VZCZCXRO4289
RR RUEHIK
DE RUEHVJ #1299/01 3241554
ZNR UUUUU ZZH
R 201554Z NOV 09
FM AMEMBASSY SARAJEVO
TO RUEHC/SECSTATE WASHDC 1006
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

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