Bosnia: IMF garage sale

Author : Anes Alic | Friday, July 31, 2009

Bosnia’s Federation government starts auctioning off luxury cars in a meager attempt to meet IMF savings demands.

The International Monetary Fund (IMF) on 8 July approved a previously halted €1.2 billion stand-by arrangement ($1.7 billion) with Bosnia and Herzegovina, designed to ease the effects of the global financial crisis, but local officials are still facing an uphill battle with painful reforms that have influential war veterans and other social groups threatening to bring the government down.

The first tranche of some €205 million arrived at the Bosnian Central Bank on 10 July, but only one of Bosnia’s two political entities will be able to put the money to use for now. The Bosnian Serb-dominated entity of Republika Srpska, for which one-third of the IMF money is earmarked, has already made its withdrawal. However, the Bosniak- and Bosnian Croat-dominated Federation entity, which gets two-thirds of the money, will not be able to touch the tranche until major budget reforms are set in motion.

Further IMF loan tranches will be released following quarterly reviews of Bosnia’s economic policy, the next one to be conducted in December.

Under the agreement, the Federation was required to make the largest spending cuts, around €207 million, while Republika Srpska was to reduce spending by €73 million.

The IMF went ahead with the first tranche only after the Federation entity again promised to slash spending by roughly one-third in a budget rebalance by the deadline at the end of August. But the rebalance has yet to be approved by the Federation Parliament and its 10 cantonal parliaments. Considering the lack of progress so far, the deadline is unlikely to be met.

The IMF and Bosnia agreed to the standby loan in late May, after nearly a month of negotiations, but its approval came into doubt last month, when the Federation backtracked on a commitment to reduce spending after facing mass protests by war veterans and workers unions.

Republika Srpska, on the other hand, is not expected to meet any major obstacles in implementing IMF savings demands. But the Federation entity, which caused the loan’s delay in the first place, will likely experience a wave of social unrest this summer.

Initially, the Federation government passed a law on budget cuts and reduced spending measures, calling for a 10 percent reduction in wages for employees of the administration and state companies. It also moved to half further employment in government institutions and cut spending on war veterans and the disabled.

So far, the only measure that can be effectively realized without creating major social unrest is the temporary halt on new employment in government institutions. The government is still negotiating with workers unions and war veterans associations about the proposed cuts, but the talks appear to have reached a dead end.

When the Federation government first announced it would cut salaries by 10 percent, several trade unions and syndicates threatened a country-wide general strike, forcing the government to retract the decision and vow to make up the difference instead in other areas.

The politics of bankruptcy

Indeed, many experts wonder whether the government has the political will to meet the IMF demands and keep the entity from bankruptcy, as compromises with these influential social groups are already underway.

For instance, when the crisis hit western countries, Bosnian authorities ensured the public that it was safe from recession and that steps were being taken to limit the impact of the global economic downturn.

As such, late last year, the government compiled a list of 49 measures that included various public spending cuts and savings plans. So far, these measures, for the most part, have been brushed aside.

In addition to the high salaries and benefits it doles out to a massive administration, the Federation government spends excessively on war veterans and invalids, who comprise a majority of the electorate. Experts largely agree that these social payments will have to be reduced sooner or later, and that in the long run, they are not sustainable.

Spending on war veterans, those disabled in the war and the families of those killed during the war – a total of 184,000 people – represents the single biggest area of spending for the entity. On several occasions, Federation authorities have had to seek help from commercial banks in order to meet their spending obligations in this area thanks to unrealistic election promises.

Earlier this year, the Federation government borrowed some €80 million from commercial banks to fill the budget deficit of more than €130 million accrued last year. Authorities now say that if social spending is not cut, the entity will end this year with €210 million deficit and without money to pay government salaries, pensions and social welfare benefits as early as September.

Sarajevo must face the fact that budget cuts are inevitable. But war veterans are serious about their threats to bring down the government should any move be made to decrease their social benefits.

On the war path

One day after the deal was signed with the IMF in May, when the government pledged to cut social spending, war veterans blocked the main government building and authorities withdrew the decision, causing the delay in the loan.

The government then decided to conduct a revision of some 25,000 war veterans and disabled to determine who is legitimately claiming benefits. However, the revision – even if possible to conduct – would take at least one year to finish. The Federation government moved to temporarily suspend payments to the 25,000 beneficiaries in question. Both the IMF and the veterans associations criticized the move.

Financial analyst Svetlana Cenic told ISN Security Watch she doubts that Federation authorities will find a solution to the problem that would both avoid bankruptcy and satisfy their voters. In the best possible scenario, they will cut social benefits only temporarily.

“The Federation government is not going to find a solution for the war veterans’ payments. Normally, when they need more money, they make cuts in the education, sports and cultural sectors, because there is less resistance there. But now they [have exhausted this area and] are forced to cut payments [social benefits] and anger their main electoral body,” Cenic said.

In 2006, after expecting a close election race, Bosniak and Croat ruling parties quickly passed a law guaranteeing €80 per month to unemployed, demobilized soldiers. The move saved the elections for both, but the budget could not sustain it. The IMF now demands that this guarantee be removed from the law by the end of this year.

The Federation’s minister for veterans’ issues, Zehid Crnkic, was caustic with war veterans associations, saying that “a man, allegedly unemployed, cannot come to the bank to draw social welfare, driving a brand new car.”

Mehmed Sisic, president of the Federal War Veterans Association, told ISN Security Watch that if any cuts are made, the government will pay dearly. “It would be better for them to leave the government by themselves, rather than have us take them down,” Sisic said.

Bits and bobs

It is impossible at this point to predict the outcome of the parliamentary debate on the issue, but either war veterans or the local authorities will suffer the consequences – there is no compromise that could satisfy both.

Moreover, if the authorities fail to resolve the issue to the satisfaction of the IMF, the same issues will be major obstacles to Bosnia’s hoped-for EU accession. The European Union has made it clear that Bosnia must reform social spending and downsize its administration.

For now, the Federation’s efforts to save money look more like a chaotic garage sale, with it putting nearly a dozen unneeded government-owned luxury cars on the market; but clearly this is not going to be enough to keep the country from going bankrupt. And it also begs another question: If they didn’t really need the vehicles, why did they purchase them in the first place?

At the same time, authorities are complaining that they are too cash-strapped to pay utility bills and that the cafeterias in the government building and ministry offices lack fresh water and juices due to failure to pay suppliers on time.

Last weekend, the Federation government sent its latest budget revision proposal to Parliament, with some €112 million in savings. The cuts include some €30 million in reductions of social benefits to the war disabled. But at the same time, the proposal moves to increase the administration’s budget by €10 million. Moreover, the government has not yet discussed the proposed law on the revision of the status of disabled persons, leaving the subject for debate until after the summer break.

It is anyone’s guess how long it will take the government to discuss the revision and pass it on to Parliament, or how long it will take Parliament to debate the budget rebalance proposal. In the meantime, the government is running out of luxury cars to auction off.

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