COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 04.03.1998 
COM(1998) 95 final 
REPORT FROM THE COMMISSION TO COUNCIL 
THE POSSIBILITY OF THE EUROPEAN INVESTMENT BANK 
LENDING IN BOSNIA-HERZEGOVINA 
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THE POSSIBILITY OF THE EUROPEAN INVESTMENT BANK 
LENDING IN BOSNIA-HERZEGOVINA 
1. Introduction 
In the light of recent developments in Bosnia-Herzegovina (BiH), ECOFIN 
requested the Commission on February 16 to examine, in collaboration with the 
European Investment Bank (EIB), the possibility of the Bank providing loans in 
this country. 
Besides humanitarian aid, BiH together with other ex-Yugoslav republics, 
receives reconstruction aid under the Council Regulation No 1628/96 of 25 July 
1996 and under the PHARE Regulation. In view of the urgent needs for 
reconstruction in BiH however, the Commission is in favour of inviting the EIB 
to extend its lending activities to BiH, while taking into account the particularities 
of the political economic and financial environment of the country. The 
possibility of mobilising Bank loans in this country must be seen as a special and 
exceptional action whose main objective would be to contribute to the speedy 
reconstruction of the country and, in the process, to facilitate the communication 
and the integration of the different communities living in the area. 
The EIB has expressed its willingness in principle to start operations in BiH 
provided there is a formal Council Decision granting a Community Budget 
guarantee for these operations and subject to a positive decision of its Board of 
Governors. The EIB indicated having undertaken preparatory work to identify 
the areas of possible Bank intervention within the framework of the 
Reconstruction Programme agreed by the International Community at successive 
Donors' Pledging Conferences sponsored by the Commission and the World 
Bank. 
2. Political, economic and financial background 
2.1. Political background 
According to the Dayton/Paris peace agreement signed on December 14, 1995, 
BiH was to remain a single state being composed of two Entities, the Federation 
of Bosnia-Herzegovina and the Republika Srpska (RS). The implementation of 
Dayton involves military and civilian aspects contributing in parallel to 
regenerate confidence and stability, which are monitored annually by the Peace 
Implementation Council (PIC). The military aspects have been dealt 
successfully. However, a military presence will remain necessary for some time. 
Civilian implementation has been much slower. It is coordinated by the High 
Representative whose mandate was reinforced at the last PIC conference in Bonn 
on December 9-10, 1997. The appointment of a pro-Dayton government in the 
RS has paved the way for an improved cooperation by this entity with the 
international community, making the political and economic outlook more 
favourable for the country as a whole. 
In the absence of a Protocol on Financial Cooperation between BiH and the 
Community, which usually provides with the framework (objectives and 
conditions) of the EU financial cooperation with third countries, the involvement 
of the EIB in BiH should be consistent with the policy of the Union in this 
country and supportive of the objectives of the Dayton/Paris agreement and 
subsequent obligations. 
2.2. Economic developments 
By 1995, GDP in BiH had shrunk to less than a third of its pre-war level and per 
capita GDP had fallen to US$500. The population was 23% smaller than in 
1991, over 50 % of the population had been displaced, and more than 1.2 million 
inhabitants were forced to flee abroad, mainly to the EU. Physical capital and 
infrastructure had been devastated. With the end of the war, the economy 
recovered strongly, fuelled by external assistance, mainly in the Federation. Real 
GDP growth reached 50% in 1996 for the country as a whole, but decelerated to 
about 30% in 1997 owing to a slower pace of financial assistance. In particular, 
the RS has suffered self-imposed isolation from the internationally-sponsored 
Reconstruction programme and has benefited only from humanitarian aid. 
Unemployment is reported high in both the Federation and RS (up to 50%) and 
represents a serious threat to social stability and peace. Considering the deficit 
of the trade balance (estimated at about US$ 2 billion in 1997 by the IMF with 
imports as high as US$ 2.7 billion), the recovery of economic activity and 
employment will continue to heavily rely on the availability of official financial 
flows. 
In 1995, the international community endorsed a medium-term programme for 
reconstruction and peace implementation activities in BiH amounting to US$ 5.1 
billion for the period 1996-99 which included the following areas among its 
priorities: basic infrastructure, housing, energy, telecommunications, transport, 
and water and waste management. Following three Donors' Pledging 
conferences, US$ 1.6 billion of aid had been donated to BiH by the end of 19971, 
of which 45% originated from the Community and the Member States. In 
January 1998, the Council welcomed the formation of the new government in the 
RS and decided to immediately support it in the form an initial emergency 
budgetary grant in the amount of up to ECU 6 million and to examine the 
possibilities for further assistance. Moreover, in view of weak implementation 
capacities in both Entities, the Council is presently discussing a Commission 
proposal aiming at streamlining the financial regulation governing its financial 
assistance to BiH. 
2.3. External financial situation and prospects 
The external debt of BiH was estimated at US$4.6 billion at end-1996, 
equivalent to over 160 % of GDP. Against an accumulation of external arrears 
of some US$ 2 billion, the authorities have tried to normalise relations with 
external creditors. Arrears to the IMF and the World Bank were cleared in 
1 See Bosnia and Herzegovina: Implementation of the Priority Reconstruction Program, Status Report 
to the Donor Community, November 1997. 
December 1995 and June 1996, respectively. An agreement with the London 
Club creditors was reached in July 1997 on the restructuring of over US$1 
billion debt. Negotiations with Paris club creditors are expected to be concluded 
soon after the authorities reach agreement on an IMF-supported programme. 
Clearance of arrears to the EIB, which amounted to approximately ECU 6 
million (including penalties) at end-1997, will also have to be dealt within the 
framework of the IMF-supported programme as a precondition for an effective 
involvement of the EIB in BiH. 
Prospect for the early conclusion of an IMF-supported programme have recently 
improved, pending the adoption of satisfactory and mutually-consistent State and 
Entity budgets for 1998, including the establishment of automatic mechanisms 
for external debt service payments. In particular, a number of essential legislation 
establishing common foreign trade and debt policies was adopted in June 1997. 
The new Central Bank of BiH launched its operations in August 1997 and the 
design of the new common currency (the convertible marka) was imposed on all 
parties in January 1998. Despite these achievements, much more needs to be 
done to effectively implement open and market-oriented economic policies and 
ensuring good governance, transparency, and accountability in the use of donor 
fund. 
3. Prospects for Bank operations 
3.1 As a rule, the EIB intervenes outside the Community in the framework of 
protocols, co-operation or association agreements signed between the Community 
and a particular country. In the absence of a Financial Protocol or Agreement 
between BiH and the Community, the involvement of the EIB in BiH should be 
consistent with the policy of the Union in this country. 
3.2 The Bank's involvement in BiH would require a Council Decision, on the basis 
of a Commission proposal, under Article 235 with consultation of the European 
Parliament, indicating the Community guarantee arrangements as well as the 
amount for the new commitment. The Council Decision would indicate that the 
new lending mandate is in addition to that defined in Council Decision 
97/256/EC of 14 April 1997. 
The EIB operation in BiH would be of exceptional nature. An amount of about 
ECU 100 million could be envisaged on EIB lending on own resources. This 
amount could be reconsidered on the basis of the experience. Towards this end, 
the Commission and the EIB will present to Council a report with the evaluation 
of the situation no later than one year after the entry into force o'f the eventual 
Council Decision. 
3.3 The conclusion and implementation of a Stand-By IMF programme and 
subsequent arrangements will be crucial for ensuring BiH's capacity to repay the 
EIB, including through the mobilization of large scale external assistance, with a 
high degree of concessionality . 
3.4 In view of the low income and BiH's eligibility to IDA, EIB loans would need to 
be combined with a substantial grant element from the Community Budget for the 
Bank to intervene effectively. This could take the form of interest subsidy and/ 
or cofinancing on a case-by-case basis. Moreover, the Bank could consider 
granting longer then the usual grace period. 
3.5 Further to a decision on a specific mandate and the appropriate guarantee 
arrangements, the Bank's intervention in BiH is also subject to the previous 
clearance of all arrears (see section 2.3). 
3.6 The Bank would operate, within the framework of the Reconstruction programme 
agreed at the various Donors' conferences, in sectors where its contribution and 
expertise can play a meaningful role and with its intervention aim to the regional 
integration of the area. The sectors that could benefit from possible Bank 
financing are general infrastructure including transport (in particular the 
reconstruction of roads and bridges), energy, telecommunications, environment 
(with focus on the water, waste water and sanitation projects). At a later state, 
when structural reforms are implemented, the industrial sector could also be 
considered. 
3.7 Projects to be supported by the Bank would have to meet the Bank's lending 
criteria notably those concerning economic, technical and financial viability and 
be in line with the relevant Community legislation. The Bank's usual lending 
conditions will apply. 
3.8 As for other lending mandates, the possible EIB loans in BiH would be subject to 
the arrangements set out in the Guarantee Fund Regulation. 
4. Conclusion 
hi the light of the above, should the Council be favourable to the EIB carrying out 
its operations in Bosnia-Herzegovina, the Commission would prepare a proposal 
for a decision granting the Community Budget guarantee to the EIB for its 
operations in this country. 

ISSN 0254-1475 
COM(98) 95 final 
DOCUMENTS 
EN 11 10 01 
Catalogue number : CB-CO-98-136-EN-C 
ISBN 92-78-31798-5 
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