February 11, 2019 / 3:29 PM / 5 months ago

Bosnia's govt. formation delay may hit growth-c.bank governor

* Govt. formation delay may affect rating, investment

* C. bank unlikely to invest in local firms despite pressures

* Growth seen broadly at about 3 percent in 2018/2019

By Daria Sito-Sucic

SARAJEVO, Feb 11 (Reuters) - Delays in the formation of governments in Bosnia since October’s elections may slow structural reforms needed to spur economic growth, affecting the country’s rating and investment, the central bank governor said on Monday.

Four months after presidential and parliamentary elections, Bosnia still does not have a new central government due to bickering between its rival ethnic leaders, which has also halted government formation in the Bosniak-Croat Federation, one of the Balkan country’s two autonomous regions.

“It is important to form a government as soon as possible to resume projects that have been halted and which are a precondition for the growth,” Senad Softic said in an interview, referring to major infrastructure projects for which about 1 billion euros ($1.13 billion) had been secured.

The IMF, EU and other international lenders have frozen aid for Bosnia since 2017 after agreed economic reforms were interrupted by internal political bickering and ethnic tensions, which intensified during campaigning for elections and afterwards.

Softic said that some reforms Bosnia made last year as well as favourable economic growth in neighbouring countries - its main trade partners - provide a good basis for its economy to grow this year.

“I expect that economy will grow in 2018/2019 at the same level as in the previous years - about 3 percent, which is not enough,” Softic said.

Inflation, which stood at 1.4 percent in 2018 and has been continuously low, should not rise beyond 2 percent until 2023, he added.

Bosnia’s central bank, which manages the currency board pegging the local currency Bosnian marka to euro at a fixed rate, has been under political pressure to divert foreign currency reserves it keeps at major foreign banks to support local firms.

Under the currency board arrangement, the central bank may only invest in securities of highly-rated euro zone countries that guarantee adequate capitalisation and liquidity, Softic said.

“Investing in local debt or financing local projects is not seen as a guarantee that the central bank will be able to service its monetary obligations,” he said.

Softic said that banks in Bosnia were profitable and liquid, recording in 2018 a pre-tax net profit of 322.5 million Bosnian marka ($187 million), at about same level as in the previous year. The rate of non-performing loans decreased in the 3Q 2018 by 65 basis points to 9.4 percent of total credits, he added.

Softic said that direct foreign investment has been rather low for years, with retained earnings, mainly from banks, accounting for more than a half of recorded investment. ($1 = 0.8846 euros) ($1 = 1.724 Bosnian marka) (Reporting by Daria Sito-Sucic; Editing by Toby Chopra)

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