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Contents Abbreviations .................................................................................................................. 3

Executive Summary ........................................................................................................ 4

Background ..................................................................................................................... 6

Debt Status of Federation of Bosnia and Herzegovina ................................................... 7

Subnational DeMPA ....................................................................................................... 9

Summary of Assessment ............................................................................................... 11

Governance and Strategy Development ....................................................................... 14

DPI-1 Legal Framework ............................................................................................... 14

DPI-2 Managerial Structure .......................................................................................... 16

DPI-3 Debt Management Strategy ................................................................................ 17

DPI-4 Evaluation of Debt Management Operations ..................................................... 18

DPI-5 Audit ................................................................................................................... 18

Coordination with Fiscal and Budgetary Policies ......................................................... 19

DPI-6 Coordination with Fiscal and Budgetary Policy ................................................ 19

Borrowing Planning, Borrowings, and Other Financing Activities .............................. 20

DPI-7 Borrowing Planning ........................................................................................... 20

DPI-8 Borrowings ......................................................................................................... 21

DPI-9 Guarantees, On-lending and Debt-related Transactions .................................... 25

Cash Flow Forecasting and Cash Balance Management .............................................. 26

DPI-10 Cash Flow Forecasting and Cash Balance Management ................................. 26

Operational Risk Management ..................................................................................... 27

DPI-11 Debt Administration and Data Security ........................................................... 27

DPI-12 Segregation of Duties, Staff Capacity, and Business Continuity ..................... 29

Debt and Loan Guarantee Records and Reporting ....................................................... 31

DPI-13 Debt Records .................................................................................................... 31

DPI-14 Debt and Loan Guarantee Reporting ............................................................... 30

Annexes……………………………………………………………………………….322

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Abbreviations

AO Audit Office BCP Business Continuity Plan BiH Bosnia and Herzegovina CBBH Central Bank of Bosnia and Herzegovina DAR Department for Analysis and Reporting DDS Department for Debt Settlement DMS Debt Management Sector DBCDR Department for Borrowing and Coordination of Development Resources DeMPA Debt Management Performance Assessment DPI Debt Performance Indicator DRI Debt Relief International DRP Disaster Recovery Plan DRS Debt Recording System DSA Debt Sustainability Analysis DTS Debt Tracking System EU European Union FBiH Federation of Bosnia and Herzegovina FDI Foreign Direct Investment FMoF Federal Ministry of Finance IMF International Monetary Fund IR Interest Rate MoFT Ministry of Finance and Treasury MPI Ministry of Planning and Investment MTDS Medium-Term Debt Management Strategy N/A Not Assessed N/R Not Rated ODA Official development assistance OECD Organization of Economic Cooperation and Development PFM Public Finance Management PIP Public Investment Program RFSPS Regulation of financial Sector and State Portfolio Rep.Srpska Republika Srpska RSFBIH Registry for Securities of the Federation of Bosnia and Herzegovina SASE Sarajevo Stock Exchange SOEs State owned enterprises State The central government of Bosnia and Herzegovina TA Technical Assistance TB T-Bills TBA T-Bills Auctions UN United Nations USD US Dollar WB World Bank

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Executive Summary

The World Bank mission team comprised by Memes/ Messrs. Lilia Razlog (mission lead, PRMED, WB), Tomas Magnusson (consultant) and Mr. Michel Vaugeois, Debt Relief International (DRI), conducted a Sub national DeMPA evaluation of Federation of Bosnia and Herzegovina (FBiH). At the request of the authorities, the mission took place from March 6 to 14, 2013.

The team worked closely with the main counterparts at the Federal level such as Ministry of Finance (FMoF), Sarajevo Stock Exchange, Court of Auditors, as well as the state level officials from the Ministry of Finance and Treasury (MoFT) and the Central Bank of Bosnia and Herzegovina.

The mission benefited from excellent cooperation from the Debt Management Sector of the Ministry of Finance of the Federation of BiH.

The assessment revealed the following main highlights across the six core functions:

• Governance and Strategy - The legal framework clearly provides to the FMoF a full authority to undertake borrowing operations at the Federal level. Importantly, the FMoF prepares a detailed report of the Federal public debt situation and potential risks arising from the portfolio composition or new borrowing requirements to the Parliament on an annual basis. However, other elements of a comprehensive debt management legal framework are missing, such as the statement of borrowing objectives and legal requirement for development of a medium term debt management strategy (MTDS).

• The Central Bank is acting as a fiscal agent of the State, as well as the payment agent of the Federation of BiH, in accordance with the bilateral agency agreement. The lending by the CB to the State or the Federation of BiH is prohibited by the legislation.

• Coordination with Fiscal and Budgetary policy – The debt service forecasts prepared for the budget preparation process are generally reliable. However, no sensitivity analysis is undertaken during the debt service forecasting exercise.

An independent debt sustainability analysis (DSA) has never been undertaken by the SN government authorities.

• Borrowings and Related Activities – Primary source of funding for the deficit financing in the Federation of BiH comes from external debt, contracted and refinanced to the federal level by the State MoFT. Since 2011, Federal MoF started issuance of the domestic T-bills and bonds as a secondary source of deficit financing, which are kept at a relatively low level for now. Further development of the domestic debt market requires considerable improvement of the cash management forecasting, which would allow elaboration of an annual auction calendar. In addition, Federal MoF has a substantial portfolio of on-lending transactions, which are undertaken without underlying analysis of the efficiency of such financing.

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• Cash Flow Forecasting and Cash Balance Management –Cash management forecasts are produced on a quarterly basis, but are not regularly shared with the Debt Management Department. Although there is established target on the preferred liquidity buffer by the Treasury, no actions are undertaken on a monthly basis to keep the liquidity amount at the target level. During the recent years, Treasury had to reinvigorate the practice of cash rationing to manage its payment obligations.

• Operational Risk Management - There is an understanding of operational risk but lack of a formal operational risk management framework. Debt data are entered in a system that is not secured and where backups are stored in the same location. Business continuity and disaster recovery plans that would provide guidelines to keep the Ministry functioning in case of an emergency are also lacking.

• Debt Recording and Reporting –Although the existing debt statistics at the federal level is reliable, overall public debt statistics of the Federation of BiH require further improvement. In order to achieve this objective, an enhancement of the reporting patterns from the cantons and municipalities is required. The FMoF is aware of the importance of a qualitative debt data and is in the process to develop requirements for procurement of the debt management software.

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Background

Political economy The Dayton Accords of 1995 established a highly decentralized governance structure in Bosnia and Herzegovina (BiH). The main powers were given to the Federation of Bosnia and Herzegovina (FBiH), and Republika Srpska (RS), called Entities in the Constitution. Under the Constitution, the responsibilities of the State (called the Institutions of Bosnia and Herzegovina) are limited to the traditional sovereign areas such as foreign policy, foreign trade policy, customs policy, monetary policy, entry of the international obligations of Bosnia and Herzegovina, immigration policy, international and inter-Entity criminal law enforcement, establishment and operation of common and international communications facilities, inter-Entity transportation, and air traffic control. All other powers are delegated to the two Entities. The FBiH, in turn, is comprised of 10 cantons (7 with Bosnian majority, and 3 with Croat majority).

The main source of public revenues of Bosnia and Herzegovina comes from the indirect taxation. These taxes stand for 65 -70 percent of the total public revenues. They are collected by the State and then distributed to the two Entities based on the proportion of revenues collected from each entity. There is a specific calculation method used to define the exact amount of revenues to be transferred to the entities, however roughly the two-thirds of the indirect taxes are transferred to FBiH and the remaining one-third to RS. The direct taxes (income, profit and property), in case of FBiH are mainly collected and held by the Cantons. The State collects very small share of revenues, mainly from fee based public services. Thus, to finance its activities it has been determined that FBiH shall provide two-thirds, and the RS one-third of the revenues required by the State budget.

The budget of the State is always balanced, and the State does not have any borrowing requirements. Consequently, the two Entities and their sub nationals, such as the Cantons and municipalities, are ultimate borrowers of the external and domestic resources, even in cases when formally borrowing is undertaken by the State level MoFT. For example, as State acts as a main counterpart for entering into “international obligations”, formally all borrowings from the international financial institutions and other sovereigns are done by the State.1 In practical terms, all these loans are on-lent by the State to the Entity that has requested these funding.

1 This means that these international agreements formally must be approved by the National Parliamentary Assembly, and ratified by the State Presidency. As representatives from the Entity that has asked for these foreign funds takes an active part in these negotiations, and that it is this Entity which will service the debt, in practical term it also determines the terms and conditions. In the Law on Debt Issuance, Debt, and Guarantees of Bosnia and Herzegovina, “International Agreement” is defined as an agreement under which Bosnia and Herzegovina agrees to assume credit and other financial liabilities, which is executed in written form with one or more countries, or with one or more international organizations, and which is regulated by international law.

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Debt Status of FBiH

Total Debt Structure of the Federation of Bosnia and Herzegovina

At end of 2012, the Federation’s total debt (domestic and external) amounted to KM 5161 million (equivalent to USD 3487 million) or 27 percent of GDP of the Federation of Bosnia and Herzegovina. External debt represented 85 percent (or KM 4374 million equivalent to USD 2959 million) of the total portfolio while domestic debt accounted for the remaining.

External Debt

The Federation’s external debt stood at KM 4379 million (or 23 percent of GDP) at the end of 2012, an increase of 5.6 percent from 2011, primarily due to new disbursements from multilateral institutions (IBRD, EBRD, EIB and IMF) and from one major bilateral source (Spain).

As Figure 1 indicates, old debt (resulting from the repartition of the external debt contracted by the former Yugoslavia) represented 25 percent of the Federation external debt portfolio at end 2012. This category comprises rescheduling agreements from both, the Paris Club and London Club as well as IBRD debt. New debt, accumulated by the FBiH is dominated by multilateral creditors (Figure 1).

Source: Federal Ministry of Finance

24.72%

64.25%

9.15% 1.85%

Figure 1 - External Debt Composition by Types of Creditors

Old Debt Multilateral Bilateral Commercial

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Domestic Debt2

Domestic debt stood at KM 781.3 million (or about USD 528 million) at end 2012 (estimated at about 4 percent of GDP), an increase of 3 percent from the previous year primarily due to the first time issuances of long-term securities (2, 3, and 5 year Treasury bonds) of about KM 130 million in the local capital market during 2011. About 77 percent of the Federation’s domestic debt portfolio originates from the securitization of war claims (direct war claims and frozen foreign currency savings account), while new issuances of T-bills and bonds represented 8 percent and 17 percent respectively of the total portfolio (figure 2)

Source: Federal Ministry of Finance

Total Debt Currency Composition

As Figure 3 indicates, forty three percent of the total debt (external and domestic) portfolio is labeled in Euro, followed by the US dollar (22 percent)3 and the local currency (21 percent).

2 / As per the DeMPA methodology, domestic debt does not include suppliers’ arrears and liabilities on the basis of outstanding wages and allowances of the Ministry of Defense and the Army of the Federation of BiH which have not been securitized. 3 / The Federal Ministry of Finance reports its external debt currency composition including the SDR. For the purpose of analysis the true exposure, the SDR has been decomposed into its four currencies (Euro, Japanese yen, British Pound sterling, and the US dollar).

52% 25%

8%

17%

Figure 2 - Domestic Debt Stock by Types of Instruments End 2012

Frozen Foreign Currency Savings War Claims T-bills Tbonds

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Other currencies (UK pound sterling, Japanese yen, Saudi Riyal, Kuwaiti dinar, etc.) account for about 13 percent. As the local currency is pegged to the Euro, foreign currency risk decreased. As a result, about 35 percent of the overall total public debt portfolio is exposed to the variations of foreign currencies.

Sources: Federal Ministry of Finance and World Bank

Subnational DeMPA

The subnational DeMPA tool assesses 33 dimensions of subnational debt management activities (and closely related areas), organized into 14 debt performance indicators (DPIs)4. It aims to measure the performance of SNG debt management and capture the elements that are indispensable to achieving sound DeM practices. Although the subnational DeMPA does not specify recommendations for reforms or staff capacity- and institution-building needs, the performance indicators for each dimension do stipulate a minimum level that should be met under all conditions. Consequently, an assessment showing that the subnational DeMPA minimum requirements are not met indicates an area that normally would be considered a priority for reform or capacity building or both.

4 The sovereign DeMPA covers 35 dimensions organized into 15 DPIs.

43.30%

22.20%

21.30%

13.20%

Figure 3- Total Debt Currency Compositoin

EUR USD KM Other

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In assessing the DeM activities of the chosen subnational entity, the assessment will include the borrowing activities such as borrowing from financial institutions including commercial banks, issuance of subnational bonds and other debt securities, issuance of loan guarantees to support a certain entity or projects, on-lending, and cash flow forecasting and cash balance management. The subnational DeMPA does not, however, assess the ability to manage any implicit contingent liabilities, such as the capacity of the SNG to monitor and supervise the non-guaranteed borrowings and other activities of its public enterprises.

The scoring methodology will assess each dimension and assign a score of A, B, or C, depending on the criteria listed. If the minimum requirements set out for score C are not met, then a score of D should be assigned.

Special attention was given to the consideration of the C scores for each dimension in each indicator. The score of C indicates that a minimum requirement for that dimension has been met. A minimum requirement is considered the necessary condition for effective performance under the particular dimension being measured. A score of D, which indicates that the minimum requirement has not been achieved, signals a serious deficiency in performance, normally requiring priority corrective action.

The A score reflects sound practice for that particular dimension of the indicator. The B score lies between the minimum requirements and sound practice for that aspect.

There are also situations in which a dimension cannot be assessed. These could be because: (i) it is not applicable, e.g., there are no derivatives. In such an event, the term “not applicable (N/A)” is to be assigned5. Or (ii) due to insufficient information it is difficult or impossible to assess, in which case, a designation of N/R (not rated or assessed) is to be assigned.

5 N/A is used when an activity is not performed, e.g. derivatives are not used, or loan guarantees are not issued.

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Summary of Assessment This table summarizes the assessed score for each dimension within the fourteen indicators.

Performance Indicators and Dimensions Score

DPI-1 Legal Framework

1. The existence, coverage, and content of the legal framework on authorization to borrow and undertake other debt management activities, to issue loan guarantees, and on external audit of DeM operations

C

2. Extent of a legal limit to direct access of unsecured financing from the central bank

A

DPI-2 Managerial Structure

1. The managerial structure for SNG borrowings and debt-related transactions

C

2. The managerial structure for preparation and issuance of SNG loan guarantees

A

DPI-3 DeM Strategy

1. The quality of the DeM strategy document D

2. The decision-making process, updating, and publication of the DeM strategy

N/A

DPI-4 Evaluation of DeM Operations

1. The presentation and content of an annual evaluation report to the local assembly (or similar body) on debt management activities

C

DPI-5 Audit 1. Frequency of audits of both the effectiveness and efficiency of SNG DeM operations and the effectiveness of the internal control system, as well as publication of the external audit reports

D

2. Degree of commitment to address the outcomes from the audits N/A

DPI-6 Coordination with Fiscal and Budgetary Policy

1. Coordination with subnational fiscal/budgetary policy through the provision of accurate and timely forecasts on total debt service under different scenarios

C

2. Availability of key macro variables and an analysis of debt sustainability, and the frequency with which it is undertaken

D

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DPI-7 Borrowing Planning

1. Preparation and quality of an annual borrowing plan for the aggregate borrowing requirement, and cost/risk assessment of borrowing options

D

DPI-8 Borrowings 1. Preparation and publication of an auction calendar for issuance of SNG debt securities

D

2. Entry of transaction data into the debt recording/management system by front-office staff or, alternatively, preparation of a terms sheet after conclusion of any borrowing

C

3. Availability and degree of involvement of legal advisers C

4. Availability of documented procedures for all borrowing operations

C

DPI-9 Loan guarantees, On-lending, Derivatives

1. Availability and quality of documented policies and procedures for approval and issuance of the SNG loan guarantees

C

2. Availability and quality of documented policies and procedures for on-lending of borrowed funds

D

3. Availability of a DeM system with functionalities for handling derivatives and availability/quality of documented procedures for the use of derivatives

N/A

DPI-10 Cash Flow Forecasting and Cash Balance Management

1. Effectiveness of forecasting the aggregate level of cash balances in the SNG bank accounts

D

2. Decision of a proper cash balance (liquidity buffer), and effectiveness of managing this cash balance (including the integration with any domestic borrowing program, if required)

D

DPI-11 Debt Administration and Data Security

1. Availability and quality of documented procedures for the processing of debt-related payments and receivables

C

2. Availability and quality of documented procedures for debt and transaction data recording and validation, as well as storage of agreements and debt administration records

D

3. Availability and quality of documented procedures for controlling access to the subnational government’s debt data recording and management system

D

4. Frequency and off-site, secure storage of debt recording and management system backups

D

DPI-12 Segregation of Duties, Staff Capacity, and Business Continuity

1. Segregation of duties for some key functions, as well as the presence of a risk monitoring and compliance function

D

2. Staff capacity and human resource management D

3. Presence of an operational risk management plan, including business-continuity and disaster-recovery arrangements

D

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DPI-13 Debt and Loan Guarantee Records

1. Completeness and timeliness of the SNG records on its debt, loan guarantees and debt-related transactions, including bank loans (if taken)

A

2. Complete and up-to-date records of all holders of the SNG debt securities in a secure registry system, if applicable

A

DPI-14 Debt and Loan Guarantee Reporting

1. Meeting of statutory and contractual reporting requirements of the SNG debt and loan guarantees to all domestic and external entities outside the SNG

C

2. Meeting of statutory and contractual reporting requirements for the SNG public sector debt and loan guarantees to all domestic and external entities outside the SNG

D

3. Quality and timeliness of the publication of a debt statistical bulletin (or its equivalent) covering SNG debt

D

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Governance and Strategy Development

DPI-1 Legal Framework Dimension Score

1. The existence, coverage, and content of the legal framework on authorization to borrow and undertake other debt management activities, to issue loan guarantees, and on external audit of DeM operations

C

2. Extent of a legal limit to direct access from the central bank A

Dimension 1

The complexity of the existing institutional framework in BiH has resulted in establishment of multiple legislative institutions covering all the levels of governance. In particular, each Entity of the BiH has its own Parliament and legal framework in place.

The State Constitution has no specific reference to the borrowing on behalf of the BiH. However, it clearly stipulates (art.3) that all government functions and powers not expressly assigned in this Constitution to the Entities of the BiH shall be those of the Entities.

The Law on Debt issuance, debt and guarantees of BiH mainly regulate borrowing and other relevant debt management functions at the State level. However, it also specifically stipulates the right of the two Entities to enter into borrowing agreement with external creditors with prior approval by the Parliamentary Assembly (art.49)6, which is in line with the Constitutional provisions.

The Constitution of FBiH7 establishes an exclusive competence of the FBiH to finance its activities. According to the Chapter IV, art.20 of the FBiH Constitution, the Parliament of FBiH, among others, is responsible for:

• approval of the loan agreements with the states and international organizations, with the agreement of the Parliamentary Assembly;

• approval of the budget of the FBIH and enacting legislation to levy taxes and otherwise secure the necessary financing.

6 In practice however, the FBiH did not use its rights for direct external borrowing after independence. 7 Constitution of FBiH, Chapter III art 1(h)

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At the Federal level, the Law on Debt, Borrowing, and Guarantees on the FBiH (86/07, 24/09 and 44/10) stipulates that FBiH can borrow externally and domestically, and in domestic or foreign currency. The Federal MoF is responsible for the implementation of the borrowing procedures and management of the Federation debt. According of the Art.51 and 52 of the same legislation, the Federal MoF is the only entity responsible for preparation and signature of the Federal guarantees. At the same time, Federal guarantees are only signed after a formal approval of the Federal Parliament. The law also includes borrowing limits for the overall public debt of the federation, which is consolidated at the FMoF.8

According to the same Law, the Federal Government of FBiH created a Commission for Debt9, which includes the Federal MoF and cantonal MoFs. This commission, among others, is responsible for determining the stock of the Federal debt, decide upon current and future requirements for debt service, monitor debt sustainability, define criteria and amounts of new borrowing in relation to the overall limits of borrowing for the next fiscal year, etc.

The framework Budget Law of the FBiH (art.41) stipulates the purposes of the federal borrowing, such as budget deficit financing, financing of capital investments, payment of Government guarantees in the event of borrower’s failure, and others. The Law also defines that the only public entity responsible for debt management at the federal level is the Federal Ministry of Finance (art.52). According to the chapter V art.40 of the above Law, the amount of the borrowing of the FBiH debt or guarantees is decided by the Federal Parliament on the proposal by the Government.

Such decisions are made in accordance with the amounts and purpose determined in the Annual budget and Budget Execution Law.

8 The Federal Law on Debt, Borrowing and Guarantees, art. 7: “The Federation may borrow long-term if at the time of borrowing the amount of debt servicing for the entire internal and external debt and guarantees coming due in each following year, including servicing for the proposed new borrowing and all loans for which the Federation guarantees were issued, along with the limits on the amounts of debt of cantons referred to in paragraph 2 of this article, does not exceed 18 percent of consolidated Federation and cantonal revenues generated in the previous fiscal year.” 9 At the state level, there is also a designated legal framework which envisages creation of the Fiscal Council of BH, which includes all the level of governances. The objective of this Council is to coordinate and approve fiscal and debt policy documents at the state and entities’ level. However, the mission was informed that there were no Fiscal Council decisions in the area of public or Entities’ debt.

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Therefore, the Annual Federal Budget and the Law on Budget execution on the Federation include provisions of the planned issuance of domestic debt, as well as external debt borrowing for the deficit financing purposes. It also defines the ceilings for the Federation debt service and ceilings for the short-term debt. The information about the investment projects financing planned for the next budget cycles is included as an annex to the budget.

Score: Current legislation of the FBiH provides clear authorization to borrow and undertake debt related transactions, as well as to issue Federal guarantees. It also includes the purpose of borrowing by the Federal Government. Thus, the score C is assigned. A higher score cannot be given due to the fact that DM objectives are not specified in the Federal legislation.

Dimension 2

The article 52 and article 67 of the Law of the Central Bank of Bosnia and Herzegovina prohibit the Central Bank to provide any credit to the authorities of BiH. Since the country’s independence, the CB has never provided credits to the public authorities, neither at the State or Entities’ level of governance.

The CB acts as fiscal and payment agent of the FBIH based of the mutually agreed agency agreement between the CB and FMoF.

Score: Due to the clear legal prohibition of the borrowing from the CBBH, as well as the fact that this legal provision was always followed by the authorities, a score A is assigned.

DPI-2 Managerial Structure Dimension Score

The managerial structure for SNG borrowings and debt-related transactions C

2. The managerial structure for preparation and issuance of SNG loan guarantees A

Dimension 1

In the FBiH government borrowing and debt-related transactions at the federal level are undertaken by the FMoF. Within the FMoF, the Debt Management Sector (DMS) is in charge of the federal debt management, as well as of the monitoring of the overall federal level public debt.

Thus, the DMS is a principal debt management office of the FBiH. It is composed by three Departments: Department for Analysis and Reporting – middle office; Department for Indebtedness and Coordination of development funds – front office and Department of debt settlement – back office. The head of the DMS has a title of Assistant Minister and is reporting directly to the Federal Minister of Finance.

Its main functions include preparation of the borrowing plans and borrowing agreements, mobilization and coordination of funding for financing of development projects, implementation of existing procedures for issuance of federal guarantees, and preparation of regular analytical

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reports on central level federal debt and overall public debt of the Federation. It is also responsible for debt service forecast and debt service payments. The DMS is also involved in the preparation of the on-lending agreements and project monitoring, as well as in the monitoring and reporting of the indebtedness of cantons, cities, municipalities, extra-budgetary funds and public companies. The organizational chart of the DMS is presented in annex 1.

As mentioned in DPI 1, the Federation Government is entitled for direct domestic and external borrowing within the legally binding limits. The direct external debt borrowing requires approval of the Federal level Government and Parliament. The domestic debt borrowing is undertaken by the FMoF with approval of the Federal Government. The approval process for the new borrowing includes submission of such information to the Debt Committee and the Cabinet of Ministers at the Federal level.

Score: The minimum requirements for the score C are met. A higher score cannot be assigned due to the lack of formal debt management strategy which would be steering debt management decisions.

Dimension 2

Issuance of loan guarantees is defined by the same legal framework as the direct borrowing. The loan guarantees at the Federal level can only be prepared and issued by the FMoF after approval of the Federal Parliament. The only entity responsible for the process of preparation, analysis and issuance of Federal guarantees is DMS of the FMoF, which is also the principal debt management entity.

Score: The score A is assigned for this dimension as all the requirements are being met.

DPI-3 Debt Management Strategy Dimension Score

1. The quality of the DeM strategy document D

2. The decision-making process, updating, and publication of the DeM strategy N/A

Dimension 1

At the state level, the Law of Debt Issuance, Debt and Guarantees of BiH10 envisage elaboration of the debt management strategy and require its approval by the Council of Ministers.

10 Article 5 of the Law

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At the same time, the Federal Law on Debt, Borrowing, and Guarantees currently does not mention any requirement of elaboration and approval of the medium term debt strategy at the Federal level.

In practice, a debt management strategy has never been developed in Bosnia and Herzegovina, neither at state or federal level of government. During the 2011, the DMS in cooperation with its colleagues from the state and entities’ level have prepared a first draft MTDS. However, this process was not completed and an overall MTDS was not finalized till now.

Score: The score for this dimension is D due to the lack of a formal debt management strategy .

Dimension 2

This dimension is not rated as a MTDS has never been prepared by the Federal MoF.

DPI-4 Evaluation of Debt Management Operations

Dimension Score

1. The presentation and content of an annual evaluation report to the local assembly (or similar body) on debt management activities

C

In line with the Art 17 of the Law on Debt, Borrowing, and Guarantees in the FBiH, the FMoF is required to present a detailed report to the Federal Parliament about the evolution of federal public debt on an annual basis. Such report must be submitted within 6 month from the end of the previous fiscal year.

In practice, FMoF presents such reports at least on an annual basis, but sometimes semiannual reports are also developed and sent to the Parliament. Such reports include debt statistics of the overall Federal public debt, its composition by creditor, currency, interest rate. It also includes comparative information with regard to the debt evolution from previous years, as well as analysis of the challenges in the area of debt management.

In addition to the above reporting, brief information about the federal debt is reported to the Parliament as part of the annual budget execution report.

Score: The score C is assigned to this dimension. Higher score could not be given due to lack of a debt management strategy.

DPI-5 Audit

Dimension Score

1. Frequency of audits of both the effectiveness and efficiency of SNG DeM operations and the effectiveness of the internal control system, as well as publication of the external audit reports

D

2. Degree of commitment to address the outcomes from the audits N/A

Dimension 1

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The external audits are conducted by the Audit Office for the Institutions of Federation of Bosnia and Herzegovina. The Audit Office during the recent years has audited the effectiveness and efficiency in parts of the health sector, agriculture and education, as well as in government water management to protect floods, etc. Till now, 8 performance audit reports have been developed by the Audit Office. Yet to be undertaken, however, is a performance audit of the debt management activities on the federal level.

The law governing the Audit Office is the Law on Auditing the Institutions of Federation of Bosnia and Herzegovina (2006). According to this Law, the Audit Office is responsible for financial audits, performance audits, and other specific audits covering all public institutions of FBiH. It reports directly to the Federal Parliament, and is a member of both INTOSAI and EUROSAI.

There is also an internal audit function, located in the Federal Ministry of Finance, called the Internal Audit Unit of the MoF. It reports directly to the Minister. On debt management activities, most attention has been on the planning process to ensure there are enough funds to service the domestic debt, particularly the claims related to the old legacy debt, such as the frozen saving deposits and the war claims. In this regard, they also have checked the debt database for completeness of debt data. In their opinion, there are good controls to assure that the debt data entries are correct. In addition, it has checked whether the end users of the loans are servicing their debt to the Federation at the due dates.

Score: As no external performance audit of any part of the debt management operations has been conducted within the past five years, the minimum requirements are not met. The score is D.

Dimension 2

As no performance audit has been conducted, the second dimension on the degree of commitment to address the outcomes from the audits is not applicable.

Coordination with Fiscal and Budgetary Policies

DPI-6 Coordination with Fiscal and Budgetary Policy Dimension Score

1. Coordination with subnational fiscal/budgetary policy through the provision of accurate and timely forecasts on total debt service under different scenarios

C

2. Availability of key macro variables and an analysis of debt sustainability, and the frequency with which it is undertaken

D

Dimension 1

As part of the yearly budget preparation, the DMS prepares and sends to the Budget Sector forecasts of the debt service, including debt service on both present debt and scheduled disbursements during the next budget year. The forecast of interest amount for new debt is

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calculated by using the current interest rates and increasing that rate by 0.5-1.0 percent to take into account the risk of any upward movement. No sensitivity analysis of likely interest movements is undertaken. The same method is used to forecast likely currency movements, i.e. by using present exchange rates and adding to the forecasted debt service an amount of 5-7 percent of the base case amount to take into account the risk of foreign currency appreciation. As the local currency –Marka - is pegged to the euro (equal to 50% of the total currency exposure) through the currency board arrangement, this added amount is basically to serve as a cushion against any upward movement of the US$, which contributes to the other half of the currency exposure. Also in this case, no sensitivity analysis is undertaken.

Overall, the debt service forecasts are reasonably reliable. In the budget year of 2012, the forecasted interest payments on the external debt deviated from the actual outcome by 15% (83.4 million compared to 70.9 million Marka) mainly due to the added margin used and currency movements, and in the budget years of 2011 and 2010 by 10.5% (78.8 million compared to 70.5 million Marka) and 33.3% (92.3 million compared to 61.6 million Marka) respectively. The relative large deviation in the budget year of 2010 was due to planned disbursements on contracted loans that never occurred.

Score: To conclude, as part of the yearly budget preparation, reasonably reliable forecasts are provided on total debt service of the Federation. The minimum requirements are met, and the score is C. For a higher score, the forecasts must include sensitivity analyses of the base case to interest and exchange rate shocks.

Dimension 2

No DSA has been undertaken so far, and nor are key macro variables used to support the debt management operations. The lack of use of macro variables is explained by the facts that no DSAs are undertaken, no sensitivity analyses are used, and no medium-term debt management strategy has been developed.

Score: The minimum requirements are not met. The score is D.

Borrowing Planning, Borrowings, and Other Financing Activities

DPI-7 Borrowing Planning Dimension Score

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1. Preparation and quality of an annual borrowing plan for the aggregate borrowing requirement, and cost/risk assessment of borrowing options

D

In the annual budget, separate ceilings for issuance of T-bills and T-bonds are stated. In addition, an annex of the annual budget includes a list of capital projects financed by external borrowings,11 together with planned loan disbursements over the year for these projects. In addition, the annual Development Projects Plan includes a section on potential creditors and the financial terms they offer. Apart from this information on planned borrowing and potential creditors, no borrowing plan is prepared, nor any auction calendar.

Score: The minimum requirements are not met. The score is D.

DPI-8 Borrowings Dimension Score

1. Preparation and publication of an auction calendar for issuance of SNG debt securities

D

2. Entry of transaction data into the debt recording/management system by front-office staff or, alternatively, preparation of a terms sheet after conclusion of any borrowing

C

3. Availability and degree of involvement of legal advisers C

4. Availability of documented procedures for all borrowing operations C

Dimension 1

Since 2011, the FBiH, through its FMoF, has started issuing securities for budget deficit financing. From 2011 until 2012, the DMS has conducted six auctions of T-bills. These financial instruments have a tenor of six months with an average interest rate of 2.1 percent. Starting in 2012, DMS has also issued medium-term securities (2 year, 3 year, and 5 Treasury bonds). Two year T-bonds carried an interest rate of 4.75 percent while 3 year T-bonds were priced at 5.35 percent and 6.10 percent for 5 year T-bonds. Maturity structure was selected by DMS based on market signals. DMS conducts informal meetings with all market participants as well as official meetings on the quarterly basis.

11 All external borrowings are formally contracted by the State, and on-lent to the Entities.

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Auctions of the various instruments are conducted at the Sarajevo Stock Exchange (SASE) and the issues are listed on the same stock exchange. Auctions are held on a Thursday and opened only to registered agents of SASE (nine broker houses of which two are commercial banks). The Federation securities can be purchased by local and foreign residents through the registered agents.

The Federation has also securitized compensations arising from the 1992-1995 by issuing long-term instruments (war claim bonds with a nine year grace period, maturing in 2017, and an interest rate of 2.5% and frozen foreign currency savings account bonds with no grace period, maturing in 2016 with an interest rate of 2.5%). These bonds are also registered at the Registry of Securities (based on the information provided by FMoF) and listed on SASE.

Currently, the market can be characterized as being shallow and having a narrow investor base. About nine commercial banks (out of 27) are active participants holding all T-bills and T-bonds. No secondary market trading on the Federation securities has been reported by SASE as opposed to heavy trading on the other types of bonds.

Once in six weeks, DSM prepares the Decision of issuing securities to be approved by the Federation Government. The decision contains certain information such as the amount to be issued (which represents a ceiling), type of securities and terms of borrowing (interest and maturity in the case of T-bonds, and maturity in the case of T-bills as they are sold at a discount). Based on the amount approved, DMS may organize one or several auctions (with the constraint that the amount issued cannot be greater than the amount stipulated in the Decision) as DMS prefers to issue a maximum of 20 million KM at the auction in order to keep the cost of borrowing low. At least seven days prior to the auction, the Ministry publishes a Public Call which contains the following information: amount to be issued, type of security, issuing terms and condition, coupon interest rate, temporary symbol of Federation’s bond, issuing date and maturity, payment date, coupon or manner of defining coupon, and contact persons in the Ministry. The Public Call is made public through the websites of the FMoF and Sarajevo Stock Exchange, and its publication in at least two newspapers.

On auction day, trading occurs between 9H00 and 10H00 when purchased orders can be rescinded and up until 10H30, when the purchased orders are finalized through SASE electronic system. After trading, SASE is responsible for providing the list of bidders by decreasing order (multi-price auction) to FMoF. The FMoF then makes the decision and informs the winning bidders through SASE electronic system and records the transaction in its database on the same day of settlement (ensuring that the funds have been properly transferred). Settlement must occur within one day (T+1) after the auction. The FMoF, then, sends the Order of Registration (which provides amount issued, terms of the security, number of the security) and the list of securities holders with the relevant banking information to the Registry of Securities. Registration might be done with a maximum delay of two days (T+2). Then the Registry of Securities notifies both FMoF and SASE. Lastly, the securities are listed on SASE after receiving the Order of Listing from FMoF. On settlement day, the Registry of Securities which is the paying agent of FMoF makes the necessary arrangements based on the Order of Payment from FMoF (see DPI-11 for details).

All the procedures related to the issuance of Government securities are described in the Decision on Terms and Conditions and Procedures for Issuing Treasury Notes in the Federation of Bosnia and Herzegovina and published in the Official Gazette of FBiH.

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Score: Currently, DMS does not elaborate nor publish an auction calendar and cash flow forecast does not feed into a borrowing plan (see DPI-7). Therefore, the minimum requirements for this dimension are not met and is rated D.

Dimension 2

As mentioned in the DPI 1, the FBiH is authorized, through the Federal Ministry of Finance, to borrow either directly in the international market (multilateral, bilateral, and commercial) or through the State. Over the last decade, the FBiH has financed its development needs only through on-lending agreements with the State (the last time the Federation contracted direct external loan was in1998) and mostly from multilateral sources.

For on-lending, borrowing process starts when a Federal sector ministry (or canton, public corporation) sends a proposal to FMoF. DMS prioritizes the various proposals that require external financing (based on certain criteria such as feasibility study done, government priority sector, etc.) and records the selected projects in the Public Investment Program (PIP). The requests are sent to Government for approval before being submitted to MoFT. During the negotiation, a joint team composed of representatives of MoFT, FMoF, and beneficiaries participate in the discussions. Once an agreement has been reached, the appropriate documentation (draft agreements, minutes of negotiations) are sent to the State Government for approval and authorization to sign. Once this has been done, the legal document (and the subsidiary or on-lending agreement) should be sent to the Parliament for approval. This process is followed only for IDA and EBRD as the multilateral institutions prepare the draft subsidiary agreement. In other cases, due to a shortage of staff, the subsidiary is drafted at a later stage. Parallel to this process, at the Federal level, the DMS prepares the necessary documentation for approval by the Federal Government before sending to the Federal Parliament which authorizes the signature of the subsidiary agreement. The last step of the process is the signing of the on-lending agreement (which has the same terms as the original external credit agreement) between the MoFT and FMoF. Within five days, all the documentation12 is forwarded to the DMS to be recorded in the external debt database. The information is recorded in the database on the same day it’s being received.

For direct lending, the same process and procedures would have to be followed at the Federal level with the authorized representative of the Federation signing the loan agreement. In addition, as required by law, the Federation would also have to obtain pre-approval for its external borrowing from the Parliamentary Assembly. However, since no direct external

12 All documentation in this regard means: loan agreement, subsidiary agreement, and decision which provides the same type of information required to prepare a term sheet and drafted for Government approval by the DMS Front office.

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borrowing was undertaken by the FBiH so far, the procedures for such operations are somewhat unclear.

Most of the time, the request for financing comes with an already identified lender and DMS does not undertake an assessment of the most beneficial or cost effective terms. Although FMoF has the power to refuse the request from public corporation or sector ministries, it seldom used such power, only in cases when the terms of borrowing exceeds the repayment capacity of the beneficiary.

Score: As the new foreign currency borrowing transactions based on the information prepared by the Front Office are recorded in external database within five days of the signature of the subsidiary agreement and the domestic database on the same day of the transaction (see Dimension 1), the second dimension is rated C13. A rating B would require DMS to record or prepare a term sheet for the signed legal documents within three business days.

Dimension 3

It is important for debt managers to receive appropriate legal advice and to ensure that the transactions they undertake are backed by sound legal documentation. The DMS only involves legal advisors from the Legal Affairs Sector when deemed necessary during the negotiation process. However, lawyers (one for external debt and two for domestic borrowing) who are permanent staff of DMS have, as one of their functions, the task to review and comment on all loan agreements before they are signed. Therefore, this dimension meets the minimum requirement and is rated C. In order to get a B, the legal advisers should be involved during a substantial part of the negotiating process of concluding the legal agreements related to all foreign borrowings. Dimension 4

There are documented procedures for both external and domestic borrowings. The Law on Debt, Borrowing and Guarantees in the Federation of Bosnia and Herzegovina details the procedures to be followed before contracting external and domestic debt. The Law is complemented by the Rulebook on Procedures on Internal Control which provides the procedures and detailed steps to be followed in order to contract external (Article 81) and domestic debt (Article 83).

Score: The dimension meets the minimum requirement and is rated C. In order to get a B, the procedures manual would need to be reviewed and/or updated at least every two years.

13 The methodology recommends that the recording of the domestic debt is done on the same business day as the auction. However, the practice of ensuring that the bondholder has settled its account before recording the transaction is sound practice and follows the same procedures than the Registrar of Securities. For these reasons, both requirements for the second dimension meet the minimum requirements and is rated C.

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DPI-9 Guarantees, On-lending and Debt-related Transactions Dimension Score

1. Availability and quality of documented policies and procedures for approval and issuance of the SNG loan guarantees

C

2. Availability and quality of documented policies and procedures for on-lending of borrowed funds

D

3. Availability of a DeM system with functionalities for handling derivatives and availability and quality of documented procedures for the use of derivatives

N/A

Dimension 1

A “Rulebook on Supplemental Documentation and Information Necessary in the Procedure of Adoption of Decisions on Issuing Guarantees of the Federation and the Percentage of Premium and Commission for Issuing Guarantees” was approved by the Federal Minister of Finance in March 2008. These procedures include the content of the application for a loan guarantee to be sent to the FMoF, which among other things shall include assessment of credit worthiness of the borrower performed by an authorized auditor, and a requirement for the application to be published in the “Official Gazette of the Federation of BiH”. Furthermore, the Rulebook requires payments of a “risk” premium of 0.5% of the guaranteed amount upfront, and a commission of 0.5% of the guaranteed amount, also upfront.14

From the Rulebook it can be concluded that at least a basic risk assessment shall be undertaken, e.g. by the requirement that an assessment of the creditworthiness of the beneficiary must be undertaken, however, there are no guidelines on how this assessment would be conducted.

At present there is only one loan guarantee that is outstanding, issued in 2010 to a Railway Company. The guarantee is considered risky by DMS, which in this case undertook a proper risk assessment, which led to a requirement for collateral.

14 The Law on Debt, Borrowing, and Guarantees in the Federation of Bosnia and Herzegovina in addition includes some policy statements, such as the guarantees only can be used to support financing of capital investments.

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Score: As there are policies and procedures in place for the approval and issuance of loan guarantees, the minimum requirements are met, thus the score is C. For the B score, the procedures must be more specific on the credit risk assessment and include guidelines on how this assessment would be conducted.

Dimension 2

At the FBiH, on-lending operations are used much more frequently than guarantees. At present, of external debt of 4.2 billion Marka, over 1 billion has been on-lent, mainly to support construction of power plants. No credit risk assessment is undertaken prior to the on-lending transactions by the FMoF and written on-lending procedures are not in place.

Score: Since there are no written procedures for the approval and lending of borrowed funds, the minimum requirements are not met. The score is D.

Dimension 3

No derivatives are used or outstanding, thus this dimension is not applicable.

Cash Flow Forecasting and Cash Balance Management

DPI-10 Cash Flow Forecasting and Cash Balance Management Dimension Score

1. Effectiveness of forecasting the aggregate level of cash balances in the SNG bank accounts

D

2. Decision of a proper cash balance (liquidity buffer), and effectiveness of managing this cash balance (including the integration with any domestic borrowing program, if required)

D

Dimension 1

The Section for Cash Management and Budget Execution Supervision of the Treasury of the MoFT is responsible for cash flow forecasting based on in-flows and out-flows of funds from the Treasury Single Account (TSA). Quarterly forecasts of the monthly aggregate level are undertaken, which are updated when needed and at least on a monthly basis. These forecasts are submitted and approved by the Minister, however, not shared with the DMS on a regular basis.

The mission team was told that the forecasts of the expenditures (the out flows) were reasonably reliable but that the in-flows were more difficult to forecast, particularly the timing of expected budget support from the international finance institutions. No analysis is undertaken to compare the forecasts with the actual outcomes.

Score: Considering that the cash flow forecasts are not shared with the DMS by the start of each month, and that no analysis is undertaken to verify the degree of reliability of the forecasts, the minimum requirements are not met. The score is D.

Dimension 2

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According to the Assistant Minister of the Treasury Sector, target on the preferred liquidity buffer has been determined. However, no actions are taken on a monthly basis to keep the liquidity amount at the target level. Instead the DMS is requested to issue T-bills on a short notice when more revenues are needed to finance the planned expenditures. No investments of surplus cash have been undertaken during the last ten years, mainly because the targeted amount of the liquidity buffer is reached rather seldom.

Score: Due to the lack of any active cash balance management, the minimum requirements are not met. The score is D.

Operational Risk Management

DPI-11 Debt Administration and Data Security Dimension Score

1. Availability and quality of documented procedures for the processing of debt-related payments and receivables

C

2. Availability and quality of documented procedures for debt and transaction data recording and validation, as well as storage of agreements and debt administration records

D

3. Availability and quality of documented procedures for controlling access to the subnational government’s debt data recording and management system

D

4. Frequency and off-site, secure storage of debt recording and management system backups

D

Dimension 1

The Rulebook on Internal Control also regulates the processing of debt servicing payments for external debt (Article 88) and domestic debt (Article 89).

Debt service payments for external loans contracted through the State are the responsibility of the MoFT. The FMoF sends annual debt service projections to MoFT for the overall coordination of the external debt service payments.

For each payment, the Federal Ministry of Finance through the DMS must receive the creditor invoice, verify the amount, and provide its approval to MoFT for processing the payment. After that, MoFT initiates the Payment Order which contains the name and banking information of the creditor, banking reference, currency, and the specific amount of debt service payments for each Entity. Payment order is submitted to the Central Bank, as fiscal representative of the State, which Bank shall make payment of the necessary amount in the required currency to the creditor's account, charging main account proceeds ensured by Indirect Taxation Authority. The Central Bank, as the State fiscal agent externalizes the payments, debits the respective accounts, and notifies MoFT. Finally, MoFT informs the FMoF that payments have been made.

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For direct external loans, the payment approval process within the FMoF starts two weeks before the due date. After receiving the creditor invoice, the transaction is entered in the database after checking the amount, accrued interest, and cost. The Department of Debt Settlement within the DMS initiates the Payment Order after checking there is sufficient funds and sent to the Economic Finance Affair (for budget verification). After that, the Payment Order is sent to the Treasury for payments. . The procedures requires three signature of which the ones from the Minister of Finance and Prime Minister. Based on the agreement between the Central Bank of BiH and the FBiH, the Central Bank acts as the fiscal agent of the Federation to externalize the payments. The Federation of Bosnia and Herzegovina makes its payments on time and does not accumulate arrears.

For domestic securities, the Registry of Securities has been retained by the Federation as its paying agent. For bonds related to War Claims, and Frozen Foreign Savings Accounts bonds, the Registry computes interest and principal payments to be made and informs the FMoF. The Department of Debt Settlements initiates the payment order (that contains amounts to be paid, bond holders, etc.) to the Economic Financial Affair and then to the Treasury which authorizes the transfer of funds (this should occur five days before due date, but the timeframe is not always respected) to the Registry’s earmarked commercial bank accounts. The Registry makes the payments to the respective bond holders (that are recorded in the Registry) and, then, notifies the FMoF which then updates its database. For securities issued directly to the market, the same procedures are followed. The processes for domestic debt as for external, requires three signatures.

Score: As the documented procedures for processing debt related payments exist, the dimension is rated C as it meets the minimum requirement. In order to get a B, the Rulebook would need to be reviewed and/or updated at least every two years.

Dimension 2

There are some documented procedures for debt data recording (Rulebooks on how to keep records on external debt, guarantees, and domestic debt) that provide procedures on the flow of information (for example, between cantons and Federation) and the types of information (creditor name, amount, terms, disbursement, debt service payments, etc.) that need to be recorded. However, the rulebooks are silent on the procedures for validation of data entry, verification of information received and archiving of relevant debt documents. All debt information is usually recorded in a timely manner (see DPI-13 for details). Although the database is reconciled periodically, the person entering the data is also responsible for the validation (only two staff members are responsible for managing the external debt database). However, when debt service payment notifications are received, they are always verified with the information contained in the database before initiating payments.

Original subsidiary and copy of loan agreements as well as debt administration documents are kept and administered by the Department of Debt Settlements. They are stored in file cabinets within the department. No copies of existing documentation are made and stored in a more secure location.

Score: As there are no complete regulations or procedures manuals for debt data recording and validation, this dimension is rated D as the minimum requirements are not met.

Dimension 3

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Foreign and Internal Debt databases are kept on server placed in Server Room, for operation of which servers IT staff is responsible, and Debt Service Department staff is granted access to the server and are able to enter various types of data in the available databases via their PCs. The computers do not have specific passwords linked to the authorized users. As there is no such security, there are no possibilities of tracking user access to the databases and verifying who enters the information. As such the databases are not fully secured. Furthermore, the various rulebooks are silent on procedures for controlling access of debt data recording system.

Score: As there is no documented procedures manual on the matter, the third dimension does not meet the minimum requirement and is rated D. Dimension 4

The Department for Debt Settlement backs up once a week (at the end of the week) all the information contained in the external and domestic databases in a CD. Although the backups are stored in a separate room (within the IT server room) which is secure from theft (entry to the room is only accessible to authorized personnel) and fireproof, they are still kept within the same location and not in a separate backup site. The IT Department is responsible for maintaining the server of the Ministry (but not the databases of the DMS as there are not integrated in the network) and is making backups on a weekly basis. They are also kept inside the building.

Score: The current practices for the fourth dimension do not meet the minimum requirement and is rated D.

DPI-12 Segregation of Duties, Staff Capacity, and Business Continuity Dimension Score

1. Segregation of duties for some key functions, as well as the presence of a risk monitoring and compliance function

D

2. Staff capacity and human resource management D

3. Presence of an operational risk management plan, including business-continuity and disaster-recovery arrangements

D

Dimension 1

There is a clear separation between the front office and back office functions of the key debt management activities. The Department for Borrowing and Coordination of Development Resources acts as the front office for external and domestic borrowing (responsible for mobilizing external resources and issuing Federation securities), while the Department for Debt Settlements is responsible for back office functions (See DPI-2). Within the DMS, the Department of Debt Settlements initiates debt service payments for both external (direct loans) and domestic debt in cooperation with the Treasury Department of the FMoF which is the sole entity authorized to make the payment order and to transfer funds to the Central Bank or the Registry of Securities’ bank account. The process requires three different signatures which include the Minister of Finance and the Prime Minister.

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There should be a risk monitoring and compliance function with one or more staff responsible for this function. The primary role is to monitor whether all government debt management operations are within the authorities and limits set by government policies and comply with statutory and contractual obligations. Within the DMS there is no dedicated unit or a staff member responsible for risk monitoring and compliance.

Furthermore, as stated in the previous indicator, there is no specific staff assigned with the responsibility of verifying data entry. As a result, the same staff performs both functions (entry and verification).

Score: The first dimension does not meet the minimum requirements and is rated D as there is no staff or unit dedicated to monitoring risk compliance. Dimension 2

The DMS is currently composed of 18 staff instead of the 33 allocated positions. The Department for Analysis and Reporting (DAR) has four staff instead of nine envisaged in the organization chart, the Department for Borrowing and Coordination of Development Resources (DBCDR) is composed of four staff as opposed to eleven staff allocated, while the Department of Debt Settlements (DDS) has nine staff instead of twelve. Certain departments within DMS appear to be understaffed, particularly the DAR and the DBCDR.

The Rulebook on Internal Organization describes the responsibilities and functions of each department. It provides a job description for each position assigned to the Department and includes the educational background and the experience required to fill the position.

The DMS is relatively new as this function was delegated only after the country’s independence. Thus DMS could not recruit experienced staff with the background in the area of debt management. Therefore, all the staff had to acquire the necessary skills through appropriate training (either externally or through TA projects financed by donors). Although some experience has been acquired over the years, certain tasks demand continuous professional development. Currently, there is no formal individual training and/or development plan for staff member. The Civil Service Agency provides an annual training program. Civil servants can apply to the offered courses through their sector manager. However, the courses offered are not specifically related to debt management. Staff from DMS can enhance their skills through capacity building program provided by the international community at the initiative of the department. Yearly performance assessment is carried out throughout the Federal Ministry of Finance, but they do not seem to be linked to promotion nor to be taken seriously by sector managers. Rules of Conduct have been adopted by the Federation for all its civil servants, but there are no separate guidelines for the staff of the Debt Management Sector.

Score: As there is no sufficient and adequately trained staff, the second dimension is rated D. Dimension 3

Many different risks (for example, the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events) can negatively affect the normal operations of an organization. Therefore, there should be a business continuity and disaster recovery plan to cover these adverse effects. These documents have yet to be elaborated and approved by the Ministry. However, the IT department reported that it is in the process of drafting a business continuity and recovery plan (they are looking for a recovery location). This component is part of a forthcoming TA project financed by the European Union.

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Score: The minimum requirements for dimension 3 have not been met and it is rated D.

Debt and Loan Guarantee Records and Reporting

DPI-13 Debt Records Dimension Score

1. Completeness and timeliness of the SNG records on its debt, loan guarantees and debt-related transactions, including bank loans (if taken)

A

2. Complete and up-to-date records of all holders of the SNG debt securities in a secure registry system, if applicable

A

Dimension 1

The DDS within the DMS records all external debt transactions (new loans, disbursements, and debt service payments) in the Debt Tracking System (DTS), a software (ACCESS database) developed by the US Treasury and installed in 2001 (the same software has been installed in MoFT and the other Entity). All outstanding external loans (direct and on-lending from the State) are recorded in the database. The DDS records all new external loans (based on the subsidiary agreement, a copy of the credit agreement and the Decision indicating the Government’s approval of the borrowing) and related transactions (e.g., disbursement and debt service payments) in the database as soon as it receives the information (notification of disbursements and confirmation of debt service payments) from the MoFT for on-lending loans, and confirmation of debt service payments from the Central Bank for direct external loans. DDS is able to obtain the necessary information within a period of one month. The two ministries reconcile their database periodically. The department also sends once a month a report on all transactions to update the Treasury ledger. The same DDS is also responsible for recording domestic debt and debt service transactions. All the information on Treasury bills, Treasury bonds and other types of bonds (frozen foreign currency savings and war claims) as well as on domestic guarantees (there is only one) are kept in Excel files. The database is updated as soon new securities are issued in the market and upon receiving confirmation of debt service payments from the Registry of Securities. The Department for Borrowing and Coordination of Development Resources is in charge of collecting information from the cantons and municipalities on the borrowing as required by law. The DTS has also been installed in the department and the information gathered are entered into it.

Score: As the Federal Ministry of Finance maintains a complete records on public and publicly guaranteed debt within one month all the requirements are met and the first dimension is rated A.

Dimension 2

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As per the agreement signed between the FMoF and the Registry for Securities of the Federation of Bosnia and Herzegovina (RSFBiH), the RSFBiH is responsible for registering all securities issued by the FBiH. New issues are registered within a maximum of two days after the auction, once the RS has received the Order of Registration (containing information on the amount issued, terms, securities number) and the list of securities holders with their banking information from the FMoF as well as confirmation from the Registry’s commercial bank (depository bank) that the payments from the securities holders have been made. The RS also registers secondary market trading based on the information provided by the Sarajevo Stock Exchange (SASE). At the end of each business day, SASE transmit the list of transactions recorded containing the names of the brokerage houses involved the different transactions.

The Registry also records bonds issued to compensate war related claims based on information provided by the FMOF.

The registry used a system (CDS) developed by outside sources from Slovenia. Back up procedures have been put in place so as to keep the Registry of Securities in business relatively quickly in case of emergency. The system is backed up simultaneously in another server in a site located forty kilometers away from Sarajevo. Score: The business procedures established by the RS meet the international standard ISO 9001-2008. They are audited twice a year by Lloyd Registry Quality Assurance in order to keep its certification. The registry is also financially audited twice a year (mi-year and end of the year) by external auditors. The second dimension is also rated A as all the requirements are fulfilled.

DPI-14 Debt and Loan Guarantee Reporting 1. Meeting of statutory and contractual reporting requirements of the SNG debt and loan guarantees to all domestic and external entities outside the SNG

C

2. Meeting of statutory and contractual reporting requirements for the SNG public sector debt and loan guarantees to all domestic and external entities outside the SNG

D

3. Quality and timeliness of the publication of a debt statistical bulletin (or its equivalent) covering SNG debt

D

Dimension 1

The State Law on Debt Issuance, Debt and Guarantees (Article 22) requires the MoFT to establish and maintain records of all Public debt and Guarantees of the Entities. The MoFT is authorized to obtain such information quarterly each year. The reports are to be submitted with a maximum delay of ten days after the end of the quarter. The reports must contain all categories of debt (external and domestic) from the Entities as well as the cantons and municipalities (as well as public corporations registered within these sub-national governments). The report provides information on a loan by loan basis for direct borrowing from the Entities and on an aggregated basis for each canton and municipality.

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For the reports of end-March, end-June and end-September, FMoF, through DMS, was able to meet its statutory requirement within a delay of twenty days. However, for the last quarter of the year, FMOF has had difficulty reporting within the same timespan as the other quarters due to some constraints for obtaining payment information from lower levels units.

Score: As the FMoF fulfills its statutory and contractual reporting requirements within three months of the reporting period, the first dimension is rated C. In order to obtain a B, FMoF should report within a period of two months for each quarter. Dimension 2

The DMS also collects the same type of information on debts contracted by the cantons and municipalities for reporting the Public debt level of the federation of BiH. Under the Federal law, canton and municipalities have to report their liabilities within a delay of 20 days after each quarter. However, the FMoF indicated experiencing difficulties obtaining reliable and timely information from the cantons. On average, canton reports to the FMoF with a delay averaging three months while municipalities have provided the required information with delays of up to two years. In some cases, certain municipalities do not report any information unless they need to obtain financing from the Federation.

Score: As FMoF elaborates one single report to MoFT, the section concerning public sector debt does not provide complete or accurate information within a three month period after the reporting deadline. For this reason, the minimum requirements are not met and the second dimension is rated D.

Dimension 3

Countries and sub-national governments should prepare periodically reports on debt statistics, particularly if they borrow in the domestic capital market so as to provide information to market participants. In many countries, countries and sub-national governments prepare debt statistical bulletins on a quarterly basis. Debt statistical bulletins should include the following minimum information:

• information on central government debt stocks (by creditor, residency classification, instruments, currency, interest rate basis, and residual maturity);

• debt flows (principal and interest payments);

• debt ratios or indicators of both; and,

• basic risk measures of the debt portfolio.

Score: The Federal Ministry of Finance does not produce nor publish a Debt Statistical Bulletin. The third dimension is rated D as the minimum requirement of publishing a Debt Statistical Bulletin is not met.

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Annex 1: Organizational structure of the DMS

(* Positions are not filled)

Department for Analysis and Reporting

Head of Department

Expert advisor for normative and legal affairs*

Expert advisor for external debt analysis*

Expert advisor for internal debt analysis*

Expert advisor for public investment programme

Senior expert associate for debt recording and monitoring*

Expert associate for debt recording and monitoring*

Senior officer in charge of database

Department for Debt Settlem

Head of Department

Expert advisor for internal debt

Expert advisor for internal debt*

Expert advisor for external debt

Expert advisor for external debt

Senior expert associate for external de

Senior expert associate for internal deb

Expert associate for internal debt*

Department for Borrowing and Coordination of Development Resources

Head of Department

Expert advisor for external borrowing

Expert advisor for internal borrowing*

Expert advisor for project implementation monitoring*

Expert advisor for coordination and mobilization of international aid funds*

Expert advisor for coordination and mobilization of international aid funds*

Senior expert associate for project implementation monitoring*

ASSISTANT MINISTER

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Annex 2: Debt Management Strategy (DMS) – main elements and rational

A DMS is a plan that the government intends to implement over the medium term to achieve a desired composition of the government debt portfolio, which captures the government’s preferences with regard to the cost-risk trade-off. It will make operational the government’s debt management objectives—e.g. ensuring that the government’s financing needs and payment obligations are met at the lowest possible cost consistent with a prudent degree of risk. A DMS has a strong focus on managing the risk exposure embedded in the debt portfolio—specifically, potential variations in the cost of debt servicing and its impact on the budget. In particular, a DMS identifies how cost and risk vary with the composition of debt.

Benefits of producing and publishing an explicit DMS:

1. Evaluate the cost-risk trade-offs: Setting clear medium-term strategic goals will help debt managers avoid poor decisions made solely on the basis of cost, or for the sake of short-term expediency.

2. Identify and manage risk: The DMS helps identify and monitor key financial risks, and establish strategies that ensure countries are well placed to take advantage of new borrowing opportunities, in an informed and risk conscious way.

3. Coordination: A DMS facilitates coordination with fiscal and monetary management, helping to reconcile various objectives and constraints, including on domestic debt market development and balance of payments issues.

4. Identification of constraints: It helps identify the constraints that affect the debt managers’ choices, allowing where possible, steps to be identified to ease those constraints.

5. Cost: A DMS can potentially lower the cost of debt servicing, as an effective and transparent strategy will support domestic debt market development, and facilitate the relationship with investors, creditors and rating agencies.

6. Transparency: A formal and explicit DMS can help build broad-based support for responsible financial stewardship, enhancing governance and accountability.

Publication of the debt strategy is beneficial because:

• Achievement of objectives is facilitated if the goals are understood and authorities make a credible commitment to meet them

• Accountability: the debt portfolio poses significant risks, and the authorities should assure markets and the wider public that they are being well managed

• Disclosure of the borrowing intentions increases certainty for investors, lowering borrowing costs to government in the long run

• A public strategy also reduces the risk of future criticism “with the wisdom of hindsight”.

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Annex 3: List of officials met during the mission

Ministry of Finance of Federation of Bosnia and Herzegovina (FMoF)

First name and surname Title Telephone E-mail

1. Mr. Ante Krajina Minister +387 33 203 147; 203 148

fmf.kab@bih.net.ba

2. Ms. Zada Gabela Secretary of Ministry +387 33 215 759 zada.gabela@fmf.gov.ba

3. Mr. Samir Bakić Assistant Minister, Debt Management (DM) Sector

+387 33 253 463 samir.bakic@fmf.gov.ba

4. Mr. Alija Aljović Assistant Minister, Budget and Public Expenditure Sector

+387 33 253 554 alija.aljovic@fmf.gov.ba

5. Mr. Pero Ivošević Assistant Minister, Treasury Sector +387 33 442 806 pero.ivosevic@fmf.gov.ba

6. Mr. Tihomir Ćurak Assistant Minister, Legal Sector +387 33 253 418 tihomir.curak@fmf.gov.ba

7. Ms. Sabina Jelić Head of Internal Audit Unit +387 33 253 521 sabina.jelic@fmf.gov.ba

8. Ms. Mensura Kožo Head of Debt Service Department, DM Sector +387 33 253 544 mensura.kozo@fmf.gov.ba

9. Ms. Jasna Vukasović Head of DM Analysis, Reporting and Coordination Department, DM Sector

+387 33 253 448 jasna.vukasovic@fmf.gov.ba

10. Ms. Jasmina Buljugić Borrowing Technical Associate, Borrowing and Borrowing Projects’ Implementation Monitoring Department, DM Sector

+387 33 253 440 jasmina.buljugic@fmf.gov.ba

11. Ms. Senka Oruč FBiH External Debt Associate, Debt Service Department, DM Sector

+387 33 253 412 senka.oruc@fmf.gov.ba

12. Ms. Fahrija Delalić Senior Technical Adviser, DM Analysis, Reporting and Coordination Department, DM Sector

+387 33 253 451 fahrija.delalic@fmf.gov.ba

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13. Mr. Adnan Husedžinović

IS Maintenance Technical Adviser, IT Department, Economic, Financial and Common Affairs Sector

+387 33 206 935 adnan.husedzinovic@fmf.gov.ba

14. Mr. Edin Šahinović External Debt Technical Adviser, Debt Service Department, DM Sector

+387 33 261 820 edin.sahinovic@fmf.gov.ba

15. Mr. Ezher Kubat Technical Adviser, Legal Sector +387 33 253 475 ezher.kubat@fmf.gov.ba

16. Mr. Draško Jeličić Macroeconomic Technical Adviser, Macroeconomic Planning Department, Budget Sector

+387 33 253 477 drasko.jelicic@fmf.gov.ba

Ministry of Finance and Treasury of Bosnia and Herzegovina (BiH MoFT)

First name and surname

Title Telephone E-mail

1. Ms. Zakira Muratović Assistant Minister, Public Debt Sector +387 33 254 201 zmuratovic@mft.gov.ba

2. Mr. Miroljub Krunić Assistant Minister, Financial Institutions Relations Sector

+387 33 703 086 mkrunic@mft.gov.ba

Central Bank of Bosnia and Herzegovina

First name and surname Title Telephone E-mail

1. Mr. Kemal Kozarić, PhD

Governor +387 33 278 201 kkozaric@cbbh.ba

2. Mr. Radomir Božić, PhD

Vice-Governor, Monetary Operations, Foreign-Exchange Reserves and Cash Management Sector

+387 33 278 202 rbozic@cbbh.ba

3. Ms. Emina Ćeman, MS

Head, Banking Department +387 33 278 107 ebrodlija@cbbh.ba

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4. Mr. Dejan Kovačević, MS

Head, Monitoring and Analysis Department +387 33 278 112 dkovacevic@cbbh.ba

5. Ms. Krstinja Tošović Deputy Chief Internal Auditor +387 33 278 207 ktosovic@cbbh.ba

6. Ms. Emira Mekić Section Coordinator, Section for BiH External Public Debt Service, Department for BiH Public Debt Service

+387 33 278 218 emekic@cbbh.ba

7. Ms. Belma Saračević Section Coordinator, BiH Relations with IFIs Section

+387 33 278 154 bsaracevic@cbbh.ba

8. Ms. Verica Božić Head of BiH Public Debt Service Department +387 33 278 221 vbozic@cbbh.ba

9. Ms. Jelena Babić Senior Technical Associate +387 33 278 374 jelena.babic@cbbh.ba

10. Mr. Aleksandar Tomić Senior Technical Associate +387 33 278 341 atomic@cbbh.ba

Securities Registry of Federation of Bosnia and Herzegovina

First name and surname Title Telephone E-mail

1. Ms. Marina Orlando Director +387 33 279 150; 279 165

marina.orlando@rvp.ba; info@rvp.ba

2. Mr. Osmo Polutak Deputy Director +387 33 279 150; 551 850

osmo.polutak@rvp.ba; info@rvp.ba

3. Mr. Mario Bošnjak Head, Registration, Clearing and Settlement Sector

+387 33 279 159 mario.bosnjak@rvp.ba

Sarajevo Stock Exchange (SASE)

First name and surname Title Telephone E-mail

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1. Mr. Almir Mirica Executive Director, Trade and Supervision Department

+387 33 251 463 almir.mirica@sase.ba

2. Mr. Tahir Taslaman Head of IT Department +387 33 251 474 tahir.taslaman@sase.ba

Audit Office for the Institutions of Federation of Bosnia and Herzegovina

First name and surname Title Telephone E-mail

1. Mr. Munib Ovčina Head of Financial Audit Sector +387 33 723 750 movcina@saifbih.ba

2. Ms. Mirsada Janjoš Head of Financial Audit Sector +387 33 723 588 mjanjos@saifbih.ba

World Bank Country Office in Bosnia and Herzegovina

First name and surname Title Telephone E-mail

1. Ms.Anabela Abreu WB Country Manager aabreu@worldbank.org

2. Mr.Goran Tinjic Senior Operations Officer gtinjic@worldbank.org

3. Ms. Sandra Hlivnjak Economist +387 33 251 490 shlivnjak@worldbank.org

Donors

First name and surname Title Telephone E-mail

1. Ms.Irena Jakulov Economist , IMF

2. Ms.Irena Smirnof EU office in BiH