May 24, 2016 / 8:11 PM / a year ago

IMF says new loan deal, reforms key for higher Bosnia growth

A customer shops at a Bingo supermarket in Tuzla March 9, 2016.Dado Ruvic

SARAJEVO (Reuters) - Bosnia's economy could grow by 4 percent in the medium-term if authorities implement reforms agreed under a new, three-year loan arrangement worth 550 million euros ($612.76 million) reached with the IMF on Tuesday, a Fund official said.

Bosnian authorities agreed in a letter of intent on a set of structural reforms and measures to safeguard financial stability and fiscal prudence in order to win an IMF extended fund facility, with a grace period of 4-1/2 years, said Nadeem Ilahi, the head of an IMF mission visiting Bosnia.

"We see growth, if reforms are done, to be 4 percent over the medium term in the next 3-4 years," Ilahi told Reuters in an interview. "That's something that would be sustainable over a longer period."

Ilahi said the International Monetary Fund saw Bosnia's economic output, based on robust consumption, growing by about 3 percent in 2016 and in 2017. But he said the Balkan country needed to grow at a much higher pace to start converging with the standards of the European Union, which it aspires to join.

The reforms sought by the IMF are part of a wider program the European Union wants Bosnia to implement to further its bid to join the bloc, particularly on social welfare, pensions and health funding.

Nadeem Ilahi speaks at a news conference in Tirana December 17, 2013.Arben Celi

Ilahi said the agreement on a new deal was reached at the staff level but needed to be approved by the lender's Executive Board, which is due to consider it in July following the implementation of a number of measures.

The authorities are expected to improve the business environment through a better functioning of the labor market, restructuring and privatization of state-owned enterprises and cutting an employment tax, "which is extremely high", Ilahi said.

They should also reduce the size of Bosnia's multi-layer government and improve the quality of government spending by cutting a large public wage bill, improving tax collection and coordination among tax agencies, he added.

Ilahi stressed the importance of maintaining the currency board arrangement as an anchor of economic policy and safeguard of the central bank's independence, after some politicians had called for the bank's reserves to be used for budget support.

"In many ways, the IMF program is the first step that unlocks assistance from many partners, including the World Bank and the European Union," he said. "The hope is that the IMF agenda and push for reforms will bring additional investment."

Reporting by Daria Sito-Sucic; Editing by Gareth Jones

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