Bosnia and Hercegovina Croatia

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1 COUNTRY REPORT Bosnia and Hercegovina Croatia 1st 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: Moya Veitch Tel: (44.171) Fax: (44.171) This publication is available on the following electronic and other media: Online databases CD-ROM Microfilm FT Profile (UK) Knight-Ridder Information World Microfilms Publications (UK) Tel: (44.171) Inc (US) Tel: (44.171) DIALOG (US) SilverPlatter (US) Tel: (1.415) LEXIS-NEXIS (US) Tel: (1.800) 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 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 1 Contents 3 Summary Bosnia and Hercegovina 4 Political structure 6 Outlook for Review 9 The political scene 14 Economic policy 16 The economy Croatia 20 Political structure 21 Economic structure 22 Outlook for Review 26 The political scene 29 Economic policy 31 The economy 34 Foreign trade and payments 36 Business news 37 Quarterly indicators and trade data List of tables 8 Bosnia and Hercegovina: forecast summary 9 Republika Srpska: National Assembly election results, Nov BiH Federation: industrial output, BiH Federation: average net monthly wages, BiH Federation: employment, Republika Srpska: unemployment, BiH Federation: consumer prices, Jan-Nov Croatia: forecast summary 30 Croatia: quarterly budget data 31 Croatia: gross domestic product 32 Croatia: industrial output 32 Croatia: construction 33 Croatia: inflation 34 Croatia: foreign trade 37 Croatia: quarterly indicators of economic activity 38 Croatia: foreign trade 39 Croatia: foreign trade

4 2 List of figures 10 Republika Srpska: National Assembly election results, Croatia: gross domestic product 25 Croatia: retail prices 32 Croatia: industrial output 33 Croatia: monthly retail prices

5 3 January 30th 1998 Summary 1st quarter 1998 Bosnia and Hercegovina Outlook for : The renewed international commitment to rebuilding a united Bosnia and Hercegovina (BiH), and the likelihood that the mandate of NATO forces in BiH will be extended beyond the current June 1998 deadline, improve the prospects for the country s reintegration and make a resumption of war less likely. Progress in securing refugee returns will be limited, despite more robust international efforts. Resistance from hardliners will continue, and the new, moderate prime minister in the Republika Srpska (RS) will depend on international support. Potential flashpoints remain, notably over the future of Brcko. Economic activity will pick up this year, mainly thanks to greater flows of international aid. Review: A moderate prime minister, Milorad Dodik, has been appointed in the RS, following the defeat of hardliners in November s parliamentary election. After initially refusing to recognise Mr Dodik s appointment, the hardliners agreed to participate in the new parliament. The powers of the international high representative for BiH, Carlos Westendorp, were increased at an international meeting on BiH in Bonn, enabling him to impose decisions on BiH s authorities. The US president, Bill Clinton, has indicated that NATO-led forces should stay in BiH as long as they are needed. Mr Westendorp has imposed new banknote designs for the joint currency, which should soon be in circulation. GDP growth estimates for 1996 and 1997 are likely to be revised downwards. Croatia Outlook for : Politics is becoming more focused between the Social Democratic Party of Croatia (SDP) on the left and the ruling Croatian Democratic Union (HDZ) on the right. The HDZ is trying to transform itself into a modern centre-right party, as emerging new leaders position themselves for the succession to the president and party leader, Franjo Tudjman. Continued international pressure will hamper Croatia s international integration efforts. A tighter economic policy is likely to be pursued in This will contribute to slower GDP growth, compared with 1997, of around 4.2%. The tourism recovery will continue, narrowing the current-account deficit in Pressure for a currency devaluation may become irresistible, although the government will be keen to avoid it. Review: Eastern Slavonia has passed into Zagreb s control. The peaceful return of refugees presents a major challenge; the international community is closely monitoring the treatment of the region s Serbs. The Croatian Social Liberal Party has split, leaving the SDP as the main opposition party.the introduction of VAT, at a flat rate of 22%, has sparked controversy and led to initial price rises. GDP growth was about 5.3% in 1997, as industrial output picked up and tourism continued its strong recovery. Monetary policy has been tightened. Imports grew more strongly than exports in 1997, and in dollar terms exports stagnated. Editors: All queries: Peter Palmer; Joan Hoey Tel: (44.171) Fax: (44.171)

6 4 Bosnia and Hercegovina Bosnia and Hercegovina Political structure Official names Form of state Legislatures National elections Head of state National government Main political parties Bosnia and Hercegovina (BiH) has legal existence within the boundaries of the homonymous republic of former Yugoslavia. 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) Bosnia and Hercegovina 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 Bosnia and Hercegovina The Federation and the RS have their own assemblies. Bosnia and Hercegovina 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 14th 1996; next elections due by end-1998 Bosnia and Hercegovina has a collective presidency of three, elected on September 14th 1996: Alija Izetbegovic, Momcilo Krajisnik and Kresimir Zubak There is a small Council of Ministers with two co-chairmen (prime ministers) and a deputy prime minister chosen by the presidency on December 18th Three departmental ministers, each with two deputies, were elected by parliament on January 3rd 1997 Croatian Democratic Union of BiH (HDZ); Party of Democratic Action (SDA); Party for BiH; Serbian Democratic Party (SDS); Serbian People s Alliance (SNS); Serbian Radical Party of the RS (SRS); Socialist Party of the RS (SPRS); Social Democrats of BiH; Union of BiH Social Democrats National government Co-chairmen Haris Silajdzic; Boro Bosic Civil affairs & communications Spasoje Albijanic Economic relations & foreign trade Hasan Muratovic Foreign affairs Jadranko Prlic Central bank governor Peter Nicholl Federation President Ejup Ganic Prime minister Edhem Bicakcic Deputy prime minister & finance Drago Bilandzija

7 Bosnia and Hercegovina 5 Key ministers Agriculture & forestry Ahmed Smajic Defence Ante Jelavic Energy, mining & industry Izudin Kapetanovic 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 Rasim Gacanovic RS President Biljana Plavsic Vice-president Dragoljub Mirjanic Prime minister Milorad Dodik Key ministers Agriculture Milenko Savic 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

8 6 Bosnia and Hercegovina Outlook for The robust international stance will continue Recent events have made the prospects for peace and further reintegration in Bosnia and Hercegovina (BiH) look better than at any time since the Dayton peace agreement was reached in The key factor in bringing this about over the last year has been the more robust stance taken by the international community. Although the military aspects of Dayton were quickly and fairly successfully implemented, progress on the political front was initially slow. It frequently appeared that there was little international will to bring about the real reintegration of the country, and that little was expected beyond a de facto separation of the former warring parties. However, the international powers involved in BiH seem to have accepted by early 1997 that such a partial implementation of Dayton merely maintained an unstable status quo. The risk of a return to war remained and the prolonged perhaps indefinite presence of international forces would be required if further fighting was to be avoided. Unwillingness to allow such a Cyprus scenario to develop led to a more robust approach, in which aid is used as a lever to secure compliance with Dayton s provisions and military force is applied to deal with those obstructing Dayton s implementation, especially in the Republika Srpska (RS). The renewed international commitment to rebuilding a united BiH was stated even more forcefully in December at the Peace Implementation Council meeting in Bonn (see The political scene). The new powers granted to the international high representative, Carlos Westendorp, to impose measures designed to build the institutions of a functioning state have provided the local parties with an incentive to be more co-operative before Mr Westendorp resorts to such coercion. The likelihood that the international military presence will continue beyond the current mid-1998 deadline (see The Political scene) reinforces the international commitment to BiH and significantly reduces the chances of a return to war. and prospects for further reintegration are improved The installation of a moderate prime minister in the RS, Milorad Dodik, has enhanced the prospects for further reintegration. Mr Dodik has signalled his desire to co-operate in implementing Dayton, and there is likely to be further progress in establishing the central institutions that bind the country together. However, building these institutions, which are intended to have only limited powers, does not by itself bring real reintegration on the ground. Mr Dodik has also indicated that he will facilitate the return of refugees. There have been suggestions that NATO troops will be more energetic in implementing provisions of Dayton such as enforcing freedom of movement, protecting returning refugees and arresting indicted war criminals. Some progress in this direction is likely, but its extent is uncertain. Hostility towards returning refugees is widespread, and confidence among most refugees in their ability to rebuild their lives in areas controlled by another ethnic group remains low. Even if it were possible for refugees to return, there is in many cases little for them to return to. although resistance will continue For the time being Mr Dodik s power in the RS rests on slim foundations. Like the RS president, Biljana Plavsic, during her recent power struggle with the RS s hardline former leaders, he will have to rely for some time on international

9 Bosnia and Hercegovina 7 support. Much will depend on whether the RS receives the necessary financial aid to make a tangible difference to the Bosnian Serbs. For the moment he and Mrs Plavsic seem to be in a strong position. Under sustained international pressure, and deprived of support from Belgrade, the hardliners are in retreat. However, they will still seek to thwart the new government, especially in the eastern half of the RS, where the hardline nationalist parties still dominate. A major challenge for Mr Dodik in the coming weeks will be the need to establish control over the police in the east. It is also uncertain how far he will be supported by Mrs Plavsic, who has not given up her nationalist views and for whom compliance with international demands is primarily a way of gaining aid and obtaining international support against her rivals. For the moment, given the continuing fragility of her position in the RS, Mrs Plavsic can be expected to co-operate with the international community. Resistance to the integration of the BiH Federation will also continue as the Bosnian Croats, in particular, seek to preserve the structures of their para-state, Herceg-Bosna. Here much will depend on Croatia. Despite heavy international pressure in recent months to bring its influence to bear on the Bosnian Croats, Croatia continues to demonstrate a lack of commitment to the unity of BiH. Croatia is likely to continue to undermine Bosnian unity as long as its aged and sick president, Franjo Tudjman, remains at the helm. The Bosnian Muslims, too, are likely to persist in attempting to preserve their predominance in structures in which power is now supposed to be shared, to the chagrin of both Croats and Serbs. and there are potential flashpoints Further political changes are in store Potential flashpoints remain which could derail the peace process. Most immediately, the decision on the future of the disputed town of Brcko could cause a serious rupture (see The Political scene). The international arbitrators may try to find a compromise, but it remains to be seen whether the Bosnian Serbs, in particular, can accept a compromise, given the strategic importance of the town to them. There is also a severe risk that the more forceful international stance could at some time provoke a backlash, for example if NATO troops move to arrest senior Serbs indicted for war crimes, such as the former RS president, Radovan Karadzic. New elections at the central, BiH level are due by the end of this year. They will provide an opportunity for another trial of strength between moderates and hardliners in the RS. In addition Alija Izetbegovic, the Muslim representative in the joint presidency and leader of the main Muslim party, the Party of Democratic Action (SDA), has announced that he will not stand for the presidency again. This will mark another break with the wartime period, although its effect on SDA politics, and on Muslim politics generally, is hard to gauge. Politics in the main Croat party, the Croatian Democratic Union (HDZ), may also start to adapt to post-war realities, following the same trend as its mother party, the HDZ in Croatia; there are already signs of a purge of Croat hardliners in Mostar. Breaking the monopoly of power of the wartime Serb, Muslim and Croat leaderships, which has already happened in the RS, may thus also occur in the Federation in 1998.

10 8 Bosnia and Hercegovina Economic reform will continue slowly which will hamper recovery Economic activity will pick up Economic restructuring has yet to get under way, but it is vital if the initial recovery, driven by international aid, is to be translated into sustained longerterm growth. Progress in building common institutions will help advance economic reforms, but will be slow as it is tied to progress on the political front. The new common currency is expected to be in circulation by April, and a new customs tariff law is due to be passed soon. These two measures should help stimulate trade, and payments between the entities should be facilitated. Furthermore, the customs tariff law is an important step in reforming public finances and should help to strengthen the revenue base of both entities budgets. A law removing legal obstacles to the inflow of foreign direct investment is to be adopted in the Federation. Privatisation in the Federation is also set to get under way this year. The slowness of economic reform will hamper the revival of industries which were previously the backbone of the Bosnian economy, such as the metals and electrical engineering industries. Besides many other problems, these industries are import-dependent and acutely short of finance. Investment needs are great, but the weak and underdeveloped financial sector will not be able to provide the finance until it is restructured and recapitalised. Economic recovery will continue to be driven mainly by the reconstruction programme financed with international donor aid. Given that international aid flows slowed last year, as aid was used as a lever to enforce compliance with the Dayton agreement, the EIU expects that the World Bank projection of 35% GDP growth in 1997 will have to be revised downwards, and that 1997 witnessed a slowdown in GDP growth in comparison with 1996 (see The economy). The very high World Bank estimates and projections of the past two years were based in part on excessive local official estimates. However, we still expect that there will be a pick-up in economic activity in 1998, as the flow of donor aid increases and the RS, at last benefiting from international aid, begins to experience a more significant recovery. Having concluded that the World Bank s estimates of GDP growth for 1996 and 1997 are likely to require downward revision, we also project that such high levels in 1998 are unlikely. We do, however, expect growth in 1998 to be very strong, and have revised our forecast to 20%. Provided that peace is maintained and that foreign aid, which is politically determined, continues to flow, strong growth from the still low post-war levels can be expected to continue in Bosnia and Hercegovina: forecast summary (% change, year on year unless otherwise indicated) 1995 a 1996 b 1997 b 1998 c Real GDP d 15 d 20 Industrial output n/a Trade balance ($ m) 930 1,546 2,000 2,500 a World Bank estimates. b EIU estimates. c EIU forecasts. d World Bank estimates: 1996: 50%; 1997: 35%.

11 Bosnia and Hercegovina 9 Review The political scene Moderates gain in the Republika Srpska s elections In the parliamentary election in the Republika Srpska (RS) on November 22nd- 23rd, hardline nationalist parties lost their majority in the entity s National Assembly. The election had been called by the RS president, Biljana Plavsic, in an effort to resolve her struggle with Pale-based leaders gathered around her predecessor, Radovan Karadzic, and Momcilo Krajisnik, the RS s representative in the joint Bosnia and Hercegovina (BiH) presidency (4th quarter 1997, pages 10-12). With strong international support, Mrs Plavsic conducted a concerted campaign against her rivals in which they lost exclusive control over the media. Mrs Plavsic accused the leadership of the ruling party, the Serbian Democratic Party (SDS), including Mr Karadzic and Mr Krajisnik, of working against the interests of the RS by their non-compliance with the Dayton peace agreement for BiH, while personally benefiting from large-scale illegal activities. This struck a cord with a part of the RS s impoverished and disillusioned population, especially in the western half of the entity around Banja Luka, the RS s largest city and Mrs Plavsic s powerbase.

12 10 Bosnia and Hercegovina Republika Srpska: National Assembly election results, % of total Party of Democratic Action (SDA) 16.9 Others 9.6 Party of Independent Alliance for Peace Social Democrats 2.4 and Progress 12.0 Coalition for a Single and Democratic Serbian Radical BiH19.3 Party (SRS) 7.2 Others 2.4 Serbian People's Alliance 18.1 Socialist Party of the Republika Srpska 10.8 Serbian Democratic Party (SDS) 54.2 Sep 1996 Total seats: 83 Source: Organisation for Security and Co-operation in Europe. Serbian Democratic Party (SDS) 28.9 Nov 1997 Total seats: 83 Serbian Radical Party (SRS) 18.1 The publication of the election results was delayed for a couple of weeks. They revealed that the SDS remained the largest party with 24 of the Assembly s 83 seats. However, even with its allies in the Serbian Radical Party of the RS (SRS), the sister party in the RS of Vojislav Seselj s extreme nationalist party in Yugoslavia (Serbia and Montenegro), the SDS could not muster a majority in parliament. Mrs Plavsic s new party, the Serbian People s Alliance (SNS), won 15 seats, while the Socialist Party of the RS (SPRS), the sister party of Serbia s ruling party, the Socialist Party of Serbia, won nine seats and two small parties won two seats each. With the two hardline nationalist parties having failed to achieve an absolute majority, the balance of power in the Assembly potentially rested with the 16 deputies of the Coalition for a Single and Democratic BiH, which represents Muslim and Croat voters, most of whom are refugees in the BiH Federation and voted in absentia. Republika Srpska: National Assembly election results, Nov 1997 Party No. of seats Serbian Democratic Party (SDS) 24 Coalition for a Single and Democratic BiH 16 Serbian People s Alliance (SNS) 15 Serbian Radical Party (SRS) 15 Socialist Party of the RS 9 Party of Independent Social Democrats 2 Social Democratic Party (SDP) 2 Total 83 Source: Organisation for Security and Co-operation in Europe. and a moderate RS prime minister is appointed It was almost two months before a new RS government could be appointed. Mrs Plavsic s first choice for prime minister, Mladen Ivanic, an economist at Banja Luka university, proposed forming a national unity government of experts. However, his efforts were blocked by the SDS and the SRS, despite his offer of cabinet seats to the SDS. The SDS and the SRS objected that Mr Ivanic was not affiliated to any of the parties and insisted that the new government should include an equal number of party representatives and experts. Mr Ivanic received backing from the international community as well as from

13 Bosnia and Hercegovina 11 the Yugoslav president, Slobodan Milosevic, but having failed to receive parliament s endorsement, he resigned his mandate on January 16th. Milorad Dodik A businessman from north-west Bosnia, Mr Dodik made money during the war exporting timber to Serbia and importing fuel and coffee. He has been a notable opponent of the nationalist RS authorities for the past couple of years. During the war he was one of a handful of RS politicians who were in contact with their counterparts in the Federation, and he was chairman of the Club of Independent Deputies in the RS Assembly. He has been involved in the shadow government, a grouping of opposition politicians in both entities opposed to the narrowly nationalistic policies of the hitherto ruling parties. He now leads the small Party of Independent Social Democrats. Mr Dodik favours the implementation of the Dayton agreement for BiH. As such, his credentials as a true moderate are much more genuine than those of Mrs Plavsic, a staunch nationalist who, until she became estranged from other SDS leaders last year, was a loyal follower of Mr Karadzic and a firm supporter of the SDS s wartime policies. Mr Dodik is regarded as a pragmatist, but his record demonstrates a genuine aversion to the violently exclusive nationalism which has dominated RS politics until now. Mrs Plavsic next nominated the leader of the small Party of Independent Social Democrats. Milorad Dodik, a long-standing moderate who had opposed the nationalistic policies of the wartime leadership, secured parliamentary endorsement of his nomination on January 17th, relying on the support of the Muslim and Croat representatives of the Coalition for a Single and Democratic BiH. Outraged, the SDS and SRS stormed out of the Assembly before the vote was taken. Mr Dodik s new government does not include any SDS, SRS members or Muslim or Croat members. signalling a major shake-up in RS politics Mr Dodik quickly announced that the seat of government would be moved from Pale, a village close to Sarajevo, in the eastern half of the RS, where the SDS-hardliners are based, to the politically more moderate Banja Luka. SDS and SRS leaders initially insisted that the new government was illegitimate and that they would not recognise it. Warning that the new government would lead to a final split in the RS, SDS and SRS deputies threatened to hold a parallel parliamentary session on the same day as the meeting of the official parliament. However, as the Belgrade authorities welcomed Mr Dodik s appointment, the SDS backed down. The outgoing prime minister, Gojko Klickovic, announced that he would hand over peacefully to Mr Dodik, and at a meeting in Banja Luka on January 24th the Assembly speaker, Dragan Kalinic, agreed with Mrs Plavsic that a full session of the new parliament would go ahead. It was further agreed that the session would be held in Banja Luka, which the SDS had initially resisted. Mr Dodik faces severe challenges in his attempt to assert his authority over the whole RS territory, and his opponents will try to thwart him. Nevertheless, his appointment marks an extraordinary break for the RS and for BiH as a whole.

14 12 Bosnia and Hercegovina Mr Dodik, the first BiH leader not to come from one of the wartime nationally based parties, has signalled his intention to implement the Dayton agreement, to shake up government, root out corruption and press ahead with economic reform. He has moved to block former ministers access to state funds and insisted that all government records be handed over to the new ministers. He has sacked several officials in the customs service and the police, as well as the directors of state-owned utilities and other state-owned companies and the editor of the state-owned daily, Glas Srpski. Taking control of customs posts and the funds they collect is also one of Mr Dodik s priorities. He has endorsed moves aimed at reintegrating BiH, such as the introduction of common passports, a common currency and common vehicle licence plates, and has promised to ease the return of refugees to the RS. International support is promised Mr Westendorp s powers are increased and he quickly uses them After the long experience of obstruction by the RS leaders to the implementation of Dayton, international officials are determined to give Mr Dodik every support in facing down his hardline opponents. Because of its leaders lack of co-operation in implementing Dayton, the RS has so far received much less aid then the Federation. Economic aid is now vital to the new government in its efforts to consolidate its position, demonstrating to the population that cooperation with international demands brings rewards. The EU moved quickly with Ecu6m ($6.7m) for the payment of back wages to public servants such as the police and teachers. The World Bank has promised aid for reconstruction and the repair of the power and water utilities. At the meeting of the Peace Implementation Council on December 9th-10th in Bonn, the powers of the international high representative for BiH, Carlos Westendorp, were increased to allow him to impose binding decisions in cases where the leaders of BiH s three constituent nations are unable to reach agreement. Thus he will be able to impose the decisions needed to establish the institutions of a functioning state, as required by Dayton. Mr Westendorp was also empowered to punish officials who block the functioning of joint institutions or who violate Dayton. Mr Westendorp has not hesitated to use his new powers. In a number of cases he has imposed, or threatened to impose, decisions, and he promptly threatened to sack Mr Krajisnik unless he becomes more co-operative. Progress in establishing joint institutions and advancing reintegration has been made in the following areas. After Serb deputies in the BiH parliament repeatedly rejected citizenship and common passport laws which failed to recognise a dual citizenship agreement between the RS and Yugoslavia that the international community regards as invalid, Mr Westendorp imposed the laws on December 16th. At the end of December he threatened to impose a common design for vehicle licence plates unless agreement was reached by the end of January. This measure is regarded as crucial in anabling freedom of movement. Mr Dodik reached agreement with his Federation counterparts on January 23rd.

15 Bosnia and Hercegovina 13 When an end-december deadline for agreement on a new BiH flag went by without a decision, he appointed a committee of intellectuals to make recommendations to him by mid-february. Early in January he threatened to take appropriate measures if an RS government was not quickly appointed. Mrs Plavsic took this as a threat that he himself would appoint a prime minister. In mid-january, after heavy international pressure, the joint presidency agreed on the appointment of 32 new ambassadors, but failed to agree on an ambassador to the United States. In January Mr Westendorp imposed a design for the new common currency (see Economic policy). Mr Westendorp s readiness to use his extended powers may persuade representatives of the three constituent peoples that co-operation is in their interest if they wish to retain control of their own affairs. US troops may stay longer The US president, Bill Clinton, visited American troops in Bosnia in December. Shortly before his departure he stated for the first time that a continued US presence, as part of the NATO-led force in BiH, would be required beyond the end of the current mandate in June. He noted the vital role of the NATO force in building and preserving peace. He added that the force would probably be scaled down, but that it would still be capable of defending itself. Crucially he said that, in contrast to previous mandates, while the mission should have clear goals, it should not have a deadline for withdrawal. NATO is considering the future of the force in BiH and has various options. President Clinton s comments weigh powerfully in favour of the continued presence of a substantial force. The US decision is key. Both the UK and France, the other leading powers in the force, have indicated that if US forces were withdrawn, theirs would go as well. In addition, a leading US role has proved vital in giving the military presence and international efforts credibility among the Bosnian parties. There has been great reluctance in the US Congress and within the administration notably on the part of the defence secretary, William Cohen to extend the mandate. Mr Clinton may have a difficult task persuading opponents of an extension to accept his view. He has tried to assuage doubts by calling on European countries to take on a greater share of the burden and by pointing out the successes of the force s more robust stance in These have included the prising away of media control from hardline opponents of Dayton in the RS and helping to bring moderates to power there; NATO troops have made the first arrests of suspected war criminals; and the establishment of joint institutions has been speeded up. Such achievements would probably be lost if the NATO force were to be withdrawn prematurely. The future of Brcko remains contentious Arbitration on whether the disputed town of Brcko will be in the RS or the Federation is due by March 15th. The town is strategically vital, lying in the corridor which links the eastern and western halves of the RS. It was the one outstanding issue left to be settled at the time of the Dayton agreement, and a decision on its future was again postponed in February last year. After that, an international supervisor for Brcko, Robert Farrand, was appointed, with the

16 14 Bosnia and Hercegovina task of promoting the town s recovery and facilitating the return of Muslim and Croat refugees before a final decision is taken (2nd quarter 1997, pages 11-12). Mr Farrand s mission has scored notable successes in a number of areas. A multi-ethnic local government and judiciary have been set up, and at the beginning of January a multi-ethnic police force began to operate successfully, according to Mr Farrand. However, the key issue of the town s disposition remains extremely divisive. The successful implementation of many of the special provisions for Brcko probably reflects the fact that compliance with Mr Farrand s decisions is likely to weigh heavily when the final decision is made. Both entities consider Brcko to be of vital strategic importance. There were rumours at the beginning of last year that Brcko was to be granted to the RS, before vigorous Muslim objections led to the decision s postponement. The Serb claim is based on the absolute need for the RS to be united, while the Muslims base their claim on the fact that Serbs were a minority in the town before the war, so that awarding it to the RS would reward ethnic cleansing. Mrs Plavsic repeated in January that Brcko must be awarded to the RS, or else Dayton will be dead. On this issue Mr Dodik is in agreement with Mrs Plavsic, and he announced shortly after the confirmation of his appointment that a government session would be held in Brcko, reinforcing the RS s claim. Tensions ease in the Federation Progress has been made recently in establishing functioning local authorities in cities which have witnessed disputes between the Federation s Muslim and Croat partners. After nearly two years of stalemate, Rasim Gacanovic of the leading Muslim party, the Party of Democratic Action (SDA), was elected mayor of Sarajevo on January 8th; his deputy is Ante Zelic of the main Croat party, the Croatian Democratic Union. Agreement had been held up by the SDA s unwillingness to share power in the capital. In the divided city of Mostar, the scheduled rotation of the office of mayor proceeded peacefully in early December, as the former deputy mayor, Safet Orucevic, a Muslim, became mayor, and the former mayor, Ivan Prskalo, a Croat, became deputy mayor. In Mostar county, too, a Muslim-Croat balance was maintained, as a Croat, Zelko Obradovic, became mayor, and Fatima Leho, a Muslim, became his deputy. However, this apparent observance of the principle of power-sharing has so far not brought about a real unification of the city. There is no agreement on the entities constitutions The Bonn conference underlined the international commitment to BiH as a single state with two multi-ethnic entities. However, the conference did not bring about progress in harmonising the constitutions of the two entities with the constitution of BiH so that the three constituent nations can be recognised as such in each entity. According to Dayton, this should have been done within three months of the signing of the peace agreement. However, nationalist opposition to this change remains strong: in Bonn, the Bosnian Croats refused to give their support.

17 Bosnia and Hercegovina 15 Economic policy A new currency design is imposed Mr Westendorp used the new powers granted to him in Bonn to impose designs for the new common currency, the convertible marka (KM). Although the marka is already legal tender, banknotes have not yet been issued because of a long-standing dispute over their design the Bosnian Serbs and the Bosnian Croats wanted designs incorporating their national symbols. To break the impasse, Mr Westendorp presented the new designs, which include no national symbols, on January 21st. They feature prominent Bosnian writers and poets, are in both the Latin and Cyrillic scripts, resemble the D-mark bank-note designs and are slightly different in the two entities (although all are valid throughout the country). It is expected that the notes will be ready by April. The new currency should encourage trade across the country (until now the D-mark has been the only common currency), and it is hoped that it will gradually replace the other currencies in circulation: the Croatian kuna, the Yugoslav dinar and the Bosnian dinar (BiHD). Banks holding assets and liabilities in Bosnian dinars (which have been used in Muslim-controlled areas) had to denominate them in markas by August 1st 1997, at a rate of BiHD100:KM1. The 1997 BiH budget was also calculated in markas. The marka will follow a currency board regime, backed up by D-mark reserves. It is intended to be an interim currency while a permanent arrangement is drawn up over the next 18 months. Agreement with the London Club is finalised Agreement with the London Club of commercial creditors was finalised in December 1997, following an agreement in principle reached in June (3rd quarter 1997, page 13). The total London Club debt stands at $394m down from the $404m agreed in June due to exchange-rate movements. Of the total, $147.8m is to be paid over 20 years, after a seven-year grace period. Repayment of the remaining $246.2m is to begin once BiH s GDP reaches an annual level of $2,800 per head for two consecutive years GDP per head was estimated at a little over $800 in Negotiations with the Paris Club should follow once a deal with the IMF is reached. The IMF has made its $100m stand-by facility conditional on agreement on the implementation of a series of measures to establish functioning central state institutions: the central bank; the state budget; arrangements for repaying debt to the World Bank; and a joint currency. but servicing foreign debt is problematic Establishing a mechanism for meeting other foreign debt obligations is a priority in drawing up the 1998 state budget. External debt servicing has proved to be a problem. The state of BiH is the sole guarantor of the country s foreign debt, but it has no independent source of revenue and is dependent on contributions from the two entities. An ad hoc debt-servicing arrangement was worked out in 1997, but the delay in settling the country s obligations held up aid from the World Bank and other international organisations (3rd quarter 1997, page 13). The World Bank recently delayed the approval of a $27m loan for reconstruction of the Federation s gas system and for several projects in the RS until the RS had paid the IMF an outstanding $288,000. The uncertainty

18 16 Bosnia and Hercegovina regarding the country s ability to meet its foreign obligations is harmful to its credibility and detracts from its appeal to potential foreign investors. A new law enables privatisation to proceed After several months delay, the Federation parliament passed a law in January facilitating the valuation of enterprises and banks prior to privatisation and sale (4th quarter 1997, page 15). This legislation was needed to get the privatisation programme under way, as a prerequisite for the arrival of significant foreign direct investment. Preparation of the law, which was drafted in December, had caused fierce disagreement between the Federation partners. According to the law, old debts are to be transferred from the banks to the finance ministry. The Bosnian Croats claimed that this would place a disproportionate burden on Croat taxpayers, alleging that the larger portion of the debt would be transferred from enterprises in territories with a Muslim majority. In the meantime there have been reports of secret privatisation deals going ahead in some parts of the Federation. This has been possible because there is still no unified legal system and powerful local figures continue to deny the Federation s authority. Such deals will complicate the implementation of the privatisation programme once it gets under way. and bank restructuring gets under way A bank privatisation law has also been framed for the Federation, providing for insolvent banks to be closed down and for others to be prepared for privatisation. The law envisages the creation of a team within the finance ministry, including international experts, to oversee the bank privatisation process. It has recently been announced that one of the largest state-owned banks operating in the Federation, Privredna banka, is to be liquidated. While the stateowned banks continue to struggle with the burden of non-performing assets, smaller private banks have on the whole done better. However, they are not yet capable of supplying credit on the scale that the economy needs. In an effort to strengthen the sector as a whole, the European Bank for Reconstruction and Development (EBRD) has recently bought a stake in a number of private banks in both entities and, together with the World Bank s International Finance Corporation, set up a micro-credit Bank to stimulate micro- and small businesses. The economy GDP growth is slower than expected According to the latest World Bank estimates, real GDP grew by 35% in 1997, following growth of 50% in The official estimate of the Federation Statistics Bureau puts 1997 GDP growth in the Federation at 37%, while the figure for the RS is not available. These estimates need to be interpreted with considerable caution. GDP figures are very tentative and have been subject to substantial revision. Figures provided at the entity level are based on different methodologies, and the coverage is patchy; in both entities much activity goes unrecorded. The World Bank estimate for 1996 used as a starting point official real GDP growth figures of 55% for the Federation and 19% for the RS. However, the official estimate for the Federation has recently been revised down to 30%. On the basis of this figure, a 1996 real GDP growth figure for the country as a whole might be around 28%.

19 Bosnia and Hercegovina 17 The Word Bank s initial projection of 1997 growth was based on the assumption that substantial amounts of donor aid would be flowing steadily into the economy, so that BiH would reach its pre-war GDP level by Economic recovery still depends largely on the injection of international aid. However, the release of donor funds, which have largely been aimed at the rebuilding of infrastructure, has been impeded by political obstacles, thus slowing down the recovery process. In the absence of more concrete information, the World Bank s estimates remain the best available. However, it is probable that the early World Bank projection of 1997 GDP growth will be revised downwards. The official estimate of 1997 GDP growth in the Federation stands at 37%, but it seems likely that this will be subject to a downward revision, as with the 1996 figure. Recovery has mainly been driven by reconstruction-related activities, combined with a slow recovery of local industry. Industries requiring relatively low capital investment (such as textiles, footwear and food processing) and those using local inputs (such as wood processing) have grown most strongly. Industrial output picks up in the Federation In the Federation, official figures recorded a pick-up in industrial output growth in the second half of 1997, after a disappointing performance and sharp fluctuations earlier in the year. Industrial output in 1997 was 35% up on 1996, and at the end of the year amounted to about 20% of the Federation s 1991 level. In September 1997 the industries that currently constitute the backbone of BiH s industrial activity electrical power, mining, construction material, food processing and textiles reached around 40-50% of their average 1991 output. As reconstruction-related activities picked up in the course of the year, following the delayed third donors conference in July (4th quarter 1997, pages 13-14), so did output in the Federation s construction sector. BiH Federation: industrial output, 1997 (% change) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Month on month Year on year Source: The Statistics Bureau of the BiH Federation. and in the Republika Srpska Wages growth has slowed A similar pattern of fluctuating industrial output, with an improved performance in the second half of 1997, was reported in the RS. The highest increases in the third quarter were recorded in the textiles, chemicals, and leather and footwear industries. However, it is not clear to what extent these data reflect real changes in production levels rather than problems with data collection, which appear to be particularly serious in the RS. After strong growth in 1996, wages in both entities grew at a much lower rate in From January to September 1997 wages in the RS and the Federation grew by 10% and 13% respectively. The level of wages is low by any measure throughout the country. In addition, especially in the RS, wages are paid irregularly and with long delays. Strike activity by workers in both industry and services has risen in areas of the Federation with a Muslim majority and in the RS. Areas of the Federation with a Croat majority continue to have the highest wages in the country.

20 18 Bosnia and Hercegovina BiH Federation: average net monthly wages, 1997 (KM) Jan Feb Mar Apr May Jun Jul Aug Sep Source: The Statistics Bureau of the BiH Federation. and employment levels remain low Official figures show that employment in the Federation was fairly static throughout most of Oscillations in the employment figures are also connected with the flow of foreign aid. There was a slight pick-up in September, to 339,792 a marginal increase on the peak in employment recorded in November Sectoral movements in employment levels are difficult to identify, as statistics are not available for the whole territory of the Federation. BiH Federation: employment, 1997 Jan Feb Mar Apr May Jun Jul Aug Sep 338, , , , , , , , ,792 Source: The Statistics Bureau of the BiH Federation. Official 1997 employment figures for the RS are unavailable. According to one unofficial local estimate, the total number of employed in the RS was around 170,000 last year, which is lower than the official December 1996 figure of 193,574. According to the same source, the number of unemployed in 1997 was around 200,000 much higher than the latest officially reported figure. Official figures show unemployment in the RS increasing steadily during the year, from 121,306 in January to 142,699 in September. The number of people working in the grey economy is believed to be significant in both entities. However, even taking that into consideration, given the slow process of job creation, the unemployment rate for BiH as a whole may be as high as 50%. Republika Srpska: unemployment, 1997 Jan Feb Mar Apr May Jun Jul Aug Sep 121, , , , , , , , ,699 Source: The Republika Srpska Statistics Bureau. The inflation rate remains steady In the Federation, following a sharp 1.7% month-on-month increase in September, caused by a 6% rise in prices for imported food products, the rate of retail price inflation slowed in the fourth quarter. January-November retail prices were up by 12% year on year. Data from the Central Bank of BiH, which effectively cover only areas under Muslim control, where the Bosnian dinar circulates, indicate that a fairly tight monetary policy was pursued in both 1996 and 1997, keeping inflation under control. A World Bank representative in BiH, Graeme Hunter, recently commented that prices are fairly stable given the conditions in Bosnia, and he said that the risk of higher inflation was low. In the RS, after an increase at the beginning of 1997, growth in retail prices slowed, with most prices stable during the rest of the year. Services prices, which increased by almost 10% between June and September 1997, were a notable exception.

21 Bosnia and Hercegovina 19 BiH Federation: consumer prices, Jan-Nov 1997 (% change, year on year) Total 12.4 Food (total) 6.5 Agricultural products 18.9 Industrial food products 3.5 Industrial non-food products 4.5 Beverages 8.6 Tobacco 5.1 Services 43.4 Source: The Statistics Bureau of the BiH Federation. Foreign trade data are incomplete The trade deficit has continued to widen Great caution needs to be exercised when interpreting the available foreign trade statistics. Reliable data are lacking and the country s division along ethnic lines means that the territorial coverage of the collected data is incomplete. In addition, given the country s porous borders and the extent of unreported trade, only a fraction of the actual foreign trade transactions is captured. The World Bank provides the best possible estimates in the circumstances, and according to its figures, exports from the Federation in 1996 were, at $336m, twice the officially reported figure. The locally produced official figures can do little more than provide a very rough indication of trends. These suggest that the volume of trade continued to increase in 1997, but at a slower rate than in Decelerating growth in economic activity in 1997 appears also to have been reflected in slower import growth. However, given that export growth appears to have remained very modest, the trade deficit will have continued to widen. According to official data, food and beverages accounted for over one-quarter of the Federation s total imports, followed by manufactured metal products, chemicals and machinery. Wood products, iron and steel, transport equipment and manufactured metal products accounted for over 60% of total exports. The official figures show a slight shift in the territorial composition of foreign trade in 1997, with Italy overtaking Croatia as BiH s most important trading partner. This should be treated with caution, however, as there is much unrecorded crossborder trade between Croatia and the Croat-controlled areas of the Federation. BiH officials would like to diversify the country s trade away from the strong bias towards Croatia; they have voiced dissatisfaction with the higher costs of imports channelled through Croatia, as well as with the discrimination shown by Croatia towards BiH s main exports, such as salt, timber and wood products current-account data are unavailable World Bank estimates of the current-account balance are the best available and show a rapidly widening deficit in 1996, up to $1.6bn from $134m in The central bank has begun to produce current-account information, although it faces the same problems as the Federation s Statistics Bureau in collecting reliable data. The widening of the current-account deficit is likely to have slowed in 1997, as import growth has decelerated owing in part to delays earlier in the year in foreign inflows. It is likely to widen as economic activity picks up in For the time being it will be financed by donor loans, but the extent of the deficit will become more of a concern in the medium term if exports do not start to pick up to close the gap.