VZCZCXRO9082
RR RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR
DE RUEHVJ #0082/01 0270938
ZNY CCCCC ZZH
R 270938Z JAN 10
FM AMEMBASSY SARAJEVO
TO RUEHC/SECSTATE WASHDC 1308
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 SARAJEVO 000082 
 
SIPDIS 
 
STATE FOR EUR/SCE AND EEB/IFD 
TREASURY FOR OASIA - PETER MAIER 
 
E.O. 12958: DECL: 01/27/2020 
TAGS: EFIN ECON PGOV SOCI IMF IBRD BK
SUBJECT: BOSNIA: IMF SECOND TRANCHE ON HOLD 
 
REF: 09 SARAJEVO 1419 
 
Classified By: DCM Jonathan Moore for reasons 1.4 (b) and (d) 
 
Summary 
------- 
 
¶1.  (C) Bosnia and Herzegovina Federation entity has not yet 
met conditions for disbursement of the second tranche of the 
IMF stand-by arrangement, worth roughly USD 135 million.  The 
IMF's local representative stressed in a January 15 statement 
that the IMF board will not approve disbursement -- either to 
the Federation or to the Republika Srpska -- until both 
entities meet all conditions as agreed last year in June and 
reiterated in November.  The Federation Minister of Finance 
confirmed in a statement the following week that the 
Federation has not yet met its commitments to pass necessary 
reforms. Failure to do so puts at risk not only this 
disbursement, but ten more scheduled over the next three 
years, along with supporting loans from the World Bank and 
European Commission.  Loss of these funds would eventually 
force both the Federation and the Republika Srpska to make 
deep cuts affecting social programs, wages, and public 
investments, and would further damage the precarious 
political situation here in the run up to the 2010 elections. 
 End summary. 
 
Reform of Federation Social Benefits Programs Stalled 
--------------------------------------------- -------- 
 
¶2.  (U) In his January 15 statement, IMF Resident 
Representative Milan Cuc focused on the Federation's failure 
to amend past legislation that had created a complex and 
overly-generous system of unemployment and pension benefits 
for veterans, demobilized soldiers, war victims, and former 
Ministry of Defense employees.  In the Bosnian government's 
June 2009 letter of intent to the IMF, the basis of the 
stand-by arrangement, the Federation committed to pass such 
amendments by the end of the year.  For its part, the 
Republika Srpska -- according to the IMF statement -- 
fulfilled its parallel obligation to adopt legislation 
establishing a property census of veterans and other 
beneficiary groups, its minimal legislative requirement for 
the second disbursement of the IMF program.  In both the 
Federation and the RS, establishment of the property census 
constitutes a first step in moving from a rights-based to a 
means-based system of social benefits.  Cuc's statement 
acknowledged that another set of essential steps for 
disbursement of the second tranche had been met by the end of 
the year: adoption of 2010 budgets by both entities and the 
BiH State government within agreed deficit parameters.  In 
the case of the State budget, trimmed to a deficit of 4.5 
percent of GDP, reaching agreement within parliament before 
January 1, the start of the new fiscal year, was an 
unprecedented event. 
 
A New Concern: Squandering the Special Drawing Rights Windfall 
--------------------------------------------- ----------------- 
 
¶3.  (SBU) Privately, Cuc raised a separate concern, not 
foreseen in the stand-by arrangement.  The allocation of new 
Special Drawing Rights to all IMF members in August 2009 
boosted BiH's foreign exchange reserves by 140 million SDRs, 
or approximately USD 220 million.  Initially, BiH authorities 
had indicated that the SDRs would be held in reserve as a 
fiscal cushion.  Soon thereafter, however, without consulting 
the IMF, the BiH Central Bank exchanged the SDRs for euros 
and distributed them to the finance ministries of the two 
entities.  Although not explicitly a violation of the 
stand-by arrangement, this raised concern in the IMF that the 
Bosnian government was not acting in the spirit of the 
program.  The IMF has now asked the entity governments to 
clarify how they will use the windfall.  The IMF board will 
not meet, Cuc has said, until the Federation passes the 
needed laws and until both entities satisfactorily explain 
their plans on use of the SDRs. 
 
Bevanda: Yes, We Are the Problem 
-------------------------------- 
 
¶4.  (U) Federation Finance Minister Vjekoslav Bevanda 
acknowledged in a January 20 statement that "the majority of 
open issues are related to the Federation" and that failure 
to pass reform of its system of social benefits was the main 
obstacle to disbursement of the second tranche.  He noted 
that the Federation's 2010 budget counted on regular 
disbursements of the IMF program, including the Federation's 
share of the second tranche, worth KM 128 million (USD 93 
million).  Highlighting the cost of continued failure to pass 
 
SARAJEVO 00000082  002 OF 002 
 
 
the necessary measures, Bevanda pointed out that in the 
absence of funds from the IMF, the Federation would have to 
make equivalent cuts across the board.  Meanwhile, the World 
Bank, whose separate USD 111 million budget support loan is 
closely tied to the IMF program and is likewise conditioned 
on reform of the social benefits system, has already been 
sending signals that its money will be reprogrammed for other 
uses if the Federation does not meet the conditions by the 
end of February.  Also at risk is a 100 million euro (USD 140 
million) budget support program from the European Commission, 
and -- further down the road -- the remaining ten 
disbursements of the IMF program, worth a total of USD 1.35 
billion. 
 
Comment 
------- 
 
¶5.  (C) We expect the IMF to maintain a strict line regarding 
the Federation's requirement to enact reforms of the social 
benefits system, as clearly laid out in the letter of intent. 
 What the Fund will require regarding the Central Bank's 
disposition of SDRs is less clear, though it seems likely 
that the entities will be able to talk their way out of that 
issue.  In the meantime, as the electoral year heats up, 
enacting the needed reforms will be more critical for the 
economy, but increasingly difficult politically.  The 
consequences of a delay or blockage in disbursement will flow 
over into this year's pre-election tensions, and will almost 
certainly be cited by officials in Republika Srpska as proof 
of the incompetence of the Federation. 
ENGLISH