IMF warns Bosnia on privatization

SARAJEVO (Reuters) – The International Monetary Fund (IMF) urged Bosnia’s two regions on Friday to spend their privatization proceeds on infrastructure projects and public sector reform and not on day-to-day or one-off expenditures. Unless spent wisely, the cash from abroad could harm the economy by putting pressure on the budget, wages and prices, and hitting export competitiveness, it said in a monthly newsletter. The IMF said the country’s two regions, the Serb Republic and the Muslim Croat federation, should focus on tackling major structural moves like bolstering pension funds. «The entities do not have a stock of expensive debt that could be repaid, so a good option is to use the funds to finance the transition costs of reforming the pension funds, as was done in Bolivia, Estonia and Hungary,» it said. The two regions operate separate sell-off processes. The Serb Republic has earned 764 million euros ($1.05 billion) this year from the sale of its telecoms operator and oil industry. Its total proceeds amount to almost a quarter of its gross domestic product (GDP), the IMF said. The Muslim-Croat federation is exploring the idea of selling its two state telecoms firms. The selloff of its aluminium smelter Aluminij Mostar is also under way. The IMF said high-quality infrastructure projects would boost Bosnia’s competitiveness and improve the business environment, but using privatization cash as a one-off fix could be economically risky and potentially lead to overheating. «Using the money to finance current government spending, such as salaries and social transfers, should… be avoided as this makes the mistake of using one-off cash receipts to finance ongoing costs to the budget,» it said. «And depositing large sums of money with the domestic banking system could be destabilizing: It could accelerate already high rates of credit growth and banks’ undervaluation of credit risk, and overheat the economy.» The IMF expects Bosnia’s economic growth to remain at 6 percent, the same as in 2006. It said inflation had accelerated in recent months but remained in line with eurozone levels.