Proposal for a Council Decision providing macro- financial assistance to Bosnia and Herzegovina
Date: 1998-11-13
Institutions: European Commission
Subjects: Bosnia and Herzegovina, Community loan, EU aid, International Monetary Fund, economic reconstruction

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 13.11.1998 
COM(1998)652  final 

98/0311  (CNS) 

Proposal for a 

COUNCIL DECISION 

providing macro-financial  assistance 
to Bosnia and Herzegovina 

(presented by the Commission) 

EXPLANATORY  MEMORANDUM 

1. 

INTRODUCTION 

In  April  1998,  after  more  than  two  years  of  discussions,  the  authorities  of  Bosnia  and 
Herzegovina  reached  an  understanding  with  the  IMF  on  an  economic  and  structural 
reforms  programme  to  be  supported  by  a  one-year  Stand-By  Arrangement  (SBA).  This 
agreement  constituted  a big  step forward  to regenerate  confidence  and  stability  in  Bosnia 
and  Herzegovina. 
In  the  context  of  this  programme,  the  World  Bank  has  also  been 
negotiating  two  structural  adjustment  operations  in  the  areas  of  public  finance  reform, 
and  enterprise  and  banking  privatization. 

On  March  I*),  IWX,  at  a  (i-24  Meeting  in  Brussels,  the  IMF  and  the  WB  outlined  a 
macro-economic  programme  lor  Bosnia  and  Herzegovina. 
The  IMF  presented  the 
country's  external  linancing  needs  and  called  for  complementary  financial  support  from 
bilateral  donors. 

to  continue 

On  May  7-8,  1998,  at  the  fourth  Donors'  Pledging  Conference  for  Bosnia  and 
Herzegovina,  the  international  community  unanimously  welcomed  the  agreements  with 
the  Bretton  Woods  institutions,  which  pave  the  way  for  more  self-sustainable  economic 
growth,  and  decided 
the  economic  reform  and 
reconstruction  programmes  of  Bosnia  and  Herzegovina.  Following  positive  indications 
from  the  ECOFIN  Council  of  April  21,  1998,  the  Commission  announced  at  this 
Conference  its  intention  to  propose  Community  macro-financial  assistance  of  up  to  HCU 
60  million  in  favour  of  Bosnia  and  Herzegovina.  The  initiative  of  the  Commission  and 
the Council  was  supported  by  a  representative  of  the  Furopean  Parliament.  At  this 
Conference,  other  bilateral  donors gave also  preliminary  indications  of  support. 

to  strongly  support 

2.  RECENT ECONOMIC DEVELOPMENTS 

Bosnia  and  Herzegovina's  declaration  of  independence  at  the  end  of  1991  was  followed 
by  three  and  a  half  years  of  civil  war,  which  shattered  the  economy  and  devastated 
human  and  capital  resources.  By  1995, GDP  had shrunk  to  less than  a third  of  its  pre-war 
level  and  per capita  GDP  had  fallen  to  US$500. 'The  population  was 23% smaller  than  in 
1991,  over  50  %  of  the  population  had  been  displaced,  and  more  than  1.2  million 
inhabitants  were  forced  to  flee  abroad,  mainly  to the  EU.  In  financial  terms, virtually  no 
debt  service  was  paid  during  the  war  leading  to  an  accumulation  of  external  arrears  of 
US$2  billion. 

To  consolidate  the  Dayton  peace  agreement  that  was  signed  in  Paris  on  December  14, 
1995,  the  international  community  endorsed  a medium-term  Priority  Reconstruction  and 
Recovery  Programme  amounting  to  US$  5.1  billion  for  the  period  1996-99.  The 
implementation  of  the  reconstruction  programme  has  remained  broadly  on  track  with  the 
exception  of  a  few  areas,  like  telecommunications  and  railways,  where,  until  recently, 
political  disagreements  among  the  parties  has  resulted  in  slow  progress.  Following  the 
first  three  Donors'  Pledging  Conferences,  co-hosted  by  the  Commission  and  the  World 
Bank  and  involving  more  than  50  donor  countries,  about  US$  3  billion  of  aid  has  been 
firmly  committed  for  reconstruction  and peace  implementation  activities;  US$  1.8  billion 

2 

hereof  has  already  been  disbursed,  of  which  about  45% originated  from  the  Community 
and  the  Member  States. 

External  assistance  fuelled  a strong economic  recovery  in  1995-97,  though  fast  economic 
growth  compensated  only  very  partially  for  the  huge  loss  in  output  that  occurred  during 
the  war.  Real  GDP  growth  for  the  country  as a whole  was estimated  at  30% and  50% in 
In  1997,  growth  decelerated  to  30%  also  as  a  result  of 
1995  and  1996,  respectively. 
delays  in  external  financing.  Unemployment  is reported  high  (at  about  40%)  in  both  the 
Federation  and  the  RS.  Following  a  period  of  hyperinflation  during  the  war,  inflation 
decelerated  rapidly  and  remained  modest  in all parts  of the  country  in  1996-97,  although 
it  varied  among  regions,  reflecting  the  use  of  four  different  currencies  (Croatian  kuna, 
Yugoslav  dinar,  the Bosnia and  Herzegovina dinar, and the DM). 

Owing  to  its  self-imposed  isolation  from  the  internationally-sponsored  reconstruction 
programme,  the  economic  recovery  in  the  RS  has  been  much  weaker  than  in  the 
Federation.  The  RS suffered  a  major  setback  in  August  1994 when  the  Federal  Republic 
of  Yugoslavia  (FRY)  joined  other  nations  in  imposing  UN-mandated 
international 
sanctions.  Following  the  lifting  of  the  sanctions  in  March  1996,  the  RS's  economy 
started  to  pick  up,  though  at  a  slower  pace  than  in  the  Federation,  as  it  benefited  only 
In 
marginally  from  the  international  financial  assistance  to  Bosnia  and  Herzegovina. 
1997,  the  economic  situation 
international 
community  strictly  enforced  its  conditionality  for  financial  assistance  and  the  political 
crisis among  the authorities  of this  Entity  paralysed  the functioning  of the  administration. 

in  the  RS  deteriorated  sharply  as  the 

On  the  fiscal  front,  State and  Entity  budgets  were  kept  broadly  in balance  on  a cash  basis 
in  1996-97, but  at the expense  of a  further  accumulation  of external  and  domestic  arrears. 
In  particular,  in  the  RS,  revenue  fell  short  of  the  estimates  as  a  result  of  the  political 
turmoil  and  the  absence  of external  assistance  outside  humanitarian  aid.  The EU  tax  and 
customs  assistance  office  (CAFAO)  reported  on  the  existence  of  widespread  fraud  and 
corruption  in  revenue  administration  in  both  Entities.  As  a consequence,  in  early  1998, 
the  international  community  endorsed  the  anti-fraud  strategy  put  forward  by  the  High 
Representative,  including:  (i)  the  formation  of  an  Anti-Fraud  Unit  to  identify  illegal 
activities  and  coordinate  international  technical  assistance;  (ii)  the  extension  of  the 
European  Community  tax  and  customs  assistance  programme  to  cover  all  indirect  taxes 
levied  by  the  Entities;  (iii)  and  the  dissemination  of  information  on  all  extra-budgetary 
accounts  and  accounts  related  to public companies  and  corporations. 

In  both  Entities,  progress  has  been  slow  in  implementing  open  and  market-oriented 
economic  policies,  establishing  a  modern  institutional  and  policy  framework,  and 
ensuring  good  governance,  transparency,  and  accountability  in  the  use  of  donor  funds. 
As a result,  the  implementation  of the  reconstruction  programme  has proved  increasingly 
difficult  to  sustain  in  the  absence  of  a  coherent  and  consistent  policy  framework  for 
macroeconomic  and  structural  reforms. 

3. 

T HE  ECONOMIC  REFORM  PROGRAMME  OF BOSNIA  AND  HERZEGOVINA 

The IMF-supported  programme  covers a range of macroeconomic  and  institutional  policy 
commitments,  involving  both  the  common  institutions  of  Bosnia  and  Herzegovina  and 
those  of  the  two  Entities. 
It  aims  at  promoting  self-sustainable  economic  growth, 
fostering  economic  integration  and  consolidating  central  institutions  with  a  view  to 

implementing  a  country-wide  economic  strategy.  It  will  be  based  on  the  following  key 
principles:  (i)  ;i  fixed  exchange  rale  administered  through  a currency  board  arrangement; 
(ii)  a  fiscal  policy  as  supportive  as  possible  of  social  and  reconstruction  needs,  while 
avoiding  domestic  borrowing;  (iii)  the  mobilization  of  external  financial  assistance;  and 
(iv)  structural  reforms  to  accelerate  the  transition  to  a  market  economy.  The  12-month 
SBA  is  expected  to  be  followed,  or  even  replaced  before  one  year,  by  an  ESAF 
Arrangement  when  a  set  of  comprehensive  structural  reforms  is  identified  with  the 
authorities, the  World  Bank, and  other agencies. 

Owing  to  the  exceptional  circumstances  prevailing  in  Bosnia  and  Herzegovina,  the 
adoption  of  the  IMF-supported  programme  relied  heavily  on  prior  actions.  Accordingly, 
important  elements  of  the  programme  are  already  in  place,  in  particular  as  regards  the 
framework  for  macro-economic  management.  The post-war  Central  Bank  of  Bosnia  and 
Herzegovina,  which  will  operate  as  a  currency  board  for  its  first  six  years,  was 
established;  the designs  of the  new  Bosnia  and  Herzegovina  domestic  currency  coupons-
die  convertible  marka  (KM)  were  adopted;  and  important 
legislation  establishing 
common  foreign  trade  and  debt  policies  (external  debt  law,  foreign  trade  law,  customs 
policy  law,  and  customs  tariff  policy  law)  were  introduced.  More  recently,  the  budgets 
for  the  Entities  and  the  State  in  1998  were  adopted,  the  operations  of  the  Central  Bank 
were  extended 
territory  of  Bosnia  and  Herzegovina,  a  clearing 
arrangement  to  avoid  credit  to  the  former  central  bank  (the  National  Bank  of  Bosnia  and 
Herzegovina)  was  accepted,  and  a  revised  Federation  pension  law  was  submitted  to 
Parliament.  Concerning  the  Entity  budgets,  a  number  of  administrative  measures  was 
taken  to  improve  tax  and  customs  tariff  collections,  to  eliminate  exemptions,  and  to  start 
rationalize  expenditure,  in  particular  social  expenditure,  so  as  to  avoid  any  domestic 
borrowings  while  honouring  obligations  to  the  State  budget  to  service  external  debt 
payments. 

throughout 

the 

Under  the  programme,  the  authorities  hope  to  continue  investment-led  real  GDI*  growth 
in  the  range  of  20-30%.  Inflation  is expected  to average  10% or  less  for  the  country  as a 
whole  during  1998,  mainly  as  a  result  of  changes  in  administered  prices.  The  fiscal 
strategy  is  to  avoid  any  further  accumulation  of  domestic  arrears,  which,  in  the  RS, 
implies  the  need  to  rapidly  restore  the  revenue  base.  On  the  basis  of  the  projected 
consolidated  fiscal  revenues,  total  fiscal  expenditures  are  expected  to  increase  from  an 
estimated  33% of  GDP  in  1997  to about  35% of  GDP  in  1998, mainly  due  to an  increase 
in  budgetary  expenditure  in  the  RS  for  the  first  time  in  several  years.  The  authorities' 
fiscal  policy  will  also  have  to  cope  in  an  effective  and  transparent  manner  with  the 
extensive  decentralization  that  is  called  for  by  the  Dayton  agreement  at  the  State  level, 
Entity, and  lower-level  governing  bodies. 

The  authorities  intend  to  continue  to  rebuild  public  administration  and  infrastructure  and 
continue  the  transition  to a market  economy.  The highest  priority  structural  measures  for 
1998-99  will  include  banking  reform,  enterprise  privatization  and  restructuring,  pension 
and  health  system  reform,  the  implementation  of  simplified  customs  tariff  system, 
exchange  and  trade  liberalization,  and  initial  steps  in  the  strengthening  of  economic 
statistics. 

finally,  it  is  worth  noting  that  the  programme  also  provides  for  the  reduction  in  external 
payment  arrears,  including  the  clearance  of all  the  outstanding  arrears  to  the  EIB  and  the 
Community  on  account  of past  EIB lending  (about  ECU  6 million  at end-1997). 

4. 

BALAN<  E-OE-PAYMENTS  DEVELOPMENTS  AND  FINANCING  NEEDS 

In  1997,  the  trade deficit  for  the country  as a whole  was tentatively  estimated  by  the  IMF 
at  US$  1.6  billion,  with  imports  as  high  as  US$  2.2  billion.  The  current  account  deficit 
reached  about  US$  1.5 billion  in  1997 or  the  equivalent  of  33%  of  GDP-and  was  mainly 
financed  by  the  reconstruction  programme,  but  also  with  a  further  accumulation  of 
the  authorities  have  tried  to 
external  payments  arrears.  Despite  these  difficulties, 
normalize  relations  with  external  creditors,  on  terms  consistent  with  the  country's 
economic  circumstances.  Arrears  to  the  IMF  and  the  World  Bank  were  cleared  in 
December  1995  and  June  1996, respectively.  The  authorities  signed  an  agreement  with 
the  London  Club  of  creditors  in  December  1997 on  the  consolidation  of  about  US$  400 
million  of  debt  and  were  granted  very  generous  terms.  The  authorities  also  intend  to 
request  as soon  as possible debt  rescheduling  on highly concessional  terms  from  the  Paris 
Club of creditors. 

In  1998-99,  in  a  scenario  based  on  sound  economic  and  structural  policies  and  inter-
Entity  cooperation,  the  IMF  projects  that  exports  would  increase  by  an  annual  average  of 
40%.  However,  despite  this  projected  export  performance,  the  deficit  of  the  external 
current  account  (excluding  official  transfers)  would  widen  to reach  US$ 2 billion  in  1998, 
rellccting  an  increase  in  reconstruction-related  imports.  Taking  into  account  the  debt 
service  obligations  (US$  117  million),  the  need  to  eliminate  arrears  vis-à-vis  the  Paris 
and  London  Clubs  of  creditors,  multilateral  creditors  and  the  Community  (US$  1.5 
billion), and  the  increase  in official  reserves  associated  with  the  start-up  requirements  for 
the  currency  board  arrangement  (US$  175  million),  Bosnia  and  Herzegovina's  gross 
external  financing  needs  is estimated  at US$ 3.8 billion  in  1998. 

Part  of  these  needs  will  be  covered  by  the  resources  made  available  by  the  international 
community  for  reconstruction  and  peace  implementation  activities  (US$  1.6 billion)  and 
other  external  inflows  such  as  private  and  public  transfers  (US$  190  million),  foreign 
direct  investment  (US$  100 million), as well  as the  London  Club  rescheduling  (US$  810 
million).  In  particular,  on  May  7-8,  1998,  the  fourth  Donors'  Pledging  Conference  for 
the  reconstruction 
Bosnia  and  Herzegovina  pledged  US$  1.25  billion 
reform 
activities,  and 
programme,  peace 
programme  in  1998. 

to  support 
the  macro-economic 

implementation 

On  May  29,  1998,  the  IMF  approved  a  one-year  Stand-by  Arrangement  for  Bosnia  and 
Herzegovina  in  the  amount  of  about  US$  81  million.  In  addition,  the  World  Bank  has 
committed  two  Structural  Adjustment  Loans  and  Credits  of  some  US$  114  million 
focusing  on  public  finance  and  privatization.  Taking  into  account  the  contributions  of 
these  institutions  for  1998 (some  US$  129 million),  the  residual  financing  gap  of  Bosnia 
and  Herzegovina  is  estimated  at  US$  965  million.  After  an  estimated  additional  debt 
relief  of  some  US$  839  million  yet  to  be  agreed  by  the  Paris  Club  creditors,  the 
remaining  financing  gap  for  1998 is estimated  at US$  125 million. 

At  the  fourth  Donors'  Pledging  Conference,  total  pledges  in  support  of  the  macro-
economic  programme  in  1998  fell  somewhat  short  of  this  target,  although  the  total 
amount  pledged  at 
and  peace 
implementation  activities,  exceeded  the  initial  objective  of  US$  1.1  billion  set  for  1998. 
Bilateral  donors  were  thus  urged  to re-examine  the  composition  of  their  aid  programmes 
to  ensure  a  full  and  timely  support  of  the  macro-economic  programme,  taking  into 
account  that  about  47%  of  total  pledges  was  already  made  by  the  Community  and  the 

the  Conference, 

reconstruction 

including 

for 

Member  States.  The  need  for  additional  balance-of-payments  assistance  from  other 
bilateral  donors  was  again  stressed  at  the  IMF  Executive  Board  discussion  on  May  29. 
1998. 

Unless  this  remaining  gap can  be closed,  Bosnia  and  Herzegovina's  ability  to  support  the 
minimum  social  needs  oi% the  population,  to  ensure  the  proper  functioning  o\'  the 
administration,  and  to  meet  its  external  financial  obligations  would  be  put  into  question. 
Hence,  the  success  of  the  whole  stabilization  and  economic  integration  programme  to 
which  the  different  authorities  of  Bosnia  and  Herzegovina  parties  are  now  committed 
could  be undermined  before  its expected  economic positive  effects  could  be  realized. 

5. 

PROPOSED  MACRO-FINANCIAL  ASSISTANCE  AND  MAIN  FEATURES  OF THE  LOAN 

The  Commission  is  proposing  that  the  Community  would  make  available  to  Bosnia  and 
Herzegovina  a  macro-financial  assistance  in  the  amount  of  up  to  ECU  60  million, 
corresponding  to around  50% of  the estimated  remaining  financing  gap  for  1998.  Taking 
into  account  the  low  level  of  income  in  Bosnia  and  I Ierzegovina  and  the  country's 
eligibility  to  the  concessional  resources  of  the  World  Bank  (IDA),  the  Community's 
assistance  should  include  a  substantial  grant  element.  It  is  thus  proposed  that  the  loan 
component  of  this  assistance  would  amount  to  a  maximum  of  ECU  30  million,  to  be 
complemented  by  a  grant  of  up  to  ECU  30  million.  The  proposed  duration  of  the  loan 
component  is of  fifteen  years.  It  takes  into  account  the  medium-  and  long-term  balance-
of-payments  outlook  for  Bosnia  and  I Ierzegovina,  which  is  expected  to  face  substantial 
financing  needs  for  the years to come. 

The  assistance  would  be  granted  in  the  context  of  the  present  SBA  and  would 
complement  resources  made  available  by  the  International  Financial  Institutions  and 
bilateral  donors. 

The  assistance  would  be  released  in  at  least  two  tranches  subject  to  a  satisfactory  track 
record  of  the  country's  macro-economic  programme  agreed  with  the  IMF  and  the 
observance  of  specific  economic  policy  conditions.  Its  effective  implementation  would 
its  outstanding 
take  place  only  after  Bosnia  and  Herzegovina  has  fully  discharged 
financial  obligations  towards  the  Community  and  the  ElB,  stemming  from  previous  EIB 
loans.  The tranches  are expected  to be made available  in  laic  1998 and  early  1999. 

As  in  the  case  of  similar  operations  in  favour  of  other  partner  countries,  the  Community 
would  provide  the  loan  element  through  market  borrowing  with  a  guarantee  by  the 
general  budget. 
the 
Community.  The  borrowing  and  lending  operations  would  be  perfectly  matched  and 
without  any  commercial  risk  for the  Community. 

Bosnia  and  Herzegovina  would  subsequently  borrow  from 

In  accordance  with  the  Guarantee  Fund  mechanism,  the  budgetary  implications  of  a 
decision  to  make  available  a  loan  of  up  to  ECU  30  million  to  Bosnia  and  Herzegovina 
would  imply  an  ECU  4.2  million  provisioning  of  the  Fund  to  be  drawn  from  the  1998 
reserve  for  guarantees  relating  to external  actions. 

As  for  the  grant  component  of this  assistance  and  without  prejudice  to the  competence  of 
the  budgetary  authority,  the  Commission  considers  that  given  the  constraints  established 
by  the  present  financial  perspective,  this  part  of  the  assistance  could  not  be  entirely 
financed  in  1998  and  would  have  to  be  implemented  in  at  least  two  instalments  of 

6 

maximum  ECU  15 million each, respectively  in late  1998 and early  1999. The necessary 
budgetary  resources  to  this  end  would  be  found  by  redeployment,  within  the  existing 
limits of Category 4 of the financial perspective for the 1995-1999 period. 

Proposal  (or a 

COUNCIL  DECISION 

providing  macro-financial  assistance 
to Bosnia and  Herzegovina 

II IE COUNCIL  OF TI IE EUROPEAN  UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article  235  thereof, 

I laving  regard  to the proposal  of the  Commission, 

I laving  regard  to the opinion  of the European  Parliament1, 

Whereas  the  Commission  has  consulted  the  Monetary  Committee  before  submitting  its 
proposal; 

Whereas  Bosnia  and  Herzegovina  is  undertaking  fundamental  institutional  and  political 
reforms  to establish  common  institutions  and  policies;  whereas  Bosnia  and  Herzegovina 
is  making  substantial  efforts  to  promote  economic  reform  and  establish  an  open  market 
economy; 

Whereas  within  the  Regional  Approach  defined  by  the Council,  it  is desirable  to  support 
efforts  made  to  ensure  a  stable  political  and  economic  environment  in  Bosnia  and 
Herzegovina,  with  a  view  to  evolving  towards  the  development  of  a  full  co-operation 
relationship  with  the  Community; 

Whereas  financial  assistance  from  the Community  shall be  instrumental  in supporting  the 
implementation  of  common 
in  Bosnia  and  Herzegovina 
institutions  and  policies 
consistent  with  the  Dayton  peace  agreement,  while  strengthening  mutual  confidence  and 
bringing  Bosnia  and  I lerzegovina closer to the  Community; 

Whereas  Bosnia  and  Herzegovina  has  agreed  with  the  International  Monetary  Fund 
(IMF) on  a comprehensive  set of economic and  institutional  policy  reform  measures  to be 
supported  by  a  12-month  upper  credit  tranche  Stand-By  Arrangement  (SBA);  whereas 
the  SBA  shall  be  followed  or  replaced  by  an  Enhanced  Structural  Adjustment  Facility 
(ESAF); 

Whereas  Bosnia  and  Herzegovina  has  agreed  with  the  World  Bank  on  a  set  of  structural 
adjustment  measures  to  be  backed  by  two  highly  concessional  Structural  Adjustment 
Loans  and  Credits  in  the  areas  of  public  finance  reform,  and  enterprise  and  banking 
privatization; 

Whereas  the  authorities  of  Bosnia  and  Herzegovina  have  requested  financial  assistance 
from  the  international  financial  institutions,  the  Community,  and  other  bilateral  donors; 

whereas,  over  and  above  the  estimated  financing  which  could  be  provided  by  the  IMF 
and  the  World  Bank,  an  important  residual  financing  gap  remains  to  be  covered  in  the 
coming  months  in  order  to  strengthen  the  country's  reserve  position  and  support  the 
policy  objectives  attached  to the authorities'  reform  effort; 

Whereas  at  the  fourth  Donors'  Pledging  Conference  on  Bosnia  and  Herzegovina  on  May 
7-8,  1998,  the  international  community  welcomed  the  agreements  reached  with  the 
Bretton  Woods  institutions  and  decided  to  strongly  support  the  economic  reform  and 
reconstruction  programmes  of  Bosnia  and  Herzegovina  in  the  form  oi'  firm  financial 
pledges; 

Whereas  the authorities  of Bosnia and  Herzegovina  have committed  to  fully  discharge  all 
outstanding  financial  obligations of all public entities of Bosnia and  Herzegovina  towards 
the  European  Community  and  the  European  Investment  Bank,  and  to  accept  the 
responsibility  by way of guarantee of those obligations  that are not yet due; 

Whereas  a  Community  macro-financial  assistance  to  Bosnia  and  Herzegovina  is  an 
appropriate  measure  to  help  ease  the  country's  external  financial  constraints,  supporting 
the balance of payments and  strengthening  the reserve  position; 

Whereas  Bosnia  and  Herzegovina  being  a  low-income  country  eligible  to  highly 
concessional  loans  and  facilities  from  the  World  Bank  and  the  IMF,  the  Community 
macro-financial  assistance  shall  require substantial  elements of concessionality; 

Whereas  the  inclusion  of  a grant  component  in this  assistance  is without  prejudice  to  the 
powers of the budgetary  authority; 

Whereas this assistance  should be managed by the  Commission; 

Whereas the Treaty  does not provide, for the adoption  of this decision, powers  other  than 
those of Article 235, 

MAS DECIDED AS FOLLOWS: 

Article  I 

1. 

2. 

The Community  shall  make available  to  Bosnia and  I lerzegovina  a  macro-financial 
assistance  in  the  form  of  a  long-term  loan  and  a  straight  grant  with  a  view  to 
ensuring  a  sustainable  balance-of-payments  situation  and  strengthening 
the 
country's  reserve  position. 

The  loan  component  of  this  assistance  shall  amount  to  a  maximum  principal  of 
ECU  30  million  with  a  maximum  maturity  of  fifteen  years.  To  this  end,  the 
Commission  is  empowered  to  borrow,  on  behalf  of  the  European  Community,  the 
necessary  resources  that  will  be  placed  at  the  disposal  of  Bosnia  and  Herzegovina 
in the form  of a loan. 

3. 

The  grant  component  of  this  assistance  shall  amount  to  a  maximum  of  ECU  30 
million  for the  1998-99 period. 

4. 

5. 

1. 

2. 

1. 

2. 

The  Community  financial  assistance  shall  be  managed  by  the  Commission  in  close 
consultation  with  the  Monetary  Committee  and  in  a  manner  consistent  with  any 
agreement  reached  between  the  IMF and  Bosnia  and  Herzegovina. 

The  implementation  of  this  assistance  is  conditional  upon  clearance  in  lull  by 
Bosnia  and  Herzegovina  of  outstanding  due  financial  obligations  of  all  public 
entities  towards  the  Community  and  the  European  Investment  Bank  and  upon  the 
acceptance  by  Bosnia  and  Herzegovina  of  responsibility  by  way  of  guarantee  of 
those obligations  that are not yet due. 

Article 2 

The  Commission  is  empowered  to  agree  with  the  authorities  of  Bosnia  and 
Herzegovina,  after  consultation  with  the  Monetary  Committee,  the  economic  and 
the  Community  macro-financial 
institutional  policy  conditions  attached 
assistance.  These conditions  shall  be  consistent  with  the  agreements  referred  to  in 
Article  1(4). 

to 

the 
The  Commission  shall  verily  at  regular 
Monetary  Committee  and  in  co-ordination  with  the  IMF,  that  the  economic  and 
institutional  policy  in  Bosnia  and  Herzegovina  is  in  accordance  with  the  objectives 
of this macro-financial  assistance and that  its conditions are being  fulfilled. 

intervals,  in  collaboration  with 

Article 3 

The  loan  and  grant  components  of this  assistance  shall  be made  available to  Bosnia 
and  Herzegovina  in  at  least  two  successive  tranches.  Subject  to  the  provisions  of 
Article  2, the  first  tranche  shall  be  released  on  the basis  of  a  successful  completion 
of  the  first  review  of  the  12-month  SBA  between  the  IMF  and  Bosnia  and 
I lerzegovina, subject  to the provisions  of Article  1  (5). 

Subject  to  the  provisions  of  Article  2,  the  second  tranche  shall  be  released  on  the 
basis  of  a satisfactory  track  record  in  the  implementation  of  the  SBA  with  the  IMF 
and  not  before  three months after  the release of the  first  tranche. 

3. 

The funds  shall  be paid  to the Central  Bank  of  Bosnia  and  I lerzegovina. 

Article 4 

1. 

2. 

3. 

The  borrowing  and  lending  operations  referred  to  in  Article  1 (2)  shall  be  carried 
out  using  the  same  value  date  and  must  not  involve  the  Community  in  the 
transformation  of  maturities,  in  any  exchange  or  interest  rate  risks,  or  in  any  other 
commercial  risk. 

The  Commission  shall  take  the  necessary  steps,  if  Bosnia  and  Herzegovina  so 
requests,  to ensure  that  an  early  repayment  clause  is  included  in  the  loan  terms  and 
conditions and that  it may  be  exercised. 

At  the  request  of  Bosnia  and  I lerzegovina,  and  where  circumstances  permit  an 
improvement  in  the  interest  rate  on  the  loan,  the  Commission  may  refinance  all  or 
part  of  its  initial  borrowings  or  restructure  the  corresponding  financial  conditions. 
Refinancing  or  restructuring  operations  shall  be  carried  out  in  accordance  with  the 

10 

conditions  set  out  in  paragraph  1 and  shall  not  have  the  effect  of  extending  the 
average  maturity  of  the  borrowing  concerned  or  increasing  the  amount,  expressed 
at  the  current  exchange  rale, of capital  outstanding  at  the date  of  the  refinancing  or 
restructuring. 

All  related  costs  incurred  by  the  Community  in  concluding  and  carrying  out  the 
operation  under  this  Decision  shall  be borne  by  Bosnia  and  Herzegovina. 

The Monetary  Committee  shall  be kept  informed  of developments  in the  operations 
referred  to in paragraph  2 and  3 at least once a year. 

4. 

5. 

Article 5 

At  least  once  a year  the  Commission  shall  address  to  the  European  Parliament  and 
to  the  Council  a report,  which  will  include  an  evaluation  on  the  implementation  of 
this  Decision. 

I )one at 

For the  Council 
The  President 

11 

FINANCIAL STATEMENT 

1. 

Title of Operation 

Macro-financial  assistance to Bosnia and Herzegovina. 

2. 

Budget heading involved 

a) 

Grant component of the assistance 

Budget Heading; B7-5320. "Macro-financial  assistance to Bosnia and 
Herzegovina" to be created through the ASB n°  1/98. 

b) 

Loan component of the assistance 

Heading BO-210 reflecting  the European Community guarantee for 
borrowing programmes contracted by the Community to provide  financial 
assistance for Mediterranean non-member countries. 

3. 

Legal basis 

Draft  proposal  presented  by  the  Commission  for  a  Council  Decision  providing 
macro-financial  assistance to Bosnia  and  Herzegovina  in accordance  with  Article 
235 of the Treaty. 

4.  Description and justification  of the action 

a) 

Description of the action 

Provision of a Community  loan (to be financed by Community 
borrowings in the international capital markets) in the amount of up to 
ECU 30 million and a Community grant of up to ECU 30 million. 

b) 

Justification of the action 

The action is in support of Bosnia and Herzegovina's reform efforts  and 
the implementation of common institutions and policies, consistent with 
the Dayton peace agreement. The sustainability of the beneficiary 
country's macro-economic stabilisation efforts  and economic and 
institutional reforms heavily depends on external financial  assistance  from 
official  sources, at concessional terms. 

5. 

Classification  of the expenditure 

a) 

b) 

Grant component : non compulsory expenditure,  differentiated. 

Loan component : obligatory. 

12 

6.  Nature of the expenditure 

a) 

b) 

Straight grant  (100% subsidy),  which  would  be  released  in  at  least two 
successive instalments. 

Potential  activation  of  budget  guarantee  for  the  Community  borrowing 
aimed to fund the loan. 

7. 

Financial impact 

a) 

Method of calculation 

The evaluation of the amount of the assistance deemed necessary is based 
on the present estimates of the beneficiary country residual external 
financing  needs (see point 4 in the proposal). 

For the loan component of the assistance, a token entry is proposed given 
that the amount and timing of any call on this budget line cannot be 
calculated in advance and because it is expected that the budget guarantee 
will not be called. 

b) 

Effect of the action on intervention credits 

The budget entry corresponding to the grant component of the assistance 
will be activated subject to compliance with a number of policy conditions 
to be agreed with the authorities of the beneficiary country. 

The budget entry reflecting the budget guarantee for the loan component 
of the assistance will be activated only in the case of an effective call on 
the guarantee. 

c) 

Financing of intervention 

(i) 

Grant 

Budget  line  B7-532,  initially  established  with  a  p.m.,  will  be 
provisioned through a transfer of appropriations from budget lines 
B7-541  and  B7-543  devoted  to  ex-Yugoslavia.  However,  if 
necessary  and  on  an  exceptional  basis,  an  amount  of 
appropriations for commitments  of about ECU  15 millions  could 
be  mobilised  by  the  end  of  1998  within  the  existing  limits  of 
category 4. 

13 

The  following  schedule  of  appropriations  is  proposed  (in  current 
ECU): 

[ 

1998 

"1999 

Commitment appropriations 

Payment  appropriations 

15 

0 

15 

30 

(ii) 

Eventual  call  on the budget  guarantee 

Recourse  to the Guarantee Fund established  by Council  Regulation 
(EC,  EURATOM)n0  2728oT3l  October  1994 

In case the Guarantee  Fund did  not contain  sufficient  resources, 
additional  payments  would  be called  up from  the budget  by 
transfer: 

•  Of any  margin  remaining  in the Reserve  for  guarantees; 

•  Of  any  late  payments  to  the  budget  for  which  the  budget 
guarantee  has  been  activated  (under  Article  27(3)  of  the 
Financial  Regulation); 

•  Of  any  margin  available  under  the  ceiling  of  category  4  of  the 

financial  perspectives or redeployment  therein. 

In order  to  fulfil  its obligations,  the  Commission  can  provisionally 
ensure  the  debt  service  with  funds  from  its  treasury.  In  that  case, 
Article  12 of the Council  Regulation  (EC,  EURATOM)  n°l 552/89 
of 29  May  1989 will  apply. 

'raud  prevention  measures 

The  funds  will  be  paid  directly  to  the  Central  Bank  of  the  beneficiary  country  only 
after  verification  by  the  Commission  services,  in  consultation  with  the  Monetary 
Committee  and  in  liaison  with  the  IMF  services,  that  the  macro-economic  policies 
implemented  in  these  countries  are  satisfactory  and  that  the  specific  conditions 
attached  to this assistance  are fulfilled  (see article 2 of the  decision) 

Elements of cost-effectiveness  analysis 

a) 

Grounds for  the operation  and  specific  objectives 

By  supporting  Bosnia-Herzegovina's  macro-economic  reform  efforts  and 
complementing  financing  by the  International  Community  provided  to  this 
country  in the context  of the  IMF-supported  programme,  this  assistance 
would  underpin  its transition  towards a market  economy. 

The present  assistance  will  only  be mobilized  on the proviso  that the 
beneficiary  country  fully  discharges  its outstanding  due  financial 
obligations  towards  the Community  and the  European  Investment  Bank. 

b) 

Monitoring  and  evaluation 

This assistance  is of macro-economic  nature and  its monitoring  and 
evaluation  is undertaken  in the  framework  of the  IMF-supported 
adjustment  and  reform  programme  that  the beneficiary  country  is 
implementing. 

The monitoring of the action  by  the Commission  services  will  take  place 
on  the  basis of a genuine system  of macro-economic  and structural  policy 
indicators to be agreed  with the authorities of the beneficiary  country.  The 
Commission  services will also remain  in close contact  with  the IMF  and 
World  Bank  services and to benefit  from  their assessment  of the  recipient 
country's  stabilization  and  reform. 

An annual  report, which  will include an evaluation  of the  implementation 
of this operation, to be presented  by the Commission  to the  European 
Parliament  and  to the Council  is foreseen  in the proposed  Council 
decision. 

' ^  Administrative  expenditure 

Actual  mobilization  of the necessary  administrative  resources  will  depend  on  the 
Commission's  annual  decision on the allocation  of resources, taking  into  account 
the number of staff  and additional  amounts authorized  by the budgetary  authority. 

10.1  Effect  on the number of posts 

Type of  post 

Staff  to be assigned  to 
managing  the operation 
Temporary 
Permanent 
posts 

0,5 

Officials  or 
A 
temporary 
B 
staff 
C 
Other  resources 

Total 

0,5 

Source 

Duration 

Additional 
resources 

Existing 
resources  in 
the  IXJ  or 
department 
concerned 

0,5 

1 year 

15 

10.2  Overall financial impact of human  resources 
10.2  Overall financial impact of human resources * 
10.2  Overall financial impact of human  resources 

Officials 
Officials 
Officials 
Temporary  stall 
Temporary  stall 
'Temporary slaIV 
(Mhcr resources (.miu.iwiMKi^-i in-line) 
(Mhcr resources (.miu.iwiMKi^-i in-line) 
(Mhcr resources (.miu.iwiMKi^-i in-line) 

Amounts 
Amounts 
Amounts 
54 000 
54 000 
54 000 

XT 
XT 
I XT 
Method  ol'calculation 
Method  ol'calculation 
Method  ol'calculation 
0.5x  108 000 
0.5x  108 000 
0.5x  108 000 

Total 
Total 
Total 

54 000 
54 000 
54 000 

By using existing resources required to manage the operation (calculation based 
By using existing resources required to manage the operation (calculation based 
By using existing resources required to manage the operation (calculation based 
on titles A-1, A-2, A-4, A-5 and A-7) 
on titles A-1, A-2, A-4, A-5 and A-7) 
on titles A-1, A-2, A-4, A-5 and A-7) 

10.3 Other administrative expenditure as a result of the operation: Nil 
10.3 Other administrative expenditure as a result of the operation: Nil 
10.3 Other administrative expenditure as a result of the operation: Nil 

16 
16 
16 

ANNEX 

BUDGETARY  RESOURCES  NECESSARY  FOR THE PROVISIONING  OF THE 
GUARANTEE  FUND IN  1998 AND MARGIN UNDER THE RESERVE  FOR  LOANS 

AND LOAN GUARANTEES  IN FAVOUR OF THIRD  COUNTRIES 

(IN I  OU MU  I ION) 

Operations 

Basis of the 
Calculation1 

Provisioning  of 
Mlanâl 

Reserve 
Margin 

Residual  lending 
capacity4 

338,0 

2414 

Decided  operations 

Project-related  assistance 

EIB/CEEC 
EIB/PVDALA 
EIB/SOUTH AFR. 
TIB/MED 

Macro-financial  assistance 

Algeria  (îïtispeusiou) 

Proposed  operations 

Project-related  assistance 

EIB/FYROM 5 
EIB/Turkey  6 
EIB/ Croatia  6 
EJB/Bosnia87 
EURATOM8 

Macro-financial  assistance 

Ukraine-Ill  s 
Albania5 
Bosnia  5 

665.7 
190.55 
17,5 
728,6 

93,2 
25.46 
2,45 
102,00 

244,8 
219,3 
2t6,9 
114,9 

100 

14,00 

I2H.9 

42 
105 
56 
7 
260 

150 
20 
30 

5,88 
14,70 
7,84 
0,98 
36,40 

21,00 
2,80 
4,20 

123,0 
108,3 
100,5 
99.5 
63,1 

42,1 
39,3 
35,1 

301 
281 
251 

1 

4 

7 

The basis  of calculation represents  70% of the nominal amount of the EIB loans and  100% of the macio-financial assistance  loans. 
According  lo  the;  pmvisioniug  uiles  provided  in  the  Council  regulation  ( 1 0,  Euratom)  n"  2728/94  ol  :<1 
Oclohei  1994 
the  I und  havHig  leached  its  large)  amount  in  1997.  HK;  rate  ol  provisioning  toi  new 
npeialtoiis has been deueased  from  15 % lo  14% 

Reserve  amount  in  1998 under  the hnancial perspective 
I or  100% guarantee  loans. 
Commission  proposal 
Tentative  estimates. 
On the basis of loans to be signed in  1998. 

'> 

ISSN 0254-1475 

COM(98) 652 final 

DOCUMENTS 

EN 

11  09  01  10 

Catalogue number  :  CB-CO-98-656-EN-C 

Office  for Official  Publications of the European Communities 

L-2985  Luxembourg 

fS1