Transcript Bosnia and Herzegovina –Economic Reform: Achievements

Bosnia and Herzegovina –
Economic Reform:
Achievements, Challenges
and Priorities
Consultative Group Meeting
Sarajevo
September 22-23, 2004
Outline of presentation
1. Main achievements to date and key
remaining weaknesses
2. Major challenges for achieving
sustained growth and higher
employment while increasingly
integrating into European structures
3. Selecting/designing priority reforms
for achieving these goals
MAIN ACHIEVEMENTS
AND KEY REMAINING
WEAKNESSES
Significant progress in reconstruction,
macro policy and state-building…
Post-conflict reconstruction supported by large
aid flows is nearing successful completion.
The currency board, backed by debt restructuring
and phased fiscal adjustment (to small surplus in
2003), laid the foundations for macro stability.
Recent advances in public financial management
(expenditure framework, tax policy) and statebuilding, including enhanced internal
harmonization and state-level coordination.
…and in some important but difficult
areas of structural reform…
Foreign trade extensively liberalized, including bilateral FTAs
with sub-regional trading partners, and enhanced access to
EU market (ATMs)
Developed a largely privatized competitive banking system,
including enforced regulatory and supervisory functions.
SMEs privatized and faced with hard budget constraints.
Reformed labor code.
Social protection (first pensions, recently veterans benefits).
MTDS and SAp.
…has already brought important
positive results
GDP trebled since 1995, extreme poverty eliminated
Much enhanced macro stability (inflation, reserves
and debt indicators, confidence in currency)
Some redirection of trade towards EU and Croatia
Foreign direct investment doubled from 2000 to
2003, reaching close to 5 percent of GDP. Total FDI
since the end of the war over US$1.6 billion
SME sector shows increasing promise (behaving
commercially, paying on time, creating new jobs)
However, significant
vulnerabilities remain…
Slowing growth, declining aid flows and large/persistent
current account deficit pose risks for sustained growth.
After a rapid initial burst, export growth has stagnated
and goods exports remain much too low (10% of GDP).
External/government creditworthiness remains elusive.
GDP still well below pre-war level, with 20% living
below poverty line.
Some 30% near-poor could slip into poverty were the
economy hit by a negative shock.
…and reforms are far from complete
Lost decade of war plus the twin challenge of
post-conflict reconstruction and transition still
leave BH quite far behind the most successful
Central and Eastern European countries.
Notwithstanding achievements, the track record in
structural policies is uneven, with partial reform in
many areas.
The agenda of integrating into European
structures lies largely ahead.
KEY CHALLENGES
Challenges are well described
in the MTDS
We focus on six:
Deepening macroeconomic adjustment
Reducing the size/improving the efficiency of
government
Accelerating export growth and deepening trade
integration
Restructuring the enterprise sector
Strengthening the business environment
Improving the functioning of the labor market
Macroeconomic adjustment
needs to be further deepened
Overarching challenge is increasing domestic savings to cut
current account deficit without harming investment,
economic efficiency
Public savings can be raised by further containing current
spending/GDP
Domestic claims resolution plan needs to be implemented
within agreed parameters
In the short-run, increasing private savings requires
controlling credit growth, primarily to household sector
Medium-term challenge is boosting corporate savings, i.e.
the profitability of BH companies
Attracting more FDI/other foreign savings also key to
external sustainability
Governments need to become
smaller/more efficient
Despite past gradual reduction, public spending still over 50 percent
of GDP, one of the highest levels in the world.
Post-DPA political/administrative structure plays a role, but much is
inefficient spending.
Need further rationalization targeted at current spending, esp. wage
bill, making room for MTDS/SAp priorities.
Transfers of responsibilities should be revenue-neutral
Within core public services, e.g. education or social protection,
expenditure allocation should be driven by efficiency/equity
considerations. Focus on education financing, welfare transfers to
households.
Also need to further enhance technical capacity and transparency,
reduce complexity of government, and continue improving
coordination between various levels of government (e.g. higher
education reform)
Further trade integration and private
sector reform are keys to export growth
Recent disappointing export performance can hardly be
attributed to a policy of liberalization/integration.
As nothing broken with the trade regime, BH should
build on initial achievements and selectively advance the
same agenda.
Need further progress in removing ‘behind the border’
barriers to using extensive market access (technical,
veterinary etc. standards; product certification; customs)
Further developing single economic space will also
stimulate cross-border trade.
Key to faster export growth is enterprise restructuring,
the business environment, and labor market (wage
competitiveness) which we turn to next.
An extensive remaining agenda of
enterprise sector reforms
Banking/SME successes not matched in broader enterprise sector, esp.
SOEs. Early (MVP) privatizations led to diluted ownership and weak
governance, soft budget constraints and weak profit drive. Large
privatization painfully slow, and exit so far rare. Need:
Faster, more transparent privatization to strategic owners.
Changes to encourage concentration of ownership in PIFs/MVP firms.
Range of corporate governance reforms to strengthen role of owners,
create incentives for efficiency gains.
Remove barriers to effective corporate restructuring.
Implementation of new bankruptcy laws (a major positive reform),
including active initiation of proceedings by government bodies/firms,
control of subsidies.
The business environment needs to
be significantly strengthened
While somewhat improved, it retains high barriers to entry and impediments
to business operation. Priorities include:
Complete new business registration system to smooth/lower cost of entry.
Improve functioning of legal system (esp. commercial courts, including
backlog) in protecting property rights and contracts.
Reduce economic policy uncertainty and corruption as most powerful
deterrents to business entry and development.
To reduce administrative barriers, streamline business inspection, incl. via
clear distribution of tasks across levels of government.
VAT introduction/ITA as particularly crucial with far reaching implications;
also level playing field in tax collection, follow by gradual reduction of tax
wedge on labor.
The labor market needs to be
made
more
flexible
Formal labor market is anemic, unemployment high (esp. for women
and youth), and informal economy may be gaining ground.
Despite relatively flexible labor laws, participation remains low,
pay/separation practices rigid, and wages grow faster than
productivity.
Problems compounded by weak firm-level discipline (by workers,
other creditors, management) and corporate governance.
Role of employers in collective bargaining needs to be enhanced.
A strict incomes policy needs to be applied in leading public
companies.
Minimum wage needs reform to promote competitiveness and
employment of vulnerable groups (women, youth).
Employment institutes/active programs also need restructuring.
Over time, reduce tax burden on labor.
SELECTING/DESIGNING
PRIORITY REFORMS
Reforms need to be selectively
chosen, flexibly implemented
The authorities have already taken many initiatives to
meet the noted challenges.
BUT envisaged actions are often too numerous to be
credible, starting with those in MTDS itself.
The vast scope of challenges calls for selectivity,
prioritization and sequencing.
Reforms must in turn be linked to and consistent with
MTEF and PIP
There is also a need to flexibly apply 4 different types of
approaches to economic policy
1. ‘Staying the course’
Means keeping the same policy direction in areas where
policies are broadly adequate, with selective further
deepening. For example:
Macroeconomic policy (rely on CBA as solid anchor
supported by continued fiscal consolidation and prudent
debt/borrowing policy).
Trade policy. Increased protectionism would backfire, so
continue and deepen liberal policies and market
integration.
Banking. Continue strengthening of supervision while
tightening credit policy.
2. Setting the right incentives
for the private sector
Accelerating progress on 16 prior requirements set forth in
the EC Feasibility Study, to open negotiations for a SAA
(extensive impact on business climate).
Tax reform (VAT, tax on labor) and creating level playing
field in tax collection.
Changing privatization/PIF laws to get core owners.
Corporate governance reforms.
Creating bankruptcy framework.
More flexible wage determination.
3. Getting out of the way
Proposed policies too often see a large and active role of
government. BUT government cannot fix everything and is
already big. Large gray economy shows entrepreneurial
activity which could flower if government got out of the
way. This includes:
Deregulation/streamlining the administrative framework
around the private sector (e.g. business registration,
licensing)
Trade liberalization
Reducing subsidies
Labor market flexibility
4. Intervening smartly in some areas
Areas where government must act decisively include:
Adjusting size/composition of public spending
Addressing domestic debt overhang
Creating institutions required to access export markets
Privatization/initiation of bankruptcy for companies with
large tax and contribution arrears
Anti-corruption efforts
Incomes policy for public sector companies
Reforming education system
Creating a new, more effective architecture for donor
coordination
Summary of key challenges
Deepening macroeconomic adjustment
Reducing the size/improving the efficiency
of government
Accelerating export growth and deepening
trade integration
Restructuring the enterprise sector
Strengthening the business environment
Improving functioning of the labor market