IMF warns BiH authorities about low GDP growth, high inflation and need to increase interest rates

"If we receive the request, we will be ready to support Bosnia and Herzegovina as before," Iancu confirmed.

As part of the IMF's current visit to Bosnia and Herzegovina, the IMF expressed its position that interest rates should be raised in the country because higher interest rates help in the fight against inflation.

"We call on the Central Bank to take measures immediately in terms of reducing the difference between interest rates in BiH and those in the eurozone. So, not all at once and not completely to the level of interest rates in the eurozone now, but to a certain gradual reduction of that difference," emphasized Iancu.

There are different points of view between the representatives of the IMF and the authorities in Bosnia and Herzegovina regarding interest rates.

She reminded that interest rates in the Eurozone have risen since last summer by 400 basis points or about 4 percent. It is expected that they will remain at a high level for the next few years.

On the other hand, she points out that Bosnia and Herzegovina is a small open economy with very strong ties to Europe, especially to countries in the eurozone. BiH has also a currency board arrangement where the currency is the convertible mark tied to the euro.

"Here on the domestic front, interest rates have risen a little and in this sense, we are talking about the compensation rate that the Central Bank pays to commercial banks for the reserves that these banks have with the Central Bank. There are several different rates, and the maximum increase that has so far occurred at the Central Bank of the fee rate is 75 basis points. In our opinion, these rates should go up, otherwise, we may end up in a situation where money starts to leave Bosnia and Herzegovina, where there is an outflow of capital. So those are the reasons, and the reason is that high-interest rates help in the fight against inflation," told Iancu.

In the context of salary reductions, she pointed out that the IMF is only asking that "fiscal policy be less explicit", that is, "through fiscal policy, current consumption should be restrained to some extent".

"The representatives of the government should decide for themselves where exactly they will open this space for disallowing fiscal spending. However, our general advice is for them to look at reducing current spending, but to avoid any cuts, i.e. reducing capital spending. It is up to the authorities, that is, the governments, to identify which items are suitable for reducing consumption, i.e. items where savings can be achieved," said Iancu.

She said that the IMF "does not advise an immediate necessary wage reduction".

She underlined that the IMF strongly opposes changes in the VAT rate for two reasons.

"The first is that VAT is still the main source of income, that is, revenue collection in BiH. Another reason is that if a differentiated VAT rate were to be introduced, it would imply that revenue collection would be less efficient. It would be very difficult to manage such a system with a differentiated VAT rate. Also, this system would open wide doors for various possibilities of tax evasion. Finally, some studies testify to the fact that the differentiated rate of VAT ultimately did not benefit the poorer part of the population, which was the purpose of that measure," stated Iancu.

She explained that the IMF is forecasting a growth rate of two percent for this year, and, as she says, she agrees with the projections of the BiH authorities.

She said that Bosnia and Herzegovina is expected to urgently establish a fund for financial stability that would help in a possible crisis in the banking sector, as well as to adopt a new law on the prevention of money laundering and terrorist activities and to prepare for the EU mechanism on border adjustment of carbon emissions.

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