BOSNIA AND HERZEGOVINA
 

Statement

by

Dr. Jadranko Prlic
Head of Delegation
 

International Conference on Financing for Development 

Monterrey, Mexico
22 March 2002


Excellencies,
Ladies and Gentleman,

It is a privilege to be here with all of you today, Heads of State and Government, the United Nations, International financial institutions, WTO, business sector and civil society, joined for the first time with a common objective- financing for development. Let me thank and congratulate our hosts, Mexico, and all those who have worked to bring this Conference to take place.

This conference constitutes a new and unique opportunity to develop a new paradigm for international cooperation. "Monterrey consensus" will allow a just sharing of the benefits of globalization to all nations and remove the poor nations from their present marginal role into active players in the process.

Building peace and fostering development in Bosnia and Herzegovina was a first such example of joint venture of international community and domestic forces. The thesis that the building of a new state was a joint project made itself felt mostly just on the example of economy. So only a week after the signing of the Peace Agreement was the First Donor Conference organised aimed at providing the initial funds for the reconstruction. The organisation of the subsequent great donor conferences (4) was entrusted to the European Commission and the World Bank on behalf of the international community.

Something unprecedented in human history happened: almost 60 countries and about 30 international organisations took part in the relief project for a country. The reconstruction activities, to large extent financed by international community, have produced re-starting of a part of our industrial production, trade and services as well as greatly improved infrastructure, particularly the telecommunication and energy sectors, and to some extent in the water supply, healthcare and education sectors.

Since the war, a combination of donor funded reconstruction and sound macro-economic performance have helped the recovery of BiH leading to average growth rates of 30% annually and an average inflation of 4%. Despite these achievements, BiH finds itself at a critical turning point, as the underlying foundations for developing a sustainable economy remain weak.

Economic growth since the war has primarily been driven by donor funded reconstruction and in the last two years GDP growth rates have been failing to one digit number. In terms of funding to fuel investment and economic growth, sources are beginning to dry up. The large amount of donor funding, since the war estimated at $5 billion, is beginning to decline as donor fatigue sets in and attention is diverted to other regions. The situation is compounded by negative trade balance, as imports continue to outstrip exports and the low level of Foreign Direct Investment.

As for the currently existing production capacities and those to be launched, results are below our expectations, causing a great unemployment rate (app. 40 %) and bellow an acceptable GDP level that has currently reached but a half of the pre-war GDP in Bosnia and Herzegovina.

It had been expected that the level of the GDP in Bosnia and Herzegovina, partly due also to the influx of such a large aid, would reach its pre-war level at the turn of the millennium. This failed to come true. The global strategy of economic development of BiH, adopted for the first time last year, forecasts that the 1990 level of GDP would be reached only in the end of this decade

The expected results in the economy of Bosnia and Herzegovina stayed away for three kinds of insufficiency: lack of political will, lack of knowledge, and non-existence of efficient or any institutions. The lack of political will was compensated by the function of international entities, especially by the activity of the High Representative. The local institutions started to be built impermissibly late. The transfer of all economic ideas was done from outside, through numerous international agencies, which, however, do not have a sufficient knowledge of the domestic circumstances nor of the domestic mentalities, and especially unknown to them are the local possibilities.

Since May 1998, Bosnia and Herzegovina embarked on an ambitious Programme of Economic Reforms, supported by the World Bank economic adjustment loan and the MMF stand-by arrangement. This Programme has the objective to create a single economic space of Bosnia and Herzegovina with a free trade and investment flows between its Entities, the harmonisation of legislation, as well as the harmonisation of taxation systems and institution building; to create a functional banking system; the privatisation and restructuring of enterprises; the restructuring of pension and health schemes; the implementation of a simplified customs system and the liberalisation of trade regime. The backbone of all these policies is the programme of macroeconomic stabilisation based on the existence of Currency Board.

After having received international technical and financial assistance in the last few years, Bosnia and Herzegovina must now assume greater responsibility for its economic and social development. Aimed at providing support for the programme of reforms, the following activities are already under way:
Decrease of wage taxes aimed at stimulating employment and reduction of grey labour. Other aims include further and gradual reduction of other business taxes, focusing on eventual fiscal and social consequences;
Privatisation programme to ensure fundamental transformation of the country's economy, which in itself should lead to a higher productivity and employment;
Package of labour laws completely in harmony with the International Labour Office (ILO) recommendations and very close to the similar national laws of the European countries. 
Reform of the Country's payment system is implemented;
Transparency and efficiency of public revenues has improved;
The Ministry of Treasury on the State level is established; 
State Border Service has been established;
Some results have been also achieved in the creation of appropriate regulatory institutional arrangements, necessary for providing efficient services provided by public companies in the transport, telecommunications and power supply sectors.

Ladies and Gentleman,
This year, we are accelerating the process of transition to the market economy, implying primarily elimination of excessively regulatory and administrative control. Likewise, we shall continue to make efforts in order to improve the quality of administrative management, to eliminate corruption and fraud, and to improve transparency in all aspects of transactions in commercial and public sector.

Under these circumstances, it becomes paramount to tackle critical structural reforms, which can break the vicious cycle of declining growth and rising unemployment and create the basis for sustainable development. These reforms include:
Developing a Single Economic Space in which laws, taxes and institutions are harmonised and there is free movement of goods, capital, labour and services between entities. 
Privatisation and creation of favourable environment for foreign investment that would, consequently, bring about development of private sector, to compensate for the decreasing inflow of international financial aid;
Improvement of public finances and efficiency of public institutions by:
- Improving the quality of public administration at all BH levels;
- Strengthening of the State institutions that should take over the responsibility for economic and political management;
- Tax reform throughout BiH;
- Improvement of tax collection;
- Cost-effective public expenditures;
Development of private sector (in this moment participate in the economy of B&H with 35%) and improvement of the regulatory environment;
Creation of a modern banking system with special emphasis on regaining the confidence in savings and its mobilisation for investment in production (domestic saving in the year 2000 was 1.6% of GDP that is considerably below the level which is necessary for self-sustainable economy);
Development of the sustainable social protection: to achieve this goal, a fundamental restructuring of social policy is necessary, social statistics. In this context, it is necessary to mention that we have initiated and undertaken the preparatory activities to draft the Strategy for Reduction of Poverty, with the World Bank support, engaging broad ranges of domestic governmental and non-governmental organization.

Mr. President,
I want to stress the importance of regional cooperation. The regional infrastructural projects (energy, transport, telecommunication, etc.) would provide for the basis to link the neighbouring countries, and consequently enhance their economic co-operation.

A great emphasis is put to the Memorandum of Understanding for the Creation of the Regional Free Trade Zones. The participating countries sign this Memorandum, and zones should be established by the end of this year. Creation of the customs free market of the South-East Europe, the region with the population of approximately 60 millions, opens enormous opportunities for the development of economy of the countries of this region. This would particularly open the avenue for foreign investment into the existing and newly launched industrial production capacities in Bosnia and Herzegovina, and this fully corresponds with the Strategy of Economic Development of Bosnia and Herzegovina.

Bosnia and Herzegovina, as part of Europe, is strategically interested in integration into the European Union, as the most successful organization in era of globalization.

There are a number of milestones for BiH to achieve before reaching this goal. Firstly, BiH needs to meet the targets set out in the 'Road Map to Europe' which involves starting the process of creating a single market based on a national regulatory framework and institutions that are harmonised with the body of EU laws and regulations. Secondly, BiH needs to make a successful transition to a market economy in order to create the basis for sustainable development. BiH enterprises need to be restructured and revived in a way that raises their ability to enter the global economy and withstand competitive pressures as well as to meet EU standards, for instance, related to the environment.

It is important to emphasise that Bosnia and Herzegovina already enjoys trade privileges with the European Union, to be extended in the future, parallel to the trend towards regional trade liberalisation. This development would provide great opportunity for foreign investment in Bosnia and Herzegovina, both from the East or the West, with future positive effects on the new business activities, with the aim to ensure "catching up" effect for Bosnia and Herzegovina as soon as possible.

The responsibility for economic and social development lies primarily on each country. But such ownership is able to provide results only by using effective interaction of all sources of finance, namely the mobilisation of domestic resourches, ODA, international trade flows for direct investment and debt relief.

This is the reason to support proposed outcome, which is going to get added value in approaching Summit about sustainable development in Johannesburg this autumn.

Lets make this year as a turning point in fight against poverty.



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