Representatives of the European Commission and the institutions of Bosnia and Herzegovina met in Banja Luka to discuss the level of approximation and transposition of the EU rules in the fields of Economic and Financial Issues.

Progress of Bosnia and Herzegovina in its European Integration process depends on the country’s fulfilment of the requirements of the Stabilisation and Association Agreement (SAA) with the EU.

The delegations of the European Commission and of Bosnia and Herzegovina (BiH) reached the following conclusions:

The Commission welcomed the updated medium-term macroeconomic scenario that was provided before and presented during the meeting but stressed downside risks related to it and recommended the development of a risk mitigation strategy.

The Commission noted that the incomplete structural reform agenda and the low quality of public finances act as an impediment for laying the foundation for sustainable and more domestic-driven growth in Bosnia and Herzegovina. The Commission encouraged BiH to undertake further efforts in its structural reforms to improve the business environment and to enhance domestic sources of growth. This includes, inter alia, reforms increasing labour market participation, pension reform in the Federation of Bosnia and Herzegovina (FBiH) and the continuation of reforms of the system of social benefits to increase the propensity to work. The Commission took note of the structural reform programme of the Republika Srpska (RS) and that the FBiH plans to adopt a comprehensive economic reform programme by the end of June.

The Commission expressed its concern that no agreement had been found for the adoption of the 2012 state budget and a fully-fledged medium-term fiscal framework. This situation seriously hampers transparency, sustainability and reliability of public finances in BiH. The Commission urged all parties involved to take all necessary steps to adopt the Global Fiscal Framework 2012-2014. The Commission took note that preparations have started for the Global Fiscal Framework 2013-2015. The Commission recalled that the adoption of the Global Fiscal Framework was also one of the main conditions to release the Commission’s Macro Financial Assistance. The Commission took note of the engagement that the fully-fledged Global Fiscal Framework 2012 – 2014 and the 2012 state budget would be adopted within a few weeks.

The Commission welcomed the authorities’ willingness to launch discussions with the International Monetary Fund on a new funding agreement, which will enhance the credibility of economic policy, while being also a precondition for the release of the Commission’s Macro Financial Assistance. The Commission noted that the Macro Financial Assistance expires in early November, thus implying that the authorities should be able to demonstrate compliance with the conditions and make a payment request in early August, at the latest.

The Commission highlighted that BiH needs to improve the quality of public finances by reducing the currently large public sector as well as by shifting public funds to more growth-enhancing activities. The Commission underlined that BiH, FBiH and RS authorities need to harmonise their methodology of fiscal statistics in order to increase the transparency of fiscal policy and to facilitate the analysis and policy-making. The Commission expressed its concern that the generous system of social benefits and privileged pensions still lacks adequate targeting.

 The Commission noted that the labour market is not functioning properly and encouraged the authorities to undertake or commission a comprehensive study analysing the structural causes of market rigidities and the reasons for the low level of job-creation.

The Commission took note of the difficulties with regard to the privatisation of state-owned enterprises and recommended developing a comprehensive and realistic strategy for the privatisation of state-owned enterprises and the reform of public undertakings that provide public services.

The Commission praised the functioning of the currency board and the exceptionally good cooperation of the banking supervision agencies of the two entities as a model for cooperation in all sectors.

The Commission welcomed that some progress was made in adopting secondary legislation for Public Internal Financial Control, while taking note that the administrative capacity in the Federation in this area needs to be strengthened as a matter of urgency. The Commission emphasised that the Co-ordination Board of the three Central Harmonization Units (CHU) providing for a single platform for Public Internal Financial Control (PIFC) in BiH needs to increase its activities.

The Commission reiterated its concern that the external Audit Offices remain subordinated to the executive and no steps are envisaged to anchor them independently in the constitutional order. This is interfering with the independence of the Audit Offices. This issue was raised already in 2010 and 2011 in the same Sub-committee.