BOSNIA: IMF PROGRAM OFF TRACK

UNCLAS SECTION 01 OF 02 SARAJEVO 001299

SENSITIVE
SIPDIS

DEPT FOR EUR/SCE AND EEB/IFD
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: EFIN PGOV IMF BK
SUBJECT: BOSNIA: IMF PROGRAM OFF TRACK

SARAJEVO 00001299 001.2 OF 002


Summary
--------------

1.(SBU) IMF representatives conducting the first progress
review of Bosnia's $1.6 billion IMF standby arrangement gave
a pessimistic report of the country's compliance with
conditions needed for disbursement of a second tranche on
schedule. They noted that both BiH entities -- the
Federation of Bosnia and Herzegovina and the Republika Srpska
-- had as yet failed to provide complete 2010 budget
information and appeared to be coming up short in fulfillment
of several conditions. The IMF reps believed that both
entities had resources in the short term to survive without
the disbursement, and they acknowledged various scenarios in
which disbursements could be postponed in the event that BiH
failed the current review. They pointed out, however, that
the fiscal pain for both entities would only get worse, the
longer they waited to meet conditions. End summary.

Second Disbursement Ideally Due in December
--------------

2.(SBU) IMF Mission Leader Costas Christou and
recently-arrived IMF Resident Representative Milan Cuc called
on Ambassador and Econ Counselor November 13, the tenth day
of a first full review of Bosnia's compliance with conditions
of the IMF standby arrangement approved in June 2009. The
program envisioned payments totaling $1.6 billion in twelve
quarterly installments over three years. A first,
front-loaded disbursement of roughly $283 million was paid to
the Central Bank of BiH in July upon IMF board approval of
the program. The second tranche, worth $136 million, was
supposed to be available to the Central Bank as early as
December 10, 2009, if performance criteria had been met by
September 30 and confirmed by the IMF review mission.

3.(SBU) An early benchmark, approval by the two entity
parliaments of rebalanced 2009 budgets by the end of August
2009, appeared to have been met, just barely in the case of
the Federation. The budget rebalancing required cuts in
current government wages, and, in the case of the Federation,
10 percent reductions in social benefits to favored
categories of veterans and war victims. Throughout the
summer and fall, veterans groups staged demonstrations
protesting the cuts. Their protests culminated in a
threatened storming of the Federation Parliament on October
2, leading the Federation House of Representatives to adopt a
hasty resolution repudiating both the rebalancing of the 2009
budget and any future budget cuts to meet IMF conditions.
The Representatives' resolution has not been introduced in
the House of Peoples and has no legal standing, but leaves a
chilling effect on the Federation government's ability to
meet conditions of the IMF program.

Federation Officials in Disarray
--------------

4.(SBU) Christou reported that his team was still
entertaining some hope that leaders in the two entities would
reach necessary agreements on fiscal policies to be able to
receive the next disbursement in December. However, he said,
officials in the two entities were not well prepared for the
IMF review, and the team after ten days still did not have a
coherent picture of the situation. He noted that within both
entities, leaders were not telling the same story or agreeing
on a course of action. For example, Federation Prime
Minister Mujezinovic had already indicated in public that he
did not expect a successful IMF review or a December
disbursement, leading Federation Finance Minister Bevanda to
react angrily in private that the PM was undermining the
discipline of the program. The Prime Minister and Finance
Minister in fact would not sit down with each other to meet
the IMF team jointly, Cuc added. The Federation, Christou
said, has been unable to present a consolidated 2010 budget,
because deep disagreements remain over how to handle wages,
government transfers, and pensions.

Republika Srpska - Controlled Chaos
--------------

5.(SBU) The situation in the RS was only slightly better,
Christou and Cuc said -- a case of controlled chaos, compared
with the uncontrolled chaos in the Federation. PM Dodik and
Finance Minister Dzombic at least made similar statements
that they were determined to stay on track with the IMF
program, though they did not have a shared plan on how they
would accomplish that. Although the RS does not have the
problem facing the Federation of having to cut overly

SARAJEVO 00001299 002.2 OF 002


generous social benefits, it does, like the Federation, have
to deal with an unsustainable pension system. And while
Banja Luka has the advantage of being able to draw on the
escrow account raised through the privatization of the RS
telecommunications company, it has been going through the
money quickly (much of it diverted away from the type of
investment projects for which it was intended),and the
account is expected to dry up by mid-2010.

Muddling Through in the Short Term
--------------

6.(SBU) Christou and Cuc were not overly concerned about the
short-term impact of a failure of the current review,
believing the Bosnians can manage for a while without the
$136 million disbursement. In the RS, they will continue to
draw on the escrow account, and in the Federation, they will
probably delay some pension payments and transfers owed to
the cantonal governments, they said. In the meantime, the
IMF can be flexible, either coming back for another review if
the situation appears to have improved and conditions appear
to have been met, or waiting until the next scheduled review
in March 2010 and lumping the second tranche in with the
third. But one way or another, the Bosnians will have to
make difficult fiscal adjustments, they said. The IMF
program was meant to ease the adjustment, but the more the
they delay the necessary reforms, the bigger the adjustment
they will have to make down the road.

Comment
--------------

7.(SBU) The costs of failure to meet terms for this second
tranche are higher than just the IMF's $136 million. A World
Bank budget support program worth another $100 million (with
the possibility of more later) and a complementary EC
assistance package worth 100 million euros ($149 million) are
probably riding on a successful IMF review. The World Bank
program has a limited shelf-life, because it is offered on
low-interest "IDA" terms for which BiH will no longer be
eligible by mid-2010. For the Federation, the problem is
compounded by the fact that its 2009 budget included the
expected disbursement of both the first and second tranches
of the IMF loan. In the absence of the second disbursement,
the Federation will be doubly hard pressed to find budget
cuts. While we don't disagree with the IMF assessment that
the Bosnians will muddle through in the short term without
IMF money, we anticipate the possibility of more social
unrest as the consequences become felt by the populace.
ENGLISH