IMF to double funding for Bosnia over flooding

Reuters News
Posted: May 30, 2014 9:25 AM

By Daria Sito-Sucic

SARAJEVO (Reuters) - The International Monetary Fund is ready to double funding for Bosnia under its standby loan deal to help it cope with the effects of the worst flooding in living memory, an IMF official told Reuters on Friday.

The lender completed a 10-day visit to Bosnia on Friday to discuss its 380 million euro standby arrangement, which was frozen in February after economic reforms stalled, as well as the damage inflicted by the recent flooding.

"We reached agreements with the authorities on a set of policies that would allow us to complete combined sixth and seventh reviews (under the deal)," Ron van Rooden, the head of the IMF visiting mission, said in an interview.

The mission will propose that next month the IMF Executive Board increase the funding for Bosnia from the originally planned 95 million euros to a total of 190 million euro ($260 million), Van Rooden said.

He expected the national parliament to pass several outstanding laws next week that would allow the IMF to unfreeze its loan deal. They include a law raising excise taxes on fine cut tobacco, a law against money laundering and subsequent changes to a criminal code.

"Given the natural disaster that happened, the impact it will no doubt have on the economy and government finances, we want to help the governments to make sure they can continue to function ... and provide the governments with additional financing," Van Rooden said.

While Bosnia's economy was growing at around 2 percent before the floods, graft and 27.5 percent unemployment have stirred tensions. In February, these erupted in the worst unrest since the end of the 1990s war that broke up Yugoslavia.

Ethnic bickering among Bosnia's rival leaders has halted progress towards membership of the European Union and blocked EU funds.

Its two autonomous regions, the Bosniak-Croat Federation and the Serb Republic, are the main recipients of the IMF cash. They already needed the money to plug budget gaps which are set to widen further after the flooding.

Van Rooden said the regions will have to revise their budgets because revenues have already dropped substantially.

He said the IMF would cut its economic growth forecast for Bosnia to around 0.5 percent from 2 percent: "The growth will be affected this year but with more money coming in and the reconstruction process getting under way, next year actually growth will accelerate."

The lender also expects to substantially revise its target ceiling for Bosnia's budget deficit of 2 percent of GDP under the standby loan.

"When the revenues go down, the spending needs go up - that means a significantly higher deficit ... that is unavoidable in the situation when you need to deal with an impact of natural disaster," Van Rooden said.

The heaviest rainfall in more than a century caused rivers in Bosnia, Serbia and Croatia to burst their banks, sweeping away roads, bridges and homes.

The European Bank for Reconstruction and Development said on Thursday the damage from flooding in Bosnia could amount to 1.3 billion euros, or 10 percent of GDP. ($1 = 0.7345 Euros)

(Reporting by Daria Sito-Sucic; Editing by Zoran Radosavljevic and Ruth Pitchford)