IMF warns it would halt aid to Bosnia if currency policy endangered

By Daria Sito-Sucic

By Daria Sito-Sucic

SARAJEVO, April 1 (Reuters) - The International Monetary Fund warned Bosnia on Wednesday it would drop assistance agreed to ease the impact from the spread of coronavirus on the health system and economy if the authorities undermine the country's currency arrangement.

Last month, the IMF announced it may extend a 165 million euros ($180.5 million) loan to Bosnia under its Rapid Financing Instrument (RFI) to soften the blow.

Following the war in the 1990s, Bosnia's monetary policy has been based on the currency board arrangement pegging the convertible marka to the euro under a fixed rate. The international reserves kept in foreign banks back up the marka.

However, since the outbreak of the epidemic, Bosnian Serb leaders, led by Milorad Dodik who is a Serb member on Bosnia's tripartite inter-ethnic presidency, have pressured the central bank to halve its international reserves and redirect them to the country's two autonomous regions to help businesses.

So far, Bosnia has recorded 465 cases of the coronavirus and 13 deaths.

The impoverished Balkan country, which has introduced a lockdown to curb its spread, is already feeling the effects on its economy, with hundreds of businesses shut down and thousands of workers laid off.

The IMF said on Wednesday the currency board arrangement was a "pillar of stability in this uncertain time", having served Bosnia well for over two decades and contributing to confidence in the currency.

"Any attempt to use the central bank's international reserves for fiscal purposes would undermine the currency board, threaten financial stability and risk significant inflationary developments," Andrew Jewell, the IMF Resident Representative in Bosnia, said in a statement.

Jewell said such intervention would add a financial and currency crisis on top of the economic and humanitarian crisis that Bosnia now faces.

"For this reason, the IMF will not provide any financial assistance to Bosnia under the RFI if the currency board arrangement is compromised," he said.

The lender said it has been preparing to disburse the loan in the second half of April, and that the total disbursement could be even larger if the IMF's Executive Board decided to increase the borrowing limit under the instrument.

The central bank has said that Bosnian banks are liquid and well capitalised and can meet all the requirements of their depositors. It also said it could decide to cut the required reserve rate for commercial banks if need be.

Bosnia's two regions, the Serb Republic and the Bosniak-Croat Federation, plan to form special stabilisation funds to help economy and businesses, which would include the IMF funds and other funding they plan after revising their respective 2020 budgets. ($1 = 0.9142 euros) (Reporting by Daria Sito-Sucic; Editing by Alison Williams)