Bosnia and Hercegovina

Transcription

1 COUNTRY REPORT Bosnia and Hercegovina 4th quarter 1998 The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group. London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent Street The Economist Building 25/F, Dah Sing Financial Centre London 111 West 57th Street 108 Gloucester Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.171) Tel: (1.212) Tel: (852) Fax: (44.171) Fax: (1.212) /2 Fax: (852) london@eiu.com newyork@eiu.com hongkong@eiu.com Website: Electronic delivery EIU Electronic Publishing New York: Lou Celi or Lisa Hennessey Tel: (1.212) Fax: (1.212) London: Jeremy Eagle Tel: (44.171) Fax: (44.171) This publication is available on the following electronic and other media: Online databases Microfilm FT Profile (UK) NewsEdge Corporation (US) World Microfilms Publications (UK) Tel: (44.171) Tel: (1.781) Tel: (44.171) DIALOG (US) Tel: (1.415) CD-ROM LEXIS-NEXIS (US) The Dialog Corporation (US) Tel: (1.800) SilverPlatter (US) M.A.I.D/Profound (UK) Tel: (44.171) Copyright 1998 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author s and the publisher s ability. However, the EIU does not accept responsibility for any loss arising from reliance on it. ISSN X Symbols for tables n/a means not available; means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

3 Bosnia and Hercegovina 1 Contents 3 Summary 4 Political structure 6 Economic structure 7 Outlook for Review 11 The political scene 18 Economic policy 22 The economy 25 Foreign trade and payments 26 Business news 28 Trade data List of tables 11 Forecast summary 13 BiH House of Representatives: election results 14 Federation House of Representatives: election results 15 Republika Srpska National Assembly: election results 18 Republika Srpska: budget revenue, Federation: budget revenue, Federation: industrial output 23 Republika Srpska: industrial output, Federation: construction, Federation: employment, Federation: retail prices 24 Federation: consumer prices, Aug Average wages, Federation: structure of trade 28 Federation: direction of trade List of figures 22 Federation: industrial output 25 Federation: consumer prices

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5 Bosnia and Hercegovina 3 October 30th 1998 Summary 4th quarter 1998 Outlook for : The nationalist parties are likely take a harder line following the decline in their support at the elections in September A constitutional crisis is brewing in the Republika Srpska (RS) and the most likely outcome is a second term for the outgoing Sloga coalition government. Western governments will maintain their commitment to rebuilding Bosnia and Hercegovina (BiH) and intervene more aggressively against opponents of change. The economic recovery will maintain its momentum, although real GDP growth, propelled mainly by international funding for post-war reconstruction, is forecast to edge down to 15% in 1999 and 10% in BiH will continue to run a substantial current-account deficit, leaving it dependent on multilateral institutions and foreign governments for debt finance. The currency board will support monetary stability but could begin to restrain real GDP growth as the reconstruction programme winds down. The political scene: The largest three nationalist parties won the largest share of the votes at elections in September, but their near monopoly on power has diminished. A hardliner, Nikola Poplasen, has become president of the RS. Economic policy: The RS came close to hitting its budget revenue target for the first half of The Federation has made less progress in eliminating tax evasion. However, it has passed laws on the capital markets. Negotiations on BiH s debt to the Paris Club have been completed. The economy: Industrial production continues to grow at over 25% year on year in both entities. However, the recovery is fragile and unemployment remains high. Retail price inflation has fallen to 2.9% year on year in the Federation. Wages are still growing rapidly. Foreign trade and payments: Croatia has agreed in principle to give BiH free transit to its port of Ploce. Exports from the Federation rose by 27.8% in the first seven months of Business news: The Kuwaiti Investment Authority has invested in the Zenica steelworks and an office development in Sarajevo. Volkswagen s car plant has started production. Editor: Gavin Gray All queries: Tel: (44.171) Fax: (44.171)

6 4 Bosnia and Hercegovina Political structure Official names Form of state Legislatures National elections Bosnia and Hercegovina (BiH) has legal existence within the boundaries of the former Yugoslav republic of the same name. It comprises two entities: the Federation of Bosnia and Hercegovina, set up by the Washington Treaty of March 18th 1994, and the Republika Srpska (RS) BiH has the following limited responsibilities under the Basic Principles agreed in Geneva and New York in September 1995, and confirmed at Dayton, US, on November 21st: the establishment of a Constitutional Court, a Commission for Displaced Persons, a Human Rights Commission, a central bank, public corporations to manage and operate transport and telecommunications, a Commission to Preserve National Monuments, and a system of arbitration between the two entities. Foreign trade is also supposed to be managed by the government of BiH The Federation and the RS have their own assemblies. BiH has a two-chamber parliament: the House of Representatives and the House of Peoples, two-thirds elected from the Federation and one-third from the RS. A valid majority requires the support of at least one-third of the members representing each entity September 12th-13th 1998; next parliamentary elections due by September Next presidential election due by September 2002 Head of state BiH has a collective presidency of three, elected on September 12th-13th 1998: Alija Izetbegovic, Zivko Radisic and Ante Jelavic National government Main political parties International involvement There is a small Council of Ministers with two co-chairmen (prime ministers) and a vice-chairman, chosen by the presidency on December 18th Three departmental ministers, each with two deputies, were elected by parliament on January 3rd The entities have their own governments Croatian Democratic Union of BiH (Bosnian HDZ); New Croatian Initiative (NHI); Party of Democratic Action (SDA); Party for BiH (SZBiH); Social Democratic Party (SDP); Social Democrats of BiH; Serbian Democratic Party (SDS); Serbian People s Alliance (SNS); Serbian Radical Party of the Republika Srpska (SRSRS); Socialist Party of the Republika Srpska (SPRS) The Dayton peace agreement called for the appointment of a high representative, a senior foreign diplomat charged with monitoring implementation of the agreement and co-ordinating the activities of international organisations operating in BiH. The high representative is advised by the Peace Implementation Council (PIC), which includes all the signatories to the Dayton agreement. In December 1997 the PIC strengthened the role of the high representative to allow him to impose decisions in cases of disagreement and to punish officials who obstruct the implementation of the Dayton agreement National government a Co-chairmen Haris Silajdzic; Boro Bosic Vice-chairman Neven Tomic Civil affairs & communications Spasoje Albijanic Economic relations & foreign trade Mirsad Kurtovic Foreign affairs Jadranko Prlic Central Bank governor High representative Peter Nicholl Carlos Westendorp

7 Bosnia and Hercegovina 5 Federation President Ejup Ganic Vice-president Vladimir Soljic Prime minister a Edhem Bicakcic Deputy prime minister & minister of finance a Drago Bilandzija Key ministers a Defence Ante Jelavic Energy, mining & industry Mirsad Salkic Environment Ibrahim Morankic Interior Mehmed Zilic Justice Mato Tadic Science, culture & sports Fahrudin Rizvanbegovic Social affairs, refugees & displaced persons Rasim Kadic Trade Ige Krezo Transport & communications Kemal Bubalo Waterpower, agriculture & forestry Ahmed Smajic RS President Nikola Poplasen Vice-president Mirko Sarovic Prime minister a Milorad Dodik Key ministers a Defence Manojlo Milovanovic Education Nenad Suzic Energy & mining Vladimir Dokic Finance Novak Kondic Health & social security Zeljko Rodic Industry & technology Djuradj Banjac Information Rajko Vasic Interior Milovan Stankovic International economic relations Savo Loncar Justice Petko Cancar Trade & tourism Nikola Kragulj Transport & communications Marko Pavic Waterpower, agriculture & forestry Milenko Savic a Outgoing government before elections on September 12th-13th 1998.

8 6 Bosnia and Hercegovina Economic structure Latest available figures Economic indicators 1994 a 1995 a 1996 a 1997 b GDP at current prices ($ bn) n/a Real GDP growth (%) n/a b 15.0 Retail price inflation (av; %) Federation c Republika Srpska 1, c Exports ($ m) Imports ($ m) 894 1,082 1,882 2,950 Current-account balance ($ m) ,300 External debt, excl debt relief d ($ bn) n/a Foreign-exchange reserves ($ m) October 30th 1998 KM1:$0.6038; KM1:DM1 Federation: origins of GDP 1997 % of total e Republika Srpska: origins of GDP 1997 % of total d Industry & mining 21.0 Agriculture, fisheries & forestry 32.7 Trade 20.0 Industry 22.4 Agriculture & fishing 12.0 Trade 9.8 Transport & communications 6.0 Transport 6.3 Others 41.0 Others 28.8 Total Total Main destinations of exports 1996 % of total d Main origins of imports 1996 % of total d Croatia 33.9 Croatia 32.1 Italy 26.3 Slovenia 15.4 Germany 16.4 Germany 13.2 Slovenia 8.2 Italy 12.5 a World Bank and European Bank for Reconstruction and Development estimates. b EIU estimates. c Actual. d IMF estimates. e Estimates of the Statistics Bureau of the BiH Federation.

9 Bosnia and Hercegovina 7 Outlook for The nationalists will harden their stance The results of the general elections held on September 12th-13th 1998 mirror the political changes that have taken place in Bosnia and Hercegovina (BiH) since the first post-war vote, held in September They indicate that support has declined for the ethnically based parties which have dominated politics in BiH since the fall of communism. Moreover, non-nationalist opposition parties have increased their share of the vote even though the electoral law puts them at a disadvantage by effectively forcing the population to vote on national lines. The hardline nationalists are likely to toughen their stance in reaction to these developments and will try to recover some of their lost support. It is in the interest of the nationalists to preserve as many of the gains secured during the conflict as possible. Since any progress towards transforming BiH into a multiethnic society erodes the foundations of their power, they will attempt to halt it. They will resist the international community s efforts to implement the provisions of the Dayton agreement, which is now entering the stage in which the new structures of government are to become operational. The hardline nationalists will oppose particularly strongly any changes in the electoral law which would deprive them of the advantages conferred by the present law. But their strongest and most obvious opposition will be over the return of refugees: it is the single most contentious issue in implementing the Dayton agreement and has yet to be addressed in a determined way. Progress on this front will be limited, at least in the short term, and the acts of violence against returning refugees seen both before and after the elections will continue (see The political scene). The first test will be in the Republika Srpska Hardliners, as represented by the Serbian Radical Party of the Republika Srpska (SRSRS) and the Serbian Democratic Party (SDS), failed to win the majority in the Republika Srpska (RS) National Assembly that would have allowed them to form a government against the combined vote of the Sloga coalition, which makes up the outgoing RS government, and the Coalition for a Single and Democratic Bosnia (KCDBiH). Nikola Poplasen, the newly elected president of the RS, is determined to form a government, but if he fails at two attempts fresh elections will be held. Mr Poplasen, a hardliner, called for an all-serb government of national unity along the lines proposed by Mladen Ivanic following the 1997 elections. There have been reports in the RS media of secret meetings between representatives from the Sloga coalition and Mr Poplasen at which this possibility was discussed. Mr Poplasen and Zivko Radisic, who succeeded Momcilo Krajisnik as the Bosnian Serb representative in the BiH presidency, visited Slobodan Milosevic, the president of Yugoslavia (Serbia-Montenegro), shortly after the elections, fuelling speculation that the Socialist Party of RS (SPRS) might form a partnership with the Radicals and the SDS. This, however, should not be taken for granted, as Mr Radisic, the president of SPRS, although considered an ally of Mr Milosevic, has taken his own line on many previous occasions; his party has committed itself to continue as part of the Sloga coalition.

10 8 Bosnia and Hercegovina where it will take time to form a government The political tensions generated by events in Kosovo, coupled with the threat of NATO air strikes on Yugoslavia, could serve as an important cohesive factor among the Bosnian Serbs. This makes the formation of a government of national unity more probable than would otherwise be the case in the RS s current political landscape. The position of the Sloga coalition is, however, the key factor, as it can block the appointment of the government in parliament. Western governments are likely to try to influence the outcome, as they did in The Sloga coalition has already been pressured by the West not to accept a government including the SRSRS and the SDS. All this indicates that, although it may seem unlikely at present, the pre-election coalition may continue in office for a second term. For that to happen, however, it might be necessary to restrict the constitutional role of Mr Poplasen so that he can not appoint the government. The high representative, Carlos Westendorp, has already issued a serious warning to Mr Poplasen regarding his inflammatory statements about NATO s possible action in Kosovo; though any action to restrain Mr Poplasen could provoke a violent reaction from the Radicals. If, however, the Sloga coalition enters the government, it will again play an important role in directing the RS s politics in the future and there should be no major backtracking in the progress achieved in the past nine months. Whichever outcome eventually occurs, it will take some time for the new RS government to be appointed. During that time, the RS will experience significant political instability and a deterioration in its overall security. Western governments will maintain pressure Western governments hope that the electoral process will eventually bring to power a body of politicians capable of running BiH without international involvement. They realise, however, that this process will be gradual and expected few such politicians to be elected at the polls in September As a result, the September 1998 elections do not appear to have weakened the resolve of foreign governments to help in rebuilding BiH. A strong indication that the US intended to maintain its policy came from the US secretary of state, Madeleine Albright, during a visit to BiH in September. She said that the US was planning a thorough review of its role in BiH, outlined an aggressive post-election agenda and declared that only those willing to co-operate in implementing the Dayton peace agreement would benefit from international financial assistance. Confirmation that the setback represented by the election of Mr Poplasen would not discourage the international community came only a week after the final election results were announced, when Mr Westendorp invalidated the mandate of Dragan Cavic, the vice-president of the SDS, after he called for reprisals against NATO troops in the RS if there were NATO strikes on Kosovo. The mandate of the high representative to remove from office people who obstruct implementation of the Dayton peace agreement will be the international community s strongest leverage in eliciting support for the peacebuilding process. Mr Westendorp will continue to use this tool.

11 Bosnia and Hercegovina 9 making BiH resemble a protectorate even more Foreign governments involvement in the post-war reconstruction of BiH has increased gradually over the past three years. Although the idea of a protectorate was put forward during the war, the preferred solution was one in which foreign governments acted as mediators and facilitators in an attempt to build consensus among local political forces. However, the parties failed to govern effectively, and progress in implementing the peace agreement was achieved only through international pressure and when decisions were imposed by the high representative. Even so, opponents of the Dayton peace agreement have had plenty of opportunity to obstruct it. This has created a situation where, despite all the efforts of the international community in rebuilding BiH, the final outcome of the process remains uncertain, and without international involvement there is still a risk of BiH slipping back into war. Western governments are likely to press on with the implementation of the Dayton agreement, possibly turning BiH into a genuine protectorate, which will limit the power of local politicians. The change in the political make-up of the BiH government institutions, with better representation of non-nationalist parties, will make it easier for Western governments to dismantle the nationalist power structures. Although the RS has an ultranationalist president, his room for manoeuvre will be restricted. The fact that a moderate RS representative is elected to the joint BiH presidency could help BiH s common institutions to function better. A heavy international presence is inevitable for some time The mandate of the NATO troops stationed in BiH will be reviewed in late 1998 and no major change is expected either in the number of troops or their mandate, at least for another six months. Depending on progress in the functioning of the newly elected government structures, a decision on some limited and phased withdrawal may be taken in the six-month review after that. At a meeting on October 6th in Sarajevo, the Steering Board of the Peace Implementation Council decided to propose an extension of the mandate of the high representative at least until December This suggestion is to be confirmed at the council meeting in Portugal on December 15th-16th The steering board outlined the priorities for the new BiH leadership: to accelerate minority returns (the return of refugees to areas where they are an ethnic minority) and, with that aim in mind, to adopt the related property regulations; and to continue police restructuring, judicial reform and reform of the media. If there is no substantial progress in these key areas over the next two to three years, there will be a risk of the BiH remaining divided, which could easily lead to renewed conflict. Foreign governments will step up their pressure on the local parties to co-operate, but progress will be slow. Economic recovery remains fragile Three years after the Dayton peace agreement was signed, BiH is still at the early stages of economic recovery. Although industrial production is rising very rapidly (see The economy), sharp variations across regions, coupled with the persistence of an unemployment rate of around 45%, demonstrate that the recovery is still fragile. GDP stands at less than 50% of the pre-war level even though the country has received very substantial international funding for postwar reconstruction, representing more aid per head than any comparable scheme. There have been some economic achievements, however. The country

12 10 Bosnia and Hercegovina has attained monetary stabilisation, supported by the introduction of a currency board and a new currency, the convertible marka (KM), fixed at parity to the D-mark. This helped to reduce retail price inflation in the Federation to 2.9% year on year in September The EIU assumes that the currency board will remain in place over the forecast period the Dayton agreement provides for it to stay until June 2003 laying a stable foundation for structural reforms to create a market economy. and dependent on international funding We assume that foreign aid and concessional loans for reconstruction will remain the principle source of growth in By October 1997 projects costing KM3.7bn ($2.2bn at the 1997 average exchange rate) had either been completed or were under way. Foreign donors have pledged a further KM3.8bn; this will largely be invested in new infrastructure (particularly in the RS) and in building houses for returning refugees; the programme will also support production and job creation. Industrial production surged in the immediate aftermath of the war, resulting in very rapid growth rates in real GDP in , estimated by the EIU at 33% and 28%. Although there was a second surge of growth in 1998 as foreign donors channelled increasing funds into the RS, we expect real GDP growth to slow to 15% in 1999 from an estimated 20% in The reconstruction programme is helping to establish a base for sustained economic recovery. Medium-sized and small private enterprises will be the main beneficiaries of credit lines from donors, helping to revive production in light industries such as textiles, timber processing and food processing. The recovery of heavy industries such as metal processing will be slower, because it will take time to restructure the large, inefficient enterprises which dominate this sector. Agriculture is expected to recover gradually, thanks to new agricultural strategies. Although real GDP growth will continue, it will decline further as the reconstruction programme winds down and BiH enters a transition process similar to that undertaken by east-central European countries in the first half of the 1990s. The presence of the currency board will erode the competitiveness of industry and prevent substantial increases in bank lending, thereby dampening growth slightly. As a result, we are forecasting 10% real GDP growth in which implies risks Trade will continue to grow The greatest risk to economic recovery is that political conflicts could lead foreign governments into withdrawing funding for reconstruction. There have been frequent threats of withdrawal over the past 12 months, whenever one of the three ethnic groups has attempted to block a measure it objects to (see Economic policy), and this has normally achieved compliance. Although the elections of September 1998 have eroded the power of nationalists, the potential for political deadlock will increase as the implementation of the Dayton agreement ventures into more controversial areas. Thus the risk remains of a stand-off, leading to the suspension of aid for months, rather than weeks. The rebuilding of infrastructure, restoration of railway services and improved co-ordination between the two entities will boost trade. An agreement with Croatia giving BiH free transit to the port of Ploce (see Foreign trade and payments) will provide a particularly strong impetus to manufacturers as it will cut

13 Bosnia and Hercegovina 11 their transport costs. Improved access to inputs, labour and capital will allow BiH to recover some of its export capacity. This will support economic growth. but BiH will depend on borrowing to support the balance of payments But BiH s trade deficit is likely to remain wide over the medium term, because strong growth in wages and employment will propel retail sales and suck in imports. We forecast that the deficit will narrow to $2.15bn in 1999 and $1.9bn in 2000 and BiH will record current-account deficits in both years. In the absence of substantial foreign direct investment or private-sector lending, it will depend on support from multilateral and bilateral lenders to finance these deficits. Forecast summary (% change year on year unless otherwise indicated) 1997 a 1998 a 1999 b 2000 b Real GDP c Industrial output Trade balance ($ m) 2,500 2,300 2,150 1,900 a EIU estimates. b EIU forecasts. c The World Bank estimates real GDP growth at 35% in Review The political scene Nationalist parties win the largest share of the votes at the elections The three nationalist parties that have dominated politics in Bosnia and Hercegovina (BiH) since the fall of communism the Party of Democratic Action (SDA), the Serbian Democratic Party (SDS) and the Croatian Democratic Union of BiH (Bosnian HDZ) once again won the largest share of votes of the ethnic groups they represent at elections held on September 12th-13th However, their monopoly on power has been eroded and a greater range of parties have obtained seats in parliament. The elections represented the most important single test of opinion in BiH since the Dayton peace agreement. Most political posts were up for re-election including: the three-person joint presidency of BiH; the House of Representatives of BiH; the House of Representatives in the Federation; cantonal assemblies in the Federation; the presidency of the Republika Srpska (RS); the National Assembly in the RS. At the state and entities level, the nationalist parties grip on power has been loosened, while non-ethnically based parties managed to increase their share of the vote. The situation has differed at the level of individual cantons in the

14 12 Bosnia and Hercegovina Federation, but in the cantonal assemblies the general trend of better representation of the non-nationalist parties has also been confirmed. Although weakened, the hardline nationalists were far from defeated. The incumbent president of the RS, Biljana Plavsic of the Serbian People s Alliance (SNS), a moderate, was beaten by Nikola Poplasen, head of the ultra-nationalist Serbian Radical Party of the Republika Srpska (SRSRS). This was the biggest disappointment of the elections for Western governments, because Ms Plavsic s support for the Dayton peace agreement in 1997 had broken a political deadlock in the RS and provided a substantial impetus for reform to begin there. Mr Poplasen, by contrast, reiterated hardline Serb nationalist views during the campaign, which he withdrew only under threats of disqualification as a candidate. Another hardliner, Ante Jelavic of the Bosnian HDZ, won the Bosnian Croat seat on the BiH joint presidency, replacing the incumbent moderate, Kresimir Zubak, who trailed in third place. However, the position on the joint presidency reserved for a Bosnian Serb was won by a moderate, Zivko Radisic, whose Socialist Party of the Republika Srpska (SPRS) campaigned in alliance with the SNS. He defeated Momcilo Krajisnik of the SDS. Alija Izetbegovic of the SDA-led Coalition for a Single and Democratic BiH, representing the Muslims, easily retained the third seat on the joint presidency.

15 Bosnia and Hercegovina 13 but suffer a decline in support The SDA, the Bosnian HDZ and the SDS all achieved lower shares of the vote than in previous elections. They have been undermined by the processes that have taken place in BiH since the end of the war and the signing of the Dayton peace agreement. Progress in implementing the civilian aspects of the Dayton peace agreement and massive and varied international involvement in BiH have helped restore some sense of normality into the lives of many people in BiH, which has had an impact on their voting patterns. BiH House of Representatives: election results Share of Seats Seats vote (%) Elected by voters in the Federation Coalition for a Single and Democratic BiH (KCDBiH) a Croatian Democratic Union of BiH (Bosnian HDZ) Social Democratic Party (SDP) 3 b New Croatian Initiative (NHI)- Croatian Christian Democratic Union (HKDU) Democratic People s Union (DNZ) Others Elected by voters in the Republika Srpska Sloga Serbian Democratic Party (SDS) list Coalition for a Single and Democratic BiH (KCDBiH) a Serbian Radical Party of the Republika Srpska (SRSRS) Radical Party of the Republika Srpska Others Total a The SDA (19 seats in the 1996 election) and the Party for BiH (SZBiH; 2 seats in 1996) contested the 1996 election separately, but joined forces for the September 1998 elections as the KCDBiH, which also included the Citizens Party and the Liberal Party. b Number of seats for the Joint List, which included the SDP and the Social Democrats of BiH. Source: OSCE. The SDA loses its majority because its core supporters have grown disillusioned The SDA contested the 1996 parliamentary elections on its own, and gained 19 seats in the 42-seat BiH House of Representatives and 78 seats in the 140-seat Federation House of Representatives. In the September 1998 elections, and as part of the KCDBiH, the SDA picked up 17 and 68 seats, respectively. The Coalition for a Single and Democratic BiH lost one seat in the RS parliament. The profile of SDA supporters has changed little since 1996, with most of the party s votes coming from (mainly Muslim) refugees, displaced people and war veterans. These groups have become increasingly disillusioned by the slow progress in implementing Annex VII of the Dayton peace agreement clauses which guaranteed the right of refugees to return to their pre-war homes and by the enforcement of property law regulations in the Federation, which is forcing many refugees to leave their new homes. According to a recent article in the BiH press, 3,000 refugees from Srebrenica have emigrated from BiH over the past year, having lost all hope of returning to their original homes or making new lives in the Federation. Support for the SDA has been eroded by articles in two independent magazines, Dani and Slobodna Bosna, alleging links between SDA officials and criminals.

16 14 Bosnia and Hercegovina Federation House of Representatives: election results The party has also been damaged by a series of articles suggesting that it was involved in the events leading to the fall of Srebrenica. Factionalisation has further weakened the party and its popularity largely hinges on the charismatic leadership of Mr Izetbegovic. Even so, many natural SDA supporters did not bother voting Seats Share of vote (%) Seats Share of vote (%) Coalition for a Single and Democratic BiH (KCDBiH) a b Croatian Democratic Union of BiH (Bosnian HDZ) Social Democratic Party (SDP) 11 c Social Democrats of BiH New Croatian Initiative (NHI)- Croatian Christian Democratic Union (HKDU) Democratic People s Union (DNZ) 3 n/a Others 2 n/a Total a The SDA (78 seats in 1996 election) and the Party for BiH (SZBiH; 11 seats in 1996) contested the 1996 election separately, but joined forces for the September 1998 election as the KCDBiH, which also included the Citizens Party and the Liberal Party. b Share for SDA only. c Number of seats for the Joint List, which included the SDP and the Social Democrats of BiH Source: OSCE. The HDZ faces more competition The HDZ recorded a good result at the September 1998 elections, but has lost the monopoly on Bosnian Croat votes that it has hitherto enjoyed. It lost one of its seats in the BiH House of Representatives and seven of its 35 seats in the Federation parliament. Aware of the changes in the political environment in BiH and the potential threat to its position, the HDZ reacted fiercely to the creation of the New Croatian Initiative (NHI). It intimidated members who wanted to defect to the NHI, obstructed NHI election rallies and launched a campaign to discredit Kresimir Zubak, the founder and leader of the NHI. In August the Croatian president, Franjo Tudjman, called a meeting of the representatives of all Bosnian Croat parties, indicating his recognition that the Bosnian HDZ is no longer the sole representative of the Croats in BiH. However, it remains the strongest party among Bosnian Croats and enjoys almost undivided support in Hercegovina, the traditional stronghold of Bosnian Croat nationalists. It appeals to people of different social backgrounds who share the aim of union with Croatia. and support for the SDS slips After losing nearly half its seats in the RS National Assembly at the November 1997 elections, the SDS suffered a further decline in its support in September It won 19 seats, compared with 24 in November 1997 and 45 seats in September Its position in the BiH parliament weakened too, where it lost five of the nine seats it won in September Nevertheless, it is still the largest single party in the RS National Assembly and equal largest Serb party in the BiH parliament. Support for the SDS began to crumble in mid-1997 when its founder and main ideologue, Radovan Karadzic, was forced out of politics in the RS. This process

17 Bosnia and Hercegovina 15 Republika Srpska National Assembly: election results gathered momentum when the new RS government, led by Milorad Dodik, consolidated its power base (3rd quarter 1998, page 14). Support for the SDS has narrowed further with allegations that its leaders have used their power to enrich themselves at a time when much of the population of the RS is enduring extreme hardship. Evidence of corruption and crime committed by SDS officials assisted Ms Plavsic s party, the Serbian People s Alliance (SNS), although its share of the vote has also dropped. The SDS continues to attract the votes of Bosnian Serbs who oppose closer integration of the RS in BiH. Such groups include war veterans, refugees and those who benefited personally while the SDS was in power. At least part of the former SDS vote has gone to the SRSRS which, for the first time, won two seats in the BiH parliament. However, it lost four seats in the RS National Assembly Seats Share of vote (%) Seats Share of vote (%) Serbian Democratic Party (SDS) Coalition for a Single and Democratic BiH (KCDBiH) Serbian People s Alliance (SNS) Serbian Radical Party of the Republika Srpska (SRSRS) Socialist Party of the Republika Srpska (SPRS) Party of Independent Social Democrats (SNSD) Radical Party of the Republika Srpska 3 4 Others 2 n/a 7 7 Total Source: OSCE. Party politics becomes more pluralistic The number of parties in the BiH House of Representatives has increased to ten from six after the 1996 elections. In the Federation s House of Representatives it rose from six to 11, and in the RS National Assembly it increased to 11, compared with seven after the November 1997 elections. The Bosnian Croats will be represented in the RS parliament for the first time, with the Bosnian HDZ and NHI winning one seat each, while the SPRS managed to secure one seat in the Federation House of Representatives. The parties represented in the three parliaments now span the political spectrum: from ultra-nationalists to liberals and social democrats. Until now, much of the political decision-making has taken place outside the institutions and among the representatives of the leading nationalist parties. This is less likely to be the case after these elections, however, which represents a big step forward in the development of democratic institutions. because of inroads by the opposition Although most people voted on ethnic lines, non-nationalist opposition parties increased their share of the vote. Their greatest success was in the elections for the Federation parliament. The two strongest opposition parties, the SDP and the Social Democrats of BiH, together won 25 seats, 14 more than in 1996, when they contested the elections as part of the Joint List coalition together with the Croatian Peasant Party of BiH (Bosnian HSS), the Muslim Bosnian Organisation and the Republican Party.

18 16 Bosnia and Hercegovina These two parties focused their efforts at Federation- and canton-level elections and have emerged as an important political force which will influence the Federation parliament. Together, they obtained eight seats in the BiH House of Representatives more than the Bosnian HDZ. The SDP and the Social Democrats appeal mainly to voters from urban areas, younger people, people from mixed marriages and professionals, as well as to some of the older generation of former Communist Party members. The trend towards greater pluralism has been confirmed by the success of several smaller parties in all three parliaments. Some of these parties did not exist at the time of 1996 elections. This in itself indicates that, as everyday life normalises and better and more objective information is available, the electorate is becoming receptive to political ideas and options different to those proposed by the three main ethnically based parties. The elections were orderly The elections, which were organised by the Organisation for Security and Co-operation in Europe (OSCE), went off peacefully and without major incidents. However, there were serious flaws in the organisation of the polls. Some 200,000 voters were mistakenly omitted from the register, four times the number of people left off the register at the 1997 local elections. The OSCE s credibility was dented further when it postponed the announcement of the results several times. The local police provided the security for this set of elections, while NATO monitored the process and intervened where necessary. At past elections even the heavy presence of NATO troops could not prevent clashes in and around the polling stations. This year, many refugees decided to vote by absentee ballot instead of going in person to their former home towns. This made the atmosphere much less tense than expected. after a campaign full of incidents and heavy international involvement The level of violence in the country increased sharply in the run-up to the election, returning refugees being the main target. The attacks on refugees, who were mostly minority returnees going back to their pre-war homes, were politically orchestrated, with the aim of sending a clear signal that attempts to reverse the ethnic separation achieved during the war would be opposed. Most of these attacks took place in the two mixed cantons of the Federation, Hercegovina-Neretva and Central Bosnia. Conditions were much more favourable in September 1998 than in September 1996, when the first post-war elections were held. Security was much better, partly thanks to the reorganisation of the police force, and the population had much greater freedom of movement than even a year ago. The campaign was assisted by media reforms, which were initiated by foreign governments and non-governmental organisations. During the election campaign, the Office of the High Representative (OHR) attempted to ensure that all parties and candidates had equal access to the media. On several occasions the OSCE took punitive measures to back this up by striking candidates from the electoral lists if their parties or people judged to be under their parties control breached electoral regulations. The OSCE first took such action on August 13th when it disqualified three candidates of

19 Bosnia and Hercegovina 17 the Bosnian HDZ, two from the Serbian Coalition of the Republika Srpska and two standing for the KCDBiH. The action also extended to monitoring media coverage of the BiH elections in Croatia and Yugoslavia (Serbia-Montenegro). For instance, the OSCE disqualified other candidates of the Bosnian HDZ on the grounds that Croatian state television which is controlled by the Croatian HDZ and can be received in much of BiH was covering the elections in a biased way. The OHR also ran its own public information campaign on all BiH television stations, while the internationally funded television station, Open Broadcast Network, organised public debates among contestants. Efforts to bring BiH elections closer to democratic standards included a request by the OHR for all the parties, coalitions and independent candidates to present an election platform containing their views and proposals regarding the return of refugees, minority rights, reconstruction and economic development, and education and social services. The political platforms were then published and distributed across the country giving the electorate an opportunity to make an informed judgement on the programmes of all the candidates. Political killings take place in the RS The power struggle in the RS between moderates loyal to Ms Plavsic and hardliners turned violent in the run-up to the elections. On July 9th two men attempted to assassinate the chief of police in the town of Bijeljina, Ljubisa Savic-Mauzer, who had been investigating allegations of fraud against senior SDS officials. The two men were killed, however, when the bomb they were trying to plant in Mr Savic-Mauzer s car exploded. On August 7th there was a successful attempt on the life of the deputy chief of police of Serb Sarajevo, Srdjan Knezevic, which also appeared to be part of the wider struggle for power. Mr Knezevic, who was regarded as loyal to Ms Plavsic, had arrested Milovan Bjelica, ostensibly for conspiracy to murder Mr Savic-Mauzer. Hardliners feared his investigation had a wider agenda since Mr Bjelica is director of Centrex, a firm allegedly involved in smuggling organised by Momcilo Krajisnik and Mr Karadzic. These rumours gathered momentum when Mr Krajisnik threatened Mr Knezevic and offered to provide bail for Mr Bjelica. However, the government backed down when the RS interior minister, Milovan Stankovic, removed Mr Savic-Mauzer from office on the grounds that he had overstepped his authority. This fuelled speculation that the Sloga alliance, led by Ms Plavsic, had decided that the investigation was no longer likely to assist its election campaign its popularity has been lifted in the past in reaction to evidence of fraud by the SDS and that it might backfire if it exposed irregularities in the interior ministry. and the suspension of an HVO general infuriates Bosnian Croat hardliners On August 30th Mr Zubak used his position as civilian commander of Croat units (HVO) in the Federation Army to suspend temporarily General Stanko Sopta, commander of the Federation Army First Guard. General Sopta was accused of ordering an unauthorised movement of his units, which allegedly crossed into Croatia in July to help put out forest fires. His suspension was requested by the commander of the NATO Stabilisation Force, General Eric Shinseki, who had previously complained that General

20 18 Bosnia and Hercegovina Sopta had disobeyed orders. In October General Shinseki requested the permanent dismissal of General Sopta and another HVO general, Ilija Rasic, for interfering in the election. which undermines Mr Zubak Bosnian Croats reacted angrily to the initial suspension and organised protest meetings in several towns under Bosnian Croat control. The Bosnian HDZ claimed that the charge against General Sopta was an attempt to provoke unrest and weaken the Bosnian Croats, pinning the blame on Mr Zubak and his party, the NHI. There were rumours, attributed to Mr Zubak s supporters, that the then Federation defence minister and president of the Bosnian HDZ Ante Jelavic, had recommended General Sopta s dismissal. If proven, these rumours could have undermined Mr Jelavic s election campaign. However, the incident turned against Mr Zubak, since most war veterans and staunch nationalists regarded his attack on General Sopta as a betrayal. Economic policy The RS nearly achieves its tax collection target Budget revenue in the RS, excluding support from foreign donors, totalled YuD807m ($96.1m at the parallel exchange rate) in January-June % of the government s target. This is a considerable achievement, given the level of tax evasion in the RS, and demonstrates that the government of Milorad Dodik has succeeded in the initiative to improve tax collection that it launched in January Revenue from fees increased rapidly, although growth in income tax, profit tax and excise duties was slower than expected. The most compelling evidence that the Dodik government has reduced tax evasion comes from higher revenue than projected from customs duties which, together with sales tax, have been the largest source of income. Republika Srpska: budget revenue, 1998 a (YuD m unless otherwise indicated) Target Actual Actual/target (full-year) (Jan-Jun) ratio (%) b Sales tax Army tax Wage tax Income tax Profit tax Excise duty Customs duty Fees Fines Railway tax Others Total 1, a Excluding contributions from foreign donors. b Actual January-June revenue as a percentage of targeted January-June revenue. Source: Office of the High Representative.

21 Bosnia and Hercegovina 19 Before Mr Dodik s government took office, customs revenues were modest and declining, because much of the trade along the borders with Serbia and Montenegro went unrecorded and smuggling was widespread. The reorganisation of the customs service and the implementation of the new legislation will raise customs revenue even more. The depressed level of economic activity and tax evasion are the main reasons why income and profit tax revenue have fallen below budget. but revenue is lagging behind in the Federation The Federation authorities have been less successful than their counterparts in the RS in controlling tax evasion. As a result, budget revenue totalled KM265m ($146m) in January-May 1998, 77% of the amount targeted. There was a considerable shortfall in customs duties, the largest single component of revenue. It has been harder for the Federation to meet its revenue targets because the two main ethnic groups in the entity the Muslims and the Croats have not dismantled the administrative systems they established during the war. The resulting bureaucratic confusion has created ideal conditions for smuggling. However, customs revenue should rise as a result of a new customs law passed in July (3rd quarter 1998, page 21), under which the Federation s customs service will be reorganised and staff will be retrained. Federation: budget revenue, 1998 a (KM m unless otherwise indicated) Target Actual Actual/target (full-year) (Jan-May) ratio (%) b Customs duty Excise duty Fees Fines Others Total a Excluding contributions from foreign donors. b Actual January-May revenue as a percentage of targeted January-May revenue. Source: Office of the High Representative. while both entities transfer funds to the central state and the Federation passes a law on external debt The Paris Club writes off two-thirds of BiH s debt The Dayton peace agreement permitted BiH only one source of budget revenue of its own consular fees making it almost wholly reliant on the entities for revenue. It obtained the first transfer of funds in July when the Federation paid KM1.67m into the central state budget and the RS transferred KM833,000. The two entities must now transfer the same amounts every month. The central state is the sole guarantor of BiH s external debt, but it depends on transfers from the entities for it to service the debt. This was partly assured on September 5th, when the Federation s House of Representatives passed a law obliging the Federation to make regular budgetary payments to service debt incurred by the state on behalf of the entities. The RS is expected to pass a similar law. In October the BiH government reached an agreement to reschedule and write off part of its $1.53bn share of the former Yugoslav debt to the Paris Club of

22 20 Bosnia and Hercegovina international sovereign creditors. Talks had been stalled because the Paris Club rejected BiH s request to write off 85% of the present discounted-value of the debt (3rd quarter 1998, page 19). The Paris Club offered a write-off of 67%, even though the high representative for BiH, Mr Westendorp, had supported BiH s request on the grounds that the country s debt burden should be kept low so as not to jeopardise economic recovery. In the final agreement BiH received a write-off of only 67%, which reduced its debt to around $500m, but any disappointment was offset by more generous rescheduling terms than expected. BiH will now repay the debt over 30 years with six years grace. The debt burden can be reduced further by swaps, as the agreement allows creditors to exchange debt for shares in state enterprises when privatisation gets under way. The deal with the Paris Club has the secondary benefit of opening the way for new bilateral lending by sovereign governments. Foreign export-credit agencies may also start providing coverage for BiH, making it easier for it to finance capital expenditure projects and infrastructure developments. The central bank dispute has lingered on but demand for the new currency increases Overvalued war veterans claims threaten privatisation The argument over the liquidation of the National Bank of BiH, which operated as the central bank in Muslim-controlled territory during the war, has flared up again. Under the Dayton agreement, the National Bank was supposed to cease operating when the new Central Bank was established, which occurred in August 1997, but Muslim leaders have staged a rearguard action to preserve it. In October 1998 the Federation prime minister, Edhem Bicakcic, claimed that the liquidation of the National Bank put at risk deposits placed there by the government. He also ordered the Federation payments system to continue depositing funds at the National Bank. This has provoked an angry response from the high representative. It also threatens to undermine relations with the IMF, which granted BiH a $81m stand-by facility in May on condition that the National Bank was liquidated (3rd quarter 1998, page 18). An increase in sales of the convertible marka was recorded in early September 1998, following a fairly steady demand for the new currency throughout the summer. Foreign-currency reserves at the Central Bank increased by DM60m in July-September 1998 from less than DM50m recorded at the end of June, shortly before the new currency entered circulation. Sales have been highest in Sarajevo, and in Banja Luka the demand for markas exceeded supply. The Central Bank has been a net buyer of markas in Mostar, implying that the Croatian kuna remains the preferred currency in parts of BiH where Croats are in the majority. The Federation privatisation agency announced plans in July to issue privatisation certificates worth DM8.7bn to demobilised soldiers to compensate them for wartime wage arrears. This provoked immediate criticism from both Mr Westendorp and the international financial institutions involved in BiH s reconstruction, who asserted that the claims were overvalued as they exceeded the value of unpaid salaries and that the agency was planning to issue certificates to people who had never served as soldiers. They asserted that this was an attempt to buy votes by the two largest parties in the Federation, the Party of