SEC (2005) 1422

Bosnia and Herzegovina 2005 Progress Report {COM(2005) 561 final} {COM(2005) 555 final}

A. INTRODUCTION 3

1. PREFACE 3

2. RELATIONS BETWEEN THE EU AND BOSNIA AND HERZEGOVINA 4

B. IMPLEMENTATION OF THE STABILISATION AND ASSOCIATION PROCESS 8

1. POLITICAL SITUATION 8

1.1 Democracy and the rule of law 9

1.2 Human rights and the protection of minorities 19

1.3 Regional issues and international obligations 25

1.4 General evaluation 28

2. ECONOMIC SITUATION 30

2.1 Economic developments 31

2.2 Progress towards economic stability and competitiveness 32

2.3 General evaluation 38

3. EUROPEAN STANDARDS 40

3.1 Internal market 41

3.1.1. Free movement of goods 41

3.1.2. Movement of persons, services and right of establishment 42

3.1.3. Free movement of capital 44

3.1.4. Customs and taxation 45

3.1.5. Competition 47

3.1.6. Public procurement 47

3.1.7. Intellectual property law 48

3.1.8. Statistics 49

3.2 Sectoral policies 51

3.2.1. Industry and SMEs 51

3.2.2. Agriculture 52

3.2.3 Environment 54

3.2.4. Transport policy 55

3.2.5. Energy 57

3.2.6. Information society and media 57

3.2.7. Financial control 58

3.2.8 Other policies 59

3.3 Justice, freedom and security 59

3.3.1. Visas, border control, asylum and migration 59

3.3.2. Money laundering 62

3.3.3. Drugs 63

3.3.4. Police 63

3.3.5. Fighting organised crime and terrorism 64

3.4 General evaluation 65

C. EUROPEAN PARTNERSHIP: OVERALL ASSESSMENT 69

STATISTICAL ANNEX 72

INTRODUCTION

Preface

The European Council in Feira in June 2000 confirmed that

“its objective remains the fullest possible integration of the countries of the Western Balkans region into the political and economic mainstream of Europe through the Stabilisation and Association process, political dialogue, liberalisation of trade and cooperation in Justice and Home Affairs. All the countries concerned are potential candidates for EU membership”.

In view of the EU-Western Balkan Thessaloniki Summit in June 2003, the General Affairs and External Relations Council adopted “The Thessaloniki agenda for the Western Balkans: moving towards European integration”[1]. The Thessaloniki agenda strengthened the Stabilisation and Association process by introducing new instruments to support the countries’ reform and European integration efforts, including European Partnerships. This agenda was endorsed by the European Council and by the countries of the Western Balkans in June 2003.

In June 2005, the European Council reiterated that:

“… each country’s progress towards European integration, taking account of the evolution of the acquis, depends on its efforts to comply with the Copenhagen criteria and the conditionality of the Stabilisation and Association process. Moreover, in this process, regional cooperation and good neighbourly relations will remain essential elements of EU policy.”

The structure of the report is largely the same as that used in previous years and assesses the implementation of the Stabilisation and Association process. The report:

– describes the relations between Bosnia and Herzegovina and the Union;

– analyses the political situation in Bosnia and Herzegovina in terms of democracy, the rule of law, respect for human rights and the protection of minorities;

– assesses the economic situation in Bosnia and Herzegovina in terms of economic developments and progress towards economic stability and competitiveness;

– reviews Bosnia and Herzegovina’s capacity to implement European standards, that is, to gradually make legislation in key policy areas more compatible with European legislation and standards;

– examines the extent to which Bosnia and Herzegovina has addressed the European Partnership priorities.

This report takes into consideration progress since the 2004 report. It covers the period from March 2004 to 30 September 2005. It looks at whether planned reforms referred to in the 2004 annual report have been carried out and examines new initiatives, as well as assessing the overall level of implementation.

Progress has been measured on the basis of decisions actually taken, legislation actually adopted and the degree of implementation. As a rule, legislation or measures which are in various stages of either preparation or Parliamentary approval have not been taken into account. This approach ensures equal treatment for all countries and permits an objective assessment of each country in terms of their concrete progress implementing the Stabilisation and Association process.

The report draws on numerous sources of information. Bosnia and Herzegovina has been invited to provide information on progress made since the publication of the last report. Council deliberations and European Parliament reports and resolutions have been taken into account in drafting the report.[2] The Commission has also drawn on assessments made by various international organisations, in particular the contributions of the Council of Europe, the OSCE, the international financial institutions, and non-governmental organisations.

Relations between the EU and Bosnia and Herzegovina

Recent developments in bilateral relations

Bosnia and Herzegovina is participating in the Stabilisation and Association Process (SAP). Currently, there is no contractual framework between the EU and Bosnia and Herzegovina. Political and technical dialogue has been taking place through the Consultative Task Force (CTF), which meets regularly several times a year. Formal contractual relations should be established through the conclusion of a Stabilisation and Association Agreement (SAA).

A Feasibility Study on Bosnia and Herzegovina’s readiness for negotiating and implementing an SAA was adopted by the Commission in November 2003. To monitor progress on the Feasibility Study’s priorities, six Consultative Task Force (CTF) meetings have been held. Bosnia and Herzegovina has made significant progress in addressing these priorities.

As a result of the Thessaloniki Agenda, the first political dialogue meeting at ministerial level between the EU and Bosnia and Herzegovina was held in September 2004 (in troika format). A second ministerial meeting took place in September 2005 alongside the annual UN General Assembly meeting.

EU-Bosnia and Herzegovina inter-parliamentary meetings, attended by delegations from the Bosnia and Herzegovina Parliamentary Assembly and the European Parliament, took place in November 2004 and May 2005. Although no formal relations exist with the European Economic and Social Committee, an introductory visit establishing contacts with civil society bodies took place in March 2005.

Bosnia and Herzegovina has been an increasing focus of EU political interest, especially in relation to CFSP and ESDP measures. In June 2004, the Council adopted a Joint Action on an EU military operation in the country (EUFOR/Althea). This decision led to the deployment of troops by the end of 2004. Also in June 2004, the European Council adopted a Comprehensive Policy with regard to Bosnia and Herzegovina as one of the European Security Strategy’s initial implementation priorities. The mandate of the EU Special Representative (EUSR) to the country, whose role is to “offer the EU’s advice and facilitation in the political process and to promote overall political coordination”, has been extended until the end of February 2006. There are ongoing discussions within EU bodies for a new police mission which should replace the current one (EUPM) as from 1 January 2006. The EU Monitoring Mission continued to operate on the basis of its Joint Action. Its current mandate expires at the end of 2005.

The first European Partnership for Bosnia and Herzegovina was adopted by the Council in June 2004 (see part C – European Partnership: Overall Assessment). Its short-term priorities coincide to a large extent with those identified in the 2003 Feasibility Study. In May 2005, Bosnia and Herzegovina adopted an action plan addressing the European Partnership priorities. Although the formal adoption of this action plan was delayed, notably by the opposition of Republika Srpska, Bosnia and Herzegovina has been able to make considerable progress in addressing many of the partnership’s short-term priorities.

Bosnia and Herzegovina’s main trading partner is the EU. In 2004, exports to the EU increased by 12% compared to 2003, accounting for 72% of BiH’s total exports. Imports from the EU increased by 9% in 2004 compared to 2003, amounting to 67%.

Main exports to the EU were manufactured goods, raw materials, agricultural products and transport equipment. Main imports from the EU were machinery and transport equipment, agricultural products and chemicals. Some trade disputes between the EU and Bosnia and Herzegovina have taken place in the reporting period. Conditions for imports into Bosnia and Herzegovina of beer and liquid detergents originating in the EU raised some concerns in 2004 due to non-compliance with WTO practices and EU standards. In the context of its WTO accession process, Bosnia and Herzegovina did not adequately verify the compatibility of its offer for liberalisation of trade in services with the Community acquis and obligations deriving from the future SAA. It is important that Bosnia and Herzegovina improves coordination and cooperation with the Commission in all WTO-related matters.

Bosnia and Herzegovina has benefited since 2000 from Autonomous Trade Measures (ATMs). These measures allow almost all imports originating in Bosnia and Herzegovina to enter the EU without quantitative restrictions and exempt from customs duties. The only exceptions are some beef and fish products, sugar and wine, to which tariff quotas apply. The ATMs have helped improve Bosnia and Herzegovina’s export performance, although a considerable trade deficit with the EU persists (EUR 1.65 billion in 2004). Bosnia and Herzegovina has been unable to take full advantage of the ATMs due, among other things, to its lack of technical certification standards and difficulties to guarantee the authenticity of its certificates of origin. Further reform and industrial restructuring are necessary, in order for the country to take full advantage of the ATMs.

Community assistance

Since the end of the war in 1995, Community assistance to Bosnia and Herzegovina has totalled more than EUR 2 billion. The PHARE, OBNOVA and CARDS programmes provided about EUR 1.15 billion to Bosnia and Herzegovina during the 1995-2004 period, of which EUR 72million in 2004.

Since 2001, the main source of EU assistance for Bosnia and Herzegovina has been the CARDS programme. The support provided through CARDS in 2005 concentrates mainly on the European Partnership priorities, which address the country’s political and economic situation, as well as the requirements it must meet to be able to implement the future SAA. Total CARDS assistance to Bosnia and Herzegovina in 2005 amounts to EUR 49.4 million. The four main areas supported are:

Democratic Stabilisation (EUR 3.1 million) - to help the Bosnia and Herzegovina authorities meet their responsibilities regarding the return and re-integration of refugees and internally displaced persons and to ensure that citizens have access to professional and impartial media which, among other things, help increase mutual understanding among the country’s constituent peoples. This includes proper regulation of broadcasting and telecommunications.

Good Governance and Institution Building, including Administrative Capacity and Justice and Home Affairs (EUR 31.3 million) – (1) to reform Bosnia and Herzegovina’s judicial system by strengthening its effectiveness and impartiality, bringing the legal framework for fighting organised crime and terrorism into line with EU standards, and enabling the judicial system to use modern investigative techniques; (2) to reform the police forces, enhancing their capacity to enforce the rule of law and guarantee security and stability; (3) to develop and implement integrated border management to facilitate the legal movement of people and goods across the borders and to ensure border control; (4) to strengthen the State’s capacity to formulate and implement an asylum and migration policy consistent with EU and international standards; (5) to achieve sustainable, effective and transparent public administration; (6) to further support customs and taxation policies and administration so as to maximise revenue and minimise the impact of organised crime and corruption in these fields.

Economic and Social Development, including the Environment (EUR 14.5 million) - to improve investment climate and develop a fully functional internal market in Bosnia and Herzegovina, to promote trade by implementing an effective trade policy, to help Bosnia and Herzegovina maximise IFI’s assistance for developing its infrastructure, to strengthen State-level capacity for environmental protection and to help the country reform its vocational education and training systems, as well as its higher education (the Commission has so far supported 66 co-operation projects with universities in the EU in the context of the CARDS-financed “Tempus” programme).

Community Programmes (EUR 0.5 million) - to help Bosnia and Herzegovina start participating in Community programmes. A Framework Agreement on Bosnia and Herzegovina’s participation in Community Programmes has been ratified. Bosnia and Herzegovina’s financial contribution (its ‘entrance fee’), to cover the cost of its participation in the programmes, may be partly paid from the CARDS budget.

Bosnia and Herzegovina also benefits from the regional CARDS programme, which in 2005 has an overall budget of EUR 40.4 million to support measures of common interest to the Western Balkans region, such as infrastructure development, institution building and cross-border cooperation.

CARDS financial support in Bosnia and Herzegovina is implemented by the European Commission Delegation in Sarajevo. Implementation rates are satisfactory, reaching 93% in terms of commitments and 84% in terms of disbursement for the period 2001-04.

In addition to CARDS assistance, Community funds amounting to approximately EUR 28.8 million were provided in 2005 to support the EU Police Mission (EUPM), the Office of the High Representative (OHR) and the EU Special Representative (EUR 20 million, 8.5 million and 0.27 million respectively). Bosnia and Herzegovina has remained a focus country for the European Initiative for Democracy and Human Rights and benefits from the LIFE environmental programme and the 6th Framework Programme for Research and Development. Support for de-mining has continued under the Anti-Land Mines Action Programme.

Bosnia and Herzegovina has also benefited from EU macro-financial assistance (EUR 60 million, composed of an EUR 20 million loan and an EUR 40 million grant). This assistance was disbursed in three instalments. The first two were paid in 2003 and 2004. In July 2005, following fulfilment of the related conditions, the third and final instalment of EUR 15 million was paid.

The Directorate for European Integration of Bosnia and Herzegovina (DEI) has the overall coordinating role for Community assistance. With the help of CARDS, the DEI’s Aid Coordination Division has improved its capacity and is now able to act as a real National Aid Coordinator. Senior Programming Officers (SPOs) have been appointed for most Ministries and other institutions. SPOs are responsible for the development of project proposals within their respective institutions, steering the programming process internally and coordinating with other relevant external bodies. For the first time, Bosnia and Herzegovina is taking a leading role in programming and the DEI and the SPOs have prepared project proposals for 2006. This is an important step towards the possible future decentralisation of Community assistance. Civil society organisations have regularly been consulted on the priorities and detailed scope of Community assistance during this process, through the Bosnia and Herzegovina NGO Forum.

Twinning

One of the main challenges facing Bosnia and Herzegovina is the need to strengthen its administrative and judicial capacity. The Thessaloniki European Council decided to extend the “twinning” mechanism, used with success during the recent enlargement, to the Western Balkans. Twinning makes the public sector expertise of existing EU Member States available to the partner country through the long-term secondment of civil servants and accompanying short-term expert missions and training. The objective is to enhance the partner country’s public administration in order to ensure proper implementation and enforcement of legislation. The Western Balkans can also draw on Member States’ expertise through the so-called “twinning light”, a mechanism which is used to support projects of a more limited scope.

Under the CARDS programme, two twinning projects have already been finalised (Ministry of Security, State Border Service) and one project (Communications Regulatory Agency) is ongoing.

Nine "twinning light" projects have also been initiated to assist several Ministries, Directorate and Agencies in areas such as internal organization and overall improvement of administrative capacity, preparation for the participation in Community Programmes and progressive alignment to European standards.

IMPLEMENTATION OF THE STABILISATION AND ASSOCIATION PROCESS

Political situation

The conditions of the Stabilisation and Association process were set out in the conclusions of the General Affairs Council in April 1997. To become EU members, the countries need to satisfy the criteria established in the Copenhagen European Council conclusions of June 1993. The Copenhagen political criteria stipulate that countries must have achieved “stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities.”

Issues to be assessed include democratic principles, human rights and the rule of law, respect for and protection of minorities, and regional cooperation. In addition, specific issues of relevance to individual countries are examined, including respect for international obligations such as peace agreements and cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY).

In November 2003, the Commission presented a Feasibility Report assessing the suitability of opening Stabilisation and Association Agreement (SAA) negotiations with Bosnia and Herzegovina. It concluded that the pre-conditions were not yet fully met, listing sixteen priorities to be addressed before negotiations could be opened. The report also concluded that the Commission would propose a recommendation for a Council decision to open negotiations as soon as it ascertained that significant progress had been made in meeting the priorities identified in the report.

The 2004 Stabilisation and Association Process (SAP) Report, issued some months later, concluded that Bosnia and Herzegovina’s progress had been moderate on the priorities identified by the 2003 Feasibility Study relating to the political situation. It underlined that further, sustained efforts were needed to consolidate the emerging reform dynamic observed in the country and ensure that the achievements made in State-building were not reversed. Regarding cooperation with the ICTY, the report considered that Bosnia and Herzegovina had only made limited progress.

As regards democracy and the rule of law, the 2004 report welcomed the progress achieved by Bosnia and Herzegovina in developing its judicial system, notably through the preparations for establishing the High Judicial and Prosecutorial Council (HJPC) and the establishment of the Bosnia and Herzegovina State Court and Prosecutor’s Office. It also welcomed Bosnia and Herzegovina’s progress in fulfilling a number of its Council of Europe post-accession commitments. In the area of public administration, the report noted Bosnia and Herzegovina’s commitment to developing a comprehensive, country-wide public administration reform (PAR) strategy and the establishment of a Functional Review Steering Committee to guide the systemic and functional reviews which would feed into the PAR strategy. Nonetheless, the report also outlined a number of weaknesses and stressed, in particular, the need to improve the overall functioning of democratic institutions, strengthen the new State-level ministries and agencies and ensure proper coordination between the State, the Entities and the Brcko District.

On human rights and protection of minorities, the report welcomed the success registered in the areas of refugee return, restitution/repossession of property and the transfer of human rights institutions from international to Bosnia and Herzegovina’s responsibility. However, it also underlined the need for the country to further improve its human rights record.

As far as regional issues were concerned, the report welcomed Bosnia and Herzegovina’s active participation in regional initiatives. In terms of bilateral relations with regional neighbours, it noted increased and generally constructive cooperation with Croatia and Serbia and Montenegro.

The section below provides an assessment of political developments in Bosnia and Herzegovina since the 2004 report, including the overall functioning of the country’s executive and judicial system, the rule of law, respect for human rights, protection of minorities and regional issues. Such developments are closely linked to Bosnia and Herzegovina’s ability to implement the reforms and reach the standards that are required to make further progress in the Stabilisation and Association process and towards the EU.

Democracy and the rule of law

Following the declaration of independence in April 1992, Bosnia and Herzegovina was plunged into a three-year long civil war. This led to major displacements of population and to extensive physical and economic destruction. On 21 November 1995, in Dayton (USA), a peace agreement put an end to the war. The Dayton Peace Agreement retained Bosnia and Herzegovina’s international boundaries and created two Entities within the Bosnia and Herzegovina State: the Bosniak/Croat Federation of Bosnia and Herzegovina (the Federation of Bosnia and Herzegovina) and the Bosnian Serb-led Republika Srpska (the Republika Srpska). In accordance with the agreement, an UN-mandated High Representative was established to support peace implementation. Currently, the High Representative also acts as EU Special Representative.

The Dayton Peace Agreement (DPA) grants the High Representative and the international community a significant role in the overall administration of the country and provides the Bosnia and Herzegovina constitutional framework. The Constitution of Bosnia and Herzegovina is an annex to the DPA. It specifies that Bosnia and Herzegovina is a democratic State operating under the rule of law with free and democratic elections and provides for a highly decentralised State. This high degree of decentralisation led to the establishment of a large number of governments and related administrations. The Constitution also provides for a sophisticated system of checks and balances to guarantee the rights of Bosnia and Herzegovina’s “constituent peoples”, i.e. Bosniaks, Croats and Serbs. State and Entity constitutions establish blocking mechanisms protecting the "vital interests" of these constituent peoples.

While the DPA has had the invaluable merit to stop the war and to bring peace and stability to Bosnia and Herzegovina, the adequacy of the Dayton constitutional system to the present circumstances is frequently questioned both within and outside the country. It is widely considered that the structures deriving from the DPA are too complex and fiscally unsustainable. It is also considered that the role and powers granted to the international community need to be progressively phased out as the country achieves normalisation.

From a European integration perspective it is difficult to argue that the present constitutional order is optimal. The current set up does not support swift decision-making and hampers reform implementation. This undermines Bosnia and Herzegovina’s possibilities to make rapid progress in its way towards the EU. Despite considerable achievements towards the strengthening of State institutions, major reforms continue to be delayed by divergences within State institutions and between the central State and the Entities. Attempts to create new State structures or to transfer competences to the State level are often perceived as undermining the Entities and their sustainability. This mistrust towards any transfer of competences from Entities or cantons to the central authorities is a major obstacle to any serious move towards a comprehensive and sustainable reform of the institutions and the constitutional order.

Municipal elections were held in October 2004. These were the first elections entirely financed and organised by the Bosnia and Herzegovina authorities, and were generally considered to have been held in accordance with international standards. In April 2005 the High Representative issued a decision withdrawing the international members from the country’s Election Commission. This development marked another important step in the transfer of ownership to the country authorities. Nonetheless, the problems identified in the 2003 Feasibility Study in relation to the election of the Bosnia and Herzegovina Presidency members and the delegates to the House of Peoples have not yet been addressed. According to the Council of Europe’s Venice Commission, the elections to both the Presidency and the House of Peoples are incompatible with Article 14 of the European Convention on Human Rights.

Staff shortages at the Audit Department of the Electoral Commission hamper implementation of the Law on Political Party Financing. While the State-level Law on Conflict of Interests has been successfully implemented, Entity legislation makes provision for different enforcement bodies which may jeopardise uniform handling of conflict of interest cases throughout the country.

The next Parliamentary and Presidential elections are expected to take place in October 2006.

Bosnia and Herzegovina has a directly elected tripartite Presidency , which rotates on an eight-month basis. The presidency is responsible, inter alia , for conducting foreign policy, proposing annual budgets and representing Bosnia and Herzegovina in international organisations. Presidencies also exist in the Entities.

Several past Presidency members have been obliged to leave office because of activities considered incompatible with the Dayton agreement, and relations within the Presidency have sometimes been strained over divergent views on Bosnia and Herzegovina's constitutional order and future. In March 2005, the High Representative removed a member of the Presidency following corruption charges against him. These developments have adversely affected the functioning and public perceptions of the institution.

Parliament

Bosnia and Herzegovina has a bicameral State-level parliament, as well as parliaments at the Entity, Brcko District and cantonal levels.

The Bosnia and Herzegovina Parliamentary Assembly has in general been favourable to European integration, and most legislation related to the 2003 Feasibility Study has been adopted in an expeditious manner. Both parliamentary Houses (the House of Representatives and the House of Peoples) have adopted resolutions giving full support to European integration and urging the authorities to speed up the integration process. This has not prevented political parties and delegates from occasionally delaying the adoption of specific laws necessary for the country’s progress in the Stabilisation and Association Process.

The State Parliament has become more efficient in preparing legislation, and the technical committees in both Houses have grown in importance. However, although the situation has improved in the last year, the Bosnia and Herzegovina Parliamentary Assembly continues to be hampered by a lack of technical resources and qualified personnel. A number of deficiencies identified in the Feasibility Study still persist. The Parliament continues to meet infrequently, holding regular sessions approximately twice a month only. The pace and quality of legislative output continues to be strongly affected by slow input from the Council of Ministers and by the lack of an adequately qualified and organised parliamentary administration. The pace of the legislature is also affected by often cumbersome parliamentary procedures. This leads to the occasional abuse of emergency ordinances and to the adoption of legislation through accelerated procedures, which limits the Parliament’s participation in the legislative process. External oversight of the Parliamentary Assembly by civil society remains limited.

Although the political parties all support European integration and structural reform in general, they are not always ready to make the necessary concessions to achieve real progress. Members of the State Parliament often continue to vote along ethnic lines or owe their first allegiance to the relevant Entity. This difficulty is compounded by the continued existence of sometimes competing centres of legislative authority at Entity and cantonal levels. There is a clear need to ensure better and instutionalised co-ordination of legislative programmes between all levels of authority.

Government

There have been a number of political deadlocks in the State-level Council of Ministers and the Republika Srpska Government which have adversely affected the normal work of the executives. Following the tabled resignations of two Serb Ministers from the Council of Ministers at the end of 2004, the work of the State-level government was blocked for almost two months. Further problems occurred when a Minister resigned following corruption charges and an open conflict erupted between the Chairman of the Council of Ministers and the Minister of Foreign Affairs. Moreover, in December 2004, as a result of non-cooperation with the ICTY, the High Representative/EU Special Representative and the United States announced a series of sanctions aimed mainly at Republika Srpska. In the wake of these measures and as a sign of protest, the Republika Srpska Prime Minister resigned, and with him the entire government. In February 2005, a new government was formed. The government of the Federation of Bosnia and Herzegovina has remained largely stable, even though two Ministers were replaced in September 2005.

The consolidation of the State-level ministries and agencies has continued to proceed slowly. Although the State-level ministries have become operational and the other bodies provided for in the Law on the Council of Ministers have been established, the appointment of personnel has been slow, and many of these institutions are not yet fully staffed. The lack of staff clearly affects Bosnia and Herzegovina’s legislative and policy development capacity, as well as its capacity to implement reform. Within the State government, the record of advancing legislation through parliamentary procedure to adoption continues to be limited. This sometimes reflects a lack of political will and diverging national interests, but also results from structural weaknesses such as underdeveloped legislative drafting abilities and inefficient support structures. In terms of legislative drafting, dependence on the international community is still strong, although clearly declining.

The Council of Ministers adopted a State Government Strengthening Plan (SGSP) designed to reinforce the capacities of the State government. The SGSP aims to improve central government effectiveness by establishing: (i) a Commission for Property Management; (ii) an Implementation Plan for the Civil Service Agency and (iii) a Commission on Public Assets. The timelines established in the SGSP have largely been missed and Republika Srpska in particular has been unwilling to participate in the Commission on Public Assets, claiming it to be unconstitutional.

To address the problem of fragmented policymaking, the Council of Ministers, in cooperation with the Entity governments, produced the Medium-Term Development Strategy. The objective was to elaborate a strategy for medium-term economic development, to be implemented from 2004 to 2007. Based on the final draft of the document, the Council of Ministers and the Entity Governments approved an Action Plan for the implementation of the most urgent reforms . As a result, the Economic Policy Planning Unit (EPPU) was established under the authority of the Chairman of the Council of Ministers. The EPPU is designed principally to coordinate socio-economic research related to European integration and to coordinate the implementation of Bosnia and Herzegovina’s Medium-Term Development Strategy.

The Legislation Office, responsible for ensuring internal legal harmonisation, has been established, and its director has been appointed. The General Secretariat is now operational, and a permanent General Secretary has been nominated. However, it still lacks the staff to carry out all its tasks under the Law on the Council of Ministers and suffers from an overly politicised environment. In Bosnia and Herzegovina, many functions normally associated with general government departments are carried out by the Prime Minister’s and other Ministers’ private offices (cabinets).

The Directorate for European Integration (DEI) has continued to play an important role within the Bosnia and Herzegovina Council of Ministers and to promote European integration in general. The DEI, which is under the direct responsibility of the Chairman of the Council of Ministers, has improved co-ordination with, and the involvement of, State and Entity ministries through regular meetings with the EU Integration Coordinators of these ministries.

The DEI has developed an Action Plan to address the European Partnership priorities. The document was approved in May 2005 after serious delays due, in particular, to Republika Srpska’s disagreements. The DEI has played a key role in promoting the debate on European integration, and has held regular seminars and meetings with the public. It has also developed a Communication Strategy with the aim of stimulating Bosnia and Herzegovina public support for the European integration process.

The overall staffing situation of the DEI has improved, although some key functions, such as the Head of the Aid-Coordination Department, have not yet been filled. The DEI’s aid-coordination capabilities have increased and DEI has been able to play a more prominent role in assistance programming. Senior Programming Officers from State ministries and key institutions have been nominated to take part in the programming exercise. There has also been progress in developing the DEI’s legal harmonisation department. Nonetheless, despite real progress in all the DEI’s departments, sustained efforts and training are necessary to further develop its capacity.

International community

On the basis of the Dayton mandate, the international community continues to be deeply involved in Bosnia and Herzegovina. The High Representative continues to play an important role. In addition to his Dayton-mandated responsibilities, the High Representative has the authority to impose legally binding decisions through the so-called Bonn powers. This has, in practice, been used in three ways: (i) to enact legislation, (ii) to remove officials from office and (iii) to impose other binding decisions. The number of decisions adopted by the High Representative is down in 2005 (52 by the end of September) compared with 2004, when there were 158 (including the dismissal of 59 officials in June 2004 for non-cooperation with the ICTY). There has been a gradual shift towards decisions which merely follow up policies already agreed in advance. The High Representative has begun to lift some of his earlier sanctions, e.g. the ban on political involvement imposed on a number of individuals. Nevertheless, in March 2005 the High Representative removed a Bosnia and Herzegovina Presidency member following corruption charges against him and his refusal to step down voluntarily. The High Representative has also needed to appoint the Director of the State Investigation and Protection Agency (SIPA) and the Director of the State Border Agency (SBS). In both cases, the intervention of the High Representative was the result of the Council of Ministers' inability to agree on candidates for these key posts.

The use of the Bonn powers continue to play a role in achieving reform. Nonetheless, the Bosnia and Herzegovina authorities have to a certain extent taken ownership of the reform process and, in the reporting period, the High Representative has not imposed laws or decisions directly related to the Feasibility Study priorities.

The current High Representative also acts as EU Special Representative. The mandate of the EU Special Representative (EUSR) is to “offer the EU’s advice and facilitation in the political process and to promote overall political coordination in Bosnia and Herzegovina”. This mandate has been extended until February 2006. The EUSR holds monthly coordination meetings and has a small number of designated EUSR staff who continues to be fully integrated into the Office of the High Representative (OHR).

In December 2004, the EUFOR/Althea military mission took over from the NATO-led SFOR mission. At the same time, NATO’s continued long-term commitment to Bosnia and Herzegovina was marked by the opening of new NATO Headquarters in Sarajevo. EUFOR continues to operate with a force of roughly the same size (around 7,000 troops), the same task force structure and under the same basic mandate as did SFOR. It has the main peace-stabilisation role and monitors the implementation of the military aspects of the Dayton Agreement. It successfully undertook its first major operation, inspecting military facilities throughout the country, in December 2004. An aspect in which it differs from SFOR is that it has an explicit mandate to provide support in the fight against organized crime, the aim being to strengthen security and help Bosnia and Herzegovina increase its self-governing and self-policing capacity.

Public administration

Bosnia and Herzegovina has slowly begun to address the related findings of the Feasibility Study, which identified public administration reform as a major challenge. A Coordination Office for the Public Administration Reform (PAR) was established in October 2004 under the authority of the Chairman of the Council of Ministers. The PAR Coordinator has played a role in promoting the public administration reform agenda, but has been hampered by the lack of sufficient budget resources, adequate premises and the necessary support staff. As a result, preparations for a comprehensive, country-wide public administration reform strategy, which was scheduled to be approved in the autumn 2004, were seriously delayed. The Action Plan for the reform of Bosnia and Herzegovina’s public administration has not yet been adopted.

Despite some improvements, efficiency of Bosnia and Herzegovina’s public administration needs to increase. In an attempt to address this issue, reviews of seven public administration sectors have been carried out (police, justice sector, education, health, agriculture, environment and refugee return). In addition, a system review of the entire public administration was published in March 2005, examining horizontal aspects such as human resources, public finance, legislative drafting, administrative procedures, information technology and institutional communication. The reviews resulted in detailed recommendations to the authorities on how to improve Bosnia and Herzegovina’s public administration and make it more cost effective and efficient. Implementation of these recommendations has so far been limited. Entity governments, in particular Republika Srpska’s, have occasionally been hostile to rationalising the public administration, as this would entail a transfer of competence from the Entity to the State level.

Work towards a professional, non-political civil service with recruitment and promotion based on experience and merit has made progress as regards lower-level civil servants. However, at present, there are still insufficient safeguards against political interference in public administration when it comes to senior management positions, where ethnic identity and party membership continue to play a significant role.

Regarding remuneration, the Council of Ministers has decided to amend the Bosnia and Herzegovina Constitution by deleting a paragraph specifying that “compensation for persons holding office in the country’s institutions may not be diminished during the officeholder’s tenure”. This decision, which was adopted at Parliamentary level in September 2005, was taken following the International Monetary Fund’s advice that the State level salaries should be reduced by 10%.

Civil service legislation exists at State and Entity level, as do Civil Services Agencies in charge of law implementation. The Civil Service Agencies (CSA) of both Bosnia and Herzegovina and Republika Srpska (RS) have been operational since 2003. The Federation agency became fully operational in October 2004. The Bosnia and Herzegovina Civil Service Agency has thus far been unable to recruit the large number of civil servants provided for in the State-building plans. This is due in part to cumbersome and time-consuming procedures, but also to poor prioritisation by the recipient institutions. From the beginning of 2004 until mid-May 2005, the Civil Service Agency had processed only 69 vacancy publications, hiring a total of 284 civil servants. In an attempt to address this inefficiency and to speed up the hiring of civil servants, the Civil Service Law has been amended. In addition, practical problems related to the lack of adequate premises remain a barrier to the proper operation of the State Ministries and other State-level institutions. Despite the awareness of the authorities and the initial measures taken by them, this problem has not yet been completely resolved.

The accountability of public officials has improved and codes of conduct exist at State and Entity levels. Separate laws on free access to information are in force at the various levels of government. These laws also deal with access to government-held information. Information is accessible to the citizens following a written request but the public tends not to exercise this right.

Bosnia and Herzegovina has a number of administrative control procedures, namely the Ombudsmen’s institutions, the State Audit Office and the Civil Service Complaints Board. The Law on Bosnia and Herzegovina’s State Ombudsman was amended in December 2003, and as of January 2004 the Institution was effectively transferred from international to Bosnia and Herzegovina responsibility. Three national Ombudsmen (one from each constituent people) were subsequently appointed. A new Law, which foresees the merging of the Entity Ombudsmen Institutions with the State Ombudsman, has been drafted. This law is in line with international conventions but it has not yet been adopted due to political and institutional lobbying and the Republika Srpska’s opposition. In the meantime, the Republika Srpska National Assembly passed amendments to its own Ombudsman law and introduced two deputies to the current Ombudsman (one of each of the other constituent peoples). In the Federation there have been no recent changes. Most of the complaints received by the Ombudsmen over the reporting period concern access to justice and social rights. Cases regarding restitution of property, which in the past constituted their main workload, are now less numerous.

A State Audit office conducts annual audits of all the State institutions. This office has reported major deficiencies and financial irregularities in many institutions, including the Bosnia and Herzegovina Presidency. Adequate follow up to these reports needs to be ensured. A Civil Service Complaints Board operates as a second-instance body for resolving appeals against decisions rendered by the Bosnia and Herzegovina institutions pertaining to the status of civil servants. The Board also acts as the second-instance body in disciplinary procedures conducted against civil servants and supervises the decisions rendered by the institutions related to the labour law status of civil servants. However, the second-instance appeal bodies for administrative procedures are not clearly identifiable. Given that the country has four laws on administrative procedure - for the State, the two Entities and Brcko District respectively -, it is not always an easy matter to determine which one is applicable and with which second-instance body an appeal should, where applicable, be lodged.

In May 2005 the Council of Ministers adopted a training programme on European integration. The programme includes general and specialised training packages for civil servants, but implementation has not yet begun. The need for education on European integration issues has been recognised as a priority in training programmes organised by bilateral donors and the EU.

The issue of local self-governance is a responsibility of the Entities. Given the very complex set-up of the Federation of Bosnia and Herzegovina and the significant powers devolved to the cantons, the reform of local self-government remains a hostage to conflicting approaches. In March 2005, a new Federation draft Law on the Principles of Local Self-Government began its journey through the Federation’s Parliament but has not yet been adopted. According to the Council of Europe, the draft law falls short of the standards of the Charter of Local Self-Government on a number of critical points, including the definition of local self-government. In Republika Srpska, the new Law on Local Self-Government has entered in force, but implementation is at an early stage.

Following the entry into force of the new status of Mostar in March 2004, the city is building up a single administration. There has been some progress in unifying the city administration, but it has been slowed down by limited co-operation between the local political forces.

Police and defence reform

After many difficulties and delays, positive developments were eventually registered in the area of police reform. On 5 October 2005, the Republika Srpska National Assembly supported a proposal for a political agreement on police reform. This proposal was in line with the principles outlined by the European Commission for this matter, e.g. i) all legislative and budgetary competences vested at State level; ii) no political interference with operational policing; iii) functional police areas determined by technical policing criteria. This “Agreement on the Restructuring of Police Structures” was also endorsed by the Parliament of the Federation of Bosnia and Herzegovina and the State Parliament. It is now essential that this political agreement be timely and properly implemented, in particular through the establishment of the Directorate for the Implementation of Police Restructuring by December 2005 and the preparation and adoption of an action plan for the reform implementation within the timelines set by the agreement.

Progress in the area of defence reform has been considerable, despite some sporadic resistance among sectors of the armed forces. The prospect of Bosnia and Herzegovina joining NATO’s Partnership for Peace (PfP) has proved a stimulus to progress. Entity and State parliaments have approved the Defence Reform package which includes full State-level competence for defence, a single defence budget, the elimination of the Entity Ministries of Defence, the abolition of general conscription, as well as a restructured and smaller reserve force.

Bosnia and Herzegovina has reached the benchmarks endorsed by the North Atlantic Council as criteria for credible candidacy for Partnership for Peace (PfP) and recent progress on the defence reform should help the country to achieve its PfP objective. However, the lack of full co-operation with the ICTY, in particular the failure to arrest the indicted war criminals Mladic and Karadzic, continues to be an obstacle to Bosnia and Herzegovina’s eventual entry into PfP.

Judicial system

The structure of the judicial system in Bosnia and Herzegovina reflects the internal structure of the country, and courts exist at State and Entity level and also within the Entities. There are 192 courts in Bosnia and Herzegovina. Judges number 1,018 (25.4 per 100,000 inhabitants) and prosecutors 271 (7 per 100,000 inhabitants). The courts at State level include members who are not nationals of Bosnia and Herzegovina: three members at the Constitutional Court and twelve members at the State Court. The foreign judges of the State Constitutional Court are appointed by the President of the European Court of Human Rights, while those at the State Court (and the prosecutors at the State Prosecutor’s Office) are appointed by the High Representative. A re-selection process for all judges and prosecutors was completed in 2004. This resulted in the removal of approximately 20% of the judges and prosecutors. A parallel court-restructuring system reduced the number of judicial positions and courts. As regards prosecutors, the number remained around the same, due to the increased responsibilities of prosecutors under reformed criminal procedure codes.

The independence of the judiciary is entrenched in law and is generally respected in practice. The Bosnia and Herzegovina judicial system has undergone a number of structural changes. The High Judicial and Prosecutorial Council (HJPC) came into being as a Bosnia and Herzegovina institution in June 2004. The HJPC has broad powers in relation to the judiciary, at all levels of government, including the appointment and disciplining of judges and prosecutors. The relevant law sets out strict eligibility criteria for appointment to the bench, including a detailed application process, detailed disclosure of personal interests, interviews, investigations, etc. Initial problems related to the funding of the HJPC and the State-level courts have been solved, and the Council of Ministers has decided on the status and salary levels of the HJPC staff. The HJPC consists of a total of fifteen members: eleven judges or prosecutors from the Entities (selected by judges and prosecutors from different categories), two attorneys (one selected by the Bar Chamber of each Entity), and two other members (selected one by the State Parliament of Bosnia and Herzegovina and one by the Council of Ministers).

Judges and prosecutors are paid relatively high salaries , both when compared to salaries in Bosnia and Herzegovina generally and also when compared to their peers in other countries in the region. Nonetheless, a decision freezing judicial salaries was imposed by the High Representative in December 2004 and a comprehensive review of the system of judicial remuneration is currently underway.

There are two judicial training centres, one in each Entity. While the State and Brcko judiciaries have no formal training centre, they generally participate in training programmes and activities organised by the Entities. Training on a wide range of substantive and procedural topics is particularly important given the large volume of legislative changes over recent years, including fundamental changes to the Bosnia and Herzegovina legal system. Training courses on judicial ethics and topics such as initial training for newly appointed judges exist and are continually developed in conjunction with relevant national and international stakeholders. Knowledge of EU law is still limited, partly because much of it has not yet been incorporated into national law. Training courses and other awareness-raising exercises in this field are ongoing. Regarding human rights, a wide range of human rights instruments have been incorporated into national law, most notably the European Convention on Human Rights (ECHR). Efforts need to continue in order to ensure proper implementation of human rights provisions and to achieve full compatibility of criminal legislation with the ECHR. Care should be taken to further develop the legal framework for witness protection, in such a way as to ensure that the safety of vulnerable witnesses is appropriately balanced with the accused right of defence.

The budgetary process for the judiciary is fragmented across a range of budgetary authorities. This leads to considerable disparities in the funding of the judiciary and in the quality of courts which, in turn, give rise to serious concerns about the equality of citizens before the law. The general level of infrastructure and equipment varies widely, although the material situation of the judiciary must be seen in the context of the overall difficult economic situation of all institutional sectors.

There continues to be a significant backlog of cases before the courts, particularly in the field of civil and administrative law. This needs to be addressed. It is necessary to ensure that recent legislative changes to streamlining civil procedures and other efforts lead to concrete results in this area.

Anti-corruption policy

Surveys and assessments conducted by both national and international organisations confirm that corruption remains a serious and widespread problem in Bosnia and Herzegovina. Corruption affects almost all aspects and levels of society.

On the ratification of international conventions in the anti-corruption field, Bosnia and Herzegovina has ratified the UN Convention against Trans-national Crime, the Council of Europe Criminal Law Convention on Corruption and the Council of Europe Civil Law Convention against Corruption. The UN Convention on Fighting Corruption (Mérida Convention) was signed in September 2005. Bosnia and Herzegovina has not yet signed the Additional Protocol to the Criminal Law Convention on Corruption, and it is not yet a party to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

The State-level Criminal Code includes chapters dealing with corruption, sanctions against corruption and measures to promote official accountability. The same issues are also covered by the relevant Entity legislation, but there is a need to harmonise the relevant criminal codes. Anti-corruption efforts have been reinforced by the adoption of a Law on Conflict of Interests and the adoption of a National Anti-Corruption Strategy under Bosnia and Herzegovina’s Mid-Term Development Strategy. However, this document does not yet contain an Action Plan with detailed measures and timelines, and has so far had very little impact. Laws on public procurement and new legislation on the Indirect Taxation System have been adopted, but implementation is still at an early phase and the impact of this legislation in reducing corruption remains to be seen.

The Ministry of Security and the State Investigation and Protection Agency (SIPA) co-ordinate anti-corruption efforts at State level. A special Department for Organised Crime and Corruption, including international prosecutors, has been established within the Prosecutor’s Office of Bosnia and Herzegovina. The courts have begun to prosecute cases of alleged corruption by both private citizens and politicians (including a former member of the State Presidency). Nonetheless, while the judicial system has the capacity to prosecute corruption, the number of successful prosecutions remains low, and mainly based in the activity of international prosecutors. With the establishment of the State Court and the State Prosecutor’s Office, the primary responsibility for investigating, prosecuting and trying most of the major cases of organised crime and corruption is progressively being transferred from international to national bodies.

Bosnia and Herzegovina is a member of the Council of Europe Group of States against Corruption (GRECO). The GRECO’s first evaluation round report was adopted in 2003 and recommended, among other things, the establishment of a body responsible for the enhancement of country-wide anti-corruption activities, the harmonisation to the largest possible extent of criminal and criminal procedures codes within the country, and to develop adequate public procurement rules at State and Entity-level. The second evaluation round report, which will provide detailed comments on the implementation of the first report’s recommendations, is expected to be produced at the end 2005. Bosnia and Herzegovina is also involved in the Stability Pact’s Anti-corruption Initiative (SPAI). In this respect, the SPAI Regional Secretariat was opened in Bosnia and Herzegovina in March 2004.

Human rights and the protection of minorities

Observance of international human rights law

There has been progress on the human rights front. As regards the transfer of the human rights bodies established by the Dayton Peace Agreement from international to Bosnia and Herzegovina’s control, the Bosnia and Herzegovina and Entity Prime Ministers signed in June 2004 an agreement to transfer the competences of the Commission for Real Property Claims (CRPC) to the State government. Subsequently, the CRPC database was transferred to State authority and is now functioning. The Presidency of Bosnia and Herzegovina appointed the members of the new Commission in November 2004. The Commission is now operational.

As the successor of the Human Rights Chamber, the Human Rights Commission was established in the Bosnia and Herzegovina Constitutional Court in early 2004. The Commission has substantially reduced the backlog of human rights cases. Its mandate has been extended until the end of 2005.

Bosnia and Herzegovina has ratified a number of international conventions on human rights, including the European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR). Bosnia and Herzegovina has also ratified all major UN Human Rights Conventions, in some cases as a successor to the Socialist Federal Republic of Yugoslavia. Bosnia and Herzegovina’s record in reporting to the international monitoring bodies has improved, but needs to improve further.

Bosnia and Herzegovina legislation provides for the protection of all the human rights and freedoms identified in the European Convention for the Protection of Human Rights and Fundamental Freedoms and its Protocols. According to the Bosnia and Herzegovina Constitution, these rights apply directly and have priority over all other legislation.

The first judge from Bosnia and Herzegovina at the European Court of Human Rights has been elected. In 2004 the European Court of Human Rights issued no judgments on Bosnia and Herzegovina. However, at the end of 2004 a number of applications were lodged (205) and a number of applications allocated to a deciding body (137).

Bosnia and Herzegovina has not yet examined the compatibility of national legislation and practice with that of the European Convention on Human Rights (ECHR) and, although representation is ensured through the Office of the Attorney of Bosnia and Herzegovina, a Government Agent before the European Court for Human Rights remains to be appointed.

In relation to personal data protection, the status of protection of personal data in Bosnia and Herzegovina remains unsatisfactory. The new Law on Protection of Personal Data, providing for the establishment of the Data Protection Agency, has not yet been adopted.

Civil and political rights

The Constitution of Bosnia and Herzegovina and the Constitution of the Federation of Bosnia and Herzegovina do not allow the death penalty . However, Article 11 of the Republika Srpska Constitution still allows the death penalty for capital crimes. This is not compatible with EU standards.

State and Entity Constitutions prohibit torture and ill-treatment and Bosnia and Herzegovina has ratified the European Convention for the Protection of Human Rights and its relevant protocols. Occasional physical mistreatment of prisoners has been reported, but investigations of police misconduct and police accountability have improved. Professional Standards Units have been established as internal affairs investigative units in each of the Entity Ministries of Interior and Brcko District. The presence of these units has led to the proper processing of complaints for police misconduct and to disciplinary decisions in accordance with standard procedures.

Amendments to the pre-trial detention chapter of the Criminal Procedure Code guaranteeing the principle of presumption of innocence and a new State Law on the Execution of Criminal Sentences have been adopted. These should now be followed by amendments to the Entity legislations on prisons. Pre-trial detainees are held separately from convicted criminals. As concerns detention facilities, the process of prison reform is on-going. Efforts need to continue in a coherent and coordinated manner. Prison standards remain in general poor, and overcrowded facilities are still a problem. There are no separate prisons for female or juvenile inmates. Particularly worrying is the lack of means to tackle the issue of juvenile delinquents. Ethnically motivated incidents have been reported. The provisional 21-bed pre-trial high security detention facility for Bosnia and Herzegovina has become operational, covering the needs of the War Crimes Chamber. In future, it will also be used for people held in connection with cases of alleged organised crime.

As regards access to justice, Bosnia and Herzegovina’s legal framework provides for the right to legal representation and legal aid. In criminal cases, legal assistance is mandatory. Legal aid is also provided if a defendant is judged by the court to be unable to conduct his own defense. However, the implementation of this right is not secured to all individuals on a transparent and consistent basis throughout the country. The availability and quality of legal aid varies greatly depending on where the defendant is facing trial. Therefore, serious concerns exist as to the guarantee of equality before the law. Limited financial means lie at the root of the problem. Legal aid in civil cases is primarily provided on an ad hoc basis by privately funded NGOs. There is no coherent nationwide scheme of publicly funded legal aid in civil cases.

The Bosnia and Herzegovina Constitutions provide for freedom of religion . A State-level Law on Religious Freedom provides comprehensive rights to religious communities and grants them a new legal status. Despite the constitutional and legal provisions protecting religious freedom, religious intolerance is still present in the country. Ethnic symbols, clerics and religious buildings have been targets of ethnically motivated violence. Local police has not always conducted serious investigations into incidents of this nature.

The country’s Constitutions provide for freedom of expression and freedom of the press , although laws safeguarding freedom of the press were delegated to the cantons in the Federation of Bosnia and Herzegovina, and to the central authorities in Republika Srpska. Freedom of expression has generally been respected by all authorities although verbal attacks on the mass media from politicians and public officials have occurred. Occasional physical attacks and sporadic attempts by political forces to exert pressure have also been reported. Mass media and especially newspapers largely continue to be ethnically divided and influenced by political parties. A Bosnia and Herzegovina Press Council exists, but has no means to enforce a code of ethics on the printed media. A positive development was the December 2004 merger of three journalists’ associations from Sarajevo, Mostar and Banja Luka.

In terms of broadcasting, the State-wide channel BHTV1 started broadcasting in August 2004 covering almost the entire Bosnia and Herzegovina territory. In addition, two Entity public channels continue to exist (FTV and RTRS) as well as a number of private and local channels. The State law on the public broadcasting system was eventually adopted in October 2005. Considerable progress has also been made towards the adoption of the State law on the public broadcasting service. Once all State level legislation will be formally adopted, Bosnia and Herzegovina will need to pass the relevant legislation at Entity level. The main objective of all this legislation is to bring together the three present public broadcasters (the two Entity broadcasters and the nation-wide one) into a single legal entity managed through a single steering board, to prevent mono-lingual channels. This should contribute to reducing ethnic divisions and to preventing the undue political use of public TV services.

The Communications Regulatory Agency (CRA) has continued to function effectively. The presence of the CRA and the effectiveness of its complaints procedure and enforcement provisions considerably reduced the level of inflammatory language in the electronic media, and the environment for electronic media is now more transparent and better regulated. Both the staff and resources situation of the CRA have substantially improved. The CRA has issued long-term broadcast licenses to all private radio and TV stations in Bosnia and Herzegovina, which now have licenses to operate for a period of approximately 10 years, while public stations received licenses for two years. Bosnia and Herzegovina has also ratified the European Convention on Trans-frontier Television.

The country’s Constitutions provide for freedom of assembly and association , and the authorities generally respect this right. The Law on Associations and Foundations of Bosnia and Herzegovina is in compliance with the European Convention on Human Rights and Freedoms and it guarantees the exercise of the right to association. However, in practical terms NGOs continue to encounter numerous obstacles when trying to register under the provisions of the Law.

Ethnic issues remain important in the country and ethnic identity continues to be used by political parties. While ethnically related incidents have overall decreased, follow-up investigations in a number of cases have been problematic. There is also harassment and discrimination against minorities, most notably the Roma population. Discrimination in employment and education remained a key obstacle to the sustainable return of refugees and displaced persons.

Bosnia and Herzegovina’s Constitutions prohibit discrimination on the basis of sexual orientation, and existing Criminal Codes do not penalize sexual minorities or restrict their rights. However, this is not enforced in practice and homosexuals are frequently discriminated against. There are reports that people belonging to sexual minorities have been dismissed from their jobs and mistreated in schools and elsewhere. The media and society in general are also hostile to sexual minorities. In 2004, Bosnia and Herzegovina’s first organization for affirmation and protection of human rights of sexual minorities was established. In general terms, it appears that efforts are still necessary in order for Bosnia and Herzegovina to meet EU standards in terms of protection against discrimination. These standards require the implementation of the principle of equal treatment between persons irrespective of racial or ethnic origin and the establishment of a general framework for equal treatment in employment and occupation, irrespective of religion or belief, disability, age or sexual orientation.

The Bosnia and Herzegovina Law on Associations and Foundations provides Non-Governmental Organizations (NGOs) with the possibility to register in the whole territory of Bosnia and Herzegovina. Whilst there is a legal basis at State level for NGOs to operate “State-wide”, few NGOs have a country-wide field of action. By-laws for the establishment and operation of NGOs are complicated and do not help the rapid development of local organizations. NGOs also have serious difficulty in raising the necessary funds. Civil society development is slowed by the complex set-up of the country. Partly as a consequence of the war, many NGOs were created and developed in donor-driven mode, with very weak links to real societal demands. The nationalist agendas of many political parties have also atomized civil society and provoked many NGOs to act on an ethnic basis.

Economic and social rights

The current socio-economic situation in Bosnia and Herzegovina has an adverse effect on the protection of economic and social rights. Officially, up to 40% of the population is unemployed. Around 20% live below the poverty line, with a further 30% close to it. This reflects in part a failure of social security systems to address the needs of the most economically deprived.

In the area of gender equality , Bosnia and Herzegovina applies the Convention on the Elimination of All Forms of Discrimination against Women, and has also accepted the Beijing Declaration and Action Platform. A Law on Gender Equality was adopted in 2003, and was the first legislation in Bosnia and Herzegovina to regulate this issue. An Agency for Gender Equality has been established and is now operational. In addition, two Entity Gender Centers exist. In November 2004, the Bosnia and Herzegovina Ministry of Human Rights and Refugees submitted a report on actions taken concerning the application of the Convention on the Elimination of All Forms of Discrimination against Women, pointing to the progress achieved in terms of legislation and overall implementation capacity. Despite some developments, there continues to be a considerable difference between legislation and practice. The participation of women in politics and public life continues to be limited. Domestic violence, which is seldom reported to the authorities, remains a problem.

In the field of children’s rights , the Convention on the Rights of the Child is part of the Bosnia and Herzegovina Constitution. The Council of Ministers adopted an Action Plan for Children for the period 2002 – 2010. This Action Plan is based on the conclusions of the World Summit for Children. A Council for Children has been established as an advisory body to the Council of Ministers. This Council has been recently reinforced and now has 15 members, most of whom are civil society representatives. Social services for children remain limited. Education is free and compulsory, until the age of 15. Children up to 15 years of age are entitled to free medical care under the law, but in practice, medical care for children is not ensured unless they are covered by medical insurance paid for by their parents. Children with special needs lack sufficient medical care and educational opportunities. There is generally no discrimination between boys and girls in terms of education and access to medical care. However, separation of children in schools along ethnic lines is a growing problem due to the lack of implementation of legislation on primary and secondary education. The use of two systems in primary education and three national education programmes is obstructing vertical and horizontal mobility of students.

In relation to the socially vulnerable , legislation in both Entities prohibits discrimination against the disabled. Nonetheless, people with disabilities resulting from the war are granted privileged treatment. Legislation regarding access facilitation for disabled people is not being implemented. The unemployment rate among the persons with disabilities is very high.

As far as labour rights are concerned, in May 2004 Bosnia and Herzegovina signed the revised European Social Charter, but ratification is still pending. Access to social protection continues to be a major concern. The practical organization of the social security system often deviates from enacted legislation. Differences between social security rights enjoyed by Bosnia and Herzegovina citizens persist, not only across the two Entities but also across the cantons in the Federation of Bosnia and Herzegovina. This situation leads to serious practical problems which adversely affect Bosnia and Herzegovina’s workers and citizens in general.

The Entity Constitutions and labour laws allow workers (except members of the military) to form and join trade unions of their choice without previous authorization. Legislation in both Entities prohibits discrimination by employers against union members and organizers, in accordance with ILO standards. Collective bargaining is provided for but, in both Entities, it does not take the form of voluntary direct negotiation between a union and individual employers. Collective bargaining agreements instead largely apply as work agreements between the Government and workers in the public sector. The law provides for the right to strike and workers exercise this right in practice.

In relation with social dialogue , the main problem in Bosnia and Herzegovina is the very complex form of government and the fragmentation of legislation. Social dialogue is decentralized to the Entity level, and the Entities of Bosnia Herzegovina have each their own legislation and their bodies of social dialogue. The State-level Ministry of Civil Affairs has recently taken some initiatives in this respect and has requested assistance from the Community and the International Labour Organization (ILO) in establishing a Bosnia-wide Economic and Social Committee. The two main Trade Unions active at the Entity-level started merging in June 2005 for the purposes of participating in the State Economic and Social Council, and created an umbrella organisation at the State-level. A State-level employer association, encompassing the associations at the Entity level, also exists. In general, the high level of informal economy is a problem for the organisation and development of both workers and employers' associations.

In order to tackle the problem of fragmented legislation, the representative employers in both Entities have been associated with the “Bulldozer Initiative” to clear a path through the fragments of legislation which would allow businesses to develop. Efforts in this area need to continue. The lack of balance between tripartite and bipartite social dialogue, and between cross-industry and sectoral negotiations, constitutes an additional issue.

Minority rights, cultural rights and the protection of minorities

Bosnia and Herzegovina is party to the Council of Europe Framework Convention for National Minorities, but has not signed the European Charter for Regional or Minority Languages.

Bosnia and Herzegovina authorities have started to pay attention to national minorities, as demonstrated by the adoption of the Law on the Protection of Rights of Persons Belonging to National Minorities and the amendments to the Election Law. Furthermore, the Entities have harmonized their relevant legislation, allowing for further development of minority language education. Nonetheless, implementation remains insufficient. The provisions on teaching minority languages, on media broadcasting for national minorities and on proportional representation in public authorities and in the civil service have not prompted substantial changes in practice. New consultation structures for national minorities, such as the proposed Council of National Minorities and corresponding bodies at Entity level, have not been set up, despite legal obligations. As regards access of minorities to political posts, rigid rules are still in force at State level, but some progress has recently been made at Entity level in terms of widening access to minority representatives. Further efforts are necessary to address the exclusion of persons belonging to national minorities from access to certain posts at State and Entity levels.

As indicated by the report of the European Commission against Racism and Intolerance (ECRI), the excessive emphasis put by Bosnia and Herzegovina's legal framework on the status of Bosnia and Herzegovina "constituent peoples" (i.e. Bosniaks, Croats and Serbs) has an adverse effect on the protection of Bosnia and Herzegovina’s minorities that do not belong to these “constituent peoples”. It is also considered to be an obstacle to the enjoyment of individual human rights by all citizens of Bosnia and Herzegovina, and to Bosnia and Herzegovina’s evolution towards a State based on citizenship rather than on ethnic representation.

Serious problems remain in the application of the Framework Convention for National Minorities with regard to the Roma population (estimated at 40,000 to 80,000 people). Full and effective equality has not been secured for Roma, who continue to be exposed to discrimination and face particular difficulties in fields such as housing, health care, employment and education. The Bosnia and Herzegovina authorities established a Council of Roma in 2002 consisting of representatives of 22 Roma organizations. This Council continues to have a very limited role. In 2005, the Council of Ministers established a Roma Board as a part of the Ministry for Human Rights and Refugees. The Board consists of 18 members and is under the responsibility of the Council of Ministers. The adoption of the National Strategy for Roma in July 2005 has been a positive development. It needs now to be properly implemented.

Other minorities in Bosnia and Herzegovina such as Jews and Ukrainians have fewer problems in comparison with those of the Roma, but the poor implementation of minority-related legislation also affects them. Minority languages are not in use in the administration, judiciary and education. Minority groups do not have their own printed media. Procedural problems mean members of minorities rarely participate in the parliaments and municipal assemblies. An association of national minorities has been established in Republika Srpska. No similar organization exists in the Federation or at State level, apart from the Bosnia and Herzegovina Council of Roma.

Regional issues and international obligations

Bosnia and Herzegovina has continued to promote regional cooperation . It successfully chaired the South East Europe Co-operation Process from April 2003 to April 2004 and has also participated actively in other regional initiatives such as the Central European Initiative, the Adriatic-Ionic Initiative, the Southeast Europe Cooperation Initiative, and the Danube Cooperation Process.

Bosnia and Herzegovina has met its Stability Pact commitments and ratified Free Trade Agreements (FTAs) with Albania, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Moldova, Romania, and Serbia and Montenegro. However, Bosnia and Herzegovina has encountered difficulties in implementing these FTAs. It needs to make further efforts to ensure their proper implementation.

In terms of bilateral relations with other Western Balkan countries, Bosnia and Herzegovina and Serbia and Montenegro have continued to meet regularly in the framework of the Inter-State Co-operation Council. A number of bilateral agreements, including on defense cooperation, determination of border crossings and facilitation of flow of persons and goods have been signed. In December 2004, the Serbian President offered an apology to Bosnia and Herzegovina for the war crimes committed in Bosnia and Herzegovina, and in July 2005 the Serbian President and other officials from Serbia and Montenegro attended the commemoration of the 10th anniversary of the Srebrenica genocide. The close relationship between Republika Srpska and Serbia continues, but does not hinder normal inter-State relations. Nevertheless, some issues between the two countries persist. Bosnia and Herzegovina’s court case against Serbia and Montenegro to the International Court of Justice (ICJ) for alleged genocide is still pending and has occasionally inflamed the political discourse. The State Border Treaty has not yet been signed. In February 2005, Bosnia and Herzegovina adopted a temporary decision on introducing 30% duties on exports of flour and beer from Serbia and Montenegro. Since then the divergences have partly been resolved and both Serbia and Montenegro and Bosnia and Herzegovina have withdrawn their protective measures.

Relations with Croatia have also developed and the countries have met at the Inter-State Council. Bilateral agreements on avoiding double taxation and implementing verdicts in criminal proceedings have been signed. A document entitled “Guidelines for Improvement of Relations between Bosnia and Herzegovina and Croatia” has been agreed. The bilateral Inter-State Border Commission has agreed on the demarcation of the border, although this agreement has not yet been ratified. A co-operation agreement on border police has been negotiated. The Agreement on Dual Citizenship has been signed. Notwithstanding these positive developments, there has been little progress on resolving issues such as the agreement on the Port of Ploce and the agreement on Settling Property Issues. In March 2005 Bosnia and Herzegovina suspended part of the FTA with Croatia. Political contacts at the highest level have been limited during the reporting period and, for several months, bilateral diplomatic communication was lowered to the level of Chargé d’Affaires.

Relations with the former Yugoslav Republic of Macedonia are good and have been developing at political level. Bilateral agreements have been signed, for example on regular air traffic and social insurance. Discussions on agreements on extradition and mutual execution of court rulings in criminal matters have been finalised and an agreement on mutual legal assistance is under consideration.

Relations with Albania have continued to be good and both countries have agreed to enhance co-operation notably in the area of justice and home affairs.

Regarding refugees and displaced persons (DPs), by the end of 2004 over one million refugees and displaced Persons had returned to their pre-war homes and municipalities in Bosnia and Herzegovina. This is considered by both domestic politicians and the international community as constituting real and tangible progress. Nonetheless, the process of return has not yet been completed. Bosnia and Herzegovina’s representatives estimate that approximately half a million people still wish to return. In addition to the wide range of conditions required to make return sustainable, including access to reconstruction assistance, employment, health care, pensions, utilities and an unbiased education system, continuing concerns for the safety of individual returnees remain. The Bosnia and Herzegovina Ministry for Human Rights and Refugees, with the support of UNHCR, has carried out a new registration exercise for refugees and DPs. The results show that there are still over 180,000 registered refugees and DPs within Bosnia and Herzegovina.

The Law on Amendments to the Law on Refugees and DPs in Bosnia and Herzegovina, which foresees the establishment of the Return Fund and the State Commission for Refugees and DPs, entered into force in November 2003. After serious delays, the Entities adopted harmonized legislation in early 2005. The adoption of the State Law on Refugees and DPs made the establishment of the Return Fund possible, and the Fund has slowly become operational. Efforts should now continue to ensure the financial sustainability of the Fund. The State Commission for Refugees and DPs is also operational and, as foreseen by relevant legislation, NGOs are participating as observers. The four regional offices of the Ministry of Human Rights and Refugees have been established and have become fully operational.

The de-mining process in Bosnia and Herzegovina, an important factor in refugee return, continues. A Mine Action Plan for 2005 has been adopted. The plan was prepared on the basis of the revised “De-mining Strategy 2005-2008 for Bosnia and Herzegovina” and envisages that areas suspected of containing landmines in Bosnia and Herzegovina will be reduced by 181 km² in 2005.

The implementation rate of the property repossession process in Bosnia and Herzegovina is considered as a major achievement. According to the authorities of Bosnia and Herzegovina, 99.5% of the cases have already been resolved. Outstanding cases will be addressed by the Commission for Property Claims of Displaced Persons and Refugees, appointed by the Bosnia and Herzegovina Presidency. The Commission’s mandate expires at the end of 2005, but could be extended if necessary.

The Parliament of the Federation of Bosnia and Herzegovina has adopted the Law on Return, Allocation and Sale of Apartments. The law foresees the return of apartments for which repossession claims have not been submitted by owners from 1991. Some 6,000 apartments are covered by this law, of which 3,000 are in the Sarajevo area. Unclaimed apartments have mostly been used as alternative accommodation for refugees and displaced persons.

Regional co-operation on refugees has also increased, notably through the commitment by Bosnia and Herzegovina, Croatia and Serbia and Montenegro to join forces in order to resolve the issue of refugees before the end of 2006. It is important that the compromises included in the “Sarajevo Declaration” of January 2005 be rapidly implemented.

Bosnia and Herzegovina’s co-operation with the International Criminal Tribunal for former Yugoslavia (ICTY) has improved, as a result however of increased pressure by the international community. Republika Srpska has been showing a more co-operative attitude and has developed a policy encouraging voluntary surrenders. Since December 2004, fifteen indictees for Bosnia and Herzegovina-related war crimes have been transferred to The Hague. The international community has recognized the progress made. Nonetheless, efforts need to increase further so as to ensure that all indicted war criminals still at large are rapidly apprehended and brought to justice.

Efforts have been made to comprehensively catalogue all persons implicated in the Srebrenica genocide. The Commission investigating the Srebrenica events produced a report which has also been endorsed by the Republika Srpska government. The continued co-operation of Republika Srpska is necessary to uncover the whole truth and to punish those who committed criminal acts. Other significant steps have been the establishment of an ICTY Monitoring Group involving Bosnia and Herzegovina authorities and representatives of the international community, and the organization of information campaigns to raise awareness among Republika Srpska’s citizens of the political and economic damaged that indictees at large represent for the Entity and the country as a whole.

Regarding the freezing of ICTY fugitive assets, Bosnia and Herzegovina has taken legislative steps to implement the 2004 EC Regulation on the assets freeze. The Ministry of Interior of Republika Srpska has reported that the relevant legislation is being implemented and that assets belonging to ICTY indictees have been frozen. The Bosnia and Herzegovina Central Bank has also confirmed that indictees’ bank accounts have been blocked.

In relation to domestic war crimes trials , the establishment of the War Crimes Chamber within the State Court in early 2005 aims at ensuring the effective and independent prosecution of individuals accused of war crimes. The Office of the Registrar – the Registry for War Crimes and Organised Crime within the State Court, which provides support to the Special Departments for War Crimes and Organised Crime, became operational in January 2005. The registry is responsible for management and administration of the War Crimes Project (including the administration of the registry, the Special Chamber, and the Special Department). Maximum-security prison facilities for pre-trial and post-conviction detention have also been established. Following ICTY’s decision, a number of war crimes cases have been transferred from The Hague. The transfer of the first indictee to be tried in Bosnia and Herzegovina took place in September 2005.

As regards the International Criminal Court (ICC) , Bosnia and Herzegovina ratified in 2003 a bilateral immunity agreement with the United States which runs contrary to the “EU guiding principles concerning arrangements between a State party to the Rome Statute of the ICC and the United States regarding the conditions of surrender of persons to the court” adopted by the Council of the EU in September 2002. No developments have taken place in this respect.

In its post-accession monitoring report in April 2005, the Council of Europe concluded that Bosnia and Herzegovina, after three years of membership, has honoured most of its post-accession commitments. It noted that “in addition to the notable progress with respect to co-operation with the ICTY, there also have been positive developments in the fields of human rights and the rule of law”. Nonetheless, it also stressed that implementation of adopted legislation remains weak. It is now urgent that Bosnia and Herzegovina fulfils its outstanding commitments, notably in the areas of elections and education, and that it makes determined efforts to ensure proper implementation.

General evaluation

As regards the political situation , Bosnia and Herzegovina has made progress in further consolidating the stability of its institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities. Most, of the Council of Europe post-accession commitments have been fulfilled. Nonetheless, continued efforts remain necessary in order to ensure a non-reversible, self-sustaining state able to assume full responsibility for government.

As regards democratic principles, Bosnia and Herzegovina assumed full organisational and financial responsibility for the 2004 municipal elections. Further progress has been made in implementing the Law on the Council of Ministers and the Law on Ministries. Efforts need now to continue to increase the effectiveness of the executive and legislative bodies, to ensure that State-level institutions are properly equipped to implement their tasks and to strengthen co-ordination between State and Entities.

Some positive steps have been taken in the field of public administration. A Coordination Office for the Public Administration Reform has been established; the Directorate for European Integration has been reinforced; a review of key public administration sectors has been carried out. Increased efforts are now necessary to create a modern and effective civil service. The comprehensive action plan for public administration reform has not yet been adopted. Lack of the necessary staff and of adequate premises for the various administrations is a recurrent issue. Building up training capacity for civil servants is also crucial.

Progress has been made regarding the judicial system. The legislation establishing a single High Judicial and Prosecutorial Council has been adopted. This legislation has strengthened the independence of the judiciary throughout the country. Bosnia and Herzegovina is progressively taking over responsibility from the international community for the management of its judicial system.

Further efforts are necessary to fight corruption. While prosecution of a number of specific corruption cases has been ensured, many continue to escape justice. Adequate anti-corruption action plans have to be prepared and implemented. The adoption of the law on the conflict of interest has been a positive step. Its consistent implementation needs to be ensured.

Positive developments have taken place regarding the defence reform through the adoption of the legislation necessary for the establishment of a single smaller and professional army, in line with NATO’s Partnership for Peace requirements. Regarding police reform, the endorsement by the Entity and State Parliaments of an agreement on the restructuring of the police in accordance with EU requirements is welcome. Proper implementation is now required.

The outstanding legislation supporting refugee returns has been adopted and the Refugee Return Fund has been made operational. Significant progress has been achieved regarding the return of refugees and displaced persons to their pre-war areas. The priority should now be to complete the process and to work towards socioeconomic integration of returnees. The transfer of human rights bodies from international to national responsibility has seen considerable developments. However, continued progress is necessary in order to meet international standards in the area of human and minority rights. In this respect, due attention should be paid to avoiding division of schools along ethnic lines. Efforts should also be devoted to improve the integration of the Roma minority.

Co-operation with ICTY has seen improvements. However, further efforts should be made to achieve full co-operation with the Tribunal so that all indictees be brought to justice. Constructive co-operation with neighbouring countries has continued. Nonetheless, proper implementation of the regional Free Trade Agreements should be ensured. Bosnia and Herzegovina should also make efforts to meet the outstanding Council of Europe post-accession requirements, notably regarding elections and education.

Economic situation

In the 2003 Feasibility Study on Bosnia and Herzegovina’s preparedness to negotiate a SAA with the EU, the Commission concluded that:

“ In general, Bosnia and Herzegovina has developed sound macroeconomic policies and made some progress with structural reform. Nevertheless, risks to macro-economic stability remain. Against the background of declining foreign assistance, high current account deficits and a persistent lack of self-sustaining domestic growth (hampered by weak corporate governance and labour market rigidities) could endanger currency stability with potential effects on inflation and the sustainability of debt servicing. On the fiscal front, public expenditure still concentrates on current rather than investment spending. Also, external public debt is on a downward trend, but domestic public debt, which includes arrears, war damages and frozen currency deposits, has not yet been fully quantified.”

In the 2004 Report, the Commission stated that:

“Despite some success in macro-economic stabilisation, Bosnia and Herzegovina is not yet firmly on the path of self-sustaining growth. As pointed out in the Feasibility Study, productive capacity and thus exports remain weak; FDI, though improving, is insufficient to compensate for large current account imbalances. Private sector development needs to be encouraged through an improved business environment, better corporate governance, reduced labour rigidities, revived privatisation and the creation of an environment which facilitates market exit and entry. Even if / when Bosnia and Herzegovina addresses the limited short-term priorities identified in the Feasibility Study, it will still have a challenging medium-term agenda to address. This underlines the need for coherent, but urgent action.”

In examining the economic developments in Bosnia and Herzegovina, the Commission’s approach was guided by the conclusions of the European Council in Copenhagen in June 1993, which stated that membership of the Union requires:

- the existence of a functioning market economy;

- the capacity to cope with competitive pressure and market forces within the Union;

and by the Conclusions of the Council of Ministers of 29-30 April 1997, which stated that contractual relations with the EU require

- macroeconomic institutions and policies necessary to ensure a stable economic environment;

- comprehensive liberalisation of prices, trade and current payments;

- setting up of a transparent and stable legal and regulatory framework

- de-monopolisation and privatisation of state-owned or socially owned enterprises;

- establishment of a competitive and prudently managed banking sector.

In the analysis below, the Commission has followed the methodology applied in previous annual Reports.

Economic developments

Macroeconomic developments

Economic growth strengthened and inflows of FDI increased but external imbalances remained large. GDP growth increased during 2004 to around 5%[3]. A rebound in agricultural production as well as increased industrial production in both entities contributed to the higher growth rate. GDP per capita also increased, from EUR 1,642 in 2003 to EUR 1,732 in 2004. External imbalances remained very large but declined slightly during the year, estimates pointing towards a reduction of the current account deficit from 24.5% in 2003 to 23.3% in 2004. The main explanatory factor to the imbalance is the large trade deficit, partly fuelled by growth in banking sector credit to the private sector. FDI inflows increased during the year and reached in total around 7% of GDP. However, inconsistencies and low quality of statistics creates a high degree of uncertainty about the exact economic situation and developments. The currency board, which pegs the Bosnian KM to the Euro, has been successful in keeping monetary stability and inflation was contained around 0.5% in 2004. The government’s external public debt situation improved further, partly driven by exchange rate effects, and the external debt declined to 30.7% of GDP at end 2004. However, large unsettled domestic debt claims risks raising the public debt burden substantially in the near future. The process of fiscal consolidation continued, although at a slower pace, with the consolidated government budget balance estimated at –1.1% of GDP in 2004 compared to -1.3% in 2003.

Structural reforms

Structural reforms have progressed, although in some areas at a slow pace. Reforms aiming to harmonise conditions between the two entities have continued. Important steps have been the creation of the Indirect Tax Authority (ITA) and the merger of the Entities customs administrations into the ITA as well as the adoption of the legal base for a unified system of indirect taxation. In May 2005 a National Fiscal Council was established which should determine overall fiscal revenue and expenditure targets and strengthen fiscal coordination, although the Council has not yet a formal legal basis. A few large privatisation deals were concluded in 2004 but the overall progress in privatisation was limited. Advances concerning corporate restructuring were slow and loss-making companies constitute a serious inefficient allocation of resources. The financial sector, and in particular the banking sector, have continued to strengthen and the regulatory environment improved.

Progress towards economic stability and competitiveness

Establishment of market principles

The development of market principles requires that prices, as well as trade, are liberalised and that an enforceable legal system, including property rights, is in place. Macroeconomic stability and consensus about economic policy enhance the performance of a market economy. A well-developed financial sector and the absence of any significant barriers to market entry and exit improve the efficiency of the economy.

Coordination of economic policies has improved, but policy ma