BOSNIA: SLIGHT DELAY IN IMF SECOND TRANCHE

UNCLAS SECTION 01 OF 02 SARAJEVO 001419

SENSITIVE
SIPDIS

STATE FOR EUR/SCE AND EEB/IFD
TREASURY FOR OASIA (PETER MAIER)

E.O. 12958: N/A
TAGS: EFIN ECON PGOV IMF SOCI BK
SUBJECT: BOSNIA: SLIGHT DELAY IN IMF SECOND TRANCHE

REF: SARAJEVO 1299

SARAJEVO 00001419 001.2 OF 002


Summary
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1. (SBU) It appears that Bosnia and Herzegovina (BiH) is on
track for receiving the next tranche of assistance from the
country's IMF Stand-By Arrangement (SBA) in January 2010.
However, given political squabbling, particularly as 2010 is
an elections year, we will not be surprised by delays as a
result of IMF criteria not being addressed in a timely
manner. Nevertheless, we understand that the IMF -- which
remains optimistic that Bosnian leaders will complete
necessary measures for the SBA to remain on track -- will
remain flexible in its disbursement schedule. End summary.

The Happy Face
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2. (SBU) IMF representatives argue that the Stand-By
Arrangement has already had a positive impact in BiH and that
BiH State government, the Federation of BiH, and Republika
Srpska (RS) have all made progress. They note that the
current account deficit is shrinking faster than expected;
pressures on the banking sector have eased; and confidence in
the banking sector is growing. They point to the plain fact
that the first disbursement of the IMF program in July, worth
more than USD 180 million, bolstered Central Bank reserves
and eased short-term pressure on the Federation and RS
budgets. The two entities initially rebalanced their 2009
budgets in August and met the IMF's quantitative targets for
September. (Note: Both the RS and FBiH have rebalanced their
2009 budgets several times since to compensate for a decrease
in revenues. End Note.)

Three Tougher Goals Remain Unmet
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3. (SBU) IMF Resident Representative Milan Cuc recently
outlined three remaining conditions for disbursement of the
second tranche, worth nearly USD 140 million. First, the
State government and two entities must pass 2010 budgets that
remain within the limit of a deficit of 4.5 percent of GDP.
The RS National Assembly adopted a KM 1.6 billion budget on
December 16, with significant cuts in public sector salaries.
The Federation adopted a KM 1.7 billion budget on December

23. The state-level budget has historically been the most
contentious. Bosniak and Croat members of the BiH Presidency
increased the original KM 1.03 billion state budget approved
by the Council of Ministers to KM 1.05 billion in November,
to increase funding for refugee returnee programs. Following
the BiH House of Representatives rejection of the increase,
State Finance Minister Dragan Vrankic reintroduced a new
budget that increases the allotment for returnee programs
while staying within the KM 1.03 billion envelope. The
budget has passed the BiH House of Representatives' first
reading on December 23 but is awaiting further Parliamentary
consideration expected on December 30. Some RS politicians,
however, are threatening to object.


4. (SBU) An additional condition for the second disbursement
is for the two entities to adopt framework laws establishing
social benefit systems based on means testing. This would
replace the prevailing system in which overly generous social
benefits are allocated on the basis of one's membership in
favored groups, including several categories of veterans,
regardless of actual need. As a first step toward such a
system, the Federation has introduced legislation to
authorize an audit of veterans' benefits. Veterans'
organizations have supported the idea of an audit, hoping to
protect those who need the benefits most, although they do
not necessarily agree with the audit's methodology. The
Federation House of Representatives, however, narrowly
rejected the law on December 8. The Federation reintroduced
the legislation the following day, determined to push this
through as the essential foundation for reforming the
benefits system. The Federation was successful and the law
passed on December 22.


5. (SBU) The third condition, applicable only to the
Federation, required adoption of a law eliminating special
unemployment benefits for demobilized soldiers no later than
May 1, 2010. The May 1 deadline was the only truly new
element to the IMF program. Cuc explained that the original
letter of intent had called for elimination of these benefits
by January 1. However, Federation authorities asserted that
they had understood the January date to be an indicative
target rather than a deadline. Cuc told us that the IMF

SARAJEVO 00001419 002.2 OF 002


decided to cut the Federation some slack on the issue, but
made it clear that May 1 is a deadline for elimination of
these benefits. Additionally, the IMF has made clear that
the law setting that deadline is a condition for the second
disbursement. The Federation, in turn, has since asserted
that they comply with this condition, because the law on
demobilized soldiers' benefits expires on May 1, 2010 and
will not be renewed. IMF representatives told us that this
should satisfy its conditions absent a law.

Setting Fiscal Responsibility in Stone
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6. (SBU) Cuc noted that these changes will not prevent a
future Bosnian government from passing fiscally unsustainable
laws. For that reason, the IMF will require establishment of
an "organic" budget law as a requirement for future
disbursements. Such a law would help to end the ad hoc
passage of unfunded benefit packages in the future, by
requiring analysis of fiscal impacts of proposed legislation.
This is the only remaining Federation issue needed to meet
the conditions for the second disbursement. The law was
before Parliament on December 22.

Comment
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7. (SBU) Although some of the measures required under the
IMF program are politically difficult, Bosnian policymakers
have begun to make a more persuasive case to their voters
that they are necessary. In the RS, Prime Minister Milorad
Dodik -- usually inclined to assert the fiscal soundness of
the RS government -- has recently issued uncharacteristic
calls for budget tightening. And in the Federation, Finance
Minister Vjekoslav Bevanda has been increasingly willing to
make the case publicly that if the Federation doesn't find a
way to clean up its system of social benefits and pensions,
cuts will have to be made across the board, hitting those who
need and deserve such benefits hardest. That message appears
to be having an effect. That said, the state and entity
governments are facing such difficult fiscal challenges that
they are willing to take extraordinary measures including
extra sessions of Parliament to obtain the second tranche of
IMF funds before the end of Bosnia's fiscal year. In the
upcoming months, we expect veterans' benefits to be a thorn
in upcoming disbursement rounds.
ENGLISH