[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 8.11.2006

SEC(2006) 1384

COMMISSION STAFF WORKING DOCUMENT

Bosnia and Herzegovina 2006 Progress Report

{COM(2006) 649 final}

TABLE OF CONTENTS

1. Introduction 4

1.1. Preface 4

1.2. Relations between the EU and Bosnia and Herzegovina 4

2. Political criteria 5

2.1. Democracy and the rule of law 6

2.2. Human rights and the protection of minorities 13

2.3. Regional issues and international obligations 18

3. Economic criteria 21

3.1. Introduction 21

3.2. Assessment in terms of the Copenhagen criteria 21

3.2.1. The existence of a functioning market economy 21

3.2.2. The capacity to cope with competitive pressure and market forces within the Union 25

4. European standards 28

4.1. Internal market 28

4.1.1. Free movement of goods 28

4.1.2. Movement of persons, services and right of establishment 29

4.1.3. Free movement of capital 31

4.1.4. Customs and taxation 31

4.1.5. Competition 33

4.1.6. Public procurement 34

4.1.7. Intellectual property law 35

4.1.8. Social policies 35

4.2. Sectoral policies 36

4.2.1. Industry and SME 36

4.2.2. Agriculture and fisheries 37

4.2.3. Environment 39

4.2.4. Transport policy 40

4.2.5. Energy 41

4.2.6. Information society and media 42

4.2.7. Financial Control 43

4.2.8. Statistics 44

4.3. Justice, freedom and security 45

4.3.1. Visa, border, control, asylum and migration 45

4.3.2. Money laundering 47

4.3.3. Drugs 48

4.3.4. Police 48

4.3.5. Fighting organised crime and terrorism 49

4.3.6. Protection of personal data 50

STATISTICAL ANNEX 52

COMMISSION STAFF WORKING DOCUMENT

Bosnia and Herzegovina 2006 Progress Report

INTRODUCTION

Preface

Since March 2002, the Commission has reported regularly to the Council and the Parliament on progress made by the countries of the Western Balkans region.

This progress report largely follows the same structure as in previous years. The report:

- briefly describes the relations between Bosnia and Herzegovina and the Union;

- analyses the situation in Bosnia and Herzegovina in terms of the political criteria for membership;

- analyses the situation in Bosnia and Herzegovina on the basis of the economic criteria for membership;

- reviews Bosnia and Herzegovina's capacity to gradually approximate its legislation and policies with those of the "acquis" , in line with a Stabilisation and Association Agreement and the European Partnership priorities.

The period covered by this report is 1 October 2005 to 30 September 2006. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a rule, legislation or measures which are under preparation or await Parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and permits an objective assessment.

The report is based on many sources. As usual, these sources include contributions from the government of Bosnia and Herzegovina, the Member States, European Parliament reports[1] and information from various international and non-governmental organisations.

The Commission draws conclusions regarding Bosnia and Herzegovina in its separate communication on enlargement[2], based on the technical analysis contained in this report.

Relations between the EU and Bosnia and Herzegovina

Bosnia and Herzegovina is participating in the Stabilisation and Association Process (SAP).

The Stabilisation and Association Agreement (SAA) negotiations were officially opened in November 2005. Negotiations have progressed well from a technical point of view and a substantial part of the text of the future SAA has been agreed. However, the conclusion of the negotiations is dependent on Bosnia and Herzegovina's progress in implementing key reforms. In the meantime, Bosnia and Herzegovina continues to benefit from autonomous trade measures granted by the EU.

The Reform Process Monitoring (RPM) – a successor to the former Consultative Task Force – is currently the main instrument for political and technical dialogue between the EU and Bosnia and Herzegovina. Six RPM meetings have been held since the start of the SAA negotiations with the aim of monitoring and encouraging reform.

The EU continues to deploy considerable resources in Bosnia and Herzegovina within the framework of the Common Foreign and Security Policy (CFSP) and the European Security and Defence Policy (ESDP). A new EU Special Representative (EUSR), who also continues to be the High Representative, was appointed in January 2006. The EUSR's mandate has been strengthened through the revision of the relevant Joint Action in July 2006. Additional staff and resources have been assigned to his office. The EUFOR/Althea mission continues to be present in Bosnia and Herzegovina with some 6,000 troops. The mandate of the EU Police Mission (EUPM) was extended for two years from the beginning of 2006. The streamlined mission is now focused on the fight against organised crime and is advising on police reform. The mandate of the EU Monitoring Mission (EUMM) has been extended until the end of 2006. The EU has expressed its intention to reinforce its engagement in Bosnia and Herzegovina after the expected closure of the Office of the High Representative (OHR) on 30 June 2007.

The revised European Partnership for Bosnia and Herzegovina was adopted in January 2006. Bosnia and Herzegovina then adopted an action plan to address the European Partnership priorities in March 2006.

In July 2006, the Commission submitted to the Council draft negotiating directives for the negotiation of agreements on visa facilitation and readmission with Bosnia and Herzegovina.

The EC pre-accession financial assistance allocated to Bosnia and Herzegovina amounts to € 51 million in 2006. Bosnia and Herzegovina also participates in a number of other EU programmes.

In addition to pre-accession assistance, Community funds amounting to approximately € 24.1 million were provided in 2006 to support the offices of the EU Police Mission, the High Representative, the EU Special Representative and the EU Monitoring Mission.

POLITICAL CRITERIA

This section examines progress made by Bosnia and Herzegovina towards meeting the Copenhagen political criteria which require stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities. It also monitors regional cooperation, and good neighbourly relations, and the respect for international obligations, such as cooperation with the UN International Criminal Tribunal for the former Yugoslavia (ICTY).

Democracy and the rule of law

Constitution

Bosnia and Herzegovina's Constitution is an annex to the Dayton/Paris Peace Agreement (DPA). Although the DPA put an end to the war and brought peace and stability to Bosnia and Herzegovina, the adequacy of the Dayton constitutional system to the present circumstances is widely questioned. The structures deriving from the DPA are complex and fiscally unsustainable. The current setup does not allow swift decision-making and hinders reform implementation. This undermines Bosnia and Herzegovina’s capacity to make rapid progress towards the EU.

Efforts to gradually reform the constitutional framework have so far failed. The Parliament of Bosnia and Herzegovina rejected a reform package agreed by political party leaders in April 2006. The package included among other things enhanced State-level competencies, improved and simplified decision-making procedures and representation of minorities in the State Parliament. Bosnia and Herzegovina thus missed the opportunity to take a first and important step towards a more democratic and efficient state.

The evolution of the Bosnia and Herzegovina Constitution is necessary. Efforts need to be stepped up to create functional and affordable state structures which fully respect human rights and support the process of European integration. This constitutional reform cannot be imposed. It should be decided by consensus amongst the population of Bosnia and Herzegovina.

Parliament

Bosnia and Herzegovina has a bicameral State-level parliament, as well as parliaments at the level of the Entities, Brcko District and cantons. Bosnia and Herzegovina’s various parliaments have in total over 760 members. Bosnia and Herzegovina’s Parliamentary Assembly has generally remained favourable to European integration. It has increased its capacity to prepare legislation and the work of its technical committees has improved. The use of emergency ordinances and the adoption of legislation through accelerated procedures have been reduced.

Nonetheless, political parties and delegates have continued to delay and block the adoption of specific laws necessary for progress in the Stabilisation and Association Process. Members of the Parliament frequently continue to vote along ethnic lines. The State Parliament was negatively affected by the Serb representatives' decision to boycott its sessions in May 2006. This boycott, which lasted one month, was a protest against delays in establishing a "Truth Commission on the sufferings of Serbs, Croats, Bosniaks, Jews and Others" in Sarajevo during the war. Parliamentarians also remain highly influenced by pressure groups pursuing their individual interests. The rejection in September of the long-awaited Law on Pharmaceutical products and medical devices is one example.

The Parliamentary Assembly has met more regularly, but the pace and quality of legislative output remains affected by slow input from the Council of Ministers. The Assembly is still hampered by insufficient technical resources, a unqualified parliamentary administration and cumbersome parliamentary procedures. Its European Integration Committee has remained largely inactive. There is a lack of relationship between the executive and the legislative organs. Cooperation with the Council of Ministers remains inadequate, and there is no coordination of legislative agendas between the State parliament and those of the Entities. External oversight of the Parliamentary Assembly by civil society is still limited.

Presidential and parliamentary elections (at State, Entity, cantonal, and Brcko District level) took place on 1 October 2006. Forty-eight political parties, eight coalitions and twelve independent candidates participated in the elections, a reduction in comparison with those held in 2002. These were the first elections since the Dayton/Paris Agreement to be fully administered by the authorities of Bosnia and Herzegovina. Preliminary conclusions of the OSCE Office for Democratic Institutions and Human Rights (ODIHR) indicated that the elections represented a step forward in consolidating democracy and rule of law, and were conducted generally in line with international standards. However, failure to amend the Constitution made it impossible for the elections to comply fully with the requirements of the European Convention for Human Rights (ECHR). Moreover, the pre-election period had an adverse effect on overall reform implementation, including on key issues such as police restructuring and the constitutional reform. Inflammatory rhetoric on identity and ethnicity-related issues impacted in particular on legislative reforms requiring transfer of competencies from Entities to the State.

Government

The Presidency of Bosnia and Herzegovina continues to rotate on an eight-monthly basis, and its mandate includes a role in foreign policy, proposing annual budgets and representing Bosnia and Herzegovina in international organisations. The Presidency has met relatively regularly, and taken key decisions such as advancing defence reform. The Presidency has also played a constructive role in the constitutional reform debate. However, Presidency members mostly show their first allegiance to their Entity and their constituent people. This hinders the work of the Presidency secretariat and its functions are often performed by Presidency cabinets. Major divergences between Presidency members include Bosnia and Herzegovina's lawsuit against Serbia and Montenegro at the International Court of Justice. The Venice Commission has indicated that the election of Bosnia and Herzegovina's tripartite Presidency does not comply with the European Convention for Human Rights (ECHR).

Presidencies also exist in the Entities, with the Federation's President being elected indirectly, and the President of the Republika Srpska being directly elected.

Within the State Government, some consolidation has taken place. The Economic Policy and Planning Unit - which has become the Directorate for Economic Planning - was formally established by a law adopted in September 2006. This body has continued to function well and has ensured the monitoring of the Medium-Term Development Strategy updated in March 2006.

The Directorate for European Integration (DEI) has played an important role within the Council of Ministers and has further promoted the European integration objective. It has maintained its efforts towards improving 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 and a Strategy for European Integration, which have been adopted by the Council of Ministers. It has also remained Bosnia and Herzegovina's focal point for assistance programming.

Dependence on the international community in terms of legislative drafting is declining.

However, the Council of Ministers continued to experience internal tensions and deadlocks, which have slowed progress. In terms of personnel, no major changes have occurred. Complicated decision-making procedures, capacity problems, lack of political will and diverging national interests in Government and Parliament continue to delay the adoption of legislation. The Parliamentary Assembly failed in September 2006 to agree on the creation of two new Ministries within the Council of Ministers.

The General Secretariat is operational, but shortages in staff remain, as well as an overly politicised environment. The Legislative Office is functioning but a lack of staff prevents it from reviewing all the required legislation. The implementation of the State Government Strengthening Plan (SGSP), designed to reinforce the capacities of the State Government, has made no real progress. Legislation to clarify the use of real estate by the State institutions has been prepared, but remains controversial and has not yet found a proponent.

Fragmented policy making between the State and the Entities is still an issue. The Coordination Board for Economic Development and European Integration, which is designed to harmonise State and Entity agendas, has met very infrequently and does not have an institutional role. More institutionalised cooperation and increased political will from all stakeholders is needed.

A new Government in Republika Srpska (RS) was appointed in February 2006, following a motion of no confidence stemming from difficulties in adopting the 2006 budget. A considerable amount of legislation has been passed by the new executive in recent months, mainly related to organised crime, privatisation and public administration. Nonetheless, a number of actions undertaken by this Government have been controversial. There are doubts whether it followed the appropriate civil service procedures for the removal of a considerable number of high officials from the administration. The appointment of prosecutors to the new RS Special Prosecutor's Office contradicted the powers conferred to the High Judicial and Prosecutorial Council (HJPC) and required remedial action. Furthermore, the executive's positions on key issues such as police reform, the redistribution of taxes collected by the Indirect Taxation Agency (ITA) and inflammatory comments about a possible referendum for self-determination in Republika Srpska have raised concern.

The work of the Federation Government has also occasionally been obstructed by internal political issues. In January 2006, work was held up by internal disputes about ministerial appointments.

The international community remains deeply involved in Bosnia and Herzegovina on the basis of the Dayton mandate. The High Representative (HR) continues to play a significant role. In addition to his Dayton-mandated responsibilities, he has the authority to impose legally binding decisions through the so-called Bonn powers. The number of binding decisions adopted was substantially lower in 2006 (46 decisions by the end of September compared with 91 decisions in 2005). No major reform required for European integration has been imposed by the HR.

The HR also acts as the EU Special Representative (EUSR). The mandate of 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 was strengthened in February and July 2006 and has been extended until February 2007. The EUSR has a small number of designated EUSR staff who continue to be embedded into the Office of the High Representative (OHR).

The Peace Implementation Council (PIC) agreed in June 2006 that OHR will begin preparations to close on 30 June 2007. The PIC steering board agreed to review in early 2007 the OHR closure, taking into account the overall situation in Bosnia and Herzegovina and the region. The Commission supports the closure of the OHR, provided that the necessary conditions are met.

OHR's departure will lead to a reinforced EU engagement in Bosnia and Herzegovina, including a strengthened mandate for the EUSR. In June and October 2006, the High Representative for the Common Foreign and Security Policy/Secretary General of the Council Javier Solana and Enlargement Commissioner Olli Rehn submitted joint reports to the Council on the future role and organisation of the EU in Bosnia and Herzegovina.

The phasing out of the OHR should imply increased ownership for the authorities of Bosnia and Herzegovina and the end of the Bonn Powers.

The EUFOR/Althea mission continues to operate throughout Bosnia and Herzegovina with approximately 6,000 staff. The mandate of the EUPM was extended in December 2005 by two additional years. EUPM now has a strengthened mandate focusing on the fight against organised crime and police restructuring. The OSCE mission continues to be present in Bosnia and Herzegovina with some tasks deriving from the Dayton/Paris Peace Agreement.

Public administration

Bosnia and Herzegovina has made some progress in this area. The National Strategy for the Reform of the Public Administration was finally adopted. The adoption of this strategy partly addressed a key priority of the European Partnership (EP). Support staff for the Public Administration Reform Coordination Office (PARCO) has also been appointed.

The Bosnia and Herzegovina Civil Service Agency has been more effective in recruiting staff for the various administrations. It processed 53 vacancy publications, hiring a total of 259 civil servants between October 2005 and September 2006.

After considerable delays and extensive lobbying by the international community, the new Ombudsman Law was adopted in March 2006. It foresees the merging of the Entity Ombudsmen Institutions with the State Ombudsman in line with international conventions. The actual merger is expected to take place as of January 2007.

Coordination between the State and Entity level Civil Service Agencies has improved. It needs now to be further formalised.

However, further efforts are indispensable. Bosnia and Herzegovina needs to accelerate reforms in this area in order to build a transparent, efficient and independent public administration, able to respond better to the needs of its citizens and the requirements of EU integration.

Bosnia and Herzegovina remains affected by cumbersome administrative structures. Human and budgetary resources allocated to the Public Administration Reform Coordination Office (PARCO) are still insufficient. The reforms recommended by the sectoral functional reviews have not yet been carried out. The recently adopted National Strategy for the Public Administration Reform needs to be properly implemented to fully address the relevant EP key priority. A major issue in the European integration and public administration reform process is to develop central policy-making and coordination capacities to ensure coherence and consistency among various policies, as well as informed decision-making. This will require new organisational arrangements, procedures, staffing and development.

While some steps have been taken, the consolidation of the State level ministries and institutions has been proceeding slowly. Further action is necessary to meet the EP key requirement of ensuring that all State-level ministries and institutions are adequately financed, operational and properly equipped, namely in terms of premises and staff. Harmonisation of the three Civil Service Laws – amongst other things to allow for transfer of civil servants between government levels – is also necessary.

Limited budgetary resources and premises continue to delay recruitment of the necessary personnel. Bosnia and Herzegovina is still far from recruiting the large number of civil servants provided for in the State-building plans. Recruited staff are often not always of an appropriate standard. Attracting young and well-qualified staff and adequately skilled senior managers remains a challenge.

Work towards a professional and apolitical civil service with recruitment and promotion based on experience and merit has been limited. Insufficient safeguards against political interference in public administration continue to exist regarding senior management positions - where ethnic identity and party membership play a significant role.

Individual institutional budgets do not allocate funds to training on a regular basis. The Bosnia and Herzegovina Civil Service Agency has an annual training budget of approximately € 40,000. Coordination and cooperation between central personnel units at State and Entity levels take place, but mainly through foreign assistance programmes. The Council of Ministers adopted a training programme on European Integration in May 2005. However, large-scale implementation of this programme has not been carried out due to lack of funds.

Local self-government reform, in line with the European Charter for Local Self-Government, is underway. Both Entities have adopted laws on local self governance which are, in principle, aligned with the Charter. However, in a significant number of areas, additional provisions are required to ensure full implementation of the rights arising from the Charter. The legislation foresees a greater role of the municipalities, including through the allocation of revenues. Nevertheless, the allocation of the appropriate financial means is still not ensured and the distribution of the newly introduced value added tax is, as yet, not fully regulated. Overall implementation of this reform remains at an early stage.

The establishment of a single administration in Mostar continues to be undermined by poor cooperation between the local political forces. The harmonisation of the statutes of the various institutions, the unification of public utility companies and the completion of procedures for the recruitment of civil servants is particularly urgent. In September 2006, the High Representative appointed a Special Envoy to Mostar to find solutions to these issues.

Little progress has been made as regards police reform. The requirements set out in the Agreement on Police Restructuring of October 2005 have not yet been fulfilled. While the Police Restructuring Directorate has been established, the work of this Directorate has been undermined by the obstructive attitude of Republika Srpska representatives. This has led to delays in the implementation of the Agreement, which is a key priority of the European Partnership ( see also section 4.3.4 on Police ).

Civil Military Relations

Progress in the area of defence reform has continued. The Bosnia and Herzegovina Defence Law was adopted in December 2005. Both Entity Ministries of Defence ceased to exist on 31 December 2005 and all defence related tasks and personnel were transferred to the State Ministry of Defence as of January 2006. The definitive size, structure and stationing of the Armed Forces was decided by the Bosnia and Herzegovina Presidency in July 2006. A Parliamentary oversight Committee has also been established at the State-level. A Defence Reform Co-ordination Group has been established to supervise and monitor reform activities. Successful (re)appointment of management positions at the State Intelligence Agency (OSA) has been undertaken and a permanent location for the Agency has been found.

Bosnia and Herzegovina has met the benchmarks endorsed by the North Atlantic Council as criteria for credible candidacy for Partnership for Peace (PfP). However, the failure to locate and contribute to the arrest of the indicted war criminals still at large has continued 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. Courts exist at State and Entity levels and also within the Entities. The number of Courts and Prosecution offices has been increased to 208, with 1,281 judges and prosecutors in office. Overall, the judiciary continues to be independent. The High Judicial and Prosecutorial Council (HJPC), which appoints judges and prosecutors, has performed well. In November 2005 a Code of Ethics was adopted. It contains guidance to judges and prosecutors for exercising their authority in a fair, transparent and independent manner. The reform of the minor offence courts is progressively advancing: the legislation was passed in April 2006 and in September the restructuring was completed in Republika Srpska. A Strategy against juvenile delinquency has also been adopted and a detention centre for young people in conflict with the law has been established. As regards human resources, the salaries of judges and prosecutors, which had seen uncontrolled growth in recent years, were harmonised, slightly reduced and frozen by a decision of the High Representative in December 2005. The recruitment of judicial associates at the courts of first instance in both Entities as well as at higher courts (District and Supreme Court) has also started.

The Courts at State level continue to employ non-BiH citizens, with the Constitutional Court employing three international judges and the BiH State Court and BiH Prosecutor’s offices employing 16 and 6 international staff respectively.

However, further efforts are necessary to improve the functioning of the judicial system. The full responsibility of Bosnia and Herzegovina in terms of finance, administration and proper functioning of the judicial system remains to be accomplished. Obstacles to the efficient operation of the judiciary persist, such as four parallel and separate jurisdictions at State, Republika Srpska, Federation of Bosnia and Herzegovina and Brcko levels; incoherent systems of laws; directives coming from fourteen Ministers of Justice; and four different bar exams for lawyers. There has been a high rate of reversal of judgements in major criminal cases at the Court of Bosnia and Herzegovina.

The judicial system is not completely free from political interference. The Government of Republika Srpska attempted to appoint the Special Prosecutor for the Entity in May 2006, which is a prerogative of the HJPC. The executive branch also provided evidence of interference in the judicial system, particularly through the questionable use of pardons. There is a persistent lack of well-trained judges, prosecutors and support staff, especially at the lower levels of the judiciary.

Progress in ensuring Bosnia and Herzegovina's full responsibility for the budget of the judicial system is slow. The financial resources allocated to the judiciary are largely consumed by salaries, leaving limited funds for operational expenses. The judiciary continues to be financed from fourteen different budgets at various levels, i.e. from the State, from both Entities, from the ten cantons and from the Brcko district. A conference to evaluate achievements and future financial needs of the BiH State Court was organised in Brussels in March 2006. The conference managed to initially raise € 7.7 million for the Court.

Little progress has been made with the backlog of cases before the courts, which remains a critical issue. There was over 1.3 million unresolved cases registered as of 31 December 2005. Most of the pending cases concern the enforcement of utility bills. Progress has also been limited regarding judicial co-operation in civil and criminal matters with other countries.

Anti-corruption policy

Bosnia and Herzegovina is a member of the Council of Europe Group of States against Corruption (GRECO), and it is involved in the Stability Pact’s Anti-corruption Initiative (SPAI).

A positive development was the adoption in June 2006 of the 2006-2009 Strategy for the Fight against Organised Crime and Corruption. This strategy now needs to be properly implemented. During implementation, Bosnia and Herzegovina needs to pay particular attention to developing the necessary structures and increasing enforcement capacity.

The fight against corruption has also been reinforced through the Law on Conflict of Interests and the laws on public procurement and VAT. Sustained efforts are needed to ensure the correct implementation of this legislation.

The courts have begun to prosecute cases of alleged corruption by both private citizens and politicians. Nonetheless, the number of successful prosecutions remains low and there is clear scope for improvement.

Bosnia and Herzegovina has not ratified the UN Convention on Fighting Corruption (Mérida Convention) and has not signed the Additional Protocol to the Criminal Law Convention on Corruption. It is not yet a party to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

There is no clear legal definition of the term "corruption" in Bosnia and Herzegovina's criminal legislation. Anti-corruption legislation is not fully harmonised across the country. 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 various criminal codes. The rapid development of an appropriate legal framework remains central. GRECO recommendations need to be fully taken into account together with the other relevant global conventions originating in the Council of Europe, OECD and UN.

Overall, Bosnia and Herzegovina has made limited progress in dealing with corruption, which remains a serious issue.

Human rights and the protection of minorities

Observance of international human rights law

Bosnia and Herzegovina has made good progress in addressing the judicial backlog at the Human Rights Commission of the Constitutional Court. Since January 2004, this institution has been the judicial body responsible for reviewing pending cases on human rights violations. In the period January 2005-June 2006 it tackled almost 3,900 cases. The Human Rights Commission is working steadily on finishing the pending cases, but the Court continues to receive a considerable number of new applications. The relevant authorities need to make sure that decisions taken by the Human Rights Commission and the former Human Rights Chamber are adhered to - such as in the "Palic case", the missing persons in Eastern Sarajevo and the case related to the citizens and residents of Bosnia and Herzegovina currently detained in Guantánamo Bay.

Bosnia and Herzegovina has ratified all major UN and international Human Rights conventions, as well as the European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR). Actual implementation of these instruments needs to improve. Current legislation enshrines most of the principles included in the European Convention for the Protection of Human Rights and Fundamental Freedoms and its Protocols (ECHR). The Constitution of Bosnia and Herzegovina guarantees that international conventions supersede any other legislation and are directly applicable.

A working group was set up in January 2006 to examine the compatibility of national legislation and practice with that of the ECHR. The process of drafting the compatibility report has been re-launched. A Government Agent to the European Court of Human Rights has been appointed. In 2005, 212 applications originating from BiH were registered at the European Court of Human Rights. Only one has been declared admissible and, so far, no judgements have been issued.

Civil and political rights

Ethnic issues are still very present in the country as a whole and are often misused by political parties. Widespread ethnic discrimination remains. This affects key aspects of the citizen's life such as employment, education, housing, health and social care, pension benefits and access to local services. It also has a negative impact on the integration of returnees to their pre-war homes. Follow-up of investigations of ethnic-related cases does not always reach the required standards.

The Constitution of Bosnia and Herzegovina and the Constitution of the Federation of Bosnia and Herzegovina do not allow the death penalty. Article 11 of the Republika Srpska Constitution however still allows the death penalty for capital crimes. This is not compatible with ECHR Protocol No. 6 concerning the abolition of the death penalty.

Torture and ill-treatment are prohibited by State and Entity Constitutions. Investigations into police misconduct and standards of accountability have continued to improve, but there is room for further improvement. Follow-up of earlier cases is unsatisfactory.

As far as access to justice is concerned, trials in Bosnia and Herzegovina are public and the defendant has the right to counsel at public expense if the defendant is charged with a crime punishable by long-term imprisonment. The law provides that defendants also have the right of appeal, the right to confront and question witnesses as well as to present witnesses and evidence on their behalf. However, there is still no coherent nationwide scheme of publicly funded legal aid in civil cases due to limited financial resources. Legal aid in civil cases is primarily provided on an ad hoc basis by privately funded NGOs. Concerns therefore exist as to the guarantee of equality before the law.

As regards arbitrary arrest , legislation guarantees the principle of presumption of innocence. This principle is generally applied and pre-trial detainees are held separately from convicted criminals. The Government has permitted visits by independent human rights observers and international community representatives and has given widespread and unhindered access to detention facilities and prisoners.

Regarding the prison system , some efforts have been made to address the issue of juvenile delinquency and to separate adult from juvenile inmates. Continued action to reform this system remains necessary however, notably in order to improve facilities, address the problem of overcrowding and introduce alternatives to prison sentences. There have been protests over poor living conditions, inadequate medical treatment, extortion through bribes and physical abuse by prison guards. Some incidents of ethnically-motivated violence among inmates have been reported. Entity legislation on prisons still needs to be adjusted to take into account the amendments introduced by the Criminal Procedure Code and the State Law on the Execution of Criminal Sentences.

The freedom of religion is enshrined in Bosnia and Herzegovina's Constitutions. A State Law on Freedom of Confession and Legal Status of Churches and Religious Communities gives comprehensive rights to churches and religious communities and gives them the legal status they had not previously enjoyed. Nonetheless, clear instructions for the implementation of this law have not yet been issued. Religious intolerance is still present. The misuse of religious symbols and buildings for political purposes has had a negative impact on inter-religious dialogue and interethnic relations.

The country’s Constitutions provide for freedom of expression, including the media . Freedom of the press has been considerably enhanced and freedom of expression has generally been respected by all authorities. Libel and insult provisions have been removed from the penal code and defamation and libel cases are addressed exclusively under the civil code. Mass media and especially newspapers largely remain ethnically divided and influenced by political parties. The self-regulation instruments set out in the Press Code do not operate efficiently. In practice, media professionals sometimes disregard the press code of conduct and show a lack of sensitivity towards, for example, gender, ethnicity and issues relating to vulnerable minorities.

Regarding public broadcasting, the necessary State-level legislation has been adopted. Republika Srpska has also passed the relevant law. However, the Federation of Bosnia and Herzegovina has been unable to complete the legislative process due to a decision of the Federation's Constitutional Court. Lack of a complete legal framework and the establishment of the necessary institutions are delaying proper implementation of the public broadcasting restructuring. Adopting all necessary legislation at State and Entity level and ensuring its implementation is a key priority of the European Partnership.

Bosnia and Herzegovina's constitutional framework provides for freedom of assembly and association , and these rights are usually respected. A wide range of social, cultural, and political organisations operate without governmental interference.

As regards civil society organisations , few NGOs have a country-wide field of action, even though the Law on Associations and Foundations allows NGOs to register freely at the State Ministry of Civil Affairs and Communications and to be active anywhere in the country. Many organisations prefer to register at Entity level as a result of the cumbersome procedures necessary to obtain a State-wide registration. NGO financing remains an issue. Current legislation does not give sufficient incentives to the business sector or private donors to provide support. 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.

Civil society development in Bosnia and Herzegovina is adversely influenced by the complex administrative organisation of the country as well as by political misuse of ethnic and religious diversity. Religious communities have displayed an increasing interest in public affairs. Their influence is extending to areas reserved to public authorities, such as the education sector.

Economic and social rights

Bosnia and Herzegovina's legislation incorporates some of the international instruments pertaining to women's rights , such as the Convention on the Elimination of All Forms of Discrimination against Women. The principle of equal pay for work of equal value is explicitly introduced in the Gender Equality Act of 2003, which also defines and prohibits both direct and indirect discrimination, as well as harassment and sexual harassment. Lack of measures to enforce the adopted provisions however creates a great rift between the de facto and de jure situation. The Central Agency for Gender Equality is responsible for the implementation of the Law on Gender Equality and related activities. There are Gender Centers operating at State and at the Entity-level. The Agency has developed the Gender Action Plan for Bosnia and Herzegovina in cooperation with the Entity Gender Centres.

Nonetheless, access of women to employment remains difficult. Women's participation to the labour market is low compared to men and is limited to certain typical occupations. Many women are not covered by health insurance. Women continue to be under-represented in politics and in executive authorities. Trafficking in women for purposes of sexual exploitation remains a problem. The law prohibits sexual harassment, but prosecution of cases is rare. Five "Safe Houses" have been established by NGOs to give shelter to women suffering from domestic violence, which remains an underreported issue.

Discrimination is also present in terms of sexual orientation. Although equal treatment is guaranteed by the Constitutions and existing Criminal Codes do not penalise sexual orientations, the concrete implementation of these principles is not ensured and homosexuals are often discriminated against.

As regards children’s rights , the Convention on the Rights of the Child is incorporated into the legal system of Bosnia and Herzegovina. Governments of both Entities remain generally committed to rights and welfare of children. The Ministry of Human Rights and Refugees has drafted an Action Plan for Children for the period 2002 – 2010 under the auspices of UNICEF. Nonetheless, problems remain regarding health and social protection and many children are not covered by health insurance. Disabled children lack sufficient medical care and educational opportunities. Moreover, domestic violence against children remains an issue.

Bosnia and Herzegovina's institutional set up in the field of education is particularly complex. Improvements regarding the legal framework have been slow, with key legislation regarding pre-school, vocational training and higher education still pending. As a result, Bosnia and Herzegovina is not fulfilling the requirements set out in the Bologna Process. Implementation of the existing legislation is weak. Little progress has been made in preventing the separation of children in schools along ethnic lines. This is a serious issue that needs to be addressed. Ethnically neutral education has not been achieved and pupils and students in a minority position frequently face a hostile environment.

In relation to socially vulnerable or people with disabilities , legislation in both Entities prohibits discrimination against people with disabilities. Nonetheless, war veterans are granted privileged treatment - one third of the total budget is allocated to them. This has an adverse impact on other categories of socially vulnerable and disabled persons, given the limited resources available. Around 50% of disabled persons do not have health protection and the vast majority are unemployed. The accessibility legislation is not being implemented. Effective policies to support socially vulnerable people remain to be developed.

As far as labour rights are concerned, Bosnia and Herzegovina signed the revised European Social Charter in May 2004, but ratification is still pending. Access to social protection continues to be a major concern. The practical organisation of the social security system often deviates from enacted legislation. Differences between social security rights enjoyed by 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 workers and citizens in general. As a result of the war, problems related to the ethnicity of workers remain in major state-owned enterprises.

The Entity Constitutions and labour laws allow workers to form and join trade unions of their choice without authorisation (except members of the military). Legislation in both Entities prohibits discrimination by employers against union members and organisers, in accordance with International Labour Organisation (ILO) standards. Collective bargaining is provided for but 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 to social dialogue , the main problem in Bosnia and Herzegovina is the complex form of government and the fragmentation of legislation. Social dialogue is decentralised to the Entity level, and the Entities of Bosnia and Herzegovina each have their own legislation and their bodies for social dialogue. The State-level Ministry of Civil Affairs has taken some initiatives in this respect and has requested assistance from the Community and ILO in establishing a country-wide Economic and Social Council. However, the Council of Ministers has so far been unable to push this initiative forward and the Council has not yet been established.

The two main Entity unions have formed a Confederation (KSBiH), with the Presidency alternating between them. As a result the Confederation has been awarded observer status by the European Trade Union Confederation (ETUC). The Ministry of Justice is however continuing to block the registration of the KSBiH, since the Federation union (maintaining the title of the pre-war Bosnian union federation) also requests registration at State level. This is hindering social dialogue, which is requested by both employers and employees. A State-level employers’ association also exists, encompassing the associations at the Entity level. In general, the high level of informal economy is a problem for the organisation and development of both workers’ and employers' associations. The lack of balance between bipartite and tripartite social dialogue and between industry and sectoral negotiations constitutes an additional issue.

Regarding property rights , the property repossession process in Bosnia and Herzegovina is practically completed and only some residual cases remain to be addressed by the Commission for Property Claims of Displaced Persons and Refugees. The Commission’s mandate has been extended until the end of 2006 to address these cases appropriately.

Minority rights, cultural rights and the protection of minorities

As regards minority and cultural rights , Bosnia and Herzegovina is party to the Council of Europe Framework Convention for National Minorities. Bosnia and Herzegovina has signed the European Charter for Regional or Minority Languages. Ratification is pending.

The convention for national minorities has not yet been adequately implemented. The provisions of the European Charter on teaching minority languages, on media broadcasting for national minorities and on proportional representation in public authorities and in the civil service have not led to substantial changes in practice. Members of minorities rarely participate in the parliaments and municipal assemblies. There are only two associations of national minorities: one association in Republika Srpska, and the Bosnia and Herzegovina Council of Roma. The Council of National Minorities was established in March 2006 to promote the role of minorities in public life, but it is not yet operational.

The 2003 Law on the Protection of National Minorities, and the amendments introduced in 2005, have not been fully applied.

Failure to adopt reforms to the constitution has perpetuated the exclusion of the national minorities from institutions such as the House of Peoples and the tripartite Presidency. Excessive emphasis placed 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 minorities that do not belong to these “constituent peoples”. It also hampers Bosnia and Herzegovina’s evolution towards a State based on citizenship rather than on ethnic representation.

The Roma population is estimated between 40,000 to 80,000 people and remains the most vulnerable of the 17 national minorities recognised by the State on the basis of the 1991 census. Full and effective equality has not been secured for the Roma, who continue to be particularly exposed to discrimination and face difficulties in housing, health care, employment and education. Their illiteracy rate is very high. The 2005 National Strategy for the Roma has not been properly implemented. Concrete improvements for the Roma community have been scarce.

Over one million refugees and displaced persons (DPs) have repossessed their pre-war homes in Bosnia and Herzegovina. The figure for real occupation, in particular regarding the so-called "minority return", is substantially less.

The Return Fund established by the State Law on Refugees became operational in 2005 and has contributed to the reconstruction of residential units in 30 municipalities. Bosnia and Herzegovina needs to ensure the sustainability of this instrument. The State Commission for Refugees and DPs is also operational and, as set out in the relevant legislation, NGOs are participating as observers.

The de-mining process continues in Bosnia and Herzegovina. It is a key factor in refugee return. It is estimated that there are still 67,000 mines and about 650,000 unexploded destructive devices affecting 10,000 localities. A new Mine Action Plan to 2009 has been adopted. Implementation will require continued involvement of the international community.

Regional cooperation on refugees has continued, notably in the framework of the 2005 Sarajevo Declaration ( see also item 2.3 on Regional issues and international obligations ).

The number of returnees is decreasing significantly, but the process of return has not yet been completed. Bosnia and Herzegovina’s representatives estimate that approximately half a million people are considering returning, and there are still a considerable number of registered refugees and DPs within Bosnia and Herzegovina. Limited progress has been made in improving the conditions required to make return sustainable, including access to reconstruction assistance, employment, health care, pensions, utilities and an unbiased education system.

The Law on Amendments to the Citizenship Law was adopted in December 2005. The Law foresees the establishment of a Commission for the Review of Citizenships granted during and in the aftermath of the 1993-1995 war. An earlier commission had existed in the Ministry of Civil Affairs, but proved ineffective. A more robust Commission was established in January 2006, with input from the Ministry of Security and Ministry of Civil Affairs, and three International Members. Thus far the Commission has revoked approximately 100 citizenships on the grounds of false personal information. Bosnia and Herzegovina has also announced plans to deport some of these naturalised citizens. About 200 additional cases are under investigation.

Regional issues and international obligations

Overall, compliance with the Dayton/Paris Peace Agreement has been ensured. Nonetheless, the pre-election period was marked by frequent allusions by Republika Srpska political leaders to the organisation of a referendum on self-determination in this Entity. The EU and the international community have made clear that such a referendum would be contrary to the Dayton Agreement and to the constitution of Bosnia and Herzegovina, and that it would not be tolerated.

Bosnia and Herzegovina has honored most of its Council of Europe post-accession commitments . However, little progress has been made regarding outstanding commitments in the areas of elections and education. Implementation of adopted legislation remains weak.

Bosnia and Herzegovina’s cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY) has continued, but it remains to be deepened. Full cooperation with the Tribunal is a key priority of the European Partnership. One additional indicted war criminal was transferred to The Hague in June 2006.

The co-operation of the Federation of Bosnia and Herzegovina with the ICTY has remained satisfactory, while the cooperation of the Republika Srpska is not yet fully sufficient. Some positive steps have been taken as regards the local prosecution of indicted war criminals and the documentation required by the ICTY. Some parts of Republika Srpska's wartime archives have been handed over to the Tribunal. There has been no additional arrests of indicted war criminals by the Republika Srpska police. However, Republika Srpska has made some efforts against the networks supporting ICTY indictees and in tracing some of the fugitives. There is no credible information available about the present location of Karadzic.

Bosnia and Herzegovina has taken legislative steps to implement the 2004 EC Regulation on the assets freeze of ICTY fugitives. Proper implementation needs to be ensured.

In relation to domestic war crimes trials , some progress has been achieved. At Entity level, this progress has been limited. There are twenty-six ongoing cases in the Federation, nine in Republika Srpska and one in Brcko District. Local courts in both entities are poorly equipped and witness protection is not fully ensured. This has an adverse effect on proceedings. At the State level, progress has been more evident following the establishment of the War Crimes Chamber at the State Court. From October 2005 to September 2006, 173 new case files have been opened in the Section I War Crimes. Four verdicts have been handed down.

The sharing of evidence between the ICTY and the War Crimes Chamber at the State Court has proved crucial for the effectiveness of these institutions. The transfer of information and evidence to facilitate prosecution in Bosnia and Herzegovina is advancing progressively. Since September 2005, the State Court has received five criminal proceedings under Rule 11 bis from ICTY. There are plans to transfer additional cases from the ICTY to Bosnia and Herzegovina shortly. However, local handling of war crimes requires further resources. The appointment of national judges at the State Court should be completed without further delay. Appropriate prison facilities for sentenced war criminals are also necessary.

In 2003 Bosnia and Herzegovina ratified 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 International Criminal Court 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 new developments have taken place in this respect.

There has been continued progress in the implementation of the Sarajevo Declaration between Croatia, Serbia, Montenegro and Bosnia and Herzegovina on the return of refugees . However, the process has been slowed down by the lack of political consensus on two remaining open issues: 1) a fair settlement mechanism in Croatia for lost Occupancy Tenancy Rights (OTR) and 2) the recognition of pension and other rights for working years spent in Serb controlled areas of Croatia during the war. There have been several Task Force meetings, but it has not been possible to make progress on these matters. A ministerial meeting has been planned to find a way forward. The concerned governments need to make further efforts to rapidly resolve the outstanding issues, and to fulfil the plans to present a comprehensive Road Map for each country and to agree on a Joint Implementation Matrix.

Regional cooperation and good neighbourly relations form an essential part of the process of Bosnia and Herzegovina's moving towards the European Union.

Bosnia and Herzegovina continues to be an active participant in regional cooperation initiatives, such as the Stability Pact for South East Europe, the South-East European Cooperation Process, the Central European Initiative , the Adriatic-Ionian Initiative and the Danube Cooperation Process. Bosnia and Herzegovina is committed to the establishment of the Regional Cooperation Council. It is currently chairing the Adriatic-Ionian Initiative.

In April 2006 Bosnia and Herzegovina signed a joint declaration for the establishment of a regional free trade agreement within the framework of an enlarged and amended CEFTA in Bucharest. It has participated in the negotiations that started in June 2006. Bosnia and Herzegovina has concluded bilateral free trade agreements (FTAs) with all countries in South-East Europe. Bosnia and Herzegovina has also signed a free trade agreement with Kosovo in October 2006. However, it has continued to face difficulties in implementing these agreements with neighbouring countries. Bosnia and Herzegovina needs to make further efforts to ensure the correct implementation of the FTAs.

Bosnia and Herzegovina is party to the Energy Community Treaty which came into force in July 2006. In June 2006, it signed the agreement on the European Common Aviation Area.

Bilateral relations with other Western Balkan countries have continued to be generally satisfactory, although little progress has been made on outstanding issues.

Overall, relations with Serbia remain good. However, Bosnia and Herzegovina’s suit against Serbia and Montenegro at the International Court of Justice (ICJ) for alleged state sponsored genocide has occasionally inflamed political discourse and relations both between Bosnia and Herzegovina and Serbia, and also within Bosnia and Herzegovina. The case is under court procedure. Hearings were concluded in May 2006 and a final outcome is expected shortly. The State Border Treaty with Serbia has not yet been signed. Republika Srpska has intensified contacts and cooperation with Serbia and a new Agreement on Special Parallel Relations was signed in September 2006. Some trade issues between Bosnia and Herzegovina and Serbia remain unresolved.

With regard to Kosovo issue, the official stance of Bosnia and Herzegovina stresses the importance of a negotiated settlement. However, Republika Srpska has been supporting the Serbian position, and political leaders have occasionally drawn parallels between the Kosovo status issue and Republika Srpska's right to self-determination.

Bosnia and Herzegovina recognised the independence of Montenegro in June 2006.

While relations with Croatia remain relatively stable and bilateral contacts have been increasing, there has been little progress on resolving issues such as the agreement on the Port of Ploce and the agreement on Settling Property Issues. Trade issues between Bosnia and Herzegovina and Croatia remain open. Ratification of the 2005 Agreement on Demarcation of the Land and River Borders is on hold. The publication of a Croatian plan to construct a bridge on the Peljesac area has also been an issue between both countries as this bridge would apparently limit ships' access to Neum port.

Good relations with the former Yugoslav Republic of Macedonia were confirmed during the visit of its Minister of Foreign Affairs to Bosnia and Herzegovina in April 2006. A number of bilateral agreements have been signed, including on mutual legal assistance, property rights issues, extradition and mutual execution of court rulings in criminal matters.

Diplomatic contacts with Albania have been limited but relations remain good.

ECONOMIC CRITERIA

Introduction

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, and the capacity to cope with competitive pressure and market forces within the Union.

Assessment in terms of the Copenhagen criteria

The existence of a functioning market economy

Economic policy essentials

Efforts were made to improve coordination of economic and fiscal policies. The National Fiscal Council (NFC) started its work in 2005, with the aim of coordinating and setting targets for fiscal policy. However, since its establishment, the NFC has operated without a clearly defined legislative basis and lacks mechanisms to enforce and break deadlocks. As a result, it has encountered frequent stalemates and its decisions have not been considered binding. Disagreements have been frequent on how to allocate indirect tax revenues between different levels of government. Progress on finding a legal solution to strengthen fiscal coordination has been slow and no concrete results have so far been achieved. The need for improved coordination has increased with the introduction of the single account as this receives the revenues from indirect taxes. Overall, coordination of and agreement on economic and fiscal policies between different levels of government have remained problematic .

The analytical capacity to support coordinated economic and fiscal policy making has improved, but from a low base. The authorities have taken over the task of compiling fiscal data from the IMF. They have also taken greater responsibility for the budget process, where the IMF and the OHR had previously played an active role. A law was adopted which creates an institutional basis for economic policy analysis at the state level. Analytical capacity at state level has also strengthened. The track record in keeping agreed policy promises has been mixed and backtracking has occurred in several cases. Bosnia-Herzegovina did not fully comply with World Bank agreements, particularly regarding the Federation. To summarize, analytical capacity improved but remained rather weak and policy coherence was often lacking.

Macroeconomic stability

The economy grew by an estimated 5.5% in 2005, down from 6% in 2004[3]. The economy has continued to be based strongly on raw materials and related manufacturing. Rising raw material prices as well as volume increases have played an important role in supporting growth. Privatisations, mainly in the RS, have also triggered some production increases in other sectors. In the RS total industrial production rose by nearly 20% in 2005 and had increased to 25% in August 2006 year-on-year. The Federation experienced a more moderate growth rate in industrial production of 5% in 2005 and of 5.5% in August 2006 compared to a year earlier. However, detailed analysis of economic developments is impeded by poor availability of statistics. To conclude, economic growth remained relatively strong but the growth base was narrow.

Export growth was supported by improved reporting as well as stronger performance in some sectors. Still, the merchandise trade deficit was 53.3% of GDP[4] in 2005. The current account deficit expanded from 20.8% of GDP in 2004 to 22.5% in 2005. However, a large part of the widening was driven by increased imports in the fourth quarter of 2005 in the run-up to VAT introduction. It was matched by a sizeable reduction of the current account deficit in the first half of 2006, as exports grew by 30% and imports weakened by 1.5% compared to the same period the previous year. After adjusting for the effects of VAT introduction on imports, the current account deficit seems to remain fairly stable at around 20%. In summary, despite some temporary improvements, underlying external imbalances continued to be large.

FDI Inflows were strongly related to the privatisation process. Other types of investment inflows grew significantly in 2005, to 13% of GDP, and financed over half of the current account deficit. These inflows were partly a result of transfers from foreign parent companies to their banks to finance increased lending and higher capital requirements. Such mainly banking-related investment inflows decreased somewhat in 2006, but their role in financing the current account deficit remained strong. Inflows of foreign direct investment (FDI) fell from 7% of GDP in 2004 to around 5.2% in 2005 and decreased further to 3.9% of GDP in June (year-on-year). Errors and omissions in the balance of payments statistics remained large at around 20% of the current account deficit. Overall, the current account deficit was mainly financed by FDI inflows and inflows via the private sector.

External public debt continued to decrease and reached 27.2% of GDP at end of 2005. Most loans are on concessional terms and the debt service was therefore only 4.1% of the value of exports in 2005. However, the private sector's external indebtedness increased. Total external debt was estimated to be close to 60%. To summarise, total external debt grew as a result of increased private sector borrowing.

Progress has been made in setting out new conditions of repayment for different types of claims on the government related to the war and pre-war period. For frozen foreign currency deposits, a state level framework law was adopted which outline conditions for debt restructuring. Legal frameworks concerning the restructuring of war damage claims have been adopted at entity- level. However, amendments to the law, aiming to shorten the repayment time drastically from 13 to 5 years, was put forward but not yet voted upon. An agreement to restructure the debt to the net present value of 10% of GDP was previously struck down by the courts and future arrangements will be more costly. Restitution claims are estimated to be large and the terms of restructuring therefore fiscally important, however, no solutions have yet been agreed or adopted. Overall, some progress has been made in addressing the issue of domestic debt claims, but uncertainty remains about the final fiscal impact.

Official data show that unemployment rose from 43% in 2004 to 44.6% in 2005. Using ILO definitions, unemployment was estimated at 31% in April 2006. Taking informal jobs into account, unemployment is estimated to be closer to around 20% of the working-age population, although no recent official estimate is available. Unemployment remained largely of a structural nature. It also varied considerably with educational levels and was high among the young. Employment creation in the formal sector has stagnated. The informal sector has absorbed some of the new entrants and laid-off workers, increasing informal employment. In conclusion, job creation remained slow and unemployment very high.

Inflation reached 7.6% in January 2006, compared with only 0.4% a year earlier. The main [5] underlying factor was price increases related to VAT introduction, but higher energy prises and increases in regulated prices also played a role and influenced price increases in other sectors. Inflation slowed down in the first months of 2006 and reached 6.8% year-on-year in March but then picked up again. In August 2006, inflation reached 7.1% in the Federation and 9.8% in the RS year-on-year. Overall, inflation rose substantially from low levels, mainly driven by supply side factors.

Bosnia and Herzegovina continued to operate a currency-board arrangement. The Convertible Mark (KM) remained pegged to the euro. The main policy tool has been the rate of reserve requirements for commercial banks, which was further increased to 15% of liabilities at the end of 2005. The upward trend in foreign exchange reserves has continued. Net foreign reserves increased by 20% in euro terms during 2005 and covered 4.2 months of imports. Reserves rose another 17% in the first 7 months of 2006. In summary, the currency board remained the anchor for monetary policy and reserves continued to increase.

Fiscal policy was tightened in 2005, but public spending is high and increasing. The consolidated budget balance switched from a deficit of 0.6% of GDP in 2004 to a surplus of 0.9% in 2005[6]. This change stemmed from stronger sales and excise tax revenues and a reduction in expenditures. However, the state and entity budgets for 2006 were expansionary and reflected the pre-election climate. The increases were mostly of a permanent nature. In addition, a War-Veterans Law adopted in the Federation will significantly raise expenditures. Despite some rebalancing of budgets in mid 2006, government expenditure is therefore set to increase from an already high level of around 50% of GDP[7] and the fiscal position is likely to worsen. Government expenditures remained inefficient and the large resources spent generated weak outcomes. Overall, public expenditures increased from a high level while efficiency in spending stayed low.

A single VAT rate was successfully introduced across the country in January 2006. This was an important reform supporting the creation of a single economic space and the reduction of the grey economy. Total indirect taxes increased by 30% in the first seven months of 2006 compared to the previous year, but the increase was partly due to temporary factors. The size of the permanent revenue increase is therefore still uncertain but is not likely to fully cover the increases in expenditures. In summary, the introduction of VAT has been a success and has resulted in increased revenues.

Exports have been increasing, but are composed of a small and mostly raw-material based range of products. This makes revenues sensitive to commodity prices and the growth base narrow. The persistence of a large current account deficit reflected high private consumption and an insufficiently dynamic and partly loss-making corporate sector. The large imbalances represent a particular challenge in the context of the currency board and require prudent fiscal policies. Looming fiscal pressures, from for example the unsettled domestic debt and costs for institution building, therefore pose a particularly significant risk. The willingness and ability have been limited in tackling the underlying structural problems and viewing fiscal policies in the long term. To conclude, despite relatively high growth and low inflation, there are threats to macroeconomic stability.

Free interplay of market forces

Private sector activity reached 55% of GDP in 2005, up from around 50% in 2004. In the RS, the privatisation process proceeded and 38 companies were sold. Almost all of these were larger enterprises. A detailed plan on the privatisation of Telekom Srpske was adopted in June 2006 and the tender procedures were launched in September. Amendments to the Federation's Law on Privatisation, supporting some improvements to the process, were enacted in mid 2006. From the initial nominal capital intended for privatisation in the RS, 40%[8] remains to be privatised mostly in the utilities and infrastructure sectors. The privatisation process slowed down further in the Federation and 13 companies were sold. This mainly reflected a lack of political will, a complex institutional decision-making structure and an inadequate legal framework. 60% of the initial capital nominated for privatisation in the Federation remains to be privatised. Overall, progress in privatisation has been uneven and the size of the public sector is still large.

Coordinated efforts to improve the business climate were weak. At the State level, the Association of Employers was responsible for identifying problems and barriers but had little influence over policies. The RS started its own initiative to identify administrative barriers and initiate changes, but the process was still at an initial stage and had not yet influenced the operational climate for companies. In summary, no significant improvements of the business environment were observed.

Free market entry and exit

In 2005, starting a company involved 12 steps and took on average 54 days, which was 5 days more than in 2004. The cost for business registration has remained high, although it has varied across the country. Acquiring all the relevant licences and permits to start operations took on average 467 days and was particularly costly (25 times GDP per capita). Registering property took on average almost a year and involved 7 different steps. The laws adopted in 2004 and 2005 allowing for the creation of a single business registration system have not been fully implemented, due mainly to a lack of technical capacity. These were aimed at reducing registration times and costs. Overall, starting a business has remained time-consuming and costly.

Since the adoption of new bankruptcy legislation in 2003, some gradual improvements have occurred. The average time to process a procedure has been reduced from 3 to 2 years and over 400 cases have been initiated in the courts. However, thousands of companies are still facing insolvency and have not yet been put into bankruptcy procedure. To conclude, some improvements have been achieved concerning bankruptcy procedures.

Adequate legal system

The country has a relatively high number of courts, but there is still a large backlog of unresolved cases. Political interference in the system has occurred. Overall, the legal system still hampers the business environment.

Sufficiently developed financial sector

Banking operations have continued to grow strongly and total assets have increased from 68.6% to 80% of GDP. This growth was supported by a continued expansion of lending to the private sector from 38% to 46% of GDP. The number of banks increased from 33 to 34. Foreign banks dominate the sector and their ownership increased further to 73% of total capital. Privatisation of banks has been completed in the RS, but in the Federation six banks have remained in public hands. They accounted for 13% of total banking sector capital. In 2005, the banking sector represented around 80% of total financial sector assets. Overall, the banking sector has continued to expand rapidly and is dominated by foreign banks.

Interest rate spreads between loans and deposits narrowed from 6.6% in 2004 to 5.4% in 2005 amid increasing competition. Return on equity rose from 5.8% to 6.4%. The lending expansion was partly financed by the foreign parent companies. This resulted in an increase in long-term foreign liabilities of the sector by 34% in 2005. Increased lending also resulted in a fall of the capital adequacy ratio from 18.7% to 17.7%. The share of non-performing loans for the sector as a whole has continued to decrease. To summarise, competition in the banking sector has increased.

The two stock exchanges both increased their market capitalisation by around 70% in 2005. The number of traded securities more than doubled and total capitalisation increased to around 60% of GDP at the end of 2005. However, most of the shares traded were in investment funds. The RS adopted a Securities Market Law supporting better operation of markets and tougher disclosure principles. To conclude, stock market capitalisation has grown rapidly and some improvements in the regulatory framework have occurred.

Banking supervision was conducted by two separate entity banking agencies, and was coordinated by the Central Bank. The approach shows clear limitations in the increasingly integrated banking sector, but no agreement could be reached on how to merge supervision. Laws to strengthen the regulatory framework for micro finance institutions have been adopted in both entities. Supervision for other parts of the financial system, such as insurance, is fragmented and still developing. Leasing operations have remained outside the scope of supervision. Overall, supervision of the financial sector has remained fragmented and is underdeveloped in certain areas.

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

Existence of a functioning market economy

The functioning of market forces is hampered by the strong influence of the public sector in the economy and the weak business environment and legal climate. Despite some improvements, markets are also sometimes fragmented between the entities. Overall, the macroeconomic setting provided a fairly stable environment for market actors, but the institutional and legal framework was often not supportive of private sector development.

Sufficient human and physical capital

Several laws to support reforms in the educational sector have been prepared, such as state-levels laws on Higher Education and on an Education Agency, but have not yet been adopted. The sector is being managed by a total of 23 organisations at different levels of government. The resources spent are comparatively large but outcomes are weak Enrolment rates are relatively low for secondary and higher education. There are substantial mismatches between the labour market and the knowledge provided by education, particularly for vocational training. There are also large regional disparities in student performance. This is a reflection of limited harmonisation and coordination across the country and differences in funding. To conclude, in the educational sector structures have remained inefficient and outcomes weak.

Laws at entity-levels aimed at simplifying the complex direct income taxation systems have been prepared. In the RS a new legal framework has been adopted, while in the Federation proposed legislation has been rejected by the parliament. The institutional structure has remained complex. There are 12 separate organisations responsible for employment service operations and another 13 for labour market policies. Labour market legislation was fairly harmonised across the country, but there were still large differences in some areas, concerning unemployment benefits, for example. In addition the legal framework is rigid and non-wage labour costs high. The laws prepared in the two entities differed and taxation rules continue to be different between the entities. Overall, limited progress was achieved in improving the functioning of labour markets.

Active labour market programmes existed at both state and entity levels. The scale of policies have remained modest and focussed on subsidising employment rather than enhancing skills. However, the large number of institutions involved in active labour market policies complicated the systematic development of policies. Mobility of workers has remained low and labour markets continued to be fragmented. To conclude, coordination of labour market policies was weak and the labour market remained fragmented.

The FDI stock per capita reached Є 495. Around 58% of total FDI went to the industry and 16% were directed to the banking sector. Yearly FDI inflows decreased from over 7% of GDP in 2005 to around 4% of GDP in mid 2006, mainly as a result of lower privatisation-related inflows. The institutional framework and capacity to deal with R&D issues have remained weak and fragmented. Overall, FDI inflows remained strongly linked to the privatisation process and the R&D framework remained weak.

Adequate sectoral and enterprise structure

The share of employment in manufacturing decreased during 2005 by around 1%, to 22% in the Federation and 23.5% in the RS. The share of formal employment in agriculture remained low, at around 2.5% in the Federation and 3.5% in the RS[9]. However, official statistics do not include a large part of the working population. Overall, the share of different sectors in total employment seemed to remain fairly stable.

Both entities have separately performed some SME related activities, but with a lack of coordination of policies. A comprehensive draft SME strategy was blocked due to opposition to the proposed creation of state-level structures. Business-government dialogues and training to support entrepreneurship have been weak. To conclude, responsibilities for SME policies continued to be fragmented.

The RS adopted a law allowing enterprises to be privatised to reschedule their debt. This was to assist their restructuring and sale. In the Federation however, legal changes implied that debt can be rescheduled without any real restructuring of the company taking place. Corporate governance practices generally remained deficient. Large parts of the corporate sector, both privately and publicly owned, need restructuring. The lack of incentives for managers and owners to embark on restructuring remained a major obstacle to change. Some legal changes have been adopted in the RS concerning the Privatisation Investment Funds, to improve ownership structures and incentives to restructure mainly in the voucher-privatised companies. Overall, progress in enterprise restructuring continued to be slow although some improvements were made to the regulatory framework.

Utilities and infrastructure facilities stayed publicly-owned. Generally the regulatory frameworks have improved, but remained weak with fragmented responsibilities. In the energy sector, reforms concerning unbundling of transmission have proceeded. Progress towards liberalisation and increased competition has been slow. To conclude, utilities and infrastructure remained publicly-owned and despite some improvements in regulatory structures the frameworks remained weak.

State influence on competitiveness

The Competition Council, created in 2004, started to play a concrete role in the market. It was given more power, improved its alignment with the acquis and expanded its regional coverage. Public procurement procedures improved and progress was made in establishing the full institutional framework foreseen in the law. However, no improvements have been made in the area of state aid and there has been no monitoring or comprehensive information on the scope of state aid. The state level has no competence in this field and state aid is mainly provided by several lower levels of government with little transparency. An Intellectual Property Institute has been established but is not yet fully operational. In summary, some progress has been achieved in improving the competitiveness climate.

Trade integration with the EU

Trade in goods and services as a share of GDP amounted to 122% in March 2006 year-on-year, compared to 117% in 2004. Imports constituted 83% of GDP. The EU has remained the most important trading partner. In 2005, trade with the EU increased and its share of total trade decreased and reached 53% of exports and 50% of imports. In the first quarter of 2006, exports to the EU increased considerably to 59% of total exports. Exports to neighbouring countries with Free Trade Agreements in place increased from 39% to 42% of total exports in 2005. 70% of trade has been achieved with five countries, three of which are in the EU. This points to a dependency on developments in a few markets. The composition of exports has continued to be narrow. Minerals, metals and related products accounted for 40% and chemicals and wood products accounted for another 20% of total exports. To summarise, trade openness continued to increase but with a continued dependency on a few markets and products.

Real effective exchange rate (REER) of the KM depreciated slightly in January to October, but then regained its value and was close to its level a year before at the end of 2005. In the first half of 2006, the REER remained fairly stable. The main influences of the REER are fluctuations in the exchange rate with some of the neighbouring countries. These are the main trading partners outside the Euro area. Overall, price competitiveness has remained broadly stable.

EUROPEAN STANDARDS

This section examines Bosnia and Herzegovina's capacity to gradually approximate its legislation and policies with those of the acquis related to the internal market, sectoral policies, and justice, freedom and security, in line with a Stabilisation and Association Agreement and the European Partnership priorities. It also analyses Bosnia and Herzegovina's administrative capacity.

Internal market

Free movement of goods

Little progress has been made as regards standardisation and certification . Bosnia and Herzegovina has not yet begun implementing 2004 legislation on the establishment of three independent Institutes for Standards, Metrology and Intellectual Property. Consequently, issues related to standards (as well as to metrology) are still addressed by a common structure, the Bosnia and Herzegovina Institute for Standards, Metrology and Patents (BASMP). BASMP is a Partner Standardization Body in the European Committee for standardization (CEN) and an affiliate member of the European Committee for Electro-technical Standardization (CENELEC). BASMP is also a full member of the European Telecommunications Standards Institute (ETSI).

By the end of 2005, 6028 European Standards (EN) had been adopted as Bosnia and Herzegovina standards (BAS), a great majority of them by the declaration method. Out of the total number of adopted ENs, 1120 are those which confer presumption of conformity to essential requirements of technical regulations.

The Institute for Standardisation established 40 technical committees as well as 64 working groups with 724 hired experts to prepare BAS standards. The Director of the Institute for Standardisation remains to be appointed.

Few developments have taken place in the field of metrology . The management positions (director and deputy director) of the Institute of metrology have been filled. The Institute is an associate member of the Organisation for Legal Metrology (OIML) and, since January 2006, has been an associate member of EUROMET (European Collaboration in Measurement Standards). In May 2006 the Rulebook on the Internal Organisation of the Institute for Metrology was adopted. The Commission for takeover and distribution of tasks, equipment, archives and pecuniary assets as well as civil servants and employees has begun its work. The legislation on metrology is not harmonised with EU standards which require a separation between legal, scientific and industrial metrology. Moreover, the existing Entity Laws on metrology are not fully harmonised with the state level legislation. A study providing a basis for the preparation of a strategy for the development of metrology in Bosnia and Herzegovina has been completed.

The Institute for Accreditation has so far granted 26 accreditations, 11 to test laboratories, 4 to calibration laboratories, 2 to product certification bodies and 9 to inspection bodies. In 2005, 6 new employees were recruited, bringing the total number of staff to 10 and adequate offices and equipment have been made available for its operations.

Limited steps have been taken as regards market surveillance . The management posts at the Market Surveillance Agency have been filled and a decision regarding the location of the Agency has been taken. Nonetheless, the Agency is not yet operational. The market surveillance system remains largely based on mandatory standards and pre-market control. Further development of a market surveillance system based on appropriate product legislation is needed.

The 2004 Law on Technical Requirements for Products and Conformity Assessment is in force, but its relevance is limited since no technical regulations transposing the acquis in the field of conformity assessment have been adopted and there is lack of a proper conformity assessment infrastructure. An Instruction on the Method of Developing and Procedure of Adoption of Technical Regulations was adopted in May 2006, but internal consultation and notification mechanisms have not been formally established.

Currently there is no conformity assessment system in place. As a temporary measure, the Ministry for Foreign Trade and Economic Relations has been mandated to give authorisations to individual bodies that are performing activities similar to conformity assessment as regards specific products. Conformity assessment is not performed on locally manufactured and imported products before they are released on the market. A Programme of Transposition of Technical Regulations was adopted in May 2006.

Some progress has been achieved in the area of consumer and health protection . The Consumer Protection Law of 2003 has been replaced by a new act that introduces the institution of the consumer protection ombudsman and gives increased rights to consumers in Bosnia and Herzegovina. The relevant Ombudsman institution has not yet been established. Bosnia and Herzegovina also has a state-wide Consumers’ Association, which aims to promote the Laws on Competition and Consumer Protection. The activities of the association are still limited, as it has no sources of funding apart from a symbolic membership fee.

A Law on Medical Products and Medical Devices has been drafted and submitted to the Ministry of Civil Affairs, but was rejected by Parliament. As a result, a domestic monopoly production is maintained. The establishment of a National Agency for Medical Products and Medical Devices that should have been regulated by this law is therefore still pending.

Institutional and legislative developments provide a basis upon which Bosnia and Herzegovina needs to build to establish a strong system of consumer and health protection throughout the country.

Bosnia and Herzegovina's preparations in the fields of standardisation, certification, metrology, market surveillance and consumer and health protection remain at an early stage.

Movement of persons, services and right of establishment

There are no particular developments to report with regard to the movement of persons . There has been no progress in relation to the movement of workers. The labour legislation and the policy framework remain fragmented and labour mobility continues to be limited. Foreign nationals, including EU citizens, with legal residence in either Entity have legal access to employment. They need to obtain a work permit. These working permits are valid for one year and may be extended. They are issued only if no unemployed, qualified citizen of Bosnia and Herzegovina is available to fill a particular vacancy. Informal administrative procedures for foreigners (e.g. educational qualifications requirements/verification) are often cumbersome and represent a deterrent to mobility. As for social security rights, the social security system of Bosnia and Herzegovina remains fragmented and technically inadequate to provide for a coordinated social security mechanism with the EU. Moreover, the system does not provide entitlements to social security benefits for dependent, resident family members of foreign nationals working in Bosnia and Herzegovina.

Bosnia and Herzegovina's efforts in the area of movement of persons need to be stepped up.

Limited progress has been made in the area of services . Banks in Bosnia and Herzegovina are still subject to separate Entity legislation and are supervised by two different Entity-level Banking Supervisory Agencies. The lack of a single State-level legislation and of a single banking regulator undermines the implementation of supervisory practices in line with international best practices. The Central Registry of Corporate Loans in Bosnia and Herzegovina, established within the Central Bank, started operating in April 2006.

The members of the Administrative Board of the State Level Insurance Supervisory Agency and the Agency's Director were appointed in December 2005. However, staff recruitment started only recently and the Agency is not yet fully operational. Furthermore, State-level legislation did not transfer supervisory competencies to the State-level Agency and therefore supervision continues to remain at Entity level.

No progress can be reported with regard to obligatory relationships and leasing legislation. As the Law on Obligations, which affects various aspects of commercial activity, such as real estate markets, mortgage lending and leasing, is yet to be adopted at State level, obligatory relationships are regulated by the non-harmonised Entity-level legislation, based on an outdated Law on Obligations from 1978.

Republika Srpska adopted in August 2006 a new Securities Market Law, which aims at aligning Bosnia and Herzegovina's legislation to the acquis .

Some progress can be reported in bringing the accountancy and audit fields into line with international standards. According to the State- and the Entity-level Accounting and Auditing Laws, as of January 2006, International Financial Reporting Standards (IFRS), and International Standards of Auditing (ISA) are applicable in Bosnia and Herzegovina. However, thresholds for application of IFRS are very low, raising questions about both the proportionality of this requirement and the capacity of the authorities and of the domestic accounting and auditing professions to apply them in practice. These laws define also the uniform requirements for professional certification and licensing as well as for the professional development of accountants and auditors, in line with the International Federation of Accountants (IFAC) criteria.

No additional development has taken place in relation to the right of establishment . Bosnia and Herzegovina continues to exercise a flexible regime on business establishment. All EU companies may freely establish their operations in Bosnia and Herzegovina, subject to national treatment (with the same rights and obligations as Bosnia and Herzegovina nationals). All enterprises operating in Bosnia and Herzegovina are also allowed to acquire land and property. The current legislation forbids nationalisation, expropriation, and requisition of those properties (except in instances of national interest, with payment of appropriate compensation). No cases of expropriated property have been reported so far.

Notwithstanding the liberal establishment regime, various informal factors continue to represent obstacles to establishment. These include cumbersome administrative procedures, corruption and poor enforcement of laws, mainly in respect of contracts and property rights.

No significant changes have occurred in relation to company law . The framework legislation on Single Business Registration in Bosnia and Herzegovina, adopted in 2004, and the Entity-level legislation, adopted in 2005, which aim to partially reduce the registration times and costs, are still not properly enforced.

Bosnia and Herzegovina's preparations in the area of services, establishment and company law have started but remain at an early stage.

Free movement of capital

No particular new developments have been observed in the area of free movement of capital .

With regard to capital movements , Bosnia and Herzegovina continues to exercise a liberal regime of inward capital flows, but imposes certain restrictions on outward transfers by individuals and non-residents. With regard to foreign direct investment inflows, restrictions only apply to the armament and media sectors where the foreign capital stake is limited to 49 percent. Transfers and repatriation of profits and remittances as well as foreign currency transfers by domestic and foreign companies are fully allowed. The State-level Law on Foreign Direct Investments and the implementing Entity-level legislation ensure transfer and repatriation rights.

Domestic and foreign companies may hold multiple bank accounts to make or receive payments in foreign currency. There are no exchange restrictions or controls on local currency and the effective currency board arrangement with a fixed peg provides for full convertibility of the Convertible Mark (KM) into the Euro. However, all foreign exchange operations, including transfers of foreign exchange, are regulated by non-harmonised Entity-level legislation which is not fully aligned with European standards.

Bosnia and Herzegovina has a modern payment system structure. The reform of the payment system has been particularly successful. The Real Time Gross Settlements (RTGS) and Gyro Clearing systems are almost entirely compliant with the Core Principles for Systematically Important Payment Systems issued by the Bank for International Settlements (BIS). The Central Bank holds the payment systems under its jurisdiction. Commercial banks carry domestic payment transactions, with the Central Bank serving as a settlement agent.

Bosnia and Herzegovina’s preparations in this area are well on track.

Customs and taxation

Limited additional progress has been achieved in relation to customs rules . Customs legislation is in place and is largely aligned to the acquis . Its full implementation needs to be ensured, especially in areas such as origin, valuation and simplified procedures.

Bosnia and Herzegovina has five operational free zones. Requests for new free zones have been submitted. There has been no consistent control on goods entering or leaving the free zones. The Law on Free Zones and the Law on Amendments to the Law on Customs Policy, adopted in June 2006, exempt from customs duties equipment imports for production activities in free trade zones. This is not in line with the acquis, which establishes that free zones are part of the customs territory and that such equipment can normally not be exempted from duties.

As for customs valuation of imported goods, during part of the reporting period Bosnia and Herzegovina continued to use price lists instead of the transaction value for determining the customs value basis for certain types of goods, a method which is contrary to the WTO rules, to the standstill clause of the EU’s Autonomous Trade Measures, to the future SAA and to Bosnia and Herzegovina's own customs law (in particular Article 26 Customs Policy Law). In April 2006 a letter was sent by the Indirect Taxation Agency (ITA) to all regional centres to rectify the situation, but consistent implementation throughout the country remains to be confirmed.

Bosnia and Herzegovina needs to dismantle customs fees for processing customs declarations as these are contrary to the acquis .

With regard to the administrative and operational capacity , the Indirect Taxation Authority (ITA) has made further progress in the area of customs. After the successful merger of the three customs administrations into the ITA, a single account was established. ITA is pursuing its efforts in combating fraud and corruption, and training for its entire staff on a Code of Conduct in line with EU standards is ongoing. There are currently 2164 staff (including the VAT section) working in ITA. Nonetheless, sustained efforts remain necessary. The capacity of the ITA internal audit, investigation and intelligence unit needs to be further improved, and risk analysis needs to be further developed.

Since January 2006 ITA has been the only competent authority for issuing and requesting verification of EUR 1 movement certificates for trade with the EU. The Ministry for Foreign Trade and Economic Relations (MoFTER) is responsible for the verification of EUR 1 movement certificates for Free Trade Agreements concluded with other countries. The distribution of competences between ITA and MoFTER concerning origin issues, however, is not clear. This is causing problems of management on origin issues which may increase when diagonal cumulation involving the EC and other Stabilisation and Association Process countries is introduced. Amendments to the Law on Customs Policy are necessary, as at present there is no legal basis for the provisions on origin regulating the application of the ATMs.

In June 2006 an agreement on cooperation and mutual assistance between the Indirect Taxation Authority of Bosnia and Herzegovina and the Ministries of Finance of the Republic of Bulgaria, the former Yugoslav Republic of Macedonia, the Republic of Montenegro and the Republic of Serbia was signed in Skopje.

As regards computerisation, the Bosnia and Herzegovina authorities co