especially in the area of business registration. Judicial system reform will provide faster resolution of economic disputes and it will also be necessary to amend the laws on obligations in order to ensure greater protection of creditors. The elimination of unfair competition (smuggling) and more efficient protection of intellectual, industrial and commercial property will be important task for the next mid-term. Inspection services in BiH will be reorganized and rationalized, while the realization of already adopted Action Plan will precede the implementation of reforms for more efficient struggle against corruption.

It is necessary to modernize the system of land, real-estate management and use of it, which will go hand in hand with strengthening of urban planning system.

New structure of economy calls for strengthening of the corporate management system – primarily the strengthening of transparency. Already existing tripartite dialogue with private sector should be further on strengthened too.

Strengthening the competitiveness of BiH enterprises must be the main and long-term goal of reforms and the key fields for urgent operations are: the reduction of taxes, especially pay-roll taxes, reduction in size of informal economy, liberalization of the labor, energy and telecom markets, speeding-up the process of dispute resolution, lowering the cost of entry. Together with aforementioned, further strengthening of the Foreign Investment Promotion Agency’s capacities, applying the foreign investment strategy and creation of the State Commission for Concessions (and suitable commissions at lower levels) should ensure the attraction of more foreign investors in our country. In this light, it is very important to continue with and facilitate the process of privatization.

Public opinion is the key point for success of all these reforms. Maintaining the political stability and avoidance of social disorders is certainly the key for successful implementation of the reforms and that is why the public should be regularly informed and included in the open dialogue on the process of reforms. It is especially important to conduct a campaign, which would promote the understanding of the public about the role and significance of foreign investments. It is also important to work on improving the international image of BiH.

Significance of small and medium enterprises for development of BiH is recognized in the document General Framework of Economic Development Strategy (dated in 1999). It is necessary to adopt the development strategy for easier and faster development of this category of companies, which will be able to utilize the limited investment opportunities in BiH in the best possible way due to their flexibility. It is also necessary to establish legal and institutional framework to support the development of entrepreneurship. Especially is important it initiate the wider affirmation of knowledge on entrepreneurship through inclusion of subjects on entrepreneurships into the curriculums of schools and universities as well as by strengthening the specific education for entrepreneurs and managers. The governments in BiH have recognized the fact that the establishment of Guarantee Fund for Small and Medium enterprises is a significant concrete step that would facilitate access of bank loans to SMEs.

Privatization

Privatization process, and especially the process of privatizing the “strategic enterprises” that was in tardiness during the past years, will be speeded-up. This will be achieved through the strengthening of an institutional framework. The entity agencies for privatization will take the leading part in preparation of the enterprises for privatization. Other problems related to the country-wide corporate restructuring will be improved by resolving of big and growing corporate debt and by reorganizing the system of protection from unemployment in order to ensure adequate social programs of workers that might lose their jobs due to the process of speedingup reforms. Special strategies will be prepared for the regulation and privatization in the sectors of energy, telecommunications, railways, and water management, waste-management as well as in the sector of forestry and in media. Strengthening of transparency of the privatization and responsibility of the state-led managing boards and managements in managing the state enterprises will be also important step forward. In parallel with this it is equally important to establish more efficient institutional framework for bankruptcy procedures and prepare list of companies and action plans for initiating bankruptcies.

Financial sector

It is necessary to strengthen the stability of banking sector by improving the local bank’s capacities for risk management. Equally is important to ensure appliance to the rules for capital adequacy. Further strengthening of stability of the banking sector could be improved by having the Central Bank of BiH to play limited role of the bank of last resort in compliance with the currency board rules. The strengthening of the existing framework for supervision of banks will be continued. The State Agency for Supervision of the Banks will be established in 2005 and it will operate within the Central Bank of BiH. The policy of decreasing the number of the banks will be continued: all banks will have to meet the requirements from the State Deposit Insurance Agency, otherwise the working licenses of banks shall be withdrawn.

The measures will be undertaken in order to improve the term structure of deposits. In the sphere of crediting, there will be further work on reduction of risk in the bank operations, which should lead to further decrease of interest rates and greater corporate lending. There is still a need for harmonization of the bank regulations between the two entities as well as with the regulations of EU. Legal and regulatory framework will be established for the operations of leasing, which provides the additional opportunities for induce of economy.

It is also important to harmonize the inter-entity regulations in insurance sector and implement the activities that would equalize the local insurance sector with the foreign insurance companies. It is necessary to improve regulation of the sector, and stimulate companies to develop new instruments and services.

The strengthening of corporate management and transparency is especially important for the faster development of capital market in BiH. This is to increase the attractiveness of these markets as well as their liquidity. Application of the new instruments, such as the short-term certificates of the Central Bank of BiH will also help the further capital market development. The possibility of uniting the regulatory framework at the state level will be reconsidered in order to stimulate merger of the capital markets with positive effects on increasing their liquidity.

Micro-financial sector has turned out to be very successful in providing the financial services to very small enterprises. Its further development will be stimulated through smaller guarantee funds, especially in agriculture. Important step forward in developing this sector will be to improve the regulatory framework by harmonizing it between two entities.

Labor market

It is necessary to eliminate all forms of discrimination and induce the mobility of labor force in the whole country. System of salaries and collective bargaining agreements should be reformed for the purpose of mitigating of the down wage rigidity of minimal wages, which is to lead to the reduction of gray economy. It is also necessary to strengthen the institutional framework and control over the Employment Offices, especially in the field of financing the employment programs that were quite non-transparent up-to-date. Revision of the use of privileges on the basis of non-employment, such as the right to health insurance, will influence the reduction of gray economy. In order to pave the road for speeding-up reforms it will be necessary to extend the period for utilization of unemployment benefits. It is essential on a long-term basis to reform the education system so that it can meet the needs of the labor market. It is especially important to stimulate the development of vocational education, as one form for re-qualification and additional qualification.

Anti-corruption

Establishment of the suitable bodies within the state and entity ministries of justice will provide better coordination of anti-corruption activities. Further reform of the judicial system and strengthening of the efficiency of the bodies specialized to uncover and suppress the corruption are the key points for the success in this field. The forthcoming public administration reform will also contribute to more successful anti-corruption activities. Strengthening of the system of management and control over public finances and especially the reform of the indirect taxation system (that leads to the bringing in VAT) will additionally reduce the space for corruption and abuses of power. Especial attention will be given to the management of the public enterprises. It will be necessary to promote greater transparency in privatization process as well as in the financing of education and health system. The establishment of single custom administration at BiH level will also influence the reduction of corruption. Money laundry and human trafficking incidents are the specific problems that BiH is facing lately -- special attention will be given to modification of the legal framework and adoption of suitable action plans to improve the coordination among institutions dealing with these matters.

Foreign trade and export promotion

The liberalization of foreign trade will be continued within the framework of obtaining the full membership at the WTO and meeting the criteria for integration into the EU. It will be necessary to enhance the coordination in implementing the state laws on foreign trade between respective ministries at the state and entity level. Moreover, it will be important to strengthen the institutional framework for the purpose of utilizing the unilateral trade preferential agreements approved and given to BiH by the EU and other developed countries. Further simplification of the custom procedures, establishment of the institutional framework for protection of local consumers and strengthening the foreign trade statistics are also priority tasks for the next midterm period. The new Custom Tariff Law will be approved in order to accommodate the needs of the BiH’s economy. Introduction of stricter control of the rules of origins and application of the reciprocities in appalling the foreign trade rules will also be one of the main emphasis for the next period. Important step forward will be signing of the Pan-European Charter on Cumulation. In order to reduce the trade deficit, it is necessary to apply more efficient ways to protect and stimulate the development of local agricultural production.

Increasing the rate of export represents the key challenge in the implementation of the PRSP. Aforementioned measures will directly or indirectly stimulate the increase of export. However, an overall strategy for increase of export will be developed, which will define the productions where BiH posess a competitive advantage, the most favorable markets for goods and services from BiH and institutional framework for export. Current low level of production must be increased and the competitiveness of BiH enterprises strengthened. In the context of increasing of export, it is necessary to facilitate privatization and insure bigger inflow of foreign investments. It is especially important to create the system for support to the exporting enterprises, which will be based on transformation of the existing Agency for investment guarantees BiH into Export-Credit Agency BiH. Reviving of railways and inclusion of the road transporters in international associations should create the conditions for reduction of transport costs.

Public administration reform

In order to implement the reform of public administration system, it is primarily needed to conduct functional reviews of administration at all levels of authorities. The strategy of public administration reform and follow-up action plan will be adopted by the end of 2004. It is necessary to strengthen the administrative capacities of BiH for the requirements of the EU integration process. The current activities in implementation of the State Civil Service Law and the reforms in defense and security sector will be continued.

Statistics

It is of great importance for overall reform process to strengthen the statistic system in BiH. It must function as single system to ensure that all institutions will be provided access to data necessary to plan activities. This process will be based on already adopted law at the state level.

SECTORAL PRIORITIES

Strengthening and amending of the legal framework and of institutional structures are indispensable in all sectors covered by the BiH Medium-Term Development Strategy, and specific priorities have been identified for each sector, as follows:

PRSP pays a special attention to the establishment of an adequate social welfare system. In order to reduce the exposure of the pensioners to poverty risk, the stability of pension payments will be increased through a more regular collection of contributions and by expanding the coverage of pension payers. It is necessary to regulate relations between the entity pension funds and lay foundations for a comprehensive reform of the pension insurance system. In protection of war and military disabled, veterans and family members of the dead, rationalization of both beneficiaries and benefits will be carried out, mechanisms will be set up to assist these categories in finding employment and administrative capacities of the competent line ministries will be enhanced. The system of social assistance will be adapted to the capacities of the society and it will be ordered along modern principles, with introduction of market elements and alternative models, with the emphasis on equality of all beneficiaries in access to benefits; the legal framework will be established and funds allocated to ensure a common minimum of benefits at entity level, primarily in child protection and protection of civil victims of war. Although available funding for support to sustainable return are being reduced, a greater efficiency in the area will be achieved through linking the work of all administrations in charge of implementation of the Annex 7, from the municipal to the state level. Rebuilding of some 50,000 housing units is planned over the next three years. In all these sectors administrative capacities must be strengthened, particularly for collection, processing and exchange of data.

In the education sector, the reform of management and financing methods will permit savings and release funds for sustainable funding of education. The coverage of students at all levels will be expanded and all forms of discrimination will be eliminated. More flexible study programs, with broad application of information technologies, will be introduced, and the standards and methods adapted to the appropriate European ones will be introduced, in conformity with the requirements of the Bologna Declaration and Lisbon Convention. The teacher-training system will be improved and made continuous. A framework state level law will regulate the higher education system, and mechanisms for supporting scientific research will be set up. Alongside the modernization of the vocational education, a system of out-of-school training will be developed.

Achieving universal health insurance coverage of the population, without discrimination, defining the basic package of health-care rights and strengthening of the solidarity system are the priorities in health care. Rationalization of the system of health care institutions, to include formalization of the ‘network of health care institutions’, will reduce expenditures from health insurance funds and will continue in parallel with the continuation of reforms of primary health care, through introduction of the system of family medicine. the contracting mechanisms between health insurance funds and health care institutions will be implemented, as well as new, incentive-based models of compensation to health care employees. The role and capacity of the public health care system will be strengthened, and the system for regulation of medicines will be established at BiH level. Improving the transparency of the systems of procurement and of planning and control of capital investments, as well as adoption of appropriate models for the system of supplementary medical practice, will contribute to combating corruption in the health care sector.

Development of institutional capacities, primarily achieving full operational status of the BiH Veterinary Office and establishment of the BiH Plant Health Protection Administration, and a better coordination between existing cantonal and entity bodies are the main tasks in the agriculture sector. The system of subsidies will be established to promote focusing on a limited number of types of production in which BiH has competitive advantages, at the minimum level of 3% of consolidated government budgets. The legal and institutional frameworks for development of organic foods will be set up. The instruments for supporting exports of agricultural products will be developed, and customs protection measures in line with the WTO rules will be applied. The business environment will be enhanced, and development of cooperatives and NGO associations of farmers will be supported.

To improve efficiency in exploitation of forest resources, which are one of the greatest development potentials of BiH, the forestry management system needs to be improved. The major tasks are to establish updated databases and conduct the national forest inventory, which will determine the real situation and lay foundations for a new organizational structure for forestry management. Establishing mechanisms for protection of forests from natural and other disasters, as well as for rehabilitation of forests, which had been neglected for long (demining, rehabilitation of degraded forests and barren areas, revitalization and sustainable management of game). Separation of protected forest areas (such as national parks, nature parks and forest preserves) will ensure at least a partial preservation of the most valuable natural heritage. In the exploitation aspect, it is vital to complete privatization and reorganization in forestry (particularly in FBiH), and to enforce the laws regulating sustainability of wood production, as well as other applicable international standards. Exploitation of other forest products (mushrooms, medicinal and aromatic herbs) and productions (bee-keeping) will be supported and promoted.

Water management will be organized on the level of river basins. A regulatory mechanism will be established for monitoring the work of municipal councils on setting tariffs and for ensuring the preservation of the quality of water and protection of the environment. The autonomy and management capacity of water utilities will be reinforced, and the degree of cost-recovery of utility services will increase to reflect real costs, with the tendency to prepare these segments for privatization. Investment in expansion of water supply and sewage systems will increase, as well as in regulation of watercourses and protection from harmful effects of waters. More efficient utilization of water for irrigation and power generation, exploitation of mineral and thermal waters, as well as restarting of navigation on the Sava River will respectively receive increased attention.

In the area of environment, the BiH Medium Term Development Strategy (PRSP) relies on the priorities of the BiH National Environmental Action Plan (NEAP), which stress the importance of strengthening of the legal and institutional environment and of the intersectoral approach to environmental protection issues. Steps to reduce pollution of air and water are envisaged, as well as enhancement of the systems of land management and soil protection, building of regional solid waste depository sites and rehabilitation of sites of existing illegal garbage dumps. It will be necessary to establish a system of integral land management, particularly for rural areas, in line with the EU standards and accepted international obligations. Over the coming medium term, the systems for preservation of the biological and geological diversity, natural and cultural heritage will be improved.

Along with the adoption of the BiH Energy Strategy, transformation of the legal system and establishment of modern institution, the basic task (in the electric power sector). It will be necessary to separate the existing three vertically integrated power enterprises in BiH to transmission, generation and distribution, with the transmission system remaining under the competence of BiH, while generation and distribution will be privatized. The process will go in three stages: reallocation of assets, corporatization and commercialization. Completion of the Power III Project is also envisaged.

In view of the role of the coal-mining sector in the BiH energy production, the restructuring and capital increases for coalmines are indispensable, which should lead to their ultimate privatization. Priorities in the gas sector are to diversify the gas supply sources, expand the distribution network, construct underground storage facilities and establish the internal gas market. Adoption of the oil sector development policy and of appropriate laws and regulations, as well as establishment of the oil and gas regulatory body, are the key prerequisites for revitalization and privatization in this sector. The coverage of urban areas with central heating will be expanded, and the technical efficiency of the systems will be enhanced. The system of setting energy tariffs will be based on economic prices and will include also the costs of the environmental protection. Energy savings and utilization of renewable and alternate energy sources will be encouraged.

In the course of the implementation period of the BiH Medium Term Development Strategy (PRSP), vital segments of road and railway networks and infrastructure will be revitalized and restored, with the accelerated construction of the Corridor Vc highway as the crucial choice. The management, monitoring and planning systems for construction and restoration of the road infrastructure will be strengthened, and appropriate financing mechanisms will be developed, including foreign investments and concessions. In the railways, particularly, economic sustainability needs to be supported with subsidies, but also through reform of tariff policy and through improvement of the marketing. In air and water traffic, the most important task is to restore the existing airports and river ports to the level compatible with international standards.

For a successful development of the telecom sector, an IT bus needs to be built in BiH, and linked with the neighboring countries, penetration in the fixed and mobile telephony needs to be increased, as well as of the Internet; the third generation (3G/UMTS) systems should be introduced in the mobile telephony. The activities of liberalizing the market of telecom will be continued with in this sector.

For the postal system, it is crucial to develop new areas of activity, such as hybrid post, sorting centers, Internet kiosks, catalogue sales etc. The sector of electronic media also needs improvements in infrastructure, primarily modernization of the radio and TV signal transmission network and digitalization of the RTV system.

The BiH Medium Term Development Strategy in sector of industry identified wood, textile, leather, metal and food industries, as well as energy, tourism and information technologies, as priority sectors, and selected a series of measures for restructuring and modernization of industries, strengthening of competition and export capacities, improvement of the entrepreneurial environment and market transparency. Measures of support to these sectors will include: adoption, or harmonization, of domestic regulations with EU regulations, abolishing of the customs duties on raw materials and equipment, simplification of the customs procedures and systems, provision of cheaper power, improved access to credits and establishment of guarantee funds, as well as creation of entity funds for support to scientific research, and support to companies in adopting international standards.

In wood industry, the goal is to discourage export of timber and develop internationally recognizable strategic products. In food processing, the HAACP should be introduced, and the agency for certification of animal-origin products should be established. For leather and footwear and textile sectors, introduction of modern management and technologies is priority, as well as development of capacity of quality control institutions. Improving management and marketing systems is of importance for metal industry as well, together with the adoption of the international standards and regulations and with introduction of the quality management techniques. To stimulate development of tourism, the strategy of tourism development in BiH needs to be adopted and appropriate laws passed at the BiH level, including the Law on National Parks.

Demining activities in BiH must have the highest priority to accelerate normalization of life on the largest possible part of the territory. The effort on removal of unexploded ordnance (UXO) will continue over the next four years, as well as the Mine Reduction Education activities (MRE), with the concurrent strengthening of required capacities.

In the information and communication technology sector (ICT), the process of adoption of relevant international technical standards will continue, as well as the process of liberalization, with the establishment of the CRA Council and transformation and modernization of telecom operators. The legal changes required to permit modern electronic commerce (e-commerce) will be made. All levels of government in BiH will introduce the system of electronic services to citizens (e-government). The system of ICT agencies will be established, and the Academic and Research Network of BiH (Arnet) and the Education Network of Elementary and Secondary Schools (EduNet) will be reactivated.

IMPLEMENTATION AND MONITORING MECHANISM OF THE BiH MEDIUM-TERM DEVELOPMENT STRATEGY - PRSP

On the basis of the work invested in the preparation of the EC Feasibility Study and the BiH Medium-Term Development Strategy (PRSP), the BiH Council of Ministers of BiH, together with the entity governments adopted the Action Plan for Implementation of Priority Reforms. By adoption of this AP, whose implementation rate is at 81%, governments introduced an initial monitoring mechanism for implementation of strategic documents. In this context, the Council of Ministers of BiH, together with the entity governments, decided to establish the Office for Coordination of Economic Research and Monitoring of the Implementation of the BiH Medium-Term Development Strategy (EPPU). This office will play an important role in developing future macroeconomic projections and drafting analytical materials required for integration of BiH into EU.

The implementation of the PRSP will retain the same elements utilized in its preparation. The strategic decisions will be made within the framework of the Coordination Board of Economic Development and EU integrations. On the technical level the work will be carried out by the working groups that were established during the preparation of the PRSP, and which consist of representatives of the state and entity governments. As in the preparation stage of the PRSP, NGOs will continue to participate in the work of the PRSP implementation working groups. The EPPU will inform the governments, parliament and the public about the course and results of the implementation of the PRSP, through regular reporting on the status of implementation of its action plans and the success rate in meeting the PRSP targets.

Indicators

To verify whether the set targets are being achieved, an established set of indicators should be followed over the next medium term. With the assistance of UNDP, PRSP was able to incorporate the millennium development goals and indicators, adapted to BiH, into the PRSP monitoring mechanism. To ensure systematic monitoring of the PRSP indicators, additional strengthening of the capacity of statistics bureaus is planned, as well as partnering with NGOs and international institutions. It is important to stress that an undeveloped system of statistics of BiH, and in this context the lack of the data reliability, will represent a particular problem for monitoring and evaluation of the PRSP, and accordingly for the Millennium Development Goals. Some of the indicators with special importance for monitoring of PRSP are: percentage of population below poverty line2, unemployment rate, net rate of enrollment in primary school, primary and secondary school enrollment rate, higher education enrollment rate and ect.

The Major Risks and Preconditions for Successful Implementation of the Medium-Term Development Strategy of BIH (PRSP)

The implementation of the BiH Medium-Term Development Strategy (PRSP) will require a greater determination of the governments in preservation of the achieved political consensus on implementation of reforms. The BiH Medium-Term Development Strategy (PRSP) envisages adoption and/or amending of a large number of laws and sub-laws. To complete these tasks within the given timeframe will require increased efficiency in the work of the parliaments at all levels. The process of acceleration of reforms will cause a short-term increase in unemployment, which might threaten social peace. In the near term, preservation of the social peace will depend on the governments’ ability to implement a social program to mitigate negative consequences of increasing unemployment in first year of the implementation of the Strategy.

In view of declining international aid, in the coming period BiH will have to rely on foreign investment as the most important source of financing future development. In this context, in addition to the acceleration of reforms and strengthening of the political stability of the country, the rate of recovery of the world economy and the increase of investment globally will influence successfulness in implementation of the PRSP.

Finally, a major precondition for a successful realization of the BiH Medium-Term Development Strategy (PRSP) is securing of additional assistance in the form of concessional credits and grants. The focus of the international community on other regions, or a failure of the government to convince the international community to continue extending aid to BiH may pose a serious difficulty to the implementation of PRSP goals.

Notes

2Using General Poverty Line for BiH.

I.6. POVERTY PROFILE OF BOSNIA AND HERZEGOVINA

Poverty Definition

Until recently the term «poverty» was applied in the meaning of insufficiency of revenues for procurement of the minimum basket of goods and services. Nowadays, it is considered that poverty is the state when basic preconditions for a dignified life are lacking. It is recognizable that poverty is manifested in different ways, among which are: lack of income and resources sufficient to ensure viable existence; hunger and malnutrition, poor health, limited or no access to education and other fundamental services; increased mortality, including mortality from disease; homelessness and inadequate housing conditions; unsafe environment, social discrimination and isolation. Exclusion from decision-making and from civic, social and cultural life of the community are other basic features of the negation of human rights. Multidimensionality of poverty as a phenomenon permit us to view it as a condition characterized by lasting or chronic shortage of resources, abilities, choices, security and powers required for an adequate standard of living and attainment of other civic, economic, political, cultural and social rights.

1. Poverty in BiH

The Living Standards Measurement Survey -LSMS that was conducted in BiH between September and November 2001, as the first representative welfare survey at the household level, has served as the most important source of information for the preparation of this overview of the poverty profile in BiH. The survey was conducted on a sample of 5.400 households in 25 municipalities of both BiH Entities, with special attention paid to obtaining representative results both at the Entity and at the BiH level.1 Using the modular survey approach (in areas of: demography, housing, education, employment, migrations, health care, privatization, loans, social welfare, expenditure, non-agricultural business activities and individual agricultural activities) data were collected on households and individuals, as well as on access to and utilization of services and government programs. The data collected made it possible to assess the poverty level in BiH, the composition of the poor, the relative extent of the poverty threat for individual categories of the population and the causes of poverty.2 It should be made clear that the Survey, although it currently constitutes the most reliable source of statistical data in this field, is nevertheless only a provisional research instrument and cannot provide answers to all important questions posed in the development policy formulation process.

The data from the Living Standards Measurement Survey (LSMS) made possible the poverty demarcation in BiH needed to establish the number/percentage of the population falling into the category of the poor. The poverty line facilitates the identification of the population that sunk into poverty, as well as monitoring changes in their situation over time3, making it easier to assess the effectiveness of the measures taken.4 The analysis of the Living Standards Measurement Survey (LSMS) has made it possible to draw conclusions necessary for determination of the poverty line.

There are two basic poverty lines: the relative and the absolute one. In determining the relative poverty line, the basic approach is to establish how the standard of living of one population category can be compared with that of other population categories within the same society, and it is usually based on a certain percentage of average income or expenditure in the country concerned. This method has some advantages, above all that it is easily determinable and that it automatically tracks increases in the standard of living. However, this kind of demarcation is not adequate for monitoring changes over time, since a rise in the standard of living in a given country may result in a rise in the standard of all population categories, without the relative situation of the poor altering, or even with a deterioration in their situation.5

Bearing in mind the limited availability of data in BiH, the researchers chose the absolute poverty line as the most appropriate instrument for defining and monitoring poverty in our country. The absolute poverty line is determined according to the value of expenditure needed by each individual regardless of the place and time he/she lives in. The absolute poverty line itself may take two forms: the extreme poverty line or the general poverty line. The extreme poverty line - or nutritional poverty line - is determined on the basis of the value of the food package that contains the minimum of necessary calories and nutritive substances. In the analysis of the Living Standards Measurement Survey (LSMS), annual consumption per person was selected as the indicator. It was calculated that the average minimum nutritional needs, taking into account the differences between demographic groups, are around 2.240 calories a day.6

The determination of the general poverty line takes into account that an individual also has survival needs other than nutrition, such as housing, clothes, etc. Since it is almost impossible to objectively determine a uniform consumer “basket” of non-nutritional goods and services that would be representative for the majority of the population, the general poverty line for BiH is the total consumption of households whose consumption of food enables them to meet the minimum nutrition and caloric needs. In other words, the general poverty line is established by adding the monetary value of non-food goods and services consumed by the households whose consumption of food equals an absolute minimum of nutritional needs (which represents the extreme poverty line), to the value of that minimum, i.e. to the monetary value of extreme poverty line.

The Living Standards Measurement Survey (LSMS) has estimated the level of the total expenditure (including non-food goods)of the households that spend the absolute minimum on food, measured by its caloric and nutritive values (about 2. 100. calories per person daily). The total expenditure arrived at in this way amounts to 2,198 KM per person per annum, and this is the general poverty line for BiH (while expenditure on minimum nutritional needs, i. e. the extreme poverty line, amounts to 760 KM per person per annum). The fact that food expenses constitute only about 34.5% of the sum representing the poverty line of BiH indicates that non-food costs are of very considerable importance in ensuring survival.7

The analysis of available statistical data on annual expenditure per person in BiH has not shown that there are groups in our country whose standard of living is close to or below the extreme poverty line, but it has been determined that the living standard of around 19,5% of the population of BiH is below the general poverty line (25% in RS and 16% in FBiH).8 The limited format and coverage of the survey inevitably result in a wide margin of tolerance of +3,6%. The percentage of citizens who are below the general poverty line differs for different community types, being lowest in urban communities (14%), higher in rural communities (around 20%), and highest in mixed local communities (near 24%).9

Supplementary indicators permit a more in-depth analysis of available data. The poverty gap is a total amount needed for all poor in a country to rise above the poverty line, divided by the total number of inhabitants of the country. In BiH, poverty gap is 101 KM, or in other words, for all poor to rise from poverty, all BiH citizens (including poor) would need to give all poor 101 KM per person per annum. The money would need to be distributed in order to allow all poor to cross the poverty line (those in deeper poverty would receive more than others).

The Survey results have also shown that a further 30% approximately of the BiH population are just above the general poverty line determined in this manner (with annual expenditure below 3,297 KM, i.e. in a range only 50% higher than the amount constituting the general poverty line). The vulnerability of this group to potential economic shocks that might push them below the general poverty line is very high.10 The research by UNDP and the BiH authorities for the needs of the Early Warning System, although conducted in accordance with a different methodology, confirms that poverty is widespread and serious, and indicates a rising trend in the numbers of the poor.11

In many surveys, a distinct majority of those polled assess themselves as poor. Although the reasons for subjective poverty as a phenomenon are numerous, among the most important are comparisons with the pre-war era and reliance on the standards of that time, as well as higher expectations and the inability of many households to afford the variety of goods available on the market.

Insecurity is an additional burden for the poor, but also for many others who do not officially fall into that category. Personal insecurity resulting from the declining influence of society and the authorities leads to rising crime and is an impediment to the integration into society and the equal economic opportunities of minorities and women in particular. Economic insecurity is reflected in exposure to various economic shocks, insecurity in terms of property or housing rights (especially displaced persons), and exposure to corruption.12

The poor are also seriously affected by the feeling of powerlessness and inability to make their voices heard in communication either with other members of the community or with the authorities. Even given the extensive decentralization of the resources distribution system, the poor frequently have difficulty gaining access to the institutions responsible for the decisions and rulings that have a significant impact on their lives. This is another problem that affects women with particular severity.13

Poverty in BiH is deeper and more widespread than in any other country of former Yugoslavia (it is more widespread only in Kosovo),14 and some 20% of the poor suffer serious shortages in all or almost all key aspects of welfare, ranging from acceptable housing and sanitary conditions and access to health care services, to literacy and integration into society. In addition, the current relatively low poverty rate of the population is the result of expenditures far exceeding current production capacities. So far, extensive international aid allowed this level of consumption, but it will soon cease to be possible. Thus it is extremely important to increase the rate of economic growth, because the danger of a dramatic increase in the poverty rate is very real.

1.1. UNDP Report on Human Development in BiH

In view of the lack of reliable and accurate information and statistical data in BiH already referred to, the activities of UNDP, in collaboration with the BiH authorities and with the assistance of the domestic statistical and research institutions, make a major contribution to filling the information gaps and providing a fuller picture of the situation in our country. UNDP’s activities in this field are formulated as quarterly reports within the Early Warning System, where a number of essential trends from the economic and social sphere are monitored continuously. The second major contribution is the publication of the Human Development Reports that constitute comprehensive research into key areas of society and phenomena that have an impact on the quality and standard of living of the members of society.

The Human Development Report, published in September 2002, introduced the Index of human development for BiH for the first time. This index is a scale that enables ranking of individual countries by their level of development compared with other countries of the world. It includes the economic dimension, but it is specifically adapted to encompass human dimensions of development that could not be adequately represented by other statistical and research methods and procedures. The human development index takes into account the issues of accessibility of education, health care, social services and information, as crucial for the successful and viable development of any society. Although issues such as human rights, oppression and discrimination of all kinds cannot be easily included in the index itself, they are also subject of analyses. In that regard, the possibility of comparison with other countries of the world (166 countries are included) facilitates the identification of specific weaknesses and provides an incentive and guidelines for improvements.

The Human Development Index (HDI) for BiH is 0.718. The significance and meaning of the HDI becomes clearer when its components are considered: HDI is composed of three sub-indices: GDP per capita, access to education and average lifetime of inhabitants. At the same time, bearing in mind the often incomplete and imprecise statistical data available for our country, we are not in a position to rank ourselves precisely on the HDI scale, and this number should be regarded as preliminary only.

The Human Development Report/Millenium Develpment Goals from June 2003 shed additional light on the poverty issue. This report estimated that 27% of adults in BiH are poor from the standpoint of education, and that 16% suffer from poverty in the health-care sense. From the employment aspect, 22% of work-capable population is poor. Housing conditions are below the poverty threshold for 11% of inhabitants, and 29% live in conditions of «legal poverty» because they live in apartments for which they lack adequate ownership or tenancy rights. In total, this analysis showed that some 72% of adults in BiH are poor from at least one of these aspects.15

2. Most Vulnerable Categories of the Poor

Although the identified poverty rate in BiH is lower than had been presumed, the essential conclusion is that the threat of poverty in BiH is widespread among the population and that the poor are a heterogeneous group, so that even a typical household bears a considerable risk of sliding into poverty.16

Below the poverty line are most frequently children, persons with low education levels, the elderly and the disabled as well as the rural population. An analysis of data for the population as a whole indicates that children, especially those under 5 years of age, displaced persons and returnees, the unemployed, and persons with low education levels, are particularly exposed to the risk of poverty. Contrary to received wisdom, the elderly are less threatened by the risk of poverty than the average person, and the same can be said for the disabled and war veterans. Those least at risk are the employed, both those in the non-economic sector and those in the “grey economy”.17 Another surprising conclusion is that poverty is not primarily a problem of the unemployed, displaced persons, the disabled, or the families of soldiers killed during the war. All these groups combined constitute less than half the poor. The majority of the poor in BiH are employed persons living in families with children, the result of low wages and the fact that one wage is inadequate to keep a household above the poverty level.18

2.1. The Young Generation and Poverty

Children are one of the categories that are most at risk of having a standard of living below the poverty line. Some 56% of the poor live in families with children. The children in RS are particularly vulnerable, since around half of this age group lives in poor families, while in the FBiH this holds for around one-third of all children.19 Around 13% of children live in families that fall into the category of the poorest, and 29% in households that are on the poverty line. Poverty of families with children is at its most pronounced where none of the family members are employed, and the situation is particularly difficult for displaced households, where the head of household is unemployed.20

Children under 5 years of age are particularly at risk. This threat takes many forms, such as: very low access to preschool education (less than 9% of children attend a preschool education institution), lower access of poor children to secondary education, very low health insurance coverage, especially in rural areas. Surveys conducted among the population also confirm that the absence of health care affects young children of both sexes most seriously, since children are seen as more susceptible to accidents and illness, and as less resistant than adults.21 Children without parental care and other children in care (in the care of social welfare institutions) are at even greater risk than children living in poor families, since the social welfare systems are financially too weak to provide appropriate care.

Unemployment is probably the major problem affecting the young generation, equally in urban and rural areas of BiH. When this is combined with housing problems, the lasting economic crisis and political manipulation, young people become depressed and desperate and turn to drugs and alcohol, or make plans to emigrate as the only way to secure a better future.22 According to the available data, 92,000 young people left BiH between January 1996 and March 2001, and surveys show that 62% of the young would emigrate if they had the opportunity.23 This is probably the most detrimental trend for the long-term revival and viability of economic development of BiH. The fact that there are fewer women among newcomers to the labour market (19 to 29 years of age) is interesting, since this means that a larger number of women than men are leaving the country.24

2.2. Refugees and displaced persons

The data of the Ministry for Human Rights and Refugees of BiH indicate that 283,900 displaced persons reside in BiH (35% from the territory of FBiH and 65% from RS). It is estimated that more than 500,000 BiH refugees live abroad, and some 100,000 have no permanent status, so the possibility of their return should be anticipated. some 248,300 displaced persons live in the RS and around 23.500 in Brčko District.25 9 According to the data of the Ministry of Refugees and Displaced Persons of BiH and UNHCR, by September 30, 2003, 713,261 refugees and displaced persons returned to the FBiH, while 242,598 went back to their homes in the RS, and 20,951 refugees and displaced persons to Brčko District.26

In all parts of the country, these categories, who are frequently without any stable source of income and not being covered by the existing social welfare systems, are considerably more vulnerable to poverty than the population that was not forced to move. In the case of returnees, the picture varies: in the RS returnees are extremely exposed to the risk of poverty, while in the FBiH that risk is lower.27

Although LSMS failed to provide sufficient data for an in-depth analysis, the severity of the plight of this category is confirmed by the earlier research. Displaced persons constitute around 45% of the extremely poor in the FBiH, while in the RS, the displaced population accounts for only 21% of all those falling into this category. Eight percent of the poorest and 37% of persons on the poverty line live in a joint household with at least one displaced person. By far the most difficult is the situation of displaced persons still living in collective centers.

In the circumstances of radical cut-backs and the imminent cessation of these types of assistance, the displaced are in an especially difficult position, as there is no organized system at the entity and cantonal level that could take over the role of financing the needs of the displaced. The displaced therefore left in a charge on the municipalities which, in most cases, are unable to provide them with even the minimal conditions for survival. Displacement had an impact on the stratification of the labour market: the displaced are in a much more difficult situation, facing greater difficulties in finding a job and often forced to accept jobs that other groups were not interested in. In view of the difficult economic situation as well as continued ethnic tensions, returnees almost never manage to return to their previous jobs. Single mothers in displaced persons or returnee households face particularly serious problems since, in addition to all the other aspects of discrimination, they do not have access to even the basic forms of social welfare provided to other population groups.28

2.3. Classic social welfare cases

There are around 260.000 beneficiaries of social welfare in BiH, i. e. around 7% of the population from each Entity. Additional 125.000 beneficiaries were registered for child care programs (2% of the population in FBiH and 6% in RS)29. The categories of social welfare beneficiaries (in both Entities)30 are children without parental care, educationally neglected children, children whose development is disrupted by their family situation, the disabled and persons with mental and physical developmental problems, persons incapable of working and without any material insurance, elderly persons without any family care, persons with anti-social behaviour as well as persons and families in social need due to special circumstances.31

Although 2% of the BiH population is registered as receiving financial benefits as a social welfare right, the reality is that funds are not available for everyone to exercise that right. For instance, only 13% of those registered in the RS are actually receiving welfare payments, and in some municipalities the percentage of those registered that are actually receiving welfare payments is as low as 2–3% while in others it may be over 20%.32 The situation is similar in FBiH, where some cantons offer no form of social assistance.

2.4. The unemployed

According to official statistical data, in December 2002 the official number and rate of unemployment (unemployed registered with employment bureaus) were 435,505, or 41.1% (42.7% in the FBiH and 38.2% in the RS) of active population.33 Women represented 44,6% of the overall number of unemployed. Approximately one third of the unemployed were demobilized soldiers, while 4% were family members of killed soldiers and military war disabled.34 About 34% of the population (38,6% of the FBiH population and 26,7% of RS population) regard unemployment as the single most serious problem faced by the country. As a result of cuts in military personnel, as already announced, as well as the impact of privatization, jobless numbers are expected to continue to rise.

Subject to certain conditions, the unemployed who previously had jobs have the right participate in the safety net which provides benefits of between 117 and 240 KM, payable for a period of between 6 and 12 months. Insufficiency of funds for this purpose led to only 3,320 people receiving these benefits in 2002,35 and in the first six months of 2003 some 4,700 persons, or 1.6% of the total of those registered with employment bureaus in this entity. Unemployed persons in the FBiH are entitled to health care on condition that they are registered with one of the cantonal employment bureaus. In the RS, during 2002, an average of 1,290 persons per month received unemployment benefits, averaging some 70 KM, and there were some 1,530 on average in the first six months of 2003. Eligibility for unemployment benefits, which are payable over a period of between 3 and 12 months, depending on years of service, is based on a specified number of years of employment during the period preceding the claim.36

The Poverty Assessment Study, drafted by a team of World Bank experts using data collected under the auspices of the Living Standards Measurement Survey (LSMS) and in collaboration with domestic experts, has reached a surprising conclusion in the preliminary phase that poverty is not primarily a consequence of unemployment. This conclusion is based on findings that less than 20% of the poor live in households in which the head of the family is not working, while more than double that number live in families in which the head of the family has a job. About 63% of the poor live in households in which at least somebody is employed. On the other hand, 28% of the unemployed are poor37, while the unemployed represent only about a third of the overall number of the poor.38 An explanation for such a wide incidence of poverty among the employed and among members of their households should be sought in the difficult conditions in which the BH economy functions. Average wage in the FBiH in December 2002 amounted to 513 KM, and in the RS to 356 KM39 (in comparison with the estimated monthly price of the consumer basket, which is 459 KM in the FBiH and 458 KM in the RS).40 At the same time, a significant number of businesses are showing very poor trading results and pay low wages, often in arrears by several months.

Bearing in mind that women account for only a third of the employed in BiH, and 44,6% of the officially unemployed are women - one of the solutions to the difficult position of families with working members is to promote a more active role for women on the labour market. However, the current state of the economy means that increasing the number of employed women will be a difficult and long-term process.41

The Poverty Assessment Study also showed that, although all unemployed persons do not fall into the category of the poor, they are at significantly higher risk of seeing their standard of living falling to below the poverty line than any other category of the population.

2.5. Low Income Pensioners

The LSMS data point out that the elderly, as a group, do not belong to the most vulnerable category, mostly because the level of pensions, especially in the FBiH, is above the poverty line. Only 17% of the poor are of retirement age.42 However, the members of that group are mostly concentrated just above that line. Belonging to a higher age group is, however, a common enough characteristic of the poor, and their specific needs and dependence on assistance from other people mean that this group is in exceptionally difficult circumstances. According to the findings of the team in charge of the Poverty Assessment Study, as many as 20% of the poor are either retired or incapable of working. In addition, at least 25% of the poor over the age of 60 are from the category of those who have not acquired the right to a pension.

In comparison with the year 1991, when the ratio of pensioners and employees was 1:3, by the end of the year 1995 the ratio had decreased to 1:1.3, after which it stabilized at about 1:1.4 in the FBiH. The level of pensions in the FBiH (an average pension of 186 KM was disbursed in December 2002) reflects the strength of the post-war recovery. Owing to the tripling of wages, and the 25% increase in the number of people paying insurance, the average pension has tripled by comparison with 1996 levels. By 2001, the average pension in the FBiH had reached 2/3 of average income per capita, which is above the ratio in most countries in transition. However, average pensions are still only around 36% of an average wage in FBiH (513 KM)43 this solid average conceals significant differences in pension levels, so that older women, widows of pensioners, are to a significant extent exposed to the risk of poverty, while a household receiving two pensions can enjoy an income significantly above the FBiH average. In addition, women pensioners are, in general, in a more difficult position than men, given that women’s pensions are lower because, in general, they had lower-paid jobs.44

The situation in the RS is significantly more difficult, with each person paying insurance contributions supporting more than one pensioner: a ratio of 1.08:1. As a result, even the very high contributions and transfers from the budget do not make it possible to pay average pensions of more than 30% of average income per capita. The level of pensions in the RS is half of what it is in the FBiH (an average pension in December 2002 as 120.18 KM), i. e. 34% of the average wage of 356 KM).45, Despite this,+, the RS pension system can function only with significant transfers from the entity budget.

3. Specific Issues Related to Poverty in BiH

3.1. Human Rights and Poverty

It must always be stressed that effects and consequences of poverty are multidimensional. This means that negative influence on one dimension of human rights (e. g. the economic aspect) inevitably affects all other rights. It is difficult to claim with certainty that economic growth might by itself lead to poverty reduction and that is why it is of utmost importance to consider poverty from an inter-sectoral perspective.

Existing legal framework in BiH (BiH Constitution, constitutions of entities and cantons, ratified international conventions) provide a high degree of protection of human rights and freedoms. Equal treatment of men and women is guaranteed by law. In addition, BiH ratified a series of international human rights conventions (although it irregularly reported to international monitoring bodies)46.

In the summer of 2000, a crucial decision of the Constitutional Court determined that changes must be introduced into entity constitutions to protect the rights of constitutional peoples in BiH. Subsequently, constitutional mechanisms were introduced in the entities to balance and safeguard the rights of every constitutional people. This decision ensured equality and proportional representation in political, administrative and judicial institutions.47

All areas of social and economic development contain a dimension of human rights and require monitoring and analysis of effects of measures implemented with regard of the individual rights of citizens, as well as rights of different citizen groups, which require a higher degree of protection, such as: children, elderly, women, people in social need, persons with invalidity, families of killed and missing, war victims, displaced persons, and in particular returnees, minorities, refugees, asylum seekers, Roma etc. Social and economic rights of BiH citizens remain constrained because of underdeveloped economy.48

According to the reports of the Ombudsmen, the most frequent human rights violation relate to equality before the law, property rights and right to work. The BiH Poverty Assessment demonstrated the strong link between violations of human rights, that are guaranteed by law, and poverty. This link is particularly strong in the case of returnees, as well as of minority populations (Roma).

3.2. Education and Poverty

About 60% of the poor live in households in which the head of the family has primary education only, or not even that The probability of a household falling into the category of poor households is almost tripled if the head of the family has completed primary school level education only.49 High-school level education is already a major guarantee of the family’s avoiding falling into poverty. This indicates the importance of the improvement of the educational system for young people, as the basic tool for the long-term eradication of poverty. In the medium term, creating new options for adults with lower educational levels would yield positive results for a large proportion of the poor.

One of the basic findings of the majority of studies relates to the negative correlation between the level of education and poverty. In general, the higher the level of education, of either an individual or a household, the lower the probability that they will become unemployed, and therefore that they will fall into the category of the poor. Even in the 25–35 age group, half of all the poor are persons who have primary education only.50 Lower education levels are linked to working in the “gray economy” -more than a half of the employees with primary school level of education work in the informal economy, while for categories with higher levels of education that indicator is under one fourth.51 Education level is single most significant of all factors affecting the poverty risk.52

3.3. Gender Equality53 and Poverty

Although there is not enough data to enable an analysis of poverty from the aspect of gender, existing studies point out that poverty takes the same toll amongst women and amongst men. Both men and women believe that the causes of poverty are the war, poorly conducted privatization, lack of the skills in demand on the labour market, corruption and the absence of the rule of law. Both groups seek their way out of poverty through improvements of their employment options, resolving their housing problems, adequate access to health and educational services, as well as through mobilization and activation of the society itself. It is interesting to note that all the groups consider that the alienation and poor cultural life are some of the important consequences of poverty.54 In the BiH context, the male and female roles were disrupted with the outbreak of the war. Men assumed the role of defenders, protectors with the absolute power and control in public and pollitical life. Women thus lost a role in public life and reverted back to the limits of the home, household and family.55

According to the findings of IBHI56 researchers, the impact of poverty is different on men and on women: men often fall into a depression over unemployment or inability to support their families, while women are more inventive and ready to accept all kinds of jobs, but are prone to stress and tend to sacrifice their own health. In our new social circumstances, women often take on additional responsibilities for supporting their families, together with their traditional roles of mother and housewife.57

Women comprise 44.65% of the overall number of unemployed, which is more evident than their share of overall employment (35%)58. or active population (37.4%).59 This is the lowest proportion of women in the total active labour force of any country in Southeastern Europe. Low employment rates among women are a problem for two reasons: first, the decline of real wages in comparison with the pre war period indicates that one wage can hardly meet all the demands of a family now; second, the ravages of war and the post war cuts in social benefits for family support have forced families to take on additional domestic responsibilities, without any additional resources.60

Women suffer discrimination in employment, in both the private and the public sector, they receive lower wages than men for the same work and they have fewer opportunities for promotion, which has a direct impact on their financial position and makes it harder for them to maintain a satisfactory standard of living. Women are first to be fired during times of restructuring and reform and it is harder for them to find new employment. The available data lead to the conclusion that female-headed households are exposed to significantly higher risks of falling into the category of the poor than male-headed households. A further problem that is a particular barrier to employment for women is the almost virtual non-existence of childcare institutions.61 For all these reasons, it is not surprising that the data indicate that women in the 19 to 29 age group are less represented in the category of new entrants to the labour market, although it may also indicate that some of the best educated are leaving the country in search of better living conditions.

Even the fact that women have a longer life expectancy contributes to significantly higher exposure of older women to the risk of falling below the poverty line. Women account for 58% of the population over 65. It is very common to find women living alone, without a pension or any other regular income, especially in rural areas.62 Even when they have acquired the right to a pension, women pensioners receive lower pensions, having as a rule had lower-paid jobs. Bearing in mind that low education levels and illiteracy are the most frequent among the members of this group, it becomes clear how hard it is for such women to make use even of the options that exist for them to receive assistance.

Poor women are especially stricken by the sense of disempowerment and inability to express their opinions, either in their own surroundings or in relation to the authorities. Single mothers (particularly of childred with special needs), elderly women, wome refugees, Roma women, victims of violence, uneducated and unemployed women, and women in rural areas have special difficulties. Women in returnee households are in by far the worst position of all, due to their minority status and, often, their total isolation from the community to which they have returned. In view of the fact that there are different categories of vulnerable women in BiH, various problemss must be addressed when designing assistance programs. Additional research in the area of gender equality is vital to obtain a clearer picture of the situation on the ground.

At the level of BiH, the issue of gender equality is completely regulated by the Law on Gender Equality in BiH63 This Law regulates, promotes and protects gender equality and guarantees equal possibilities to all citizens, both in the public and private sphere of the society, and prohibits gender-based direct or indirect discrimination. Full gender equality is guaranteed in all segments of society, and particularly in education, economy, labor and employment, social and health care, sports, culture, public life and the media, without regard to marital and family status. However, the focus in the next period must be on the implementation of the Law on Gender Equality in BiH and on integration of gender equality issues into all future strategic documents.

3.4. Elderly People and Poverty

The BiH population is rapidly aging, due to the declining rate in the natural increase of population, increasing life expectancy and emigration of the young. It is estimated that more than 12% of the BiH population is over 65, and for the RS this estimate is 15%. Over 80% of elderly persons are pensioners, about 10% of them receive benefits as war disabled, and about 5% are receiving social assistance.

Bearing in mind that pensions are low and social welfare, which is low and is often in delay, elderly people are one of the potentially most vulnerable groups. Although precise data are not available, some groups, such as elderly women living alone in villages, find it very hard to cope, due to the lack of access to social services, while the isolation of their homes and their own illiteracy often means they have no way of seeking assistance.64

3.5. Poverty in Rural and Urban Areas

The consequences of the war have extremely complicated the situation in BiH and the position of its rural population, where the level of poverty is significantly higher. Although BiH has no pronounced potential for the development of agriculture, about half the rural population relies to a large extent on agriculture to survive. Many rural communities have been destroyed and their population displaced, either to third countries or within the country, where they are now largely living in cities. The slow pace of demining means that normal life is still impossible in many parts of the country, and a proportion of arable land cannot be cultivated.

Only about 20% of the poor live in urban communities, and poverty is most present in smaller communities, which frequently suffered the worst damage during the war. The risk of falling into poverty in the RS is significantly higher in non-urban, than in urban areas: 27% to 12%., while in the FBiH this risk is balanced: 16% of the poor live in non-urban, and 15% in urban areas.65

Practically all the aspects which influence household living standards are more unfavourable in rural areas. In many parts of the country the basic infrastructure is still lacking. Access to educational and health facilities is more difficult and more expensive, and the quality of those which are accessible is lower. The virtual absence of pre-school institutions is increasingly significant, as they could help children from rural areas to compensate for the limitations which are often the result of growing up in a village. Only 6% of children from rural areas attend such institutions, in comparison with 15% of city-dwelling children.66

The lack of a comprehensive agriculture development policy deters people from investing in that activity, while options for other types of employment in rural areas are minimal. All this prevents many displaced persons from leaving their temporary residences in the cities, which creates an additional pressure on the very small number of jobs, increases the cost of housing and gives rise to difficulties in the provision of educational, health care and social services.

3.6. Ethnic and Religious Dimensions of Poverty

UNDP findings67 prepared in collaboration with the BH authorities, indicate that there is a correlation between the ethnic structure of certain parts of the country and levels of household income. In Croatmajority areas, 6.9% of households fall into the category of the poor based on income levels, in Bosniac-majority areas the percentage is between 22% and 25%, and in Serb-majority areas it is between 40% and 43%. Expressed differently, there is a growing gap in the economic development and standard of living between the different regions of BiH: Croat-majority areas enjoy the highest living standards, Bosniak-majority areas are in the middle, and RS has the lowest standard of living. Bosniak-majority Sarajevo Canton is the exception to the rule, thanks to its specific position as the capital and the presence of so many government authorities and international organizations

Almost everywhere in BiH minorities are much more vulnerable in regard to their financial status. In comparison with the above figures on the majority populations of the various areas, more than half of ethnic minority households in RS are poor, and in the Croat-majority areas of FBiH, 15.6% of ethnic minority households are poor. In Bosniak-majority areas, about 25% of ethnic minority households fall into the category of the poor, but the data from 2002 do not indicate any great differences between majority and minority ethnic groups.68

A minority group that is almost entirely marginalized in BiH is the Roma population. Although it is impossible to ascertain the number of Roma living in BiH today with any degree of certainty (the estimates of Roma organizations range between 17, 000 to close to 80,00069) it is almost certain that they represent the largest ethnic minority.70 The number of Roma is difficult to ascertain because many of them still live nomadically. Although no in-depth surveys of poverty among Roma have been conducted, all available information indicates that they are one of the most vulnerable groups, living in conditions below even the most minimal for survival and often without the resources to support their families and ensure that their children can receive an education. As a group, Roma have by far the lowest levels of education in the country, their unemployment rate is almost 100%, and more than 90% have no health insurance. Due to their minority status they are marginalized, and their lack of knowledge of the system means that they are effectively deprived of many legal rights, including the right to social assistance.

Of the Roma families polled, 80% have no family members in permanent employment, and the majority mostly survive by doing temporary work or seasonal jobs, as small-scale traders in outdoor markets, or as scrap merchants.71 Roma encounter discrimination when job-hunting. A further problem is that very few have any formal education and even fewer have professional qualifications of any kind The results of polls conducted among the Roma show them to be poorly integrated into the education system, with 23% illiteracy and low attendance rates at pre-school institutions and primary schools, resulting in their almost total exclusion from high school, vocational and university education.72 By way of illustration, a poll by the Roma association “Our Future”, covering 582 Roma children aged 7 to 18 in Sarajevo Canton during the school year 1995/1996 found that only 189, or 33%, attended school regularly.73 As Sarajevo is an urban area in which the majority of children have the opportunity to attend educational institutions, one can assume that the situation in other parts of BiH is even worse. Confirmation for this can be found in a survey on the status of Roma in Tuzla Canton, which covered 189 families and established that only 10 families enrolled their children in schools.74

Roma give as reasons for their children’s failure to attend school: poverty, the necessity for children to start working and providing for the family at an early age, lack of confidence in the authorities (including schools), ill-treatment by their peers at school, and their inability to provide an environment conducive to study at home. Another reason often cited is the language issue: 86% of Roma polled give their mother tongue as Roma, which adds to their problems at school, where in the overwhelming majority of cases no special provision is made for pre-school assistance to Roma children.

Roma have long faced difficulties and exclusion from community, but the BiH Law on the Rights of National Minorities from 2002, and establishment of consultative fora, created a mechanism for protection of their rights.75

4. Causes of Poverty

4.1. War destruction

About 250.000 people lost their lives during the war in Bosnia between 1992 and 1995, and more than half the pre-war population of 4.4 million people became internally displaced or refugees abroad. The war caused immense devastation to manufacturing capacity and infrastructure, severed trade connections and put an end to the economic reforms that had just been launched in former Yugoslavia. Direct material war damage is estimated at between 50 and 60 bn. US$, of which about 20 bn. US$ on industrial capacities76. Adding to this the loss of GDP from 1992 to date, overall damage amounts to more than 100 bn. US$. Because of the war, from a development country (within the former SFRY) BiH had, in European terms, become a poor country.

4.2. Slow Implementation of Reforms

In the post-war period, issues related to the implementation of the Dayton Accords were the focus of attention of all governments. Implementation of necessary reforms, that would lead to an economic revival, and consequent increase in employment, were delayed. Lack of political consensus on the reform program represented an additional obstacle.77

4.3. Unemployment

Unemployment, especially widespread among the younger population, one of the most significant causes of poverty in BiH. The unemployed are not in fact a majority of the poor, because many live in households where one or more persons are employed. Another significant reason is the very strong informal sector (36,2%)78. The size of the “grey economy” led the World Bank to conclude that real unemployment rate (based on the very broad ILO definition) could be as low as 16.7%.79

4.4. Human Rights Violations

Human rights violations in BiH, particularly in cases of returnee and Roma populations, influence the poverty rate. Ethnic discrimination is expressed in difficulties in achieving return of private property, threats to personal security or obstruction of returns to pre-war places of residence and pre-war jobs, as well as the general impossibility of finding work, particularly in the public sector. Access to education, health-and social services or participation in the labor market are all hampered.

4.5. Inadequate Social Assistance System

In the conditions of insufficient fiscal revenues, the existing social assistance system is incapable of providing for the large numbers of the poor. Discrimination is present in realization of benefits, in that the transfers to military disabled are higher and more regular than to other categories of persons with disabilities. At the same time, discrimination is also regionally-based. Unlke other parts of the country, poor cantons in FBiH and poor RS municipalities are not allocating funds for social assistance, due to the shortage of funds in their budgets. The inadequate organization of social assistance in post-war conditions, together with the decentralized formulation and implementation of social policy, with policy determined on one level (entity) and implemented on another (canton or municipality), makes the adequate provision of assistance much harder. The peripheral municipalities, especially in the RS and Goražde Canton, pose a particular problem, as many were created through a division of pre-war municipalities and most lack even the most basic physical infrastructure, let alone the capacity to organize social assistance and care for the poor within their jurisdiction. Finally, the oversight of the benefits’ approval process is inadequate, which leads to the conclusion that social assistance benefits granted to date need to be reviewed.

Social assistance is an important factor in reducing poverty: the current assistance is equal to some 17% of GDP in BiH. Transfers to households comprise the largest share – around 15% of GDP. One in five inhabitans is a recipient of social assistance in some form. This assistance comprises around 11% of total household spending. For some 13% of the polled, the assistance is the shield from sliding into poverty, because for that group it increases spending by 50% on average. Many households in BiH receive some form of assistance, but less than half of the poor households are covered by these programs. Compared with other countries in the region, social assistance in BiH was unequally distributed between vulneragle groups and has limited effect to reduction of general poverty level in the country.80 As previously mentioned, the existing social assistance system favors one group in relation to others, thus the total social transfers are not equally shared between all those in need of such assistance. The issue of financial assistance of both entity governments to war veterans is a particularly complex. Contrary to the public opinion, the analysis of the data collected during the Living Standard Measurement Survey (LSMS) demonstrated that the war disabled and war veterans face considerably lower risk of sliding into poverty in relation to average inhabitant of BiH. This may be explained by higher sensitivity of governments to this category, owing to their ability to exercise far more effective influence on the public opinion in comparison with other categories of the poor. Thus, for instance, transfers to the veteran populations are 13 times higher in FBiH, and 2 times in RS, than allocations for child protection.

Amounting to nearly 4% of GDP, veteran transfers represent a major burden for entity budgets and restrict the capacity for assistance to other vulnerable categories of the population. In addition, in both entities, significant additional financing is channelled to these categories from lower levels of government. It has been recognized that the most severely disabled (over 50% of disability) are not adequately protected, while the assistance is provided for a great number of work-capable disabled.

That the situation of social assistance beneficiaries is not even worse may be explained by other forms of assistance they receive. During the war and post-war period, humanitarian aid was particularly significant, as it often included, in addition to food, clothes and medicines. Humanitarian assistance was shared and through government bodies and through NGOs, and was available to nearly everyone in need. However, this form of assistance has been considerably reduced in recent years and one must expect that in the near future it will no longer have a significant role in meeting the basic needs of the vulnerable categories of the population. On the other hand, other survival strategies are in evidence: many poor rely on assistance of the family and relatives, and many others have access to arable land. Assistance from abroad is also a significant means of supstituting or complementing social protection. Most of this assistance flows outside official financial channels, making it impossible to determine their levels with certainty. The BiH Central Bank estimates that private transfers from abroad in 2001 reached KM 2.1 billion, i. e. equal to 22% of GDP, which is far above the other countries in the region. It is, however, impossible to determine what share of these funds goes to the poor or to those who would be poor without such assistance.81

4.6. Quality of Education

The quality of education has a direct influence on employment options, and thus on the possibilities for poverty reduction.

4.7. Corruption

Corruption, which is widespread in BiH, affects the poor especially hard, whether it is the matter of visit to a doctor, realization of the right to some form of social assistance, obtaining documents, education, return of property or employment.. Displaced persons, the elderly, the rural population and unemployed are often forced to pay for such services because they lack the channels of communication that would allow them to access these services in any other way.

4.8. Inability to Influence the Institutions of the System

Inability to influence the institutions of the system are both a cause and a consequence of poverty. In most cases the poor lack or are unaware of the channels of communication with the authorities that make the decisions and control the resources affecting their lives, which reduces their chances of breaking out of the “vicious circle” of impoverishment and participating in the formulation of policies and measures adjusted to their needs.

5. Priority Activities for Poverty Reduction

A major goal in implementation of the Medium-Term Development Strategy of BiH (PRSP) is reduction of the poverty level by 20% by 2007. To achieve this goal, it will be necessary to implement the following reforms and measures, which are described in detail in the text of the Strategy:

  • implement the fiscal reform to ensure a more effective collection of public revenues and higher assistance to the poor;
  • accelerate the growth of the private sector to increase employment as one of the most effective ways of reducing poverty;
  • establish a more adequate system of social protection to ensure a minimum of social rights and a more balanced distribution of social assistance for all categories of the poor in the entire country;
  • reduce the corruption, which mostly affects the poor;
  • reduce the level of “informal economy”, which will lead to increases in pensions and reduction of poverty among the elderly;
  • ensure safeguarding of human rights guaranteed by the existing legal framework and signed international treaties, which will lead to a better integration of returnee and Roma population into the community and reduce the poverty levels among these categories;
  • fully implement the BiH Law on Gender Equality, which will reduce the gender effect on the poverty level;
  • implement the reform of the education system, provide out-of-school forms of education and make them accessible to persons with low levels of education, which is most frequently the cause of their poverty.

Notes

1Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 2.
2Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, pp 3–4.
3The changes may be followed over time only if an LSMS or similar survey is taken every year, which is not the case at this time. LSMS is not yet a panel survey, i. e. a survey conducted periodically. Although the Living in BiH Survey has been developed from LSMS, it does not contain the consumption module which may serve to calculate the poverty line. A Household Budget Survey (HBS) is planned, but the problem with the HBS is that most variables from LSMS have not been included into HBS questionnaire, so the analytical possibilities are significantly constrained, though the poverty line, which is the basis for all poverty-related analysis, can be determined from the HBS findings.
4Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 5.
5Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 6.
6Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 5.
7Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 5.
8Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 6.
9Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 9.
10Bosnia and Herzegovina: Poverty Assessment, Volume II, World Bank, Report No. 25343-BIH, p. 46.
11Early Warning System, Quarterly Report April – June 2002, UNDP and BiH authorities, pp. 15–16.
12Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 13.
13Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 22.
14Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 7.
15Human Development Report/Millenium Development Goals, June 2003, p. 17.
16Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 11.
17Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 12.
18Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 36–37.
19Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 35.
20Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 36.
21Gender and Poverty: A Qualitative Survey, IBHI, June 2002, p. 6.
22Gender and Poverty: A Qualitative Survey, IBHI, June 2002, p. 6.
23Human Development Report, UNDP, September 2002, page 42.
24Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 111.
25Reform of social security development in FBiH, Inter-ministerial Working Group for Social Policy, February 2002, p. 28–29.
26UNHCR Mission in BiH, www.unhcr.ba
27Bosnia and Herzegovina: Poverty Assessment, Volume II, World Bank, Report No. 25343-BIH, p. 38.
28Gender and Poverty: A Qualitative Survey, IBHI, June 2002, p. 2.
29Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 127.
30Reform of social security development in FBiH, Inter-ministerial Working Group for Social Policy, February 2002, p. 9, and Analysis of the situation in the social sector in RS with proposed measures, Social Sector Working Group, June 127.
31Reform of the development of social security in FBiH, Inter-ministerial Working Group for Social Policy, February 2002, pp. 7–8 and 11, and Analysis of the situation in the social sector in RS with policy proposals, Working Group for Social Sector, June 2002.
32Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 127.
33Bulletin 4, January – December 2002, Central Bank of BiH, pp. 148–149.
34Education in Poverty Reduction, Federal Ministry of Education, Science, Culture and Sports, May 2002.
35Reform of the development of social security in FBiH, Inter-ministerial Working Group for Social Policy, February 2002, pp. 19,
36Analysis of the situation in the social sector in RS with policy proposals, Working Group for Social Sector, June 2002.
37Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 33.
38Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 38.
39Bulletin 4, January – December 2002, Central Bank of BiH, pp. 153.
40Monthly Bulletin of the Federal Statistical Bureau, June 2002, page 55, and Early Warning System, Quarterly Report April – June 2002, UNDP and BiH authorities, p. 36.
41Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 120–121.
42Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 35.
43FBiH Retirement Fund, April 2003.
44Human Development Report, UNDP, September 2002, p. 86.
45Payment of retirement benefits, RS Retirement Fund, December 2002.
46Report of the European Commission to the Council on preparedness of BiH to initiate negotiations with the European Union on the Stability and Association Agreement, Brussels, 18 November 2003, p. 10.
47Report of the European Commission to the Council on preparedness of BiH to initiate negotiations with the European Union on the Stability and Association Agreement, Brussels, 18 November 2003, p. 11.
48Report of the European Commission to the Council on preparedness of BiH to initiate negotiations with the European Union on the Stability and Association Agreement, Brussels, 18 November 2003, p. 11.
49Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 32.
50Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 44.
51Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 60.
52Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 46.
53Global Advocacy for Gender: Vienna Declaration, Convention on Elimination of Discrimination Against Women (CEDAW), and Beijing Action Platform
54Gender and Poverty: A Qualitative Survey, IBHI, June 2002, p. 25.
55Human Development Report/Millenium Development Goals – BiH 2003, UNDP BiH, June 2003, p. 41.
56Independent Bureau for Humanitarian Issues.
57Gender and Poverty: A Qualitative Survey, IBHI, June 2002, p. 1.
58Bosnia and Herzegovina: Poverty Assesment, World Bank, Report No. 25343-BiH, p. 38.
59Human Development Report, UNDP, Sarajevo, June 2003, p. 18.
60Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 38–39.
61Gender and Poverty: A Qualitative Survey, IBHI, June 2002, p. 2.
62Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 102–103.
63This Law has been harmonized with EU standards, adopted by the BiH Parliament and gazetted on 16 June, 2003, “Official Gazette” No. 16/03.
64Human Development Report, UNDP, September 2002, pp. 53–54.
65Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 42.
66Household Survey of Women and Children in BiH, 2000, UNICEF and Statistics Agency of BiH, December 2000, pages 47 and 111.
67Early Warning System, Quarterly Report April – June 2002, UNDP and BiH Authorities, pp. 16–17.
68Early Warning System, Quarterly Report April – June 2002, UNDP and BiH Authorities, p. 34.
69Status of Roma in BiH (Poll Findings), Center for Protection of Minority Rights, Sarajevo, 1999, p. 14.
70Denied a Future? The Right to Education of Roma Childer in BiH, Save the Children, March 2001, p. 34.
71Denied a Future? The Right to Education of Roma Childer in BiH, Save the Children, March 2001, p. 19.
72Denied a Future? The Right to Education of Roma Childer in BiH, Save the Children, March 2001, p. 9.
73Denied a Future? The Right to Education of Roma Childer in BiH, Save the Children, March 2001, p. 32.
74Analysis on the Current Status of the Roma Returnees to Tuzla Canton, Helsinški parlament gradana i romska udruženja iz Tuzlanskog kantona, 1999.
75Report of the European Commission to the Council on preparedness of BiH to initiate negotiations with the European Union on the Stability and Association Agreement, Brussels,18 November 2003, p. 13.
76Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 49.
77Human Development Report, UNDP, September 2002, Pages 47–48.
78According to LSMS findings.
79Human Development Report, UNDP and Economic Institute Sarajevo, September 2002, Page 35.
80Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BiH, p. 99.
81Bosnia and Herzegovina: Poverty Assessment, World Bank, Report No. 25343-BIH, p. 27.

II. MEDIUM-TERM MACROECONOMIC FRAMEWORK AND FRAMEWORK FOR FISCAL REFORM

II.1. MEDIUM-TERM MACROECONOMIC FRAMEWORK

1. Objectives

1.1. By 2007, reach 70% of 1991 GDP;

1.2. By 2007, achieve partial credit worthiness on international capital market.

2. Situation: Recent Trends

After the war, GDP in Bosnia and Herzegovina fell to about 20% of its pre-war level. Since 1995, BiH recorded high levels of growth averaging over 25% per year. As a result per capita GDP more than doubled from around KM 900 in late 1995 to an estimated KM 2,900 in 2003, although one needs to emphasize that the aforementioned level of GDP remains around half of the level executed in 1990. There are significant differences between the two Entities, with per capita GDP in the RS being only around 75 percent of that in the FBiH. Substantial regional differences in the level of economic development exist in both Entities.

From very high levels (over 75% in 1996 and 35% in 1997) real economic growth fell to around 10% in 1999 and an estimated 3.5% in 2003. This reflected a number of factors, including the end of the immediate post-war economic rebound, which was a result of a significant inflow of donor funds, falling levels of international assistance, slower than anticipated progress with economic reforms, political instability in the region, economic crisis in the world and the adverse climatic conditions in 2000 and 2003 which affected agricultural output.

In the course of the previous period, certain progress has been achieved in a number of areas1. The Central bank of BiH was strengthened: in 2003, the coverage of imports with reserves amounted to around 5 months. Due to the growth of public revenues, consolidated fiscal deficits were decreased, from 9 percent of GDP in 1999 to a modest surplus in 2003. Tax administration was strengthened, which yielded positive results, as constant growth of revenues was being recorded. Trade deficit, which amounted to 50 percent, in relation to GDP, between 1996 and 1999, is now constantly declining. In 2003 trade deficit declined on around 40% of the GDP. In period after the war exports were increased nine times over. Better control of expenditure was established, through the treasury system, which is functioning on the state and entity level, and which is now being introduced on cantonal and municipal levels, too. Fiscal consolidation was undertaken, through the implementation of additional activities aimed at demobilization of soldiers, and the reform of public administration is in preparation, too. Industrial production still shows positive growth rates. After the decline in 2001 and 2002, the scope of industrial production in RS in 2003 grew by 5 percent. In FBiH it grew by about 4,5 percent, which is still less than in 2002. The general assessment is that BiH is developing solid macroeconomic policies and achieving results in structural reforms2.

Economic development is multidimensional, and, to a large extent, it depends on maintaining macroeconomic stability and openness of economy in BiH. Economic growth and stabile economic developments creates the preconditions for increasing the employment rate and the rate of efficiency of the social protection system, which, at the end, leads to the reduction of poverty.

2.1. Problems

Recent economic development has been associated with substantial external and internal imbalances generated by the post-war adjustment and reconstruction of the economy. The massive reconstruction programme required a very high level of imports that has been reflected in the still present extremely large current account deficit, which amounted to around 17% of GDP in 2003. Slow renewal of domestic production affected the exports, which were weak, and which, in 2003, amounted to about 31 percent of total imports. Unemployment rate was also at a very high level.

The reconstruction of the country required a significant public investment program, which, for example, in 2001, represented about 10% of GDP, having fallen from around 15% of GDP in the late 1990s. Levels of public consumption have remained high, at around 23% of GDP in 2003, which affected the growth of tax burdens and fiscal revenues that have grown in line with the Gross Domestic Product (GDP). The continued high level of public consumption to a significant extent reflects the limited progress with economic transformation. In parallel with that, throughout the period, there is a constant trend of extremely high levels of public expenditure. In 2003 they amounted to about 46% of GDP and they by far outreach the average for transition countries.

High levels of imports, public consumption, public investments and public expenditure were, in the most part, possible due to substantial inflows of foreign aid, the spending of a significant number of foreigner residents in BiH and high levels of remittances from BiH citizens living abroad (refugees).

The data on the overall budgetary deficit are still unknown, and it could turn out to be higher than the data shown in this document indicate, due to strong indications that the cantonal and municipal budgets got indebted in the domestic banking sector. According to the IMF3 data cantonal budgetary deficits financed in this manner reached the amount of about 42 mill KM in the year 2002, which is far above planned level.

A particular difficulty is present in the level of the so-called corporate debt, which is, in the most part, the debt of companies in state ownership or companies privatized through certificates (vouchers). In fact, of special concern is the appearance of the so-called “non-payer culture” in relation to wages, contributions, taxes and liabilities to suppliers, creditors etc. Debts of those enterprises grew to such an extent that they pose one of the most severe obstacles for privatization and continuing development of the country.

Activities in the recent period failed to result in achieving total integration of the single economic space in BiH, and the size of the gray economy (36 percent of GDP) creates a magnitude of problems. The transition is posing a set of questions bearing social and cultural consequences, that are already present in BiH, such as, for example, «to pay or not to pay the taxes», «to register or not to register the workers».

3. Medium-Term Macroeconomic Framework: we have lost 18 years, must we lose another 18?!

Table 1 shows the projected midterm macroeconomic framework for the PRSP. This framework is called “Reform Scenario” and it implies aggressive implementation of reforms envisaged in the proposal of the Mid-term Development Strategy for BiH (PRSP).

Table 1.Reform scenario Bosnia and Herzegovina: Mid-term Macroeconomic Framework, 2003-2007
20032004200320062007
Proj.Proj.Proj.Proj.Proj.
Real sector
Nominal GDP (In millions of KM)12.17312.91113.85414.89316.040
(Percentage change)4,76,17,37,57,7
Real GDP (In millions of 1999 KM)10.80611.35711.98112.64013.335
(Percentage change)3,55,15,55,55,5
CPI, period average percentage change0,10,91,82,02,2
Savings and investment (In percent of GDP)
Consumption111,1108,4106,1103,4100,5
Public consumption22,522,321,220,119,1
Private consumption88,786,184,983,381,4
Investment19,920,321,221,822,2
Public investment4,54,94,94,95,0
Private investment15,515,516,316,917,2
National savings2,34,56,08,310,4
Public savings1,81,52,53,23,4
Private savings0,53,03,55,07,0
Foreign savings17,715,815,213,611,3
General government (In percent of GDP)
Total revenue and grants46,745,844,743,542,5
Grants3,43,32,31,51,1
Total expenditure46,346,045,444,343,1
Current expenditure41,941,140,539,433,1
Capital expenditure4,54,94,94,95,0
Own-financed capital expenditure0,20,60,81,11,7
Foreign financed capital expenditure4,24,34,13,83,3
Overall balance0,4-0,2-0,7-0,8-0,6
Overall balance excl. grants-3,0-3,5-3,0-2,4-1,7
Accumulation of arrears0,50,70,50,50,5
Financing0,20,81,21,31,1
Domestic financing0,0-0,20,60,70,3
Foreign financing0,11,10,60,60,8
Total foreign assistance 1/564,53,72,6
(In millions of US dollars)350436372322283
Balance of payment; (In millions of US$)
Current account balance (including official transfers)-1.237-1.302-1.368-1.324-1.187
(Percent of GDP)-17,7-15,6-15,2-13,6-11,3
Export growth rate (In percent)3422131415
Import growth rate (In percent)22125,46,56,4
Gross reserves1.7251.7141.7641.8141.864
(Months of imports of goods and n.f services)4,54,54,44,34,1
Total public debt 2/
(In millions of US£)2.5724.9304.9975.0385.041
(In percent of GDP)34,059,756,252,548,5
Total external debt service in percent of exports of goods and non-factor services8,67,27,06,14,4
Memorandum item:
Percentage change in real current public expenditure1,34,9-1,32,52,8
Sources: Data provided by the Bosnia and Herzegovina authorities; and IMF staff estimates and projections.

Includes disbursements of foreign loans, and grants.

Includes external public debt, stock of expenditure arrears, debt to domestic banks, and frozen foreign currency deposits. Excludes any liabilities arising out of war damage claims.

Sources: Data provided by the Bosnia and Herzegovina authorities; and IMF staff estimates and projections.

Includes disbursements of foreign loans, and grants.

Includes external public debt, stock of expenditure arrears, debt to domestic banks, and frozen foreign currency deposits. Excludes any liabilities arising out of war damage claims.

3.1. Reform Scenario

The scenario envisages that, in mid term, the real GDP growth rate will increase from 3.5 percent in 2003 to 5 percent in 2004, reaching about 5.5% by 2007. Such growth rates envisaged by the Reform Scenario would enable BiH to regain the pre war levels of GDP by the end of the decade, and accelerate the integration of BiH into EU.

The key risk to realization of the Reform Scenario is the possibility that the necessary pace of reforms proposed by the Mid-term Development Strategy for BiH (PRSP) will not be achieved, which would result in lower rates of economic growth. The impact would be further exacerbated by a sharper than expected fall in external resource inflows, which can be expected to be increasingly linked to the timely implementation of reform measures.

3.2. Scenario in the Case of a Slower Implementation of Reforms (status quo)

Due to the risk that the governments might fail to achieve the necessary pace of implementation of reforms, the PRSP team prepared an alternative mid-term macroeconomic projection which is titled “Scenario in the Case of a Slower Implementation of Reforms”. That scenario is based on the trends in growth and implementation of reforms, which existed between 1996 and 2002 (status quo scenario).

According to this scenario, GDP growth rate in real terms would, in 2004, will fall down to 1.8 percent, after which it would stabilize at the level of 1.9 percent annually (Table 2). In 2006, GDP growth in real terms would be around 10% lower than the one projected within the Reform Scenario. In real terms, public consumption would fall by 8 percent, which would require significant reductions of allocations for social benefits, public service and public investment financing. In case of this scenario, there is a risk that, due to internal and external imbalances, enforced adjustments would take place, which would additionally undermine economic growth and stability. Prospects for building a sustainable economy and reaching the pre war GDP level would be utterly uncertain, international aid would decline drastically, the country would not have credit worthiness to get indebted on the international capital market, and the prospects for entering EU by 2009 would be significantly undermined.

Table 2.Scenario in the Case of a Slower Implementation of Reforms
2004200520062007
Proj.Proj.Proj.Proj.
Real Sector
GDP in nominal terms (KM million)kt11,59311,92412,29812,717
(percentage change)3.5%2.9%3.1%3.4%
GDP in real terms (KM million)11,18511,39811,61411,835
(percentage change)1.8%1.9%1.9%1.9%
CPI: period average percentage change1.7%1.9%2.0%2.1%
General Government (% of GDP)
Total balance (KM million)-321-341-353-347
Total Revenues and Grants53.3%53.0%52.8%52.6%
Total Expenditure56.0%55.9%55.6%55.3%
Overall Balance-2.8%-2.9%-2.9%-2.7%
Total Foreign Assistance (grants and loans in m.US$)371381356341

Taking into account the adverse effects of maintaining the status quo and a slower implementation of reforms, BiH does not have any alternative other than to accept the Reform Scenario and accelerate the reforms. Even in the case of the implementation of the Reform Scenario, which requires the implementation of an ambitious reform plan envisaged by the Mid-term Development Strategy of BiH (PRSP), BiH will lose 18 years of development, as the reinstatement of the pre war GDP levels is envisaged in 2009, and not prior to that. The question to ask the governments and the public in BiH is: must we lose even more?

3.3. Important Prerequisites for the Realization of the Reform Scenario

In order for the objectives envisaged by the Reform Scenario (Table 1) to be achieved, it will be necessary to undertake the following priority activities and measures:

3.3.1. Maintain GDP growth rate of 5 to 5.5 per cent per annum

Growth rate in real terms in 2003 amounted to 3.5 percent of GDP. The drought that affected the region this year was also one of the significant causes of the reduction of the growth rate in real terms. In the following four year, the growth rate should reach the level of between 5 and 5.5 percent of GDP. Besides the implementation of the set of priority reform activities and measures, the final results of the Reform Scenario realization shall still be affected by external factors. The decline of oil prices and rebound of the world economy, and, especially, of European economy, shall continue to be important factors determining the rate of economic growth.

3.3.2. Maintain Low Inflation, Decrease Overall Public Expenditure, Consolidate Public Debt

With the arrangement of the “currency board” it is to be expected that the inflation will remain low throughout the period, at between 1 and 2 percent. On the fiscal account, the overall deficit before grants is expected to fall from around 3 percent of GDP in 2003 to around 1,7 percent of GDP in 2007. Overall public expenditure, which amounted to about 46 percent of GDP in 2003, shall have to fall to about 43 percent of GDP by 2007. High level of public expenditure in recent years was facilitated by a significant scope of international financial aid, significant expenditure of foreign residents, and significant monetary transfers. In the course of the aforementioned period, it is expected that the level of public expenditure shall fall from around 22% of GDP in 2003 to 19% of GDP in 2007. Fiscal discipline will be further reinforced by continuation of the policy of avoiding commercial external borrowing and restrictive borrowing of governments on the domestic capital market. The realization of entity level plans for the reduction of public debt shall result in the decline of the overall level of public debt from around 60 percent of GDP in 2004 to around 49% in 2007. The highly concessional nature of external debt means that external debt servicing payments will remain modest, falling from 8,6% of export receipts in 2003 to 4,4 percent in 2007.

3.3.3. Decrease the Current Accounts Deficit and Trade Deficit and Increase Exports

In 2002 the foreign trade deficit deteriorated due to a sudden increase of imports caused by a sudden expansion of consumers’ credits, the scope of which increased by 102% in comparison with 2001. That caused the deterioration of current account deficit for even 4,5 percent. The adverse set of circumstances is further exacerbated by the fact that in last year the level of remittances from abroad was decreased4 due to the fact that the refugees are still returning to BiH in significant numbers.

The Reform Scenario envisages that in the course of the 2004–2007 period, exports should grow at a rate of between 13 and 15 percent, and that the growth rate of imports should be retained at between 4 and 6.5 percent. It is envisaged that the realization of those rates of imports and exports should lead to a decrease of the trade deficit and the current accounts deficit from about 17 percent of GDP in 2003 to about 11 percent in 2007.

3.3.4. Increase the Scope of Investments; Ensure an Increased Inflow of Foreign Investments

The scope of investments should grow from about 20 percent of GDP in 2003 to about 22 percent of GDP by 2007. In parallel with the decrease of the scope of public investment as percentage of GDP, primarily due to the decrease of grants and the implementation of rationalization measures in public consumption, growth of private investments is envisaged, from about 15 percent of GDP in 2003 to about 17 percent of GDP in 2007.

Achieving higher rates of private investments shall require a higher scope of foreign investments. The scope of foreign investments have to be increased gradually, from the level of about 2,5 percent of GDP in 2002, in order for it to reach the level of about 9 percent by 2007. In absolute terms, that means that around US$ 2 billion shall have to be mobilized on that basis by 2007.5 That is an important prerequisite for the success of the Reform Scenario, as a higher level of foreign investments shall have to compensate for the declining levels of international aid. At the same time, a higher level of foreign investments shall contribute to the growth of exports, as there are other advantages that foreign investments bring, such as new technologies, new management and new markets.

3.3.5. Increase the Level of Private Savings

Regardless of the continuing growth of private savings in the previous years (due to the exchange of old currencies to EURO and the increase of confidence in the domestic banking sector), the level of private savings6 in 2003 remained at the level of just 0,5 percent of GDP. Reasons should be found in the fact that, in last year, there was a delay in privatization, which slowed down the development of the private sector. Profitability and productivity of enterprises in BiH is at a low level, which has a direct effect on the low level of private savings. An important precondition for the success of the Reform Scenario is for private savings to grow continuously in order to reach the level of about 7 percent of GDP in 2007, which will require implementation of a set of measures that should lead to a more accelerated growth of the private sector and the growth of citizens’ savings.

3.3.6. Ensure the Continuation of Favorable International Financial Aid

BiH is not a credit worthy country, which means that it cannot acquire credit indebtedness on the international capital market. Due to that, in order to maintain the growth rates envisaged by the Reform Scenario for 2003–2007 period, it shall be necessary to ensure additional international financial aid, at least at the level of about US$ 1,5 billion. That aid has to comprise of favorable credits and grants, with a very limited share of commercial credits in the later part of the mid term period. On the basis of initial consultations which were held with key donors, there is a level of readiness for a socalled consultative meeting with donors and potential investors to be held after the end of the preparation of PRSP and after the PRSP is adopted by the authorized bodies, and on that meeting additional possibilities for a new cycle of international aid to BiH would be considered. It is quite certain that any international aid for the coming period will be conditioned with a significant level of progress in the realization of reforms, which implies the implementation of the Reform Scenario and the reform program contained in the Mid-term Development Strategy of BiH (PRSP).

In the coming period, it shall also be necessary to reach an agreement with the IMF in connection with the reform program. In contrast with the previous period, characterized by the short term Stand-by arrangement, it shall be necessary to reach an agreement on a mid term program (EEF).

4. Monetary Policy: BiH Central Bank

Managing fiscal policy on the principle of the “currency board” should keep on being a very important prerequisite for maintaining fiscal stability, in the coming mid term period, too. It should ensure a low level of inflation, fiscal policy that should exert pressure on maintaining low deficit, with an increased level of public investments and accelerated implementation of structural reforms. However, the functions of the Central Bank of BiH should be expanded with the objective of strengthening the financial sector and providing incentives for the development of capital markets.

In view of this, it is necessary to amend the Law on Central Bank of BiH, in order to enable the bank to play a limited role of the “bank of last resort” in the coming mid term period, within the framework of the currency board rules. This is important because of the fact that there is term inconsistency present between the deposits and credits awarded, which increases the so-called “systematic risk”. Due to the domination of short term deposits, banks (in most cases those with the majority of domestic capital) are, because of the need to maintain liquidity, forced to keep more assets than is usual. Taking into account that those resources are not interest bearing, banks have higher operation costs, which affects the price of banking services and the level of interest. An important prerequisite for the Reform Scenario is the growth of private savings (both citizens’ and corporative), which depends in the stability of the banking sector. The Central Bank would, through a limited role of the “bank of last resort”, have an instrument with which it could forestall crises of liquidity in certain banks, and, with the reduction of the so-called “systematic risk” it would contribute to the stability of the banking sector.

Central Bank of BiH should also be allowed to issue short term bonds within the framework of the currency board. The domestic banking sector feels the need for short term securities in which it could make investments. Emission of short term securities by the Central Bank would result in a reduction of assets held abroad by domestic banks, and it would facilitate the development of capital markets, as an important prerequisite for the realization of the pension system reform.

As a result of the management of monetary policy on the principle of the “currency board” it shall be necessary to ensure a stable level of national reserves in the coming medium term, too. The existing level of national reserves of about 5 months of overall exports is satisfactory and it represents a stabilizing factor in the functioning of the Central bank of BiH. In order to ensure the stability of the currency board, it is necessary to reduce the current account deficit in line with the aforementioned parameters, as that deficit, together with the amount of the public debt, represents the most severe threat to macroeconomic stability. In connection with that, besides the reduction of the public debt, it is necessary to reduce the current account deficit, and, as has already been mentioned, through increasing export rates, decreasing import rates and increasing the inflow of foreign investments.

In parallel with that, it shall be necessary for the Central Bank of BiH to continue with the implementation of measures of monetary policy with the objective of limiting the scope of consumers’ credits at the extent to which they represent a threat to the increase of the current account deficit.

II.2. FRAMEWORK FOR FISCAL REFORM

1. Objectives:

1.1. Decrease the share of public expenditure in the GDP

1.2. Achieve sustainability through fiscal consolidation

2. Situation

The entity governments have adopted Budget Framework Papers (BFPs) for the preparation of the 2004 budget which include a Medium Term Expenditure Framework (MTEF) for 2004 – 2006. The fiscal reform programme for BiH as a whole, as presented in this chapter, is broadly consistent with the MTEF for each entity.

Levels of domestic revenues that, in 2003, amounted to about 47 percent of GDP, including grants, and public expenditure, at about 50 percent of GDP, are still significantly higher than in other transition economies with similar GDP levels. The high levels of revenue and expenditure are common to both FBiH and RS, although RS revenue and expenditure is higher than FBiH, when expressed as a % of GDP and lower when expressed as values per capita.

Slower economic growth and the decline of foreign aid flows have resulted in a stagnation of the general government spending since 2000, although current expenditure in real terms continued to grow. Reflecting the differences in GDP per capita, public expenditures in RS are currently at the level of only about 75% of public expenditure in FBIH.

Significant, although declining, level of foreign grants and loans, which, in 2002, amounted to 8 percent of GDP, sustains an important program of public investments relating to reconstruction. High levels of expenditure are present in many important sectors, including defense, law and order, education, health and social protection. Overwhelming public services and relatively high level of public sector wages are resulting in high administration related costs.

Fiscal planning and management is hindered by decentralized government structures: 94 percent of overall budgetary expenditure falls to entity and lower levels, while in FBiH, 55 percent of budgetary expenditure falls to cantonal and municipal levels, with 22 percent of RS expenditure at the municipal level.7 Resource allocation between different levels of government is often unadjusted to responsibilities for service provision in the public sector.

There are significant discrepancies in per capita spending between the entities, but also within the entities themselves. Overlapping responsibilities are evident, as well as overlapping in the allocation of public revenues on different levels of government, especially between cantons and municipalities in FBiH. Institutional frameworks for macroeconomic analysis of fiscal policies remain very limited.

The existing model of fiscal operations produces high tax burdens. That creates significant disincentives for the development of economy in the private sector and contributes to the growth of gray economy and wide expansion of tax evasions

3. Fiscal reform in the Conditions of the Reform Scenario and the Scenario in Case of a Slower Implementation of Reforms

In the context of fiscal reform it is also necessary to analyze the effects in the case of both the realization of the Reform Scenario, which implies an aggressive implementation of reforms envisaged by the Mid-term Development Strategy of BiH (PRSP), and the scenario in case of a slower implementation of reforms. While PRSP does not expect that the slower reform will take place, it is, nevertheless, necessary to make contingency plans for managing public finances in case external factors actually cause a slower rate of economic growth.

3.1. Fiscal Reform: Reform Scenario8

Relatively rapid economic growth will permit progress to be made towards fiscal consolidation with the overall general government deficit for 2004–2007 remaining at a low level of about 0,6 percent of GDP (including grants). That should provide scope for funding regular servicing of foreign and domestic debt in line with plans for the reduction of public debt. Total revenues and grants over the period are projected to fall from about 47% of GDP in 2003 to about 431% of GDP in 2007. This is in line with the entity MTEF projections (BFP)9.

On the public expenditure side, total expenditure is projected to fall from about 46% of GDP in 2003 to 43% of GDP in 2007, which is also in line with entity MTEF projections (BFP).

Thanks to the favorable structure of external debt it is expected that the servicing of foreign debt will decline from 8.6 percent of overall exports in 2003, to around 4.4 percent by 2007. in view of the importance of capital investments for the development of the country in the conditions of insufficiently developed private sector, in the coming mid term period it shall be important to maintain their scope at the level of about 5 percent of GDP, regardless of the decline of international aid. However, domestically financed public investment will have to be increased, from 2% in 2002 to 2.6% of GDP in 2007, to compensate for a decline in foreign financed investment.

External concessionary credits will continue to provide the primary source of financing of the budget deficit, although total foreign assistance is expected to fall from 8% of GDP in 2002 to 2% of GDP in 2007. Public sector borrowing from domestic sources will continue to be tightly controlled.

3.2. Fiscal Reform: Scenario in Case of a Slower Implementation of Reforms

This scenario illustrates possible consequences of a slowdown in the pace of economic reform leading to lower rates of investment and growth. It assumes that real economic growth from 2004 onwards will only be one third of that in the Reform Scenario and that external aid flows would only be twothirds of expected as donors respond to the slow pace of reform by delaying the release of planned financial aid and reducing new funding commitments. As a result, public expenditure would remain static in real terms. That would lead to significant deterioration in the quality of public services and would make it more difficult to meet the demands for social assistance, which would increase the level of poverty in comparison with the current one.

4. Fiscal Reform Priorities

Priority activities in the area of fiscal reform shall be directed towards decreasing the share of public spending in the GDP. In connection with that, allocations for defense and law and order should be reduced, and allocations for wages in public administrations should be constrained. In parallel with that, mechanisms for more efficient collection of public revenues and reduction of the scope of gray economy shall be established, control over the collection and expenditure of public revenues shall be strengthened, budget management and planning shall be improved. Finally, sector spending shall also have to be reduced to sustainable levels.

4.1. Establish a More Efficient System of Public Revenue Collection

Significant progress has already been made in the harmonization of indirect taxes, rationalization of exemption policies and reduction of high rates of labor taxes10.

The focus of this reform area is put on establishing the BiH Board for Indirect taxation, within which a unified customs administration is going to function on the state level. Another important step is the introduction of value added tax (VAT) on the BiH level, with the fundamental aim of elimination of the existing obstacles to economic development, more efficient collection of direct revenues, prevention of fraud and corruption, reduction of the level of gray economy, and achieving progress towards EU integration and WTO membership.

In the same period, it is necessary to prepare and realize the reform of direct taxation, also with the aim to modernize the system and harmonize it with European practices. In this context, it is important to eliminate all present forms of double taxation, especially in the case of profit tax and income tax. Finally, in parallel with the strengthening of the customs administrations, it shall be necessary to continue with the strengthening of tax administrations.

The establishment of a new system of revenue collection shall contribute to increasing efficiency, as well as to the reduction of the level of gray economy. Introduction of the VAT is an importantly instrument in achieving this goal. However, taking into account that the implementation of the VAT is expected in the final phases of the implementation of the Mid term Development Strategy for BiH (PRSP), positive effects of its introduction could not be taken into account when designing entity Mid Term Expenditure Frameworks (BFPs).

Although the general objective of the BiH Medium Term Development Strategy (PRSP) is to reduce the overall tax burden, especially for the economy, through the reduction of the scope of public spending, it was determined that there is room for increasing certain types of taxes. That primarily refers to the so-called «property taxes» which are under the scope of authority of sub-entity levels of government. However, on those levels, especially municipal ones, there is a practice of enforcing new tax burdens which do not have any foundation in the legislation. This concerns the introduction of various administrative fees. In line with that, it is necessary to ensure the implementation of the legislation and prevent such occurrences.

With the objective of more efficient collection of public revenues based on oil, it is necessary to create preconditions for the transport of oil and oil derivatives by rail and waterways exclusively (Brčko).

4.2. Ensure Adequate Allocation of Public Revenues to Different Levels of Government and Strengthen Coordination Between Them

A further set of issues relates to the assignment of revenues and expenditure responsibilities. As has already been mentioned, BiH is functioning as a highly decentralized system, in which almost all revenues are collected and spent on sub state levels. According to the Constitution of BiH, institutions on the state levels have limited authorities, only, so, due to that, the level of expenditure on the state level is also low. The largest part of public revenue spending happens on entity and cantonal levels. In both FBiH and RS, municipalities play a limited role, directed primarily to urban planning, public utility services, local facilities, culture and limited functions in health and education. As has already been mentioned, municipal expenditure accounts for just 7–8 percent of overall entity spending, and in RS it amounts to 22 percent.

There are substantial regional variations in per capita revenues, especially in FBiH, which was, in the absence of sufficient equalization mechanism, reflected in the quality of public service delivery. For example, in 2001–2002 cantonal per capita revenues averaged KM 521 across all cantons, ranging from KM 299 in Gorazde to KM 1,172 in Sarajevo.

On the other side, entities have adopted policies which had implications on expenditure programs on cantonal and municipal levels, without a thorough consideration of the availability of resources for covering the resulting costs on the sub entity level. That presents a special problem, especially when it comes to legislation in the sector of social protection. When determining tax-sharing mechanisms, insufficient attention was paid to public expenditure needs of sub entity governments. For example, in FBiH, although canton governments have the major responsibility for the delivery of public services, their share of total FBiH revenues11 has fallen from 61% in 1999 to and estimated 49% in 2002. The situation improved due to the change of the point of collection of sales tax, which occurred in the course of 200312. However, the cantons are, in general, faced with enormous difficulties in budgetary expenditure planning because of the insufficient level of coordination between the entity and the cantonal level in decision making, which results in the change of revenue and expenditure policies.

The strengthening of state level revenues shall be executed in parallel with the introduction of the VAT, and, until that period, the state budget shall be filled with transfers from entity budgets. A part of the reforms is directed towards the strengthening of public administration (for example. Defense reform, customs reform…) which should not lead to an increase of the overall public spending: the transfer of entity authorities to the state level shall lead to the reduction of their budgets. In 2004 the Brčko District shall initiate regular transfers of a part of its revenues to the state budget.

In the course of the coming period one can expect a further decrease of customs revenues, of up to 20 percent per annum, especially because of the implementation of the free trade agreements with the countries of the region. Taking into account that the customs represent a very important source of revenues for entity budgets (especially in FBiH), and in order for disturbances in entity financing to be avoided, it shall be necessary to compensate for the loss of revenues, primarily through increasing the level of efficiency in the functioning of customs administration, and, in the coming mid term, through the reallocation of revenues on the basis of VAT. An important step in that direction is the reduction of the number of customs offices, customs desks and border crossings for the trade of goods.

The preparation of public administration reform in BiH is ongoing and one of its objectives is to eliminate the overlapping of activities, to increase efficiency and establish coordination between different levels of government. In line with the strengthening of the system of public revenue collection and reforms in the area of public administration, it shall be necessary to ensure adequate allocation of public revenues to different levels of government.

In connection with those issues, it is necessary to:

  • Ensure the coordination of activities in relation with the decision making with implications on the change of revenue and expenditure policies. This is especially important in the case of FBiH, where the Ministry of Finance of FBiH has established regular coordination with cantonal ministries of finance, which needs to be strengthened constantly,
  • Ensure that the allocation of resources between entity and sub entity levels reflects the distribution of responsibilities connected to public service provision,
  • Establish a higher level of solidarity, in order to assist poorer cantons and municipalities.

4.3. Constrain Public Sector Wage bill Spending

At 19.6%13 of GDP in BiH, wage bill spending in the public sector is almost three times the level of other Central and Eastern European (CEE) transition countries. One consequence is that spending on current operations and material costs are on a low level, which is threatening the quality of public services.

The high level of wage bill spending in BiH is not, to such a degree, a consequence of the size of public service employment14, as of the level of public sector wages and salaries, which are significantly higher than in similar transition countries (especially in the case of FBiH and the state level). An equally significant factor is that the levels of public sector wages are different on different levels of government: wages on the state level are up to 40 percent higher than wages in RS public services. Wages in the district of Brčko and City Administration of Mostar are the highest in BiH. In FBiH, wages on public administration are by 35 percent higher than average, and, in RS, by 37 percent, while the difference in the District of Brčko is the most pronounced (67 percent). The disparity in the level of wages in the country additionally affects the differences in the quality of public service provision.

In contrast with the practice present in all developed countries, the level of public sector wages is significantly higher than the level of wages in the real sector of economy, with the exception of the financial sector15. Polls among the employers (see section on labor market) have ascertained that they have significant difficulties in finding adequate labor force on the market, which is, inter alia, a result of the high level of interest for working in public administration and public enterprises. Nevertheless, there continue to be substantial pressures for additional salary and wage increases in public administration. In the course of the previous year (2002), the Government of FBiH has increased the budget item for wages by about 30 percent in comparison to the year before, while the RS did the same, at the level of about 10 percentage points. The trend of growth in public sector wages continued in 2003 also.

In view of the aforementioned, in the coming mid term period (2004–2007) it is necessary to constrain the allocations for public sector wages. However, taking into account the different wage levels, this measure should not be implemented equally in both entities and the Brčko District. That means that the average budgetary wage increase in FBiH should not be over 2 percent, while in the RS it should not be over 4–5 percent, and any additional wage increase should be compensated for with an adequate decrease of the number of public servants.

Constraining wage allocations shall enable the decrease of overall allocations on that basis as the share of GDP in the coming mid term – in RS, from about 10 percent in 2003 to 7.8 percent in 2006, and in FBiH from about 16 percent in 2003 to 12.3 percent in 2006.

4.4. Reduce Allocations for Defense and law and Order (including Judiciary)

Budgetary spending on defense at 4.5% of GDP16 (2.7 percent in RS, 5.1 percent in FBiH17) is over twice the average (1.9% of GDP) for other CEE countries. Substantial off-budgetary expenditure and arrears means that in recent years, the true level of defense expenditure has been significantly higher18. Spending on defense is also excessively concentrated on personnel (around 80% of budget).

Spending on public order and safety at 4.4% of GDP19 is over twice the average for other CEE countries and four times the average for EC countries. Expenditure in the sector is driven by high levels employment which are substantially above pre-war levels.

In the defense sector, reforms and demobilization should be continued, in order for the allocations for defense in FBiH to be reduced from 5.1 percent of GDP in 2002 to 2.3 percent in 2006, and, in RS, from 3.8 percent in 2002 to 1.9 percent in 2006. In the course of 2004, alone, both entities are planning to demobilize about 8,000 soldiers, which will lead to additional savings at the level of about 1 percent of GDP.

In the area of law and order, rationalization plan needs to be prepared, in order for the allocations for that purpose in FBiH to be reduced from 4.5 percent of GDP in 2002 to 3.5 percent in 2006, and in RS, from the same level in 2002 to 3.9 percent in 2006.

4.5. Adopt Legal Framework for Public Procurement

The adoption of a legal framework for public procurement shall lead to further strengthening of the single economic space and transparency in public revenue spending. The adoption of this legal framework is a conditions for a faster integration of BiH in the EU and for the membership in the WTO. However, it is important to mention that the new legal framework in this area shall lead to more significant savings in public expenditure.20 Besides the adoption of the legal framework, it shall be necessary to establish adequate public procurement agencies, as well as bodies for auditing public procurement.

BiH needs to gradually harmonize its laws on public procurement with those of the EU. It is also necessary to strengthen the corresponding institutions and judiciary, in order for the public procurement procedure to be implemented according to the regulations.21

4.6. Increase the Share of Domestic Public Revenues in the Financing of Current (Operating) Costs

The major part of public revenues is being spent on public administration wage bill. In recent years, allocations for material (operating) costs were below the necessary level, and the majority of those costs were covered from donors’ resources. However, the overall allocations, from both domestic and donor revenues, were not sufficient, which lead to weaknesses in the level of equipment in public administration and the deterioration of government infrastructure. In order for public services to be improved, in the coming mid term (2003–2007) it is necessary to ensure a higher share of public revenues in the financing of current (operating) costs of public administration. Constraining the nominal level of allocations for public administration wage bill shall enable an increase of allocations for that purpose, which should, in 2006 amount to 4 percent in FBiH and to 4.5 percent in RS (of GDP).22

4.7. Increase the Share of Domestic Public Revenues in the Financing of Public Investments

Since 1996 the international donor community has, mostly through donations, largely financed the public investment program in BiH. For example, in the previous years, domestically financed capital spending has accounted for around 10% of all public investment. The need to move ahead quickly with reconstruction projects has meant that the major share of internationally financed projects have been managed through independently established project implementation units (PIUs) operating outside of the framework of the government budget. This has resulted in a number of problems. It has been difficult for Entity and sub-Entity governments to track credit investments into public investment, which has seriously undermined accountability related to the servicing of those credits. On the other side, decisions on public investment projects have often been taken without adequate harmonization with financial capacities.

Due to the expected decrease of international aid flows, the share of domestically financed public investment will have to increase substantially. By 2006 it is estimated that domestically financed projects will account for two-fifths of all public investment, with externally financed projects largely being financed from concessional credits.

Therefore, in the coming mid term period (2004–2007) it shall be necessary to increase the share of domestic resources in the financing of public investment programs, by 15% per year in comparison with the 2003 allocations.

There is an urgent need to strengthen the planning and management of the public investment program in both entities, and recent establishment of Aid Coordination Units on the state and entity level is a step in that direction. The RS Government has already adopted a Public Investment Program for the coming mid-term, and it is expected that the FBiH Government shall do the same by the end of February of this year.

4.8. Reduce Sectoral Spending to Sustainable Levels

An analysis of expenditure by function suggests that spending levels in Bosnia across a number of major sectors are substantially higher than those in other CEE countries.23 Consequently, there is considerable scope for the reform of spending programme linked to the overall reduction of public expenditure as a share of GDP.

Spending on education, at 6.4% of GDP, is also higher than average for other transition economies (3.3% of GDP), with spending considerably higher in the FBiH (6.8% of GDP) than in the RS (4.7% of GDP).24 The highly fragmented education system, particularly in the FBiH, results in high unit costs, inequitable provision, and poor outcomes. High levels of spending and inefficiencies show that an increase of spending on education in nominal terms should not be permitted, but, instead, it should be reduced, especially in FBiH. Education sector reform, which is ongoing, shall reduce the spending for this purpose to 5.6 percent of GDP in FBiH and to 4.5 percent of GDP in RS, by 2006.25

Public spending on health is financed primarily from Health Insurance Fund contributions, and, to a lesser extent, by budget interventions. At 6.9% of GDP in FBiH and 6.4% of GDP in RS26, spending levels in the health sector are significantly higher than average allocations for that area in other transition countries (4.4%). It is estimated that the level of allocations on the basis of payments for health services in the private sector accounts for an additional 5% of GDP in both entities. However, health revenues fall significantly short of the financial requirements of the legally stipulated level of health services.

In view of that, the efficiency of health spending needs to be improved, through the rationalization within the sector itself, which implies the improvement of management in public health funds, direction of resources to priority programs of prevention and treatment, and improvement of public procurement procedures. Future spending on health shall depend on the level of inflow of resources into health funds. It is expected that by 2006 spending in this sector shall fall to 6.9 percent of GDP in FBiH and, in RS, from 6.4% in 2002 to 5.9 percent.27

Public spending on social transfers (including allocations on the basis of veterans’ rights, unemployment, pensions and classical forms of social protection) at 18.9% of GDP in FBiH and 14.7% in RS28 is only slightly higher than the average for CEE countries (14.2% of GDP). However, the high percentages of allocation do not show the real picture of the situation, taking into account the relatively generous and extensive veterans’ entitlements. Allocations on that basis account for around one third of total social transfers. On the other side, social welfare services continue to face acute funding problems and an unclear and overlapping division of responsibility between different levels of Government. In the FBiH, the recent Law on Social Services placed considerable additional spending responsibilities on the Cantons without any corresponding adjustment in revenue assignment. There is still a lack of clarity in the assignment of responsibilities and resources with respect to refugees, displaced persons and returnees, especially in FBiH.

Sending on social transfers need to remain in the existing levels. It is expected that spending on this purpose in 2006 shall amount to 17.8 percent of GDP in FBiH and 13.5 in RS.29 Social transfers towards the veterans’ population shall remain at the same level, while other social transfers shall be increased by 4% per annum30, in order to finance poverty reduction oriented programs.

Spending on utilities shall increase at 5% per year, to allow for improved services, especially amongst the poorest areas. Finally, spending on development programs shall be increased by 2.5 % per annum, to allow for a higher level of agricultural support.31

The necessary reform measures in each of those sector are identified in the following txt of the PRSP.

4.9. Reorienting Public Expenditure in Compliance with the Priorities of the Mid Term Development Strategy for BiH (PRSP)

The priorities identified in the Mid Term Development Strategy for BiH (PRSP) will have an impact on the nature of future public expenditure, both for investment and for recurrent activities. The instruments for the realization of those priorities will include the entity Mid Term Expenditure Frameworks (BFPs) entity Public Investment Programmes (PIP) and discussions with donors.

The Reform Scenario of the Macroeconomic Framework of the PRSP expects rapid implementation of reforms to generate growth of about 5,5% per year. Under this reform scenario, it is expected that the public revenues in both entities shall grow at the rate of 4.5 percent per year.32 The total level of public investment during the four year period 2004 – 2007 will be about KM 2.3 billion, of which about KM 500m is already programmed for completion of ongoing projects. The allocation of the remaining KM 1.8 billion is ascertained by entity Public Investment Programmes which are an integral part of the PRSP.

The PRSP working groups have done some initial work on estimating the financial implications of the reforms. This work has included consideration of financial implications of the implementation of reforms within conventional investment projects, as well as other ‘one-off’ and recurrent costs. The recommendations of the PRSP are presented in figures 1 and 2 below.

Figure 1.Indicative Share of Public Investment and ‘One-Off’ Expenditure suggested by the PRSP

Figure 2.Allocation of Public Resources by Priority

Allocations for the program of public investments and other one-off interventions are presented in Figure 1.

Investment requirements for the financing of the public investment program are substantially higher than the projected growth rate of public revenues, so that it shall be necessary for a part of the public investment program to continue to be financed by donors, but in amounts significantly lower than before.33 Most reforms will have to be funded from savings in recurrent spending arising from increased efficiency. However, in case the excepted growth rate of 5 % per annum in real terms is ensured, some incremental resources will be available in the coming four years, which will in most part be a result of the decrease of the defense spending, spending on law and order, public administration wages (as a share of GDP), internal savings, including the implementation of new legal regulations in the area of public procurement, and more efficient collection of public revenues. According to the Reform Scenario, it is expected that the total recurrent spending be expected to be KM 87 million higher in 2007 than in 2003, in real terms. It is also expected that defense savings shall provide an further KM 88 million per year by 2007, thus allowing for non-defense spending to be KM 175 million higher in 2007 than 2003, in real terms.

Work on reorienting recurrent expenditure in line with the PRSP is ongoing, and is linked to the MTEF and budget process. Figure 2 presents an early indicative sectoral allocation of incremental recurrent costs. Most education reforms will be funded from savings and all health improvements will be self-funding within the Health Insurance Fund. As a result, it is the reforms in social welfare which dominate incremental recurrent spending. Some increase in agricultural subsidies is also foreseen, in line with recent parliamentary decisions.

Figure 2 represents sectoral recommendations of the PRSP for the allocation of those additional public revenues. The major part of reform in education sector shall be financed from savings, and in the health sector through the increase of efficiency and self-financing of health insurance funds. As a result, the major part of additional public revenues should be used for the financing of reforms in the social protection sector, inter alia for the financing of social implications of accelerated implementation of structural reforms (acceleration of privatization, reform of public administration, restructuring of mines etc.). A certain increase of subsidies in agriculture is also envisaged, in line with the recent decisions of entity parliaments, and it shall also be necessary to ensure a higher share of domestic public revenues in the financing of works in the sectors of transport and water management, which will be most affected by the reduction of donor aid.

Savings executed through the realization of the Reform Scenario in the coming mid term should also be used for the reduction of taxes. In that, priority should be given to the reduction of tax burdens and contributions levied on wages, which would yield multiple results: it would have a stimulating effect on the growth of the private sector, attraction of foreign investments and reduction of the gray economy.

The level of additional public resources available is strongly related to the rate of economic growth envisaged by the Reform Scenario. On the other side, in the Scenario of Slower Implementation of reforms (ie with only 1.9% growth), total revenue envisaged for 2007 are by KM 113 million lower than according to the Reform Scenario. If growth is only 1.9% and defense savings are not realized, then recurrent spending would have to decline by KM 26 million in real terms, to protect the KM 2.3 billion investment levels, the servicing of external debt and the reduction of the level of domestic public debt.

4.10. Improve the System of Public Spending Planning and Management

In 1999 both entities undertook steps directed to the development of the Mid-term Expenditure Framework (MTEF), with the objective of strengthening macro-fiscal planning and improving connections between government policies and resource allocations. In the course of that year, entity governments adopted mid term expenditure frameworks for 2004–2006, which were used as an important document in the preparation of the Mid Term Development Strategy for BiH (PRSP).

It shall be necessary for the entity governments to revise the BFP regularly, in line with the priorities of the PRSP. The MTEF shall present an important element for strengthening the annual budget preparation cycle, through the provision of more reliable and detailed projections of revenues. This issue is extremely important in the case of FBiH, where the cantons are faced with serious difficulties in connection to revenue projections. The FBiH Government, and, especially, the Federation Ministry of Finance should establish a regular practice of holding monthly meetings with cantonal governments and ministries. In that context, activities in connection with the planning and realization of public investment programmes need to be adjusted with the priorities of the PRSP and entity mid term expenditure frameworks.

In line with the recommendation of the EU Feasibility Study, it shall be necessary to adopt budget laws on all levels, in line with the Mid Term Expenditure Frameworks (MTEF), and introduce unified government accounts. It shall also be necessary to undertake steps on recording all payments to public bodies on all levels of government, including payments of grant funds and other modes of international assistance.34

Entity ministries of finance need to strengthen their departments for: macroeconomic analysis and projections, fiscal analysis and analysis of budgetary policies, consolidation and analysis of fiscal data and reporting. On the other side, line ministries will need to strengthen their departments for sector policy analysis and public investment program planning. It can be expected that it will include the establishment of sectoral units for creating strategies, programs and budgets in the most significant line ministries.

4.11. Establish Institutional Framework for Preparing Consolidated Balances on BiH Level

On the state level there is no mechanism for the preparation of consolidated fiscal balances. So far, that was done by the IMF and that is a practice that needs to be terminated. Besides the BiH Ministry of Finance and Treasury, the BiH Indirect tax Administration should be engaged in the preparation of consolidated fiscal balances, and a body (a council) could be formed within that institution, with the task of coordinating fiscal issues on BiH level.

4.12. Introduce Treasury Operations in All Public Institutions

The establishment of treasury functions in 2001 has significantly strengthened budget execution, as it enabled a more efficient control of spending and a better management of cash assets. It will be necessary to establish treasury operations on the sub entity level, which includes both cantons and municipalities35. Additional steps which need to be taken include: the implementation of treasury procedures on the functioning of extra budgetary funds, the improvement of the classification of public expenditure in order for a higher level of consistency and correctness in recording to be ensured.

4.13. Strengthen Transparency and Accountability in Collection and Spending of Public Revenues

In the area of public finance, a significant step ahead has already been achieved through the establishment of external audit offices and through the establishment of treasury procedures. Additional steps which need to be taken include the following: presentation of mid-term expenditure frameworks to entity parliaments, preparation and publishing of reports aimed to the general public, on public revenue spending, further strengthening of audits, involving parliamentary commissions into the control of budgetary execution.

There is a practice of managing significant public revenues and other resources outside of the budget. In both entities, almost 50 percent of public spending happens outside of the budget, mostly through health and social insurance funds. Necessary mechanisms of coordination between different levels of government do not exit, which has lead to overlapping of functions, inconsistencies between the allocation of revenues and expenditure responsibilities, especially on the cantonal and municipal level. Entity ministries of finance must get enabled for the monitoring of extra budgetary funds, which represent a significant element of Government fiscal operations. In FBiH, insufficient analysis of spending on sub-entity levels has contributed to significant imbalances that appeared in the allocation of public sector resources, both between different levels of government, and on individual levels. The elimination of those weaknesses shall require that the entity ministries undertake activities on including the remaining extra budgetary sources of financing into the budget and improving the comprehensiveness and quality of budgetary analysis and monitoring. It shall also require that the ministers of finance make the presentation of budgets of extra budgetary funds to the parliaments, together with annual budgets, as is stipulated by the relevant laws on budgets in each of the entities. It shall be necessary to establish an adequate mechanism for coordination of budget planning issues with the District of Brčko.

In line with that, the Roads Directorate in RS shall be totally included in the Budget in 2004, and, in FBiH, full transparency in view of the usage of resources of the federal Roads Directorate, including the cantonal directorates, shall be ensured.

It shall be of key importance to increase the level of transparency and financial management in the operations of public enterprises.

4.14. Public Debt

Internal public debt in BiH in 2003 amounted to about 67 percent of GDP. In 2002, the total external debt amounted to Km 4,045,862,013336, which is about 40 percent of GDP. In view of external indebtedness, BiH can be considered a moderately indebted country. However, what makes BiH an over-indebted country is the size of internal debt, which represents one of the most severe threats to macroeconomic stability of the country. According to the Reform Scenario, the total public debt should, by 2007, be reduced to about 49 percent of GDP. In connection with that, entity governments opened an escrow account,37 on which a part of privatization proceeds are deposited, together with the resources from succession, in order to ensure a starting basis for the reduction of the public debt.

The reduction of public debt to the level of 49 percent of GDP is important element for achieving credit worthiness of BiH on the international capital market. That would have a positive effect on the macroeconomic stability, prospects for a faster integration of BiH in the EU, increasing the level of interest of foreign investors and enable a larger scope of credit funds for the development of BiH.

Both entity governments have adopted plans for the reduction of the public debt, in which the following claims were identified as parts of the internal public debt:

  • general claims (arrears of budgetary and extra budgetary beneficiaries),
  • claims ion the basis of old foreign currency savings,
  • claims on the basis of war damages (mobilized and taken over tangible and technical assets and equipment, delivery of materials, produce, goods and services rendered for the demands of military operations, pecuniary assets taken over).

In compliance with the plans for the reduction of public debt, the amount of resources to be used for the repayment of internal debt is limited to the level of 10 percent of GDP. A part of the claims shall be settled in cash, with resources from the escrow account, but the majority shall be settled through the emission of long-term bonds. A significant amount of internal debt needs to be written off.

In order to realize the plans for the reduction of public debt, it is necessary to adopt a legal framework in the first part of 2004.

4.15. External Borrowing Strategy

The macroeconomic framework envisages that BiH may attain external and fiscal sustainability, as well as limited external creditworthiness, by 2007, but this will require a considerably greater effort on structural reforms, along with the continuation of donor support. This requires adoption of a strategy of foreign borrowing.

4.15.1. Analysis of the External Debt of BiH

After the dissolution of former Yugoslavia, and during the wartime period, BiH had considerable arrears to all its creditors.38 Recognition of all obligations accruing to the end of the war was a precondition for the normalization of the membership and continued extension of credits by the International Monetary Fund (IMF) and the World Bank. In the course of the debt-rescheduling process in 1996 – 1997, BiH managed to normalize relations with the majority of creditors and renew its membership in the IMF and the World Bank.39 An agreement was reached with the Paris Club, which led to the reduction of BiH debt by 67%. In December 1998, an agreement was concluded with the London Club to write off 73% of this debt.40

At end-2001, the overall indebtedness of BiH, was Km 4,045,862,013 (about 40 percent of GDP), of which KM million 2,613 (64.4%) concerns FBiH, and KM million 1,432 concerns RS (35.4%). The indebtedness of BiH on the basis of old (pre-war) debt, with December 31st 2002, amounts to KM 2,310,334,262 (57% of overall debt), and the new (post-war) indebtedness amounts to KM 1,732,528,751 (43% of overall debt).41

The major share of the external debt was incurred with the World Bank (KM 2,173 million): on the basis of pre-war indebtedness, this debt amounts to KM 967 million, and on the basis of post-war indebtedness, KM 1,206 million (see Table in the text below). The write-off and the rescheduling of a significant part of commercial credits on the basis of IDA conditions42 have contributed to the favorable situation in connection with the servicing of the external debt. The private sector had limited access to foreign credits, mostly because of the lack of credit worthiness of the country. Excluding the amount for which the repayment is outstanding, the debt of the private sector represents only 0.6% of overall remaining external debt. The currency structure of the external debt is mostly in US$ and EUR.

Through analyzing the structure of post-war indebtedness, one can notice that the majority of credits were spent on budgetary support and financing in the sectors of education, health and social protection (KM 938 million). That is followed by credits for infrastructure investments (KM 493 million), and the credits spent on investments in economic activities, mostly in the private sector, are at the bottom (KM 303 million).43

Table 1.SUMMARY REVIEW OF THE STRUCTURE OF BIH BORROWING BY CREDITOR AND SHARE OF “OLD” AND “NEW” DEBT IN 1998–2002 PERIOD
BALANCE OF DEBTAmounts in KM
19981999200020012002
Old debt - total1.375.827.7012.464.536.2142.496.374.8972.599.815.9732.310.334.262
Paris Club80.342.7301.071.465.7241.093.562.3881.093.669.4931.038.252.520
London Club261.919.000261.919.000261.919.000261.919.000261.919.000
World Bank IBRD956.811.5031.035.250.0941.089.745.5671.197.609.567967.255.022
Other76.754.48595.901.39651.147.94246.617.91342.907.720
New debt - total863.835.5361.271.475.7971.531.960.5151.766.064.5881.735.528.751
European Invest, Bank0007.370.67020.210.420
World Bank IDA729.637.014962.675.5121.093.900.9351.252.873.8451.206.232.151
Saudi Fund For reconstruction and development29.764.71734.893.32942.703.70547.637.53547.200.235
IFAD16.569.65633.178.00839.245.80640.064.80638.651.223
IMF56.965.675141.215.973220.643.699245.714.475260.849.552
European development Bank Council3.347.2009.516.60210.391.99110.936.1499.258.267
EBRD20.520.71755.365.17089.407.091108.214.12299.671.845
European Commission / Union019.558.30019.558.30039.116.60029.116.600
Other6.994.55715.090.90316.108.98814.136.59614.338.458
Balance of debt - old and new debt - together2.239.663.2373.736.012.0114.028.335.4124.365.880.5614.045.863.013
STRUCTURE OF NEW DEBT BY SECTOR – PURPOSEAmounts in KM
19981999200020012002
New debt - total863.835.5361.271.475.7971.531.960.5151.766.064.5881.735.528.751
Credits for investments in infrastructure*270.320.213384.425.126475.993.330530.446.973493.549.822
Credits for investments in economic activities**132.983.799187.244.233242.600.114261.097.636303.121.281
Credits for public – budgetary expenditure***460.531.524699.806.384813.427.071974.519.979938.857.648
SOURCE: MINISTRY OF FINANCE AND TREASURY OF BIH

Water, roads, electricity, waste management, telecommunications

Privatization projects, small enterprises, agriculture IGA

Social program, PFSAC, IMF, education, health

SOURCE: MINISTRY OF FINANCE AND TREASURY OF BIH

Water, roads, electricity, waste management, telecommunications

Privatization projects, small enterprises, agriculture IGA

Social program, PFSAC, IMF, education, health

4.15.2. Is the External Debt of BiH a Large One?

When assessing the external debt burden of a country, the nominal value of the total external debt is not a useful indicator. The important element is the debt structure (share of concessional with respect to commercial credits). In the case of BiH, more than one-third of the total external debt is comprised of concessional credits, and an important share of the commercial debt has been rescheduled under concessional terms (London Club).

In comparison with the countries of Southeastern Europe and with the countries with a similar per-capita income, BiH debt is relatively high (around 67% of GDP). Despite the rescheduling and consolidation, the debt-to-GDP ratio of BiH is second highest in the region of Southeastern Europe, after Bulgaria.44 However, there is a major difference: the debt structure of BiH is relatively good, which is illustrated by a relatively favorable ratio of debt servicing and the exports of goods and services. As of end-2002, the payments coming due for the total foreign obligations were only around 8.6% of the total exports of goods and services. A high share of concessional credits in the overall structure of external debt of BiH, and favorable arrangement made with the London Club of Creditors put BiH in a privileged position from the aspect of external debt servicing in the coming mid term period (2004–2007). The Reform Scenario envisages that the ration between the annual debt servicing allocation and overall exports will fall in comparison with 2003 (8.6%) and that in 2007 it will amount to about 4.4 percent.

Regardless of the overall relatively favorable foreign debt-servicing situation, its inflexibility is evident, i. e. it would be extremely difficult to get any further debt restructuring, even in the event of sudden economic shocks.

In view of all this, when it concerns external indebtedness, one can conclude that BiH belongs to the category of moderately indebted countries.

4.15.3. Sustainability of the external debt of BiH and external debt strategy in the coming medium-term

When assessing a country’s potential creditworthiness, the analysis of the external debt sustainability is normally based on three key determinants: total existing debt and its repayment terms, fiscal and external repayment capacities, increase, composition and terms of new foreign financing.

The analysis performed in the context of the Reform Scenario shows that the conditions of external borrowing in the course of the implementation of the Medium-term Development Strategy of BiH – PRSP (2003 – 2007) will be crucial for restoration of the creditworthiness of BiH at the international capital markets by 2010. Securing additional US$ 1.5 billion in new credits and grants (non-returnable aid) is also a vital precondition for this scenario.

Debt sustainability analysis within the Reform Scenario indicate that creditworthiness may be restored by the end of this decade. In that context, the strategy of foreign borrowing in the coming mid term period needs to ensure the following:

  • that the majority of external borrowing is exclusively under favorable terms, especially in the first part of the mid term period,
  • that a limited level of commercial borrowing is engaged exclusively in those sectors that can repay it by themselves (such as, for example, telecom, energy), and in the second half of the mid term period,
  • that the level of credits taken for budgetary support is reduced, and that the borrowing for the support to accelerated development of private sector is increased,
  • that borrowing on the basis of technical assistance provision is reduced and ensured through grant resources.
  • to start with realization of so called Swap arrangement45

Further development of debt-servicing and monitoring mechanisms between the State and the entities is a crucial prerequisite for strengthening the capacities for foreign debt management and for prevention of further borrowing by local authorities from the domestic banking sector. Its goal is to: create a comprehensive reporting system on indebtedness of all levels of governments and of all public funds, establish clear procedures for budgeting, monitoring of indebtedness and issuance of guarantees and develop procedures for coordination of intra-entity borrowing.

It is important to emphasize that Bosnia and Herzegovina has high claims on the basis of works executed by BiH companies before the war. Negotiations with Russian federation on the pre-war clearing debt are ongoing. Similar negotiations have to be initiated with other countries (Iraq, Libya).

Notes

1Final Mission Report on Consultations on Article IV, IMF, Decembar 2003.
2“Commission Report to Council on BiH Readiness for Initiation of Negotiations on Stabilization and Accession Agreement with the EU” (Feasibility Study), Brussels, November 18th 2003
3Bosnia and Herzegovina – Second and Third Review Under the Stand- By Arrangement, May 2003
4Central bank of BiH
5Between 1996 and 2002 BiH attracted about 1,1 bilion EURO.
6Defined in accordance with the National Accounts Methodology which implies differentiating total deposits of private entities and companes from total credit indebtedness of the same entities and companies.
7FBiH and RS BFPs, October 2003.
8Separate projections of fiscal operations for the state level have not been developed yet. However, one can expect that the state level expenditure will grow, from the initial low levels, due to the expected expansion of functions necessary for fulfilling the criteria of EU integrations.
9Adopted by both entity governments in October 2003.
10Especially in the case of RS
11Excluding extra-budgetary fund revenues.
12Sales tax is now collected on the point of production or import, instead at the retail level.
13From Aid Dependence to Fiscal Sustainability, PEIR, World Bank, September 18th 2002
14Studies by ESI (Bosnia and Herzegovina Public expenditure and explosive debt, 2003) shwo that the number of officials in BiH is not overwhelming (except in the case of the Brčko District). About 4.5 percent of BiH population (about 3.8 million) are public sector employees, which is lower than in Croatia, and two times lower than in Czech Republic.
15World Bank estimates show average sector wages and salaries in the public sector as 67% higher than industrial sector earnings in the FBiH. The corresponding ratio for the RS was even higher at 86%. (PEIR, WB, 2002).
16PEIR, WB, 2002.
17FBiH and RS Government BFPs, October 2003.
18World Bank estimates put total defence spending at around 9% of GDP (PEIR, WB, 2002).
19PEIR, WB, 2002
20World Bank Study on the BiH Public procurement System, 2002.
21“Commission Report to Council on BiH Readiness for Initiation of Negotiations on Stabilization and Accession Agreement with the EU” (Feasibility Study), Brussels, November 18th 2003
22FBiH and RS Government BFPs, October 2003.
23Comparisons of functional allocations with the level of GDP should be taken with a certain level of caution, due to the still significant presence of gray economy.
24FBiH and RS Government BFPs, October 2003.
25FBiH and RS Government BFPs, October 2003.
26FBiH and RS Government BFPs, October 2003.
27FBiH and RS Government BFPs, October 2003.
28FBiH and RS Government BFPs, October 2003.
29FBiH and RS Government BFPs, October 2003.
30FBiH and RS Government BFPs, October 2003.
31FBiH and RS Government BFPs, October 2003.
32FBiH and RS Government BFPs, October 2003.
33In the first part of 2004. a consultative donors’ meeting shall be held, and the aid programme to BiH at the level of $ 1.5 billion should be considered. That is the amount identified in the pRSP as necessary for assistance to the payment balance and financing of the public investment program.
34“Commission Report to Council on BiH Readiness for Initiation of Negotiations on Stabilization and Accession Agreement with the EU” (Feasibility Study), Brussels, November 18th 2003
35In the FBiH, the Sarajevo Canton has introduced the treasury system of operations, while in the RS the introduction of that system is prepared in five pilot municipalities.
36BiH Ministry of Finance and Treasury
37An account on which resources are kept until the signing of a contract or fulfillment of other conditions
38The arrears in end 1995 were estimated at USD 1.9 billion, of which USD 342 million to the World Bank alone.
39After the repayment of the arrears, BiH became a member of the IMF in December 1995. By signing the Consolidated Loan, which regulated the arrears, BiH renewed its membership in the World Bank.
40It was agreed that, out of the total amount only USD 147.8 million will be serviced over the following 20 years, while the rest of the debt will come due only after BiH GDP per capita reaches USD 2,800.
41BiH Ministry of Finance and Treasury
4220-year WB loans, with over 10-year grace period and interest 1–2%.
43BiH Ministry of Finance and Treasury
44It is important to remember that the high debt-to-GDP rate is partially caused by the steep decline of the production after the war.
45In the framework of reprogramming of debth towards Paris Club

III.1. ENHANCING THE BUSINESS ENVIRONMENT FOR DOMESTIC AND FOREIGN INVESTMENT AND SUPPORTING ENTERPRENEURSHIP

1. Goals

1.1. Promote entrepreneurship and more rapid private sector development

Remove administrative barriers for the start up of businesses -- reduce the time period required for the registration of business to 15 days.

1.2. Create conditions for a more efficient privatization process

A more favorable business climate will significantly improve the privatization process.

1.3. Attract more foreign investment

In the time period between 1996 and 2002, BiH attracted about USD 2,1 billion KM (1,1 billion EURO) in foreign investments. It is necessary to attract an additional USD 2 billion in foreign investments during the period from 2003 until the end of 2007 in order to meet the macroeconomic goals outlined in the midterm proposal of the Poverty Reduction Strategy Paper (PRSP).1

2. The Current Situation:

The enhancement of the business environment along with stimulation of entrepreneurship is an important prerequisite for private sector growth. This implies, above all, the establishment of an appropriate legal, business, social, security, and in general, socio-economic climate.

The European Bank for Reconstruction and Development (EBRD) publishes a Transitional Report in which it, among other areas, assesses the business environment of countries in transition. In its 2002 Report, BiH was placed among the countries that have improved their business climate compared to previous years, but still must resolve a number of issues before the business environment could be considered attractive for domestic and foreign investment.

The Economic Intelligence Unit of the prominent magazine, The Economist, analyzes business environments of countries in transition and on the basis of its findings ranks countries according to the quality of their business environment. In its latest report2, which analyzes 27 countries, Bosnia and Herzegovina fell from the 20th position to the 22nd position, despite the fact that its cumulative score went up from 4.15 to 4.77. The explanation for this fall can be found in the fact that other countries, such as Serbia and Montenegro, which used to be ranked below BiH, improved their business environments with a greater level of success in less time. Out of all the countries in transition, Serbia and Montenegro made the highest jump, managing to get to the 14th position from the 25th position in just two years.

In 2001, the Ministry of Foreign Trade and Economic Relations of BiH, in cooperation with the World Bank (Foreign Investment Advisory Service – FIAS), conducted two studies in order to find answers to the question of creating a more favorable business environment for domestic and foreign investment. The two studies in question are An Investigation into Administrative Barriers to Investment in BiH and A Diagnostic Examination of Corruption in BiH. In 2001, the Council of Ministers of BiH, together with the entity governments, adopted a long-term Action Plan for the Enhancement of the Business Environment to Attract Domestic and Foreign Investment, which is now in the implementation phase. Additionally, the Council of Ministers of BiH has adopted a Jobs and Justice document, with the goal of improving the business environment and initiating reforms in the shortest time span possible.

Businessmen from all over the country, together with government representatives and the international community, led by the OHR, have formed a so-called “Bulldozer Committee”. The goal of the Committee is to propose concrete measures to improve the business climate in accordance with the already adopted strategic documents. The Bulldozer Committee has already presented the governments on all levels with two sets of reforms geared at improving the business climate.

In April 2003 there was an advisory meeting of the BiH Council of Ministers, entity governments, and representatives of entity and state parliaments at Mt. Bjelašnica in which a People First declaration was adopted. The declaration underlines, among other issues, the need to implement the midterm PRSP document, and the comprehensive reforms in order to ensure private sector growth. As a result of this meeting, the Council of Ministers, together with the entity governments, adopted a six-month Action Plan at the end of July 2003 for the Implementation of Urgent Reforms geared towards improving the business climate.

3. Noted Problems:

The absence of a single economic space is a great obstacle to the creation of an attractive business climate for domestic and foreign investors and approximation to the European Union. There are still a number of barriers to inter-entity trade alone.

Administrative barriers to setting up and operating businesses, i.e. drawn out registration, high start up costs, tax rates that are among the highest in Europe3, inspections, and corruption are all obstacles to faster private sector development. The legal framework on bankruptcy in the Federation of BiH, which has not been updated, is a part of this problem. The size of the gray economy presents a particular problem. According to European Commission estimates and the World Bank, the gray economy accounts for 36 to 40 percent of the country’s overall economy.

Judiciary inefficiency in resolving commercial disputes and a weak legal framework protecting creditors further attribute to the weak business environment.

The above factors, combined with competitiveness and a poor world image, have greatly contributed to the low foreign investment numbers attracted to date. Rather high tax rates, comparatively expensive labor, insufficiently developed technology, an internally divided market, and the high costs of doing business (permits, electricity, postal services, etc.) rate among the highest.

4. Priorities

As compared to previous years, there has been noted improvement in removing administrative barriers for domestic and foreign investment. The pace of implementation of reforms in this area leads one to believe that by the end of 2004 a majority of administrative barriers will have been removed, commercial disputes will be resolved at a higher rate, and appropriate protection of creditors will be ensured. Thus, the focus of improving the business climate will shift from removing administrative barriers to creating conditions for higher competitiveness of the local economy, reducing tax rates, and strengthening corporate management.

4.1. The strengthening of a single economic space in BiH

The provisions of the BiH Constitution guarantee freedom of movement of persons, goods, services, and capital.4 However, despite the success of the past few years, there still exist certain obstacles that make it difficult to conduct business countrywide.

The harmonization of the tax system was achieved largely in the area of indirect taxation. However, in the area of direct taxes, e.g. income tax, one still finds double taxation.

The European Commission project, Single Economic Space5, noticed a number of inter-entity problems pertaining to trade, production, carrying out services, and the mobility of the work force. The project focuses on a limited number of activities, including the production and trade of medicines for human consumption, the movement of goods with the CE mark, phyto-sanitary controls in the entities, inspection (Brčko), market barriers in the entity laws, bus transport, free movement of the labor force, and market surveillance. Practices in all of the above areas points to an absence of the constitutionally guaranteed freedom of movement of goods, services, capital, and persons.6

The fact that the state level government does not have a larger role in creating and coordinating the economic policy of the country poses a particular problem.

Infrastructure is an area that is quite fragmented, as can be seen in the functioning of the railroads.7

The transposition of the EU Acquis Communutaire (the complete legal heritage of the EU), as a part of the stabilization and association process, will help resolve the above problems and integrate the BiH economic space. Added institutional building and technical infrastructure modeled after the internal EU market, will aid in creating a single economic space and movement towards integration into the EU market. This, in turn, will accomplish three important goals – an improved business climate and increased efficiency of the BiH market; better consumer protection; the creation of preconditions for more exports to the EU.

In line with the above, it is necessary to achieve the following priorities:

4.1.1. Harmonizing regulations pertaining to the freedom of movement of goods, services, capital, and persons with respective EU regulations

In drafting the National Plan for the Adoption of the Acquis Communutaire (NPAA) particular attention must be given to those regulations which deal with the freedom of movement of goods, services, capital, and persons. The Stabilization and Association Agreement with the EU (SAA) does not regulate the issue of movement of persons in its entirety; rather, its provisions pertain to the movement of the work force from a candidate country to the EU member states and vice versa.

4.1.2. Establishing a legal and institutional framework for fair competition and consumer protection

In order to achieve a properly functioning market economy it is necessary to have effective consumer protection. In this respect, BiH must8:

  • Create and active consumer protection policies in line with EU legislation,
  • Harmonize Consumer Protection Laws with those of the EU,
  • Establish independent and efficient administrative structures to ensure the fulfillment of basic requirements in terms of health and safety,
  • Ensure consumer advocacy, information, and education.

It is necessary to establish a BiH Council of Competition and provide sufficient funding from the budget for its work. Following the establishment of the BiH Council of Competition, Entity Offices for Competition and Consumer Protection should be established as well.

In order to safeguard consumer health and safety, it is necessary to harmonize three important market segments with the EU laws -- product legislation, conformity assessment, and market surveillance. It is particularly important to adopt by-laws and create an institutional framework for the implementation of the BiH Law on Consumer Protection. The SAA itself also stresses the significance of the issue of consumer protection, as its proper functioning is essential for ensuring an effective market economy.

In the future Stabilization and Association Agreement (SAA) with the EU, BiH will have to refrain from those measures which have a negative impact on fair competition. Therefore, it will be necessary to ensure full transparency in government subsidies, by developing and publishing an annual subsidy inventory.9

4.1.3. Introducing mutual recognition provisions for products to the BiH legal system10

In this respect it is necessary for both entity governments to mutually recognize all technical trade standards in order to prevent having to obtain two licenses and two permits. This would allow businesses to operate unobstructed throughout the BiH market.

4.1.4. Establishing a single public procurement system for the entire country

In public procurement, there still exists discrimination of companies based on the entity they come from, despite the BiH Constitution. Therefore, with the aim of improving the business climate, it is necessary to adopt a new legal framework on public procurement on the state level. The implementation of such laws will contribute to strengthening the single economic space in the country.

4.1.5. Increasing the mobility of the labor force and eliminating discrimination in hiring practices

Despite contemporary labor laws that are also harmonized between the two entities there is still discrimination in hiring practices, especially when it comes to the returnee population. In addition to political factors, there are also other factors, which affect the low mobility of labor force in the national market (see the Labor Market segment). Therefore, for example, the minimum wage, unemployment benefits, and pensions differ between the entities, while the levels of social welfare, healthcare, and the quality of education differ not only between the entities, but also among the cantons in the Federation of BiH.

4.1.6. Improving public infrastructure management coordination

It is necessary to intensify the activities of the BiH Public Railroad Corporation (BHJŽK) in order to make a plan for restructuring the railroad and developing regulations for a more efficient flow of railroad traffic. It is further necessary to intensify the work of the Public Road Traffic Corporation, which should coordinate the activities of both entities in the area of the road network. Accelerated activities on the liberalization of the electricity and telecommunication markets will further contribute to greater integration of the BiH market (see Infrastructure, Telecommunications, and Energy segments).

4.1.7. Stimulating regional economic development

According to the EU regional development model, an economic region is a single economic space comprised of multiple local units bound together by geographic, historic, cultural, and economic ties. With the support of the European Commission, a process to strengthen regional development has started. This process was well received by municipalities. There are five economic regions being developed in BiH at this time. Several regional development agencies have been established.

The experiences of Hungary, Poland, Slovenia, and the Czech Republic show that regional development has a large effect on the overall improvement of a country’s economy. In the case of BiH, the establishment of economic regions will lead to a strengthening of the single economic space in the country.

The existing network of regional development agencies in BiH is very weak at the moment. Due to insufficient staff and resources, these agencies have extremely limited capabilities in stimulating regional development. Therefore, they must be strengthened and provided with sufficient funding by interested municipalities. Furthermore, it is necessary to improve coordination between the agencies and with governments on the local level.

The priorities, to further develop economic regions are as follows:

  • Adopt a suitable legal framework and establish a proper forum, at the BiH level, which would propose policies and measures for regional economic development;
  • Finalize the process of defining economic regions, based on voluntary linking of municipalities;
  • Define a strategy for regional development;
  • Strengthen the existing and establish new regional development agencies.

4.2. Maintaining macroeconomic stability

In the years following the end of the war, BiH succeeded in maintaining macroeconomic stability. This is an important presumption for a better business environment in the upcoming period.

4.3. Eliminating all forms of unfair competition

A significant portion of the BiH economy is still gray (36%). There is smuggling of goods, especially those with higher tariffs. Even though an accurate analysis has never been carried out, the international community, the OHR, and CAFAO in particular, have made public audit information that shows an amount of up to KM 1 billion a year.11 Unfair competition is also a large obstacle to substantial domestic production, and consequent increased employment.

It is important to strengthen the State Boarder Services, establish a customs administration on the state level, simplify customs procedures and reduce the number of custom-houses, adopt procedures that will ensure the import of petroleum and petroleum products by rail only, and increase control over the free custom zones. It is especially important to establish a BiH indirect taxation authority and introduce a value added tax (VAT) before the end of 2006.

4.4. Removing all administrative barriers to domestic and foreign investment and reducing the cost of registering businesses

In 2001, it took an average of 120 day to register a business. According to this year’s research conducted by the World Bank, over the last two years the number of days has dropped12; it now takes 59 days13 to register a business. Nonetheless, this change does not constitute a satisfactory improvement. However, the entity governments report that the number has fallen down to around 30 days.14 Regardless of the various data, it takes too long to register a company in BiH. There are several factors that attribute to this, including strict administrative regulations, inadequate administrative apparatus, and the large number of state level institutions involved with registration (12 to be exact). It is therefore necessary to simplify registration procedures and reduce the number to institutions involved in the process to a bare minimum, as in the case of the registration of foreign enterprises.

When comparing registration costs, it is evident that start up costs for companies registering their business in BiH are extremely high, and much higher than in other countries in transition or the OECD countries.15 Consequently, measures need to be taken to reduce the costs of registering a company in BiH.

In relation to the above, it is paramount to adopt a framework Law on the Registration of Businesses, as well as respective entity laws, and to establish entity business registers and one single date base for BiH.

4.5. Accelerating commercial dispute settlements

Settling commercial disputes in BiH is a lengthy and costly affair. According to World Bank research,16 the average time period required to settle a commercial dispute in a judicial proceedings takes around 630 days. With the exception of Slovenia and Poland, in BiH this procedure lasts longer than in any of the other countries in transition and twice as long when compared to the OECD average.

At the moment, judicial reform is underway, a part of which is amended criminal and procedural laws. Several activities have been underway in cooperation with USAID, including the formation of 16 commercial divisions as a part of first instance courts in BiH, the appointment of judges, and judicial training in the area of commercial disputes. In addition to the above, there should also be an alternative, out-of-court system for commercial dispute settlement (arbitration).

4.6. Simplifying the tax system in BiH

There is double taxation in BiH, especially in the areas of profit and income taxes. The introduction of a VAT will to a large extent simplify the country’s tax system.

Reform of tax on profit and income tax would lead to their simplification and the abolishment of double taxation. Additional activities should include continuing with the reduction of tax withholding which would automatically stimulate a reduction of the gray economy; adopting a Code of Conduct for tax officials on all levels; and the establishment of an independent appellate body on all levels to decide on appeals of tax administration decisions.

4.7. Strengthening corporate governance17

Efficient corporative governance is an important prerequisite for the creation of better business environment, which means the proper functioning of the financial market in BiH. Strong corporative governance improves access to capital markets, increases the trust of investors, and strengthens a company’s competitiveness. The main problem with corporate governance in BiH lies with the fact that 60 percent of the economy is still state owned. On the other hand, the privatization model used has led to ownership dispersion, the appearance of PIF, as well as a fragmented and insufficiently liquid capital market. The fact that there is no tradition of corporate governance results in a lack of information on the part of owners regarding their rights and responsibilities, and this presents a particular problem.

In addition to focusing on the ongoing reforms in the area of enterprise legislation, other issues, such as a quicker privatization process, continued activities in strengthening the capital market, and especially its regulatory framework must also be dealt with. An important measure in supporting corporate governance would be if stock companies and public companies were required by law to be quoted on the stock market. This would not only contribute to the development of the capital market, but would also increase their transparency.

4.8. Restructuring of inspections

Due to the multi-layered system of state organization, there is much overlap of authority when it comes to inspections. The system of inspection of private sector activities is massive, the required coordination does not exist, and the inspectors’ discretionary power is too great. There are too many inspections, and this work is not transparent. The governments of the Federation of BiH and the RS have adopted action plans for the reorganization of inspections. These action plans address reforms in three major areas – drafting regulations, the internal organization of entity inspections, and the training of inspectors.

In the upcoming period it will be necessary to adopt a BiH framework Law on Inspections, as well as respective entity laws. Furthermore, a Federation inspectorate and the RS inspectorate must be established. In the Federation of BiH, each canton has its own inspectorate. The aim of the restructuring of the inspectorates is to centralize inspections into several inspectorates in order to increase their efficiency, transparency and to reduce costs.

4.9. Ensuring more efficient protection of creditors and creating greater access to bank loans

As previously stated, there should be a more efficient system for the resolution of commercial disputes. This must be accomplished in the upcoming period. In addition to slow court procedures, another problem is the fact that a proper system for the protection of creditors does not exist. Credit securing is not systemized, nor is there an efficient mechanism for collection, both of which present obstacles to greater availability of loans to the private sector. The collection of collateral in BiH is still quite complicated and must be simplified. It is necessary to adopt a number of new laws and to amend existing ones, so that there is a more efficient mechanism for the protection of creditors in place. In relation to the above, it is necessary to adopt mutually harmonized entity level Law on Obligations and Law of Things in the FBiH and the RS, and the Law on Notaries in the RS. It is particularly important to adopt a state level Law on the Registration of Pledges on Movable Property, as well as entity Laws on the Registration of Pledges on Movables, and to establish a single register of pledges on the BiH level.

The Bankruptcy Law and the Law on Liquidation play a significant role in creating an attractive business environment. Recently, the RS adopted a Bankruptcy Law, which meets the requirements of the contemporary business climate. However, the same cannot be said of the FBiH, which gives an unlimited right to collect back salaries in full. In this way, other creditors are put in an unfavorable position and have no incentive to decide for bankruptcy and restructuring of a company in order to revive it. With such a law, creditors are more likely to liquidate a company. Therefore, the FBiH Bankruptcy Law must be amended.

4.10. Implementing reforms in order to combat corruption more efficiently

According to research done by the World Bank in cooperation with local experts18, the level of corruption in BiH presents a big obstacle to private sector development. According to this research, “18 percent of costs incurred by companies go to pay bribes” and in the process of doing business, managers spend one tenth of their managing time communicating with government representatives.19 It is necessary to implement an action plan for combating corruption, which is an integral part of the PRSP.

4.11. Modernizing the system for land and real estate management

There are no harmonized laws regarding ownership and transfer of ownership of all types of real estate. Obtaining zoning permits and building permits is a slow and costly affair. The unresolved issue of restitution poses an added problem. A number of problems have been discovered during privatization regarding the transfer of ownership of real estate, which additionally complicates privatization, making it less efficient, especially in the case of PIF.

What is needed is to strengthen the urban planning system and coordination at all levels to eliminate the Institute for Urban Planning’s monopoly in the process of preparation of infrastructure development of locations, as well as to introduce private sector competition, and to merge the procedures for obtaining zoning permits and building permits. In this context, modern cadastre laws must be adopted in order to integrate land books and the cadastre, a state Law on Restitution must be adopted, and the process of amending existing laws must be accelerated in order to resolve property rights issues related to privatization in a more expedient manner. It is particularly important to introduce a harmonized system for land registration, which would bring about a greater level of trust in exercising one’s property rights.20

4.12. Providing more effective protection of intellectual, industrial, and commercial property

One of the prerequisites of the Stabilization and Association Agreement (SAA) is more effective protection of intellectual, industrial, and commercial property, including protection from counterfeiting and piracy. BiH also needs to sign multilateral European conventions in this area.21

4.13. Institutionalize existing activities which would bring about dialogue with the private sector

The influence that the private sector has over the government is quite weak, with a visible tendency of strengthening associations, formed outside of chambers, on the basis of voluntary membership. Still, considering the tradition, it would seem most logical that the chambers, and the Foreign Trade Chamber of BiH in particular, would be the most important partner for the governments at all levels. In the past two years, the so-called Bulldozer Committee has yielded the best results in terms of cooperation between the private sector and the government on the issue of improving the business climate. This is in part due to the fact that this committee has been established by the OHR. Taking into account the results achieved so far, it is paramount to continue with the activities modeled after the Bulldozer Committee. The local authorities must takeover the ownership of this initiative from the OHR. In the same context, it is important to schedule regular work of the economic and social councils in the entities.

5. Business Climate and Attracting Foreign Investment

5.1. Situation

In the time period between 1996 and 2002, BiH attracted around USD 710 million in foreign investments. In 2002, the inflow of foreign investment grew (USD 240 million) and achieved a 100 percent increase in comparison to the previous year. Nonetheless, the number of investments in BiH is generally low. The total per capita inflow of foreign investment in the postwar period has been around USD 166, far below the average for countries in transition. For the sake of comparison, during the same time period, per capita foreign investment in Croatia was USD 1,321, in Bulgaria USD 480, and in Romania USD 288. The level of foreign investment in Macedonia and Albania is also high three times higher22 It should be noted that in just two years Serbia and Montenegro succeeded in attracting three times as much foreign investment as BiH.

There has been no considerable foreign investment in the real sector in BiH. This presents a particular weakness from the point of view of competitiveness of the local economy, and consequently exports and employment. The structure of foreign investments by sectors is not particularly dispersed. Investment in the exploitation of resources (the steel plant in Zenica and the cement factory in Kakanj) and the finance system (as much as five out of the ten largest investments are in the banking sector) are at the forefront.

In order to meet macroeconomic goals set in the midterm proposal of the Poverty Reduction Strategy Paper (PRSP) by 2007, it will be necessary to attract an additional USD 2 billion in foreign investment. This represents a great challenge, given the situation of the BiH economy, the worldwide investment crisis, and the fact that there is strong competition among countries in the region, which also base their economic development on attracting foreign investment.

The attraction of a greater share of foreign investment remains an important priority of the midterm proposal of the Poverty Reduction Strategy Paper (PRSP), given the many positive effects that these investments create, including increased employment, new management skills, new technologies, new markets, and more exports.

5.2. Priority activities

In order to attract more foreign investment, the above priorities must be achieved, starting with the strengthening of a single economic space and maintaining macroeconomic stability, as well as putting in place all the other elements important in the creation of a business environment more conducive to domestic and foreign investment.

The following text emphasizes the reforms and measures that would affect the increased competitiveness of the BiH economy, an important prerequisite for attracting a larger share of foreign investment, as well as private sector development.

5.2.1. Strengthening the competitiveness of the BiH economy

Local experts, in cooperation with the MIT Center at the School of Economics, University of Sarajevo, using World Economic Forum methodology, have surveyed local businessmen, in order to access their view of the competitiveness of BiH on the global market. This methodology is based on 184 indicators (134 qualitative and 50 quantitative), ranked in several categories, such as the openness of the economy, efficiency of government institutions, the finance sector, infrastructure, the labor market, technological development, and others.

According to their findings, the level of competitiveness of our country is satisfactory in only 18 categories, while in the remaining 98 it shows low competitiveness in the global environment. The country scored favorably mainly in the area of macroeconomics. According to the managers surveyed, in the area of infrastructure, it is railroad transport, maritime traffic, and the overall state of infrastructure that are particularly deficient. Financial markets have also been assessed as insufficiently developed and inefficient in financing development and investment.

Conditions are also extremely dissatisfactory. A number of shortcomings have been detected in the structure of the system; the implementation of regulations is inconsistent and discriminatory; and tax collection is not at a desirable level. As a result of the above shortcomings, technological development and productivity are low, while weakness in the area of business strategy and operation pose additional problems. According to the conclusions of the study, it will take the BiH economy a minimum of ten years of intensive efforts to overcome the above shortcomings.

In 1999, the World Bank and the European Bank for Reconstruction and Development (EBRD) jointly developed The Business Environment and Enterprise Performance Survey (BEEPS). This survey examines a wide range of issues related to business environment and competitiveness of companies in transition countries, including BiH. The 2002 BEEPS’ report lists lack of competitiveness in the form of difficult access to capital, a complicated tax system, and corruption, as the main barriers to foreign investment in BiH.

The Tax system has a destimulating effect on investment. In the past three years, efforts have been made, especially in the RS, to reduce contributions paid out of wages and with that the cost of labor for employers. Nonetheless, tax withholding still remains an obstacle to foreign investment. The level of public spending in the country is at around 56 percent (somewhat lower in the RS at 50 percent), a number that is far above the 40 percent average of transition countries. Public spending and the budget deficit must come down in the coming period, as do taxes and contributions, in order to further stimulate private sector growth and encourage foreign investment.

Taxes on profit are different in the FBiH (30 percent) and the RS (10 percent). Moreover, FBiH legislation provides for profit tax cuts, depending on the amount of foreign investment, while this option does not exist in the RS. This is not in the spirit of the BiH Law on Foreign Investment, which prohibits tax breaks that could create competition between the two entities or could put the domestic private sector in a less favorable position than foreign investors. For instance, a VW automobile manufactured in the FBiH is more expensive in the RS because that entity has a higher tax rate than the FBiH.23

The Informal sector of the economy (at 36 percent of the GDP) is widespread, leading to unfair competition. Further income tax withholding cuts and strengthening of inspections are the necessary steps to reduce the informal sector and unfair competition.

Labor costs are rather high when compared to other rival countries24, partially due to the fact that taxes and income tax withholding are high.

Costs of public utilities are higher than in other countries in the region, and in part higher than the European average. This also presents a problem in attempting to attract a substantial share of foreign investment.

According to analysis done by the World Bank and the OHR, electricity prices for businesses are far above the European average. International calls are up to ten times as much as in other transition countries, and also higher than in European Union countries. On the other hand, the level of services does not meet the needs for greater private sector development and attracting foreign investment. For instance, BiH has a low penetration of mobile telephones (only Albania has lower), as well as low fixed telephone penetration (with only Romania having lower). Internet access, with the exception of Albania, is also the lowest among the transition countries.25 Expensive services of inadequate quality provided by public companies, combined with relatively expensive labor, comparatively high tax rates and start up costs for companies, make BiH less competitive in the area of foreign investment.

In order to make our country more competitive, it will be necessary to implement a series of reforms. With the introduction of the VAT and the reform of the profit and income taxes, the entire tax system will be simpler. Parallel with this, activities geared at reducing the informal sector of the economy, cutting taxes, liberalizing the electricity market and postal and telephone services must continue. For this reason, the upcoming reform of the labor market and education are aimed at strengthening the competitiveness of the labor force in BiH.

5.2.2. Accelerating privatization

There is a co-relation between the efficiency of privatization and the share of foreign investment. Unlike many other transition countries, slow privatization in BiH, among other factors, has contributed to the small number of foreign investments. According to the EBRD annual Transition Report, the BiH privatization index, when compared to other transition countries, received low marks.26 One of important reasons attributing to foreign investment in the banking system comes from the fact that the privatization of the banking sector was much more efficient than in other sectors.

5.2.3. Establishing an institutional framework for concessions

It is necessary to establish a state level Commission for Concessions and the respective commissions on lower levels as well.

5.2.4. Further liberalizing the labor market, current payment regime and capital flow

As a part of the Stabilization and Association Agreement (SAA), BiH will have to commit to a progressive liberalization of the internal and external flow of capital, particularly in relation to foreign direct investment. Better protection of investors in terms of liquidation must be ensured (this is not the case in the FBiH, where liability towards workers takes precedence), as well as the repatriation of investment and profit. At the same time, discrimination against nationals of EU countries when it comes to issuing working permits and giving priority to the hiring of local labor must be eliminated.27

5.2.5. Reducing political instability and social unrest

Political instability, as seen in the dissatisfactory level of safety of returnees, still presents a serious impediment to any substantial foreign investment. Also, more frequent threats to social order caused by accelerated reforms, privatization in particular, deter foreign and domestic investment.

5.2.6. Improving world image

War and postwar events in BiH,28 and the region, have helped to create a poor world image. Consequently, there is no interest on the part of businesspeople to invest in our country.29

5.2.7. Organizing a public campaign to improve the public’s perception of foreign investment

There are certain prejudices among the public, including some politicians and professionals that are causing resistance to creating climate conducive to foreign investment. These prejudices are caused by a lack of understanding of the advantages foreign investments offer.

5.2.8. Developing a strategy for foreign investment in BiH

The strategy should define those sectors in which BiH has the highest comparative advantage for foreign investment, as well as a strategy for attracting those foreign investments that would be the most beneficial for the BiH economy.

5.2.9. Strengthening capacities of FIPA

Lately, FIPA has been quite successful in promoting the investment capabilities of BiH. However, because of its limited capacities, FIPA is unable to produce better results.

5.2.10. Signing agreements on preventing double taxation and protecting investments with a greater number of countries

Priority here should be given to countries in the region, those with whom we have already signed Free Trade Agreements.

6. Support for Small and Medium-Size Enterprise (SME) development

6.1. Situation

Strengthening entrepreneurship in BiH has already been identified as a need and a potential for a rapid private sector development, particularly for small and medium-sized enterprises (SME). For this reason, the Ministry of Foreign Trade and Economic Relations of BiH prepared a document in 2001, titled “The Entrepreneurial Society” (A global framework for the economic development of BiH), which served as a framework for defining policies in SME development.

At the EU Summit, held this year in Thessaloniki, BiH adopted the European Charter on Small and Medium-Sized Enterprises, and in doing so, has committed to implement its recommendations.

So far, considerable effort has been made in the two entities and the Brčko District to improve the business environment. Nonetheless, the problems that SMEs and potential entrepreneurs face are still great. The varying dynamics at which the activities aimed at improving the business environment and entrepreneurship that were implemented resulted in ununiform legal and institutional framework that is at different stages of development.

Generally speaking, one can say that entrepreneurship in BiH is in its infancy. The legal and regulatory framework is yet to be adapted and harmonized, starting with business start ups, which as a rule take too long; complicated administrative requirements for doing business; drawn-out court procedures and procedures related to bankruptcy and liquidation. Furthermore, the tax system is neither uniform nor adapted to the circumstances in which SMEs operate in BiH. A policy for supporting start-ups of SMEs has not been developed. The banking system presents a particular problem, since it considers investing in SMEs high risk. There is the widespread practice of investing more in micro credits, which is actually absurd from the point of view of risk. However, the reason lays with the fact that donors have given much more support and have invested more in micro credit sector development, and far less in SME development. The local governments have not created instruments through which to encourage the banking sector to invest more in SMEs.

6.2. Priority Activities

For the future strengthening of entrepreneurship and SMEs in BiH, the governments ought to rely on the recommendations of the European Charter on Small and Medium-Sized Enterprises. In the area of industrial cooperation between SMEs and tourism, BiH must create a policy that will aim at modernizing and restructuring the industry, as well as strengthening the SME sector.

6.2.1. Adopting a strategy for supporting small and medium-sized enterprises in BiH

A strategy, to be harmonized with the European Charter on Small and Medium-Sized Enterprises, must define measures and institutions which will support the development of entrepreneurship and of small and medium-sized enterprises taking into account the specific characteristics of the FBiH, RS and the Brčko District. Defining the measures for the enhancement of the business environment for the development of SMEs is a particularly important segment, which includes the removal of administrative barriers, the reduction of costs for SME registration, the definition of incentives for SME support in the area of fiscal policy, and the development of new technologies.

6.2.2. Establishing a legal and institutional framework for supporting the development of entrepreneurship

The RS has already adopted a Law on the Development of Small and Medium-Sized Enterprises and now the FBiH and the Brčko District must do the same. In signing the European Charter on Small and Medium-Sized Enterprises, BiH has made a commitment to establish an Office of a State Coordinator within the Ministry of Foreign Trade and Economic Relations of BiH (Sector for support to and promotion of entrepreneurship). The Ministry of Development, Entrepreneurship and Trade of the FBiH, and the Ministry of Economy, Energy and Development of the RS, deal with the above issues. Furthermore, local communities must have centers for development that will support SMEs in defining their programs and projects, and in disseminating information on SMEs and their projects. These centers must be equipped to assist the SMEs in strengthening their competitiveness, increasing their productivity, and continuously improving their technical capacities, through promoting business incubators, clusters, technological networks, industrial parks, and associations. With the establishment of agencies for the promotion of human resources, the SMEs would have assistance in the training of their staff.

In light of the above, it is important to enable the relevant ministries to implement the recommendations of the European Charter on Small and Medium-Sized Enterprises and to coordinate with the Office of the State Coordinator for the implementation of the Charter, as well as with other ministries and institutions in the process of implementing SME development projects. It is particularly important that the Office act as a promoter of BiH SMEs in European and regional development projects.

6.2.3. Creating a Guarantee Fund to support small and medium-sized enterprises

As it has already been stated, the banking sector considers investing in small and medium-sized enterprises extremely risky. Having noted this as a general problem for the private sector in BiH, USAID, in cooperation with commercial banks in BiH has established a Guarantee Fund, as a means of support to enterprises. However, this Fund is intended for larger enterprises, so small and medium-sized enterprises cannot benefit from it.

Using the above model, the entity governments in BiH should establish a Guarantee Fund to support small and medium-sized enterprises. The Fund could be established in partnership with interested commercial banks that would, in addition to investing their own funds, also make the risk assessment.31 The Fund would provide guarantees for a part of the business risk, which would then encourage banks to issue loans to this sector. Taking into account the experiences of other transition countries, it is the young labor force that would benefit most from such Funds. At the moment in BiH, it is this category of young workers that are most often involved in the gray economy. The establishment of a Guarantee Fund is also one of the recommendations of the European Charter on Small and Medium-Sized Enterprises.

6.2.4. Encouraging training and education of entrepreneurs and managers

One of the more important recommendations of the European Charter on Small and Medium-Sized Enterprises is the affirmation of knowledge on entrepreneurship through education. At present, only the Brčko District has Entrepreneurship as a part of its secondary school curriculum. The existing five Schools of Economics at the universities in the FBiH and the three in the RS offer four-year undergraduate programs, which, in addition to courses in economics, also offer a range of management courses, including Marketing, Management, Accounting, and Finance. All of the universities have departments that offer specialized training in areas such as Business Finance, Accounting, International Business, and Marketing in the senior year.

In addition to four-year programs, four Schools of Economics at the universities in the FBiH also offer two-year undergraduate programs; these are now so-called “Business Schools”. Graduate studies offering a Master’s Degree in Business Administration (MBA) are offered at five universities in BiH.

NGOs and Chambers of Commerce also conduct business training and give support to SMEs in addition to the Schools of Economics and the training centers at the universities,. The network of Enterprise Development Agencies (EDA), comprising of five organizations throughout BiH, is the most important group of institutions providing SME support, even though other NGOs also offer training in this field. International donors most often finance the activities that these institutions carry out, even though they are also partially funded by their attendees. There are several manager-training centers – two in Sarajevo, one in Tuzla and Banja Luka each, and since recently one in Zenica. They are financed by tuition, sponsorship for certain courses, and through consultancy fees. Such centers also exist within the Chambers of Commerce of the FBiH and the Sarajevo Canton.

BiH participates in the South-East Europe Enterprise Development (SEED) program, established and supported by the IFC, which works on increasing demand for management training among SMEs. SEED also organizes training for managers. And finally, with the help of the World Bank, the School of Economics of the University of Sarajevo, in cooperation with the Universities in Banja Luka and Mostar, has founded a Distance Learning Center (GDLC), organizing training in which some of the world’s best universities and experts take part. The GDLC offers great possibilities for manager training in accordance with international standards and it is, therefore, paramount that both entity governments continue supporting its work.

All of the above leads us to conclude that the system of training and educating entrepreneurs and managers in BiH is quite developed. However, there are numerous problems in this field. Courses offered by a majority of providers are mostly standardized, often too theoretical, and rarely tailored to the needs of clients. There is no suitable literature or journals in the local language. Many lecturers are quite old fashioned in their approach to training. Service providers are passive when it comes to assessing market needs and conducting training. University courses are often a result of internal compromises between various university institutions engaged in business training.32 The UK Department for International Development (DFID) has conducted labor market research and has found that employers find it difficult to find employees trained in management, while many employers have stated that they cannot afford to finance their training.

One of SEED’s projects works on assessing the long-term needs of SMEs. The analysis of 41 replies from SME representatives shows that general managers, financial managers, and marketing managers are the most sought after in the hiring process. As a result of these findings, SEED is preparing appropriate training courses.

Taking into account the importance of having suitable education and training in place for entrepreneurs and management in order to develop the private sector, the following must be done:

  • Promote, award, and support successful managers,
  • Encourage young people to choose management as a profession,
  • Include Entrepreneurship in secondary school curriculum.
  • Support introduction of independent four-year undergraduate studies in Business and Management,
  • Toughen the standards for institutions and trainers carrying out management training,
  • Encourage cooperation with similar institutions training entrepreneurs and managers from other countries,
  • Contact other governmental and nongovernmental organizations worldwide, which offer training in this field, to enable stakeholders in BiH to take part.

Notes

1Source: Ministry of Foreign Trade and Economic Relations of Bosnia and Herzegovina, IMF
2Economies in Transition: Regional overview, Country Forecast, September 2003
3“Commission’s report to the Council regarding BiH’s readiness to start negotiating with the EU about the Stabilization and Association Agreement“(Feasibility Study), Brussels, 18th November 2003.
4“There shall be freedom of movement throughout Bosnia and Herzegovina. Bosnia and Herzegovina and the Entities shall not impede full freedom of movement of persons, goods, services, and capital throughout Bosnia and Herzegovina. Neither Entity shall establish controls at the boundary between the Entities. “” Article I (4) BiH Constitution.
5“Single Economic Space Strategy in BiH”, European Commissions, September 2003.
6Bosnalijek from Sarajevo is treated as a foreign enterprise in the RS; Saniteks Company from Velika Kladuša, which has a CE mark which allows it to export to the EU market, must undergo a conformity assessment procedure with FBiH legislation in the Federation of BiH, while the same procedure is not required in the RS; there are different lists of seed sorts in the two entities; inspectors in the Southern part of the Brčko District apply RS laws, while those in the Northern part of the District apply FBiH legislation; bus transport between the RS and Serbia and Montenegro is considered local, while passenger transport between the FBiH and Serbia and Montenegro is considered international travel; nationals of Serbia and Montenegro are not treated as foreign laborers in the RS, while in the FBiH they are.
7Locomotives are still changed at the inter-entity boarder.
8“Commission’s report to the Council regarding BiH’s readiness to start negotiating with the EU about the Stabilization and Association Agreement“(Feasibility Study), Brussels, 18th November 2003.
9“Commission’s report to the Council regarding BiH’s readiness to start negotiating with the EU about the Stabilization and Association Agreement“(Feasibility Study), Brussels, 18th November 2003.
10“Commission’s report to the Council regarding BiH’s readiness to start negotiating with the EU about the Stabilization and Association Agreement“(Feasibility Study), Brussels, 18th November 2003.
11Statement given by the Ambassador Don Hays, Senior Deputy to the High Representative in BiH, in Oslobodenje, the BiH daily newspaper, issue number 20370 of 24 October 2003.
12Since the Action Plan for Enhancement of Business Environment for Domestic and Foreign Investment has started to be implemented.
13“Doing business in 2004, Country Profile of Bosnia and Herzegovina”, WB, June 2003.
14“Bosnia and Herzegovina, Report on the Implementation of the European Charter on Small and Medium-Sized Enterprises,” Ministry of Foreign Trade and Economic Relation of BiH, September 2003.
15“Bosnia and Herzegovina, Report on the Implementation of the European Charter on Small and Medium-Sized Enterprises,” Ministry of Foreign Trade and Economic Relation of BiH, September 2003.
16“Bosnia and Herzegovina, Report on the Implementation of the European Charter on Small and Medium-Sized Enterprises,” Ministry of Foreign Trade and Economic Relation of BiH, September 2003.
17“Commission’s report to the Council regarding BiH’s readiness to start negotiating with the EU about the Stabilization and Association Agreement“(Feasibility Study), Brussels, 18th November 2003.
18A Diagnostic Examination of Corruption in BiH, World Bank, 2001.
19A Diagnostic Examination of Corruption in BiH, World Bank, 2001, pg.25–26.
20“Commission’s report to the Council regarding BiH’s readiness to start negotiating with the EU about the Stabilization and Association Agreement“(Feasibility Study), Brussels, 18th November 2003.
21“Commission’s report to the Council regarding BiH’s readiness to start negotiating with the EU about the Stabilization and Association Agreement“(Feasibility Study), Brussels, 18th November 2003.
22PRSP team’s research based on the World Bank data.
23Investment Climate in BiH – Benchmarking, FIPA, September 2003.
24Conclusions from the MIT Study on the Competitiveness of the BiH Economy, School of Economics, University of Sarajevo, 2002.
25Investment Climate in BiH – Benchmarking, FIPA, September 2003.
27“Commission’s report to the Council regarding BiH’s readiness to start negotiating with the EU about the Stabilization and Association Agreement“(Feasibility Study), Brussels, 18th November 2003.
28Foreign media have contributed to a poor world image regarding corruption (“Leaders in Bosnia are said to steal up to $1 Billion, New York Times, 17 August 1999). Foreign media reporting on the presence in BiH of individuals connected with terrorist organizations, failure to apprehend those indicted of war crimes, violation of the UN embargo in the “Orao” case, trafficking in humans, have all contributed to a poor world image of BiH.
29Unsuccessful bid for the 2010 Winter Olympics and the consequent explanation of its decision by the International Olympic Committee also point to the fact that BiH needs to work on its world image.
31A fund like this one functions well in several countries in transitions, and is particularly successful in Estonia.
32Management and Business Improvement through Education and Training in Bosnia and Herzegovina, Croatia and Yugoslavia, Aziz Šunje, Ph.D., April-October 2001

III.2. PRIVATIZATION

1. Goals

1.1. Complete the privatization of “strategic” enterprises;

1.2. Define strategies for the privatization of the infrastructure sector1 and restructure the enterprises in this sector (public enterprises and utilities companies).

2. Situation

Privatization, during its initial phase, failed in the restructuring of the production capacities of companies. The predominantly voucher-based method, used to date, has not secured fresh capital, new technologies, or new management practices.

However, a recent survey by the World Bank and domestic experts, based on a sample of 100 newly privatized companies, indicates the emergence of a different trend.2 Industrial production over the last three years has been constantly on the rise, especially export-oriented production. On the other hand, employment in these companies has remained relatively at the same level with only a slight increase. Although most of these companies still operate with losses, their results are significantly better than of the remaining state-owned companies. These are grounds to state that the newly privatized companies will continue to operate successfully and have a positive effect on the overall economic development of the country. The experience of other transition countries was that it took roughly three years for the effects of reforms to start being felt.

Although privatization investment funds play an important role, the result of mass public share offerings, due to the large dispersion of firm ownership, the shortage of capital and the lack of stockholder interest, was only the transformation of ownership and not a real revival of production. In light of the requirements of the Stability and Association Agreement, the success of privatization leads to the creation of a functioning market economy, which represents the fulfilment of the Second Copenhagen Criterion.

2.1. Enterprise privatization

Privatization is operationally managed by the FBiH Privatization Agency and the RS Privatization Directorate, in accordance with the entity laws. There are also cantonal privatization agencies in the FBiH.

Privatization has, up to now, mainly been conducted through the sale of state capital for certificates/vouchers or through public offerings of shares. The new ownership structures created in this way, with a multitude of small stockholders, either independent or in privatization investment funds (PIF), have failed to induce the restructuring of enterprises or the restarting of production. Because such developments had been anticipated even before voucher privatization began, a number of “strategic enterprises” were selected for tender privatization.

By mid-2003, significant progress had been achieved in small privatization; 77% of state capital in the FBiH and 47% in RS had been sold. The privatization of large enterprises (with more than 50 employees or over KM 500,000 in capital) has proceeded more slowly. In the FBiH, by mid-2003, 272 out of 411 large enterprises had been privatized, and in the RS, during the same period, 304 out of 648 enterprises from the same category had been sold.

In the FBIH, 86% of enterprises have (fully or in part) gone through the privatization process, and 65% have completed the process. The total value of privatized state capital in the FBiH is KM 5 billion, or 37 per cent of the total planned for privatization. The proceeds amounted to KM 8.8 billion, of which only KM 338 million was cash and the rest was privatization certificates (KM 1.76 was paid for each 1 KM of state capital). Over KM 800 million of new investments was contracted, of which KM 371 million was foreign investment. In the RS, in addition to voucher sales, the privatization proceeds included KM 133 million in frozen foreign currency savings and KM 20 million KM in cash.

Despite the international community’s support for privatization of so-called ‘strategic’ enterprises, by mid-2003 only 17 out of 56 firms in this category had been sold in the FBiH and 4 out of 52 in the RS. In a few prominent cases, the privatization negotiations failed, mainly because of inflexible laws, the inexperience of the privatization agencies, and the lack of political will on the part of previous governments to accommodate potential investors, or, in other words, because of the nontransparency of the process. The acceleration of the privatization of ‘strategic’ enterprises is an absolute prerequisite to boosting economic development.

2.2. Bank privatization

Bank privatization in both entities was conducted in accordance with special laws. The banks could not have been privatized for certificates/vouchers, only through cash investments selected through international tenders.

During privatization in the RS, the capital of 13 banks,11 of which were majority state-owned, was offered up for sale. Eight banks were sold or merged with other banks, two were closed, two are in receivership, and the sale of the last bank, the Doboj Bank, is underway. Due to the poor situation in the banking sector, total proceeds were KM 7.4 million.

In the FBiH, there were separate processes of privatization of the group of banks with majority state capital and of the banks in which the FBiH had minor ownership stakes. Most banks were successfully privatized. The privatization of the remaining banks is underway, while five banks were placed into receivership. Unlike enterprise privatization, banking sector privatization was much more effective and it resulted in the stabilization of the banking system. Although there was significant foreign investment in the banking sector, the proceeds from bank privatization to date only amount to KM 6.8 million.

2.3. Privatization Investment Funds

Privatization investment funds (PIF) emerged as a result of the voucher privatization model. So far in the FBiH, eleven PIFs have been registered and have collected KM 4.5 billion in certificates. By the end of the public offering of shares, these eleven PIFs had bought KM 1.9 billion of state capital. In the RS, there are 13 PIFs that have collected KM 1.6 billion in vouchers. The shares of these investment funds are listed on the Sarajevo and Banja Luka stock markets, creating the conditions for trade in the shares of these funds.

Given the nature of PIFs and their combined share of ownership in privatized firms, unrealistic public expectations have arisen regarding the capacity of PIFs to contribute to more dynamic economic growth. The negative public image of PIFs, aggravated by their lack of effort to counter negative publicity, has been one of the major reasons that people have neglected to spend a large share of their certificates/vouchers (about KM 4 billion) in the privatization process. The failure of voucher privatization was not only caused by the passive ownership role of the PIFs, it was also the fault of the large ownership dispersion of newly privatized companies and the limited possibilities for securing fresh capital.

The PIFs have played a positive role in accelerating privatization and stimulating the capital markets. Their capacities for boosting the investment cycle are limited due to a lack of capital. On the other hand, PIFs have 5% to 80% share of ownership in several hundred privatized firms. Unfortunately, PIFs hold majority ownership in the poorest companies that could not have been privatized through other methods. PIFs are usually minority owners in better companies. Therefore, their ability to contribute to the acceleration of the economy is limited. Access to new capital is hard to secure for those companies in which the PIFs hold majority shares. The poor results achieved by the PIFs are also, to a large extent, a reflection of the lack of tradition of in corporate governance.

2.4. Privatization of infrastructure enterprises – public enterprises and public utilities

The privatization of public enterprises that produce, transmit and distribute electricity, PTT services, public utility services and other infrastructure sector enterprises (railroads, water management, forestry, and electronic media) is still in its preparatory phase. The adoption of the Law on Concessions at the BiH and entity levels in 2002 created preconditions for more substantial inflows of private capital for infrastructure through the privatization of these enterprises.

The most significant activities so far have taken place in the energy sector with the adoption of a legal framework and the entity action plans for restructuring and privatization. In their initial stages, the action plans focus only on restructuring and leave privatization for the next stage.

Unlike the FBiH, the RS has made considerable progress in preparations for the privatization of their telecommunications. In its Action Plan, the RS Government committed to privatize Telekom Srpske a.d. by the end of 2005, and has already raised a pre-privatization loan from the EBRD for this purpose.

Public companies producing and distributing electricity, as well as telecom services in BiH, have already offered part of their total capital (before incorporation and/or restructuring) up for sale through public share offers (10 percent in the FBiH and 20 percent in the RS), while majority ownership will be offered to strategic investors. There has not been major progress in the restructuring or privatizing of other infrastructural sectors. Some sector laws (such as forestry, water management, and railroads) have been adopted at the entity level and activities are underway to prepare some studies, but there is no clear or harmonized direction for reforming these sectors. In the future, it will be necessary to make a consistent legal and regulatory framework in order to attract and secure private capital participation in these sectors.

3. Problems and obstacles to privatization

3.1. Main causes of the poor results of the privatization process to date:

  • Slow privatization, indecisiveness on the part of the government to undertake the necessary steps to accelerate privatization, lack of public trust in the transparency of the process, insufficient attempts to educate public about privatization, frequent elections;
  • Insufficiently transparent privatization process thus far;
  • Complex and disharmonized legal framework,
  • Inappropriate privatization model and an attempt to use privatization to settle arrears owed to citizens;
  • Poor management of companies and inadequate preparedness of companies for privatization, including incomplete and questionable integrity of companies’ legal and financial records;
  • Poor business environment, fragmented economic space, poor world image, inconsistent application of laws, political instability in the country and the region, instances of open and indirect political interference and obstruction of privatization;
  • Inconsistent approach and poor results of the international community when involving foreign consultants to assist with sale of strategic companies,
  • Economic crisis in most parts of the world, which caused a global decline in investment.

3.2. The main obstacles to more efficient privatization:

  • Companies are heavily burdened by debt;
  • Lack of social programs to deal with surplus labor;
  • Investors encounter terms and deadlines that are not market-based, including requirements to provide welfare support, rigid business rules, and public policies that raise the cost of doing business through imposing excessive administrative requirements and unnecessary political interference;
  • Part of the state capital has not been prepared for privatization owing to ownership disputes or potential hidden liabilities of such enterprises;
  • Overestimated enterprise values;
  • Inconsistent legislation treating the same subject in different ways; the non-existence of the Law on Restitution;
  • Overly decentralized institutional framework for privatization in the FBiH;
  • Management boards and managers tend to resist privatization in order to maintain their privileges;
  • Lack of funding for the preparation of enterprises for privatization;
  • Lack of strategy for privatizing public enterprises and public utilities, which slows down the legal and regulatory frameworks needed for attracting investors.

4. Priority Activities

4.1. Accelerating the privatization of “strategic” enterprises

Accelerating the privatization of strategic enterprises will:

  • Prevent the erosion of state capital: privatization must be accelerated, because the pace of the process so far has contributed to the erosion of the value of state capital and to the accumulation of debt to suppliers, commercial banks, the state and employees. The greatest weakness of the privatization process is not in the model (which may not be the most appropriate), but in the slowness of the process.3
  • Accelerate economic growth and increase employment: Despite the fact that it could increase unemployment in the short term, accelerating privatization provides opportunities for stable economic growth and an increase in employment over the next medium-term period.4
  • Increase the volume of foreign investment: The level of foreign investment in BiH is still very low. Accelerated privatization offers opportunities for faster inflow of foreign capital, which, in addition to new jobs, introduces new technologies and new management and opens new markets.
  • Accelerate integration into international markets and create conditions for increased exports: by definition, and on the basis of the experiences of other transition countries, privatization offers a more efficient way of managing enterprises, which leads to greater competitiveness of domestic products on the international market5
  • Secure incomes: despite the modest results in securing additional revenues from privatization so far, accelerated privatization of strategic enterprises could potentially create substantially larger future revenues, which could then be channelled into job creation, stabilizing the pension funds, reducing public debt and into social assistance programs.

4.2. Increasing accountability of management boards and managers in state enterprises

The large share of the responsibility for the erosion of state capital in state-owned enterprises often lies with management boards, who are appointed by the governments at different levels. Along with management, they presented a large obstacle to faster privatization. In order to increase accountability and professionalism in managing state enterprises, management board members should be reappointed and selected in publicly advertised competitions. But, since it cannot be expected that even this measure would significantly improve enterprise management, the possibility of eliminating management boards as instruments of managing state capital should be considered; management could be contracted out through so-called management contracts, with performance overseen by the appropriate government bodies.6

4.3. Strengthening institutional framework for privatization

The decentralized institutional framework for privatization in the FBiH, where, in addition to the FBiH Privatization Agency, there are also ten cantonal agencies, has not yielded the desired results. In the upcoming period, competent FBiH privatization agencies must be strengthened, particularly in the segment of privatization of strategic enterprises, and clear rules for coordinating activities with the cantonal agencies must be established.

The role envisaged by the legislators for the agencies in the FBiH and the directorate in the RS in preparing enterprises for privatization was noticeably weak in the past. The negative perception the public had of privatization, often equating it to criminal activity, additionally limited the agencies in the FBiH and the directorate in the RS in negotiating more actively sales agreements, which lead to their inefficiency. Rules for tenders do not allow for negotiating an offer after the selection of the best bidder. On the other hand, the method of direct bargaining was, because of public pressure, burdened by the demands of the agencies in the FBiH that investors keep current employees on (even though the law does not stipulate this), which in turn discouraged potential investors. Therefore, the FBiH agencies and the RS directorate need to be given greater flexibility and discretion in choosing the best privatization strategies. Furthermore, they should be empowered to prepare for the process of privatization, including short-term restructuring of enterprises, as well as the possibility of meeting the requests of potential investors during the negotiation of contracts.

4.4. Categorize “strategic” enterprises by their readiness for privatization and then adopt operational plans for privatization, including restructuring, bankruptcy and liquidation proceedings

The attractiveness of strategic enterprises for potential investors varies from company to company. Since the amount of debt incurred by an enterprise is one of the most important parameters for accessing its attractiveness for privatization, the Federal agency and the RS Directorate, jointly with the World Bank and DFID, have carried out a financial analysis of the debt incurred by strategic enterprises. Taking this analysis as a starting point, the Federal agency and the RS Directorate should categorize enterprises according to their readiness for privatization into the following categories: privatization-ready; requiring restructuring; and those for bankruptcy or liquidation. The entity governments should adopt a document with the categorization of enterprises, which would greatly accelerate privatization.

Based on categorization, the operational plan for privatization should be adopted to include restructuring plans for enterprises selected for restructuring by the entity governments, which would be done in such a way as to selectively split up the existing enterprises -- liquidating unprofitable parts of an enterprise, while offering the competitive ones to the market. Such a way of getting enterprises ready for privatization requires a tailored approach to each enterprise and a change in the powers of the entity privatization institutions.

The process would include short-term restructuring only, including:

  • Property restructuring: sale of property and technology (separating main business from strategically unimportant activities),
  • Financial restructuring of debt to state and commercial banks,
  • Organizational restructuring: establishment of strategic business units (profit centers), strengthening marketing and sales, further education and training of managers and other employees.

The categorization document would determine the enterprises for which it will be necessary to start bankruptcy or liquidation proceedings. In order for this to be successful, entity laws on bankruptcy and liquidation must be amended in such a way as to put creditors and potential investors in a more favorable position.

4.5. Improve the mechanism for privatization of enterprises that are not categorized as “strategic”

In this case we are talking about small enterprises. It is necessary to give a deadline for the privatization (including debt or without it) to the management of these enterprises. The most adequate method of privatization of these companies should be sale through stock exchange and public auctions. If companies fail to secure buyer within given deadline, and still have problem of indebtedness, the bankruptcy procedure will have to be initiated.

4.6. Defining the policies of entity governments and resolving the issues of accumulated debt of strategic enterprises

As was previously mentioned, the FBiH Privatization Agency and the RS Privatization Directorate, jointly with the World Bank and DFID, have prepared a financial analysis of the debt incurred by the strategic enterprises. These enterprises owe the FBiH KM 203 million, of which KM 112 million (55 percent) is back taxes, KM 45 million (22 percent) is back wages, and KM 34 million (16 percent) is debt to connected persons.

According to the experiences of other countries, Hungary in particular, it would be useful to establish entity units to manage debt incurred by strategic enterprises. These units would take over the debt to the state in the form of back taxes, back wages, and unpaid contributions for health insurance, pension funds, and to employment bureaus, but not the debt for bank loans or any other business activity.

At the same time, the entity governments should define a repayment plan for the debt taken over by the entity debt management units. The basis of these plans should be a write-off of debt to the state for taxes and health insurance. The remaining debt should be reprogrammed and gradually repaid partially out of privatization revenues and partially out of funds received through the succession of property of the former Yugoslavia and favorable loans from international banks for development. In relation to this, an agreement must be made with the IMF that the revenues received through privatization and succession should be used for reducing public debt.

The debts that the strategic enterprises have incurred to commercial banks and suppliers are another impediment to faster privatization. The Federal Agency for Privatization and the RS Directorate for Privatization should discuss the possibility of writing-off part of the debt or reprogramming the debt with the commercial banks. For this, the Federal Agency for Privatization and the RS Directorate for Privatization should set up special departments to mediate the reduction and reprogramming of the debt that the strategic enterprises have incurred to commercial banks and suppliers.

  • Companies privatized through voucher schemes

Special attention should be given to the companies privatized through voucher schemes and which are managed by Investment Public Funds (IPFs). It is necessary to change book of rulers of the IPFs in order to insure that level of fee they get for managing these companies depends on results in recovery of them.

Given the fact that most of these companies are in debts, it is necessary to give them a deadline by which they have to settle debts. In the case they fail to settle debts the bankruptcy procedure should be initiated.

4.7. To improve institutional framework for more efficient bankruptcy procedures

In most cases timely bankruptcy procedure could result in preserving companies and jobs. In order to put in place more efficient bankruptcy procedure it is important to complete nominations of judges in the sixteen regional courts and judges for newly established commercial chambers of courts. Besides inadequate legal framework (which has been changed), the biggest problem for efficient bankruptcy procedures in the past has been the lack of political will on the government’s sides to move bankruptcy procedures and lack of the adequate social program for those who would loose their jobs. Thus, parallel with improving the institutional framework and securing the social program it will be necessary to prepare the list and the action plan of the companies for initiating the bankruptcy procedure.

4.8. Reorganizing the unemployment insurance system

Lack of social programs is quite worrisome to employees about to lose their jobs following privatization and, at the same time, it is a great obstacle to faster privatization. The current practice of transferring social problems onto investors has not yield positive results since it makes already debt-burdened BiH enterprises even less attractive for privatization.

In relation to the above, the following must be assessed:

  • Surplus labor in strategic enterprises;
  • Arrears to surplus labor in the form of back wages and contributions.

Following the assessment, the unemployment insurance system must be reorganized and the social protection system must be strengthened. In relation to this, the existing legal framework must be modified in order to help the unemployed in resolving their existential problems:

  • Tying years of service to meet retirement conditions;
  • Purchasing years of service to meet retirement conditions;
  • More appropriate unemployment insurance (longer-term).

In addition to funds from the unemployment bureaus, a share of revenues collected through privatization, succession, and favorable international bank loans should be the main source of financing a reorganized social unemployment insurance system. Considering the limited nature of these funds, the Federal Agency for Privatization and the RS Directorate for Privatization should be given powers, when negotiating with potential investors, and depending on the attractiveness of the enterprise for privatization, to partially resolve the issue of unemployment insurance through sales contracts, particularly in relation to back wages and severance pay. In relation to this, and taking into account the fact that the unemployment contributions in the RS are as much as three times lower than in the Federation, consideration should be given to an increase in the RS from 1 percent to 2 percent for a three year period in order to ensure sufficient funds for compensating the large number of unemployed workers. Consequently, this would speed up privatization.

Once again, an agreement must be reached with the IMF to have a portion of revenues received through privatization and successions used for unemployment insurance.

Finally, labor unions will have to influence workers, especially those working in enterprises that are not attractive for privatization, to reach an agreement with the state and investors on reprogramming payment of back wages, in order to facilitate their sale and start production.

4.9. Adopting a strategy for privatizing public companies and public utility companies

Defining strategies and action plans for companies for the sector of infrastructure will contribute to better the operational planning of the privatization of these important sectors.

Taking into consideration the fact that many public utility and infrastructure enterprises in transition countries suffer from years of neglect and lack of investment, outdated technology, inefficient management, and low quality of services provided to clients, it is quite understandable that, with an injection of private capital into the public utility and infrastructure enterprises, the governments want to:

  • Increase efficiency in providing services;
  • Obtain funds for new investments;
  • Take advantage of private sector abilities and knowledge.

Taking the above as reasons for privatizing public utility and infrastructure enterprises, it is possible to define the following privatization goals:

  • Increasing the economic efficiency of an enterprise;
  • Obtaining considerable private capital investments or gaining access to private capital markets;
  • Introducing new technologies, and technical and managerial skills and knowledge;
  • Reducing public subsidies to this sector or redirecting them to the needy;
  • Making the sector more responsive to the wishes and needs of its users;
  • Shielding the sector from political interference and the influences of interest groups.

Firms from these sectors (telecommunications, mining, forestry, water supply, and infrastructure) are generally unsuitable for privatization by the methods applied so far. Because of the marked public interest in these sectors, the entry of private capital into these sectors, and the mode of management. Appropriate legal and regulatory frameworks must be adopted at all levels of the government to ensure the consistency of regulations and the establishment of an attractive and stable environment for investments.

Further steps in preparing for privatization pertain to institutional systematization of infrastructure (separately for each of the areas), including the adoption of sector laws, liberalization of sectors in order to make room for competition, setting tariffs, regulation, and determining the responsibility for building and managing infrastructure.

Following the institutional systematization of this sector, it will be possible to start privatizing companies providing individual services, with the possibility of private capital participation ranging from contracts for services, management contracts, and rental agreements, to concessions, and sale of property/shares.

4.10. Restructuring and Privatization of the Power Sector

Based on the Power Sector Restructuring and Privatization Study, a legal framework was adopted for the said activities in the form of the Law on Electricity Transmission, State Regulator and Independent System Operator in BiH, as well as the laws on electric power at the Entity level. By forming the State Electric Power Regulatory Commission of BiH (SERC) and the entities, conditions have been established for issuing licenses for new commercial organizations that will be established in this sector and for implementing tariff methodologies that are related to the production and distribution tariffs.

The above mentioned Study provides for two phases: the transition phase (assets reallocation, incorporation and commercialization) and the privatization phase. Incorporation means that the companies will be organized in a way that is different from the present situation where there are three companies. Commercialization means the adoption of a profit oriented philosophy for the companies in this sector. Concerning privatization, the generation and distribution companies would be privatized, while power transmission would remain state owned.

Based on the Action Plans adopted by the entity Parliaments, what follows next is the adoption of the Law on Independent Power System Operator. During 2004, the following activities were conducted: reorganization and re-registration of generation and distribution companies as new joint stock companies; provisional licenses were issued to the new companies; SERC and the Entity Regulators adopted tariffs and market rules, and future investment plans were updated. The second phase of the Privatization Action Plan will follow in 2005 and 2006. The State is supposed to remain the majority owner in this sector, which should be run under the “Managerial Contract”.

4.11. Restructuring and Privatizing the Telecommunication Sector

In the early stages of the transition of the telecommunication sector, the new Law on Communication was adopted at the state level in 2002, providing that the Council of Ministers was responsible for developing and adopting the sector policy, while the Communication Regulation Agency was responsible to regulate the telecommunication networks and services, including licensing, pricing, linking and specifying the basic conditions for provision of joint and international means of communication. The post-war development of this sector in Bosnia and Herzegovina was characterized by monopolistic behavior of the three operators in the country’s divided market.

Preparation of the companies for privatization in the Federation of BiH started in 2002 by splitting the PTT BiH and HPT Mostar into telecom and postal services companies. This process included: dividing property, liabilities, managerial structure, and the workforce; making the opening balances, auditing the financial reports in accordance with international standards and by independent auditors; accepting the obligation to provide subsidies to the postal companies, etc. In the Republika Srpska, the separation of the telecom services from postal services into separate legal entities was completed much earlier.

The Council of Ministers’ decision on the telecommunication sector policy in BiH has limited the number of operators to three by the end of 2005. In accordance with this act, the state owned mobile phone operators were to receive their licenses without any compensation (such licenses have already been issued to BH Telecom and Telekom Srpske), while the procedure for awarding the third GSM operator license is currently ongoing.

Next steps:

  • Re-balance tariffs and liberate services: develop a market oriented tariff structure, identify the cost structure for each service, meet the users’ demands for each service, improve operational performance, and optimize the profit on the basis of the service provided.
  • Pass decisions on selling the telecom companies: make the sale on the basis of the decisions made by the Governments and Parliaments in accordance with the relevant legislation.
  • Conduct privatization: prepare the companies for privatization, define the obligations of the strategic investor, specify criteria for selection of bidders, specify the size of the share package that will be offered, choose an advisor for the privatization transaction, and determine the optimal timing of the sale.

4.12. Restructuring and Privatizing the Railway Sector

The railway system in Bosnia and Herzegovina was destroyed during the 1992–1995 war. The total damage to the railway system in BiH has been assessed at USD 854 million, of which USD 767 million or 90% is for the vehicles, while USD 87 million or 10% is for infrastructure.

By the end of the war, the scope of work of the operators in Bosnia and Herzegovina was limited. Operators are organized into three companies – two in the Federation (ŽBH and ŽHB) and one in the Republika Srpska (ŽRS). The two Federation companies have merged on the basis of the Law on Railways of the Federation of BiH from 2001. In accordance with the agreement between the Federation of Bosnia and Herzegovina and the Republika Srpska from April 1998, a joint railway public corporation was established as a part of the transport corporation.

Recognizing the Conclusions by the ministers from European countries (ECMT) and the EU Directives (e.g. Directive 440/91) further steps in restructuring this sector would be the following:

  • The railway companies should be given the status of independent operators who will work on a commercial basis and in accordance with the needs of the market;
  • It is necessary to distinguish between the provision of transport services and infrastructural operations and to have separate accounts for the two;
  • Improve the structure of the company (reduce the debt);
  • Make sure that access to railway infrastructure and transit rights are guaranteed to international groups for international services between member countries.

4.13. Restructuring and Privatizing the Water Management Sector

Conversely to the power sector, the water management sector (managing water resources, water supply, removal and treatment of waste waters) has seen no concrete reform actions undertaken so far. There have been (and some are still ongoing) international community several projects to reform this sector, but they were implemented in way that lacked comprehensiveness and coordination. They failed to materialize in the form of a single reform concept that would be accepted by the Governments in Bosnia and Herzegovina.

The studies implemented to date indicate that in the restructured sector, the Governments should work on defining the long term development goals for the sector and on formulating policies for competition, investment, and ownership. Sector planning is also an important function that needs to be developed. The interests of various future users (for instance, hydro-power, water supply, flood protection) must be reconciled, so the final restructuring plan must treat all users in an objective and fair manner on the basis of sound technological reasoning and appropriate sector investment policy.

Legislation in the sector should move in the direction of creating an independent regulatory institution whose major task would be to determine prices, i.e. a tariff structure that would provide for the sector’s financial sustainability. Private investors seek projects that provide them with an acceptable rate of return on their investment. The regulatory authorities should be developing structures that will make sure that the tariffs for potable and waste waters reflect the actual expenses incurred in their supply and removal, as well as provide for a sufficient profit to meet the needs of the management companies (no matter whether they are municipal utility companies or private companies). The system should be structured in a way that provides for easy collection from consumers and meeting the goals of the community (for instance, minimum water supply for low income consumers).

The necessity of restructuring the water sector is reflected in the need that policy, planning and legislation are retained as responsibilities of the state, while the private sector provide services in the area of water supply, sewer operation and treatment of waste waters.

4.14. Preparation and Privatization of Utilities

If one takes into consideration the fact that among the total number of utility companies registered for privatization the water supply and waste water removal companies (water supply and sewer) have a dominant position, the link between the utility and water sectors becomes evident.

The other utility companies that are to be found in the above mentioned registry are the district heating companies, the gas distribution companies, burial/funeral services, public transport, park maintenance, fire fighting, public housing companies, and produce and green markets.

The regulations applicable to the establishment and operation of utilities, which were passed by cantonal and municipal authorities in FBiH and municipal authorities in RS, vary from one to the other to reflect the needs of the individual local community. In some smaller communities, those companies are organized to include all utilities, however, in most cases there are separate legal entities that provide different services.

Next steps:

  • Restructure the sector (identify the utility services where monopolies have to be retained for reasons of their nature – water supply and sewer, gas distribution, district heating – and those services where several companies may compete -- produce and green markets, waste disposal, parks, fire fighting);
  • Supplement the legislation (change the sector regulations that define what is a good in general use and specify the procedure for proclaiming goods in special use for each utility, adopt a regulatory regime and a methodology for tariff determination, adopt and implement laws that enable various forms of partnership between the public and private sectors);
  • Specify privatization criteria (incorporation and commercialization prior to privatization for some companies, choosing the privatization option among the available range of options).

4.15. Preparation and Privatization of the Forestry Sector

Forests and land represent one of the major natural resources in Bosnia and Herzegovina. They are valuable for their ecological, social and production functions. Forests and forest land, being of general importance, demand special care and protection from the state.

Special problems in this sector are a lack of sector policy at the state and entity levels, a lack of institutional definition, variations in regulating forest management and use in various parts of the country.

One attempt to adopt a single approach to forest management included the establishment of public enterprises in the entities (BH Forests and HB Forests in the Federation and the Forests of RS in the other entity). In the Federation, particularly the territory managed by BH Forest, the results were rather poor, which can be explained by the diverging interests of the local communities.

Once the sector has been properly legislated and the property, management and use of forests defined, it will be possible to determine the following directions in terms of activities in the privatization of forests:

  • First, privatize the so-called non-strategic areas (parts of the enterprises that handle the transport of logs, road construction and maintenance, catering facilities in forestry, facilities for the processing of timber, plants for extraction and the processing of river gravel);
  • Privatization (private sector involvement) of the strategic parts of the forest industry should wait until the documents prescribed by law are adopted (forest program etc.) and until the new organization has been realized. Before the strategic capital is privatized, all material and non-material profits and losses in forestry must be analyzed from the aspect of the public and private sectors;
  • Supplement the existing and adopt new privatization regulations (bylaws) to reflect the unique characteristics of this sector;
  • Reinvest revenues earned in the process of privatization into forestry for the purpose of developing the industry and renewing the forests;
  • Special attention needs to be paid to the social aspect of privatization, i.e. resolving the excessive workforce.

4.16. Regulating and Privatizing the Media

The media market in Bosnia and Herzegovina after the war includes 272 media outlets, 203 in the Federation of BiH and 69 in the RS. Through the Dayton implementation process, the international community has shown a strong interest in regulating the media in BiH. In the early days, this was carried out through various media commissions, until the CRA was established under the 1998 Law on Telecommunications and it became the regulatory agency for electronic media. This Law defined the method of frequency management, including media frequencies at the level of BiH.

During 1999 and 2000, the High Representative passed decisions on restructuring the public broadcasting system in Bosnia and Herzegovina, whereby imposing the tasks of establishing commercially and technically sustainable RTV companies and laying the foundations for a strong public media sector. The Law prescribed the establishment of a Public Broadcasting Service at the BiH level (PBS BiH), as well as entity broadcasting services (RTV FBiH and RTV RS).

The activities related to restructuring public broadcasting, as well as the prohibition of privatization until licenses were issued for the electronic media that was imposed by the OHR, slowed down the implementation of privatization activities. Before those decisions, there were sporadic examples of privatization of some local media, radio stations in particular.

Once the sector has been regulated and companies reorganized, it will be necessary to organize the following privatization activities:

  • Make a list of companies to be privatized;
  • Prepare the companies and choose the privatization method;
  • Implement the privatization transaction.

Concerning the preparation and choice of the privatization method, in the case of other companies (regional and local RTV stations) one has to take into account that all outlets require some investment capital and additional professional skills. Because of this, the best option would be to choose the strategic investor, because it is not very likely that the financial investors will be interested in investing in a small, underdeveloped and fragmented market that can not yield profits and liquidity of shares over a short term. One possible option for privatization that deserves some consideration is the involvement of managers and employees in the privatization of those media outlets (the MEBO method).

The privatization transaction itself needs to be fully transparent and the future buyer is to be requested to comply with the requirements specified by the CRA when receiving a broadcasting license.

4.17. Improving the Business Environment for Investing in BiH

An improved business environment is an important prerequisite for achieving better quality privatization. Therefore, it is necessary to implement the Action Plan for the improvement of the business environment for domestic and foreign investors.7 In this same context, it will be necessary to implement a six-month Action Plan for the implementation of emergency reforms.8

4.18. Speeding up the Resolution of Disputes Conducted before the Responsible Courts or through Arbitration

The privatization process has stalled in a significant number of large companies because those companies are involved in legal disputes before the national courts, or in arbitration. It is necessary to encourage the speediest possible resolution of such disputes by pointing out the positives of streamlining the procedures conducted before the responsible institutions or achieving non-institutional agreements between parties in a dispute.

4.19. Improving Transparency in Privatization

In the opinions of national and international experts, the privatization process implemented to date in BiH has not been transparent in all its phases. This has resulted with a certain number of purchase and sale agreements that have not properly protected the rights of state property and workers, while mechanisms were not provided to ensure proper performance and control whether the obligations undertaken by the buyer were actually met.

In order to overcome such a situation, it will be necessary to adopt appropriate legislation that would provide for an effective control mechanism to check whether obligations undertaken in the process of privatization have been met. One such mechanism would be the termination of a contract where the buyer was found in default.

4.20. Strengthening the Promotion of Investment Opportunities within the Privatization Process as one Form of Overall Investment Opportunity in BiH

It will be necessary to coordinate activities between FIPA and the agencies responsible for privatization.

4.21. Starting a Public Campaign on Privatization

Considering the negative public perception of the privatization process, it will be necessary to initiate a public campaign with the purpose of educating the general public about the main activities of the process and secure public support for these activities. It will be particularly necessary to stress the importance of accelerating privatization as one possible generators of BiH economic development.

Notes

1Involves electric power sector (including mining), telecommunications and transport sector (railways, airports, gas), water management sector, utilities sector (district heating, garbage disposal, other communal services), forestry sector, electronic media sector.
2“Study of Achieved Results and Conditions for Improvement of Operation of Privatized Industrial Companies in BiH,” October 2002, the World Bank, (prepared by Muris Čičić, Ph.D.)
3Despite the fact that, during the process of determining the initial balances of firms, debts of firms in the amount of several billion have been written off, due to apathy and slowness of privatization, the debts of state enterprises towards the state commercial banks and employees have again grown to such levels that make these firms less and less attractive for privatization.
4The above mentioned survey by the World Bank and domestic experts, based on a sample of 100 newly privatized companies, showed that the level of employment in privatized companies has been maintained, and even increased.
5The above mentioned survey of the World Bank and domestic experts based on sample of 100 newly privatized companies shows that the exports in these firms have been constantly on the rise.
7The method of managing state capital through a managing contract is often used in other transition economies, especially to manage companies providing services in the infrastructure sector. In that case, the government publishes an advertisement inviting offers for a management team that will contract to achieve pre-set business and other goals. In this way, the institution of management boards, which have not proven effective, will be eliminated, while state bodies, as owners of the state capital, will have the task of direct oversight of the management of such enterprises.
7 The Business Environment Improvement Action Plan was adopted by the Council of Ministers and both entity governments, and this Action Plan was further developed under the process of preparing the Poverty Reduction Strategy Paper (see the special part on business environment).
8The six-month Action Plan for implementation of urgent reforms was adopted by the Council of Ministers and the entity governments in August 2003.

III.3. FINANCIAL SECTOR

Contrary to the situation in the industry sector, the financial and, especially, the banking sector have, for the most part, realized the reforms successfully and should represent one of the pillars of economic development of the country in the coming medium term period.

1. Objectives

1.1. Ensuring an increase of domestic private savings

In the situation characterized by declining levels of international aid, it will be necessary to increase the level of domestic private savings to about 7 percent of GDP by the end of 2007, and enable the financial system to answer to the growing demands for financial intermediation.

1.2. Ensuring a more favourable source of financing for the private sector

The existing level of interest rates is still high, and the term structure in banks is unfavourable for longer-term borrowing by the private sector.

1.3. Ensuring a higher share of credits to enterprises in comparison with household credits

In the last two years, a trend of increased crediting of households was evident. A higher volume of loans to enterprises will lead to an increased pace of economic growth and an increase of employment.

1.4. Increase Liquidity of the BiH capital market

It is necessary to ensure the growth of liquidity in the capital market and the introduction of new financial instruments.

1.5. Building a functional insurance market in BiH

The insurance market in BiH is fragmented, while the reforms in this area are aimed at ensuring the future growth of this sector. There are inconsistencies between laws and regulations on BiH level, while the supervision over insurance underwriters is weak.

2. Banking sector

2.1. Current situation

Financial intermediation in BiH is, almost totally, executed through the banking system, which i dominates in the financial sector. In recent years, the most evident progress has been achieved in the banking system, and the results were visibly better in FBiH than in RS.

The most significant achievements are the following:

  • Privatisation has been completed, almost in full, and the regulatory framework has been put in place;
  • The number of banks has been reduced, foreign banks are present, interest rates are falling;
  • The process of the payment system takeover by commercial banks has been finalized successfully;
  • Confidence in banks has been strengthened, deposit insurance system has been established, the level of savings has been increased;
  • Bank supervision has been developed and it is continuously being improved.

The results of the successful reform in the banking sector in the recent period are reflected in the consolidation of the entire sector, increased injections of capital in banks, a higher level of foreign capital entering the country, growth of balance sheet items and increase of profitability. The process of consolidation and restructuring is continuing, and the legal framework and bank supervision have been improving for a number of years.

According to information available to entity banking agencies in November 2003, with September 30th 2003 there were 37 banks operating in BiH (with banking licenses): 27 in FBiH and 10 in RS. Nine banks from FBiH had the total of twelve organizational units in RS and nine in the District of Brčko, while three banks from RS had the total of five organizational units in FBiH. Interim administration was instituted in five banks in FBiH, and in one bank in RS, while bankruptcy proceedings are ongoing in four banks in the later entity. Arrangements leading to the merger of the HVB Bank with Central Profit Bank, as well as the merger of Zagrebačka Bank with Univerzal Bank, are ongoing, so that, by the end of the first half of 2004, the number of banks in FBiH will be reduced to 26.

In FBiH, there are 20 banks with majority private ownership (84 percent of capital), and in RS all banks are in majority private ownership (98 percent of capital). There are 7 banks in FBiH with majority state owned capital (16 percent of capital), while in RS only about 2 percent of capital falls into this category. In the same period, there were 5,341 employees working in banks in FBiH (5 percent more than in 2002), and in RS there were 2,343 employees (3 percent less than in 2002).

The aggregate balance sheet amount for all banks in FBiH in the first nine months of 2003 amounted to KM 5.4 billion, which is 17 percent higher than with December 31st 2002.1 In the majority of banks with majority privately owned capital there was an increase of assets, and, among them, 11 banks recorded growth rates higher than 15 percent. The most significant change in the structure of assets is the increase of the share of loans by 2.8 percent, while the share of monetary assets was decreased by 0.8 percent. Loans and monetary assets represented 91 percent of overall balance sheet assets. Of the total growth of the balance sheet sum, 73 percent concerns the five largest banks. The structure of bank liabilities remained almost unchanged in comparison with the end of 2002, and the deposit potential of 75.4 percent remains the dominant item in the formation of the banks’ financial potential.

The aggregate balance sheet total of the RS banks for the first ten months of 2003 amounted to KM 1.4 billion, which is 22 percent higher than in December 31st 2002. There was an increase of assets in RS, too, where monetary assets and loans represent 86 percent of total balance sheet assets. In the same period, three banks in RS held a share of 58 percent of total assets. The structure of bank liabilities grew by about 18 percent, while the deposit potential amounts to 72 percent and is dominant in the banks of this entity, too.2

On the liabilities side, in the banks of both entities, growth was mostly financed by the increase of on sight deposits (both government deposits and citizens’ deposits) in local currency, but also through a significant increase of external borrowing.

As has already been mentioned, the major part of liabilities in commercial banks consists of deposits, which, in the course of the first nine months of 2003, in FBiH grew by 15 percent in comparison with December 31st 2002 (in the privately owned banks, exclusively). If one analyses the deposits by sector, the highest growth rate was present with deposits of banking institutions (57 percent), but the deposits of privately owned enterprises were reduced by 8 percent. There were no significant changes in the sectoral structure: citizens’ deposits are dominant, at 41 percent. The remainder consists of deposits of governmental institutions (12.8 percent), public enterprises (12.9 percent), private enterprises (15.1 percent), and banking institutions (11.5 percent). It is important to note that the growth of savings deposits, which are the most important segment of the financial potential of banks in general, was continued, at 9 percent. In 2003 we saw a continued trend of moderate improvements in the term structure of deposits. A higher growth rate of long-term deposits was observed, and now, their share of overall deposits amounts to 27.4 percent, while short-term deposits are still dominant, at the share of 73 percent of overall deposits. Just as in other segments, savings are concentrated in a couple of banks: 67 percent of total savings is deposited in the three largest banks. Mostly due to the increase of the interest rate on mandatory provisions instigated by the Central Bank, there was a significant change of currency structure of deposits: share of deposits in foreign currencies was reduced from 70 percent to 64 percent, while the share of deposits in local currency was increased from 30 to 35 percent.3 However, taking into account that, in the meantime, the Central Bank decreased interest rates on mandatory provisions, one can expect that the BiH banks will increase the scope of assets deposited abroad, which should change the currency structure of deposits, at the expense of the KM.

In the first nine months of 2003, growth of deposits was recorded in RS, too, and by higher rates than in FBiH. Contrary to the situation in FBiH, where citizens’ deposits are dominant, in RS the share of deposits of government institutions (18 percent), public institutions and state owned enterprises (6 percent), privately owned enterprises (17 percent), banking institutions (27 percent) and citizens (23 percent) is roughly similar. A sectoral analysis indicates that the highest growth of deposits (92 percent) was recorded in the item “other deposits”, mostly relevant for foreign organizations which illustrates the fact that the citizens’ confidence in the banking sector in RS is being regained at a slower pace than in FBiH, but also to the fact that there is a difference in the level of development of the two entities. The rate of growth of other deposits is followed by the rate of growth of bank deposits (51 percent). In view of the term structure of deposits, it is evident that, just as in FBiH, 73 percent of overall deposits in RS are short-term deposits, and 27 percent are long-term deposits. As a consequence of the growing confidence in the local currency, deposits in KM in RS are growing, at the rate of 33 percent, and, in September 2003, they represented 52 percent of overall deposits.

In both RS and FBiH, interest rates have shown a constant declining trend for the last four years.4

In the first nine months of 2003, 17 banks in FBiH achieved positive financial results, in the total amount of KM 53.3 million, while nine banks had losses totalling KM 15.5 million, and the consolidated positive financing result of the banks amounted to KM 37.8 million. Three private banks earned as much as 96 percent of overall profits, which points out to a conclusion that the profitability of the majority of banks is unsatisfactory. Revenues from interest show a steep increase of about 10 percent in comparison with 2002, and represent 71 percent of overall revenues. The share of total costs is 89 percent of total revenues, which is a decrease of 5 percent in comparison with 2002.

The profitability of banks in RS is lower than in FBiH, but it is improving, which is a signal showing that the reforms in the banking sector, which were delayed in this entity, have started to yield results. Two banks in RS made losses of KM 41 million in total, while eight banks have achieved positive financial results, in the overall amount of KM 9 million. Contrary to the situation in FBiH, where revenues from interest represent the majority of overall revenues of the banking sector, in RS operative revenues of the banking sector represent 64 percent, and revenues from interest represent 36 percent of overall revenues, which points out to a far lower level of crediting activity in this entity.

Role of banks with majority foreign capital

Regardless of the negative and, often, contradictory public reactions on the role of banks with majority foreign capital, there are many reasons to believe that the competition from the foreign banks has had a positive effect on the growth of confidence in the banking sector, and, in connection with that, on the growth of savings, decrease of interest rates, decrease of the level of banking fees and increase of the quality of banking services. The share of foreign capital in the overall capital in FBiH was increased from 14 percent in 1996 to 68 percent in 2002, while in the RS the growth of foreign capital recorded in 2002 amounted to 239 percent, so that the banks with majority foreign capital are, in practice, dominant on the market. Those banks hold the share of 80 percent in the total crediting of companies in BiH, and about 80 percent of domestic savings is concentrated in those banks, which is a reflection of the confidence of the population in their work. The fact that a large amount of deposits collected in the country has been transferred to accounts abroad is often used as an argument against those banks.5 However, it is equally often forgotten that the same is also done by the banks with majority domestic capital, just as by the Central Bank of BiH, too. The placement of short-term deposits abroad is a regular practice of all commercial banks in transition countries, just as of all central banks of those countries. On the other side, there are no adequate instruments (treasurer’s bonds) in the capital market of BiH, which would enable the banks to execute the placement of assets within the country. The Central Bank of BiH had increased the interest rates on mandatory provisions, which enabled the banks to execute the placement of assets in BiH, and, in 2003, that contributed to the decrease of the level of assets that the banks have deposited abroad. However, as has already been stated, the Central Bank of BiH cut these interest rates and because of that an increase of deposits abroad can again be expected. The essential reason for this should be sought in the fact that this concerns short-term deposits, which, in either case, are not adequate for borrowing to enterprises. The second reason is that the majority of enterprises in BiH are still in majority state ownership, and that, in line with that, there is not a sufficient number of creditworthy clients. Finally, an important reason for the aforementioned situation also concerns the level of risk involved in the placement of assets in BiH, which is still above average for transition countries and which is related to the slow pace of resolution of commercial disputes and inadequate protection of creditors.

The Banking Association on the BiH level has not yet been formed, although the legislative conditions for its establishment are present. The existing entity associations of banks have not shown a high level of activity. Preparations for the establishment of the banking association at the level of BiH are ongoing. The lack of strong associations makes it impossible for the banks to exert influence on improvements in the business environment for their activities in a more efficient way.

2.2. Priority activities and measures

2.2.1 Strengthening the stability of the banking sector: improving risk management and increasing capital adequacy

  • Improving risk management

Contrary to the situation in other transition countries, the majority of credit risk in domestic banks concerns long-term credits (with maturity of over 12 months), i.e 67. percent of overall credits in 2002. Those long-tern credits are partially covered with long-term deposits, which, according to the banking agencies, reach the level of 45 percent of the amount of long-term credits. According to liquidity regulations of entity banking agencies, the banks are under obligation to cover credits with maturity of up to 90 days in full. However, in practice, term inconsistencies between deposits and credits are present. According to the findings of the IMF6, the majority of banks do not follow these regulations, regardless of penalties stipulated for their breaking. The frequency of deviation from the regulations leads to a conclusion that the penalties are not strict enough, so that it is necessary to review those regulations and strengthen the mechanism of their implementation.

The existing inconsistency between the term structures of deposits and credits is putting the liquidity of banks in question. In order to mitigate that risk, the banks are holding significantly higher amounts of assets, in order to ensure liquidity, which increases their operating costs. Deviation from the liquidity rules is a serious problem, and even more so in the absence of a “lender of last resort” mechanism, as it increases the so-called systematic risk and can undermine the confidence in the banking sector. This presents a far more serious problem for banks with majority domestic capital, than for the banks with majority foreign capital that, in case of a liquidity crisis, can count on interventions of their head offices abroad. Looking at the consolidated balance sheet of commercial banks7, one can notice a significant growth of foreign liabilities in the last year, which is a result of the increase in domestic banks’ borrowing abroad. In this way, the bulk of the credit expansion was covered by increased foreign borrowing, and, to a much lesser degree, by the growth of domestic deposits. In keeping with this, it is necessary for the banks, in cooperation with entity banking agencies, to prepare and execute plans to adjust their foreign currency exposure and liquidity ratios. Besides that, it is also necessary to tighten the regulations on the breach of liquidity rules and harmonize the rules for the classification of assets and provisions for the coverage of losses with international standards.

On the other hand, some analyses indicate that the banks in both FBiH and RS failed to adequately adjust the level of provisions for contingent bad placement, and that, in relation to that issue, the banking practices are not in compliance with the regulations of the banking agencies in either entity. This information points to the possibility of a liquidity crisis, which would, as has already been noted, endanger the banks with majority domestic capital in most cases. A liquidity crisis outbreak in any of the BiH banks would result in multiple adverse consequences for the restoration of confidence in the domestic banking sector, which is one of the basic prerequisites for the realization of the macro-economic objectives of the PRSP, specifically the sevenfold increase of private savings by 2007.

In 2002, for example, the general credit risk and contingent credit losses in the banking sector of FBiH were increased by about 4 percent, i.e. by 3.8 percent of total assets, including non-balance-sheet items, which is by a modest 0.4 percent lower in comparison with 2002. In general, the risk management in banks still can be said to be in its initial development phase. Banks have very little experience, both with regard to credit and market risks, and with regard to general systems and procedures. Capacities for risk management within banks, as well as within the banking agencies, must be strengthened, as the banks are taking higher and higher risks, and the system is growing in complexity. This especially concerns the exposure to foreign currency risks and capital. In 2002, a number of banks defaulted from the regulations on foreign risks and capital exposure. Therefore it is necessary for those banks to prepare action plans, in cooperation with the entity banking agencies, to ensure the urgent implementation of regulations on foreign risks and capital exposure.

In view of the term inconsistencies between deposits and credits, default from the liquidity rules and insufficient capacities for risk management in banks, the Central Bank can also give a very significant contribution to the reduction of the so-called systematic risk and to the strengthening of the banking sector stability. Therefore it is necessary to review the options for amendments to the Law on Central Bank of BiH, and, in compliance with the Currency Board rules, empower it toserve, in a limited fashion, as a “lender of last resort” in the coming medium term period, to have the possibility to intervene in case of a liquidity crisis in one of the banks.

Although there is a possibility of larger, more liquid banks taking over a part of the market through lending to smaller banksto improve their liquidity, this is not a current practice. The larger banks with excess cash are not willing to lend, as they do not want to expose themselves to credit risk towards banks with liquidity problems, since they believe that potential profits would not be in proportion with the risks and costs involved in such an operation. There probably is room for establishment of such a market, based on strict aggregate thresholds for banks with liquidity problems. Such a market has not yet developed, but it could be developed through short-term securities, whose maturity would be extended in line with the increase of confidence between banks.

An additional problems for the domestic banking sector may arise from the loss of correspondent relations with foreign banks, due to the lack of procedures and controls in connection with money-laundering and other forms of financial crime. More and more attention will have to be paid to the implementation of those measures, for which the adoption of legislation alone will not suffice, as it will also require strengthening of capacities in banks and regulatory institutions for a consistent implementation of international standards, to counter money laundering, funding of terrorism etc. In this context, it is especially important for the banking agencies from both entities to continue the special monitoring of bank transactions with connected persons, in line with the Basle Principles. The steady drop of the share of transactions of this kind in the banking sector of both entities is encouraging.

  • Improving capital adequacy

The growth of risky assets and a much more modest growth of net capital indicate the necessity of capital injections in a number of banks. Additional capital will, most probably, be needed in the form of direct investments, since the retained earnings in most of the banks are relatively modest, and that an active market of securities for capital supplementation is non-existent. Therefore, the largest banks, i.e. those with majority foreign capital, will most probably increase their capital through transfers from their head offices abroad.

Capital in the BiH banking system (1997-2002)
(in KM million)199719981999200020012002Difference 2001 - 02
Capital Accounts1,0431,3051,2571,0971,1211,21695
Other, Net-438-672-699-373-346-420-74
Net Capital60563355872477579621
Capital minus Other, Net / Total Assets18.14%16.96%14.29%16.98%13.90%12.72%-1.18%
Net Capital per BankN/AN/AN/A1316204
Source: BiH Central Bank, PRSP Research Team
Source: BiH Central Bank, PRSP Research Team

The growth of capital in the Federation of BiH, so far, was significant, as only in the course of 2002 it amounted to KM 124 million, and, in the overall structure of liabilities, capita accounted for 13.7 percent. However, the level of capitalization in banks is declining, and, in comparison with previous years, the adequacy ratio of capital, which 19.6 percent in 2003, is also dropping. In the Republic of Srpska, apart from the decrease of the capital adequacy ratio to 21 percent in comparison with the end of 2001, when it was 38 percent, the total capital was left unchanged, which is a consequence of the transition process and strict compliance with regulations.

The high growth rate of credit activities, especially in FBiH, boosted the level of risk in view of the fact that it was not accompanied by a corresponding increase in net capital. For example, in this entity, in 2003, 24 out of 27 banks had the capital adequacy ratio higher than the legally stipulated minimum of 12 percent. The capital adequacy ratio in banks in both entities exibits a declining trend, as a result of the growth rate of risky assets being higher than the growth rate of capital.

Therefore, one of the key tasks is to provide incentives for the capitalization of banks and for their mergers. In this context, it is necessary to amend the entity banking laws so that they force the banks to hold at least 10 percent of capital, in the total assets, at all times. Also, the entity banking agencies should, by passing appropriate decrees, place the banks, especially those with adequacy ratio of under 15 percent, under obligation to strengthen their capital base. Any additional growth of risky assets is sure to require a corresponding growth in capital. Therefore, the entity banking agencies should introduce an obligation for the banks to develop programs for bank capital management.

It is necessary to finalize activities on the determination of the international credit rating of the country to ensure more favorable terms for access to capital for the domestic banking sector on the international capital market.8

2.2.2. Continuing the efforts on strengthening the bank supervision framework

Supervision over the banking sector is divided between the entities. Both entity banking agencies invested significant efforts in personnel and technical development. The quality of bank supervision is a significant factor for the stabilization of the sector. There is a need to improve the supervision of banks, in order to facilitate timely and high quality monitoring and ensure fair conditions for bank operations throughout the country.

In the last two years, the level of business cooperation between banks in BiH grew steadily. Some banks are opening their branches in both entities. Nine banks from FBiH have 12 business units in RS, and nine in the Brčko District, while three banks from RS have five business units in FBiH. Therefore it is necessary to strengthen the coordination of operations between the entity banking agencies within the established Payment System Council, operating within the Central Bank of BiH. However, the option of establishing a single Banking Supervision Agency on the level of BiH should also be considered. This would permit a reduction of the costs of bank supervision, a better utilization of capacities, but, above all, it would strengthen the single economic space in BiH.

It is especially important to continue the harmonization of banking regulations with the Basle Principles and the EU guidelines. Supervision should force the banks to better manage their credit risks, borrowing limitations and credit concentration limits, as some of the banks are overly focused on their shareholders and meeting their needs. Similarly, risk assessment of the country and of the market in domestic banks is quite weak. In recent years, domestic supervisors failed to look into that problem, but its significance in their future activities will keep increasing. In the coming period, the entity banking agencies should:

  • Establish better policies and procedures for the control of country risk and market risk;
  • Add by-laws regulating domain of banking agency powers (foreign currency risk, capital related standards) in compliance with the Basel Principles and the EU directives,
  • Build capacities for risk management in non-traditional banking operations, which will be increasingly expanding,
  • Prescribe better procedures of internal control within banks,
  • Prescribe procedures for control and prevention of money laundering,
  • Establish coordination with other countries, in connection with the supervision of foreign banks with branches in BiH,
  • Complete the work of the remaining receivership administrations,
  • Establish special supervision over the banks with the highest level of citizens’ savings and banks with above average expansion rate,
  • Establish a database on risky bank clients,
  • Establish a single registry of the bank accounts in BiH.

2.2.3. Providing incentives for additional mergers in the banking sector

A smaller total number of banks would lead to an increase of efficiency and a decrease of operating costs, to improvements of capital adequacy, reduction of the systematic risk from the failure of one of the banks, and more favourable interest rates. The number of banks in FBiH has fallen drastically, while the same process in RS has proceeded at a slower pace.

Up to and including 2002, only two banks in FBiH had assets in excess of KM 500 million, and their share of total assets was 34.9 percent. In RS, three banks held assets in the value of KM 158 million, and their share of total assets was 58 percent. Average assets of banks in FBiH were to about KM 135 million, and in RS KM 85 million, which is significantly lower than in other transition economies.9 Average capital increased from KM 13 million in 2000 to KM 20 million in 2003, which means that the capital in the banking sector remained at a relatively low level. Incentives for further concentration of the banking sector should be provided through a tighter implementation of regulations on capital adequacy and risk management, obligatory membership in the Deposit Insurance Fund, the most significant conditions for which are the capital adequacy of 12 percent and majority private ownership, 90 percent at the minimum.

2.2.4. Improving the term structure of deposits: providing incentives for the growth of long-term savings

In recent years, since the consolidation of the banking sector began, private savings have constantly grown, primarily through the growth of citizens’ savings, while the corporate savings have been at a low level. Also, while bank capital remains low, deposits have grown significantly. Citizens’ savings in RS in the first nine months of 2003 were only KM 179 million, and in FBiH reached KM 1.6 billion. However, because of the above mentioned predominance of short-term deposits (73 percent of total deposits in both entities), term inconsistency between deposits and credits is present in the BiH banking sector, as well as the growth of risky assets and the decline of the capital adequacy. The shortage of longer-term credits for businesses is a grave problem, far exceeding the importance of interest rate levels.

The constant growth of citizens’ savings in the recent period was a result of a gradual restoration of citizens’ confidence in the banking sector, more so in FBiH than in RS. This is, inter alia, reflected in the presence of majority foreign-owned banks, in the stability and convertibility of the domestic currency, and exchange of DEM to EURO. Confidence in KM has grown significantly, but it is noticeable that KMs are most often used in transactions, while the majority of citizens still prefer to keep their savings in foreign currencies, most often in EURO.

The acceleration of the pace of economic growth and the strengthening of confidence in the banking sector are important preconditions for the growth of private savings, especially long-term deposits. The fundamental measures for stimulating further growth of savings and long-term deposits should be the following:

  • Repayment of old frozen foreign currency deposits

The problem of old frozen foreign currency savings has been a burden on the banking sector in BiH for a long time, and, at the same time, it can be viewed as a cause of poverty of certain population groups. Claims arising from old frozen foreign currency savings have been recognized as public debt, and both entity governments have adopted plans for their settlement. In this context, it is necessary to ensure that Slovenia and Serbia and Montenegro repay the old frozen foreign currency savings from the Ljubljanska banka and Investiciona banka.

  • Strengthening the deposit insurance system

Deposit insurance is a proven instrument for building confidence in the banking system and increase of savings. In 2002, a significant step was taken by the establishment of the relevant legal framework and creation of the BiH Deposit Insurance Agency, covering the entire banking system. By August 2003, of all the banks in BiH, 15 had fulfilled the criteria for deposit insurance, of which as many as 13 are in FBiH. The level of deposits insured is limited to KM 5,000. It is a cause for concern that only two banks in RS have met the criteria for deposit insurance.

In this respect, the BiH Deposit Insurance Agency requested from all commercial banks that failed to fulfill the criteria for deposit insurance to submit action plans by the end of 2003, detailing the steps to be taken for the fulfilment of those criteria. In keeping with this, it is necessary for the BiH Deposit Insurance Agency to ensure, in cooperation with the entity banking agencies, that banking licenses of the banks unable to fulfill the deposit insurance criteria in the course of 2004 are revoked.

  • Introduction of new savings instruments: savings certificates

The introduction of new instruments, such as savings certificates, represents a very acceptable solution, in the situation characterized by an enormous need for long-term savings, and, at the same time, the demand from the savings holders for a higher level of flexibility in the management of their deposits. In the existing set of circumstances, citizens prefer their savings to be more liquid, than to yield higher interest rates, in order to insure themselves for their short-term needs. Savings certificates would permit this level of flexibility, as their ownership is transferable from one person to another, so that the savings holders get an option to use their savings as guarantees, or to use them before their maturity, contrary to the options present with term deposits. The standard maturity of those certificates would amount to between 24 and 36 months, and they would be denominated in KM 500 and 1,000.

  • Improvement of profitability of companies through the strengthening competitiveness of the domestic economy
  • Maintaining stability and exchangeability of the local currency

2.2.5. Implementing the measures leading to the reduction of risk, and, through that, reduction of interest rates, and a higher share of credits to enterprises, in comparison with the share of household credits

In the course of the last three years, a sudden drop in interest rates in BiH was recorded. The level of interest rates was cut by half, and, in the course of this year, the average interest rate for business loans has fallen to below 10 percent. However, the differential between the passive (3 percent) and active interest rate (10 percent) is still marked.

The decline of interest rates in the recent period was predominantly a result of the strengthening of competition between the banks, rather than of the decline of the risk in the placement of credit funds. It would be difficult to expect any further decline of interest rates, in the absence of accelerated reforms resulting in a higher number of creditworthy clients for the banks.

Credit services, as one of the key elements of development, became more accessible to both businesses and citizens. In 2002, a sudden increase of household credits was recorded: household credits grew by as much as 102 percent in comparison with 2001, while the increase of business loans in the same period was to about 40 percent. In the first nine months of 2003, the slowing down of household crediting in FBiH was evident, while the growth in comparison with 2002 was only 27 percent. In the same period, the growth of private sector credits reached the level of 23 percent. In total, loans to the economy (private, state-owned and public enterprises), which accounted for 47 percent of total credits, closed in with the volume of household credits, which made up 49 percent of total loans issued.10 A smaller volume of household credits is a direct result of monetary policy mesaures taken by the BiH Central Bank to stabilize the macroeconomic situation in the country. Namely, the increase of household crediting represents a difficulty for the macroeconomic stability of the county, as it contributes to increased imports and has an effect on high trade deficits, and, through that, on high current account deficits.

Contrary to the situation in FBiH, in RS in the composition of total credits, credits to the economy were predominant, at 56 percent, while 40 percent of the total credits were approved to households.11

Composition of credits by sectors (end of period, in KM million)
YearDomestic institutional sectors
GovernmentsSocial protection fundsNon-banking financial institutionsPublic enterprisesPrivate enterprises and non-financial institutionsNon-profit organizationsHouseholdsOtherTotal
12345678910=

2+…+9
1997132.00.38.31,099.11.034.86.8121.035.92,439.6
1998108.91.55.41,100.01.314.36.9247.5133.52,920.8
199950.96.34.81,114.21.322.97.0247.0141.12,896.8
200048.17.16.21,143.21.332.46.7248.421.02,815.6
200144.36.15.31,061.71.363.53.6255.522.12,765.0
200241.85.921.71,181.61.351.024.01.040.223.33,697.7
Source: BiH Central Bank
Source: BiH Central Bank

The significant level of household credits is the result of the banks’ intent to diversify the risk, but also a direct consequence of the above mentioned lack of creditworthy clients in the economy. The risk in household credits is lower, due to a more efficient method for the collection of claims, which is not the case for credits to businesses, in view of inadequate regulations and the slowness of the judicial system. Therefore, the key challenge facing the banks is to decide what to do with the excess liquidity in the conditions when the BiH Central Bank securities are non-existent, the number of creditworthy companies on the market is not sufficient, and there are no regulations ensuring a more efficient protection of creditors.

To encourage the continuing decline of interest rates and a higher level of lending to the economy, it will be necessary to implement a set of reforms to create conditions for an accelerated growth of the private sector. For example, the BiH economy is still dominated by state-owned enterprises (60%), and it is only natural that the interest of commercial banks to lend to state-owned enterprises is low. Therefore it is necessary to ensure the following:

  • Accelerating privatisation (See the privatisation chapter)
  • Improving the business environment for an accelerated private sector growth (see separate chapter devoted to business environment and improvement of entrepreneurship)
  • Ensuring adequate protection of creditors

The banks face the problem of maintaining the quality of their assets and of exposure to credit risks. The level of arrears and outstanding claims is not decreasing, and bad assets are not being reduced. To resolve this problem in the functioning of banks, it is necessary for governments to intervene. In this regard, the commercial disputes resolution procedure must be accelerated, which will occur as a result of the establishment of 16 specialized commercial departments within first instance courts throughout the country.

In addition, amendments to the entity laws on obligations and to the RS Law on Notaries should be adopted, to improve the legal framework for a more efficient collection on security instruments (collateral). Finally, it is of special importance to improve the institutional framework for more efficient execution of bankruptcies.

The establishment of a unified registry of bank accounts is a significant step towards increasing the level of protection of creditors. Upon an initiative of the Anti Money-Laundering Committee, under the auspices of the OHR, the Central Bank of BiH has already initiated activities on the establishment of a single registry of bank accounts. In addition, it will be necessary to establish a single registry of pledges on movables.

As previously mentioned, a significant amount of funds (KM 1.1 billion) is transferred abroad by domestic banks, because of the shortage of high quality instruments for capital multiplication in the country. One of the problems is the lack of adequate instruments on the securities market (bonds) in BiH. In keeping with this, the legal framework should be amended to permit the BiH Central Bank to issue short-term securities.

2.2.6. Providing incentives for competition between banks in order to improve quality in the provision of banking services

The banking sector in BiH has high operating costs, which is the result of a weak business environment, a high level of risk, expensive provisions that have to be paid to state institutions and internal inefficiencies. As a result, besides the relatively high interest rates and unfavourable term structure of credits, expensive banking fees – especially in the international payment system – are an additional burden on the private sector and citizens. In most cases they amount to as much as 1 percent of total profits of businesses. The lending to the economy is under additional burden of transaction costs at the rate of 1 percent. The share of operating income (fees) in total earnings represents the most significant source of income of RS banks, while in FBiH, the intereste income exceeded operating income in 2003.

The analysis of the profitability of BiH banks given above indicates that it is still far below the world standards, and the reasons are to be found in the inadequate efficiency of the BiH banking sector. Profitability would be even lower if the world standards for provision levels had been applied.12

Earnings and efficiency coefficients (2001-2002)
(all in %)Federation*RS*
2001200220012002
Return on average assets-1.180.411.001.00
Return on average total capital-5.623.043.03.00
Return on average equity-6.153.564.003.00
Revenues from interest / average assets5.264.504.006.00
Revenues form fees / average assets7.645.504.004.00
Operating and direct costs / average assets6.543.73N/AN/A
Operating costs / average assets7.405.8011.008.00
Total costs excluding interest / average assets13.949.5216.0020.00
Source: Banking agencies of FBiH and RS;

Data for the Federation concerns all banks, data for RS concerns profitable banks only

Source: Banking agencies of FBiH and RS;

Data for the Federation concerns all banks, data for RS concerns profitable banks only

One of the key challenges faced by the banks is the reduction of costs. Inefficiencies of some of the banks in BiH are the result of inadequate financial infrastructure, an outdated method of operation and surplus working force. The banks lack a developed network of correspondent relations with banks abroad, because of which too much time is spent on executing transactions.13 Loan approval procedures are complex, and, due to the lack of coordination between government bodies, as well as between banks, the private sector suffers increased losses of time and incurs additional costs.

The introduction of the new payment system, relying on banks, was a very useful reform, which led to a decrease in transaction costs for the economy. However, costs for small users are relatively high, which has adverse effects on the poor and their living standards. For example, the payment system costs for certain administrative procedures amount to above 10 percent, which means that a payment of KM 10 carries with it a KM 1 amount of transaction costs.

The domestic banks have not yet sufficiently developed their lending methods, and they mostly rely on solid collateral, and much less on a more active financial management of investment projects. Commercial banks will have to improve their financial management and offer more varied lending arrangements to their clients, on the basis of the cash flow, which would require a more complex analysis and staff training, as well as the development of long-term business cooperation and the division of risk. According to the opinion prevailing in the banking sector, institutions for assessment of creditworthiness (i.e. LRC) still do not have enough to offer to meet the demands of the banking sector. However, there is a need for the development of the creditworthiness assessment system.

The new banking products offer their users a higher level of comfort and reliability in the utilization of banking services. Credit and debit cards and e-banking, by relying on new technologies, increase the efficiency of banking operations and decrease the clients’ transaction costs. This trend will continue due to the increase of competition on the market and the need to increase the level of compatibility with the developed financial markets. The introduction of credit and debit cards brings additional benefits, as it lowers the of cash in the economy, and, through that, the scope for the informal economy. Credit and debit cards also provide incentives for the development of new technologies. However, the development of credit and debit cards is facing difficulties related to high transaction costs, which can amount to as much as 2 percent per transaction.

In this context, the privatisation of the remaining banks should be finalized, to allow for clear standards of operations and efficiency for banks to be established by the authorized banking agencies, especially with regard to the introduction of credit and debit cards. It will be necessary to improve the coordination between the banking agencies, the Deposit Insurance Agency and the Central Bank in their work. On the other hand, it will be necessary to establish better coordination between government institutions in charge of the implementation of money laundering laws (tax and customs administrations, employment institutes etc.) in order to eliminate additional administrative burdens on banks and, through that, reduce the costs of their operations.

2.2.7. Harmonizing regulations concerning the operations of the banking sector within BiH, but also with the EU directives

The legislative and regulatory aspects have been significantly improved and, in part, harmonized with the international standards. Legislation on commercial banking has, to a significant extent, been harmonized between the entities, but not in full and not in conformity with the EU standards. The banking laws in the two entities have been harmonized. In the coming period it will be necessary to build on the existing legislation in compliance with international experiences, especially with regard to the compatibility with the EU standards. In the area of the regulation of foreign currency operations, there are inconsistencies between the two entity laws. In FBiH, the law in force was adopted in 1998, and it will need to be modernized. On the other hand, in RS the law in force dates back to before the war, and only in 2004 the procedure for the adoption of an up-to-date law in this field has been initiated. In view of these inconsistencies, an umbrella law on foreign currency operations in BiH should be adopted on the BiH level,14 in order for the entity regulations to be harmonized. Similar inconsistencies exist in connection with the regulations concerning promissory notes and cheques, so that, because of the same reason, a framework BiH law on promissory notes and cheques need to be adopted.

2.2.8. Creating the legal and regulatory frameworks for the renewal of leasing operations

In the set of conditions characterized by relatively high interest rates and unfavourable term structure of credits, leasing operations offer a possibility for domestic businesses to initiate production without the classic banking intermediation. The interpretation of certain provisions of the entity laws on obligations, indicates that there are options for leasing activities. On this basis, some banks in BiH have entered into activities similar to leasing, but, in this case, these primarily involve financing of household consumption. The non-existence of a precise legal framework, which would regulate leasing, makes it impossible to develop this very important mode of operations for the domestic private sector. Therefore it is necessary to amend the entity laws on obligations in order to regulate the relations between contractual parties arising from a leasing transaction, in detail, and especially with regard to the protection of creditors, which is a shortcoming of the existing legislation. In addition, it is necessary to adopt mutually harmonized entity laws on leasing, which would prescribe the criteria for the provision of these activities and the method of their regulation.

3. Insurance sector

3.1. Current situation

The insurance sector in BiH is passing through a phase of stabilization and strengthening, after an interruption in its functioning during the war. Almost the entire sector is privatised, apart from one insurance company, which is also in the process of ownership transformation. Constant increases of the volume of operations is recorded: between 1996 and 2002, revenues from premiums increased by 300 percent and, in 2002, they reached KM 265 million (KM 193 million in FBiH and KM 72 million in RS). At this point, there are 28 insurance companies operating (18 in FBiH and 10 in RS), and one insurance company is a specialized provider of re-insurance. The total number of employees in the sector is 1,650. The dominant activity is auto insurance (about 70%), while other forms of insurance (life insurance, property insurance, insurance from professional accountability etc.) have a very modest share. The insurance sector is stronger in FBiH: in 2002, profits grew by 16 percent, return on assets was 3.4%, and return on capital 4 percent. With respect to liquidity, current assets were three times higher than current liabilities, with respect to solvency, the capital amounted to 85 percent of total assets.

The field of insurance is regulated by different laws in different entities, and the supervisory function is also realized separately, through the Insurance Office in FBiH and a department of the Ministry of Finance in RS.

An association of insurance companies, espousing high standards of professionalism and experties, should be established as soon as possible. Only joint efforts can find resolutions for issues ranging from increasing competition, complicated conditions for market operations, access to international insurance markets, and membership in international associations, which, on their part, seek a partner on the national level. The shortage of adequate staff and statistics is felt throughout the sector, so the insurance companies will have to continue investing into the development of professional staff, capable of better risk assessment, improving the structure of coverage and of more adequate pricing of insurance policies.

3.2. Priority activities and measures

3.2.1. Harmonizing inter-entity regulations and putting the domestic insurance industry in an equal position with foreign insurance underwriters

The inconsistency of the regulations makes it impossible for insurance companies to operate throughout the territory of the country, which undermines the unity of the economic space. Poor client protection and difficulties in the resolution of commercial disputes are general weaknesses. With the objective of reforming and harmonizing the legal and regulatory frameworks for the insurance of persons and property and harmonization with the EU directives, a new legislation on the BiH level has been prepared. The Parliamentary Assembly of BiH adopted the Law on Insurance Agency of BiH. The next step will be the adoption of identical laws on insurance in both entities, creating identical conditions for operations and supervision in the insurance sector.

These enactments would improve the regulations and tighten the criteria for issuing licenses for operation. Operations of foreign insurance companies are not regulated and present a risk for local clients, while hindering the development of the domestic sector. With the implementation of the new regulations, domestic insurance industry would be placed in an equal position with foreign insurance companies.15

The market regulation is separated by entities, based on the location of the head office of the insurance company. The new legal framework should ensure the harmonization of the legal and regulatory frameworks for the insurance of persons and property in conformity with the EU directives, as well as the unification of the economic space. The BiH Insurance Agency will allow the resolution of differences between the existing regulatory agencies, the introduction of the new legislation with the objective of the implementation of EU directives, the supervision of the Green Card Bureau and the representation of BiH in international forums.

3.2.2. Improving the supervisory framework in the area of insurance

Contrary to the situation in the banking sector, supervision in the area of insurance is not efficient enough and does not possess adequate penalty instruments. Due to oversights in supervision, problems of unfair competition between domestic companies have occurred, which increases the volatility of the entire sector and reduces the level of protection of policy holders. Therefore, the supervision of the operations of insurance companies should be improved, in conformity with the EU standards, which implies a better information flow for the market supervision, introduction of on-site inspections and the improvement of the general risk assessment covering liquidity, solvency, methods of investment and resolution of damage compensation claims. In FBiH, there is the Office for the supervision of insurance companies, functioning as a separate supervisory institution. In RS, however, supervision is entrusted to the Ministry of Finance, which is, at the same time, in charge of the definition of regulations in that area, which is not in keeping with the international practices. The new RS Law on Insurance stipulates the establishment of an Insurance Agency, which will become operational after a transition period of three years.

3.2.3. Strengthening the capital market in order to create preconditions for more efficient operations of insurance underwriters

Because of the underdeveloped capital markets, insurance companies often invest their surplus funds in a risky fashion, in the form of loans without guarantees. This also calls for creation of a legal framework, in order for the BiH Central Bank to start issuing short-term securities, which would, together with the issuance of state bonds (such as, for example, for the reduction of internal public debt and, in this context, settlement of old frozen foreign currency savings) have a stabilizing effect on the insurance sector.

3.3. Providing incentives for all kinds of insurance

The dominant activity in the domestic insurance sector is auto insurance (about 70%), while the share of other forms (life insurance, property insurance…) is modest. It is of special importance to develop life insurance, which yields a lot of benefits for the economy of a country, as, besides their basic function of the collection of damage compensation, they also have an effect on the increase of private savings. In addition, this type of insurance brings general benefits for the society, as it provides for the families of those who get hurt or die in accidents, without the need for interventions from public funds. At the same time, life insurance funds can be a a long-term source of high-quality revenues. Therefore, to encourage development of this mode of insurance, life insurance should be treated as social and pension insurance. It is of special importance to sanction illegal foreign competition, which has been expanding.

4. Capital markets

4.1. Current situation

The development of the capital market in BiH was initiated by the privatisation through certificates (vouchers), as well as by the consequent transformation of state owned capital in shareholders’ capital. There are two stock exchanges in BiH (in Sarajevo and in Banjaluka). The volume of trading on those stock exchanges is still very low, and the capitalization is insignificant (KM 9 billion in FBiH, or KM 15 million in average per issuer, while in RS the total market capitalization is KM 500 million, i.e. KM 1 million perissuer), while the annual market turnover is only KM 63 million for both stock markets, and average transaction size amounts to KM 2,000 in FBiH and to about KM 1,000 in RS. Intensified and expanded trading of shares and securities can be expected only after the end of the privatisation. Issues of new shares, apart from those issued in the mass privatisation program, has not started yet, and, so far, only two voluntary initial public offers (IPO) were registered at the stock market in FBiH, and they both failed.

In general, the main obstacle for the development of the securities market is the non-existence of institutional investors and the shortage of companies attractive to investors. Profitable banks in BiH generate KM 46 million, i.e. less than 2 million per one profitable bank, while the average profit per one insurance company is less than million KM, which means that the institutional sources for investments are limited, even if all funds were to stay in the domestic market. The second reason can be found in the domestic companies, which are still incapable of meeting all requirements regarding the transparency of their business results in a way satisfactory to investors, so that even the introduction of a regional stock market would not serve to attract more capital, as long as the companies are incapable of offering the level of information accuracy required by the investors.

The supervision of the operation of the stock exchanges is conducted by the authorized entity securities commissions, while the trading is executed electronically. In keeping with the practices of other transition countries, the commissions were given a extensive powers regarding the establishment, regulation, supervision and development of the capital markets. In the preparation of the legal framework, identical solutions were introduced in most cases and harmonized legal provisions adopted, in both entities. The Capital Market Council was established within the Central Bank, with an advisory role.

To date, there are 11 investment funds in FBiH, which collected over KM 4.5 billion in certificates, and, after the conclusion of the public offer of shares, they bought the capital in the value of KM 1.9 billion. In RS, there are 13 privatisation investment funds, which collected KM 1.6 billion in vouchers. The shares of these investment funds are listed on the stock exchanges in Sarajevo and Banja Luka, which created the preconditions for trading in the shares of the funds as well.

4.2. Priority activities and measures

4.2.1. Promoting corporate governance and transparency on capital markets

The development of the capital market in BiH is still in an early stage, and it still does not represent a significant mode of financial intermediation, nor a source of financing for businesses. In the recent period, major efforts were devoted to the establishment of institutions and legal preconditions for the operation of the capital market or the securities market.

In the context of the further development of the capital market, it is important to resolve the disputed ownership relations in newly privatised companies. This would permit more successful operations of privatisation investment funds. To promote corporate governance, it will be necessary to amend a number of laws (company laws, laws on the fund management, on securities commissions, on securities registries). Amendments to the company law should harmonize the status of joint stock companies, with the objective of facilitating the trading of their stock. It is of special importance to adopt entity level laws on company takeover, which would guarantee the protection of minority investors’ rights. The Rulebook on Listing State-Owned Capital at the Stock Exchange should adopted in FBiH as soon as possible. Standards of corporate governance harmonized with the OECD recommendations, including the application of the international accounting standards, should also be adopted as soon as possible. In this context, it is important to adopt the Law on Audit and Accounting on the BiH level.

In the context of strengthening of corporate governance, all joint stock companies with a highly dispersed ownership and a certain level of capital must be legally required to be listed on the stock market. In addition to the strengthening of the capital market, this would also ensure a higher level of transparency in the operations of these businesses, as the stock market listing would requires businesses to submit regular public reports on their operations. In addition, it is necessary to harmonize the laws on public enterprises with other business regulations, and to require public enterprises to list on the stock market for the same reason.

4.2.2. Developing other instruments on capital markets

The capital markets in BiH are limited to the issuance of shares, while the other types of securities are still non-existent. This is a severe obstacle for the development of the so-called institutional investors (insurance companies, pension funds) whose development is, inter alia, extremely important for the reform of the pension insurance system.

Among the share issuers, the majority are legally required to convert to the shareholders’ form of organization, such as, for example, the privatisation investment funds. By core capital, the privatisation investment funds are leading, with nearly half of total capitalization, followed by privatised joint stock companies.

For this reason also, it is very important to empower the BiH Central Bank to issue short-term securities, especially to encourage the development of institutional investors, and to lay the groundwork for the issuance of state bonds for the regulation of old foreign foreign currency savings and internal debt.

On the other hand, a legal framework for the issuance of so-called municipal securities should be created. The initiation of trading in this kind of securities will require the strengthening of municipal fiscal revenues and of instruments for budget management and institutions for the supervision of the collection and expenditure of public revenues.

4.2.3. Providing incentives for an increase of liquidity of the capital market in BiH

The above information shows that the stock exchanges in BiH lack the necessary liquidity to make them attractive for investments. On the other hand, the fragmented regulatory framework also increases the costs of their operations. The non-existence of a single capital market in BiH has been assessed as one of the shortcomings in the EU Feasibility Study for our country.

The stock exchanges were established as private joint stock companies and they are independent in decision-making on their operations. However, in view of the importance of the stock exchange for the development of the capital market, and, in this regard, for the reform of the pension insurance system, it is necessary to encourage their cooperation, which would increase their liquidity, as well as promote integration in the regional capital market, which is envisaged by the action program of the Stability Pact. To achieve this objective, the conditions for the integration of the capital markets must be created through harmonization of legislative regulations in the area of their operations, which would, as the final objective, facilitate the trading of shares of all enterprises, registered at both stock exchanges.

In view of this, the existing regulatory framework should be adjusted to facilitate interest-based cooperation between the stock exchanges, and allow private participants to decide what their interest is.16 In this context, it is important to support a higher level of coordination between the entity regulators, through the Capital Market Council with the Central Bank of BiH. However, in the near future, it is necessary to consider the options for the development of a regulatory framework on the level of BiH that would reduce the costs of stock exchange operations, harmonize the regulations concerning the licensing of brokers and brokerage firms, facilitate trading to brokers and brokerage firms on both stock exchanges, and, in a later stage, prescribe identical conditions for listing and, thereby, encourage competition between the stock exchanges.

5. Micro finance sector17

Micro financing, in the broader sense, represents a mechanism for the provision of financial services: loans, savings, insurance, leasing etc. Clients are mostly found amongst the poorer categories of the population, without access to traditional financial institutions. The micro-finance movement has proven its worth as a successful instrument in the resolution of problems faced by the low-income population in many parts of the world. Subsidies in this sector may yield a higher level of benefits for the society than the level of costs involved, as those programs are capable of covering a wide range of beneficiaries, including marginalized social groups, which is of great importance. The clients of micro financing institutions emphasize that the simple procedure and accessibility of services represent the main advantages of this method of financing.

5.1. Current situation

The organization of the micro finance sector in BiH was facilitated by donor assistance, primarily from the World Bank, and some commercial banks have also been involved in this type of lending. At this point, there are 11 major micro credit organizations (MCOs) active. The two projects (Local Initiatives Project I and Local Initiatives Project II), besides establishing the MCOs, also served to develop the environment for their future self-sustainable operations. The total assets in the micro-finance sector is over KM 120 million, which makes this sector still relatively small in the overall BiH financial market. The average number of loans granted in a month exceeds 5,000, while the total number of active clients is 50,000. The average value of credits is about KM 3,000, and the majority of credit beneficiaries are women (51%). The rate of repayment of those loans is high, at 98 percent. To date, more than 100,000 jobs have been created and supported in this way.18 At the outset, the micro credits were mostly used for service provision activities and trade, but lately the number of beneficiaries in rural areas and the number of loans for agricultural activities have been on the rise.

In parallel with the significant lending activities, institutional development was also taking place, and nowadays most MCOs have achieved full financial sustainability. The MCOs have trained their own staff and developed policies and procedures, in line with the best world practices of financial institutions management, which today enables this sector to function independently.

The adoption of entity laws on micro crediting organizations has established the legal framework for the operation of non-governmental and non-profit lending institutions.

5.2. Priority activities and measures

5.2.1. Providing incentives for future development of micro credit financing, especially in the agricultural sector

The level of poverty is higher in rural than in urban areas. In this regard, it is necessary for municipal government bodies to establish relations with micro credit institutions, to secure cofinancing of agricultural activities, in the form of small-scale guarantee funds.19

5.2.2. Strengthening the supervision over the operations of the MCOs in order to eliminate the informal economy

The fact that only about 50 percent of micro credit beneficiaries are part of the official economy is an issue unto itself. The main reason for this is the situation in which the majority of self-employment modes (small scale agricultural production, in-house crafts etc.) are not required to register. On the other hand, the number of registered micro credit beneficiaries in the sectors of trade and service provision is increasing, and, to date, is about 65 percent.

To boost the inclusion of micro credit beneficiaries in the official economy, it is necessary to introduce tighter criteria for financing, especially for permanent clients of the MCOs and for more profitable activities. It is particularly necessary to tighten the criteria for those clients who have reached a sufficient level of economic strength and who can now access other sources of financing, but are still preferring micro credits, in order to avoid taxes. This necessitates development of clearer criteria for access to micro credits. In this regard, the MCOs should improve their cooperation with local authorities, to improve their targeting.

5.2.3. Harmonizing regulations for supervision over the micro credit sector operations

The existing entity regulations are preventing the development of the micro credit sector on the territory of BiH as a whole. In this regard, it is necessary to harmonize the existing laws on micro finance in both entities, amend the existing solutions with provisions on investments in core capital, on prevention of money laundering and on reporting. In the first stage, it is particularly important to entrust the supervision over the operations of the micro-credit sector to the FBiH Ministry of Finance, as is done in RS (at this stage, the FBiH Ministry for Displaced Persons and Refugees is currently in charge of this in FBiH), and, in the near future, the supervision over this sector needs to be transferred to the entity banking agencies. It is necessary to improve the legal framework in order to extend the micro financing industry to other financial services (leasing, insurance, housing cooperatives). In view of the constant necessity of strengthening the citizens’ confidence in the banking sector, micro-crediting organizations should not be allowed to collect deposits in the coming medium term period. However, it would be useful to permit the transformation of micro finance institutions to commercial forms of financial services provision.

Notes

1Information on the Federation of BiH Banking Sector, September 30th 2003
2Information on the RS Banking Sector, September 30th 2003
3Information on the Federation of BiH Banking Sector, September 30th 2003
4Information on the RS Banking Sector, September 30th 2003
5In 2003, the amount that banks in FBiH held deposited equaled to around KM 1.1 billion.
6“Report upon the fourth review of the Stand-by Arrangement”, IMF, November 2003.
7Central Bank of BiH Bulletin No.2
8The Central Bank of BiH involved HVB bank on activities in regards to the determination of the country’s international rating. Those activities are ongoing, and they should be completed in the first half 2004.
9Average capital in banks in Slovenia amounts to about KM 900 million.
10Information on the FBiH Banking Sector, September 30th 2003
11Information on the RS Banking Sector, September 30th 2003
12In most part, due to losses in one bank, amounting to 58% of overall losses.
13In the course of consultations with bankers and entrepreneurs organized by the PRSP team, the general manager of Klas factory from Sarajevo pointed out that it sometimes happened that trucks arrived for upload much sooner than the money paid on the account of a foreign partner.
14The RS Law on Foreign Currency Operations is in the adoption phase. However, in view of the increasing level of business cooperation between banks in the country, it will be necessary to regulate this area in a unified way throughout the country.
15New regulations would, inter alia, introduce licenses for operations with precise lists of the types of insurance covered by the license, prescribe provisions on the marginal solvency and the minimal level of the guarantee capital, increase the founding capital and provide incentives for the increase of safety provisions, prescribe the minimal level of information exchange etc.
16In the course of discussions held so far within the Capital Market Council, operating with the Central Bank of BiH, a high level of understanding was expressed amongst the major actors, including both stock exchanges, in view of the unification of the regulatory framework on the state level.
17Data from the Local Initiatives Project II (Micro Financing) Impact Assessment, April 2003, and LIP II Annual report,
18Micro Crediting Institutions Report 2003.
19Guarantee funds of that type have already been established in the District of Brčko and the Municipality Center in Sarajevo.

III.4. LABOR MARKET REFORM1

1. Goals

1.1. Increase labor force mobility as a vital factor for strengthening the single market in BiH

1.2. Reduce the grey labor market

1.3. Reorganize the employment brokerage system

2. Situation

2.1. Employment

In 1987, there were about 1.076 million employed in BiH, approximately one fourth of the total population at the time. In later years, however, the number of those employed stagnated and by 1990 (not counting those employed in agriculture) this figure fell to 1.054 million.

The total number of employed in BiH today is estimated at (based on data from LSMS) 999,500 persons, out of which 638,000 (63.8%) are formally employed. Postwar BiH was marked by “growth without employment,” which speaks in favor of the hefty figure of 361,500 (36.2%)2 who are employed in the informal sector. According to the same source, the share of those informally employed is noticeably higher in the RS (41.4%) than in the FBiH (32%).

Compared to 1990, the labor force in the formal sector is now considerably older. Young and unqualified workers are relegated to the informal sector. Also, the participation of women in the labor force is unsatisfactory: women constitute only about 30 percent of the labor force in the FBiH, and 39 percent in the RS.3

There is employment discrimination based on ethnicity, age and sex.

2.2. Unemployment

According to the official data, the unemployment rate in BiH is almost 41%. However, lending support to the thesis on the existence of a large informal sector, the World Bank, in several studies (based on data from LSMS), stated that the real unemployment rate in BiH could be around 16.4% (16.9% in the Federation BiH, 15.8% in the RS).4

According to World Bank research, the average waiting period for a job in BiH is over three years. Older individuals (between 35 and 55 years of age) on average spend longer than five years looking for work.

The fact is that, since 1995, growth in BiH has been based on employment in the informal sector. This sector has, among other things, enabled many families in BiH to stay above the poverty line. Still, when it comes to future growth, the existence of an informal unemployment sector is undesirable for the following reasons:

  • its harmful effect on efficiency and equality,
  • the number of workers who are denied rights to social insurance and retirement benefits,
  • the detrimental effects on budgets and pension insurance funds.

2.3 Employment Structure by Sector

In both BiH entities, the employment structure by sector has changed in comparison to the employment structure in 1990. In the FBiH, it is estimated that employment in manufacturing fell from 41% of all jobs in 1990, to 32% in 2000.5

Of the total number of those employed, 27% are in the public sector (28% in the FBiH and 24% in the RS). This significant employment rate in the public sector can be explained by the slow recovery of the industrial sector, coupled with the parallel development of the administrative structures after the war. The best illustration of this change in the relationship is the fact that, before the war, the ratio of employees in the non-economic sector and those employed in the economy was 1:5.6. After the war it fell to 1:2.8. Characteristically, there is an overwhelmingly large number of younger workers in the informal sector: more than 3/4 of employed young people work in the “grey economy”6.

In addition to very high employment in the non-economic sector, in comparison with other transition countries, considerably higher public sector salaries in BiH (in the FBiH, salaries and benefits in the public sector are 67% higher than in industry, while they are 86% higher in the RS) make the share of wages and salaries in the GDP reach around 20%, or more than 33% of total budgetary spending in 2000 (by comparison, the average for Central and Eastern European countries is around 17.3%). Furthermore, these numbers do not reflect expenditures on the defense sector, which currently employs close to 1% of the total population.7

According to the same World Bank study,8 the number of employees in public administration almost doubled (from 5.9% to 11.6%), while the share of employment in the trade sector increased by over 30% (from 9.1% to 14%), as well as the share of employment in the education sector (from 5.8% to 8.5%). In comparison to the official statistics, the general trend is essentially unchanged.

High employment in the service sector, particularly in the informal sector, is also a significant indicator. Although its share in the economy may not look great by international standards9, the service sector is very sensitive to the overall state of the local economy. A downward trend in spending, for example, as a result of a reduction in donor assistance, will immediately have a negative effect on this sector, and by the same token, on the total employment in the country.

Employment is highest among people with higher education and high qualifications.

2.4 Outlook

It is quite certain that any increase in employment can be expected mainly in the private sector, and that the best path to reducing unemployment is to stimulate entrepreneurship. However, polling of representatives in the private sector point to a huge mistrust in the system and business partners, which presents an increasingly serious obstacle for the development of the private sector. The previously mentioned report by the World Bank showed that the level of interpersonal trust and confidence in the system in BiH is among the lowest in the region. In the opinion of private sector representatives, along with high taxes and inadequate bank financing, these are the most important obstacles to the development of the private sector and new job creation, even more so than legislation.10 However, by the end of implementation period of the PRSP it is expected increase in employment rate and decrease of the unemployment rate of around 30% in relation to the current one.

Considering that the implementation of vital reforms still lies ahead, a large increase in unemployment may occur over the early medium-term period (2004–2005), particularly in the public sector. Estimates claim that up to 100,000 jobs could be lost in the FBiH alone and another 50,000 in the RS.11 Even some public officials accept such statements. However, exact estimates have not yet been made and in their absence it would be difficult to discuss the scope of this projected reduction. All available data indicate that the hardest-hit in any such drop in employment would be wait-listed workers, as well as the large number of workers who are only formally employed, but who are not receiving salaries or benefits. Therefore, it is possible to conclude with certainty that the official statistics will register job losses in the industry sector, but that in reality there will be no large increase in unemployment. In other words, few of those currently employed who are receiving their salaries and benefits will be affected. This, however, does not hold true for the energy sector, where there may be job losses because of reforms aimed at liberalization of the power market. According to the studies performed by the responsible entity ministries in cooperation with a number of international institutes, the restructuring of mines will lead to between 7 and 8 thousand redundancies, mainly in the FBiH.12

In corroboration of the thesis that accelerated privatization will not cause an increased number of job losses, one may turn to recent research by the World Bank and local experts, conducted on a sample of 100 newly-privatized companies, and indicating the emergence of a different trend.13 Production in the past three years has seen continued growth, especially export-oriented production. At the same time, employment in these companies has remained unchanged, and even slightly increased. Therefore, the fear of massive job losses due to privatization, based on the example of companies tracked for the study in question, does not seem justified.

As previously mentioned, a large number of people are employed in the service sector, mainly in the informal sector. The major consumers of services in BiH are foreign citizens permanently residing in BiH (numbering around 25,000). According to estimates by the UNDP ICT Forum14, this group of consumers spends about 3 million KM daily in Sarajevo alone. Other estimates claim that foreign organizations in BiH employ about 9,000 local staff. Unless economic activity is intensified in the next few years, the expected reduction in the number of foreign citizens in 2005–2007 will add to the projected rise in unemployment.

Due to new reforms, job losses are expected in the latter part of the medium-term period (2005–2007) in the areas of public administration, education and healthcare. Along the same lines, there will be another round of demobilization of professional soldiers, in conformity with principles and guidelines adopted earlier.

Finally, due to the reforms in the sector of energy and telecom (liberalization) it will be necessary to reorganize public companies in areas that will deal with solving problems of job losses that is evident.

2.5. Institutional Framework: Employment Agencies

The system of state employment agencies follows the organizational principle for BiH established by the Dayton Accords, meaning that the employment agencies are organized at the entity levels and cantons in the FBiH, while the RS Employment Agency is a centralized institution with six regional branches and a number of municipal offices. A BiH Agency for Labor and Employment has been established at the state level. Three ethnically divided employment agencies still exist in the Brčko District.

Employment agencies and their activities are financed through wage contributions paid by employers and employees. The rates and formal titles of these contributions are significantly different between the entities. In the RS, the rate of contribution is 1% of net wage and is called an employment contribution. This rate is also assessed against all benefits arising from employment (hot meal, vacation subsidy, holiday bonuses, so called “thirteenth salary” etc.). In the FBiH, the contribution rate is officially 2.5% and it is called an unemployment insurance contribution.

2.5.1. Separation of powers between employment agencies

The state-level BiH Agency for Labor and Employment has authority in the domain of representing BiH internationally, signing and implementing international agreements regarding labor and employment, as well as regulating relationships with other states for the purpose of enabling our workers to seek work abroad. One of its important responsibilities is to manage compensation payments for returnees from Germany after the recent war.

Labor ministries in both entities establish guidelines for the work of the employment agencies. As part of the traditional role of the employment agencies, the entity-level agencies provide cash payments to individuals as unemployment assistance, as well as payments to their healthcare and pension insurance schemes. Assistance in the form of cash payments is received only by those unemployed fulfilling certain criteria, most importantly that they were employed for a certain period of time and that their unemployment insurance was paid for them during this time.

In the area of active employment programs, the Federal Employment Bureau provides loans, while the RS Employment Bureau provides grants15, as assistance to companies that submit programs for new job creation and organize or provide funding for the re-training of potential hires or continued education of employees. The Federation Employment Bureau is authorized to use its funds to assist cantons failing to collect sufficient contributions to fund cash assistance payments, as well as payments for health-care and pension insurance. Formally, the employment agencies are responsible for tracking/monitoring the situation in the labor market and have a brokerage role in finding employment. In practice, however, these activities are neglected.

As mentioned above, there are still three separate, ethnically divided employment bureaus in the Brčko District. The powers and resource base for their operations are significantly weaker than in the entities. Some form of health care insurance is envisaged for all unemployed, but no cash assistance is paid in case of job loss. The expenses of the employment agencies in the Brčko District are borne by the entity bureaus.

2.6. The wage calculation system: real level of wage taxes and contributions, and unemployment contribution levels are higher than officially recognized

In the RS, the wage calculation system is very simple, since the following deductions are made against the net wage:

  • 5% - income tax
  • 24% - contribution for pension and disability fund
  • 15% - contribution for employee health insurance,
  • 2% - child care contribution
  • 1% - employment contribution.

In RS, the same rates are applied to all other income from employment.

In the FBiH, the wage calculation system is determined by the Law on Contributions and it is significantly more complex than in the RS. The 5% tax is calculated against the net wage and it is cantonal revenue. Contributions are calculated by a two-fold application of the coefficient 1.4705 to:

  • contributions from wages
  • contributions against wages.

In conclusion, the system of wage calculation in FBiH is complicated and needs simplification. Due to the complex system of wage calculation, the real allocations for wage tax and contributions are higher (69%) than officially claimed (62%). The same holds for the unemployment insurance contribution, which in reality is 3.7% and not 2.5%, as officially stated. In the RS, because of the simpler wage calculation system, wage taxes and contributions, though in reality also higher, are closer to the official figure (around 52%), as well as the employment contribution (1–1.5%)16 Bearing this in mind, it is clear that taxes and contributions in the FBiH are higher (69%) than in the RS (52 to 54%) and that, consequently, labor costs are higher in the FBiH.

2.7. Spending of funds collected from unemployment contributions: employment bureaus have high administrative costs.

In the FBiH, employment contributions are divided at the point of bank transfer, and 70% is allocated to the given cantonal employment bureau, and 30% to the Federation Employment Bureau. In the RS, all contributions are paid into the Employment Bureau account.

In 2002, the total revenues of the RS Employment Bureau were 8,681,980 KM. Out of this amount, 2,705,711 KM, or 31.17%, was spent on the Bureau’s operational costs (including salaries). Gross unemployment benefits comprised 2,212,496 KM (25.48%) of the total revenues (cash benefits accounted for 2,015,543 KM, the pension fund contribution for these benefits totaled 121,190 KM, and the health insurance contribution was 75,762 KM). In the course of 2002, unemployment assistance cash benefits in the RS Employment Bureau were paid to an average of 1,290 unemployed every month. The average benefit was 70 KM. For active employment measures, the 2002 allocation was 1,612,500 KM or 18.57% of total revenues.

Over the first half of 2003, the 2002 trends in RS continued, except that the share of operational costs increased (from 31.17% to 38.77%). There was also an increase in the number of unemployed receiving cash benefits – from 1,290 to 1,530 persons in the first half of 2003.17

Total revenues of the Federation Employment Bureau and cantonal employment agencies in the first half of 2003 were 75,242,072 KM. Unemployment insurance contributions for this period were 33,846,967 KM. Other revenues were 7,275,914 KM and the amount of 29,099,191 KM was carried over from 2002.

The operations of the Federation Employment Bureau and employment agencies in the first half of 2003 cost 5,485,703 KM, which comprises 13.33% of the total revenues, excluding funds carried over from 2002. The basis for calculation of cash benefits was the average wage in the given canton over the three preceding months, which is why the levels of the cash benefit in FBiH vary across the range from 117 to 240 KM. In the same period, 6,361,910 KM, or 15.47% of the total revenues – not counting that carried over – were used to pay unemployment assistance cash benefits. The total number of unemployed registered in FBiH in July 2003 was 297,477, but the cash benefit was paid to only 4,786 persons (1.61%). The situation is even bleaker when one considers that these figures include the benefits received by returnees from abroad.

The health care system in the FBiH in the first half of 2003 was used by an average of 170,000 persons every month, which comprises 58% of the total number of those who are unemployed and registered with the cantonal agencies. The allocation for health care was 4,924,533 KM, or 11.97% of the total revenues. To support employment (credits, grants, subsidies, retraining etc.) the Federation Employment Bureau and cantonal agencies allocated 13,148,942 KM, or 31.97% of their total revenues.

The funds of the Federation Employment Bureau and the cantonal agencies carried over from 2002 to 2003 were 29,099,199 KM, and the surplus of funds found in the preparation of the semi-annual statement was 36,906,196 KM.

The total revenues, just from contributions, for the first half of 2003. came to 33,846,967 KM, so it is possible to estimate that annual unemployment insurance revenues in FBiH are around 68 million KM.18

An analysis of the above numbers confirms that the unemployment funds in the RS are much lower than in the FBiH, where unemployment assistance contributions are higher. The number of unemployed receiving benefits is low. Both in the FBiH and RS the operational costs of the employment agencies is relatively high. An audit conducted by the World Bank on behalf of the entity governments in 2002 pointed to the non-existence of clear criteria and inadequate use of funds earmarked for stimulating job creation, which were mainly provided in the form of credits in the FBiH and in the form of grants by the RS. The effectiveness and transparency of the programs for stimulating job creation were also questioned.

2.8. The labor market: problems observed

The labor market in BiH is burdened with a number of problems. Above all, it is still fragmented and does not provide workforce mobility. The existing labor legislation is suited to the demands of a market economy, but in practice there is discrimination on the basis of ethnicity, age, and sex. Political divisions also impede the mobility of the workforce. There is also an inertness and inflexibility in the workforce as well. There is less inclination to move from one profession to another, which is the consequence of socialist practices, an educational system unsuited to the contemporary demands of the labor market, and an inflexibility concerning the level of minimum wage. Employers are not sufficiently involved in bargaining over collective contracts and as a result the level of the minimum wage is a disincentive to the employment of younger, highly productive workers (especially in the FBiH). Employment agencies have a very narrow scope of activity. Large numbers of people are employed in the informal sector, especially the young.

3. Priority Activities and Measures

3.1. Strengthen the single economic space: reduce market fragmentation in BiH

Markets in both entities are geographically confined and employers focus primarily on local labor markets. The fragmented state of the BiH economy and the existence of a number of isolated local economies inside each of the two entities are causes for concern because local markets offer little opportunity for building an economy with the scope and capacity for specialized production based on the comparative advantages of BiH. The smaller the market, the greater the likelihood of unstable demand. Local markets offer little opportunity for expanding businesses and by the same token for increasing employment.

In the case of both BiH entities, the foreseeable instability of demand, in the midst of a small market, is a very serious problem, especially when taking into account the implementation of announced reforms in the areas of privatization, bankruptcy proceedings and business insolvency. If a major local source of income vanishes or is reduced, for example, by the restructuring of a large enterprise, or a reduction of financial aid from international donors, the local economy could experience a sudden drop, or even a collapse, and a subsequent increase in poverty.

Another potential problem is the disparity in regulations concerning the legal requirement to publish Calls for Tender for work contracts and public procurement. Often such announcements are only made in the local media. This problem is especially visible in the FBiH19, but is also present at the national level. In this context, it will be vital to strengthen regional development20 and appropriate local-level institutions, with the mission to promote business opportunities of their respective communities throughout the country. It is expected that the adoption and implementation of the legal framework for public procurement on a national level will strengthen the single market.

3.2. Implement education reform: promote continuing education21

Of a group of employers surveyed who employed new workers in the previous 12 months, 48% in Trebinje, 49% in Zenica and 25% in Travnik said that their greatest difficulty was finding workers with adequate qualifications. In a country with such high levels of education,22 this is an alarming finding. Considering that most workers completed a high-school education, this response from employers leads to the conclusion that formal education is failing to provide the needed qualifications. Therefore, the preparation of a study of the skills needed in the BiH labor market, which should serve as the basis of a second stage of education reform.23

Within the framework of the same survey, the employers listed work experience as the main hiring criteria, before qualifications. That is why, in addition to education reform, it is necessary to develop mechanisms to enable youth to acquire experience through voluntary (trainee) work. Students would develop working habits, acquire knowledge and experience in the fields they are training for, establish links with employers during the training, acquire necessary qualifications, not just receive diplomas, and eventually they would find jobs more easily after the completion of their education, often with the same employers with whom they did their trainee work.

The contacts with employers confirm that the service sector has a constant problem finding qualified workers. It also appears that the industrial production sectors in Trebinje and Travnik are encountering similar difficulties. In any case, most employers stated that they would be willing to train their workers, and some would have done if financial considerations allowed. Many employers in Zenica attempt to train their workforce on their own, because of, in their view, the high cost of specialized institutions. In view of the great need for training a young workforce, it is of utmost importance that the imminent education reforms allow all forms of extra-mural education, as well as to find modalities to subsidize training, particularly for the younger workforce. A share of funds collected by the employment agencies should be channeled to financing these programs.

It is important to emphasize that unemployed workers are interested in acquiring new skills. About 84% of those unemployed in Trebinje, 70% in Travnik, and 95% in Zenica, expressed their willingness to attend free training sessions to acquire new skills. An interesting experience is that of Malaysia, which provides free training and skill-acquisition for unemployed individuals, in a wide range of skills required for participation in the contemporary labor market.24

The education system must be reformed to successfully contribute to poverty reduction. According to data form the public employment institutions in BiH, there is demand for only 20% of the 252 occupations which are currently being trained within the secondary education system. Out of 32 higher education professions, jobs are available in only four.25 Holders of high-school and college diplomas comprise 62.6% of the registered unemployed. The unemployment rate is 2.6 times higher among the young (19–25 year olds) who have recently left school than among the members of the 25–49 age group, and even 3.6 times higher than among those aged 50–60.26

3.3. Eliminate all forms of discrimination in employment: women participating in the labor force is among lowest the region27

In the future Stabilization and Association Agreement with the EU, BiH will be required to remove all forms of discrimination with regard to working conditions, wages and firing workers.28

Some individuals in Zenica and Trebinje expressed the conviction that there is discrimination in employment based on sex, ethnicity, age, and status. Only 25% of those polled in Zenica, 27% in Travnik, and 16% in Trebinje believe that there is no discrimination.29 According to a study entitled “Gender and Poverty”30, displaced persons are in an exceptionally difficult position, since they rarely find work, and are therefore compelled to accept jobs that were undesirable to other social groups. The cruelest form of discrimination on the basis of ethnicity concerns returnees who have great difficulties in finding jobs in public administration or public companies. This will require the enforcement of the constitutional changes, which establish the obligation of all levels of government to ensure a composition of employees in the public administration that reflects the ethnic composition of the local population from 1991. The efficiency of the implementation of the regulations prohibiting discrimination on any basis when hiring and at work, and a strengthening of the activities of the ombudsmen in this area are needed.

Women, in particular, suffer discrimination in employment, receiving in both the private and public sector lower salaries for the same type of work and with less chance of promotion. This is inevitably reflected in their material status and complicates the maintenance of acceptable living standards. Women are first to lose their jobs in times of restructuring and reform and have more difficulty in finding new employment. Action should be taken to design and implement measures to prevent discrimination in the areas of labor, employment, the share of women in the public life etc., in line with the Law on Gender Equality in BiH.

In the surveys which DFID carried out with employers, respondents stated that they are slow to hire handicapped persons. In view of the specific situation of BiH, as a post-conflict country, and of the needs of this population, it is necessary to adopt a legal framework, which would ensure that at least 3% of employees in public administration are persons with disabilities.

It is particularly important to strengthen the existing micro-credit institutions to stimulate employment, especially among women and returnees.31

3.4. Reduce the rigidity of the wage-setting system, increase youth employment

The average age of those employed in the formal sector has grown considerably from 36.6 years in 1991 to 40 years in 200032, which means that the young workforce predominantly works in the informal sector. The share of workers below the age of 36 is considerably lower than before the war. The share of the 25–34 age group in the labor force in 2000 was 23%, comparing to 37% in 1990. According to LSMS data, 18% of the total number of employees in the informal sector are under 25, while this age represents only 7% of the employees in the formal sector. One of the main reasons for this is the rigidity of wage-setting system. The minimum wage, especially in the FBiH, is above average for countries in transition (only in Slovenia it is a little higher). In essence, the government and the unions negotiate about the wage level, still without the effective participation of employers. Younger workers tend to be more willing to work for a smaller wage, which is not stimulated by the existing wage schemes. For this reason, the average age of workers rose and productivity in the formal sector dropped, while the younger work force was relegated to the informal sector. This is another way the informal sector became more competitive than the formal sector – due to the larger share of young employees, as the more productive segment of the workforce.

Apart from the rigidity regarding the minimum wage, the wage system in general is burdened with other payments unfamiliar to a market economy, particularly in the public sector. This category includes entitlements on the basis of past work, hot meals, thirteenth salary etc. In a market economy, wages are exclusively linked to the productivity of the workforce. This above all applies to wage schemes based on past labor, which impedes workforce mobility: older workers when they lose their jobs have a much harder time getting new jobs, due to the obligation the employer must pay for such a worker because of a higher salary on the basis of past work. In this way, the older workforce is also forced into the informal sector. This necessitates improvement in the work of the Economic and Social Councils at all levels of government to involve employers in the dialogue and to introduce greater flexibility into the wage system.

In the coming period, all levels of government in BiH will be required to drastically reduce public expenditures and particularly public sector wages. In this context, and in order to reduce existing wage system anomalies, it will be necessary to gradually reduce such benefits as hot meals, vacation subsidies and, at later stage, to eliminate compensation for past labor.33

For some groups of the young who are especially needy, such as orphans and school drop-outs, special employment programs need to be developed, e.g. through subsidies to companies that hire them. Employers should be stimulated to employ young people, particularly first-time entrants into the labor market.

3.5. Stimulate workforce mobility: the labor market is static

Analyses performed so far indicate that workforce mobility is insufficient. When asked where they would like to seek employment, of the surveyed participants currently looking for another job (working in the formal sector) 71% in Trebinje, 73% in Travnik, and 57% in Zenica stated that they were looking for work only locally. None of the participants were prepared to look for work in another part of their entity, let alone in the other entity, although many expressed willingness to work abroad.34 One contribution to the many obstacles to workforce mobility is the fact that the market in BiH has not entirely adapted to the changes in the state of the economy and has not started to allocate the available labor force efficiently. In this case, too, the inflexible system of setting the minimum wage represents just as great an obstacle to employment creation, as for the mobility of the employed from one job to another. A particular problem arises from political instability, which discourages unemployed workers from seeking work in areas where their ethnic group is a minority.

The existential vulnerability of a part of the workforce is an additional cause of its reduced mobility. Only a very small number of survey participants regularly receive social assistance. Most individuals who do not work survive on financial assistance from family members. As in many poor societies, it appears that the family is the main source of social and economic support. This factor accounts for the obvious disinclination of workers to look for work outside of their local region. Workforce mobility is also destimulated by the inequalities in the levels of unemployment benefits, past work, pension and health insurance.

Around 28% of respondents in Zenica, 45% in Travnik, and 46% in Trebinje have access to some land for growing food or raising animals. Agricultural activities play an important role in the survival strategy of BiH, which also contributes to less workforce mobility.

In conclusion, the labor market is static, which is primarily a result of the slow recovery of the economy and lack of new job creation. Thus, for instance, growing companies created an average of 4.2 jobs, while shrinking companies lost about 5.3 jobs annually. The situation in the RS is considerably more difficult, compared to the FBiH. The low dynamic of creation of new productive jobs and the closing of unproductive ones, moving from an unproductive to a more productive job, undoubtedly slowed the productivity growth and the general growth potential, including the growth of employment.35 Interestingly enough, the rate of employee turnover in the public sector, mainly in loss-making firms, does not lag by much when compared to the employee turnover rate in profitable companies.

A reduction of political tensions, the strengthening of the single economic space, the harmonization of the system of social assistance as well as unemployment benefits and rights, the harmonization of the quality of education, health care, minimum wage and pension levels – are all important prerequisites for higher workforce mobility in BiH. It is particularly important to strengthen the role of employment agencies in the identification of the needs of the local labor markets and their brokerage role in finding jobs, and to link their databases electronically.

3.6. Strengthen the monitoring of use of unemployment benefits: the present system stimulates expansion of the informal sector

The system of “automatically” awarding unemployment benefits is counterproductive. It seems that the primary motivation for registration with an unemployment agency is obtaining the right to health insurance. There is no efficient system of verification that unemployed persons fulfill the requirements for receiving benefits, especially health insurance. This stimulates employment in the ‘grey economy’, because individuals can formally claim unemployment in order to receive assistance and health insurance. Finally, the absence of control over the realization of benefits leads to irrational spending. Considering the sizable informal sector, unemployment benefits, particularly health insurance, should be reserved for those unemployed who are in a difficult financial situation, and employment agencies must play a more active role in verifying the fulfillment of criteria for receiving benefits.

It is necessary to clarify and tighten the criteria for attaining and losing the status of an unemployed person, taking into account the International Labor Organization Convention, particularly to ensure an appropriate level of social security for the unemployed. This necessitates harmonization of the employment contribution rates in BiH. Finally, the criteria for attaining the right to health care must be tightened and its implementation more closely monitored.

3.7. Promote the activities and strengthen the efficiency of employment agencies: the current system of funding employment stimulation programs is inefficient and non-transparent

One of the conclusions drawn from the above mentioned surveys is that the employment agencies, especially in relation to the EU standards, do not play a sufficiently relevant role in facilitating job searches. None of the respondents was of the opinion that the employment agencies are familiar with the situation in the labor market. This reaction conforms with the recognition that both employers and job-seekers are more likely to turn to other methods when seeking to hire or be hired. The majority stated that personal connections were their primary method in seeking work. Even persons currently employed in the formal sector do not consider employment agencies to be an important channel for finding a new job. None of the respondents employed in the formal sector in Trebinje and Zenica used employment agencies in finding work, while only one person did this in Travnik.

In this context, the employment agencies need to be reinforced in the area of identification of the needs of the labor market and in the labor market brokerage role.

There is inefficiency and a lack of control over the way in which employment agencies allocate resources for job-creation support programs.

Employment agencies in the FBiH and in the RS direct some of the resources collected from employment insurance contributions to projects that, in their opinion, contribute to job creation. Inefficiency and non-transparency of the present system are a cause of concern, particularly because, according to rough estimates, since the end of the war the employment agencies have collected around 450 million KM, at least two-thirds of which went to the Federal Employment Bureau.

Until now, the practice has been that both entity employment bureaus, as well as the cantonal employment agencies, had discretionary powers to evaluate the suitability of projects for financing. The Federation Employment Bureau provides loans for such projects, while its RS counterpart provides grants. In both cases, banks are merely service-providers. This system of allocation of funds, in which public agencies have the role of banks, is inadequate, since these institutions are not equipped to perform credit analysis. On the other hand, the control over spending of the funds by the recipient private companies is questionable, as is the responsibility for potential poor performance. Both entity employment bureaus have so far failed to perform regular verifications on the level of compliance with conditions for receiving loans and grants.36 The monitoring of this type of activity of these agencies by the overseeing entity ministries has been insufficient so far. In consequence, the RS should change to a system of providing credits, and not grants, as support to job-creation projects. In that case, both entity employment bureaus should abolish the practice of selecting projects for job creation support and should leave this task to the banks, which should also bear the risk of the placement of funds.

3.8. Strengthen the institutional framework and oversight of employment agency operations

On the institutional level, the BiH Labor and Employment Agency, and the single Brčko District Employment Agency need to be established. A tripartite management (government, unions, and employers) should be established to ensure adequate representation of interest of all stakeholders. In particular, it is imperative to reinforce oversight of the operations of employment bureaus by competent entity ministries and bodies, and to set, in percentage terms, a ceiling for the share of administrative costs in the total revenues.

3.9. Expand and ease requirements for acquiring the right to unemployment benefits

The existing system, in which all unemployed who previously regularly paid their contributions, have the right to one-year of unemployment assistance, is unjust to those workers who, after a longer period of work and paying contributions, lose their jobs. Therefore the length and duration of unemployment benefits should be determined on the basis of the duration of previous employment and the period when contributions were paid. This becomes particularly important for the next period, when job losses because of privatization and the implementation of other reforms are expected, and the funds collected by the employment agencies should be a part of the overall social program for all those who lose their jobs due to acceleration of reforms.

3.10. Strengthen the activities aimed at reduction of the informal sector

As mentioned above, a large informal sector exists in BiH, which, according to LSMS data, consists of around 362,000 workers. A large number work in agriculture (47%), construction and the services sector (17%), as well as production (9%). Most workers are employed in the private sector, and around 28% are self-employed. The young and workers without qualifications are especially predominant in this sector. On the other hand, employers register minimal salaries in order to avoid full payment of contributions, which the LSMS found to have a discouraging effect. To achieve the goals of this priority, it is necessary to stimulate employers, as well as employees, to cross from the informal into the formal sector. Exemption from the payment of contributions for a certain period proved effective in other transition countries. To increase efficiency in this area, activities on reorganization of inspection services, and particularly of labor and employment inspections, should be brought to completion. Finally, in line with the above, the criteria for receiving unemployment benefits, and particularly health insurance, must be tightened, and compensation for past work should be gradually eliminated.

3.11. Strengthen the existing system of social assistance to ensure more adequate support for those losing jobs due to acceleration of reforms.

It must be emphasized again that there is no reliable data on the actual unemployment rate in BiH. The number of employed workers who have not received wages, nor have had contributions for them paid, for a long period, are expected to register with employment agencies, together with all other categories of unemployed workers. Many of these, despite holding only fictitious employment, have still not registered with an employment agency. Their registration will exert further pressure on the employment agencies as they seek to provide health care coverage and other for unemployment assistance for these workers.

Based on the poverty analysis performed by the PRSP team, it was estimated that around 20 percent of the BiH population lives at or below the poverty line. It was also established that another 30 percent is positioned just above the poverty line for various reasons: holding insecure jobs or employment in the informal sector, working on a very localized labor market sensitive to economic shocks. Such workers are at a high risk of job loss, reduction of income, and descent into poverty.

Increased unemployment must not be the sole concern of the employment agencies. It requires the mobilization of funds from various sources. In this context, it is necessary, through the existing system of social assistance and unemployment insurance, to secure funds for linking interrupted pension insurance payments or purchasing missing pension insurance for early retirement.

Notes

1Owing to the lack of reliable statistics, the major part of data for the analysis of the labor market was obtained from LSMS. In addition, some donors, such as the World Bank (“Labor Market in Post-War BiH: How to Instigate New Job Creation and Increase Worker Mobility”, World Bank, 2002) and DFID (Qualitative Labor Study) carried out their own labor market studies. DFID completed a series of panel surveys on households – SPID/HSPS, on the basis of the samples from Zenica, Travnik and Trebinje, among three target groups: individuals, employers and employment brokers.
2LSMS
3(“Labor Market in Post-War BiH”, World Bank, 2002
4UNDP estimated the number of unemployed, when contrasted with the estimate of the working age population actually residing in BiH, and put the unemployment rate at 41.8%, with a 43% rate in FBiH and 40% in the RS (UNDP: Early Warning System in Bosnia and Herzegovina, Report on Basic Indicators – Base Line Report, June 2000, p. 27). These estimates contradict the initially surprisingly low unemployment rate indicated by the data from LSMS. As will be seen, the survey data collected for this Study uphold the claim of a lower unemployment rate, and consequently a lower poverty rate.
5An estimate produced by World Bank BiH Mission experts.
6BiH: Poverty Assessment (First Draft), World Bank, September 18, 2002. p. 49.
7BiH: From Aid Dependence to Fiscal Sustainability, World Bank, 2002, pp. 35–36.
8BiH: From Aid Dependence to Fiscal Sustainability, World Bank, 2002.
9In a highly developed economy, such as that of Great Britain, 71% of total employment is in the service sector. If we exclude financial services, this share of the employment market falls to 52%.
10Labor Market in Post-War BiH, World Bank, 2002.
11Accelerated privatization, implementation of laws on bankruptcy and liquidation.
12The following feasibility studies were prepared by international companies: Marston&Marston of U.S, for the mines in the Central Bosnian and Tuzla Basin, DMT-Montan Consulting GmbH of Germany, for the mines in the FBiH, Kennedy&Donkin Ltd. of U.s. for the Gacko mine and thermal plant, JCI of Japan for the Stanari Lignite Mine and Ugljevik mine and thermal plant, as well as Fichtner of Germany for the BiH power sector.
13Report on Progress and Conditions for Improving Commerce Among Privatized Industrial Enterprises in BiH, October 2002, World Bank (prepared by Dr. Muris Čičić)
14UNDP Information-Communication Technologies Forum.
15RS Regulations do not allow banking and credit activities outside the banking system.
16Research of the PRSP Team.
17Research of PRSP team.
18Research of PRSP team.
19According to some canton regulations (such as the Zenica-Doboj Canton), it suffices to publish local tender offers only in the local media.
20With the support of OHR and other donators, the European Commission has approached the realization of the project to unite local communities on the basis of economic regions. This process is in motion, and several regions composed of municipalities in both entities have already been formed. The PRSP team had the intention of giving priority to regional development, but was unable to gain the support of the PRSP team in RS, which does not consider this a priority.
21Based on research done by DFID (HSPS, 2002) on several localities in BiH.
22In Trebinje 67% of individuals surveyed had completed a high school education, while 17% had higher or university education. In Zenica, the corresponding numbers were 70% and 8%; in Travnik, 58% and 8%.
23In agreement with the responsible ministries and the PRSP team, DFID initiated preparation of this study.
24Report of the Malaysian Team of Experts, March 2003.
25Education in the Fight against Poverty, Ministry of Education, Science, Culture and Sports of FBiH, May 2002.
26Human Development Report, UNDP/Economic Institute Sarajevo, September 2002, p. 36.
27LSMS
28“The Report of European Commission to the Council on preparedness of BiH to initiate SAP negotiations with the EU” (Feasibility Study), Brussels, 18 November 2003.
29Somun et. al. (2001), also discovered a widespread conviction that there is discrimination in employment. See also, WB, ECSSD, Local Level Institutions and Social Capital Study
30Gender and Poverty, IBHI, June 2002.
31According to the reports of micro-credit institutions, funded from the World Bank credit, the majority of credit recipients are women.
32Labor Market in After War BiH: How to stimulate companies to open new positions and increase mobility of the workers, WB, November 2002.
33This practice is mainly present in public administration.
34Studies performed by the World Bank in 2002 reached similar conclusions.
35Labor Market in After War BiH: How to stimulate companies to open new positions and increase mobility of the workers, WB, November 2002.
36The most recent research by Project Implementation Units for the social sector and the World Bank in connection to the work of employment agencies.

III.5. STRATEGY FOR COMBATING CRIME AND CORRUPTION

1. Goals

1.1. To strengthen the rule of law;

1.2. To establish transparency and responsibility in the public sector;

1.3. To strengthen the trust in government institutions among citizens: ensure equality in access to public services for all citizens;

1.4. To improve business climate;

1.5. To eliminate organized crime.

2. Introduction

Corruption (lat. corupere – rot, spoil, bribery, buying off, to bribe a person with money or other material goods), in a broader sense, is a term that encompasses all types of misuse of an official position for self-serving motives, and in a narrower sense denotes bribery. Passive bribery is the bribe accepted by a public official who asks for or receives gifts or favors, or takes the promise of gifts or favors, in exchange for using his/her power to perform or fail to perform some official action.

Corruption, as a general phenomenon in the world, and especially in post-conflict and transition countries, is an exceptionally tangible problem in BiH. The processes of transition, privatization, and the very process of state-building on an entirely new foundation, allowed the quick spread of corruption at all levels and in all areas of social life. Beginning in 1998, the governments at all levels in BiH began organized anti-corruption activities. The World Bank, on request of and in cooperation with the BiH Council of Ministers in cooperation, prepared the Diagnostic Survey of Corruption in BiH, published in 2001, which provided first insights into the causes of corruption in BiH. The Global Framework of the BiH Economic Development Strategy (I-PRSP) stressed that the corruption is among the greatest problems for achieving economic development and growth in the country and ranked anti-corruption combat among highest priorities.1 Additional activities were taken as part of the Stability Pact programs, within its SPAI2, with the purpose of introduction and implementation of European and international anti-corruption instruments.

In August 2002, the BiH Council of Ministers presented to the Peace Implementation Council (PIC) the “Jobs and Justice” document, which contains urgent measures for establishment of a system for fighting corruption and crime.

  • promoting transparency and responsibility in the public (government) sector;
  • creating an environment conducive to free competition in the private sector;
  • strengthening trust in government institutions among citizens, by facilitating their inclusion and participation in establishing policies and institutional reforms;
  • implementing all-encompassing legal reform.

3. Situation, causes and problems related to corruption in BiH

The ‘Transparency International’ NGO, headquartered in London, every year publishes the CPI3 Report, which measures the degree of corruption in most countries in the world. In the most recent report – published on October 7, 2003 – BiH is ranked 70th out of 133 countries where research was conducted. Several transition countries are ranked lower than BiH, for instance Romania, Russia and Turkey, while Macedonia and Serbia and Montenegro were given ranks above 100.

The analysis of corruption in BiH, prepared by a number of organizations4, points out that the major causes of this phenomenon are:

  • a) absence of the rule of law and inadequate judicial system;
  • b) presence of organized crime;
  • c) corruption in public administration, widespread bribing and conflicts of interests;
  • d) warped business environment;
  • e) complicated political and administrative system;
  • f) poverty;
  • g) inadequate influence of the private sector and civic society on the work of governments.

Corruption in government and administration

The Diagnostic Surveys of Corruption in BiH differentiated between two basic forms of corruption – corruption in government and in administration. Corruption in government concerns acts of individuals, groups or firms – in either public or private sector – aimed at shaping laws, regulations, ordinances and other elements of government policies to their benefit, which originate through illegal and non-transparent award of benefits to public officials. Corruption in administration is intentional departure from regular implementation of existing laws, rules and regulations in order to place either public on non-public actors in a more favorable position, as a result of extending illegal and non-transparent benefits to public officials.

Source: Anticorruption in Transition, Contributions to the Strategy Debate, World Bank, 2000.

3.1. Features of corruption in BiH

3.1.1. Public opinion is that the level of corruption is high, which causes low level of confidence of citizens into governments and public institutions.

The organization “Transparency International” (TI BiH) conducted a series of studies about public perception and causes of corruption in BiH. The principal conclusion was that one in five inhabitants of BiH see corruption as second most important issue facing the society:

ProblemBiH (%)RS (%)FBiH (%)
Unemployment25,825,625,4
Corruption20,317,021,9
Political instability14,012,314,9
Poverty, low standard of living12,612,512,6
Crime10,912,010,4
Economic reconstruction7,311,05,5
Poor inter-ethnic relations3,32,33,9
Refugee return2,31,82,6
Poor health care1,72,31,4
Prosecution of war criminals1,20,81,4
Other0,41,30,0

The findings of the Diagnostic Survey of Corruption in BiH, conducted by the World Bank, also confirm that “the public in BiH believes corruption to be very widespread and that it contributes to the growing gap in economic stratification of the population, deters foreign investment and undermines government stability.”5

3.1.2. Widespread bribing

It is worrisome that the practice of bribing is increasingly seen as ‘morally neutral’, as part of the “efficiency of the system”, thus directly causing moral erosion of the society.

The surveys by TI BiH showed that 84.7% of the respondents believe that it is necessary to offer money to a clerk to solve a problem. The views are similar concerning gifts: 85% of the respondents believe that offering a gift to a clerk greatly increases the likelihood of resolving a problem, while 82% consider it likely that the same result will be achieved by offering the clerk a reciprocal favor.6 A particularly striking finding of the survey among civil servants is that one in three respondents believe that colleagues who refuse to ask for, or accept, bribes are sometimes ostracized, criticized, victimized or forced out of their institutions.7

3.1.3. Customs administration, health care and education are among most corrupt public services

According to TI research, the following table contains ranking of public services by degree of corruption:

Institution8Number of respondents

- clients
Percentage of respondents

paying bribes
Health Care61026%
Education6007%
Police14717%
Judiciary1575%
Other5715%

TI research demonstrated that 89.3% of respondents believed corruption existed in higher education. The findings about perception of corruption are similar for health care, where, in the opinion of 76.5% of respondents believe that there is corruption among health care employees. It is worrying that in reality there is a “typical price list” and that access to some services and physicians depends on the capacity to pay.

Conflict of interest is particularly present in public agencies and institutions. 75% of respondents believe that at least some of their colleagues own private companies. The customs administrations are at the head of the most corrupt list: nearly 90% of the customs administration employees who responded, believed that corruption is widespread in their agencies. Abuse of office also occurs in the customs service, to protect interests of businesspersons linked by political or other connections to employees of the customs administrations.9

3.1.4. Corruption in judiciary, prosecution authorities and police: doubtful independence.

Judiciary, prosecution authorities, as well as police, take a particular place in corruption analysis, exactly because their fundamental role of safeguarding and enforcing the law. The recently published fact that, as of September 4, 2003, 3,040 complaints were registered against judges and prosecutors, is alarming.

In this context, it is notable that TI research found that 64.4% of respondents stated that there is corruption in these institutions. In the case of police, only 3.3% of respondents stated that police is not corrupt. According to this study, one in four inhabitants was asked to pay bribes to policemen.

3.1.5. Corruption has direct effect on increase of poverty

A high degree of corruption in public institution, particularly in health care and education, undermines the principle of equality in provision of public services, and thereby causes an increase of general poverty and the gap between the rich and poor.10 It should be noted that the poor are particularly sensitive to corrupt practices.11

3.1.6. Corruption adversely affects the development of private sector and attractiveness for foreign investment

Potential for investing in BiH and strengthening of private sector is further reduced by findings that ‘18% of company outlays are bribes, while one-tenth of the managers’ time is occupied by various communications with the authorities.12 Such facts make the country less attractive for investment. By undermining the efficiency of the legal system, corruption increases the degree of uncertainty and causes the rise in investment costs, thereby reducing the interest of foreign investors in BiH.

4. Priority activities

4.1. Establish appropriate bodies within the state and entity justice ministries, in order to improve coordination of anti-corruption activities13

An appropriate body within the BiH Justice Ministry should be responsible for international cooperation and investigative activities related to the analysis of causes and manifestations of corruption in BiH. Anti-crime and anti-corruption sub-committees should be established in the parliaments at all levels of government. In this context, it is important to consistently implement the Law on Conflict of Interest and to reinforce the election commissions for its implementation.

4.2. Continue the reform of the judiciary14

The goal of the court system reform is the establishment of an efficient professional, independent, autonomous, professional, transparent and modern system, which will operate on the same basis throughout the country.

In the FBiH and RS, the structure of the court system has been reformed, with municipal and cantonal, or regional, courts. The implementation of the law on the number and composition of court employees is under way, and establishment of commercial departments at the cantonal/regional courts is imminent, which should considerably reduce the scope for corruption in the business sphere. It is vital to continue and intensify activities to ensure transparent election of judges and consistent insistence on professional and ethical criteria.

Legislative reforms of procedural laws are important for the reform of the judiciary. In the area of criminal law, criminal procedures were introduced at the level of BiH, FBiH, RS and Brčko District in order to:

  • exclude judges from criminal proceedings
  • expand the powers of the prosecution authorities in investigations
  • introduce new investigative techniques
  • enhance procedural efficiency, with ensuring protection of human rights.

It is particularly important to implement the new criminal laws, which define new criminal acts, such as money-laundering, breaches of payments system security, bribing etc. It is also important to reform regulations of offences, misdemeanors and economic crime, including introduction of modern techniques of investigation for uncovering and prosecuting corruption, in line with the European standards and principles of protection of human rights. The BiH Parliamentary Assembly enacted a series of state laws which describe these offences, but a body in charge of their prosecution needs to be established.

It is of highest importance to implement the new laws on administrative proceedings, which serve to protect creditors and implement valid court decisions and court execution orders, as well as of the laws on bankruptcy and the laws on entering legal persons in court registers.

The reform of the laws on obligations must be accelerated, to regulate debts and collection of claims, in line with the European Law, as well as the reform of property codes, which would regulate the area of property and other property rights in a single fashion, as well as passage of the state law on money-laundering.

Legislative reforms go in parallel with institutional reform of courts and other judicial institutions. By mid-2004 departments for commercial disputes should be established in 16 first-instance courts around the country (10 in FBiH, 5 in RS and 1 in RS), and the training of judges for working in such specialized commercial departments within first-instance courts should start, to ensure efficient implementation of, first of all, the new laws on legal proceedings and administrative proceedings.

The prosecution offices at all levels have been recently restructured, and the BiH State Prosecution Office has been established. The enacted laws on prosecution authorities considerably altered the role of prosecutors, who assumed responsibility for investigations. The practice of police, customs and financial inspectors conducting investigations were abolished, which reduced the scope for corruption and enhanced efficiency. The reform of the prosecution authorities is one of the most significant activities for strengthening the rule of law and the confidence of the public in the institutions of society.

In consultation with civil society, conducted within the framework of the preparation of the BiH Medium-Term Development Strategy, it was emphasized that more severe penalties for persons offering bribes, or corrupting the public sector in any other way, need to be introduced. The focus was particularly directed towards the professional lawyers, who are, in the opinion of the NGOs, most frequently involved in the process of corrupting civil servants. In this context, the bar associations must devote special attention to strengthening of the code of the legal profession and to monitoring of the law practice.

4.3. Strengthen efficiency of anti-crime and anti-corruption bodies15

Normative penalization of corruption, through provisions of the criminal laws of BiH, FBiH, RS and Brčko District, and the newly enacted laws on criminal proceedings, is surely an important factor in combating corruption and crime in general. Amendments of the regulations of the powers of prosecution authorities and the new role of justice ministries in the prosecution process provide new and more efficient ways to uncover and combat corruption.

The bodies in charge of investigation and reporting (such as ministries of interior, financial police, customs administration, tax administration, authorized auditors, prosecution authorities, criminal courts etc.), which are responsible for the implementation of most laws and regulations, must be strengthened. It is particularly important to continue efforts to curb political influences and accelerate modernization of the investigative and reporting bodies.

It is further necessary to establish daily and functioning cooperation of all these bodies on combating acts of corruption. In this sense, it is particularly important to continue adding to the normative and legal framework, as in the case of enactment of the Law on Anti-Fraud Administration and the Law on Prevention of Money Laundering, or with continued implementation of the CIPS project.

Abolishment of the role of the investigating magistrate in the Law on Criminal Proceedings at all levels, and by assigning a more active role in the investigation and prosecution process to the justice ministries, processing of crimes will be accelerated, and the preconditions for a higher efficiency of the judiciary as a whole have been created. These reforms should continue, in order to keep reducing the opportunities for bribing and corruption.

To increase effectiveness of the investigative and prosecution bodies, the prerequisites for implementation of the laws on post-trial protection of witnesses exposed to threats and to danger.

Finally, it is indispensable to secure adequate funding for operations of investigative and prosecution bodies.

4.4. Continue reform of the indirect taxation system

The reform of the indirect taxation system has an important role in the combat against corruption. The change of place of collection of the sales tax for high-excise goods from retail to point of imports or production, has already produced positive results, reflected in the increase of public revenues.

As previously mentioned, independent studies showed that, of all public services, the customs administration is the most corrupt. Therefore it is important to implement the reform of the indirect taxation system, which requires establishment of a single customs administration at the state level and which will reduce corruption in this branch of public administration. Introduction of the Value-Added Tax (VAT) will significantly reduce scope for currently widespread fraud and reduce the loss of public revenues, as well as enhance the business climate.

4.5. Reform of public and state administration

At the level of BiH, RS and Brčko Disctrict, civil service agencies have been established, while founding of such an agency in FBiH is in progress. The purpose of establishment of these agencies is to strengthen and depoliticize the civil service. Establishment of respective agencies at the cantonal and municipal level needs to be accelerated. In the coming period, it is important to devise the codes of conduct of civil servants and to improve their qualifications. In practice, there are overlaps in responsibilities between different levels of government, as well as excessive bureaucratization, which creates opportunities for corruption. Activities on preparation of the strategy for reform of public administration are underway. The Action Plan for Reform of Civil Service in BiH is scheduled for adoption by September 2004.

Among other things, these reforms should allow citizens access to information. The right to information is a crucial human right, which allows even the most vulnerable categories of the population to participate more actively in conduct of public affairs.16

4.6. Strengthen the public finance management and control system

Strengthening the system of management and control of collection and spending of public revenues remains a vital activity in the struggle against corruption. In this context, it is necessary to:

  • strengthen auditors’ bureaus at all levels, through increasing their budgets and their staff,
  • establish electronic links between auditors’ offices at all levels, and with tax administrations,
  • introduce treasury system in all cantons and municipalities,
  • enact a new legal framework for BiH on public procurement,
  • enact the BiH Law on Accounting and Auditing
  • establish the systems of internal control of collection and spending of public revenues in all bodies of public administration, including ministries,
  • ensure transparency in collection and spending of public revenues by publishing budgets at all levels,
  • establish systems of internal auditing in all larger institutions and public enterprises and identify an appropriate model for smaller institutions,
  • strengthen the role of parliamentary committees, responsible for auditing on all levels of government, in the sense of monitoring of the realization of recommendations and conclusions following the findings of audits and demanding responsibility for errors identified.

4.7. Continue activities in combating human traficking17

Bosnia and Herzegovina is, in most international reports, described as one of the countries that faces the problem of human trafficking, both as a transit country or a final destination, and most recent indicators show that female citizens of BiH have also become victims of trafficking.18

In the previous period, considerable activities were conducted to strengthen the institutional framework for combating this problem. The BiH Council of Ministers adopted the Action Plan on Prevention of Human Trafficking in BiH on 6 December, 2001, and the State Commission, established on 14 March 2002, was tasked with its implementation. The Council of Ministers appointed the State Coordinator for Combating Human Trafficking and Illegal Immigration, whose task is to operationally coordinate activities of domestic and international institutions that deal with this issue. In this context, the Law on Movement and Stay of Foreigners and on Asylum was adopted19, and the control of the visa regime was strengthened, particularly for citizens of countries where victims of human trafficking most often come from.

Many problems, however, persist. The human-trafficking prevention activities are inadequately supported by international organizations, with the exception of the U.S. Embassy. There was no necessary degree of coordination of international and domestic NGOs with the governments in BiH, which had no insight into their work. Funding for planned activities was insufficient for achievement of better results.

Measures to be taken in the next period:

  • secure funding for implementation of the BiH Action Plan for Prevention of Human Trafficking,
  • in conformity with the Law on Movement and Stay of Foreigners and on Asylum, amend the temporary instructions and transform them into a Rule Book on Protection of Victims of Human Trafficking,
  • conduct intensive activities to collect data and electronically link institutions charged with activities on combating human trafficking,
  • adopt guidelines on special protection of minors, which should be integrated as part of the Action Plan for Combatting Human Trafficking, and ensure that ministries responsible for social assistance assume a leading role in their protection,
  • educate members of the State Border Service (DGS), particularly to ensure effective implementation of the BiH Criminal Code, Law on Criminal Proceedings and Law on Movement and Stay of Foreigners and on Asylum,
  • establish, within DGS, an investigation department for combating human trafficking, and ensure responsible government institutions assume a larger share of responsibility for operations of shelters for victims of human trafficking.

4.8. Strengthen transparency in privatization

According to assessments of both domestic and foreign experts, the privatization process in BiH to date has not been transparent, with the consequence that a number of privatization contracts were concluded in which the public property and employees’ rights were inadequately protected, nor were the mechanisms for ensuring that the obligations assumed by the purchasers are met.

To overcome this problem, it is necessary to:

  • pass legislation to ensure an effective mechanism for dissolution of those contracts in which the buyer (investor) failed to meet the contractual obligations,
  • strengthen the role of the FBiH Privatization Agency and RS Privatization Directorate in conducting the privatization process,
  • initiate a public information campaign to ensure that the public is better informed about the privatization process.

4.9. Strengthen transparency and modernize the system of funding education

The data on perception of corruption in education indicate presence of corruption in this area. The education reform, which is underway, has for its primary goal harmonization of education at the level of the state, participation in the regional integration processes, modernization of legislation in this area and reintegration of universities in line with European models. Over and above these reforms, it is necessary to strengthen transparency and modernize the system of funding education throughout the country, which will lead to reduced corruption in this area.

4.10. Implement the health-care system reform, particularly in its financing segment

In the studies conducted by TI BiH and the World Bank, it was determined that, together with the customs administration, health care is highest among the branches of civil services by the level of corruption. A central goal of the reform of the health care system is to ensure equality in provision of health care services, which entails reduction of corruption in this area. For this purpose it is necessary to:

  • regulate by law execution of supplementary activities in health care
  • reform the funding system of the health care funds,
  • increase efforts on reduction of the grey labor market, to increase the health care contribution collection rate,
  • adopt the law on public procurement in BiH, which will regulate the system of procurement.

4.11. Strengthen effectiveness in combating money-laundering

In cooperation with the European Commission, appropriate standards in the fight against money-laundering need to be introduced.20 It is particularly important to:

  • implement the BiH Criminal Code, which categorizes money laundering as a crime,
  • adopt the legislative framework for prevention of money laundering at the level of BiH and FBiH,
  • improve coordination of bodies dealing with money laundering (DGS, entity banking agencies, tax police, tax administration of FBiH and the Department for Combating Money Laundering Activities of the RS Finance Ministry),
  • implement the adopted Action Plan for Combating Money Laundering,
  • establish the single register of bank accounts with the BiH Central Bank.

5. The role of the media and civil society in combating corruption

In the course of preparation of the BiH Medium-Term Development Strategy (PRSP), public debates about the Action Plan for Combating Corruption were held with participation of NGO representatives. NGOs demonstrated a great interest for cooperation and this dialogue should continue.

The role of the media and civil society in combating corruption is of vital importance. Therefore a greater transparence in the work of governments and public institutions is needed, both in publishing action plans and in consulting with preparation of strategic documents. It is particularly important to ensure transparency inplanning and implementation of budgets at all levels.

It is also necessary to establish mechanisms and bodies to allow citizens to point to cases or instances of corruption, as well as mechanisms for processing requests or complaints. It is crucial to provide for further strengthening the offices of state- and entity-level ombudsmen.

In the context of forthcoming reform of income tax, the possibility to allocate a share of this revenue for funding NGO activities will be considered.

Notes

1I-PRSP, p. 24.
2Stability Pact Anticorruption Initiative
3Corruption Perception Study. CPI is an index measuring the level of corruption in a country. The best grade is 10, and lowest is 0.
4Diagnostic Surveys of Corruption, World Bank, UNDP, TI and Anti-Corruption in Southeastern Europe: First Steps and Policies, SELDI. www.seldi.net
5Diagnostic Surveys of Corruption, BiH, World Bank, 2001.
6‘Study of Perception of Corruption in BiH’, Transparenty International, Sarajevo, June 2002.
7Diagnostic Surveys of Corruption, BiH, World Bank, 2001.
8Diagnostic Surveys of Corruption, BiH, World Bank, 2001.
9Diagnostic Surveys of Corruption, BiH, World Bank 2001.
10Diagnostic Surveys of Corruption, BiH, World Bank 2001.
11Right to equal access to justice: International Convention on Civil and Political Rights (ICCPR), Article 14, Convention of the Rights of the Child (CRC), Article 40, Convention on Elimination of All Forms of Discrimination against Women (CEDAW), Article 15.2, Convention on Elimination of Racial Discrimination (CERD), Article 5a.
12Diagnostic Surveys of Corruption, BiH, World Bank, 2001.
13Report of the European Commission to the Council on Preparedness of BiH to Start the Negotiation on the Stabilization and Association Agreement with the EU, Brussels, 18 November 2003.
14OHR, which coordinates important reforms of the legal system and judiciary, has greatly contributed in the combat against corruption. Enactment of the BiH Criminal Code, BiH Law on Criminal Proceedings and the Law on Court Police.
15Report of the European Commission to the Council on Preparedness of BiH to Start the Negotiation on the Stabilization and Association Agreement with the EU, Brussels, 18 November 2003.
16Political rights and freedoms: International Convention on Civil and Political Rights (ICCPR), Articles 19, 21,22 and 25, General Comment No. 10, (XIX Session, 1983), adopted by the Human Rights Committee (HRC), International Convention on Economic, Social and Cultural Rights (ICESCR), Article 8, General Comment No. 25 (57, 1986), adopted by the Human Rights Committee (HRC), Convention on the Rights of Child (CRC), Article 13 and 15, Convention on Elimination of All Forms of Discrimination against Women (CEDAW), Article 7, Convention on Elimination of All Forms (CERD), Article 5c, d, viii and ix.
17Report of the European Commission to the Council on Preparedness of BiH to Start the Negotiation on the Stabilization and Association Agreement with the EU, Brussels, 18 November 2003.
18For more information see: Report of Human Rights Watch, November 2002, work of the STOP (Special Trafficking Operations Programme) Team of UNMIBH, IOM and Ministry of Human Rights and Refugees
19On the basis of Article IV.4.a) of the BiH Constitution, the BiH Parliamentary Assembly, at the session of the House of Representatives, held on 27 June 2003, and at the session of the House of Peoples, on 18 July 2003, adopted the Law on Movement and Stay of Foreigners and on Asylum, Official Gazette 06/10/2003, Year VII – No. 29.
20Report of the European Commission to the Council on Preparedness of BiH to Start the Negotiation on the Stabilization and Association Agreement with the EU, Brussels, 18 November 2003.

III.6. FOREIGN TRADE POLICY, MEMBERSHIP IN WORLD TRADE ORGANIZATION AND SUPPORT TO EXPORT

The fact that the BiH market is small explains the necessity of adopting a liberal foreign trade policy. Further liberalization of the foreign trade regime in the region should remain a priority for BiH, together with the creation of conditions for integration into the EU market.

1. Goals

1.1. Reduce trade deficit

The existing trend of a growing trade deficit is unsustainable. An increase in exports, together with accelerated economic growth, is the precondition for maintaining macroeconomic stability and for the functioning of monetary policy on the currency board principles. Maintaining a liberal foreign trade regime is a vital prerequisite for this. In order to achieve macroeconomic effects projected for BiH Medium-Term Development Strategy - PRSP, the level of exports should increase substantially, with a simultaneous drop in the level of imports. Over the next three years, the export growth rate must increase, to stabilize at the rate of 15% annually by 2007. At the same time, the imports growth rate should be reduced (in 2007 at the rate of 6,5%).

1.2. Accelerate economic development of the country

There is agreement among experts that free trade accelerates economic development. However, views on whether an increase in international trade effectively contributes to poverty reduction fundamentally differ. For this reason, only a small number of developing countries expressed interest for the Uruguay Round of Talks. Since the establishment of the World Trade Organization, the situation has changed substantially. The WTO now comprises 146 member countries, which together account for about 90% of world trade. Furthermore, more than 30 developing and transition countries are negotiating accession to this world organization because it is economically hazardous to stay out. More recent studies have shown that developing countries with open economies achieved an average annual growth of 4.5% during the decade from 1970 to 1980, whereas countries with closed economies achieved only 0.7%. Countries with open economies grow 18 times faster than countries with closed economies and the former take 16 years to double their economic potential, whereas countries closed to the outside require more than 100 years.

1.3. Strengthen quality and competitiveness of domestic production

Experiences of other countries with liberal foreign trade policies, as well as of other transition countries, indicate that competition of foreign goods on the domestic market contributes to strengthening the quality and enhancing the competitiveness of domestic products in international markets, which subsequently leads to increases in exports.

1.4. Encourage foreign investment

Due to bilateral free trade agreements, the market for goods produced in BiH has expanded to tens of millions of customers, which should also entice foreign investors to invest in our country, and a higher volume of foreign investment will lead to faster rates of export growth.1

1.5. Accelerate integration of BiH into the EU

The establishment of the liberal foreign trade policy is one of the main preconditions for accelerating the process of EU integration, as well as for the utilisation of unilateral trade privileges that the EU has granted BiH.2

”Ensuring the free flow of goods is one of the main objectives of the EU Accession Agreement to the EU. Within the coming SAA, BiH should progressively establish a free trade zone with the Union, gradually, over the period that will be negotiated. This free trade zone has to be in compliance with the relevant WTO regulations. BiH has to eliminate all quantity restrictions and measures withequivalent effect and to progressively eliminate the tariffs in the trade exchange with the EU. The BiH Customs Service must be capable of monitoring and safeguarding the trade regime”.3

2. Situation

Pursuant to the Constitution, foreign trade and customs policies fall within the competence of BiH institutions. The provisions of the BiH Law on Foreign Trade Policy are very similar to those of other modern market economies, and are based on the free trade of goods and services. Exceptionally, and only as a temporary measure, the authority has been granted to the Council of Ministers of BiH to introduce certain restrictions in the entire territory of BiH, only in cases of the legitimate protection of interests of the country.

The tariff structure in Bosnia and Herzegovina consists of four tariff categories (between 0% and 15%) while the simple average of those tariffs amounts to 6.4 percent.

All goods originating from BiH and meeting the prescribed technical and technological requirements can, by the end of 2005, be imported to all 15 countries of the European Union, without any quantity restrictions and exempt from payment of any customs or other duties. The only exceptions to this general rule are beef and wines, for which quotas are set. The EU has also set precise conditions and procedures that must be complied with or this preferential treatment approved can be discontinued at any time. This concerns the following requirements: obeying the EU rules on the origin of goods, refraining from introducing new import duties or increasing existing ones, including customs, or quantity restrictions for goods originating from the EU; the inclusion of BiH in an efficient effort to combat crime; the readiness of BiH for actual economic reforms and regional cooperation with other countries involved in the EU process of stabilization and accession. As an insufficiently developed country, Bosnia and Herzegovina was unilaterally, i.e. without the requirement of reciprocity, granted preferential export regimes for a number of countries in the world, on the basis of international preferential schemes - GSP or GSTP, which opens to BiH the possibility of favorable exports even to the largest world markets.

Among the countries that approved preferential status and exemptions from customs duties or quality related restrictions for BiH are the following: Switzerland, Norway, Japan, USA, Russia and Canada. In all cases, there are exceptions or quota restrictions for certain, especially volatile goods, for individual countries.

As of 2002, countries in the region have committed themselves to bilateral free trade agreements. Some of them have concluded free trade agreements with countries outside the region. For instance, Slovenia, Turkey, Bulgaria, and Romania have the greatest number of free trade agreements, for which the transition period has expired, and have allowed unrestricted access of goods from over 25 countries to their markets. Croatia also has over 20 free trade agreements. Serbia and Monte Negro, Macedonia, Albania, and Moldavia, have each concluded nine free trade agreements within the region. BiH has also concluded nine free trade agreements, of which four have entered into force, and the others are in the process of ratification.

Because BiH still does not meet international foreign trade regulations and standards, only a small number of products can be exported, mostly raw materials and semi-finished goods. On the other hand, owing to non-existent regulations and the non-existent system of safety and quality control of goods imported to BiH, it is possible to import almost anything into our country, including products inadequate and even potentially harmful to the health and life of domestic consumers. BiH is currently going through the WTO accession procedure and full membership is expected during 2005.

2.1. Analysis of imports and exports

BiH is executing over 80 percent of its trade exchange on markets in neighbouring countries and the EU. The coverage of imports with exports is increasing. In the course of the last year, the coverage of imports with exports amounted to around 27 percent. However, according to the January 2004 data of the External Trade Chamber of BiH, the coverage of imports with exports in 2003 improved and reached 30 percent. In view of the fact that the overall scope of external trade exchange in 2003 grew by 6.5 percent, one can conclude that the coverage of imports with exports grew by 12 percent in comparison with 2002. In the same period, the growth rate of exports was recorded at 18.7 percent, while the growth rate of imports decreased 3.7 percent, which is an improvement in comparison with the projected rates of export growth and import reduction for the last year.4 In accordance to this in 2003 (in comparison to 2002) trade deficit was increased from 49% to 41% in relation to GDP.

The growth of exports was mostly recorded in the FBiH, where the coverage of imports with exports grew from 29 to 34 percent. However, the draught, which affected our country in the course of this year, caused a decline in the scope of agricultural production, especially in the RS, which resulted in a modest increase of exports in that entity and in the District of Brčko.

The most important export markets for BiH goods are the markets of countries with which BiH has concluded free trade agreements. In 2003, a total of 42 percent of overall BiH exports was directed to those markets. It is a special cause for concern that the trade exchange with the EU is stagnating. The value of BiH exports to the EU in the 2001–2002 period amounted to EURO 0.6 billion, while the value of imports from the EU amounted to about EURO 1.3 billion.5

Coverage of imports with exports
In thousands KM
20022003
BiH1ENTITIESBD4BiH1ENTITIESBD4
FBiH2RS3FBiH2RS3
EXPORTS1,897,8731,432,055456,2669,5522,252,4231,768,687467,06616,671
IMPORTS7,154,5685,022,5531,858,757273,2587,416,8415,167,8891,943,777305,175
TOTAL EXCHANGE9,052,4416,454,6082,315,023282,8109,669,2646,936,5762,410,843321,846
BALANCE-

5,256,695
-

3,590,498
-

1,402,491
-

263,706
-

5,164,418
-

3,399,202
-

1,476,711
-

288,504
Coverage of exports with imports in%27%29%25%3%30%34%24%5%
Source: Characteristics of overall trade exchange of commodities of Bosnia and Herzegovina for 12 months of 2003, External Trade Chamber of BiH, January 2004

Data results from adding the entity data with the Brčko District (BD) data

Customs Administration of the Federation of BiH H

Republic Tax Administration of RS

Central bank of BiH and the Statistics Bureau of the Brčko District of BiH (2002); Customs services of the Brčko District (2003)

Source: Characteristics of overall trade exchange of commodities of Bosnia and Herzegovina for 12 months of 2003, External Trade Chamber of BiH, January 2004

Data results from adding the entity data with the Brčko District (BD) data

Customs Administration of the Federation of BiH H

Republic Tax Administration of RS

Central bank of BiH and the Statistics Bureau of the Brčko District of BiH (2002); Customs services of the Brčko District (2003)

In the course of the entire post-war period, BiH has executed deficits with the majority of its external trade partners, as can be seen in the tables attached.

TOTAL TRADE EXCHANGE WITH MAJOR BIH EXTERNAL TRADE PARTNERS
DESCRIPTIONBIH12003BD4
ENTITIES
FBIH2RS3
EXPORTSIMPORTSSCOPEEXPORTSIMPORTSSCOPEEXPORTSIMPORTSSCOPEEXPORT SIMPORTSSCOPE
TOTAL2,252,4237,416,8419,669,2641,768,6875,167,8896,936,576467,0661,943,7772,410,84316,671305,175321,846
Croatia414,6921,779,3762,194,068358,5591,467,6651,826,22452,294236,659288,9533,84075,05278,892
Slovenia150,868946,1161,096,984115,374791,239906,61334,287145,521179,80812079,35610,563
Germany345,283732,2091,077,492325,541554,553880,09418,215167,883186,0981,5289,77311,301
Serbia and Monte Negro388,584650,8651,039,449176,868118,844295,712205,692474,942680,6346,02557,08063,105
Italy307,309591,877899,186262,104456,298718,40243,006127,794170,8002,1997,7869,985
Austria83,817452,547536,36475,012353,034428,0468,69382,20490,89711317,31017,423
Hungary15,744514,878530,62211,026240,670251,6964,696174,133178,82922100,075100,097
Switzerland221,362118,301339,663217,73098,435316,1653,55918,22021,779731,6461,719
Czech Republic9,454193,686203,1407,195163,816171,0112,11129,40031,511148470618
Poland5,983154235160,2185,082121,540126,62290131,91632,817-779779
Turkey12,371147,688160,05910,675132,469143,1441,69613,37015,066-1,8481,848
Great Britain70,83653,817124,65316,57143,10559,67654,26510,47964,744-233233
France20,85791,903112,76018,50555,60574,1102,33634,84537,181171,4531,470
USA17,57494,126111,70016,76180,64097,40181312,82813,641-658658
Netherlands14,44493,407107,85110,83270,17381,0053,46722,56126,028145674819
Other countries173,245801,810975,055140,852419,803560,65531,035361,022392,0571,35420,98222,336
Source: Characteristics of overall trade exchange of commodities of Bosnia and Herzegovina for 12 months of 2003, External Trade Chamber of BiH, January 2004

FBiH, RS and BD BiH tax administration information include exports and imports of goods according to ICD and UCD.

Data results from adding the entity data with BD data

Customs Administration of the Federation of BiH

Republic Tax Administration of RS

Central Bank of BiH and the Statistics Bureau of the Brčko District of BiH (2002); Customs services of the Brčko District (2003)

Source: Characteristics of overall trade exchange of commodities of Bosnia and Herzegovina for 12 months of 2003, External Trade Chamber of BiH, January 2004

FBiH, RS and BD BiH tax administration information include exports and imports of goods according to ICD and UCD.

Data results from adding the entity data with BD data

Customs Administration of the Federation of BiH

Republic Tax Administration of RS

Central Bank of BiH and the Statistics Bureau of the Brčko District of BiH (2002); Customs services of the Brčko District (2003)

The leading group of imports, by value, is agricultural and food related products, accounting for almost one quarter of the total value of imports. On the other hand, according to the value of imports of individual products, the most significant products are energy sources, beverages, alcohol and cigarettes, which are, in most part, imported from countries with which BiH has signed free trade agreements, while agricultural products are imported, at a higher percent, from countries that are candidates for EU accession, as well as EU member countries. It is especially important to emphasize that in 2003 machinery, equipment and tools represent the second most significant group of import products (at 18.5 percent of total imports), which is an indication that the import rate is growing because of development that is beneficial to GDP growth.6

COMMODITY IMPORTS STRUCTURE IN BIH
In US$ million
ExecutedRatios
Type of Commodity200020012002I-IX

2003
Grade



2003
2001

2002
2002

2001
2003

2002
2003

2000
Agricultural foodstuffs497545665571732110122110147
Beverages and tobacco141151187155206107124110146
Ore and construction materials176188222186248107118112141
Energy sources34738632029635511183110102
Hydrated alumina and inorganic chemistry products506150415512282110110
Medicines6766858110899129127161
Chemistry products and plastics326342387377503105116127154
Leather and footwear6279877398127110112158
Textiles153171202187249112118123163
Paper and celluloses8090121110147112135122184
Timber3237423648116114114150
Furniture747488648510011997115
Steel and iron143150190179238105126125166
Aluminum404135334410385126110
Machinery, equipment and tools513557668615807109120121157
Vehicles and spare parts26121923623030784108130118
Other1216188590133113
TOTAL BIH IMPORTS2.9743.1733.6033.2974.395107114122148
Source: Analysis of BiH external trade exchange, BiH Ministry of External Trade and Economic Relations, December 2003.
Source: Analysis of BiH external trade exchange, BiH Ministry of External Trade and Economic Relations, December 2003.

Timber, furniture and paper represent the most significant group of products exported from BIH, and that group, at the same time, does not include many imported substances. It is especially important to emphasize that, in 2003, the growth rate of exports of furniture and paper was significantly higher than the growth rate of exports of timber. Last year, that group of products represented more than a quarter of overall BiH exports. The second group of products, according to value of exports, is the group of products related to machinery, tools, vehicles and spare parts, which accounts for 17 percent of overall Bosnian and Herzegovinian exports, followed by leather, footwear and textiles with 14 percent of overall exports. Data on exports, in line with the research executed in the course of the Mid Term Development Strategy of BiH (PRSP) preparation, show that BiH has competitive advantages in wood processing, metal, leather and textiles industry and that, therefore, those branches should be designated as strategic branches for further economic development of the country. Agricultural and food related products account for just 5 percent of the overall BiH exports, while the coverage of imports with exports in that area remains on a very low level of just 9 percent.7

COMMODITY EXPORTS STRUCTURE IN BIH
In US$ million
ExecutedRatios
Type of commodity200020012002I-IXGrade

2003
2001200220032003
20032002200120022000
Agricultural foodstuffs3440464155118115120162
Beverages and tobacco1315151520115100133154
Ore and construction materials1521242229140114104193
Energy sources7769937510090135108130
Hydrated alumina and inorganic chemistry products572111103718
Chemistry products and plastics40353036478886134118
Leather and footwear839466689011370136108
Textiles981125557761144913878
Paper and celluloses1113192432118146168290
Timber18617219316421992112113118
Furniture4156756890137134120220
Steel and iron506963668813891140176
Aluminum172160154128171939611199
Machinery, apparatus and tools spare parts8694103123164109110159191
Vehicles and spare parts3232393647100122121147
Other47491548410610431469226
TOTAL BIH EXPORTS1,0421,0521,1301,0081,344101107119129
Source: Analysis of BiH external trade exchange, BiH Ministry of Foreign Trade and Economic Relations, December 2003.
Source: Analysis of BiH external trade exchange, BiH Ministry of Foreign Trade and Economic Relations, December 2003.

3. Priority activities in the area of external trade

3.1. Further liberalization of external trade in BiH

It is necessary to continue further liberalization of trade and the conclusion of new free trade agreements, in which the priority should be given to countries in the region. In addition to this, the practice of concluding asymmetric free trade agreements should be continued, wherever possible. Within the future Stabilization and Accession Agreement with the EU (SAA), BiH shall have to commit to progressive and reciprocal liberalization of services, especially, in compliance with the relevant WTO rules, especially Article V of GATS.8

There is criticism within the general public in connection with the justifiability of the existence of free trade agreements. However, the results of the enterprise sector studies show that the majority of companies in BiH assess the effects of the free trade agreements positively.9 As has already been mentioned, the most significant markets for BiH goods are the markets of the countries with which BIH has signed free trade agreements, and, in the 2000–2003 period, 38 percent of overall Bosnian and Herzegovinian exports was to those markets.10 Exports to those countries are showing constant increase and in 2003 they amounted to 42 percent of overall BiH exports. Contrary to this, imports from those countries grew at rates slower than the growth rate of imports from other countries and, in comparison with 2002, when they amounted to around 40 percent of overall imports, in 2003 their share fell to 36 percent of overall imports.

Despite public controversy, BiH has strong reasons for concluding bilateral free trade agreements, since these agreements, among other things:

  • a) Create conditions for increasing exports. BiH is a small economy that is forced to export, particularly in the conditions of a monetary policy based on the currency board principles. As mentioned above, in recent years BiH has managed to channel nearly 90% of its exports to the EU markets and to the markets of neighbouring countries. Several years ago the EU unilaterally granted very significant preferential treatment to BiH exports. However, our production was hardly able to satisfy the standards of the European markets, and the institutions which are authorized to issue certificates about meeting certain standards do not even exist. Therefore, it was necessary to find more suitable markets for our goods and signing asymmetrical bilateral free trade agreements with neighbouring countries was the most logical solution.11 One must stress that all countries which BiH signed FTAs have signed similar agreements with numerous other countries. This fact was crucial in the decision about negotiating and signing FTAs, because if they did not exist, BiH exports would not be competitive in these markets.
  • b) Help the poor. Low customs duties and liberal trade policies in previous years have helped the poor in BiH because they maintained low food prices.
  • c) Stimulate production dependent on imported semi-finished goods. Low customs duties have acted as stimuli to domestic production, which is based on imports of semi-finished goods, because inexpensive imports were made possible.
  • d) Contribute to lower level of smuggling. Though smuggling is a major problem, low customs duties and liberal foreign trade regime help reduce smuggling to a level lower than if the customs duties were higher.
  • e) Strengthen the quality and competitiveness of domestic product offering.The liberal imports policy contributes to improved competitiveness on domestic markets, which creates important preconditions for better quality of domestic products and for strengthening of competitiveness of goods offered on international markets, which then facilitates exports.
  • f) Stimulate inflow of foreign investment by securing greater market possibilities than is the case in BiH at the moment.As mentioned above, the existence of FTAs makes BiH more attractive to foreign investment because it opens the path to larger markets.
  • g) Contribute to faster integration into the EU.In addition to economic interests, signing bilateral trade agreements with countries in the region contributes to faster integration into the EU. By signing the Declaration of the Zagreb Summit in November 2000, held as part of the Stability Pact, heads of states and governments committed themselves to making agreements on cooperation that would result in free trade. At the end of June 2001 in Brussels, foreign trade ministers of the Stability Pact countries signed a Memorandum of Understanding committing them to conclude bilateral free trade agreements before the end of 2002. Finally, it should be noted that the EU conditions the application of the preferential treatment granted to goods exported from BiH with the readiness of BiH to engage in regional cooperation with countries involved in the Stabilisation and Association Process (SAP), specifically manifested through the establishment of free trade zones, pursuant to Article XXIV and other relevant WTO rules. The EU also issued guidelines on free trade agreements of the SAP-participant countries with EU candidate states or third countries.
  • h) Contribute to faster accession of BiH to full membership of the WTO The liberal foreign trade regime will facilitate WTO accession.

In this context it is important to emphasize that the liberalization of trade cannot, by itself, result in accelerated economic growth and that, in parallel with liberalization, the implementation of structural reforms needs to be accelerated, especially in regards to the privatization of enterprises, the improvement of the business environment, as well as infrastructure etc.

The fact is that the free trade agreements concluded so far have not, in spite of being asymmetric12, yielded the expected results in view of the reduction of the trade deficit and that they have, to a higher extent, led to the redirection of imports, from imports from other, more developed countries, towards imports from, in most cases, the Republic of Croatia, Slovenia, Serbia and Montenegro (trade division), and, to a lesser extent, to the growth of Bosnian and Herzegovinian exports (trade creation), and, in line with this, to a faster pace of economic growth in BiH.

A large trade deficit is a threat to macroeconomic stability of the country and to retaining the currency board arrangement, as an instrument for the management of the monetary policy. Reasons for the weakening of export results should, primarily, be sought in the lack of competitiveness of Bosnian and Herzegovinian exports, which is the result of the slow pace of implementation of reforms and the best illustration for this is the fact that roughly 60 percent of the BiH economy is still state owned. On the other hand, the lack of an institutional framework for meeting the standards in connection with the “acquis communautaire”, the lack of regulation in the domestic agricultural sector and fiscal restrictions related to increasing the level of support to agricultural production13 are also important reasons for weak export related results.

It is a known fact that the free trade agreements with the Republic of Croatia and Serbia and Montenegro were meant to lose their asymmetric features as early as 2004. The loss of the asymmetric features in the case of these two countries, with which BiH carries trade deficits, is a cause for concern. The BiH Council of Ministers reached a decision in December of 2003 according to which the implementation of the zero level customs rates on a number of products from the Republic of Croatia and Serbia and Montenegro was prolonged by three months. In view of the state of competitiveness of domestic agricultural production, it is necessary to ensure that customs protection is retained for these types of products, by ensuring the following through bilateral discussions:

  • Extension of customs protection for the group of agricultural products in which BiH has a special interest over the coming two years,
  • Prolonging the application of standards related to the “acquis communautaire” for a year and the acceptance of Bosnian and Herzegovinian technical standards in view of quality and safety of products,
  • Sign Veterinary Protocols with countries with which BIH signed free trade agreements

3.2. Provide incentives for a higher level of harmonization of external trade policies for countries in the region (signatories to free trade agreements)

An important dimension of the Stability Pact is the liberalization of external trade in the countries of the region. With that objective, a Working Group for Trade was formed, representing an important forum for the signatories to the Stability Pact.14

In addition to trade liberalization within the member countries of the Stability Pact, it is of special importance to initiate the harmonization of external trade policies of all country – signatories to free trade agreements, with other trade partners, especially in the EU. It is also important for the signatories to free trade agreements to keep liberalizing their trade regimes towards the EU (decreasing the tariffs for industrial goods even further), in parallel with the full implementation of free trade agreements and the elimination of all non-customs barriers, as well as to maintain equalized policy in that regard. This would have a strong positive impact, as it would decrease the danger of the relocation of certain industrial branches from less developed countries of the region to more developed ones (as in the case of South-South trade integration), but it would also equalize the conditions for doing business with EU companies. In connection to this, it is necessary to initiate the signing of a regional free trade agreement within the Working Group for Trade of the Stability Pact, which would replace the existing, mutually harmonized bilateral agreements.15 In this way, trade barriers, relating to the rules on the origin of goods, could be eliminated or reduced, which is one of major causes of the smaller scope of exports from BiH to the EU.

In the context of further management of external trade policy, it is necessary to ensure additional strengthening of the BiH Ministry of External Trade and Economic Relations of BiH.

3.3. Conclude agreements recognizing so-called diagonal accumulation

The other way to reduce the adverse effect of the implementation of the rules on the origin of goods is accession to the Pan-European Agreement on Origin and Accumulation. The existing free trade agreements and rules on origin envisage bilateral accumulation only, which is a disincentive for linking different production processes, with the objective of exporting to the EU.16 In this context, the recognition of the so-called diagonal accumulation within the signatory countries to free trade agreements and between all those countries and the EU would, without a doubt, improve the situation in this regard.17

3.4. Establish an adequate level of coordination in the implementation of state laws on external trade

The BiH Indirect Taxation Board, which is in the phase of establishment, shall contribute to a higher level of coordination of external trade policies, as both the policy and administration for policy execution shall be concentrated in one area. It is necessary to ensure that the authorities at the BiH level start supervising the implementation of laws in the area of external trade and implement sanctions for failing to follow them. Solutions have to be sought in order to avoid differing interpretations and blockages in the implementation of state level laws in this area. In this regard, it is necessary to adjust terminological differences between the laws on external trade activities and customs policy. It is of special significance to adjust the implementation regulations in the area of customs policy with the European Standards and simplify procedures in internal processing systems for textile companies. These measures should also be implemented in the course of the transitional period, until the full functionality of the Indirect Taxation Administration in BiH is established.

In the area of external trade balance, there is a need to manage payment and balance statistics. In this context, it is necessary to strengthen the capacities of the Central Bank of BiH for monitoring sectoral and entity capital flows from BiH and into BiH, so that on the basis of those information measures could be proposed for the equalization of the payment balance.

The implementation of free trade agreements shall result in a decrease of customs revenues, which still represent a significant source of revenues for entity budgets. Therefore, in the context of the establishment of the BiH Indirect Taxation Administration, it shall be of special importance to improve the level of efficiency in the operations of the customs administration (to be formed at the state level), in order to ensure fiscal stability until the introduction of the VAT, which shall become the most important fiscal revenue source.

It is of special importance, in line with the recommendation of the EU Feasibility Study, to strengthen the Ministry of Foreign Affairs, for it to be prepared for activities it shall face in connection with the negotiations on the WTO membership, but also for the conclusion of the Stabilization and Accession Agreement (SAA).

The External Trade Chamber is a significant institution, and coordination in the preparation and realization of measures in this area with that institution should also be ensured.

3.5. Review the existing system of customs tariffs, especially for strategic branches of industry

In the course of the preparation of the Mid Term Development Strategy of BiH (PRSP), studies were undertaken with the objective of defining the strategic branches of industry. On the basis of a number of studies, executed by the GTZ, USAID and inter-entity working groups, a conclusion was made that BiH has competitive advantages in metal processing, wood processing, the textile and leather industries, food processing and electricity production (see the chapter relating to sectoral priorities in the area of industry). Because of a direct influence on increasing productivity levels and, through this, increasing the level of competitiveness of production, the status of a strategic branch of industry should also be given to the new technologies (IT) sector.

Tourism should also be evaluated as an export directed activity, and it should be included in the ranks of industrial branches for which future fiscal and other exemptions should be ensured.

In line with this, it is necessary to invest efforts into the reduction of customs tariffs in the import of raw materials for all the above listed strategic industrial branches. It is also necessary to phase out customs duties on reproductive materials that are not produced in BiH. In order to define policy in this area, in as precise a way as possible, it is necessary to:

  • - continue activities initiated by the Mid Term Development Strategy of BiH (PRSP) in the definition of strategic industrial branches, as well as through the drafting and adoption of a study of industrial policies,
  • - strengthen statistical institutions in order to ascertain, in as precise a way as possible, the balance of demands for the import of reproductive materials, and in order for an analysis of options for their production in BiH to be prepared,
  • - adopt a new BiH Law on Customs Tariffs.18

Apart from this, it is also necessary to regulate the import of old equipment and machinery, through legislation. In view of the fact that the level of importance of customs, as a source of fiscal revenues, is going to decline (because of the signing of free trade agreements), it is necessary for domestic companies, just like foreign ones, to be exempt from paying customs duties on the import of machinery and equipment for production.19

With the objective of attracting new investments for certain types of economic activities, such as, for example, assembling cars, it is necessary to redefine the level of customs tariffs.

In parallel with these activities, it is necessary to define strategic branches of production in agriculture, in order for options to be opened for maintaining the existing level of protection, or even increasing it, through negotiations with the WTO, EU and bilateral partners, with which free trade agreements were signed. It is especially important for a so-called transition period to be ensured for this type of production, in the course of the coming negotiations with the WTO. The most significant reason behind this is the existence of fiscal restrictions for increasing the level of subsidies. Options for the introduction of the so-called seasonal customs rates should also be reviewed.

3.6. Strengthen the institutional framework for the utilization of trade exemptions, approved by the EU and the majority of developed countries for BiH

As has already been underlined, BiH is not able to utilize the trade exemptions approved to it unilaterally by the majority of developed countries due to the lack of adequate institutional framework for the certification of goods in international trade. This is one of the reasons why the existing free trade agreements have failed to yield the expected results.

In line with the recommendations of the EU Feasibility Study, it is necessary for BiH to improve its capacities for ensuring the authenticity of certificates on origin. It is necessary to adopt a number of legislative regulations, with the objective of meeting the requirements pursuant to the “acquis communautaire”, for the definition of technical requirements for products and conformity assessment, which would define new principles in the area of technical legislation, transferred from the EU, as well as the exact allocation of authority in the adoption of new regulations, by individual types of products. It is also necessary to adopt by-laws necessary for the implementation of the Law on Quality Control of Imported Goods and Goods for Exports, establish new institutions for standardization and accreditation, meeting the requirements of the WTO and the EU, and adopt a number of other legislative and regulative enactments, as well as establish new and strengthen the existing institutions.

In that context, special efforts must be put into the establishment of legislative and institutional frameworks for intellectual property protection, which is, at the moment, to a high extent unregulated.

It is of special importance to review the functioning of the so-called free trade zones, and prevent the practice of using those zones as “irregular” entry points to the BiH market, which can, potentially, undermine the preferential treatment granted by the EU.20

3.7. Ensure BiH accession in the WTO as a full member

The constitutional definition of freedom of movement of people, goods, services, and capital, which has been developed in the BiH laws on foreign trade policy, customs policy and policy on direct foreign investment should be the basis for negotiations on WTO accession. Joining the WTO will require adopting international standards on economic policies, institutions and the legal system. This will naturally be subject to negotiations, especially with respect to the duration of the transition period. BiH has submitted its responses to questions received from the WTO member states and the Secretariat. The first meeting of the Working Group was held in early November 2003 and the preparations for the second meeting are underway.

In the course of the negotiations on membership, it is necessary for BiH to utilize the advantages provided to smaller countries in transition in order to ensure a transitional period, as long as possible, for the adjustment of customs rates and legislation, on individual WTO agreements, and in line with the rules of that organization and obligations accepted. In this context, it is necessary to prepare an initial list of concessions for goods, according to individual customs tariff items and the List of Liabilities in services.

As the average customs rate in BiH is low (around 6 percent), and lower than the majority of WTO member countries, especially transition countries, potential demands for a more significant reduction of customs rates should not be accepted. However, this does not relate to the reduction of “zero to zero” customs rates from products in the product groups for which the bodies of the WTO have issued decisions. Finally, in view of the fact that customs rates for a certain group of products in BiH are significantly lower than other member countries of the WTO, it is necessary to request for their increase to be facilitated, up to the present level in other member countries.

3.8. Simplify customs procedures and strengthen statistics in the area of external trade

The introduction of the ASYCUDA system provides significant possibilities for the simplification of customs procedures, which should certainly be taken advantage of. It is especially necessary to simplify the customs procedure for the execution of commissioned (loan) activities, through the adoption of a special rulebook. With the same objective, it is necessary to reduce the number of customs offices and customs desks, as well as the number of border crossings for the trade of goods (currently there are 25). It will also be necessary to establish a database with the Ministry of External Trade and Economic Relations on external trade representative offices, link this unified with the entity authorities, strengthen border inspection, modernize border crossings, and strengthen the control over the operation of free trade zones.

In the context of EU recommendations21, it is necessary to find a model for the establishment of adequate border inspection services, which would encompass market, sanitary, veterinary, and agricultural and product safety inspections. It is also necessary to regulate and harmonize the operations of phyto-sanitary, veterinary and customs services on border crossings in compliance with the EU standards, and especially in regard to timing, location etc.

An important task is also to strengthen statistical institutions, as well as the Statistics Department with the Central Bank of BiH, in connection with data relating to external trade.

3.9. With the objective of reducing trade deficits, it is necessary to ensure an increased scope of protection of domestic agricultural production

A higher level of protection of domestic agricultural production can ensure a reduction of the trade deficit, because of the fact that the food related products account for the majority of imports into BiH. Due to fiscal restrictions for ensuring a higher level of incentives for agricultural production, it is necessary to ensure the continuation of the asymmetric approach to the implementation of free trade agreements. It is also necessary to prepare a strategy for export substitution. Also, in the course of the negotiations on the accession of BiH to full fledged membership in the WTO, it is necessary to ensure favourable status for BiH in order to utilize exemptions. In the same context, it is necessary to tighten the procedures for the control of the origin of products, in order to prevent the import of products not covered by free trade agreements into our country. Finally, it is also necessary to implement the “Buy Domestic” campaign continuously.

3.10. Establish institutional framework for the protection of domestic consumers

BiH is importing goods without checking their safety and without continuous control. Therefore it is necessary to create a policy of active customer protection in compliance with EU standards. In this context, it is necessary to establish independent and efficient administrative structures that will ensure the fulfillment of the basic requirements concerning health and safety (Competition Council of BiH, entity offices for competition and consumer protection). It is of special importance to adopt bylaws and establish an institutional framework for the implementation of the BiH Law on Consumer Protection.

3.11. Ensure reciprocal application of rules in external trade practices

BiH imports goods without conducting quality and other standard types of controls. On the other hand, in addition to harsh competition, BiH exports are exposed to exasperatingly long and expensive procedures of securing entry permits for goods moved into the markets of BiH foreign trade partners. BiH exporters themselves are helpless in this matter and need the support of the state. Establishing a system of quality control for imported goods, and imposing reciprocity in trade practices with foreign partners would serve to stimulate domestic production and reduce trade deficit.

Together with the FTA-signatory countries, it is necessary to eliminate the so-called non-customs barriers. While in the case of Albania, Croatia and Macedonia, and all WTO members, there are no formal customs barriers. Serbia and Montenegro approve imports for certain types of goods. Contrary to Serbia, which requires import permits for a certain number of products from the area of metal processing industries, Montenegro has the most rigorous stance in the region and it requires import permits for a number of industrial branches.22 Macedonia and Slovenia have tightened the procedure for verification of the origin of products, which has slowed down the export of goods from BiH to those countries. It is necessary for BiH to undertake similar steps.

4. Support to exports

4.1. Recent trends

In 2001, 2002 and the first eight months of this year, a growth in industrial and other production and exports was recorded, which was executed in parallel with a continuous reduction of the number of those employed. The reduction in the number of those employed by 5,800 persons, or 1%, implies that productivity has increased, together with, most probably, all other qualitative parameters of BiH economy operations. Exports have grown, in comparison with last year, but imports are also showing constant growth and at a higher rate. A study executed by the World Bank, in cooperation with local experts, showed a trend toward increase in exports with privatised enterprises. According to this study, of the overall scope of production of privatised enterprises analysed, exports increased from around 32 percent in 2002 to 50 percent, mostly to markets of the former Yugoslavia.23

4.2. Identified problems preventing the growth of exports

4.2.1. Slow private sector growth

The slow process of privatisation and weak inflows of foreign investments, pillars of exports in the majority of transition countries, as well as the still unfavourable business environment, represent obstacles for the further growth of the private sector, in which the most significant results are expected in relation to exports. On the other hand, the low level of commitment to exports among the domestic companies is a cause for concern.24

4.2.2. Lack of competitiveness of domestic production

Around 60 percent of the BiH economy is still in state ownership, which is the cause of its lack of competitiveness. The lack of competitiveness of domestic production is mostly reflected in the lower level of productivity, more expensive labor force in comparison with the region, high tax burdens, high level of smuggling, inefficiency of courts, high transport costs, relatively expensive capital, and high costs of electricity and PTT services. This is confirmed by the Competitiveness Review Study of BiH, in global proportions, executed in 2001 and 2002, by local experts, mostly from the Economic Faculty in Sarajevo (MIT Center). Contrary to this, the trade deficit is even further aggravated by the constrained local production and its low quality. This fact, together with the significant level of local demand, determines the scope of imports.25

It is necessary for BiH to improve industrial competitiveness through improved corporate governance and increased availability of financing.26

4.2.3. Lack of adequate institutions for exports to the EU

On the level of the state, as well as on the entity level, institutions, which would satisfy the criteria of the “acquis communautaire”, have not been developed.

These institutions should enable the certification of products that would be recognized both within the region and on the internal market of the EU. With this objective, it is necessary to ensure the adoption of an adequate legislation concerning the products, as well as a wider regulatory framework of institutions from the domain of quality provision infrastructure.

4.2.4. Fiscal restrictions for increased incentives for agricultural production

Regardless of the evident necessity of increased incentives for domestic agricultural production, this is not possible due to constrained budgetary resources.

4.3. Priority activities

4.3.1. Prepare a comprehensive strategy for increasing the scope of exports, which would define the following, on the basis of efforts invested so far in the preparation of the Mid Term Development Strategy of BiH (PRSP):

  • the areas of production in which BiH has competitive advantages,
  • the most favourable markets for goods and services from BiH,
  • the institutional framework for the promotion of BiH exports,
  • sources for support to exports.

The preparation of the Strategy should be coordinated with the research continuously executed in this area by the External Trade Chamber.

4.3.2. Accelerate reforms in order to increase the level of industrial production

The main problem for BiH exports is the low level of production in general, and especially of production able to compete in external markets. Production capacities, which are in part devastated and in part outdated, cannot offer competitive products. All the segments of the prewar economy are facing the loss of international markets, which changed in the meantime. The other problem is that a significant number of processing industrial capacities are based on imported raw materials. This does not enable them to utilize the preferential treatment in the most important export markets.

Insufficient commodity funds for external markets and weak competitiveness of BiH products are also the result of the unfavourable business environment (lack of a single economic space in BiH, unfair competition, slow courts, high costs and long registration procedures, corruption), the slow privatisation process, unfavourable conditions for financing and expensive banking services, relatively high tax burdens, high costs of public services (electricity, PTT services). A separate problem is posed by the relative lack of competitiveness of the labour force in BiH in comparison with the region.27

In order to achieve a higher growth rate of industrial production, it is necessary to ensure accelerated growth of the private sector, through the following:

  • improvement of the business environment for domestic and foreign investments,
  • finalization of the privatisation process, especially in relation to strategic enterprises which have to become the pillars of exports,28
  • attracting more foreign investment which, aside from new technologies and new management systems, also brings the benefit of new markets.

4.3.3. Implement reforms that will result in an increase of the competitiveness of BiH exports

In order to increase the level of competitiveness of domestic production in the international market, it is necessary to implement reforms in a number of important areas:

  • labor markets,
  • indirect taxation,
  • judiciary,
  • strengthening capital markets,
  • liberalization energy and PTT service markets,
  • reduction of tax burdens.

In the same context, it is necessary to:

  • introduce exemptions for investments in new technologies, as well as restrictions on the imports of outdated technologies;
  • adopt regulations and bylaws for the Law on Customs Exemptions on Equipment Intended for Production.29

4.3.4. Ensure incentives for export oriented enterprises

Support for enterprises in the areas of strategic industries needs to be ensured through the following:

  • establishment of an export crediting bank (which needs to be established through the transformation of the IGA)
  • strengthening the existing Guarantee Fund30 for export oriented enterprises,
  • establishment of a Fund for assisting export oriented enterprises in receiving CE and ISO standards.
  • IGA as an official BiH Export Credit Agency

In order to establish a successful export credit agency, it is necessary to:

  • Create the legal framework for the functioning of the state export credit agency. The adoption of the BiH Law on Establishing Conditions for Increasing Exports and on the BiH Export Credit Agency, would provide this Agency with clearly defined regulations for functioning, which would enable it to provide effective support to exporters and banks.
  • Transfer funds to the IGA balance account. Through a decision of the Council of Ministers of BiH and with the World Bank’s approval, transfer funds from two loans and three grants, from the accounts of the BiH State to the IGA account, this would represent a necessary increase in the balances of the IGA, which are at the moment insufficient for a proper export credit agency.
  • Financially strengthen the IGA. Within one year from enacting the BiH Law on Securing Conditions for Increasing Exports and on the Export Credit Agency, it will be necessary to secure additional resources for strengthening the agency’s financial situation. Giving medium-term loans to buyers of BiH exports will require significant financial resources, but it will enable BiH companies to enter quality contracts that they could fulfil technically, if only they would have adequate financial support that is equal to that of their competitors. IGA currently uses World Bank funds, as well as grants from some donor countries. This is not sufficient capital for a serious and comprehensive support to BiH exporters. IGA compensates for its lack of resources by securing contracts with private insurance companies such as Lloyd’s, and with other European re-insurance houses. These contracts are still unfavorable for BiH because insurers and re-insurers often reject good business due to their own risk assessment. Thus, IGA cannot support solid export contracts, which would be in the interest of the state.
  • Adopt the BiH Law on Buyoff of Export-Related Claims (Factoring. At this moment, the IGA provides factoring services. However, the lack of an adequate legislative framework constrains the capacities of the IGA and BiH banks to provide working capital for exporting enterprises in BiH in a more efficient way through the buyoff of export-related claims.31

4.3.5. Create preconditions for the reduction of transport costs

The revitalization of rail transport would contribute to the reduction of transport related costs for domestic exporters, in the same way that enabling the BiH economy to utilize the port of Ploče would. The construction of the 5C Corridor would also result in more efficient and less expensive transport for Bosnian and Herzegovinian goods.

Reciprocal elimination of transport permits for trucks and collection of road toll should be agreed with those countries with which BiH has concluded free trade agreements.

In addition, it is necessary to gain membership to the Association of Transporters with the External Trade Chamber and the IRU (International Road Transport Union), and to provide guarantees for acquiring TIR and ATA carnets, which would significantly facilitate our transporters in crossing borders. The introduction of the TIR system in BiH is ongoing within the External Trade Chamber of BiH, which needs support in those activities. However, regardless of the fact that BiH is not a signatory to the ATA Convention, legislation in BiH allows for the implementation of the ATA carnet. Therefore it is necessary to establish a mechanism for the utilization of the ATA carnet and enable the transporters from BiH to use this advantage too.

In line with the recommendations of the EU Feasibility Study, it is necessary to implement the already signed TIR. In connection to this, it is important to conclude a guarantee agreement between the External Trade Chamber of BiH and the BiH Customs Administrations, which is an important prerequisite for the accession of BiH to the TIR system. It is necessary to regulate the conditions for acquiring the right to provide international freight forwarding on the level of BiH in compliance with EU standards and simplify customs procedures in regards to exemptions from freight forwarding guarantees when transporting goods up to 48 hours. In view of the significant legislative variations in this area, it is necessary to adopt the Law on Transport on the level of BiH, which will be harmonized with the remaining legislative and regulatory enactments. With this objective, it is necessary to adopt bylaws for the implementation of the BiH Law on International and Inter-entity Road Transport, as well as the Decree on Road Toll. Because of the lack of these bylaws, only domestic transporters pay road toll, while the foreign transporters do not. This practice, through which the local legislators put local economic entities in an unfavorable position in comparison with foreign ones, needs to be corrected. Domestic transporters also pay road tolls in all other countries.

In the area of CEMT permits, it is necessary to ascertain clear criteria for their issuance on the BiH level and execute regular monitoring of the control of their usage.

It is especially important to achieve an agreement with those countries that are the main trading partners for the simplification of procedures for awarding visas to businessmen.

4.3.6. Standardize laws and institutional framework for exports

“To meet the conditions of the Stabilization and Association Agreement (SAA), BiH should gradually harmonize its laws with the EU technical regulations and the EU practices in standardization, metrology, acreditation and conformity.”.32 Only firms which, on their own initiative, went through a long, complicated, and expensive procedure of harmonizing their production with the EU regulations can export into the EU. Products of animal origin and agricultural products which meet the requirements of international veterinary and sanitation regulations still cannot be exported, until all the EU requirements have been met, which requires the establishment of the legal framework and the necessary institutions at the level of BiH. ”BiH needs laboratories and certification bodies which may verify that the agricultural goods conform to the EU acquis in this area.”33

In addition to being a barrier for meeting quality requirements, the non-existence of adequate regulatory and institutional framework results in poor utilization of a number of privileges arising from the concluded bilateral free trade agreements and other unilateral preferential treatments granted to BiH by the EU34 and most developed world countries.

In view of all this, it is necessary to:

  • adjust all future laws and regulations with the requirements of the “EU acquis communautaire” (old and new approach),
  • provide incentives for the development of infrastructure in the area of standards, certificates and quality, in compliance with the EU rules,
  • provide incentives for the usage of technical regulations and procedures for conformity assessment, compatible with the rules and procedures of the EU,
  • encourage the participation of BiH in the work of various European and international organizations,
  • initiate procedures that would result in the conclusion of agreements with the European Commission and the European Economic Area (EEA) on conformity assessment and product acceptance,35
  • harmonize all adopted laws with the “EU acquis communautaire” (old and new approach).
  • establish a quality control and monitoring system for the BiH market, in compliance with the requirements of the EU market and the WTO agreements on technical barriers to trade (TBT), sanitary and phyto sanitary supervision (SPS).36

The highest level of priority in this area should be the establishment of a relevant body on the level of the state of BiH for the preparation of technical legislation in regard to the free flow of goods within the EU market.

In view of the existing situation, and in compliance with the aforementioned, it is necessary, through bilateral discussions with signatory-countries of free trade agreements to ensure our exporters a delay in the implementation of standards on the basis of the “acquis communautaire”, to one year. In the course of this period, country-signatories of free trade agreements would accept the technical standards of our country, which would be regulated through special protocols. In this context, it is especially important to conclude an Agreement on Veterinary Medicine with the Republic of Croatia, which has represented an obstacle for the export of Bosnian and Herzegovinian products of animal origin to that country so far.

4.3.7. Organize export promotion

Current activities on Bosnian and Herzegovinian export promotion are insufficient, as well as fragmented from the institutional point of view. Within the BiH Ministry of External Trade and Economic Relation there is a Department of Exports. There is also a BiH Foreign Trade Chamber, while the BiH Ministry of Foreign Affairs is developing special activities in regards to so-called economic diplomacy, which should be active in the promotion of Bosnian and Herzegovinian exports. Finally, the IGA is functioning on the level of BiH, providing support to exports, and it should develop into a state export-crediting bank.

The promotion of exports in the conditions of BiH should be focused on the following:

  • Ensuring information on favourable markets for the export of goods and services from BiH and organizing public campaigns, in order to get the local enterprises acquainted with that information,
  • Providing consultant services in regards to the analysis of certain markets, production of goods and provision of services for exports (such as, for example, in connection with designs etc.), organizing marketing for presentations on interested foreign markets,
  • Acquainting local managers with regulations on the fulfilment of standards and procedures for exports to interested markets, organizing training for marketing presentations on those markets, as well as training for export financing, ensuring guarantees, establishing joint ventures etc.,
  • In cooperation with the BiH Ministry of Foreign Affairs, it is necessary to simplify the procedure for acquiring business visas for businessmen in BiH,
  • Within the diplomatic and consolatory network, it is necessary to strengthen the economic departments of embassies on those markets assessed as especially interesting for BiH.

From the institutional point of view, activities on export promotion should be located in the BiH Ministry of External Trade and Economic Relations.37

Notes

1Thus, for instance, 60% of total Hungarian exports are realized by foreign companies based in that country.
2Unilateral trade privileges are insufficiently used because there are no adequate institutions in the country.
3“The Report of the EC to the Council on the Preparations of BiH to Start Negotiations the on Stabilization and Accession Agreement with the EU” (Feasibility Study), Brussels, November 18, 2003.
4Generalized System of Preferences – EU system of trade exemptions.
4 Global System of Trade Preferences – System of trade exemptions between developing countries.
4 Despite the fact that such support has not been used enough in current BiH situation, either due to insufficient budget resources, or due to unregulated internal market.
4 Activities in connection to admission to WTO last on average 5,5 years, starting from the submission of the Memorandum on Foreign Trade Policy, having in mind that the shortest waiting period was 2 years and 4 months (Kyrgyz Republic).
4 In our case, these will mostly be regulations on gradual reduction of import tariffs to other countries, as well as regulations on accepting international standards for trade in services and intelectual property.
4 The final draft of BiH Working Group Report should include all obligations that BiH has accepted, including lists of required customs tariffs with individual tariff numbers, tariff calculations and calculations of maximum compounded tariff according to percentage defined by particular tariff list, transformation of certain fiscal obligations into absolute amounts (customs evidentiary list, for instance), requirements of domestic support to agriculture, requirements of limiting export subsidies, lists of requirements in services sector, ultimate exemptions from national treatment, etc.
4 This is especially important given the prevalent practice in BiH to decide on, and give interpretations of, foreign policy and legislation at various levels, even without authority sometimes. Disputes among WTO member countries are very frequent. Fines are quantitatively expressed, and sometimes are monetary. In cases where BiH has introduced a measure that contravenes WTO regulations (for instance, a temporary ban on imports of petroleum by the RS Government in 2002), WTO affected countries can impose very high additional tariffs on any BiH exports (aluminum, for instance), and practically prevent us from exporting.
4 IMF Trade Statistics 2002.
4 BiH Statistics Agency, preliminary estimate.
4 IMF Trade Statistics 2002.
4 BiH Statistics Agency, preliminary estimate.
4 Study on Achieved Results and Conditions for Improvement of Privatisation and Restructuring of Industrial Enterprises in BiH, World Bank BiH, Sarajevo, October 2002, prepared by Muris Čičić, Ph.D.)
4 Implement Action Plan on Business Climate Adjustment for Domestic and Foreign Investment, adopted by the Ministry Council of BiH and entity governments.«Characteristics of Overall Trade Exchange of BiH for twelve months of 2003», BiH External Trade Chamber, January 2004.
5The Report of the EC to the Council on the Preparations of BiH to Start Negotiations the on Stabilization and Accession Agreement with the EU” (Feasibility Study), Brussels, November 18, 2003.
6Analysis of BiH external trade exchange, BiH Ministry of Foreign Trade and Economic Relations, December 2003.
7Analysis of BiH external trade exchange, BiH Ministry of Foreign Trade and Economic Relations, December 2003.
8The Report of the EC to the Council on the Preparations of BiH to Start Negotiations the on Stabilization and Accession Agreement with the EU” (Feasibility Study), Brussels, November 18, 2003.
9Early Warning System, Quarterly Report, April-June 2003, UNDP.
10Analysis of BiH external trade exchange, BiH Ministry of External Trade and Economic Relations, December 2003.
11Free trade agreements with countries in the region are also needed because tax burdens in all the neighboring countries are very high. If BiH did not have free trade agreements with these countries, our goods would be very significantly non-competitive on their markets. For instance, average ad valorem customs tax is 12.0% in Albania, 12.4% in Croatia, 13.4% in Yugoslavia, 16.5% in Macedonia, 12.2% in Slovenia, and 12.0% in Turkey. At the same time, average ad valorem customs tax in BiH is 6.8%.
12Such agreements on asymmetric establishment of free trade were concluded with Croatia, Slovenia, Yugoslavia, Macedonia, Turkey and Romania. BiH was given free and custom exempt access for all its goods to the markets on the aforementioned counties right away, while their goods have access to the BiH market only with gradual reduction of customs and other import duties.
13Which is a precondition for exporting to countries with which free trade agreements were concluded.
14Besides that initiative, there is also the SECI initiative with the same objective – liberalization of external trade.
15In view of all the advantages, one of the possible solutions would be to establish a customs union of all countries in the region. However, that option implies serious political difficulties as all countries of the region are more focused on the integration in the EU market.
16Because the inputs of all countries signatories to free trade agreements are treated as imports.
17Because the inputs of all countries signatories to free trade agreements are treated as imports.
18Upon a proposal of entity governments, the Council of Ministers of BiH adopted a conclusion in November of 2003 that a new BiH law on customs tariffs was to be drafted. A special commission was established with that objective, working on the propose text of the law.
19The existing Law on Foreign Direct Investments puts domestic companies in an unfavorable position, as foreign investors are exempt from paying customs duties on imports of equipment and machinery for production.
20“Commission Report to Council on BiH Readiness for Initiation of Negotiations on Stabilization and Accession Agreement with the EU” (Feasibility Study), Brussels, November 18th 2003
21The Report of the EC to the Council on the Preparations of BiH to Start Negotiations the on Stabilization and Accession Agreement with the EU” (Feasibility Study), Brussels, November 18, 2003.
22Policies and Institutions in the Countries of SEE in the EU Stabilization and Association Process, Regional Report, March 28, 2003
23Study of Performance and Conditions for Improvements from Privatization and Restructuring of Industrial Enterprises in BiH, World Bank BiH, Sarajevo, October 2002
24Presentation of Ante Domazet, Ph.D. on the «Strategic directions of external trade policy and support to exports» workshop, BiH External Trade Chamber, Sarajevo, December 3rd 2003
25The Report of the EC to the Council on the Preparations of BiH to Start Negotiations the on Stabilization and Accession Agreement with the EU (Feasibility Study), Brussels, November 18, 2003.
26The Report of the EC to the Council on the Preparations of BiH to Start Negotiations the on Stabilization and Accession Agreement with the EU (Feasibility Study), Brussels, November 18, 2003.
27The major element affecting poor competitiveness of the labor force in BiH in comparison with the region is lower productivity owing to relatively older labor force in the official sectors, and higher wage levels.
28Within the research used in the preparation of the PRSP, a number of industrial branches were identified that could be included in the ranks of strategic ones: metal processing industry, textiles and leather, wood processing, food production, electricity and new technologies.
29Foreign investors are exempt for paying customs duties under this law, and therefore adequate bylaws and regulations should be adopted for exempting the domestic private sector form paying customs duties.
30The Guarantee Fund was formed with the support of USAID in order to support export-oriented enterprises.
31IFC, a part of the WB Group dealing with private sector support, is included in the preparation of the Law on Buyoff of External Claims, through its specialized agency for the region of South East Europe (SEED).
32The Report of the EC to the Council on the Preparations of BiH to Start Negotiations the on Stabilization and Accession Agreement with the EU (Feasibility Study), Brussels, November 18, 2003.
33The Report of the EC to the Council on the Preparations of BiH to Start Negotiations the on Stabilization and Accession Agreement with the EU (Feasibility Study), Brussels, November 18, 2003.
34To be able to use all types of preferential treatment, it is necessary to satisfy Regulations on origins of goods, which can done either through Form EUR.1, or Form A. In addition to satisfying this requirement, BiH products must satisfy in quality, which should be standard (according to EU). Achieving EU standards and other quality certifications represents the biggest problem for BiH exporters and it is the reason why they cannot make use of preferential treatment in practice; meaning they rarely achieve allowed quotas.
35The Report of the EC to the Council on the Preparations of BiH to Start Negotiations the on Stabilization and Accession Agreement with the EU (Feasibility Study), Brussels, November 18, 2003.
36Croatia, Albania, Macedonia and, lately, even Serbia and Montenegro have made significant steps towards the fulfillment of important standards in compliance with the requirements of the EU market. In the sector of pisciculture, alone, Albania has 24 locations for fish production certified by the EU, while BiH has none. Of all the countries in the region with which BiH has signed free trade agreements, BiH is the only one with not even one location for production certified by the EU.
37Within the BiH Council of Ministers there are views that export promotion might be entrusted to FIPA.

III.7. PUBLIC ADMINISTRATION REFORM

1. Goal

1.1. Establish functioning system of public administration at all levels

1.2. Establish a civil service modelled after the EU practices

2. Situation

In the “Public Administration Reforms’ document of March 2003, the government in BiH recognized the fact that public administration fails to meet the needs and expectations of citizens. A study done by the UNDP demonstrated that only 23 percent of citizens hold a favorable opinion about the work of the public administration, 52 percent is dissatisfied with its work, and 25 percent are undecided.1 The administration is slow and non-transparent, and the multi-layered system, encompassing the state, entity, cantonal and municipal bureaucracies often acts from opposing positions. Employees are insufficiently qualified and lack the skills required for working in public administration, while the system has never been standardized. These weaknesses are the inheritance of the past. The principles of professionalism and nonpolitical stance in the work of the civil service are only slowly taking hold. A clear legal framework which would define the system of accountability within the civil service is not yet in place.2

BiH is facing acceleration of implementation of important reforms and a huge effort related to preparations for the EU accession. The success of this effort will depend on the pace of implementation of the public administration reform. On the other hand, the need for fiscal consolidation of the budgets of all levels of government in BiH make the reorganization of public services urgent. Within the administration, the number of employees (at 4.5–5% of the population) is within the average for Central and Eastern European countries3, but the salaries in the public administration are higher than in the rest of the economy4, and far exceed the average for transition countries.

The adoption of the civil service laws at the level of the state, entities and the Brčko District represents a major progress in the process of establishment of the public administration system. While the implementation of these laws has begun in the RS and at the state level, in the FBiH, where 70 percent of all civil servants in BiH are employed5, the implementation of this key law is only to begin. It is important to note that the RS initiated the process of civil service reform as early as 1997. The legal framework was put in place, and the board of directors and operational bodies for the preparation of the reform project had been set up. In 2000, the RS Government verified the reform program, and the Action Plan for Civil Service Reform (2003–2006) was adopted in May 2003.

2.1. Inter-Ministerial Working Group for Public administration Reform

In conformity with the decisions of the Peace Implementation Council (PIC),6 which supported the ongoing public administration reform activities in BiH and adopted the ‘Public Administration Reform’ document, the Inter-Ministerial Working Group for the Public Administration Reform was established,7 to oversee and coordinate these activities, with the special mission to work out a detailed strategy of public administration reform in all of BiH by the Fall of 2004, and to adopt the action plan for its implementation.

The main goal is to create solid, efficient, reliable and transparent public administration in all of BiH, with a qualified and professional civil service at all levels. The strategy for meeting this goal should be devised jointly by all levels of government in BiH, after a comprehensive public debate and analysis of the country’s needs in this area. It is particularly significant that citizens, businesspeople and civil society representatives are consulted. The reforms that are underway should be accelerated, and the prepared plans should be incorporated into the public administration reform strategy which should be ready in the Fall of 2004.8

3. Priority activities

3.1. Conduct a functional review at all levels of government

The public administration reform in BiH is particularcly complex and demanding, because available information on the present state of the administration is incomplete and unreliable. To plan and monitor the implementation of reforms successfully, a functional review should be conducted at all levels of government, in order to determine the present situation, define sectors and types of needed reforms.

3.2. Adopt the Public Administration Reform Strategy and implement its action plan

This strategy should be developed along the lines set by the ‘Public Administration Reform – Our Program’ Document, adopted by the BiH Council of Ministers and entity governments at the meeting of the PIC Steering Board (in Brussels, March 28, 2003), which set the following priorities:

  • establish a more efficient and better organized public administration,
  • ensure conditions for spending tax revenues in an economical and transparent fashion,
  • establish a professional civil service, composed on the basis of the principle of equal representation,
  • ensure functioning of the public administration in accordance with the best practices of the EU,
  • ensure that public services are of high quality and adapted to the needs of citizens.

3.3. Continue the current activities on implementation of the civil service laws

In this context, it is crucial to continue with the activities of verification of civil servants at all levels. Urgent establishment of the Control Agency for Civil Service is vital for the achievement of this goal.

3.4. Continue current activities on reforming the defense and interior affairs sectors

After several years of efforts on reducing defense expenditure in BiH and on aligning the defense structures with the budgetary capacity of the country, the manpower levels of the armed forces in BiH were reduced to around 19,500 professional military personnel in late 2002. The adoption of the BiH Defense Law was an important step towards further reform in this sector. The institutions in both entities and the BiH State realize that further reduction of troop strength is inevitable in 2003–2004. Since all modalities of the armed forces reforms have not yet been determined, it is extremely hard to provide exact numbers, but a rough assessment is that further 8,000 servicemen would need to be demobilized from the BiH armed forces

Rationalization will be necessary in the interior affairs sector (law enforcement and public security) as well. The trend that dismissed servicemen found employment in the interior affairs services has been noticed. However, in view of the continued sensitive political situation, marked intensity of criminal activities in the country and the region, and insecurity of returnees, the rationalization in this sector should proceed very carefully. Establishment of the SIPA (state-level intelligence agency) is a major step in further reform of this sector

3.5. Reinforce administrative capacity of BiH for European integrations

To meet the requirements that BiH will face in the European integration process, it is evidently necessary to expand existing administrative capacities. The level of understanding of the integration processes is still low, and particularly of the requirements arising from the Stability and Association Agreement (SAA). The SAA will require a more effective coordination between a large number of ministries. This role was given to the newly-established Directorate of European Integrations (DEI), which, although not yet fully developed, coordinated the preparation of the BiH responses to the questionnaire from the Feasibility Study exceptionally well. The Statutes of DEI were adopted in September 2003, and these should allow reassignment of staff and employment of new civil servants, which should enable the Directorate to strengthen its capacities for strategic analysis, legal harmonization and aid coordination. The DEI must speedily formulate a comprehensive integration policy, agree it with competent ministries and, through adoption of the European Integration Strategy, ensure a coherent national approach. Bringing the DEI to full functionality is an urgent task.9

In the context of inclusion of BiH into the European integration processes, it is necessary to develop public administration that will be capable of implementing the Acquis communitaire. The existing administrative capacities in the country are considerably weaker than necessary for a country negotiating EU membership. For this reason, creation of a stable, efficient, professional and independent public administration must be seen as both a major challenge and a great chance for acceleration of the Europeization process in this country.10

Additional EU membership criteria, agreed at the Meeting of the European Council in Madrid, require the candidate country to establish the precondition for integration through adaptation of its administrative capacities. Although it is important that the entire BiH legislation is aligned with the European system, its efficient implementation, through appropriate administrative and judicial structures in BiH, is even more important.

Notes

1Survey on the Work of Public Administration at All Levels of Government in BiH, UNDP and CSSC program, April 2003, p. 24.
2Report of the European Commission to the Council on the Preparations of BiH to Start Stabilization and Accession Negotiations (Feasibility Study), Brussels, November 18, 2003, p. 7–8.
3Research conducted by ESI (European Stability Initiative), BiH Public Expenditure and Explosive Debt, 2003.
4Research conducted by ESI (October 2003).
5BiH: From aid dependence to fiscal sustainability (draft), World Bank, p. 39.
6PIC meeting on 28 March in Brussels.
7At the meeting in Brčko,15 April 2003. The working group was composed of the BiH Minister of Justice, RS Minister of Governance and Local Governance, FBiH Minister of Justice, Mayor of Brčko, heads of civil service agencies of BiH and RS, and it is planned that the head of the future FBiH Civil Service Agency will also be a member. The auditing institutions of BiH and entities, DEI, PRSP Coordinator, and the international organzations involved in public admininstration reform projects. It is envisaged that, other domestic and international agencies may be included in these working groups as needed. The Office of the Public Administration Reform Coordinator, attached to the BiH Justice Ministry and financed by the EU, has the task of coordinationg the activities on the preparation of the strategy.
8The ‘Public Administration Reform – Our Program’, the PIC Steering Board, Brussels, March 28, 2003..
9Report of the European Commission to the Council on the Preparations of BiH to Start Stabilization and Accession Negotiations (Feasibility Study), Brussels, November 18, 2003, p. 8.
10Report of the European Commission to the Council on the Preparations of BiH to Start Stabilization and Accession Negotiations (Feasibility Study), Brussels, November 18, 2003, p. 7.

III.8. STRATEGIC DIRECTIONS IN THE DEVELOPMENT OF THE STATISTICAL SYSTEM1

1. Goals:

1.1. Harmonization of the BiH statistical system with international standards

2. Situation

The shortage of statistical capacity and reliable data creates difficulties for precise assessment of the economic situation in the country. The statistical system in BiH is not harmonized with international standards, including those applied in the EU.

‘BiH needs to build a statistical system capable of timely provision of reliable, objective and correct data, required for planning and monitoring of the transition and reform processes.’2

The issue of the BiH statistical system was for the first time defined by the Decision on the Establishment of the BiH Statistics Agency, adopted by the BiH Council of Ministers in late 1998, and subsequently by the BiH Law on Statistics, promulgated by the High Representative on October 21, 2002.

Despite all efforts, the legislation with the Brčko District is still not harmonized, nor are the statistical methodologies between competent institutions in BiH which are as follows: the BiH Statistics Agency (with its branch office in Brčko), the FBiH Statistics Bureau and the RS Statistics Bureau.

An effective and sustainable statistical system is indispensable for economic planning and monitoring of the macroeconomic situation. The SAA treats these matters within the framework of the Cooperation Policies.

3. Priority activities

3.1. Implement the existing legal framework

According to the assessment of the EU Feasibility Study, implementation of the existing legal framework for the statistical system in BiH is a crucial precondition for the initiation of the Stability and Association Agreement. Therefore it is necessary ‘to fully implement’3 the legal framework promulgated by the High Representative, to strengthen the system of statistics in BiH. The implementation of this law should ensure that the BiH Statistics Agency and the competent entity statistics bureaus provide necessary statistical data for the BiH level and the entity level, which are at present ‘poor (or non-existent) and which prevent creation of a development policy, as well as regular trade relations’.4

In this context, the BiH Parliament should pass the BiH Law on Statistics. For implementation of this law, the Manager and the Deputy Manager of the BiH Statistics Agency and the Council of the BiH Statistics Agency, as well as prepare the BiH Statistical Program, which should be harmonized at all levels. This document should also specify the funding necessary for its implementation.

In the preparation of future statistics programs, the requirements from the General Data Dissemination System should receive special attention, in conformity with international standards.

3.2. Strengthen the statistics of the national accounts

National accounts, as per international methodologies of the System of National Accounts 1993 (SNA 93) and the European System of Accounts 1995 (ESA 95) have a pivotal place in the modern statistics. The systems of national accounts play an integrative role in the entire statistical system and represent the methodological framework for the entire statistics and, among other things, include the estimates of the informa economy, which is crucial for the statistical system in BiH.

3.3. Increase sample-based surveys

Sample-based surveys have a crucial role in the statistical system, because they represent a rich source of data for a large number of statistical indicators. The preparations for the Household Budget Survey are in the final stage and it should take place in 2004, with results available in 2005. The Labor Market Survey is planned for a later period. This would provide reliable data for monitoring of social trends, preparation of the national accounts (personal consumption), weighting and indices of consumer prices, poverty indicators etc.

It is of particular importance that the Household Budget Survey, which should subsequently take place periodically, adapts its methodology in order to acquire the most detailed possible data about the poverty rate in BiH.

Economic indicators for lower levels of territorial integrations should be defined by 2005.

3.4. Strengthen the price statistics

The price statistics envisages replacement of the existing retail price index with the consumer price index, which, in line with the EU recommendations, should be counted in 2005, at the level of BiH and of the entities. The consumer price indeks will represent the official inflation measure for BiH. For international comparison purposes, indices of investment goods prices, export and import prices will be prepared annually. In 2004 it will be necessary to harmonize the producer price indices with the EU methodology.

3.5. Strengthen agricultural statistics

Those agricultural enterprises and agricultural cooperatives that are currently included in the statistics, comprise only a small share of the agricultural production in BiH, while for individual farms there are only estimates. Therefore, new statistical activities in the plant and livestock production, sample-based and in conformity with international standards should be introduced by 2007, instead of the existing estimates, both for BiH and for its constituting entities. Establishment of the farm register is indispensable for introduction of such activities, requiring a series of activities related to the census in the agricultural sector, for which the preconditions should be in place in 2005.

3.6. Strengthen the wage and employment statistics

According to the EU definitions, by 2006 a new employment indeks and a new labor force indicator should be introduced, which will be facilitated by the Labor Market Survey for BiH and for the level of its constituting entities.

3.7. Strengthen the statistics of other short-term economic indicators

By end-2004, an aggregate index of the industrial production at the level of BiH should be prepared, and harmonization of the index of industrial production completed between FBiH, RS and the Brčko District.

Demographic statistics should remain a corner stone of the statistics system. Usefulness of the vital statistics date is limited by the lack of population data. Bosnia and Herzegovina is one of the rare countries where a census is not taken in regular 10 year cycles, and for this reason it has not been possible to determine spatial, demographic, economic and educational characteristics of the population, characteristics of households and families, and neither the characteristics of housing and other elements.

In 2004 the political decision on the timing of the census should be made, to allow for the timely start of the preparations.

3.8. Strengthen foreign trade statistics

Together with the customs administration, it is necessary to define a harmonized structure of a data set, which will be submitted to the BiH Statistics Agency and entity agencies. The activities on harmonization of the structure and the format of the BiH foreign trade statistics, in line with the EUROSTAT recommendations, should also continue.

3.9. Establish statistical registers

For implementation of modern methods of data collection, processing and analysis, over the next medium term the following statistical registers should be established: statistical register of businesses, register of households and farm register. These registers must be in conformity with the EU Ordinance on Registers for Statistical Needs and with the EUROSTAT Methodology for Maintaining Registers.

3.10. Harmonize statistical classifications with the international classifications

With the purpose of producing comparable statistics, uniform statistical definitions should be used, and continuous harmonization of classifications in use should be conducted, with the attention to priorities.,

3.11. Define the format of publication of statistical data

During 2004 the format should be defined and competences determined for dissemination of data to various users. The basic principle is that the BiH Statistics Agency and entity bureaus are responsible for their dissemination.

3.12. Conduct a regular training of statisticians

Although certain improvements in the training of statisticians were made, such training should continue, but adapted in such a way as to be of a more practical character in implementation of the methodologies and the sample, of standards and of information technology.

3.13. Strengthen coordination with other institutions

The BiH Central Bank, in line with its competences, developed statistical capacities which, at present, are not a part of the entire BiH system of statistics. Therefore the legal conditions should be created to incorporate statistical capacities of the BiH Central Bank and other institutions (finance ministries, tax administrations, the State Border Service (DGS) etc.) into the BiH system of statistics.

4. Required resources

Through the end-2004, a detailed plan of human and material resources for implementation of priority and other statistical activities should be prepared, in line with the capacities of BiH, FBiH and RS.

Notes

1The statistical system includes the system at the level of BiH, FBiH and RS
2Report of the European Commission to the Council on Preparations of BiH to Start Negotiations with the EU on the Stabilization and Association Agreement, Brussels, November 18, 2003.
3Report of the European Commission to the Council on Preparations of BiH to Start Negotiations with the EU on the Stabilization and Association Agreement, Brussels, November 18, 2003
4Report of the European Commission to the Council on Preparations of BiH to Start Negotiations with the EU on the Stabilization and Association Agreement, Brussels, November 18, 2003

IV. THE MAJOR RISKS AND PRECONDITIONS FOR SUCCESSFUL IMPLEMENTATION OF THE MEDIUM-TERM DEVELOPMENT STRATEGY (PRSP)

1. Governments’ determination to accelerate reforms

In the post-war period, the governments in BiH failed to implement the reforms speedily. The implementation of the BiH Medium-Term Development Strategy (PRSP) will require a greater determination of the governments in:

  • a) preservation of the achieved political agreement on implementation of reforms;
  • b) successful coordination in implementation of the proposed reforms;
  • c) strengthening competence and capacities of all levels of administration for implementation of the reforms.

2. Efficiency of parliaments at all levels

In the previous period, sluggishness in the implementation of reforms was also a result of inadequate efficiency in the work of the parliaments. The BiH Medium-Term Development Strategy (PRSP) envisages adoption and/or amending of a large number of laws and by-laws. To complete these tasks within the given timeframe will require increased efficiency in the work of the parliaments at all levels.

3. Maintaining social peace and political stability

The process of acceleration of reforms will cause a short-term increase in unemployment, which might threaten social peace. In the near term, preservation of the social peace will depend on the governments’ ability to:

  • a) implement a social program to mitigate negative consequences of increasing unemployment; and
  • b) achieve a consensus on implementation of major reforms, through a dialogue with all segments of the civil society.

In parallel, the political stability of the country will need to be preserved, which will require further progress in the reduction of political tensions.

4. Stability in the country and the region, as well as a recovery of the world economy

In view of declining international aid, in the coming period BiH will have to rely on foreign investment as the most important source of financing future development. In this context, in addition to the acceleration of reforms and strengthening of the political stability of the country, the rate of recovery of the world economy and the increase of investment globally will be major factors. BiH should retain interest in active participation in all regional initiatives, to support strengthening the regional stability.

5. Decline of the interest of the international community for BiH

A major precondition for a successful realization of the BiH Medium-Term Development Strategy (PRSP) is securing of additional assistance in the form of concessional credits and grants, to a lower extent than previously. The focus of the international community on other regions, or a failure of the government to convince the international community to continue extending aid to BiH may pose a serious difficulty to the implementation of PRSP goals.

IV.1. IMPLEMENTATION, MONITORING AND EVALUATION MECHANISM OF THE BiH MEDIUM-TERM DEVELOPMENT STRATEGY - PRSP

The EU accession will remain high priority for BiH in the coming years. This process requires the governments in BiH to develop the capacities for strategic planning, as well as an effective mechanism for policy implementation and monitoring. The process of preparation of the BiH Medium-Term Development Strategy (PRSP) helped the governments to strengthen their capacity in the area of strategic planning. There is still, however, need and scope for strengthening this segment.

On the basis of the work invested in the preparation of the EC Feasibility Study and the BiH Medium-Term Development Strategy (PRSP), the BiH Council of Ministers, together with the entity governments, on 29 July, 2003 adopted the Action Plan for Implementation of Priority Reforms, which introduced an initial monitoring mechanism for implementation of strategic documents, However, as in the case of strategic planning, the monitoring and evaluation capacities need further strengthening.

During the preparation of the PRSP, both on the technical and ministerial level there were consultations on the most suitable mechanism for implementation, monitoring and evaluation of this strategic document. In this context, the Council of Ministers, together with the entity governments, decided to establish, within the framework of the implementation of the Action Plan for Implementation of Priority Reforms, the Office for Coordination of Economic Research and Monitoring of the Implementation of the BiH Medium-Term Development Strategy (PRSP), which will function as a part of the Office of the Chairman of the BiH Council of Ministers.

The main tasks of this Office are as follows:

  • to coordinate future socio-economic research related to economic development and European integrations,
  • to monitor implementation of the action plans which will guide implementation of the PRSP and other strategic documents.

In view of the high priority of all governments related to the integration of BiH to the EU, the Office will closely cooperate with the Directorate for European Integrations. All important activities concerning the EU integration have already been integrated into the PRSP.

The offices of the entity prime ministers will be strengthened to improve coordination in the implementation of the PRSP, as well as the entity finance ministries, for the continuation of the activities on revision of the medium-term expenditure frameworks and on linking of PRSP priorities with the budget cycle. The FBiH Government will, use the framework of the established coordination with the cantonal governments for the implementation of the PRSP priorities. Finally, further strengthening of the coordination between the PRSP implementation teams and the units in charge of preparation of the public investment program will be necessary.

The implementation of the PRSP will retain the same elements utilized in its preparation. The strategic decisions will be made within the framework of the Coordination Board of Economic Development and EU integrations, which is chaired by the Chairman of the BiH Council of Ministers and consist of entity prime ministers, finance ministers at the state and entity level, Deputy Chairman of the Council of Ministers for Economic Matters, Minister of Foreign Trade and Economic Relations and the Head of the Directorate of European Integrations. On the technical level the work will be carried out by the working groups that were established during the preparation of the PRSP, and which consist of representatives of the state and entity governments.

Civil society will have an important role in the implementation of the PRSP. The Office for Coordination of Economic Research and Monitoring of the Implementation of the BiH Medium-Term Development Strategy (the Office) wil lead the process of consultations and of involvement of the NGOs and other organizations, as well as of scholars and scientists, trade union, youth and private sector representatives, in the preparation of further strategic documents and in the implementation of the PRSP. As in the preparation stage of the PRSP, NGOs will continue to participate in the work of the PRSP implementation working groups. The funding for supporting NGOs in the implementation of specific PRSP-related projects is already planned in the budget of the Office.

The Office will inform the public about the course and results of the implementation of the PRSP, through regular reporting on the status of implementation of its action plans and the success rate in meeting the PRSP targets. BiH Council of Ministers will send reports on implementation of the PRSP every six months to the BiH Parliament.

To verify whether the set targets are being achieved, an established set of indicators should be followed over the next medium term. In September 2000, the adoption of the Millenium Declaration by 189 UN member states pointed to the crucial goals of humanity at the outset of the new millenium, as well as to concrete measures to assess progress in meeting these goals. In the case of BiH, UNDP is working on the National Human Development Report (NHDR) and the Millenium Development Goals Report (MDGR). Preparation of the BiH Medium-Term Development Strategy (PRSP) and of the UNDP’s NHDR and MDGR took place at the same time and in cooperation. With the assistance of UNDP, PRSP was able to incorporate the millenium development goals and indicators, adapted to BiH, into the PRSP monitoring mechanism. The BiH Development Strategy (PRSP), is defined as the medium-term strategy (2004–2007), while the MDGs are a long-term strategy (through 2015), and therefore these two strategies are complementary.

To ensure systematic monitoring of the PRSP indicators, additional strengthening of the capacity of statistics bureaus is planned, as well as partnering with NGOs and international institutions. One of the instruments envisaged to be useful for monitoring of the implementation of the BiH Medium-Term Strategy (PRSP) is the Panel Survey ‘Living in BiH’1. It must be emphasized that the use of this survey will not be at the expense of the results of other surveys and estimates.

A portion of the data connected by the Panel Survey relates to the BiH Medium-Term Development Strategy (PRSP), and the questionnare used may be adapted further, in order to ensure monitoring of even more indicators. The Panel Survey ‘Living in BiH’ in its third- and fourth-wave questionnaire does not include the module for monitoring the poverty rate. To obtain these data, crucial for the implementation of the PRSP, additional funding is needed, so that the panel survey questionnaire can serve to collect poverty rate information for BiH. If this is not the case, there is a risk that for 2004 – 2005 period BiH will have no poverty rate indicators, as the results of the household budget survey, in view of the different methodology compared with LSMS, will not be known before the end-2005.

During the coming period, the Household Budget Survey and the Labor Market Survey are planned, and these surveys should contribute to monitoring of the targets of the BiH Medium-Term Development Strategy (PRSP). It is worthy of note that some NGOs (ICVA) already developed projects for monitoring of the PRSP implementation, which are an integral part of the overall monitoring and evaluation mechanism of the PRSP strategy.

It is important to stress that an undeveloped system of statistics of BiH, and in this context the lack of the data reliability, will represent a particular problem for monitoring and evaluation of the PRSP, and accordingly for the Millenium Development Goals. It is known that the last census, taken before the war (1991), can not serve as a reliable statistical basis for conclusions on conditions and trends in the post-war period. Further strengthening of the institutional framework for strategic planning within governments, and for implementation of the development policies, necessarily entails concurrent strengthening of the statistics for the entire country.

PRSP and MDG implementation indicators Indicators for monitoring of MDG accomplishments and PRSP objectives
IndicatorsData sources for BiHAssessments for BiH

(2000/2001)
Projections

for 2007
OBJECTIVE I: Eliminate extreme poverty and famine
Percentage of population below poverty line2LSMS319.1% (general)16%
Poverty gapLSMS4.6%
Participation of the poorest fifth in domestic consumptionLSMS9.6 %
Prevention of under-nourished children up to age of 5UN Statistics Division, UNICEF4%
Gini CoefficientIHR MRC Report0.260.27
Share of income of the richest fifth of populationLSMS35.8%
Unemployment rateLSMS

WB Povery Assessment 2003

Official Statistics
16.4%

28.1%

41%
13.5%

22%

30%
Participation of informal sector in total employment rateLSMS36.2%
OBJECTIVE II: Achieve universal inclusion in primary education
Net rate of enrollment in primary schoolBiH NHDR 200297%99%
WB BiH Poverty Assessment 200395%
BiH from dependence on aid to fiscal self sustainability, ECSPE,

2002

LSMS




92.8%

98.9%
Percentage of 5th grade students of those enrolled in 1st gradeBH Common Country Study

Development Indicators, Final

Draft, 2002
99.0%

97.9% (m)

/98.2% (f)
99%
Literacy rate over age of 15BH Common Country Study

Development Indicators, Final

Draft, 2002
99.6%

99.6% (m)

99.7% (f)
99%
Additional indicators for BiH
Secondary school enrollment rateBiH NHDR 2002, estimate BiH from dependence on aid to fiscal self sustainability, ECSPE,

2002

LSMS
56.8%



72.6%

68.3%
75%
Higher education enrollment

rate
BiH NHDR 2002, estimate

BiH from dependence on aid to fiscal self sustainability, ECSPE, 2002

LSMS
19.8%



24.2%

23.0%
25%
Percentage of children included in pre-school educationWB BH Poverty Assessment, 2003

BiH from dependence on aid to fiscal self sustainability, ECSPE, 2002
4.3%12%
Percentage of GDP for educationBiH from dependence on aid to fiscal self sustainability, ECSPE, 20026.0%5.6% (FBiH)

4.5% (RS)
Literacy rate of population over age of 15BiH NHDR 2002, estimate

LSMS
85.9%

88.9%
90%
OBJECTIVE III: Improve gender situation and social position of women
Ratio between boys and girls in primary, secondary and higher educationBiH NHDR 2002, estimate









LSMS
98:96 - primary

56.3:57.5 - secondary

18.4:21.3 - higher

98.5:99.2 - primary

67.2:69.2 - secondary

16.9:20.6 - higher
98.8:99.5 -

primary

73:76 -

secondary

20:26 -

higher
Participation of women in paid employment in non-agricultural sectorFBiH ZS4, RZS RS5, as of March 2001, calculation of IHR MRC report39.2%40%
Percentage of women MPs in BiH ParliamentCEDAW, Art. 7 – participation of women in political and public life14.3%16%
Additional indicators for BiH
Rate of registered women unemploymentFBiH ZS, RZS RS, as of March 2001, calculation IHR MRC report45%44%
Women employment rate (participation of employed women in female population)BiH NHDR 2002, estimate11.9 %13%
Rate of economically active female population (participation of women in total employment)BiH NHDR 2002, estimate37.2%38%
Participation of women in executive authoritiesCEDAW6, art. 7 – participation of women in political and public life2.38%4%
Literacy ratio of men and women over age of 15LSMS94.1%96.8%
OBJECTIVE IV: Reduce children mortality
Children mortality below the age of 5 (per thousand)UN Statistics Division, UNICEF, WHO



ZZJZ FBiH7, Fund ZZ RS8, FBiH ZS9



BH Common Country Study

Development Indicators, Final Draft, 2002
18 (19m/15f)

13 (2000),

10.3 (2001)

11.2(2000)

9.61(f)/12.69(m)
9.3
Infant mortality rate below age of 1 (per thousand)UN Statistics Division, WDI 2002 ZZJZ FBiH, Fund ZZ RS, ZSFBiH

ASBiH10, bulletin 2/2003
13–15

11.2 (2000),

8.5 (2001)

9.7 (2000),

7.6 (2001)

8.51(f)/10.78(m)
7.0
Percent of children below age of 1 vaccinated against variolaUN Statistics Division, UNICEF, ZZJZ FBiH, Fund ZZ RS, FBiH ZS83%

80.74%–95.06%
98%
Additional indicators for BiH
Percentage of new-born children weighing 2.500 grams or lessZZJZ FBiH, Fund ZZ RS, FBiH ZS4%3%
Percentage of breast-fed

infants up to age of 6 months
ZZJZ FBiH, Fond ZZ RS, FBiH ZS2.1%5%
OBJECTIVE V: Improve health of women in childbed
Mortality rate of women in childbirth (per 100,000 babies)UN Statistics Division

BH Common Country Study

Development Indicators, Final

Draft, 2002
5.05 estimate4
Percentage of deliveries with expert assistanceUN Statistics Division ZZJZ FBiH, Fond ZZ RS, FBiH ZS BH Common Country Study Development Indicators, Final

Draft, 2002
100%

99%



99.6%
100%
Additional indicators for BiH
Fertility rate (total number of babies per woman)ASBiH Bulletin 3/20031.3 (2000)

1.4(2001)
1.5
Birth rate (per thousand)ASBiH Bulletin 3/200310.5 (2000)

9.9 (2001)
11.5
Mortality rate (per thousand)ASBiH Bulletin 3/20037.87.1
Natural growth rate (per thousand)ASBiH Bulletin 3/20032.4 (2000)

1.9 (2001)
3.7
Life expectancyBiH NHDR, 2002

WDI 2002
73.3 (1995–2000)

73 (76(f)/71(m))
73.5
OBJECTIVE VI: Fighting HIV/AIDS and other contagious diseases
Percentage using contraceptionWHO

BH Common Country Study

Development Indicators, Final

Draft, 2002
49 % (2001)

47.5% (2000)
55%
Number of children infected with HIV/AIDSZZJZ FBiH, Fond ZZ RS, FBiH ZSN / A*
Number of adults infected with AIDS, number of new casesWDI 2002 HDR 200151

3
Case and deaths of tuberculosis (per 100,000)WHO4 deaths

50 cases
0

30
TBC cases discovered and treated under DOTS (per 100,000)WHO90N/A
Additional indicators for BiH
Percentage of GDP spent on healthBiH BiH from dependence on aid to fiscal self sustainability,

ECSPE, 2002

IHR MRC report
7.3%(2000)



5.5 (2000)

4.8 (2001)
6.7% (FBiH)

5.9% (RS)
Percentage of population with health insuranceZZJZ FBiH and ZZZ RS1178% (2001)85%
Number of doctors per 1000 peopleZZJZ FBiH and ZZZ RS1.3 (2000)

1.5 (2001)
1.5
Number of hospital beds per 1000 peopleZZJZ FBiH and ZZZ RS3.7 (2000)

3.2 (2001)
3.2
VII OBJECTIVE: Ensure environment sustainability
Percentage of forested landWDI 2002, WRI

IHR MRC report
44.6%

55.6%
52%
Percentage of land protected for maintaining of biodiversityWDI 2002, WRI0.5%1.5%
GDP per unit of consumed energy (economic efficiency indicator)Based on WDI 2002, calculated

for IHR MRC report
47.540
Carbon dioxide emission /pc (1,000 kg)IHR MRC report3.23.5
Percentage of population connected to water supply systemIHR MRC report53%58%
Percentage of population with available hygiene/percentage of households with sanitationIHR MRC report33%36%
Percentage of population with private propertyWB Poverty Assessment 2003 Calculated by IHR MRC teamApprox. 71%75%
Additional indicators for BiH
Consumption of el. power/pc (kwh/pc)WDI 20025401050
Percentage of cleared mine filedsIHR MRC Report5%20%
OBJECTIVE VIII: Develop global partnership for development
Percentage of population who can obtain medicines on regular basisIHR MRC Report50% (2000)60%
Phone lines per 1000 inhabitantsWDI 2002, WTDR 2001

Transition Report 2003, EBRD
103 (2000)

111 (2001)
150
Personal computers per 1000 inhabitantsGlobal project Science policy in FBiH, ANUBiH, 2002.3040
Total public debt (foreign and domestic) of country/GDP, in%Ministry of Finance and Treasury67 (2003)51%
Country debt per capitaMinistry of Finance and Treasury, calculation in IHR MRC report789 $ (2000)

687 $ (2001)
Additional indicators for BiH
Public expenditures as part of GDPMinistry of finance and treasury BiH47%Around 43%
Number of Internet users per 100 inhabitantsUN Statistics Division4.61 (2000)

1.11 (2001)
4.0
Expenditures on research and development % GDPGlobal project: Science policy in FbiH, ANUBiH, 2002.0.05 (2000)0.4
Number of published scientific papers in relevant journals per 100,000 inhabitantsGlobal project: Science policy in FbiH, ANUBiH, 2002.0.61 (2000)4.8
GDPCouncil of Ministers BiH12,1 billion KM16 billion KM

Notes

1The project is funded by DFID, and implemented by BSAL/IBHI (implementation in three waves covers 2002–2006 period).
2Using General Poverty Line for BiH.
3Living Standards Measurement Survey for BiH.
4FBiH Statistics Bureau.
5RS Statistics Bureau.
6Convention on Elimination of All Forms of Discrimination Against Women.
7FBiH Public Health Protection Institute.
8RS Health Care Fund
9FBiH Statistics Bureau.
10BiH Statistics Agency.
11RS Health Care Institute.

V.1. SECTOR PRIORITIES – SOCIAL AND PENSION POLICY

1. The policy goals of the governments of FBiH and RS are:

1.1. create a modern legislative framework, which would promote human and social rights, in accordance with the undertaken international standards,

1.2. create institutional and budget mechanisms for development of social policies, which would identify strategic goals in social sector,

1.3. define the minimum of social rights at the level of BiH,

1.4. create effective measures of social security and secure financial programs that would reach the poorest ones, and involvement the local community,

1.5. preserve the minimum standards of the most vulnerable ones, in the context of fiscal restrictions and establishment of FBiH,

1.6. ensure transparent horizontal and vertical coordination between the governmental and non-governmental sectors for providing assistance to the most vulnerable,

1.7. reallocate the public revenues and total gross domestic product to benefit the poor.

2. Introduction

Development strategies of modern states are based on the capacities for political, economic and social development. When planning its own future, Bosnia and Herzegovina needs to start with economic and social development and, in its founding documents, it has to strive for the rule of law and for the welfare of its citizens. The implementation of the Poverty Reduction Strategy (PRSP) addressing social policy issues in BiH will be very important, as it is the first time in our country that so many groups are being systematically consulted in the preparation of a comprehensive development strategy for the country. In addition, within the framework of the EU integration processes, it is important for BiH to adapt its social protection systems to the new economic situation and new social needs.1

In drafting a development strategy for social welfare in FBiH and RS, which includes social protection, protection of families with children, protection of civilian victims of war, employment, pension and disability insurance, displaced persons, veterans’ and invalids’ protection, it is necessary to start from basic human rights, as a set of principles, standards and norms, the objective of which is to ensure decent living conditions for dignified and comprehensive development of individuals.

Bosnia and Herzegovina and, especially, the Federation of Bosnia and Herzegovina, spends less on social welfare of the indigenous population than any other country in the region, which is difficult to justify for a country with such a level of social needs. For example, according to the data of the World Bank, the share of gross domestic product (GDP) allocated on social and child protection in 2000–2002 was 1.1 percent in Slovenia, 1.6% in Macedonia, 1.9% in Croatia, 1.4% in Bulgaria, 2.4% in Latvia, 2.1% in Estonia. In Bosnia and Herzegovina, in the Republic of Srpska, allocations for social and child protection in 2000 amounted to 1.1 percent of GDP, and, in the Federation of Bosnia and Herzegovina, just 0.7 percent of GDP.2

Comprehensive reforms are needed in social policy, as well as an increase in expenditure on social protection (in absolute terms and as a share of GDP) up to the levels closer to regional averages. Neither of the entities finances nor supports social protection benefits from the entity budget, which is unsustainable.

From the aspect of European integrations, it will be necessary to maintain the balance between the economic and social dimensions. Therefore, the area of social policy, according to the White Paper3, covers many areas, such as freedom of movement of labor, coordination of social security programs, ensuring equality between men and women, and adjustment of certain provisions of the labor law. The Stability and Association Agreement (SAA) treats those issues through its Cooperation Policies.

3. Pension and disability insurance

3.1. Present status

According to the data of the Federal Statistical Institute, as of November 2003, 286,039 pensions were paid. While the average pension amounted to 199.39 KM, or 36.0% of an average wage in FBiH (528.19 KM)4 as of November 2003. In December 2003, the PIO RS Fund paid the pensions to 183.167 pensioners, in the average amount of 162 KM.5

A very important measure for stabilization of the situation in the pension system was the decision made by the High Representative in 2000, according to which the pensions are paid in proportion to the amount of the pension contributions collected, without any delays and arrears in the pension system. In November 2003, improvements at the level of collection of contributions for pension insurance brought about a significant increase in pensions in RS.

3.1.1. Legislative and institutional framework

According to Annex 4 of the Dayton Peace Accord, which represents the Constitution of BiH, the system of pension and disability insurance is under the authority of entities. That means that each of the entities has its own separate legal regulations in the area of pension and disability insurance. The new Law on Ministries of BiH foresees a certain role of the state level, which will require some more precise definition in future.

The Law on Pension and Disability Insurance, which took effect on July 30th 1998, is based on principles of reciprocity, solidarity between generations and obligatory pension and disability insurance. Citizens who do not have mandatory insurance can execute the entitlements from the area of pension and disability insurance only through voluntary insurance. According to this Law, certain entitlements of social character are no longer being executed (protective addition, pecuniary compensation for other person’s assistance and care and pecuniary compensation for bodily damage). According to the Law on Contributions, the rate of contributions for pension and disability insurance amounts to 17 percent levied on the insured person and 7 percent levied on the employer, i.e. a total of 24 percent of net wages. The new FBiH Labor Law was passed in 2000.

In the RS, the Law on Pension and Disability Insurance establishes mandatory pension and disability insurance and determines the rights and responsibilities based on that insurance, as well as the options for persons who are not covered by mandatory insurance to get voluntary insurance. This Law, adopted on October 1st 2000, carried out the most important changes in the system of pension and disability insurance, i.e. eliminated the right to pecuniary compensation for bodily damage and pecuniary compensation for assistance and care of another person, made the conditions for acquiring the right to old age pension more strict, and stipulated that the determination of the pension base is executed in accordance with the average wage of the insured person.

In FBiH, in line with the Law on Organization of Pension and Disability Insurance, the Federal Institute for Pension and Disability Insurance started functioning on January 1st 2002, as the single institution responsible for pension and disability insurance. With the beginning of the operations of this Institute the pension and disability institutes in Sarajevo and Mostar ceased to function.

To provide for execution of rights to pension and disability insurance, as well as of ascertained needs and interests in this field of insurance, the RS Pension and Disability Fund was established. The Fund has branch offices at regional and local levels, and, at the level of the Fund, a specialized administration was established.

In accordance with the new Law on the BiH Council of Ministers, the Ministry of Civil Affairs has certain jurisdiction with respect to coordination of the entity pension funds, as well as in resolving pension-related issues at the international level.

In cooperation with the World Bank, the preparations have started for the reform of pension system through the Social Insurance Technical Assistance Project (SITAP6). The purpose of this project is to strengthen the effectiveness and efficiency of the health care and pension insurance system through provision of technical assistance and training in implementation of the planned reforms and development of options for future reforms of social insurance. In the area of pension insurance, the SITAP will help to: develop options and instruments for expanded coverage and transferability of insurance rights, identify and implement the mechanisms for consolidation of collection of social insurance premiums, improve reporting, control and collection of contributions and consider the medium-term reforms of pension policy. In addition, the Project will support the competent ministries to build capacities in defining the strategic goals, business and financial planning and effective implementation of the adopted reforms, and it will assist in strengthening the IT capacities in the institutions to ensure harmonization of the data systems, providision of IT support, and training in good management practices in the fields of communication and information technologies.

3.2. Problems

The marked discrepancy between expenses and revenues is the basic cause of difficulties in the functioning of pension insurance, of delays and reductions of pensions, which, for the majority of pensioners increases the risk of falling into the category of the poor. In comparison with 1991, when the ratio of pensioners and employees was 1:3 in BiH, by the end of 1995 that ratio decreased to 1:1.3, and, after that, in the part served by the Social Pension and Disability Fund Sarajevo) it climbed to about 1:1.47. There are significant variations in the level of pensions, which are additionally increasing the exposure of individual groups of pensioners to the risk of falling into poverty.

In RS, there are more pensioners than insured persons – the ratio is 1:1.08. Because of that, even the extremely high contributions do not enable the payment of average pensions which would be above 30 percent of average income per inhabitant. The level of pensions in the RS is by one third lower than in FBiH, and the ratio between pensions and wages is 1:2. Regardless of that, the pension system in the RS is functioning only because of significant transfers from the entity budget, and it is still in a difficult position. In the early 2003, only pension payment coefficient of under 0.6 was achieved, so, due to poor collection of revenues, the pensions actually paid are only 60 percents of the level of pensioners’ entitlements.8

3.3. Priorities in the area of pension insurance

In choosing the priorities and setting the modalities of their realization, the working groups took care of the size and the speed of the improved inflow of resources into the pension and disability funds and the facilitation of their operations, with the objective of ensuring regular payment of pensions. The focus is on activities which will ensure or improve the implementation of already existing regulations and which will eliminate deviations in the functioning of the system, which were incurred in the course of the war and later, as a consequence of political disputes and the weakness of the system, the priorities for strengthening the pension and disability insurance funds are as follows:

3.3.1 Improve the financial position of the PIO funds to ensure stability of payment of pensions:

  • ensure regular and full payment of contributions for all employees in BiH on actually received wages, through strengthening inspections to regularize payment of contributions and increase penalties for work in the informal economy,
  • ensure regular payment of contributions for all employees, and the inclusion of BiH citizens who are employed with foreign or international organizations and institutions, as well as in consular or diplomatic representative offices, into the system
  • repay debts owed to pensioners,
  • collect pension and disability insurance contribution arrears from previous years,
  • set pension levels on the basis of the average wage throughout the working age,
  • separate outlays for pensions arising from contribution payments from pensions received on the basis of privileges and benefits, as well as all payments not preceded by insurance payments,
  • rationalize the administration of the PIO funds, to lower the operational costs,
  • resolve property related issues – in connection with the real estate belonging to the pension and disability insurance funds,
  • strengthen the capabilities of the personnel and capacities of the funds, particularly for computer processing and exchange of data, both within and between the entities.

3.3.2. Improve the relations in the pension system and lay groundwork for its reform

  • resolve disputes between entity pension and disability insurance funds in connection with the payment of pensions earned in one entity to beneficiaries now living somewhere else. The possible options are signing a new agreement between the entity funds, or adopting a state level law which would regulate this area, which would:
    • - define the responsibilities of BiH for implementation of international agreements in the field of pension and disability insurance,
    • - ensure the minimum of social security for pensioners in BiH, and
    • - ensure the harmonization of regulations in this field.
  • consider the possibility of establishment of the single state-level pension and disability insurance fund,
  • initiate pension reform simultanenously in both entities,
  • within the reform of the pension system, offer the insured persons additional or supplemental models of pension insurance which would include the option of insured persons retaining the right to manage those resources.

3.3.3. Strengthen the capital market in the country

A functional capital market, characterized by liquidity, is a very important precondition for reform of the existing pension system. However, the capital market in BiH is fragmented, which is an important reasons for its lack of liquidity. This primarily applies to the stock exchanges, that have mostly been used, and still are, in implementation of the privatization process. In order for the pension system reform to provide better results, measures must be taken to strengthen the capital markets (see the Financial Sector section).

These priorities do not require significant resources of pension and disability insurance funds, except when it comes to the rationalization of administration, where it might be necessary to pay severance payments to former employees. The novelty compared to the previous period is the determination of both entity pension and disability insurance funds to harmonize their activities, which requires adoption of new laws and regulations or amendments to the existing ones. Depending on the adopted level of connection of entity pension and disability systems, the resources necessary for the equalization of pension levels in both entities can amount to over 150 million KM annually (for equalizing the level of pensions in RS with the level achieved in FBiH).

Most proposed measures aim for the stabilization of the financial situation of the pension and disability insurance system, which would improve the regularity of pensions and the social status of pensioners. The issue of improving connections and cooperation of entity pension and disability funds will require a political decision to be made at the highest level, for which the most favorable alternatives should be presented. The resolution of this issue will reflect on the formulation of the reform of the pension system in BiH. This reform should radically resolve the difficulties inherent to the existing system, in which the current employees are financing the pensions of current pensioners (pay as you go system), which creates distrust in the system and encourages the avoidance of the payment of contributions. In keeping with the expected capacities of BiH society in the coming period, it is envisaged that the reforms will take the form of introduction of additional types of voluntary pension savings funds.

4. Protection of the disabled and family members of the killed

4.1. Present status

According to the provisions of the three existing laws in the Federation of BiH, which define the basic rights of military invalids and families of killed soldiers, the right to personal and family disability benefit is acquired by the total of 97,746 beneficiaries. There are 45,377 military invalids of war and 52,419 family members of killed and missing soldiers.9 The funds required for personal and family disability benefits for those beneficiaries exceed 23 million KM per month. The data includes the beneficiaries of veterans’ and invalids’ protection who acquired these rights before the 1992–1995 war, i.e. on the basis of the participation in the 1941–1945 war of national defense.

The fact that in FBiH, in practice, there are still two separate legal frameworks, which regulate the area of veterans’ and invalids’ protection in different ways, points to the necessity of adopting a unified Federal law on the rights of veterans and family members of killed soldiers, as soon as possible, which would provide adequate protection of the members of these categories of populations, especially the most vulnerable ones, under the same conditions and in the same way, throughout the FBiH.

According to the proposed new law, the rights to benefits of military disabled and families of killed soldiers need to be within the framework of realistic funding capacity of FBiH, and will be paid from the FBiH Budget, in keeping with the position of the IMF Mission for BiH. The provisions of the new law, it is expected, would not recognize the right to exceptional support payments.

According to the proposals contained in the new law, the burden of funding veterans’ and invalids’ protection in the FBiH will be distributed, depending on the jurisdiction, between the Federal, cantonal and municipal budgets. Only the basic rights, i.e. the disability benefits (personal and family), would be financed from the FBiH Budget, while the additional rights would be financed from the cantonal budget (health care, professional rehabilitation, unemployment support, education, scholarships, exemptions from paying certain taxes, customs exemptions etc.).

According to the data available to the RS line ministry, the rights on the basis of veterans’ and invalids’ protection in that entity are executed by 40,659 persons with recognized status of military invalids, classified in 10 categories, from 20 percent to 100 percent disability. The number of family members of killed soldiers and deceased military invalids, who are executing their rights on the basis of veterans’ and invalids’ protection, amounts to 41,994. Family disability benefit, acquired on the basis of family member - killed soldier is used by 25,190 persons, of which the family benefit on the basis of a family member – deceased military invalid is used by 2,633 beneficiaries and 633 co-beneficiaries. The number of beneficiaries of civilian personal disability benefit is 2,293. The number of beneficiaries of family civilian disability benefit is 1,949.

Because of the inability to ensure resources for veterans’ and invalids’ protection over the amount envisaged by the RS budget, the Government of RS issued the Decree on Determination of Priorities in Payments Arising from the Law on Rights of Veterans, Military Invalids and Families of Killed Soldiers. In compliance with this Decree, in 2001, resources were secured for funding the following rights:

  • For military invalids: personal disability benefit, allowance for care and assistance, orthopedic allowance, contribution for health insurance and subsidy for expenses for the purchase of orthopedic aids and for the costs of health care,
  • For family members of killed of missing soldiers – family disability benefit, family disability benefit supplement, family disability benefit complement, contributions for health insurance, subsidy for the costs of health care, while the subsidy for the cost for erecting gravestones for killed soldiers were paid subject to availability of funds.

4.1.1. Legislative and institutional framework

There are two legal frameworks from the domain of veterans’ and invalids’ protection in FBiH: one is for the members of the FBiH Army and the other is for the members of HVO. For the members of the FBiH Army, this area is regulated by the following legal regulations:

  • The Law on Basic Rights of Military Invalids and Families of Killed Soldiers, which is as a law of the SFRY, taken over and implemented as a Republic level law (“Official Gazette of the RBiH”, no. 2/92 and 13/94);
  • The Law on Extraordinary Material Security of Military Invalids of War and Families of Killed Soldiers (“Official Gazette of RBiH”, no. 33/95, 37/95 and 17/96);

There is a separate system of veterans’ and invalids’ protection functioning for the members of HVO, which is based on the Law on Protection of Military Invalids and Families of Killed and Missing Defenders.

In the RS, the forms and the scope of rights of veterans, military invalids and family members of killed soldiers, as well as the conditions and the procedure for realization of these rights are stipulated by the Law on Rights of Veterans, Military Invalids and Families of Killed Soldiers.

In compliance with the existing regulations of FBiH, the right to personal and family disability benefit is, in the first instance, resolved by authorized municipality services. In the process of revision and in the process of deciding on appeals filed in regards to the first instance decisions, the Federal Ministry of Veterans’ and Invalids’ Issues decides in the second-instance. The Federal Ministry also decides on the rights to extraordinary personal and family material benefit, in the first instance.

Cantonal ministries, i.e. administrations for veterans’ issues, adopt regulations on additional rights of veterans’ population members and, in the second instance, decide upon appeals filed on the first instance decisions of authorized municipal services, made on the basis of cantonal regulations. Cantonal ministries for veterans’ issues and the municipal services for administration are not organizationally subordinate to the Federal Ministry of Veterans’ and Invalids’ Issues, but to the authorized cantonal and municipal bodies on the higher level, so that their organizations, rights, responsibilities and authorities are stipulated by cantonal and municipal regulations. The Federal Ministry has inherencies over the administrative and fiscal supervision over the implementation and application of Federal regulations from the area of veterans’ and invalids’ protection in authorized municipal services.

In compliance with the existing regulations in RS, arising from the Law on Right of Veterans, Military Invalids and Families of Killed Soldiers and the Law on Protection of Civilian Victims of War, the first instance decisions are made by municipal administrative bodies. The decisions made in the first instance determine the level of military disability, the right to personal disability benefit, family disability benefit, increased disability benefit and the increase of family benefit, addition for care and assistance, orthopedic addition, health protection and the status of a veteran and the classification into the relevant category are subject to revision, which is conducted by the Ministry for Veterans’ Issues, Victims of War and Labor.

4.2. Problems

The difficulties faced by the entities of BiH in ensuring veterans’ and invalids’ protection are, primarily, the result of the inability of entity budgets to ensure sufficient resources for the large number of beneficiaries of rights in this area. Despite the revisions executed earlier, the division of the system (especially in FBiH) and the lack of updated databases on the beneficiaries of these rights, make the determination of the existing situation and the planning of adequate reforms more difficult. Extraordinary sensitivity of entity governments to the protests of the beneficiaries of these rights has made the implementation of the reform of the system of veterans’ protection more difficult. In fact, the reform in this area implies a more equitable distribution of resources, focused on providing adequate protection to the categories of the most disabled military invalids and the most vulnerable families of killed soldiers. The activities on reforming the system of protection of war veterans and families of killed soldiers are under way, and the RS Government has in the recent period made significant progress in preparation of this reform.

4.3. Priorities in the area of protection of disabled veterans

4.3.1. Rationalize the system of protection of disabled veterans and families of killed and missing soldiers:

  • Adopt a unified Law on Veterans’ Rights in FBIH, which requires the assistance of the international community. This law should ensure the establishment of a unified system of protection of the rights of invalids, veterans and families of soldiers in FBiH, taking into account the realistic level of resources available for those purposes.
  • Establish functional information systems for veterans’ and invalids’ protection in RS and in FBiH.
  • Conduct a revision of the beneficiaries.
  • Rationalize the number and forms of benefits.
  • Significantly improve functioning and the effectiveness of the social security network for the members of the disabled veterans’ population, to ensure that the funds allocated for those purposes are better targeted to the most vulnerable categories most in need of assistance.
  • Assist in solving housing issues of the veterans’ population.

4.3.2. Develop instruments to encourage and assist in employment of disabled veterans, veterans and family members of killed and missing soldiers:

  • Develop and implement training programs for providing skills for easier employment for the disabled veterans and family members of killed and disabled soldiers.
  • Improve the level of physical and psychological capacity of invalids through specialized centers for rehabilitation.
  • Earmark funds for co-financing generation of new jobs for military disabled, as it is the best method of their labor related rehabilitation,
  • Earmark funds for adaptation of work areas and procurement of special technical equipment, needed for employment of people with more severe disabilities.

Limited capacities of entity budgets imply the necessity of a gradual reduction of allocations for veterans’ and invalids’ protection. The entity governments are committed to preventing that this reduction worsens the living conditions of the most vulnerable categories of this population. The number of beneficiaries of veterans’ and invalids’ protection will be reduced through the planned review, and the beneficiaries with remaining work capacity will be assisted in securing adequate employment, through the re-training and other forms of assistance in employment.

5. Social protection

Social protection aims to ensure social welfare of citizens in the state of social need and of their families. The term “social need” implies a permanent or a temporary situation in which citizens or families can find themselves in, which is caused by the events of war, by elements, by the general economic crisis, by the psychological or physical condition of individuals or by other causes, which cannot be eliminated without the assistance of the social community.

5.1. Situation

In compliance with the existing laws in FBiH and RS, the beneficiaries of social protection are persons in the state of social need, specifically:

  • Children without parental care, or who are neglected by their parents
  • Children whose development was disturbed by family circumstances,
  • Persons with disabilities either physical or psychological,
  • Materially uninsured persons incapable of labor,
  • Elderly persons without family care,
  • Persons with socially negative behaviors,
  • Persons and families who need social protection because of a set of special circumstances.

Social protection, as an increasingly important function and form of social policy in the conditions of transition, operates in the conditions of limited resources and criteria inherited from the socijalist system. Many cantons and municipalities are unable to provide the necessary level of social protection. The growing needs for social protection in the population and the inability of the existing system to meet those needs result in an increase of the number of unprovided for and vulnerable persons, together with the drop in the quality of services provided by institutions for social work.

The total number of social protection beneficiaries in FBiH in 2002 was 96,961, of whom 84,157 adults and 12,794 children. These figures indicate a decline compared to 2001, when the number of social protection beneficiaries was 153,396, 140,465 adults and 12,841 children.10 This change is partly explained by the continued process of return, which has removed a significant number of people from the records of the social work centers. The number should also include persons who are able to work, but who are under the care of the employment bureaus.

The data from the centers for social work and services of social and child protection in the RS indicate that, in 2002, 138,266 adult and 5,990 underage citizens had the right to social protection. The socially vulnerable population seeking asssistance from these institutions, also include refugees and displaced persons, as well as 23,252 citizens entitled to subsidies.

Debts which have accrued between the entities, for beneficiaries from RS who are situated in the institutions of social protection in FBiH, and vice versa, are an additional burden on the functioning of social protection. After the mediation of OHR, the Agreement on Mutual Compensation of Costs between RS and FBiH was signed. However, this problem is still not resolved in a satisfying way.

The FBiH Law on Distribution of Public Revenues and Financing defines the distribution of public revenues between FBiH and the cantons. A significant part of revenues was given to cantons. Through their own regulations, cantons are determining the type and the level of revenues they are giving to municipalities. This is the main source of funding for social protection.

5.1.1. Legal and institutional framework

In 1999, the Parliament of FBiH adopted the Law on Basic Social Protection, Protection of Civilian Victims of War and Protection of Families with Children (codified regulation). With the adoption of this Law, transition processes in the social sector were initiated, as the legal framework for the beginning of the reform was created. The final objective of the reform in this sector is to ensure social care and assistance to all who are in the state of social need, in the most economic and most humane way.

The Federal Law on Basic Social Protection, Protection of Civilian Victims of War and Protection of Families with Children contained the provision which obligated the cantons to adopt their own laws on social protection within three months. Unfortunately, the adoption of cantonal laws was delayed, so that, by now, eight cantons have adopted their regulations, while in the remaining cantons the parliamentary procedure is still ongoing.

The basic legal act regulating this area in RS is the Law on Social Protection, adopted in April 1993, and amended in July 1996. This Law contains concepts inherited from the pre-war period, such as, for example, “social security and material provisions” which imply a higher level of social protection than the one possible in the current conditions.

In FBiH, the immediate provision of social and child protection is managed by 10 cantonal ministries for labor, social policy, refugees and displaced persons, through the operations of 79 local services (54 centers for social work and 25 services from the provision of activities from the area of social and child protection and two cantonal centers for social work, in Sarajevo and Bosnian Podrinje cantons).

The institutions in charge of social protection in RS are the RS Government and the local community. The RS is responsible for regulating and defining relations, rights, responsibilities, authorities and contents of social protection. The local community is the framework for meeting the majority of personal and joint needs of citizens, including social protection. Municipalities are the framework in which one can have influence on the prevention and the elimination of various social problems, and it is the decision maker in the execution and improvement of social protection.

5.1.2. Institutionalized care

Prema podacima iz 2002. godine u FBiH u 25 ustanova socijalne zaštite bilo je zbrinuto 3.169 korisnika. U kracem razdoblju u FBiH osnovano je 11 centara za dnevno zbrinjavanje lica sa mentalnom retardacijom.

Besides the centers for social work, there are 10 institutions in the RS, which, as a priority, provide care for elderly and for children, i.e. for persons with special needs. On average, 1,600 persons from the population of elderly people and children are located there, as their needs could not be met in any other way.

5.2. Problems in the area of social protection

The system of social protection in both entities of BiH is in grave difficulty, as it is faced with an enormous increase of demand for various types of social assistance, which are still growing. The functioning of that system was made more difficult by inadequate laws, which are prescribing a far wider scope of social protection than the budget capacities allow. This problem is additionally complicated by the division of authorities between the levels of government (especially in FBiH), where the entity is prescribing the level of social protection, and the lower levels of government are under obligation to ensure resources for its realization. An additional difficulty is the lack of updated and comprehensive databases on social protection beneficiaries.11

Social protection is at present characterized by:

  • economic vulnerability of the majority of the population and constant worsening of social problems, i.e. increase of the number of people who are requesting social assistance (refugees, civilian victims of war, returnees, veterans etc);
  • lack of realization of legally stipulated social protection rights, as well as weak linkages between the social protection institutions on municipal and entity level in RS;
  • funding the forms of social and child protection on cantonal level in FBiH faces serious difficulties, due to the lack of funds in cantonal budgets. The capacities of Federal government to assist the cantons in this area are limited, as the jurisdiction social and child protection, i.e. the provision of funding is, in keeping with the FBiH Constitution and the FBiH Law on Distribution of Public Revenues, lies exclusively with the cantonal or municipal bodies;
  • inadequate definition of methods of funding the social protection system and a high indebtedness within it;
  • poor material and staff capacities in social protection institutions;
  • inequalities between different regions or cantons and non-existence of a solidarity system;
  • problems resulting from the privatization process;
  • lack of programs for poverty reduction, underage criminal behavior, struggle against substance abuse, alcoholism etc.;
  • lack of records and monitoring, which would enable timely detection of the needs of population and timely provision of protection

5.3. Priorities in social protection

5.3.1. Establish the modern system of social protection adapted to the possibilities of the community:

  • adopt harmonized laws on social protection in FBiH and RS, which will determine the scope of basic entitlements from the area of social protection, which will be financed from the entity budget or from some other source,
  • adopt the law on assuming founder’s rights over social protection institutions,
  • provide adequate support to centers for social work: increase investment in development of local services, training of personnel, adoption of norms and standards in labor, conduct permanent revision of beneficiearies in cooperation with the local community, NGOs, etc.
  • establish a new database of beneficiaries of social protection, to determine the actual condition of social vulnerability of the population and the establishment of new social and economic statistics, in the entities and BiH, to ensure information system compatibility for the identification, as well as revision, of the number of socially vulnerable persons. It is also necessary to adopt a manual on the content, obligations and methods of keeping the single registry records of the beneficiaries of social protection in the FBiH and the RS,
  • develop intersectoral cooperation for a sustainable system of social protection, but also for the improvement of the system, implies a much stronger connection between the social protection system and the following: health protection, education, judiciary, local police forces, financial sector etc.,
  • conduct regular surveys of households and of living standards to collect reliable data for developing and planning social protection in the FBiH and the RS and for the harmonization of social policy on the level of BiH.

5.3.2. Introduce market principles and alternative forms of care into social protection system:

  • promote volunteer work in the social protection system,
  • develop the nongovernmental (NGO) sector in the social protection system, as an equal partner for the governmental sector,
  • reform of funding regulations and by introduction of tax benefits, endourage involvmeent of the local community and the private sector, through introducing stimulating measures for grants and tax benefits for aid channelled to socially vulnerable groups,

To establish a mixed system of social protection in the FBiH and the RS, it is also necessary to amend regulations, as follows:

  • In the area of health protection,
  • In the area of education,
  • In the reform of the existing disincentive fiscal system.

5.3.3. Ensure equal access to social protection

  • determine a single minimum of social protection rights for the entire BiH,
  • ensure regular payments of social protection benefits to the most vulnerable categories,
  • ensure that legal benefits in an equal amount are paid to all users regardless of the place of residence.

The plan is to achieve this by affirming the principle of solidarity by allocating the funds from the entity level (in FBiH) and mandatory allocation of a predetermined share in the municipal budgets (in RS), which will necessitate changing the laws on allocation of revenues. The limited funds impose the partial approach to this matter: FBiH plans to implement this reform in 2004–2005 in the area of child protection and protection of civilian victims of war.

5.4 Specific segments of social protection:

5.4.1 Individuals with disabilities

The protection of persons with disabilities has significantly deteriorated in the post-war period in both entities, for numerous reasons, and it might be said to be in inverse proportion with increase of the number of persons with disabilities. According to the accepted methodology, persons with disabilities who are social protection beneficiaries are persons with bodily damage, psychological difficulties and arrested development, persons with combined difficulties, persons with hearing, sight and speech impediments. The number of persons with disabilities in BiH is difficult to determine, as the data are collected in accordance to different criteria and different methodologies, taking into account that in a number of cantons (FBiH), and a number of municipalities (RS) not even lists of disabled persons have been compiled (particularly in returnee municipalities).

In the coming period it is necessary to harmonize legal protection of all persons with disabilities on the basis of standard rules for the equalization of opportunities for persons with disabilities. This will require harmonization of the legislation with international standards and norms, together with facilitating the process according to which the beneficiaries acquire those social protection benefits, along with the rationalization of administrative procedures for applying for these social protection benefits. It is also necessary to set new standards in the appropriate laws in the regional planning and construction segments, adapted to the needs of numerous persons with disabilities.

5.4.2. Protection of families with children

Recognizing the enormous importance of families and the rearing of children, one of the objectives of the strategy is to establish, further develop and improve the system of protection of facilities with children. This objective needs to be achieved through ensuring realistically possible forms of protection, i.e. basic rights of families with children.

The most important forms of protection of families with children are stipulated by Federal and cantonal laws:

  • Children’s allowance is paid only in the Sarajevo Canton, for 19.648 beneficiaries with 36,261 children. The other cantons pay no children’s allowances.
  • Wage remuneration to employed mothers, for the duration of their absence from work caused by the care of children, and allowance for mothers who are not employed.

The Children’s Fund operating in RS is seen as the most effective segment of social protection in BiH, and further development in this field is expected to introduce similar solutions in RS.

In this area it is necessary:

  • adopt a special law on child protection in FBiH and adapt the existing law in RS,
  • eliminate existing legal and legislative barriers for realization of children’s rights, especially for children with disabilities, in the sectors of education, health, spatial arrangement and urbanism, finance etc., and the adoption of more strict legislative penalties for breaching the rights of children,
  • in connection with child protection, it is necessary to adopt and amend the following laws in FBiH: the Family Law, the Law on Amendments to the Criminal Code of FBiH, the Law on Criminal Procedure, the Amendments to the Law on Distribution of Public Revenues and Financing of the Federation of BiH, the Amendments to the Law on Lottery and Games of Fortune, the Amendments to Federal and cantonal laws on internal affairs, as well as to eliminate the existing legal and legislative barriers for the execution of children’s’ rights, especially for children with disabilities, in the sectors of education, health care, regional planning and urbanism etc.,
  • to define family related policies in FBiH and RS, within the framework of defining population related policies. The most important measures include the children’s benefit, tax exemptions, paid maternity and paternity leaves, family services etc.,
  • establish the Child Protection Fund in FBiH. In the meantime, it is necessary to fund at least the minimum of rights (children’s allowances) in the same amount for all beneficiaries in FBiH, on the basis of the principles of solidarity and subsidiarity, within the frameowrk of reaching the objectives of the poverty reduction strategy and assistance to the most vulnerable groups in the society, particularly since the children, particularly those up to age of five are the category of population most vulnerable to poverty.
  • establish a newdatabase for monitoring the beneficiaries of child protection in the FBiH, according to European standards, with constant monitoring of the actual situation of the vulnerabilityof families and children,
  • develop and strongly support alternative forms of care, primarily accommodation in foster families, day centers and half-day centers, as they are a more humane, but also a less expensive, form of care for children without parental care and children with special needs (physical and mental disturbances), in comparison with institutional care.

5.4.3. Civilian victims of war

In FBiH, there are 8.330 persons entitled to personal or family disability pension, and additional 11.589 in the Republika Srpska. The basic rights of the civilian victims of war, as specified under this law, and exercised at the level of FBiH, are as follows: personal disability pension, allowance care and assistance by another person, orthopedic allowance, family disability pension, and child allowance. In RS, the rights of the civilian victims of war have been regulated by the same law and in the same way as the rights of the disabled war veterans.

Specific priorities in this segment are:

  • to transfer the protection of civil victims of war in FBiH from the cantonal to the entity level, and within the framework of the protection of the protection of disabled veterans, as is the case in the RS (a relevant law is in the parliamentary procedure),
  • in this segment, as for the other programs of assistance for persons with disabilities, it is necessary to harmonize the criteria for the determination of the level of disability, i.e. prepare a standardized manual to be used in all centres for social work, and establish the single commission for determining the level of disability.

6. Refugees, displaced persons and expelled persons

6.1. Situation

Of the total of 2.1 million of refugees and displaced persons, the BiH Ministry of Human Rights and Refugees estimates that 283,900 displaced persons still live in FBiH (35% from the territory of FBiH and 65% from RS). In RS, there are around 248,300 displaced persons, and about 23,500 in the Brčko District. It is estimated that about half a million of refugees from BiH live abroad abroad, of which about 100,000 do not have a permanent status, and therefore it is necessary to anticipate the possibility of their return to BiH. According to the UNHCR, there still are 29 collective centers, housing 1,997 persons. In FBiH, there are 16 centers with around 1,219 persons, and in RS there are 13 centers with 778 persons.12

According to the data of the BiH Ministry of Human Rights and Refugees and UNHCR, from the signing of the Dayton Peace Accord until the September 30, 2003, the total of 976,810 returns of refugees and displaced persons in BiH was registered, of whom 436,883 are refugees and 539,927 are displaced persons. 713,261 persons, i.e. 73.02 percent, returned to the territory of FBiH, 242,598 persons, or 24.84 percent, returned to the RS, and 20,951 persons, or 2.14 percent of refugees and displaced persons returned to the Brčko District.

Concerning the so-called minority returns, 2002 was the most successful year, ever since the signing of the Dayton Peace Accord, as of 107,909 registered returns, 102,111 of them, which is close to 92 percent, were categorized as “minority returns”. The return of members of minority nations in the course of 2002 outweighed the results achieved in all previous years of return.

Although the tempo of return, and, especially, of minority return, has significantly accelerated in the last two years, the representatives of the Ministry of Human Rights and Refugees of BiH estimate that about 50 percent of refugees and displaced persons are still not in their homes. This Ministry also estimates that some 114,000 refugees from the countries which have extended their hospitality to refugees, and about 300,000 displaced persons (of about 574,000 – according to a survey conducted in 2000), want to return to their homes. Therefore it is necessary to ensure close cooperation with competent institutions in those countries to bring back to BiH as many of the remaining refugees as possible.

Creation of the conditions for sustainable return and implementation of property law constituted an important part of the Road Map.13 In the Report of the European Commission to the Council on readiness of BiH to start negotiations on stabilization and accession, the issue of refugees, displaced and expelled persons is seen as crucial in the process of preparation for SAA negotiations in the area of political trends, which, among other things, needs to be addressed on the regional level.

6.1.1. Legislative and institutional framework

The legislative framework at the level of Bosnia and Herzegovina comprises:

  • the Constitution of Bosnia and Herzegovina (Article III, item 1. paragraph f),
  • Annex 7 to the General Framework Agreement for Peace in Bosnia and Herzegovina,
  • the Law on Refugees from BiH and Displaced Persons in BiH, with its accompanying bylaws.

The legislative framework of FBiH in the field of protection of refugees, displaced persons and refugees comprises:

  • The Law on Displaced Persons – Refugees - Returnees to FBiH, and accompanying bylaws,
  • The adoption of cantonal laws on displaced persons and refugees is currently underway.

The legislative framework of the RS in the field of protection of refugees and returnees includes:

  • The Law on Refugees, Displaced Persons and Returnees, and accompanying bylaws;
  • Property laws and bylaws in the entities (The Law on Abrogation of the Law on Abandoned Apartments and the Law on Abrogation of the Law on Temporarily Abandoned Property Owned by Citizens).

Governments on various levels handle the issues related to refugees and displaced persons:

  • BiH Ministry of Human Rights and Refugees;
  • FBiH Ministry of Displaced Persons and Refugees with the Office for Displaced Parsons and Refugees;
  • RS Ministry for Refugees and Displaced Persons, with 52 municipal sections and 4 regional offices in FBiH, with the total of 520 employees;
  • Sector for Refugees in the District of Brčko;
  • Sector for Planning and Economic Development in the Brčko District;
  • Cantonal line ministries in all ten cantons;
  • Municipal services in 84 municipalities of FBiH, working in this field.

Funds for supporting the return of refugees and displaced persons are set aside by all level of government and significant, although declining, assistance of international organization and donors is still incoming for this field:

  • Funds from the budget of FBiH (3% of the return needs);
  • Funds from cantonal budgets;
  • Funds from municipal budgets;
  • Other funds in compliance with decisions of the FBiH government and cantonal governments and also in compliance with administrative decisions of municipalities;
  • Other funds.

Among the international organizations active in the field of assisting the return of refugees, the most important role, naturally, belongs to the UNHCR, who had been vested with the leading humanitarian role in BiH. The OSCE and the CRPC also play significant roles with respect to property rights of refugees and displaced persons, and they have, together with many other organizations, contributed to creating conditions for more successful return. The EU, USAID, UNDP, IOM and a whole range of other international, governmental and non-governmental organizations, have been providing, and still do, the assistance in the reconstruction and return process. Prior to the end-2003, the RRTF (Return and Reconstruction Task Force) had also had an important role of coordinating international activities related to return and reintegration of refugees and displaced persons, operating under the OHR. Its tasks will be assumed by the BiH Ministry for Refugees and Displaced Persons.14

6.2. Problems

Despite the favorable situation and a more accelerated tempo in the last two years, the most serious barriers for the finalization of the process of return of refugees and displaced persons are the safety of returnees from harrassment and violence, the implementation of property regulations, still not fast enough in some municipalities, the need for reconstrution of the houses of returnees, provision of economic and social conditions for the sustainability of return, and the lack of updated databases on refugees and returnees.

The repatriation of refugees, resulting in the relocation of returnees, directly influences the constant increase of the number of displaced persons in FBiH.

6.2.1 Security

Personal security is certainly a key factor for the sustainability of the return of refugees and displaced persons. Although the security situation is gradually improving, occasional incidents directed against the returnees of minority nationalities still occur occasionally, particularly in RS.

6.2.2. Implementation of property regulations

Over the last two years, the process of return of property and occupancy rights to the refugees and displaced persons from the war period has been greatly accelerated. As of August 31, 2003, of the total number of applications for return of property (privately owned or occupancy right) submitted, 95 percent of cases were resolved, and in 88 percents of the cases the property in question had been returned. In FBiH, the process of passing decisions is in its final stages, with 97 percent of applications resolved, and the property returned in 88 percents of the cases. In RS, the return of property has achieved the same pace as in FBiH, which is happening for the first time since the property return process has been monitored in both entities; so the percentage of the applications resolved is 94 percents, and 88 percents of the applications were resolved by this time.

The issue of property return also reflects on the aspect of “legal uncertainty” because the regulations in this area have changed so many times since 1992. There still are around 28,000 cases to be resolved.

6.2.3. Reconstruction of housing units

The document titled “Strategy of Bosnia and Herzegovina in Implementation of Annex 7 to the Dayton Peace Agreement”, which was endorsed by the Peace Implementation Council in Brussels, on January 20, 2003, and later adopted by the Council of Ministers and the Presidency of BiH, foresees a reconstruction of 50.000 housing units for the needs of the returnees. This number is based on the fact that around 400,000 persons have been registered in the data bases as those who want to return to their pre-war homes. In the initial phase, ending in 2004, planned is the reconstruction of around 30,000 houses, while the remaining 20,000 housing units would be reconstructed by end-2006.

Iz budžeta svih nivoa uprave u BiH, u 2002. godini je za potrebe podrške povratku izdvojeno oko 100 miliona KM, a procjenjuje se da su sredstva koja je upotrijebila medunarodna zajednica bila na istom nivou. U okviru Sporazuma o udruživanju i nacinu realiziranja sredstava za potrebe rekonstrukcije i povratka u BiH u 2002. godini, izdvojeno je 15,8 miliona KM (3 miliona KM iz budžeta BiH, po 6,4 miliona KM iz entitetskih budžeta) za zajednicke projekte na osnovu kriterija, koje je definirala Komisija za izbjeglice i raseljene osobe.

The similar agreement for 2003, which was signed by the entity ministries and the BiH Ministry for Human Rights and Refugees, provided 14 million KM (2 million from BiH budget, and 6 million KM from each of entity budgets). The novelty compared to the previous period is that the European Commission also decided to co-fund in the joint project with the amount of 2 million EUR.

According to the available information, it can be reliably stated that, in the coming years, the available funds will not by far suffice in meeting the assessed needs because the in-flow of international donations will diminish more and more, while the budgets of the governments in Bosnia and Herzegovina will not be able to fully assume the burden of financing the return process.

6.2.4. Databases

One of the most serious problems, which has hampered the process of refugee return, is the lack of a database on the activities which have been undertaken, those ongoing and those being planned. A better approach to such information would permit the recognition of actual priorities and eliminate double beneficiaries from the program. Because of undefined links between various administrative levels, the exchange of information is insufficient. Coordination with international organizations could also be improved. The negotiations with the European Commission and the RRTF on the transfer of the HVM (Housing Verification Monitoring) database on housing units reconstructed by donor funds, and this database has already been made available to the BiH Ministry of Human Rights and Refugees.

The existing data base on displaced persons needs to be updated through registration of the returns implemented, i.e. by de-registering the displaced persons who ceased to qualify for that status. By determining the actual number of displaced persons who remain would greatly facilitate future planning and finalization of the return process.

6.2.5. Sustainability of return

The most important problem for the majority of returnees, even after they return to their property, is how to ensure economic existence. Apart from the difficulties with finding employment, returnees also face problems in access to the basic public services: education, health care and social protection, the payment of pensions. In the activities so far, a number of agreements between the entities were reached in various areas, such as education, but there are no practical results yet.

6.3. Priorities

6.3.1. Supplement the legislative framework and ensure its full implementation

  • for full achievement of goals stated in the strategic document – BiH Strategy for Implementation of Annex 7 to the Dayton Peace Accords, it was necessary to adopt the Law on Changes and Amendments to the Law on Refugees from BiH and Displaced Persons in BiH. This Law was published in the “Official Gazette of BiH” No. 33/03, of November 5, 2003, and the urgent adoption of bylaws, which would ensure the implementation of the assorted legislation is now urgently needed,
  • harmonize entity laws with the Law on Refugees from BiH and Displaced Persons in BiH;
  • harmonize laws and by-laws in the following areas: education, health care, employment, pension and disability insurance, distribution of socially-owned land, property-related regulations and their implementation,
  • ensure protection of human rights guaranteed by the BiH Constitution in the entire BiH and implement the decision on the constitutive peoples on all levels, in line with the 1991 census.

6.3.2. Strengthen the coordination between the institutions implementing the return of the refugees:

  • urgently reorganize and rationalize the administration engaged on the implementation of Annex 7;
  • establish a vertical chain of communnication in which the BiH Ministry of Human Rights and Refugees would act as an umbrella institution defining policies in the field of return and coordinating the implementation, which would be the responsibility of line structures in the entities and in the Brčko District;
  • intensify the activities in creation of regional centers of the BiH Ministry for Human Rights and Refugees that are to be established in Banja Luka, Tuzla, Mostar and Sarajevo,
  • appoint the members and strengthen the role of the Commission for Refugees and Displaced Persons;
  • urgently establish the fund for return as an independent financial institution at the level of BiH, in accordance with the Law on Refugees from BiH and displaced persons within BiH. Make sure that the Agency for Civil Service starts hiring the personnel for this fund as soon as possible,15
  • intensively continue the activities started in relation to Bosnia and Herzegovina joining the Development Bank of the Council of Europe, which would provide access to the funds of this financial institution under the most favorable conditions.

6.3.3. Improve the institutional capacities:

  • organize professional training of employees in the social protection network, in information technology, in adequate provision of social services, in financial planning and analysis, writing narrative and financial reports, drafting bylaws and laws;
  • take over and maintain the database on beneficiaries of donor aid in reconstruction;
  • update the existing data base on displaced persons by registering the realized returns, or by deregistering the displaced persons who ceased to be so.

6.3.4. Plan the return by placing focus on long term sustainability:

  • create preconditions for returnees to stay in their homes: conduct demining (4.2% of BiH territory is still inaccessible due to the landmines), establish infrastructure, power and phone connections, remove all forms of discrimination in employment,
  • consistently implement the BiH Constitutional Court’s decision on constituent peoples of BiH;
  • governments at all levels should adopt and implement the laws and regulations required for normal inclusion of the returnees into the life of local community, which also implies the guarantee of their personal and property safety. Appropriate solutions need to be agreed and implemented urgently to enable the returnees to use the services of education, health care and social systems, receive pensions, etc., under the same conditions as everybody else.
  • provide alternative housing for individuals legally entitled to it;
  • establish mechanisms for taking care of the elderly returnees who have nobody to care for them;
  • take steps to finally close collective centers;
  • introduce and implement tougher sanctions for destruction of other people’s property when leaving the illegally occupied houses and apartments;
  • review the grants of construction land.

6.3.5. Continue the implementation of property laws and the reconstruction of housing units

In spite of the progress made in implementation of property laws over the recent period, this activity will have to continue in 2004, when the remaining 28,000 cases will have to be resolved.

A plan was made to renew 30,000 houses in the 2003–2004 period, and additional 20,000 in the period 2005–2006. According to the current parameters, a number of housing units have been reconstructed in 2003, but the actual needs by far exceed the results so far. There is a real danger that the whole process might extend after 2006, which would, most certainly, affect the final decision of refugees and displaced persons concerning return to their pre-war homes.

6.4. The issue of return should be dealt with on the regional level

Since refugees from Croatia and Kosovo are present in BiH, this problem will have to be addressed on the regional level.

7. Funding social sector reforms in FBiH

The present difficult economic situation in FBiH and limited public resources have caused that only three most urgent reforms in the sector of social assistance and protection requiring yearly funding are proposed. These three changes are as follows:

  • 1) funding child allowance from FBiH budget in 2004 – 2005,
  • 2) funding basic benefits to the civilian victims of war from FBiH budget,
  • 3) funding minimal social assistance benefits from 2006.

The above measures are proposed with the aim of remedying the present discrepancies in the level of benefits between the cantons in FBiH and of ensuring equal minimal allowance to all beneficiaries. In accordance with the FBiH Constitution, the cantons and municipalities would retain the right to fund supplemental benefits, in accordance with their respective legislation. Due to limited funds, i these measures would be phased in, one by one, every year, starting from 2004.

7.1. Funding child allowance in FBiH

The proposed amount of child allowance was defined as 6 percents of the average salary in FBiH, so in 2005, it would amount to 32 KM. It was estimated that about 150,000 children would be receiving this allowance, so the annual outlay would total KM 68 million, to be sourced from gradual increase of employment and GDP by the end of 2007.

7.2. Funding basic benefits for civilian victims of war from the FBiH budget

For civilian victims of war in all parts of FBiH, the personal orfamily disability pension would be paid. In 2004, the the total of KM 8,735,000 would be needed to pay benefits to 8.330 beneficiaries (the distribution costs would amount to KM 40,000); it is planned that the level of disability pensions would match the growth of GDP in the coming four years period.

7.3. Funding minimal social assistance benefit

Some 97,000 beneficiaries of social assistance in FBiH are qualified to receive the harmonized minimal benefit. This benefit may be defined as a certain percentage of the lowest pension or the lowest wage in FBiH. According to the most conservative proposal, the minimal benefit would amount to 40 percents of the lowest pension, i.e 84. KM, which would require KM 97,776,000 in 2006. These benefits would increase in line with the GDP growth.

8. Funding the social sector reforms in RS

The need to finance one basic benefit at the entity level in RS has been identified, in order to provide to all beneficiaries with a harmonized minimum of social assistance. The determination of the required funding is underway. This process has proceeded slowly and with difficulties owing to the lack of adequate records and coordination between the municipal level and the Ministry for Health and Social Policy of RS.

9. Indicators:

Monitoring the following basic indicators would allow a sound analysis of the results of implementation of the Medium-Term Development Strategy – the PRSP and government policies.

IndicatorSource

(with BiH statistical agencies)
Assessment for

BiH

(2000/2001)
Projections

for

2007
Percentage of population living under the poverty line16LSMS17

WB BiH Poverty Assessment 2003
19.1% (general)

20.0% (general)
16%
Poverty gapLSMS

WB BiH Poverty Assessment 2003
4.6%
Share of the poorest fifth in the national consumptionLSMS9.6%
Prevention of malnutrition in children under 5 years of ageUN Statistics Division, UNICEF4% (2000)
Population eating less than daily energy needs (malnutrition)UN Statistics Division, FAO200,000 stat.

(1998)
Gini index/coefficientIHR MRC Report0.260.25
Share of the richest fifth in the revenuesLSMS35.8%
Unemployment rateLSMS

WB BiH Poverty Assessment 2003
16.4% actual13.5%
28.1% narrower22%
43.6% broader35%
Rate of unemployment in the age group 15–24NHDR 200234.8%30%
Informal sector share in the overall employmentLSMS36.2%

Notes

1„European Commisison Report to the Council on BiH readiness to start the negotionations with the EU on stabilization and accession», Brussels, November 2003, p. 34.
2This refers to social assistance to classical social cases and excludes transfers for veterans and disabled.
3The White Paper is the main document for creation of preconditions for working operation on the EU internal market. It provides guidelines to administrative and judiciary bodies of the countries who wish to approximate the European standards, with the long term goal being the integration in the EU structures.
4Statistical data on economic and other trends, the Federation Institute for Statistics, January 1, 2004.
5Fond PIO RS, January 2004.
6Social Insurance Technical Assistance Project.
7Social Insurance Technical Assistance Project (SITAP), Report No. 25672, World Bank, May 12 2003, p. 5.
8SITAP, p. 6.
9Information of the Federal Ministry of Veterans’ Issues, April 2003.
10Federalno ministarstvo rada i socijalne zaštite, Ministarstvo zdravstva i socijalne politike RS, septembar 2003.
11Ovaj problem istice i Studija izvodljivosti EC („Izvještaj Komisije Vijecu o spremnosti BiH za otpocinjanje pregovora sa EU o Sporazumu o stabilizaciji i pridruživanju“, Sarajevo, 18. novembra 2003., str. 34.)
122003 UNHCR Programme in Bosnia and Herzegovina, Collective Center Status (as of October 31, 2003), http://www.unhcr.ba/programme/ccentar.htm
13The Road Map is the reference document providing 18 conditions the national bodies had to meet in order to qualify BiH for the feasibility study. In 2002, the requirements of the Road Map have been declared essentially met.
14It is important to emphasize the recently initiated process of transfer of responsibilities of the international institutions whose mandate expired on December 31, 2003. First of all, this applies to the CRPC, whose mandate in BiH ended on December 31, 2003, but also to RRTF, which will assume a somewhat different role in BiH from 2004. All responsibilities handled by these international organizations have been transferred to the agencies of Bosnia and Herzegovina Government.
15The concern about the slowness in creation of the fund for return in BiH has also been shown in the EC Feasibility Study of the Preparedness of BiH for Starting Negotiations with the EU on the Stabilization and Associationi Agreement (“Report of the Commission to the Council”, Sarajevo, November 18, 2003, p. 12)
16The general poverty line for BiH has been used here.
17The complete reference is: UNDP, DFID, WB LSMS (“The BiH Living Standards Measurement Survey”); the preliminary report has been published as a publication of the BiH Statistics Agency, of the FBiH Institute for Statistics and the RS Institute for Statistics, who have cooperated in implementation of the LSMS.

V.2. SECTORAL PRIORITIES – EDUCATION

1. Goals

1.1. Modernize and improve the quality of education on all levels, with special emphasis on information technology and the environment

1.2. Eliminate discrimination in education

1.3. Reform primary education, ensure total inclusion, change the structure of and develop curriculum for secondary education that would allow student access to tertiary education and ensure harmonization with the European model

1.4. Implement institutional and teaching staff reforms in tertiary education in order to ensure international recognition of university diplomas from BiH.

1.5. Develop scientific research as a prerequisite to quality education

1.6. Create conditions and capacities for easy retraining, as well as continuous modernization and update of knowledge, and adopt a lifetime learning approach

2. Situation

In 2003, there were approximately 606,000 students in Bosnia and Herzegovina. Around 367,000 attended 1,836 primary schools, and around 172,000 students attended 295 secondary schools. There are seven universities with 95 schools and 67,000 full time students.

It is a known fact that the most advanced and wealthiest countries also have the best educational systems. Whether they are rich because they have such strong educational systems, or vice versa, it is very hard to say, but there is no doubt that the two are directly related. This should be complemented with the fact that the more educated people there are, the less likely it is that they will be poor. As a result, it is impossible to define any reform process intended to reduce poverty without an element relating to education reform.

The right to education is a fundamental human right which allows underprivileged children and adults to rise above the poverty level.1 It is important to note that exercising the right to education lays a strong foundation for the exercise of other civil, cultural, political, economic and social rights. Education benefits the society as a whole, as well as individuals. The right to education is built into the Constitution of Bosnia and Herzegovina, which states that “The rights and freedoms set forth in the European Convention for the Protection of Human Rights and Fundamental Freedoms and its Protocols shall apply directly to Bosnia and Herzegovina. These shall take priority over all other laws. All persons within the territory of Bosnia and Herzegovina shall enjoy human rights and fundamental freedoms, including the right to education.”2

The White Paper considers education to be one of the most important elements in the process of elimination of discrimination, through mutual recognition of professional qualifications aimed at achieving free movement of people and services. The Stabilization and Association Agreement (SAA) considers this to be political cooperation. BiH is a signatory to the Bologna Declaration.3

2.1. Legal and Institutional Framework

Education in BiH is covered by legislation at various levels in the FBiH and RS. In the RS all education levels are covered by Entity level legislation. There are separate laws for each of the above four levels of education. In the FBiH, education is regulated by legislation at the cantonal level. Each of the ten cantons has its own law on pre-school, primary and secondary education, and the cantons that have universities also have laws on higher education. The Brčko District, as a separate organizational unit in BiH, has its own laws covering each of the four levels of education. Therefore, there are more than thirty laws of different levels regulating this area.

In the RS, the Ministry of Education and Culture is responsible for monitoring, planning and executing policy. In the FBiH this role belongs to the cantonal ministries of education and the Federal Ministry of Education and Science at the entity level. The Federal Ministry of Education and Science acts mainly as a coordinating body for education policy among the cantonal institutions. The Agency for Standards and Evaluation for General Education at the inter-entity level, and the Coordinating Committee for Higher Education, should facilitate the required formulation of a coherent education policy framework.

The rules and regulations for planning the funding of primary and secondary education are similar in the FBiH and RS and are based on the principles of public funding. Neither Entity allocates sufficient funds for education. The funds are spent primarily on salaries and compensations of people employed in the education sector and very little is channeled into current operating costs and maintenance; what is spent under these headings often goes to pay for the cost of public utilities. The shortage of funds has lead to the deterioration of school buildings. Capital investments are funded mainly from donations and grants. The sustainability of the present funding system is jeopardized by the rapidly falling budget revenues of the Entities and declining international aid. Problems with educational financing are compounded by the fact that, until last year, the entity budgets, as well as most cantonal budgets, did not allocate funding for science. The funds allocated for science last year were entirely insufficient.

Although the funds that are allocated for educational purposes are inadequate, the total allocations for education as a percentage of GDP in BiH are far greater than the average of other European countries (EU and CEE). The level of budget allocations in both Entities, although high as a proportion of GDP, is insufficient to fund high quality education. Budget allocations for education are not equal at the entity and cantonal levels. Education reform, therefore, calls for balanced funding for education in both entities.

The total share of GDP spent on education in BiH is 6.4 percent, which far exceeds the average for other European countries (EU and CEE), so it seems illogical that the financial position of education is so poor that it is often unable to cover the costs of even basic activities. However, GDP in BiH is very low and education is not organized rationally and, further, it is burdened with many problems.

3. Problems

The main characteristics of the present day educational sector in BiH are as follows:

  • the large number of laws regulating education,
  • the highly politicized nature of education,
  • education accounts for a signi