Representatives from 45 countries and 30 international organizations met in Brussels to pledge their support for the economic reform and reconstruction program of Bosnia and Herzegovina. This Fifth Donors’ Pledging Conference, co-hosted by the European Commission and the World Bank, was opened by European Commission Director Fabrizio Barbaso and World Bank Director Christiaan Poortman.

Bosnia and Herzegovina was represented by the Co-Chairmen and Vice Chairman of the Council of Ministers, Messrs. Silajdzic, Mihaijlovic and Tomic, the Prime Ministers of both Entities, Messrs. Bicakcic and Dodik, as well as ministers of the State and Entity governments.

The Conference heard a statement of the Presidency of Bosnia and Herzegovina which expressed their primary interest in integration with the international community, and in particular into European institutions. The Presidency pledged its intention to fully implement the Dayton-Paris Peace Agreement

The High Representative, Carlos Westendorp, gave a report on the status of civilian implementation of the Dayton Peace Agreement and noted that while Bosnia and Herzegovina was in a better situation than it had been a year ago, more could have been achieved with greater collaboration of the common institutions. He expressed the desire of ordinary people for peace and prosperity. He emphasized the need for full implementation of the Peace Agreement, including support for return of refugees and the internally displaced as well as critical economic and media reforms, including the new public broadcasting service, endorsed by the Madrid Peace Implementation Conference. He stated that only local authorities complying with the Dayton Agreement could expect the financial support of the international community. He further noted the decision taken on the status of Brcko on March 5 of this year, and reminded participants of the need for support for its revitalization. Participants warmly thanked Mr. Westendorp for his dedicated work over the last two years.

It was noted that the conference was taking place against the backdrop of crisis in the wider Balkan region. Participants noted the impact of the crisis on Bosnia and Herzegovina’s still-fragile recovery. This background made it all the more important for both the authorities and the donor community to continue their efforts to complete reconstruction and recovery and transform Bosnia and Herzegovina into a peaceful and prosperous market economy that will play a critical role in contributing to stability in the broader Balkan region.

The BH authorities expressed gratitude to the international community for its support thus far in implementation of the peace agreement and reconstruction program. They expressed their intention to strengthen the joint institutions and implement economic reforms, starting with quick and transparent enterprise and bank privatization, payments bureau reform, elimination of parallel institutions in the Federation and sound public finance management. Participants welcomed these remarks.

Remaining statements by participants covered four broad themes: (1) progress on reconstruction; (2) economic policy and institutional reforms; (3) the 1999 program needs (including the impact of the Kosovo crisis) and pledged amounts; and (4) medium-term challenges.

Progress on Reconstruction

Participants recalled that following the signing of the Dayton Peace Agreement, the international community endorsed a $5.1 billion medium-term Priority Reconstruction and Recovery Program. During 1996-98, donor countries and organizations had firmly committed $4.2 billion in concessional assistance to support Bosnia and Herzegovina’s reconstruction and recovery, of which about $2.8 billion had been disbursed in the past three years.

Three and a half years into program implementation, Bosnia and Herzegovina has achieved substantial results in terms of both reconstruction and economic recovery. Annual economic growth has averaged about 40 percent in real terms since 1995, and GDP reached US$4.1 billion in 1998, equivalent to roughly 40 percent of its pre-war level. Many community and infrastructure services had been restored to near prewar levels: water service had been restored to 90 percent of the prewar level, about 1,300 kilometers of roads had been repaired, and more than 1,000 primary schools and kindergardens had been rebuilt. Donor-funded lines of credit had boosted enterprise activity, the first postwar private foreign capital had been invested and unemployment had fallen to about 35 percent from its postwar high. Finally, donor assistance has continued to be essential for critical budget needs, including support for the most vulnerable groups – often provided through NGOs.

However, it was noted that even with very high growth rates – on an extremely low postwar base – Bosnia and Herzegovina remains the second poorest country in Europe. Moreover, growth remains largely driven by reconstruction, and an important agenda of policy reforms remains to achieve private-sector-led growth and reach sustainable recovery. Refugees and the displaced have not returned in the numbers hoped – in particular minority returns – which hampers development. Finally, while reconstruction has advanced, it is not yet complete – and lags in particular in housing, community services and in the Republika Srpska more generally. Much remains to be done both in 1999 and in the years beyond.

Economic Policy and Institutional Reforms

It was noted that BH had made progress toward a sustainable market economy during 1998. The main achievements included the country-wide acceptance of the Konvertible Marka, the commitment to initiating privatization and strengthening the administration of government finances, including initiation of harmonized tax policies and budgets. Important progress had also been made toward the establishment of one economic space, including elimination of internal barriers to the movement of goods and people, a uniform tariff regime and trade policy, and inter-Entity cooperation on customs administration. Both Entities have now eliminated preferential trading arrangements with neighboring countries.

Participants welcomed progress made, however emphasized that even more could have been achieved with greater cooperation. A large unfinished agenda of economic reform and institution building measures remain and will be the primary tasks for the authorities in 1999 and the years beyond. While making generous pledges, many participants stressed the importance of demonstrable improvement by the authorities in meeting the commitments outlined in the Madrid Declaration. Many noted that disbursement of their funds would be conditioned on significant progress in the field of economic reform, media, rule of law, human rights and return of refugees.

The Bosnian authorities expressed their commitment to implementing near-term economic policy measures, including the key tasks of completion of payments bureau reform, quick and transparent privatization, judicial reforms, transparency and accountability of public management and pension and health reforms, among others. It also confirmed its commitment to minority returns. The authorities of Bosnia and Herzegovina were urged, in particular at this time of regional conflict, not to stray from the reform path.

1999 Needs and Pledges

External financing needs of about US$1 billion for 1999 were announced. It was also noted that an additional requirement of US$90 million in fiscal support would be needed to close Bosnia and Herzegovina’s budgetary gap for 1999 as a result of impacts of the crisis in the region. It was noted that near-term fiscal needs were particularly marked in RS.

The representative of the IMF explained that the impacts of the Kosovo crisis included financial and social impacts associated with the approximately 58,000 refugees from FRY, as well as broader trade-related impacts. The additional budgetary needs are due to costs associated with demand for additional security, health, education and other services in both Entities, as well as budgetary impacts caused by disruptions in economic activity and increased transport costs due to closing of certain transport routes. In addition, private investment was affected. It was also noted that if conflict persists, these impacts could actually be greater. Donors were urged to increase fiscal support to meet these additional needs, and to not allow program implementation to slip. It was noted that such sustained support would demonstrate the unwavering commitment of the international community and be a signal to the private sector.

Participants noted that 1999 was a transition year when Bosnia and Herzegovina needed to move from reconstruction to a more medium-term concern with sustainable economic development. For this transition to bear fruit, real ownership of the reform program was needed and implementation of the reconstruction program and donor coordination should increasingly be taken over by the authorities of Bosnia and Herzegovina. This will require more decisive efforts from the authorities to improve internal cooperation, strengthen the common economic institutions and take decisive reform measures. In this context, participants welcomed the authorities’ intention to prepare an economic development strategy.

The Conference heard pledges from delegations for assistance in 1999 reaching a total of US$1,052 million (Euro 992 million). Some US$917 million (Euro 864 million) was pledged for reconstruction activities and support to policy reforms. An additional US$135 million (Euro 128 million) was pledged for peace implementation activities. Finally, donors announced intentions regarding fiscal support towards the 1999 budget gap. Participants noted that while there remained a budgetary gap of some US$50 million, the announced intentions represent a positive start. Donors were strongly urged to return to their capitals and seek means of filling this remaining gap in the near term. Many participants expressed the need to turn pledges into firm commitments. With the commitment of these pledges, the external financing needs of the Priority Reconstruction Program of US$5.1 billion would have been met.

Medium-Term Challenges

Participants noted that as Bosnia and Herzegovina enters the last year of a successful reconstruction program, the key questions are how to sustain growth in the face of an inevitable decline in external concessional assistance, and how to ensure that the benefits of this growth are expanded. Reforms will be most needed in three areas to enable the country to grow as a thriving market economy:

• Continued strengthening of economic institutions and sound macroeconomic management, including a medium-term fiscal strategy that aims to smooth the adjustment as donor aid flows decline.

• Active private sector development, including policies aimed at stimulating private investment, banking sector reform, privatization of enterprises and banks and the start of utility privatization, and labor market reform, including non-discriminatory employment practices.

• Development of Bosnia and Herzegovina’s human capital and establishment of a fiscally affordable and equitable social protection system.