The International Monetary Fund on Friday gave high marks to Bosnia for maintaining economic growth and controlling spending despite a severe drought, weak manufacturing and shrinking foreign aid.
But in its annual comments about Bosnia's economy, the IMF said the biggest challenges were to maintain economic stability, deepen institutional reforms and revive businesses.
Millions of dollars in foreign aid poured into Bosnia after a brutal 1992-95 civil war, but aid has fallen sharply even as the country struggles to rebuild its economy.
The Bosnian conflict was characterised by "ethnic cleansing," with separatist Serb forces driving out hundreds of thousands of Bosnian Muslims.
"These challenges are compounded by an eventual decline in aid inflows and the need to continue absorbing refugees," the IMF executive board said in a statement.
The fund said fiscal tightening might be required to cushion uncertainty about the balance of payments.
Bosnia's economic activity slowed in 2003 to about 3.5 percent from 5.5 percent the previous year as manufacturing had all but stood still and the drought cut agricultural output by one-fifth. Despite these problems, the country controlled spending, especially on wages and pensions, reduced its current account deficit and strengthened its currency board, the IMF said.
It welcomed the government's commitment to a strong fiscal stance in its 2004 budget, which was trimmed to about $680 million at the IMF's request.
Planned increases in wages and social payments were dropped after the IMF warned the Serb Republic government the move would delay a $17 million IMF disbursement, the last tranche under a 2002 $97 million stand-by loan.
Bosnia-Herzegovina has pushed ahead with reforms that stretch from the justice system to the banking, defence and taxation system.
Major defence reforms are anticipated for 2004, the fund said, which would centralise command and control structures of the military.
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