In the red, in the Balkans

The global financial crisis has both magnified and exacerbated the shortcomings of the Federation of Bosnia and Herzegovina.

By Ian Bancroft

Following on the heels of Serbia’s request for assistance from the International Monetary Fund (IMF), agreement has finally been reached for a new stand-by arrangement that will give Bosnia and Herzegovina access to €1.2bn of support over the next three years. The agreement is conditional, however, on the enactment of a series of testing reforms, primarily designed to reduce excessive public spending that continues to undermine the financial viability of the country. With reductions in administrative expenses largely dependent upon the stagnant constitutional reform process, the socioeconomic ramifications of curtailing social transfers, especially in the Federation of Bosnia and Herzegovina, will have a destabilising impact on the political environment. With unemployment rising and protectionist measures currently under consideration, the global financial crisis has further exposed Bosnia and Herzegovina’s economic and structural frailties.

Under the agreement with the IMF, the federation is set to receive two-thirds of the available support, with the remaining third going to Republika Srpska. Such assistance, however, will be confirmed only once strict conditions, particularly with respect to public expenditures, have been met. According to the IMF, Bosnia and Herzegovina’s respective levels of government should reduce their consolidated budgets by a combined total of €348m, with the Federation expected to contribute the bulk of the savings, Republika Srpska shedding €73m, the state some €20m and Brcko District around €5m. The head of the IMF mission to Bosnia and Herzegovina, Costas Christou, has warned that a “decisive package of measures” would be required.

In response to the crisis, Republika Srpska has already cut the salaries of government and public sector employees, and has reduced public spending to below 40% of gross domestic product, as advised by the IMF. Important questions remain, however, about the capacity of the federation to implement the IMF‘s tough fiscal requirements. With the burdensome administrative expenses of the federation’s cantonal structure seemingly resistant to change, especially in the short-term, attention must shift to the spiralling system of social transfers that has left the entity on the verge of bankruptcy, with a €71m short-term credit from local banks necessary to cover part of a backlog of payments from 2008.

Tackling the system of social payments through deeply unpopular measures, however, will only further fuel the already prolonged crisis in the federation, with the current federation government on the verge of collapse in the face of protests by war veterans and invalids’ associations determined to protect their respective constituencies from benefit cuts. With internal political wrangling undermining the government’s capacity to lead a much-needed reform agenda, further social unrest seems inevitable in the face of the IMF‘s requirements and insufficient steps to mitigate the effects of the economic crisis.

As recent statistics from the State Employment Agency show, about half a million people are now registered as unemployed – an unemployment rate of around 40% – with some 35,000 losing their jobs in the first quarter of 2009. The dire economic situation has prompted protectionist responses, with the parliament of Bosnia and Herzegovina adopting in its first reading a measure to re-introduce customs duties on certain goods, including meat and dairy products, in order to protect domestic farmers from competition from Croatia and Serbia – which Mladen Zirojevic, the minister for foreign trade, described as “a direct violation of CEFTA” (the Central European Free Trade Agreement). With exports, particularly of metals and industrial output continuing to plummet, and domestic consumption showing signs of further weakening, Bosnia and Herzegovina’s economy is expected to contract by almost 3% this year, according to the IMF.

The global financial crisis has both magnified and exacerbated the inherent shortcomings of the federation, whose dysfunctionality has severe ramifications for the overall stability of Bosnia and Herzegovina. Should the federation fail to fulfil the conditions stipulated by the IMF, then the entire country could be denied access to vital financial assistance, sparking an economic and political crisis that would further complicate the process of finding a mutually-acceptable constitutional settlement. As Joseph Rothschild wrote a decade before the disintegration of the former Yugoslavia, “politicised ethnic assertiveness is in large measure but a reflection of the contemporary state’s … crisis of legitimacy”. If Bosnia and Herzegovina is to avoid a similar crisis, then it must immediately contend with the deficiencies of the federation that continue to undermine the long-term viability of the very state itself.

This article first appeared on The Guardian’s Comment is Free (CiF) section on Monday 18th May.

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