Representatives of the European Commission and the institutions of Bosnia and Herzegovina met on 4-5 May 2015 in Brussels for the 7th Sub-committee meeting on Economic and Financial issues and Statistics since the entering into force of the Interim Agreement in 2008. This was the 3rd of the Sub-committee meetings of this 7th cycle so far, although the first Sub-committee could not take place due to internal disagreements in Bosnia and Herzegovina. It was chaired on the Commission side by Mr Peter Bekx, Director in the Directorate General for Economic and Financial Affairs, Directorate for International economic and financial relations, global governance and on the side of Bosnia and Herzegovina by Ms Vera Letica, Assistant Minister from the Bosnia and Herzegovina Ministry of Finance and Treasury. The authorities of Bosnia and Herzegovina reported on the economic and fiscal situation of the country, to which the Commission responded inter alia as follows:
• The Commission noted that 2014 was a particularly challenging year for Bosnia and Herzegovina as heavy spring floods in May caused significant damages and losses of up to 15% of GDP. In addition, the enduring government formations following the general elections in October put an additional pressure on maintaining the political and economic stability of the country.
• The Commission welcomed the measures taken towards an improved budget management over the past year, namely the adoption of Law on Budgets in the Federation to improve fiscal responsibility and coordination also with lower levels of government. However, it stressed the importance of making efforts to enhance its efficient implementation. The Commission welcomed the plans to adopt the Law on Fiscal Responsibility in Republika Srpska, especially including the establishment of a Fiscal council and the adoption of a fiscal rule. The Commission encouraged the authorities to tackle deficiencies in budget planning and fiscal coordination and develop further the medium-term fiscal strategy in order to strengthen its role as a fiscal coordination tool.
• At the same time the Commission expressed its concerns regarding the widening of fiscal imbalances, although it acknowledged that this was partly related to emergency financing and reconstruction activities following the spring floods. It urged the authorities of Bosnia and Herzegovina to take the necessary steps and successfully complete the ongoing consultations with the IMF eventually allowing for paving the way for a new programme with the Fund. This certainly would prove essential given the tight fiscal space as the country has virtually no access to international capital markets.
• The Commission stressed that a key challenge for the country is to ensure sustainable public finances in a growth-friendly way. Moreover, it emphasized that the Commission’s policy guidance sent for the first time by the former Vice-President Rehn to the authorities of Bosnia and Herzegovina at the end of June 2014, featured structural issues prominently. The Commission reiterated that in particular, the restructuring and streamlining of the public sector and a better targeting of social benefits are key prerequisites for laying the foundation for sustainable and domestic-driven growth in the country.
• The Commission underlined that Bosnia and Herzegovina urgently needs to enhance its long-term growth potential. Although some progress to improve the business environment has recently been achieved, both in Republika Srpska and in the Federation, Bosnia and Herzegovina is urged to accelerate its efforts and to take decisive steps to lower business barriers, to facilitate the issuance of construction permits and to reduce para-fiscal charges. It also called for addressing the deficiencies in the functioning of the labour market, and raising the quality of the human capital, thus laying ground for the self-sustained strengthening of the economy’s competitiveness.
• With regard to Public Internal Financial Control, the importance of further coordinated progress in constructing the required legal framework, the setup as well as the implementation of key financial management and control arrangements, has been underlined, as is the need for more outspoken political support of the reforms. The progress noted in the set-up of the internal audit function is welcomed; however levels of staffing should not be too low. In the area of External Audit, the lack of Constitutional anchorage of financial and organisational independence of the Supreme Audit Institutions remains a concern.
• As regards statistics, the Commission urged the three statistical institutes to resolve the outstanding methodological issues related to the population census and finalise the remaining stages of data processing in line with the recommendations of the International Monitoring Operation and the census law. It also requested the authorities of Bosnia and Herzegovina to break the stalemate on preparations of an agricultural census, preferably by agreeing on a state level law, which would ensure a single country-wide methodology and the necessary financing.