VZCZCXRO6146
RR RUEHIK
DE RUEHVJ #1419/01 3620717
ZNR UUUUU ZZH
R 280717Z DEC 09
FM AMEMBASSY SARAJEVO
TO RUEHC/SECSTATE WASHDC 1174
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

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 
------- 
 
¶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 
-------------- 
 
¶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 
-------------------------------- 
 
¶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 
-------------------------------------- 
 
¶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 
------- 
 
¶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