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REPUBLIC OF SRPSKA

GOVERNMENT

ECONOMIC REFORM PROGRAMME

OF THE REPUBLIC OF SRPSKA

FOR THE PERIOD 2016 -2018

Banja Luka, December 2016

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Contents

1. OVERALL POLICY FRAMEWORK AND OBJECTIVES .............................................................................. 3

2. MACROECONOMIC FRAMEWORK ................................................................................................................ 4

2.1. RECENT ECONOMIC DEVELOPMENTS ..................................................................................................... 6 2.2. THE MEDIUM-TERM MACROECONOMIC SCENARIO ............................................................................ 8 2.3. ALTERNATIVE SCENARIOS AND RISKS ................................................................................................. 10

3. FISCAL FRAMEWORK ..................................................................................................................................... 10

3.1. POLICY STRATEGY AND MEDIUM-TERM GOALS ................................................................................ 10 3.2. IMPLEMENTATION OF THE BUDGET IN 2015 ........................................................................................ 11 3.3. MEDIUM-TERM PROSPECTS BUDGET .................................................................................................... 12 3.4. THE LEVEL OF INDEBTEDNESS ......................................................... ERROR! BOOKMARK NOT DEFINED. 3.5. SENSITIVITY ANALYSIS AND COMPARISON WITH THE PREVIOUS PROGRAM ........................... 15 3.6. PUBLIC FINANCE SUSTAINABILITY ....................................................................................................... 16 3.7. INSTITUTIONAL FEATURES...................................................................................................................... 17

4. PRIORITIES OF STRUCTURAL REFORMS IN THE REPUBLIC OF SRPSKA IN THE PERIOD OF

2016-2018 ......................................................................................................................................................................... 18

4.1. IDENTIFICATION OF THE KEY OBSTACLES FOR GROWTH AND COMPETITIVENESS ........ 19 4.2. PRIORITIES OF STRUCTURAL REFORMS BY AREAS...................................................................... 19

4.2.1. Public finance management .................................................................................................................... 19 4.2.2. Infrastructure .......................................................................................................................................... 23 4.2.3. Agriculture .............................................................................................................................................. 24 4.2.4. Industry ................................................................................................................................................... 25 4.2.5. Service sector ......................................................................................................................................... 26 4.2.6. Business environment, corporate governance and reducing informal economy .................................... 28 4.2.7. The technology absorption and innovation ............................................... Error! Bookmark not defined. 4.2.8. Trade integration ....................................................................................... Error! Bookmark not defined. 4.2.9. Employment and labour market ................................................................ Error! Bookmark not defined. 4.2.10. Fostering social inclusion, combatting poverty and promoting equal opportunities .... Error! Bookmark

not defined. 4.3. BRIEF SUMMARY OF REFORM PRIORITIES ................................ ERROR! BOOKMARK NOT DEFINED.

5. BUDGET IMPLICATIONS OF STRUCTURAL REFORMS .......... ERROR! BOOKMARK NOT DEFINED.

6. INSTITUTIONAL QUESTIONS AND INVOLVEMENT OF INTERESTED PARTIES .................ERROR!

BOOKMARK NOT DEFINED.

7. SUMMARY DATA ................................................................................ ERROR! BOOKMARK NOT DEFINED.

APPENDIX 1: TABLES ................................................................................................................................................. 42

APPENDIX 2: EXTERNAL CONTRIBUTIONS ........................................ ERROR! BOOKMARK NOT DEFINED.

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1. POLICY FRAMEWORK AND OBJECTIVES

Countries that are in the process of negotiating with the European Union on the Stabilisation and

Association Agreement, as well as countries that have already signed this agreement but have not yet obtained candidate status, until 2014, preparing economic and fiscal program. At the same time, economic and fiscal program was a kind of preparation for Pre-Accession Economic Program, which were made when the country candidate status, and in a broader sense, it has been preparing for the Convergence Programme, after joining the European Union.

During 2014, the European Commission adopted a new strategy for expansion with a new approach to economic management, which has become a key pillar of EU enlargement. The main objective of the new approach is that countries, through economic dialogue in the enlargement process, first solve the basic economic questions and thus meet the economic criteria for accession. The new approach is based on the process of the European Semester at the EU level and aims to target specific recommendations for each country and to improve reporting on national economic policies plans, including structural reforms. Increased focus on economic governance relates in particular to the Western Balkan countries with the aim that they provide long-term growth and competitiveness. Accordingly, all countries of the Western Balkans and Turkey have submitted their first national program of economic reforms in January 2015.

This year, of all the countries of the Western Balkans and Turkey are expected to prepare a program of economic reforms for 2016 that contains a medium-term macroeconomic framework and a fiscal policy framework, as well as a comprehensive programme of structural reforms.

Accordingly, based on the methodology and guidelines provided by the European Commission, the Republic of Srpska has elaborated the Economic Reforms Programme of the Republic of Srpska for the period 2016-2018 (hereinafter referred to as ERP RS 2016-2018) and submitted to the Directorate for Economic Planning (DEP), that is pursuant to the Council of Ministers Conclusion tasked to consolidate parts of the text for entities in the document named Economic Reform Programme of Bosnia and Herzegovina for the period 2016-2018 (hereinafter referred to as ERP BiH 2016-2018) and to harmonize it with entities, and to submit it for approval to the Council of Ministers. Once adopted, the same shall be submitted to the European Commission no later than 31/01/2016.

ERP RS 2016-2018 is aligned with the Revised Document of the Republic of Srpska Framework Budget for the period 2016-2018, which was adopted by the Government of the Republic of Srpska at the 9th Special Session, held on 12.12.2015., and the Economic Policy of the Republic of Srpska in 2016 and the Republic of Srpska Budget for 2016, which were adopted at the 15th Special Session of the National Assembly of the Republic of Srpska, held on 2 -23.12 .2015..

The adoption of the RS Government policy was preceded by a comprehensive public debate. The Government of the Republic of Srpska at the 8th Special and at the 25th Working-Consultative Session discussed the draft version of the Economic Policy of the Republic of Srpska in 2016 and established the text that was distributed to all government partners. In this regard, prior to making the Draft Economic Policy of the Republic of Srpska for 2016, RS Government has invited all relevant actors to submit their suggestions and comments on the draft version of the RS Economic Policy for the year 2016, and thereafter on December 7, 2015 held a public debate with all its partners. In addition, the working version of the Economic Policy of the Republic of Srpska in 2016 was discussed on 9 December 2015 at the 34th Regular Session of the Economic and Social Council of the Republic of Srpska and with certain remarks and suggestions of the Government’s social partners received the unanimous support. All acceptable written and oral proposals on the Draft version of the RS Economic Policy for the year 2016 are incorporated in the Proposal of the RS Economic Policy for the year 2016, and subsequently in the ERP RS 2016-2018.

Policies of the Republic of Srpska, given in the ERP RS 2016-2018, DEP should incorporate into the final document of BiH's Economic Reform Programme for the period 2016-2018.

The Economic Policy of the Republic of Srpska for 2016 defined the RS basic objective of the, which is strong, stable, democratic and prosperous Republic of Srpska, with its competences verified by the Dayton Agreement, open to the world and with institutions that can meet the needs of all its citizens. On the basis of a clear objective, detailed analysis of the situation in all areas, the Government Work

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Programme for the period 2014-2018 and the policies of the RS Government, defined by the Reform Agenda for the period 2016-2018 and the RS Action Plan, which were agreed with the European Union and international financial institutions, a key reform areas of the RS Government for the year 2016 are based on the five pillars of reform: stable economic growth, fiscal sustainability, social security, rule of law and European integration. Stable economic growth will be based on the recovery of the economy and improving the business climate and competitiveness. Ensuring sustainable, efficient and continuous economic growth, the strengthening of administrative capacity and increasing the efficiency of public institutions at all levels, will create space for increasing and better targeting of social benefits, and create a favourable and socially equitable environment. Efforts to ensure fiscal and financial sustainability will be reinforced by measures to strengthen the rule of law and fighting corruption. At the same time, all mentioned policy of the RS Government will help the European path of the Republic of Srpska.

In order to implement targeted policy guidelines adopted at the Economic and Financial Dialogue in May 2015, the Republic of Srpska emphasizes that it is carried out the improvement of the budget management framework, through the adoption of the Fiscal Responsibility Act in the Republic of Srpska, which establishes the rules and fiscal measures and founded the Fiscal Council of the Republic of Srpska. At the same time, through the budget for the year 2016, we have endeavoured to improve the system of planning in public spending, which in the forthcoming period will create fiscal space for capital investment. In addition, we are actively working on the establishment of a register of parafiscal levies in order to ease the economic strains. Adopting the new Labour Law, we opened the process of labour market reforms, and in 2016 we expect further steps on reducing the tax burden on labour, ensuring at the same time realistic and safe sources, which will compensate for the loss of revenues of extra budgetary funds. With technical IMF assistance we are preparing a new legislative framework for the banking sector of the Republic of Srpska.

2. MACROECONOMIC FRAMEWORK

According to the IMF Report from October 2015, World Economic Outlook (WEO) which analyses

the global economic trends, projections for global growth is 3.1%.

Table 2.1: Overview of IMF projections, updated in October 2015 Projections

2013 2014 2015 2016 Real GDP growth,% World 3,4 3,4 3,1 3,6 Developed economies 1,4 1,8 2,0 2,2 USA 2,2 2,4 2,6 2,8 eurozone -0,5 0,9 1,5 1,6 Developing countries 5,0 4,6 4,0 4,5 European Union 0,1 1,5 1,9 1,9 European develping countries 2,9 2,8 3,0 3,0 Growth of world trade (goods and services),% 3,5 3,3 3,2 4,1

Growth of oil prices in dollars, annual change, % -0,9 -7,5 -46,4 -2,4

Consumer prices

Developed countries 1,4 1,4 0,3 1,2 Developing countries 5,9 5,1 5,6 5,1

Source: IMF, World Economic Outlook, Update Octobеr 2015.

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A weaker recovery in 2015 and 2016 (compared to earlier projections) is mainly a result of the impact of global factors (high public and private debt, the weakness of the financial sector, low investment, low growth rate of labour productivity, the demographic transition, the fall in prices of raw materials etc.), which also represents a risk for the realization of the projected growth. According to these projections the economic growth in Euro zone is 1.5% in 2015 and 1.6% in 2016, while in the European Union is 1.9% in 2015 and 2016. For European developing countries1 projected growth is 3.0% in 2015 and 20162. According to the IMF, the SEE region has benefited from lower oil prices and a gradual recovery in Euro zone, but on the other hand, it was affected by the situation in Russia and under the influence of high corporate debt.

Similar to the previous, according European Commission projections from November 20153 is expected to continue moderate economic recovery in the future, despite the numerous challenges in the global economy. In fact, despite the fall in oil prices and the weakening of the euro, the economic recovery in 2015 was present in almost all EU countries, but remained lower intensity. The expected real GDP growth in euro zone was 1.6% in 2015 to 1.8% in 2016 and 1.9% in 2017, whereas the EU is expected to grow by 1.9% in 2015 to 2.0% in 2016 and 2.1% in 2017.

Quarterly GDP growth rates of the EU28, in 2014, were 1,5%, 1,2%, 1,4% and 1,4%, and in the first two quarters of 2015 1.8 % and 1.9%. Data in Graph 2.14 shows that countries that are the most important foreign trade partners of the Republic of Srpska achieve positive business trends. Among the examined country, Slovenia and Germany have achieved growth during the whole period, the recession in Italy and Croatia was reduced to a level of around 0.5% in 2014 and in the first half of 2015 these countries achieved positive growth rates. Similarly, in Serbia, after a series of negative GDP growth rates in the second quarter of 2015 recorded a positive growth of 1.0%.

1 European developing countries include: Serbia, Croatia, Bulgaria, Hungary, Poland, Romania and Turkey, including Albania, Bosnia

and Herzegovina, Macedonia and Montenegro. 2 The projections have been adjusted in April by 0.1 percentage points and -0.2 percentage points respectively

3 Autumn Economic Forecast of the European Commission 2015

4 Source: EUROSTAT, Statistic Database, not seasonally adjusted (ESA 2010 ), data taken on 29 10 .2015..

Table 2.2: European economic forecasts EU, Autumn 2015

Projections for EU 2013 2014 2015 2016

Real GDP growth (%, y/y) 0,2 1,4 1,9 2,0

Inflation (%, y/y) 1,5 0,6 0,0 1,1

Unemployment (%) 10,9 10,2 9,5 9,2

Budget balance (% of GDP) -3,3 -3,0 -2,5 -2,0

Total public debt (% of GDP) 87,3 88,6 87,8 87,1

Current account balance (% of GDP) 1,5 1,6 2,2 2,2

November 2015, European Commission

Graph 2.1: Real growth rates of GDP quarterly (K/K4) – Comparison of the Republic of Srpska, the EU 28 and

countries in which the Republic of Srpska exports mostlyизвози

Source: National Bureau of Statistics of the Republic Srpska, EUROSTAT

(seasonally adjusted data)

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According to the report on investment in the world (24 June 2015) the movement of foreign investments in 2014 registered a larger decline than expected, a decline at the global level in foreign investments compared to 2013 in the amount of 16 % in relation to the expected 8.0%. Developed countries decreased by 28% compared to the expected 14%, while developing countries recorded an increase in the amount of 2.0% compared to the expected 4.0%. Countries in transition have recorded decrease of 48.3%, which is close to the expected decline. When it comes to South East Europe, according to the UNCTAD World Investment Report in 2014, we can see that almost no country has reached the level of foreign investments before the outbreak of the global financial crisis in 2008.

2.1. RECENT ECONOMIC DEVELOPMENTS

Although the Republic of Srpska, in 2014 has been two times affected by the floods (in May and in August), it has achieved a real GDP growth of 0.2%. In addition to poor hydrometeorological situation, economic trends influenced the decrease in the price of oil and food prices on the world market, and the Eurozone exit out of recession. Achieved GDP rates of real growth in the first two quarters of 2015 amounted to: 0.9% and 1.5%, respectively5, which contributed to continued deflationary pressures, the recovery in Eurozone countries and in the region and growth in the areas of industrial production and construction.

Industrial production with a share of GDP from 15.5% in 2014 recorded a growth of 0.7%. For the most part this is the result of growth in the areas of: manufacturing industry (5.0%), while there was a decrease in the Production area and electricity, gas and steam supply and air conditioning supply (-9.0%) and mining and quarrying (-3.3%). In the period January-September 2015 the growth rate was 3.8%, which contributed to the increase in production in the areas of: Production and supply of electric energy ... (2.9%), mining and quarrying (13.9%) and Manufacturing industry (2.2%). Such trend of industrial production is indication of an increase in economic activity in 2015 in the Republic of Srpska.

The average rate of deflation in the Republic of Srpska (measured by the consumer price index CPI) in 2014, amounted to 1.2%, while in January-September 2015 the same was 1.3%. This indicates continued deflationary pressures amid falling oil and food prices in the world market. So the biggest fall in prices is evident in following sections: Food and non-alcoholic beverages (-2.9%) and Transport (-1.2%), the fact that the Republic of Srpska foreign trade has a significant trade deficit in the categories of goods. The Graph 2.1.1 shows the impact of changes in food prices and transport on the overall level of prices in the Republic of Srpska in 2014 and nine months of 20156. It is estimated that the average rate of deflation in 2015 will be at around 1.0%, while in the Eurozone the inflation is expected to be at 0.1%.

The average net salary in the Republic of Srpska in 2014 amounted to 825 BAM, which is, compared to 2013, the nominal increase of 2.1% and real by 3.3% taking into account the deflation. In the period January-September 2015, the average salary was 832 BAM and it is estimated that annual will amount to 833 BAM.

In 2014, the survey unemployment rate decreased (by 1.3 per cent) to the level of 25.7%, while the number of unemployed decreased by 3.6%. In the period January-September 2015, the unemployment rate decreased further to 4.2%, and there was a slight decline in the survey unemployment rate (0.5 percentage points) to the level of 25.2%.

The volume of foreign trade in 2014 amounted to 7.6 billion BAM and compared to the previous year is higher for 6.7%, while the coverage of imports by exports was 54.4%. Export growth was 3.4%, while import growth was 8.5%, which is mainly contributed to the increase in exports and imports in the manufacturing industry, which in the overall structure of imports and exports accounted for about 70-80%. In the period January-September 2015 the volume of foreign trade decreased by 7.1% as a result of the decrease in exports of 4.1% and a decrease in imports of 8.7%, while export-import ratio was 58.9%. The

5 The estimated data of the RS Statistics Institute.

6 The changes are indicated by annual rates (compared to a particular month with the same month of the previous year)

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drop in exports has contributed significantly to the decline in exports in the areas of: Petroleum oils and oils obtained from bituminous minerals, other than crude (-57.2%), Electricity (-45.7%) and Fuel wood(-20,0%)7.

The drop of imports was largely due to a decline in crude oil imports from Russia (-33.7%), which

significantly participate in the structure of imports by 15.1% (5.7 per cent less than in the same period of 2014), and thus the increase in imports. It is estimated that annually, the reduction in exports will be 2.9% and in imports 7.5%.

Graph 2.1.3: Trend of crude oil electricity export and import in the period January - September 2015

Source: National Bureau of Statistics of the Republic of Srpska


The banking sector in the previous period has preserved stability. In the first half of 2015, the

accomplished growth in total loans was 3.0%, mainly due to the growth of loans to private companies (5.0%) and loans to citizens (4.0%). After long trend of growth, total deposits record a slight decrease (1.0%), whose structure is the most significant drop of 22.0% of government institutions deposits, deposits of banking institutions 15.0%, and deposits of private companies 10.0%. However, deposits of citizens still have growth trend and increased by 7.0%, and represent a stable and significant source of funding for banks. Non-performing loans, which represent one of the key risks of the banking sector increased by 3.0%, with an increase in non-performing loans to private individuals amounted to 6% and non-performing loans of legal entities 2.0%.

7 In 2015 a planned reduction in the production of electricity for the revitalization of generators G1 in HPP Dubrovnik. Characteristic

Electrical system of the Republic of Srpska is that over 50% of electricity generation comes from two thermal power plants so that when unplanned downtime in their work leads to significant disruptions in production. The Republic of Srpska balance has surplus electricity that range 20% -30% of total production on an annual basis.

Graph 2.1.1: Impact of food and transport price change on the overall level of prices in the Republic of Srpska in 2014 and 2015


Graph 2.1.2: Comparison of average annual inflation rate in the Republic of Srpska, Bosnia and Herzegovina and the Eurozone

Source: National Bureau of Statistics of the Republic of Srpska,

IMF

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According to data of the Statistical Office of the Republic of Srpska, the value of investments in fixed assets in 2014 amounted to 1995.5 million BAM, which compared to the previous year, represents an increase of 29.1%. In terms of the technical structure, the most significant increase was recorded in investment in buildings and facilities (66.6%), while investments in machinery, equipment and transport equipment remained at approximately the same level (0.5%) and while other investments decreased ( -20.8%). According to the investors’ activities, the most significant increase in investment was achieved in the fields of mining and quarrying, education and production and electricity, gas, steam supply and air conditioning. .

According to the Central Bank, in 2014, realized companies foreign direct investment with headquarters in the Republic of Srpska amounted to 379.1 million BAM, which is almost 2.5 times more than in 2013, when investments were at a low level (152.6 million).

Public debt of the Republic of Srpska, which includes internal and external debt of the Republic, internal and external debt of local authorities, and the internal debt of social security funds and the University Clinical Centre of Banja Luka on 31 December 2014 amounted to 4090.6 million of BAM, while the estimation for the end of 2015 is 4,357.4 million BAM. Total debt of the Republic of Srpska, which in addition to public debt includes external debt of public enterprises and IRB RS, at 31 December 2014 amounted to 5055.2 million BAM, while the estimation for the end of 2015 is 5351.4 million BAM.

Accordingly, the share of public debt to GDP ratio at the end of 2015 will amount to 48.8% of GDP, while the total debt of the Republic of Srpska amount to 60,0%8 of GDP. If we look at what positions will be a significant growth of debt in 2015 compared to 2014, we see that it is the foreign debt of the Republic of Srpska (budget) and of local authorities, and the internal debt of social security funds. The increase in debt in 2015 is primarily a result of depreciation of BAM relative to other currencies, and investment activities in the Republic of Srpska (flood damage repairs, investment in health and education sectors, refugees and displaced persons housing, etc.).

Objectives of debt management in the future are: securing necessary financing for government functioning, providing necessary financing for infrastructure development and health, as well as dealing with the consequences and flood protection of the Republic of Srpska, raise funds with minimal risk and costs, taking into account the limitations of financial resources as well as the need to strengthen the domestic securities market.

In addition to criteria relating to the debt, the Maastricht criteria follow the budget deficit. The level of deficit allowed by the Treaty of Maastricht was 3.0% of GDP. The deficit in EU countries in 2013 amounted to -3.0 % of GDP. According to the calculation of deficit for the Republic of Srpska, the deficit according to GFS methodology in 2014 was -3.2% of GDP.

2.2. MEDIUM-TERM MACROECONOMIC SCENARIO

Based on macroeconomic indicators of the Republic of Srpska in the previous period and in the period January-September 2015, economic activity in the Republic of Srpska and neighbouring countries, initiated activities and planned policies of the Government of the Republic of Srpska, estimates and projections of macroeconomic indicators of the Republic of Srpska for the period 2015 -2018 are made.

Table 2.2.1: Estimates of macroeconomic indicators for 2015 and projections for the period 2016-20189

8 The estimates of indicators for public (48.8% of GDP) and total debt (60.0% of GDP) for 2014 does not include loans for financing

the remediation of damage from the Single Registry of damage - according to the Law on Borrowing debt and guarantees of the Republic of Srpska ("Official Gazette of the Republic of Srpska" Nos. 71/12 and 52/14), it shall be exempt from the restrictions imposed for the total (60%) and public debt of the Republic of Srpska (55%). 9Note: Due to the official figures of GDP, in the case of Bosnia and Herzegovina to the Agency for Statistics of Bosnia and

Herzegovina based on the production approach, the Ministry of Finance of the Republic of Srpska as a basis for the evaluation takes

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2011 2012 2013 2014 2015 2016 2017 2018

GDP in millions of BAM - Nominal 8.682 8.585 8.761 8.847 8.873 9.135 9.536 10.012

Population - in millions 1,43 1,43 1,43 1,42 1,42 1,42 1,41 1,41

GDP per capita in BAM 6.073 6.006 6.146 6.225 6.256 6.454 6.752 7.104

GDP per capita in BAM 4,4% -1,1% 2,1% 1,0% 0,3% 2,9% 4,4% 5,0%

% GDP growth, in real terms 0,8% -1,1% 1,9% 0,2% 1,4% 2,4% 2,7% 3,0%

Inflation - annual 3,9% 2,1% 0,0% -1,2% -1,0% 0,5% 1,5% 1,7%

Просјечне нето плате у КМ 809 818 808 825 833 842 853 865

Import in millions BAM 4.578 4.488 4.558 4.946 4.575 4.777 5.053 5.352

Import growth in% 13,0% -2,0% 1,6% 8,5% -7,5% 4,4% 5,8% 5,9%

Exports in millions BAM 2.561 2.375 2.604 2.692 2.613 2.744 2.936 3.171

Export growth in% 17,6% -7,3% 9,7% 3,4% -2,9% 5,0% 7,0% 8,0%

The coverage of imports by exports in% 55,9% 52,9% 57,1% 54,4% 57,1% 57,4% 58,1% 59,2%

Unemployment rate % 24,5% 25,6% 27,0% 25,7% 25,2% 24,7% 24,2% 23,7% Source: National Bureau of Statistics of the Republic of Srpska (2011 -2014), assessment (2015) and projections (2016-2018) of the

Ministry of Finance of the Republic of Srpska

Bearing in mind developments in the region and in the Republic of Srpska (floods in 2014, drought

in 2015, continued deflationary pressures, as well as planned activities in the Republic of Srpska) estimated real GDP growth in 2015 is 1.4 %. In the forthcoming period, due to the gradual strengthening of economic growth and employment in the region, expected growth in exports and domestic demand, which is partly financed by remittances from abroad. In the period from 2016 to 2018 is expected to continue economic growth with the real GDP rate of 2.4%, 2.7% and 3.0%, respectively. Also, starting from expected them to positive developments in the environment and their impact on the economy of the Republic of Srpska and the fact that industrial production in the RS is significantly export-oriented, in the coming period, we expect the positive movement of industrial production growth rate (3.0-5.0% ).

The projections for the next year, the positive rate of core inflation indicate a positive growth rate of goods and services that are the subject of trade with foreign countries. On the other hand, international institutions predict maintaining of oil and food prices at a low level in 2016, but due to the recovery in developed countries it is expected a modest rise in prices, so that projected inflation in the euro zone will be 1.0%. Given the above-mentioned, it is estimated that in 2016 in the Republic of Srpska inflation amount to 0.5% while in 2017 and 2018 is expected to grow, as oil and food on the world market, and in those years the projected inflation in the Republic of Srpska is 1.5% and 1.7%, respectively.

In the coming period, we expect a slight increase in net salary, 842 BAM in 2016, 853 BAM in 2017 and 865 BAM in 2018 and continued downward trend in unemployment, so that the projected unemployment rate amounted to 24.7%, 24.2% and 23.7%, respectively.

In projections of foreign trade of the Republic of Srpska, started from these assumptions regarding the improvement in economic activity in the region, particularly in countries with which the Republic of Srpska has a significant foreign trade and on the basis of expected growth in export demand. In addition, in 2016 starts operating TPP Stanari, so that the electricity production plan has increased by 27.8% compared to the planned production in 2015. In future projected growth rates of exports amounted to 5.0% in 2016, 7.0% in 2017 and 8.0% in 2018, the import growth rate of 4.4% in 2016, 5.8% in 2017 and 5.9% in 2018, while the projected rate of coverage of imports by exports will be in the range 57.4% - 59.2%.

According to estimates of the Ministry of Finance of the Republic of Srpska, the share of public debt in GDP in the Republic of Srpska in 2016 will amount to 48.5% of GDP.

Investment activity in the economy will be one of the most important engines of economic growth in the future. Strategic areas in which it will be invested the most are transport infrastructure, agriculture, forestry and water management, as well as energy.

data on annual GDP as in the quarterly assessment in 2014, based on the production approach, and recommended by the authorized institutions of the Republic of Srpska and Bosnia and Herzegovina.

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2.3. ALTERNATIVE SCENARIOS AND RISKS

Substantial risks in the coming period are related to the economic indicators of the environment and

the risks related to (non) realization of estimates and projections of the neighbouring countries, the uncertainty of price fluctuations on the world market, as well as natural disasters. Also, risks related to the real sector, which would be significantly reflected in the expected economic growth could occur in case of lack of planned investments. When it comes to fiscal risks, they are linked to a possible decline in revenue from indirect taxes.

3. FISCAL FRAMEWORK

3.1. POLICY STRATEGY AND MEDIUM-TERM GOALS

Consolidated balance sheet "General Government of the Republic of Srpska" presented in this

Document includes revenue, expenditure and financing for the level of the “Central Government of the Republic Srpska" (Republic of Srpska Budget, the RS budget beneficiaries inside and outside the Treasury General Ledger which have their own banking accounts and funds under the basis of investment projects financed from abroad and funds from the escrow account) and levels of budget and local authorities and financial plans of social security funds.

Based on the analysis conditions in all areas, the Government of the Republic of Srpska designated key economic policy objective of the Republic of Srpska in 2016: stable economic growth, fiscal sustainability, social security, rule of law and European integration.

The Government of the Republic of Srpska adopted Revised Budget Framework Paper of the Republic of Srpska for the period 2016 - 2018 and, at the session held on 12.12.2015., defining the planned budget frameworks and financing and debt for all levels of government in the Republic of Srpska. Data for 2014 represent budget execution at all levels of government observed. Data for 2015 have been adjusted in accordance with the budget rebalance for 2015, and data for the year 2016 in accordance with the budgets at all levels of government. Data for 2017 and 2018 are consistent with changes in the budgets drawn up after the adoption of the Revised Budget Framework Paper of the Republic of Srpska for the period 2016-2018. It should be noted that the budgets were not adopted at all levels of government so that part of the data representing the projection.

When we talk about the goals of the fiscal policy of the Republic of Srpska, targeted a consolidated deficit of the general government amounted to 3.0% of GDP a. The consolidated general government deficit of the Republic of Srpska in relation to the RS GDP in 2014 amounts to about a 3.2 %. According to projections, in the period under review, it is predicted a movement of deficit/surplus in the range of -1.7% of deficit to 1.8% of surplus.

Table 3.1: The fiscal framework for the period 2014 - 2018 under the baseline scenario Fiscal indicators 2014 2015 2016 2017 2018

(% Of GDP) Execution Rebalance Plan Plan Plan

Total revenue 41,3 42,8 41,5 40,4 39,8

Total consumption 44,5 44,1 43,1 41,3 37,9

Net borrowing / lending -3,2 -1,3 -1,7 -0,8 1,8

Interest expenditure 1,0 1,3 1,3 1,3 1,3

Primary balance -2,2 0,0 -0,4 0,5 3,1 Source: Ministry of Finance of the Republic of Srpska

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Republic of Srpska remains committed to strengthening fiscal stability so that despite the nominal

increase in interest expenses over the years should not led to an increase in current and total consumption. So, with the projected growth of GDP of the Republic of Srpska is expected continuous reduction of consumption of observed levels of government of the Republic of Srpska in GDP from 44.5% in 2014 to 37.9% in 2018.

When it comes to the debt policy, the main objective of the Republic of Srpska is certainly linked to the process of accession to the European Union, which means that the long-term commitment of the Republic of Srpska is maintaining of public debt at a level below 60% of GDP of the Republic of Srpska.

3.2. BUDGET IMPLEMENTATION IN 2015

The largest part of the fiscal framework of the General Government of the Republic of Srpska

makes the Budget of the Republic of Srpska. Republic of Srpska Budget for 2015, adopted by the National Assembly of the Republic of Srpska on 28 December 2014, in the amount of the budget framework of 2,033.0 million BAM.

Conditions for starting budget re-balancing of the Republic of Srpska were created because of changes in the structure of realized budget funds, as well as from the realization created from obligations arising from laws and bylaws in the current year, the implementation of government policies and priorities, proper recording of budgetary expenditure and the implementation of Decisions of the National Assembly of the Republic of Srpska on long-term borrowing of the Republic of Srpska for University of Istočno Sarajevo refinancing. The most significant amendments to budgetary positions made by Rebalanced budget of the Republic of Srpska in 2015 compared to the budget of the Republic of Srpska for 2015 are:

In relation to the Republic of Srpska Budget for 2015, total tax revenue in 2015 rebalanced budget increased by 30.9 million BAM (2.2%), while total budgetary revenues and receipts of non-financial assets increased by 20.3 million BAM (1.3%). Proceeds of the financing of planned revised budget increased by 29.8 million compared to the budget plan for 2015.

Losses on the use of goods and services increased by 10.9 million BAM (12.4%) - as a result of amendments to the special contribution of solidarity to extending the period of validity of the said law until 31.12.2015., providing added resources for expenditures by court rulings, judicial institutions, education and culture.

Funding expenses and other financial expenses were reduced by 2.2 million BAM (3.6%) - in accordance with the plan of repayment of foreign and internal debt.

Remittances from social protection that are paid from the state budget were reduced by 11.2 million BAM (4.6%) - as a result of the transfer of allocations for veterans' supplement from Current transfers for War Veterans supplement to the position of expenditures for payment of outstanding liabilities from previous years, amounting to 11.0 million BAM and to ensure proper accounting recording and executed reallocation and redistribution proposed by budget beneficiaries themselves.

Acquisition of non-financial assets increased by 11.0 million BAM (67.9%) - largely as a result of the implementation of the Decision on long-term borrowing of the Republic of Srpska totalling $ 12.7 million for the University of Istočno Sarajevo debt refinancing, of which 0.7 million relates to expenditures for non-financial property.

Within these expenditures, funds in the amount of 6.8 million BAM are provided with for equipment purchase and reconstruction of facilities for the Republic’s institutions.

Resources within the Public investments are also increased in the amount of 3.5 million BAM.

Expenditures for repayment of debts increased by 33.0 million BAM (6.9%) - were planned in the amount of 12.0 million BAM in order to implement decisions on long-term borrowing of the Republic of Srpska totalling $ 12.7 million University of Istočno Sarajevo debt refinancing.

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In order to properly accounting recording of allocations for veterans' supplement the funds are transferred from a position of liquid transfers to war supplement to the position of expenditures for payment of outstanding liabilities from previous years, amounting to 11.0 million.

Also, within these expenditures were provided funds in the amount of 2.1 million for the payment of obligations created in the previous period.

Proceeds arising from borrowing increased by 29.8 million BAM as a result of enlargement proceeds of financial assets of 3.6 million, proceeds from borrowing by 10.0 million BAM and receipts from reimbursements paid off loans in the amount of 16.2 million BAM.

According to reports on the execution of the Budget of the Republic of Srpska for six months of

2015, total revenues were realized in the amount of 99% compared to the plan, taxes 100%, while non-tax revenues 88%. On the expenditure side, the achievement of total expenditures is 87%, 89% of current expenditures, and expenditures for non-financial assets of 50%. Within current expenditures, expenditures for personal incomes were executed 100%, expenses arising from the use of goods and services 65%, financing expenses and other financial expenses 90%, transfers from social protection 87% and transfers between budget units of 81%. From this, it can be seen that during the implementation of the budget, debt repayment was a priority, while current spending was harmonized with revenue performance budget. That was the way to control public spending, by limiting the expenditures for the use of goods and services.

3.3. MEDIUM-TERM PROSPECTS BUDGET

In the Table 2. Prospects budget of the broader Government of the Republic of Srpska, are given

consolidated information about planned budget funds of General Government. The Budget of the Republic of Srpska for the year 2016 was adopted by the National Assembly of

the Republic of Srpska on 23.12.2015. amounting to 3127.0 million, which was 1,043.9 million (50.1%) more than planned by Budget rebalance for 2015. The most important innovation in the Budget of the Republic of Srpska in 2016, compared to previous years is the introduction of the Pension and Disability Insurance Fund (PIO Fund)10 in the treasury system of operations, as budget beneficiaries of the Republic of Srpska, and the greatest divergence in income and expenditures of the Budget of the Republic of Srpska are result of these changes. If we look to consolidate budgets for the level of the General Government of the Republic of Srpska, this change will not be evident because in the previous period PIO Fund was included in the sub-sector social security funds.

Budget of the Republic of Srpska has planned for 2016 a deficit of EUR 2.0 million, while at the level of central government budget a deficit of 169.4 million BAM, and at the level of the General Government a deficit of 153.9 million. The planned budget deficit at the level of the General Government in 2017 amounted to 79.4 million, while in 2018 the level of the General Government is expected a surplus of 183.4 million BAM.

The estimated tax revenues of the Republic of Srpska Budget for the year 2016 has increased by 839.1 million (57.9%) compared to the funds reserved in the budget for the year 2015 primarily as a result of the introduction of the Pension Fund in the treasury system of operations, as a beneficiary of the budget of the Republic of Srpska.

Indirect tax revenues are planned in the amount of 1,141.7 million BAM (with foreign debt), which is a growth of 5.5%. Revenues from contributions for pension and disability insurance in 2016 amounted to 779.0 million BAM, based on the inclusion of the Pension Fund. Non-tax revenues amount to 179.2 million KM, which represents an increase of 20.1 million (12.7%). Proceeds in the financing increased by 184.7 million (28.0%), and refer to income from short-term and long-term borrowing, the proceeds of refunds paid off loans from end beneficiaries and revenues from financial assets.

10

Fund for Pension and Disability Insurance of the Republic of Srpska

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Total budget costs and the problem of non-financial assets in 2016 amounted to 2484.3 million, which represents an increase of 886.0 million KM (56.3%) compared to the funds earmarked in the budget for the year 2015:

Expenditures of financing and other financial expenses rose by 19.7 million (33.5%), in accordance with the plan of repayment of foreign and domestic borrowing, an updated plan for the withdrawal by investment loans, the budget planned financing, and the calendar issuing of treasury bills and long-term bonds..

Transfers between budget units of different levels of government were reduced by 193.3 million BAM (66.5%) as a result of the cease of transfers to the Pension Fund due to the introduction of the Pension Fund in the treasury system of operations, as well as reducing the transfer of the Health Insurance Fund of the Republic of Srpska.

Expenditure on non-financial assets have been increased by 24.9 million (47.7%) as a result of providing funds for the purchase of the facility in Istočno Sarajevo for accommodation of representatives of the Republic of Srpska in the BiH institutions, as well as reductions in positions of purchases of plant and equipment and expenditure for non-produced assets..

Expenditure for debts formwork in 2016 amounted to 668.0 million BAM, which is an increase of 157.9 million BAM (31.0%).

The budgets of local government units for 2016 plan spending of 5.5% of projected GDP of the

Republic of Srpska and a surplus of 0.5% of the same, i.e. 43.4 million BAM. The financial plans of social security funds11 in 2016, plan social payments in the amount of 721.6 million BAM. The planned budget spending on social security funds is amounted to 8.6% of projected GDP of the Republic of Srpska and the predicted deficit of 0.3% of it and amounts to 27.9 million BAM.

3.4. LEVEL OF INDEBTEDNESS

Law on borrowing, debt and guarantees of the Republic of Srpska in detail stipulate field of

borrowing and issuance of guarantees of the Republic of Srpska and local government units, and the methods and procedures for borrowing, which together with the existing laws on the budget system is a comprehensive legal framework for the promotion and control of budget discipline. This law established a limit on the amount of debt so that the total debt of the Republic of Srpska12 at the end of the fiscal year cannot be higher than 60%, while the public debt of the Republic of Srpska cannot be greater than 55% of the achieved GDP in that year. The debt of the Republic of Srpska incurred on the base of debt to finance the repair of damage from the Unified Register of Damage, stipulated in the Law on Solidarity Fund for the reconstruction of the Republic of Srpska, shall be exempt from the restrictions imposed on the overall and public debt of the Republic of Srpska.

Regarding the institutional arrangements for debt management in the Republic of Srpska, this work has been entrusted to the Department for Debt Management, as well as the organizational unit of the Ministry of Finance. That Department has been created in 2007, which abandoned the previous practice of debt operating by a number of different organizational units within the Ministry of Finance.

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Including the Health Insurance Fund of the Republic of Srpska, Child Protection Fund of the Republic of Srpska and Employment Service of the Republic of Srpska, while the Fund for Pension and Disability Insurance of the Republic of Srpska in 2016 became part of the budget of the Republic of Srpska. 12

In accordance with the Law on borrowing, debt and guarantees of RS, RS total debt consists of public debt of the Republic of Srpska, debt of public enterprises, IRB RS and public sector institutions. Public debt is the debt of the Republic of Srpska (budget), the debt of local governments and social security funds debt.

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As at 31.12.2014. the external debt of the Republic of Srpska, which is serviced by the Budget of the Republic of Srpska13 amounted to 4.649,9 million BAM. Out of this amount, the external debt is 2.887,2 million (62,1%), while 1. 762, 7 million (37, 9 %) represent the internal debt.

Currency structure of the observed debt of the Republic of Srpska is characterized by the dominance of 4 currencies: BAM, EUR, SDR and USD. The largest share in the currency structure of the debt has BAM (37.9 %) because the domestic debt in general has been denominated in this currency. Bearing in mind that the Central Bank of Bosnia and Herzegovina maintains monetary stability in accordance with the currency board arrangement14, it may be reasonable to assess that the share of euros in the currency structure of debt is significant(32.5 %). The high share of EUR and BAM provides a high degree of predictability of future liabilities, and in this respect the Republic of Srpska is the under less currency risk. However, due to the significant participation of SDR (21.6%) and USD (4.1%) currencies in the currency structure of the debt, and bearing in mind the dominance of the US dollar in the structure of SDR-а15, enhancing the value of the US dollar could affect the increase in the balance of external debt. This would also require more local currency for servicing foreign debt.

When it comes to the structure of debt in terms of maturity, it is essential as a positive fact to point out that the observed debt of the Republic of Srpska is almost entirely a long-term debt. The short-term debt relates only to 2.5%, while the entire remaining debt is long-term and its share is 97.5%. From the observed debt of the Republic of Srpska in the repayment phase is 52.1%, while in the grace period is 47.9 % of the debt. On the whole, the external debt is largely in repayment, i.e. 58.5%, while the "old" debt repayment is 94.7%, while the "new" debt repayment is 48.5%. From the internal debt repayment phase is 41.6%, while in the grace period is 58.4%. Most of the observed debt i.e. 61.4% is repaying at fixed interest rates. Unlike external debt, which is largely repaid by changing conditions (53.8%), domestic debt is largely repaid at fixed conditions (86.7%).

When it comes to the structure of the observed debt from the standpoint of instruments, marketable portion of debt (bonds and treasury bills) amounts to 29.2%, and non-marketable portion of debt (loans and debt that will be settled through the plan or in cash) amounts to 70.8% of the debt. Marketable debt gives the opportunity to take advantage of debt management as they are openly traded on the capital market. Contingent liabilities

With 31.12.2014. the debt balance on all loans for which the Republic of Srpska Government issued a guarantee amounted to 236.8 million BAM. In the Budget of the Republic of Srpska have been planned funds for the repayment of liabilities arising from activated guarantees and outstanding guarantees which are estimated to be risky. Table 3.4.1. Servicing and total public debt of the Republic of Srpska and debt servicing from the budget

of the Republic of Srpska

Category 2014 with

30.09. 2015.

2015 2016 2017 2018

1 Servicing of external debt 265,0 137,4 219,8 275,0 364,2 376,6

1.1. Republic of Srpska 200,7 90,8 143,8 184,1 262,0 278,0

1.2. local governments 3,6 1,9 5,6 7,7 8,0 8,0

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This is a unique way of expressing information at all levels, for the purposes of this document shows the debt of the Republic of Srpska, which is serviced by the budget of the Republic of Srpska, which includes the foreign debt of the Republic of Srpska (budget), local government units, public enterprises and IRB RS, and the internal debt of the Republic of Srpska (budget) and social security funds originated indirect borrowing. 14

Currency board arrangement, i.e. currency board, established publishing it in domestic currency with full coverage in freely convertible currency at a fixed exchange rate 1 BAM: 0,51129 EUR. 15

The value of SDR -a is determined by a basket of four major currencies, i.e. its value consists of USD 41.9 % JPY 9.4% , EUR 3 7.4 %, GBP 11 , 3 %.

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1.3. public enterprises and IRB 60,6 44,6 70,4 83,3 94,2 90,6

2 Servicing of internal debt 352,4 320,6 397,0 517,7 506,0 593,4

2.1. Republic of Srpska 216,9 216,2 258,5 413,4 405,1 497,5


2.3. social security funds 68,8 56,1 63,8 43,5 41,9 40,2

3 Servicing the public debt of RS 556,7 413,4 546,4 709,4 776,0 879,4

3.1. external debt (1.1.+1.2.) 204,3 92,7 149,4 191,7 270,0 286,0

3.2. domestic debt (2.1.+2.2.+2.3.) 352,4 320,6 397,0 517,7 506,0 593,4

4 Service of total debt of RS 617,4 458,0 616,9 792,7 870,2 970,0

4.1. external debt (1.1.+1.2.+.1.3.) 265,0 137,4 219,8 275,0 364,2 376,6

4.2. domestic debt (2.1.+2.2.+2.3.) 352,4 320,6 397,0 517,7 506,0 593,4

5 Servicing the debt from the budget of RS 518,1 388,8 526,9 726,2 805,5 908,5

5.1. external debt (1.1.+1.2.+.1.3.) 265,0 137,4 219,8 275,0 364,2 376,6

5.2. domestic debt (2.1.+2.3.2.) 253,2 251,4 307,1 451,2 441,2 532,0

Note: Data for 2015 are in line with the Budget for 2015, for the period 2016-2018. are in line with the Budget for 2016 and the following two years

Table 3.4.2 . Condition and total public debt of the Republic of Srpska and debt condition under

obligations which are financed from the Budget of the Republic of Srpska

Category 2014 with

30.09. 2015.

2015 2016 2017 2018

1 Foreign debt 2.887,2 2.957,2 3.167,0 3.581,0 3.799,7 3.456,3

1.1. Republic of Srpska 1.859,1 1.935,3 2.093,8 2.308,2 2.456,6 2.146,5


1.3. public enterprises and IRB 964,7 957,3 993,9 1.136,9 1.211,6 1.182,8

2 Condition of domestic debt 2.168,0 2.213,3 2.184,4 2.029,4 1.886,6 1.731,5

2.1. Republic of Srpska 1.528,0 1.579,1 1.572,8 1.604,7 1.543,9 1.487,1


2.3. social security funds 309,7 325,1 356,0 152,0 113,1 73,7

3 Public debt of RS 4.090,5 4.213,2 4.357,4 4.473,5 4.474,8 4.005,0

3.1. external debt (1.1.+1.2.) 1.922,5 1.999,9 2.173,1 2.444,1 2.588,1 2.273,5

3.2. domestic debt (2.1.+2.2.+2.3.) 2.168,0 2.213,3 2.184,4 2.029,4 1.886,6 1.731,5

4 Balance of total debt of RS 5.055,2 5.170,5 5.351,4 5.610,3 5.686,3 5.187,8

4.1. external debt (1.1. + 1.2. +. 1.3.) 2.887,2 2.957,2 3.167,0 3.581,0 3.799,7 3.456,3

4.2. domestic debt (2.1.+2.2.+2.3.) 2.168,0 2.213,3 2.184,4 2.029,4 1.886,6 1.731,5

5 Condition of the debt serviced from the RS budget

4.649,9 4.746,5 4.940,4 5.313,4 5.436,7 5.001,7

5.1. external debt (1.1.+1.2.+.1.3.) 2.887,2 2.957,2 3.167,0 3.581,0 3.799,7 3.456,3

5.2. domestic debt (2.1.+2.3.2.) 1.762,7 1.789,3 1.773,4 1.732,5 1.637,0 1.545,3

3.5. SENSITIVITY ANALYSIS AND COMPARISON WITH THE PREVIOUS

PROGRAMME

The sensitivity of budget projections to alternative scenarios and risks

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The fiscal projections are based on the movement of the same in previous years and in the first ten months of 2015, the planned changes to the law and macroeconomic framework for the following year. For each type of income trends achievements have been analysed in the previous period included one-time effects that will occur in the future, and determined correlation of certain types of income to the movement of macroeconomic aggregates. All revenues are expressed in current prices, and the degree of elasticity of tax revenue is calculated based on changes in real and nominal size of the relevant macroeconomic aggregates, notably gross domestic product.

Expenditure projections are made based on requests of budget beneficiaries and obligations arising from the laws and bylaws. Budget execution is carried out in accordance with the projected revenue and proceeds to the budget.

The risk lies in the realization of (non) achievement of macro-economic and other assumptions that underlie projections. Also, the risks in the real sector would be affected by the expected economic growth and the number of employees.. Comparison with the previous programme

When comparing documents of ERP RS for the year 2016 and NERP RS for 2015, it is evident that in 2014, due to conservative revenue planning within the last document generated total revenues than projected. The most significant variations are within the indirect tax revenues, revenues from corporate income tax, social security contributions and tax revenues. At the same time, total expenditures in 2014 were higher than projected in last year's document. The most significant variations in current expenditures are related to remittances for social protection, and the expenditure for non-financial assets. This caused an increase in the deficit by 10% in relation to the planned in last year's document.

In 2015, the updated projections of revenues and expenses are also higher than projected in last year's sample form. The increase in total expenditures is slightly higher than the increase in revenue, so that the programme of this year's projected deficit exceeding 8.9%, compared to last year's program.

Updated projections for 2016 and 2017 have increased public revenues, but to an even greater extent public spending, which led to an increase in the deficit. The reason for this is primarily that the projections are based on conservative projections of revenues and at the same time on expenditures based on the expressed needs of budget beneficiaries.

3.6. SUSTAINABILITY OF PUBLIC FINANCES

Republic of Srpska has implemented reforms that should ensure long-term sustainability of public

finances. One of the most important reforms is the reform of the health sector. In the first step will be carried out analysis of debts of health system or community health centres and hospital sector, in order to clearly determine the extent of obligations, and to suggest a model for its solution. The second step, which will help to establish a system of full accountability and fiscal discipline in all institutions of the health system, will represent the introduction of the treasury system. In 2016, shall be passed Law on Amendments to the Law on Health Insurance. In addition, it shall be proceed with the adoption of the new law or amendments to the Law on Medical Chambers.

In the area of pension and disability insurance from 2016, it is necessary to examine the need for a reform of the pension system parameters, in order to ensure its sustainability. In order to ensure the regularity of pensions payment were adopted amendments to the Law on Pension and Disability Insurance, the Law on Budget System, Law on Treasury and Law on Contributions, whose main goal is the introduction of the Pension Fund of the Republic of the Srpska in the treasury system from 01.01.2016. The aim is to achieve additional security in the timely provision of funds to pay pensions. Also, in accordance with its

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obligations under the Reform Agenda, in 2016 a scheme for voluntary retirement will be drafted, and also it will be started with the establishment of the first voluntary pension fund.

In cooperation with the Investment and Development Bank of the Republic of Srpska, an analysis of sustainability of state-owned enterprises has been planned, as well as proposals of measures for sustainable rehabilitation and liquidation of non-viable companies.

As in most countries, nonperforming loans represent one of the key risks of the banking sector. In order to address non-performing loans, it is necessary to undertake activities that encourage out of court debt restructuring, and remove barriers that hinder this process, both in the legislative framework, and in its consistent implementation. It is necessary to encourage banks to implementation of different modalities of financial restructuring that contribute to improving the situation of the debtor (the write-off of liabilities based on interest and / or principal, the introduction period of standstill obligations, rescheduling the longer term, and the like), which is so far in practice rarely used, except for reprogramming obligations for shorter time periods, after which the bank resorted to forced payment.

A detailed explanation of the key measures is provided in section 4. Priorities of structural reforms.

3.7. INSTITUTIONAL FEATURES

Implementation of the Fiscal Responsibility Law in the Republic of Srpska, which was adopted in

2015, will significantly improve fiscal responsibility and discipline in spending public funds throughout the budget system of the Republic of Srpska, both at national level and at the level of local governments and extra budgetary funds. The primary objective is that all subjects of the budget system of the Republic of Srpska express their outstanding liabilities, make realistic plans for their settlement in the future, and to prevent the creation of obligations beyond the defined budgets level. In this way, savings in public expenditure will be focused on capital spending. Passing new legislation allows further improvement of the system of public finances by strengthening fiscal responsibility, transparency and medium-term and long-term sustainability of public finances. Also, this law aims to strengthen the responsibility for legal use of budgetary resources through the improvement of control and supervision in order to ensure fiscal discipline.

In 2016 it will be continued with improvement of work of controlling authorities in the Republic of Srpska, while special attention will be paid to the reform of inspection services in all areas, through the Draft Law on Amendments to the Law on Inspections in the Republic of Srpska.

The proposed Law on Amendments to the Law on Tax Procedure is part of a set of laws that plans to implement further reform of the economic system in the Republic of Srpska with the primary aim of combating grey economy through improved control inspection procedures and increasing the efficiency of inspection bodies.

Law on internal financial controls in the public sector of the Republic of Srpska will be determined by a system of internal financial controls in the public sector, including financial management, control and internal audit and sets forth the methodology and standards, and other issues of importance for the establishment, development and implementation of internal financial control in the public sector. In this way, with the Fiscal Responsibility Law the Republic of Srpska will complete the system which will significantly improve fiscal discipline and accountability in the Republic of Srpska.

In the area of financial reporting in 2016, will continue to extend the reporting system through activities focused on the development of statistical bases of financial reporting, harmonized with the internationally recognized standards of macroeconomic statistical systems, increasing efficiency, comprehensiveness and transparency of the consolidated financial statements of budget beneficiaries, and controlled units of the public sector. With the aim of strategic planning in accounting and auditing it will be adopted a strategic document for further development and improvement of accounting and auditing profession in the Republic of Srpska.

Reform of the Republic’s administration in the Republic of Srpska will continue in 2016 in order to improve the efficiency and transparency of management, as well as improving the professionalism of

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employees. It will be adopted Law on Civil Servants which will in a new way define jobs for senior civil servants, the greater mobility of employees when filling vacancies and others. The government and the bodies of the Republic within its organization will be directly closely related to the reform process.

In 2016, it will be proceeded with the adoption of the new Law on Local Self-Government and the Law on Civil Servants and Employees in the organs of local self-government, which will be the basis for developing new strategic development document in the field of local self-government in the Republic of Srpska. These laws will regulate, among other things, the criteria for determining the number of employees in the municipal or city governments, and establish principles for their internal organization. New Strategy of development of local self-government will define the directions of development of local self-government in the Republic of Srpska in the period 2017-2021. The vision of the development will include the establishment of multi-type concept of local self-government, to examine the possibilities for further functional decentralization, development of mechanisms of inter-municipal cooperation, and strengthening the role of local communities in local government. Also, in early 2016, will be adopted the Strategy of training for employees in local self-government in the Republic of Srpska, which covers the period 2016-2020. The overall objective of the Strategy is to establish a sustainable and functional training to officials in municipalities and cities to be a good source of knowledge and acquiring skills necessary for the development of a highly professional, accountable and effective local self-government in the Republic of Srpska.

4. PRIORITIES OF STRUCTURAL REFORMS IN THE REPUBLIC OF SRPSKA IN THE

PERIOD 2016-2018

The basic platform of the Republic of Srpska has always been a strong, stable, democratic and

prosperous Republic of Srpska, with competences which were verified by the Dayton Agreement, open to the world and the institutions that can meet the needs of all its citizens. On the basis of a clear objective, detailed analysis of the situation in all areas, the Government Work Programme for the period 2014-2018 and the policy of the Government of the Republic of Srpska, defined the reform agenda for the period 2016-2018 and the Action Plan of the Republic of Srpska, which were agreed with the European Union and international financial institutions, key reform areas of the Republic of Srpska Government for the year 2016 are based on the five pillars of reform:

1) Stable economic growth, 2) Fiscal sustainability, 3) Social security, 4) The rule of law and 5) European integrations.

Steady economic growth will be based on the recovery of the economy and improving the business

climate and competitiveness. Ensuring sustainable, efficient and continuous economic growth, the strengthening of administrative capacity and increasing the efficiency of public institutions at all levels, will create space for increasing and better targeting of social benefits, and create a favourable and socially equitable environment. Efforts to ensure fiscal and financial sustainability will be reinforced by measures to strengthen the rule of law and fighting corruption. At the same time, all mentioned policy of the Government of the Republic of Srpska will help the European path of the Republic of Srpska.

In accordance with the Guidelines for the economic reform program, which we received from the European Commission ten priority areas have been defined, namely:

1) management of public finances, 2) infrastructure 3) agriculture,

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4) industry, 5) services sector, 6) business environment, corporate governance and reduce the informal economy, 7) technological absorption and innovation, 8) trade integration, 9) employment and labour market 10) promoting social inclusion, fighting poverty and promoting equal opportunities. In this connection, below we provide an overview of priority of reform measures of the

Government of the Republic of Srpska in some of the areas (maximum ten) , given that in accordance with the guidelines necessary to identify a maximum of 15-20 priority reform measures for Bosnia and Herzegovina, to which the Government of the Republic Srpska placed emphasis in the period 2016-2018. years.

4.1. IDENTIFICATION OF KEY OBSTACLES FOR GROWTH AND

COMPETITIVENESS

Key barriers to growth and competitiveness in the Republic of Srpska are reflected in the following:

existence of consolidated budget deficit and public debt growth, why it is necessary to implement fiscal consolidation which will gradually lead to a reduction in the budget deficit in medium term and lead to a reduction in public debt levels;

inflexibility of the labour market and labour legislation; excessive public administration; unfavourable business climate and competitiveness of investments; noticeable "grey economy" in almost all areas; long-term unsustainable welfare systems, notably the health sector; needed reform of public enterprises, primarily the Republic of Srpska Railways, with the aim of

establishing sustainable and profitable businesses.

4.2. PRIORITIES OF STRUCTURAL REFORMS BY AREAS

Below we provide an overview of key structural reforms in the Republic of Srpska by areas of reform.

4.2.1. Management of public finances

Analysis of areas of public finances in the Republic of Srpska clearly shows that the existence of

budget deficit of the consolidated government, and the steady growth of public debt, indicate the need to reform this sector, which is the key pillar of the reform of the Government of the Republic of Srpska in the period 2016-2018. Analysing the consolidated budget deficit it has been noticed that the main problems occur in the health system, in certain public companies, and that is the individual budgetary beneficiaries expressed lack of fiscal discipline as these liabilities exceed assets that have been granted by the budgetary framework. In addition, the Government of the Republic of Srpska since 2015, will insist on finding realistic and sustainable sources of funding off-budget funds, which will allow the reduction of the aggregate contribution rates and thus reduce the tax burden on labour, and a more competitive economy. And finally, the fight against the grey economy, with the intention of efficient collection of public revenues will be an area to which the RS Government in 2016 will dedicate special attention.

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In this regard, when it comes to public finance management in the Republic of Srpska, in the period 2016-2018, the focus in 2016 will be on the following:

reducing the tax burden on labour, while finding a realistic and trustworthy sources of financing, from which funds will be reimbursed extra-budgetary funds, the loss of revenue from contributions;

increasing fiscal accountability and improving internal financial control system in the public sector, through the implementation of the Fiscal Responsibility Law and the Law on internal financial controls in the public sector of the Republic of Srpska;;

combating the grey economy by adopting the necessary legislation, which will improve the operation of all control bodies;

Health system reform. Reducing the tax burden on labour by reducing contributions, which we started with

implementation in 2015, will be implemented in 2016, providing at the same time relieve the economy, and a safe and realistic sources from which will be compensated by means of budget funds due to the decrease in revenue from contributions. In this regard, the RS Government expects full involvement of all levels of government in Bosnia and Herzegovina and the International Monetary Fund, given that this is one of the priority areas defined reform agenda, which stated that the additional measures, including VAT increase consideration by the end of 2015. In addition, reducing the tax burden on labour is the general guidelines of the Economic and Financial Dialogue in May 2015.

When it comes to deadlines, the intention of the Government of the Republic of Srpska is that by the end of the second quarter analyses the situation and to establish clear and reliable sources of compensation funds budget funds due to the loss of contribution revenues. Then, in the third quarter, it is necessary to prepare and adopt the draft, in the fourth quarter, following the public hearings to prepare and adopt the proposals of legislative solutions that will allow tax relief work, but also the sources of additional financing from non-budgetary funds, notably the Health Insurance Fund. In this way, by adopting the necessary legal solutions at all levels of government, it would create conditions that from 01.01.2017. make tax relief operation, ensuring the sustainability of the budget and extra-budgetary funds, which is in line with proposed IMF Letter of Intent.

The proposal of the Government of the Republic of Srpska went in the direction of reducing the aggregate contribution rate from 33.0% of gross salary, to 31.6% of gross salary, or by 1.4 percentage points (reduction of contributions for health insurance for 1,0 percentage point, child protection 0.1 percentage points and the unemployment 0.3 percentage points). According to calculations of the Ministry of Finance of the Republic of Srpska, the financial effects of the proposed changes would lead to falling revenues of extra-budgetary funds in the amount of approximately 72.4 million (of which Health Insurance Fund 43.3 million BAM, Child Protection Fund 4.5 million BAM, Employment Office 11.1 million BAM, as well as the Pension Fund 13.4 million BAM due to the gross salary decrease) . In this case, some 53 million BAM would remain available to the real sector.

Bearing in mind the significant resources needed to offset the loss of revenue of extra-budgetary funds, the key task for all levels of government will be to come up with realistic and reliable sources that will compensated with the loss of revenue from contributions.

Increasing fiscal accountability and improving internal financial control system in the public sector, through the implementation of the Fiscal Responsibility Law and the Law on internal financial controls in the public sector of the Republic of Srpska, will allow greater fiscal discipline and better control of spending of public funds.

Implementation of the Fiscal Responsibility Act in the Republic of Srpska, which was adopted in 2015, will significantly improve fiscal responsibility and discipline in spending public funds throughout the budget system of the Republic of Srpska, respectively, both at the national level and at the level of local governments and extra budgetary funds. The primary objective is that all subjects of the budget system of the Republic of Srpska express the total outstanding liabilities make realistic plans for their reconciliation in the future, and to

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prevent the creation of obligations beyond the level defined budgets. In this way, savings in public expenditure will be focused on capital spending. It should be noted that the adoption and implementation of the Fiscal Responsibility Law in the Republic of Srpska is in the general guidelines of the Economic and Financial Dialogue in May 2015. At the same time, in order to effectively and effective implementation of the Law on fiscal responsibility in the Srpska Republic, will be adapted to other legal provisions, if the need arises, to fiscal responsibility and discipline further strengthened.

Law on internal financial controls in the public sector of the Republic of Srpska will regulate the system of internal financial controls in the public sector, including financial management and control and internal audit and sets forth the methodology and standards and other issues of importance for the establishment, development and implementation of internal financial control the public sector. In this way, with the Fiscal Responsibility Law in the Republic of Srpska , which is already in force, and the adoption of the Law on internal financial controls in the public sector of the Republic of Srpska shall be rounded up a system which will enable a significant improvement of fiscal discipline and responsibility in the republic and s Srpska.

When it comes to the time frame of these measures, the intention of the Government of the Republic of Srpska is that in the first two quarters prepare all necessary subsidiary legislation under the Law on fiscal responsibility in the Republic of Srpska and the establishment of the Fiscal Council of the Republic of Srpska, so that after the adoption of the Budget Framework Paper of the Republic Srpska for the period 2017-2019 all will be actively involved in the preparation of the budget for 2017.

The Law on internal financial controls in the public sector of the Republic of Srpska was adopted by the Government in the draft, and the intention of the Government is that by the end of the second quarter to adopt it in the form of a proposal to the National Assembly of the Republic of Srpska, and that enters into force from 07.01.2016.. In this way, the second half of the year would be reserved for the adoption of the necessary secondary legislation, so that this legal solution has its full implementation since 01/01/2017.

This legal solution will disable the creation of liabilities in excess of the amount of funds to budget beneficiaries at the disposal budget, which will create significant savings, both in the Republic’s budget and the budgets of local governments. Budget analysis for the period 2010-2014 indicates that the budget beneficiaries create obligations on average of about 25 million more than the funds give to them by the budgetary framework, with those that were in 2011 and 2012, providing incentives for agriculture, created additional obligations in the amount of 35.7 million, i.e. 48.9 million. Based on the analysis, we can conclude that with implementation of the aforementioned legal solutions will be provided savings of 25 million BAM annually through the cease of creation of obligations beyond the funds level given by budgetary framework from 1.1.2017.

Combating the grey economy by adopting the necessary legislation, which will improve the

operation of all control bodies is a measure whose implementation we started back in 2015, preparing the necessary legal arrangements, will be implemented in 2016. The grey economy significantly worsens fiscal sustainability, i.e., grey economy is several times and from several aspects negative phenomenon that largely prevents quality economic progress, creating a particularly unfair competition, declining revenue budget and extra-budgetary funds, denial of employment in the grey zone to exercise their rights under the social insurance. Accordingly, one of the primary goals of the Government of the Republic of Serbian in the future, the way to achieving fiscal sustainability and fiscal consolidation, are fighting and preventing grey economy.

In this regard, the proposed Law on Amendments to the Law on Tax Procedure is part of a set of laws implementing further reforms of the economic system in the Republic of Srpska with the primary aim of combating the grey economy. Improving control inspection procedures, increase the efficiency of inspection bodies are part of this reform, which is achieved above all by creating an adequate legal framework with the carrier in the proposed draft laws for the implementation of special inspections and repressive measures for determining violations of regulations concerning the registration of businesses in the form of entrepreneurs, enterprises or institutions, as well as regulations concerning the registration of taxpayer contributions to the Single System of Registration, Control and Payment. The set of laws in this part of the reform, it is proposed that all inspections in the Republic of Srpska have jurisdiction in monitoring the provisions governing the compulsory registration of legal form for carrying out certain

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activities, and also to all inspections in the Republic of Srpska have jurisdiction in overseeing the provisions of the law is required to be registered contributors in a single system of registration, control and collection of contributions. Тhis or very similar solution have countries in the region, and it should primarily have a preventive effect and consequently repressive because of a violation of the provisions on business registration, that entity will be prohibited from doing business and sealed the premises in which these activities carried out, and in case of violation of the provisions on registration of contributors (workers) will first be issued a fine, and in the case of a repeat offense that subject would be prohibited from doing business. The proposed law, therefore, with the aim of combating grey economy, creates a legal framework for the supervision and the imposition of measures prohibiting the performance of activities of that natural or legal person, entrepreneur or institution that is not registered as an employer of workers (taxpayers CONTRIBUTION) in the Unified System of Registration, Control and Payment contributions, and are given responsibility and other inspectorates to carry out this monitoring.

Accordingly, in 2016 it will continue to work on improving the operation of all control bodies in Republic of Srpska, while special attention will be paid to the reform of the inspection services in all areas. In this regard, the Draft Law on Amendments to the Law on Inspections in the Republic of Srpska is done redefining the powers of inspectors in order to achieve a more efficient mechanism for ensuring compliance, so that, inter alia, redefining the powers of inspectors from the Authority for Inspection Affairs, as well as inspectors in local government regarding the powers that, irrespective of types of activities and competence of the inspectors, inspectors, i.e. all inspection professions foreseen in the Law on Inspections in the Republic of Srpska, be authorized to perform the inspection of compliance with the provisions on registration of entities to perform certain activities, as well as control of registration of workers on compulsory types of insurance. In addition to the inspectors of the Republic’s Administration of Inspection and inspectors, the inspection activities carried out at the local government level as mandated tasks, supervision over the implementation of provisions on registration of entities to perform certain activities in accordance with special regulations, and will be carried out by inspectors of the Tax Administration, as well as inspectors of Republic’s Administration for games of chance. Supervision of the application of provisions on registration of contribution payers in the Unified System of Registration, Control and Payment of all inspectors who control the specified area, carried out in accordance with the law governing the tax procedure, while all authorized inspectors monitoring compliance of provisions on the registration of operators for provision activities in accordance with special regulations, made on the basis of the authority vested by this Law.

When it comes to the time frame of these measures, the intention of the Government of the Republic of Srpska is that the aforementioned legal solutions would be adopted by the end of the second quarter 2016, in order to start the application from 7.1.2016.

The financial effects of these measures are reflected in the efficient collection of tax revenues, and larger coverage of taxpayers, or tax base enlargement, which should improve the fiscal position of both the state budget and the budgets of municipalities and cities, and the fiscal position of budget extra-budgetary funds. However, analysis of the Ministry of Finance of the Republic of Srpska show clearly that these measures will not be sufficient to compensate for the loss of funds budget funds due to the reduction of the tax burden on labour, but it is necessary to find a realistic and stable sources from which funds will be provided to extra-budgetary funds, engaging all levels of government in Bosnia and Herzegovina, which is one of the key commitments of the Reform Agenda.

Health care reform will be implemented in several phases. With the aim of introducing of treasury

system in the health care system of the Republic of Srpska, and in all public health institutions and the Health Insurance Fund of the Republic of Srpska, as previous measures, it will be carried out an analysis of health system debts, as well as health centres, and hospital sector, in order to clearly identify the amounts of liabilities and proposed a model for their solution. Partners in the overall and comprehensive reform of the health sector will be experts from the World Bank.

The second step in the reform of the health system, which will help to establish a system of full accountability and fiscal discipline in all institutions of the health system, will represent the introduction of the treasury system, which will be implemented in two phases. The first will be introduced treasury system

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in health centres, in the way that local governments, as founders of health centres to fully take responsibility for the management and fiscal discipline, health centres, while in the second phase of the treasury system is to be turned on secondary and tertiary level of Health Protection and Health Insurance Fund of the Republic of Srpska. It is intended that the first phase will be completed by the end of the second quarter of 2016, with the implementation of the second phase will be completed by the end of 2016.

In this way, we create a space to, with the expert help of World Bank experts, find new models and sources of health sector funding, and to make a standardization network of health care institutions, which is also planned to start in 2016, and thus prepare all activities the successful implementation of the complete reform of the health system by the end of 2017.

Detailed analysis of obligations of health system is currently under way, and the RS carried out it with experts from the World Bank, so that detailed information on the financial situation and the fiscal effects will be available only after the analysis of World Bank experts.

4.2.2. Infrastructure

Analysis of infrastructure in the Republic of Srpska shows that the period 2016-2018 will be marked

by the continuation of already started, and new investments as well as primarily in the area of energy infrastructure, and in the field of transport. At the same time,

Restructuring of the Republic of Srpska Railways

are one of the priorities of the Government of the Republic of Srpska in 2016, to establish a system that is self-sustaining, and also that is efficient and effective. In this regard, the activities that had begun in 2015, with technical assistance from the World Bank, will be intensified in 2016. Railways of the Republic have a multitude of specific features, which make them unique, and making special condition, a unique approach to the restructuring process. The organization and functioning of the Republic of Srpska Railways is normatively regulated primarily by the Law on Railways of the Republic of Srpska. However, the performance of the affected companies and other legislative acts of the Republic of Srpska and BiH (the Law on Public Enterprises, the Law on Enterprises, and others), numerous secondary legislation (regulations, decisions and other by-laws), regulations in the field of railway transport, collective Agreements (general, branch and collective agreement of the Republic of Srpska Railways) and the Articles of Association, as its highest normative act. In addition, this area is also subject to regulations and directives of the international community (EU regulations, UIC, CIT, FTE, etc.). In this respect, the restructuring program involves a total adjustment to operating conditions, which will be very specific and requires a very detailed and highly sophisticated knowledge in all these areas, and will be jointly and in cooperation with World Bank experts try to find the best model. Results of implementation of the proposed measures and restructuring activities should be visible through the strengthening of the operational and financial capacity of Railways, in terms of stabilization of the core business, but also through the establishment of quality railway system in the Republic of Srpska, which is not inferior to the best practices of developed countries. These results, through the optimization of revenues and expenses, provide future profitability of the Republic of Srpska Railways. Further investment in the Republic of the Republic of Srpska Railways company, both through annual grants, and through servicing credit obligations and public investment in the railways, must result in a change in ownership structure, considering that the Republic is only shareholder who constantly and in high amounts subsidize or invest, and which ultimately must reflect the change in the ownership structure of the railways, or the valorisation and increase the ownership share of the Republic. The dynamics of implementation, as well as the effects of fiscal reform measures depend primarily to the World Bank experts and their analysis which is currently underway.

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For this purpose an economic-economic growth and development of the Republic of Srpska, in the area of energy infrastructure, we will continue on-going implementation of initiated, as well as providing conditions for the realization of new investments while maintaining energy stability through the construction of large power plants: TPP Stanari, TPP 3 and Gacko 2. The costs of implementation shall be borne by investors from their own financial resources, with the support of the Republic of Srpska in terms of allocation of land owned by the Republic of Srpska necessary for the realization of the project or guarantor for a loan amounting ZP RITE Gacko for the realization of TPP 2. The construction of major energy facilities that use Renewable energy sources will be implemented through the start of construction or preparation for construction of the following facilities: HPP Dabar from Gornji Horizonti, Mrsovo HE on the Lim River, MHE Bočac 2 on the river Vrbas, and WF Trusina, Nevesinje and VE Hrgud Berkovići. Implementation costs borne by investors with the support of the Republic of Srpska in terms of allocation of land owned by the Republic of Srpska necessary for the realization of the project or the guarantor of indebtedness for the realization of HPP Dabar, VE Hrgud and MHE Bočac 2.

In the field of transport will be built spatial planning documents, and will commence the construction of the cargo facility, expanding the airport passenger terminal and the procurement of equipment, all with the goal to get to the Banja Luka Airport an increased flow of goods and passengers, and to increase the level of safety of air navigation. In addition to that , it will be created a master plan for the airport, as well as spatial and plan for a special purpose. Also, in order to keep CAT I at the Banja Luka International Airport it will begin activities on the expansion of the airport complex and basic airport pathways to the east. The investment includes the preparation of spatial - planning documentation, the removal of buildings - houses in the zone of expansion of primary trails, building new fences, relocation of circumferential channels, expansion of basic routes and its stabilization. It will be continued a realization of projects, namely: Work on development of the main project and construction of the highway Banja Luka - Doboj, section Prnjavor-Doboj length 37 km Work on development of the main project and construction of the highway Banja Luka - Doboj, section Banja Luka - Prnjavor 35 km; Activities related to signing a contract with a potential investor (the Chinese partner) for the construction, highway on the section Glamočani - Banja Luka - Mrkonjic Grad - Mlinište; Activities on the preparations for the design and the search for potential investors for the construction of a motorway or fast road at the Banja Luka - Prijedor section Activities on analysing the feasibility of, and preparations for the design and the search for potential investors to build a highway or expressway on the section from Istočno Sarajevo to Višegrad, in conjunction with projections and strategies of the main roads in the Republic of Serbia; Activities related to the construction of the interstate bridge over the Sava River near Gradiska; Activities in connection with finding financing for the construction of highway Doboj-Vukosavlje within the Corridor Vc in the length of 46.6 km; and activities on the construction of the bridge over the river Drina on the location of the Bratunac-Ljubovija and access roads in the Republic of Srpska, as well as joint border crossing.

4.2.3. Agriculture

Analysing of barriers in agriculture in 2016, it is clear that, in the said area should be created legal conditions that take into account and respect the constitutional order of BiH, which will constitute an adequate framework for access to EU funds. In this regard, it will be necessary to make the adoption and harmonization of regulations stemming from the constitutional jurisdiction of the Republic of Srpska (Law on Seeds, Planting Material Act, the Law on Genetically Modified Organisms, Law on Food, Agriculture Act, the Agricultural Land Law) and adoption and harmonization of regulations relating to the constitutional responsibilities of the joint bodies at the BiH level, which are also in line with the acquis communautaire in order to timely prepare for a complete transposition of EU regulations when BiH becomes a member of that organization, in order to prepare the necessary legal basis.

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Activities will be undertaken to establish the system for identification of land parcels (Eng. LPIS - Land Parcel Identification System), as an integral part of the Integrated Administrative Control system (Eng. IACS - Integrated Administration and Control System) , which is in accordance with the requirements of the EU common Agriculture Policy (En . CAP - Common Agriculture Policy). This results in significant savings and ensures financial discipline and dedicated agricultural budget expenditure. Also, to draft a document for rural development and IPARD operating structure, which is a prerequisite for the creation of the IPARD Programme and the measures to be financed from EU funds for rural development. In addition, a potential beneficiary of these funds is obliged to conclude the Framework Agreement and Sectorial agreements with the European Commission, and then to obtain accreditation for IPARD established operating structure. The use of EU funds in the pre-accession period is important because it allows users to besides increasing the competitiveness of agricultural producers, have accredited operating structure, which will serve for the reception of a much larger EU funds for agriculture and rural development (EAFG and EAFRD) after acquiring full membership.

4.2.4. Industry

The analysis of the industry in the Republic of Srpska, we have identified a number of problems,

which are primarily reflected in the inadequate structure of primarily manufacturing industry, where in the Republic of Srpska dominate big companies from metal and wood industries, that burdened by the legacy of the socialist system, with inadequate process failed to position in the market as a recognizable economic entity in its field.

Manufacturing is one of the most important sectors of the economy of the Republic of Srpska as evidenced by the following data: the participation of manufacturing industry in the overall industry of the RS amounts to 61.4%, the share of manufacturing industry in the RS export is 88.3%, and also the manufacturing industry employs 48.952 workers. In this respect, economic growth and macroeconomic stability of the Republic of Srpska is unsustainable without a stable growth of manufacturing industry, and its dominant influence on exports.

Bearing in mind the length of the privatization process in the manufacturing industry, a modest inflow of foreign direct investment, the lack of new programs and technologies, low competitiveness of companies and the number of companies in bankruptcy, we can conclude that the privatization process has not given the expected results. The results as well as the duration of the process of privatization of companies, have been influenced by many factors, especially the very poor state of most companies. It primarily refers to the high indebtedness, the burden of surplus labour, out-dated technology, unresolved property rights, loss of markets, leaving of qualified personnel, lack of capital for starting serious production and others.

Bearing in mind that manufacturing industry is an important sector of the Republic of Srpska, RS Government will begin in 2016 , and in 2017 and 2018 continue, the process of re-industrialization in all areas of the manufacturing industry, which aims to start/revive production, increasing the volume of industrial production and employment. This process implies a "general cleaning and storage" in the companies with majority state ownership, some of which do not operate or do business with a minimum capacity, and as such are inefficient and illiquid. Implementation concept of reindustrialization includes:

Completion of the privatization process. In the manufacturing industry operates 20 commercial companies which were not privatized state capital, of which 11 companies with a majority of the 100% state capital, whose status should be urgently addressed.

Restructuring. In order to successfully implement the privatization, it will be implemented procedures of companies restructuring with a majority of the 100% state capital, provided that

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they have the same market and further prospects, and expected positive effects of the implementation of this procedure.

Starting and ending the bankruptcy proceedings and liquidation. Societies where privatization and restructuring do not give positive effects should be subject to bankruptcy proceedings and liquidation. It is a severe social and economic process, which have no alternative and it is essential to prevent further loss making and deterioration of these companies. However, in the event that there are proper resources, the bankruptcy procedure will be carried out in the direction of reorganization, and in order to maintain production and employment.

In this regard, in accordance with the Action Plan of the Republic of Srpska for realization of the Reform Agenda should be noted that some of the measures require the Agenda: making a list of viable and non-viable public enterprises, development of strategies for dealing with loss-making enterprises in the public domain (Restructuring Programme and Privatization Programme), and resolving unsustainable publicly owned companies.

When it comes to the dynamics of the implementation of this measure, the intention of the Government of the Republic of Srpska is that by the end of 2016, in cooperation with the Investment and Development Bank of the Republic of Srpska, which manages funds that are the owners of the state capital in enterprises, to prepare a list of viable and non-viable public enterprises, as well as Restructuring and Privatization Programme, and that the issue of resolving unsustainable publicly owned companies to be measures in 2017 and 2018.

Analysing the fiscal impact of the above measures, it is clear that it will prevent the creation of new losses in companies that are owned by the Republic, and in this way, public funds would be required to provide for the continuation of "survival" of these enterprises will be channelled into capital investment. At the moment it is almost impossible to estimate how much would be the amount to potential savings, because it is necessary first to consider in detail the situation in each company individually, which will be exactly one of activities in 2016.

4.2.5. Service sector

The analysis of statistical data related to the tourism and hospitality and analysis of data on

payment of tourist tax in the past, have shown the need to work on the competitiveness of the tourist product of the Republic of Srpska. It is necessary that it will be an innovative, heterogeneous, appealing and unique, and formed from a spectrum of different products adapted to the possibilities of the tourism area per the requirements of tourism demand After the proclamation of tourist destinations and to create products and identification of potential markets, follows the promotion of products and tourist offer of the Republic of Srpska towards these markets and target groups.

Analysis of the banking sector of the Republic of Srpska indicates that one of the main problems is

the high share of non-performing loans to total loans of banks of the Republic of Srpska. Problems related to the growth of non-performing loans and uncovered part of the reserves for loan losses in the coming period may significantly weaken the capital base of banks, if it proceeds with negative trends in asset quality and a deterioration of loan collection. In order to further strengthen the resilience of banks and preserve the quality of their operations in the next period the bank will focus its activities on capital strengthening of banks, improvement of risk management system, especially credit and liquidity risk, control the level of overdue receivables and non-performing loans for early recognition of deterioration in the loan portfolio and taking appropriate measures to address non-performing loans, and the establishment and improvement of stress tests on possible scenarios of crises and their impact on the bank's operations, particularly capital, credit risk and liquidity risk.

Within the framework of its powers, the Banking Agency of the Republic of Srpska will in the implementation of continuous bank supervision enhance oversight of credit risk, the adequacy of reserves

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for potential credit losses, and capital adequacy of banks conducted stress tests on individual banks, the establishment of an early warning and detection of problem and negative trends in banks for preventive action and timely taking measures to strengthen the transparency of operations of banks and other financial institutions in order to preserve confidence in the banking system. In addition, the Agency's activities should be aimed at protecting the rights and interests of consumers of financial services, both through the work of the Ombudsman for the banking system, as well as direct control of financial institutions, in order to further develop and improve the supervision of the banking sector in accordance with international standards and market requirements.

In order to achieve the above-mentioned, in 2016 will be modernized legal framework to tighten sensible requirements of banking business, including more adequate assessment of the risk profile of banks, better risk management, consistent application of corporate governance standards and improve the supervisory function of the Banking Agency of the Republic of Srpska introducing additional measures, early intervention, development of consolidated supervision, and creation of conditions for conducting the banks restructuring. Accordingly, in 2016 it will be passed the new Law on Banks of the Republic of Srpska, as amended

by the Law on Banking Agency of the Republic of Srpska, in order to comply with the new Law on Banks of the Republic of Srpska, especially in the restructuring of banks and the Banking Agency of the Republic of Srpska it will be adopted an Action plan for implementing the recommendations of the FSAP mission, which will cover the period from 2015 to 2017.

In this regard, in 2015, was drawn up the draft text of the new Banking Law of the Republic of Srpska, which is based on the recommendations of the Basel Committee, applicable solutions directives of the European Union, the positive practice of the environment as well as suggestions given through its technical assistance within the existing Stand - by agreement with the International Monetary Fund. The new law will be defined stricter prudential banking operations, better risk management of banking business, the sale of loans from banks under the loans authorized customers, improvement and strengthening of the control function of the Agency for Banking Republic of Srpska, with special emphasis on early intervention, the implementation of testing at banks stress, developing a special regime of consolidated supervision, preparation of plans for the recovery of the banks themselves, as well as other issues of importance for the recovery of banks, as well as the procedure of liquidation and bankruptcy.

The adoption of the new law creates the possibility of banks restructuring, in order to ensure business continuity systemically of important banks and to avoid adverse impact on the stability of the financial sector, ensure the protection of depositors and investors, as well as protection of funds and assets of bank clients. According to the legal solutions, which are in accordance with the requirements of new EU directives on the recovery and restructuring of credit institutions (2014/59/EU), undergoing restructuring losses in the bank should first be borne by bank shareholders, and that the bank itself is primarily funded the costs of bank restructuring process payment of contributions to the Fund for the restructuring of banks, whose establishment is envisaged by law. In case of lack of resources of the Fund, there is a possibility of using other sources of financing of restructuring, such as loans, credits and other acceptable forms of support to banks and the limited conditions and the use of extraordinary public financial support of the Republic of Srpska.

It is important to emphasize that the mentioned reform measures are given in the Reform Agenda, and in the Action Plan of the Republic of Srpska for the realization of the Reform Agenda.

As for the time frame of the above reform measures by the end of 2016 will be adopted a new Law on Banks of the Republic of Srpska, amended the Law on Banking Agency of the Republic of Srpska, in order to comply with the new Law on Banks of the Republic of Srpska, especially in banks restructuring, at the same time, the Banking Agency of the Republic of Srpska shall pass by-laws necessary for the implementation of the new Law on Banks of Republic of Srpska. In 2017 the Agency for Banking of the Republic of Srpska will adopt the action plan for implementing the recommendations of the FSAP mission, which will cover the period from 2015 to 20 17, while in the period 2016-2018 the Banking Agency of the Republic of Srpska plans to gradually implement BASEL - and II and BASEL -a III in accordance with the

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adopted Strategy and amendments to the Strategy for the introduction of the "International Convergence of Capital Measurement and Capital Standards BASEL II".

When we talk about the cost of implementation of the mentioned reform measures, new Banking Law of the Republic of Srpska Banks introduces the obligation to pay ordinary and extraordinary contributions to the Fund for the restructuring of banks in accordance with the requirements of the new European Union directive on the recovery and restructuring of credit institutions, which means that future restructuring systemically important banks carried out at the expense of the banking sector, rather than the budget. As it was assumed that the banks' restructuring activities performed by the Agency for Banking of the Republic of Srpska and within the same fund will be established for banks restructuring, it will lead to additional costs of establishing a special organizational unit responsible for the restructuring of banks, and the cost of the necessary training of employees who will perform these tasks, which will be financed from its own revenue. Even though this reform will require additional costs from the Agency to accommodate new business, this solution represents a lower cost compared to other possible solutions to banks restructuring (e.g. the establishment of special institutions for the restructuring and management of the Fund). Also, the potential cost may constitute use of extraordinary public financial support, but only in the event that the Fund for the restructuring of banks is not enough, and the restructuring of banks is in the public interest.

4.2.6. Business environment, corporate governance and reduce of informal economy

Improving the business climate and competitiveness are the basis for ensuring stable economic

growth. Further growth and prosperity must be based on new investments, which will provide new jobs and be a driver of new economic cycle. The realization of this objective is based on the intensified fight against the grey economy, and elimination of barriers to businesses and new investments.

As at the global level, after 2007 also in the Republic of Srpska has been a decline in foreign investment. Data of the Central Bank show that in 2014 there was an increase in the volume of foreign investments (379.1 mil. BAM, which is approximately half of the total investments in BiH - around 740 million BAM according to the latest data) compared to 2013, but is not reached the level of before the global economic crisis (as in most countries of South East Europe). In addition to global developments, which are a significant factor for the inflow of foreign investment, international reports ( Doing Business, Global Competitiveness Index, etc.) indicate weaker position of Bosnia and Herzegovina (no data for the Republic of Srpska) when it comes to the factors that affect competitiveness. This suggests the need to improve the business environment and competitiveness and in a number of areas: start business, market exit, construction permits, registering property, paying taxes, protecting investors, and so on.

Although the Republic of Srpska has implemented a series of activities aimed at attracting foreign investments, this is a dynamic area that needs to adapt to international trends and the environment. Therefore, it is planned to adopt the strategy of attracting foreign investment from 2016 to 2020 and the accompanying action plan which is based on the aforementioned analyses. Strategy objectives (and measures envisaged for its implementation) relate to strengthening the competitiveness of RS and improvement of the business climate (for certain areas of Doing Business and other international reports), to strengthen cooperation and the capacity of institutions and promotional activities.

At the same time, frequent changes of regulations create legal uncertainty and poor performance affects the business environment. In addition, the process of making quality regulations includes cost-benefit analysis of their application, to the business sector and the public budget, citizens, environment, etc. In this regard, the Government of the Republic of Srpska is among the first in the region who introduced impact assessment regulations, first through pilot projects, and then permanently in their legal system, and in 2015 RS Government has adopted a new decision on the improved implementation of regulatory impact assessment in the drafting of regulations. In addition to the mandatory application of all laws stipulates the mandatory application of the methodology and in-laws. In the future, it is necessary to

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further strengthen the capacity for its application in all key laws, especially for business community. In particular, it is necessary to strengthen the capacity and to apply to the by-laws because they are often directly affect the business sector.

In this regard, the business community has long emphasized the problem of different types of fiscal charges, which not only financially, but also the administrative burden on the economy of the Republic of Srpska and problems faced in the course of bankruptcy proceedings. By eliminating barriers to businesses and investment, through the registry fiscal charges and improving bankruptcy procedures, the elimination of administrative barriers in all sectors of the economy, and also investments in infrastructure projects, particularly in transport, with particular attention to making education with the labour market, will continuously improve the business climate and the competitiveness of the Republic of Srpska.

In this regard, the key reform measures in the field of business environment in 2016 in the

Republic of Srpska will be: Eliminating barriers to businesses and investments and The adoption and implementation of the Law on Bankruptcy.

Eliminating barriers to businesses and investments will enable establishment of a register of

parafiscal levies, in order to prevent the creation of new fiscal charges. Then with the help of USAID will continue to analyse fiscal charges included in the register. Based on results of analysis the decision is made on the eventual abolition of certain charges that prove that they are not justified. The legal basis for the register of parafiscal levies will be established through the new Act on the tax system.

The dynamics of implementation of new measures imply the adoption of the new Law on the tax system by the end of the third quarter of 2016, and the establishment of a register of parafiscal charges, after which it will approach the analysis of the possible abolishment of some kind of parafiscal levies.

The effects will be well-known at the end of the analysis. As part of these measures is planned the abolition of Special Republic’s tax, on the basis of which it will be realized less revenue in the budget of the Republic of Srpska (approximately 10.0 million), but also a relief for businesses.

The new bankruptcy law defines the procedure of restructuring and bankruptcy proceedings, the legal effects of the implementation process of restructuring and bankruptcy proceedings, reorganization of the debtor based on a bankruptcy plan, and international insolvency. Bearing in mind the existing problems and difficulties in the bankruptcy proceedings, the new law has realized the following objectives: timely initiation of proceedings restructuring and bankruptcy proceedings, financial and operational restructuring of debtor in the restructuring process, shortening the period of bankruptcy proceedings, reduce costs, especially the cost of advance payment, the manner of appointment of bankruptcy trustee respecting the principle of uniformity and equality in appointments, as well as the age limit of bankruptcy trustees and the amount of their compensation, protection of the rights of creditors in bankruptcy proceedings, the improvement of the reorganization process, in terms of its simplicity, harmonization of regulations that affect the application of the bankruptcy proceedings and determining the body that supervises the application of legal provisions concerning the timely initiation of proceedings and that would impose sanctions on debtor or body authorized to represent the debtor as a result of untimely initiation of proceedings. The introduction of the process of restructuring as something new will enable companies with financial difficulties, before the onset of insolvency and the reason for bankruptcy, to restructure its financial obligations and to eliminate the possibility of bankruptcy and to continue with normal economic life. Those who fail in the process of restructuring will have under this law the opportunity to do so in bankruptcy proceedings reorganization in bankruptcy of debtor. When it comes to the process of restructuring, the new Law inter alia stipulates that the APIF is in charge or has duty as an organ that keeps records of corporate accounts, to draw up a list of debtors who are late with the settlement of monetary obligations up to 60 days and to publish this list on the website and within three days to inform the debtor that the conditions are met to initiate the procedure of restructuring, which opens the possibility of timely identification of potential insolvent business entities. The restructuring must be completed within 150 days

30

after its opening, exceptionally, in justified cases this period may be extended for another 90 days. At the same time, refers to a higher degree of control over the work of bankruptcy trustee through a specially developed method of control operation of bankruptcy trustee of creditors, and stipulates harsher fines and simpler shift administrators and delete them from the list. The number of cases that can lead to a bankruptcy trustee is limited, and elected the trustee is obliged to conclude after taking up the office at the insurance company to conclude the liability insurance for all the risks associated with its activities. In this way, in 2016, it provides new legal regulations, which would substantially solve the problems encountered in the previous bankruptcy proceedings.

It shall examine and prepare legal solutions for processes of possible programmed, guided, rapid bankruptcy or similar procedure for joint stock companies or public corporations of general interest, such as public utilities, in which the owner must provide the performance of public functions and in the eventual bankruptcy proceedings, as well as significantly accelerated and clearly prosecuted.

Considering that the Law on Bankruptcy was adopted in the draft in 2015, and has passed the public hearing, we expect its adoption in the first quarter of 2016.

Fiscal effects related to the reduction of costs of keeping the bankruptcy proceedings and restructuring process, and will also allow a better control and collection of receivables from business entities themselves, thus increasing the liquidity of the economy.

4.2.7. Technology absorption and innovation The analysis of the field of technology absorption and innovation in the Republic of Srpska identified that one of the biggest problems of our economy is its relative isolation, i.e. its lack of connection with the academic and scientific research area, but also with potential partners that can provide answers to many questions of the business sector. The networking of the above-mentioned presents a solution that has proven to be very effective. Together with a strong commitment of the institutions, this process can improve the business environment and create the preconditions for its recovery in a short time.

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At the same time, the problem concerning the strong support for the development of scientific research staff for the needs of academic market and the weak response of other sectors for these incentives, especially of the real sector, was identified. A lack of mobility of students and researchers was also identified, as well as the relatively weak connection of scientific research institutions with foreign organizations of the same or similar profile. In this regard, within the available financial possibilities, the Republic of Srpska Government will work intensively in 2016 to eliminate the identified problems, but due to limited resources and their focus on other priorities, the significant reform measures in this area are not defined in the period 2016-2018.

4.2.8. Trade integration The analysis of the situation in the field of trade integration in the Republic of Srpska points to the need for additional improvement of the consumer protection, and establishment of the strategic directions in the field of trade in the following period. At the same time, the additional promotion and protection of national production through product branding will enable a better recognition of national products and national production potential. In this connection, the Government of the Republic of Srpska will implement the following activities in 2016: to adopt the Law on Amendments to the Law on Consumer Protection in the Republic of Srpska; to issue the Trade Development Strategy; to carry out further activities on the implementation of the Policy of branding of national production; while the following activities will be conducted in order to promote national products and national production potential: the continued implementation of the campaign Ours is better in cooperation with the Chamber of Commerce of the Republic of Srpska; issuing of Best from Srpska bulletin; provision of financial support to the work of consumer protection associations, and the creation and implementation of consumer protection policies. However, significant reform measures in this area are not defined as a priority in the period 2016-2018.

4.2.9. Employment and labour market The analysis of the situation in the labour market and the area of employment points to the lack of market flexibility, as well as to the lack of connection between the amount of wage and the work performance. At the same time, the high negative incentives for employment do not motivate people to work, which creates special problems for non-budgetary funds, though the stimulation of informal employment. All of the above additionally burdens the companies, preventing a higher staff turnover, which would enable higher employment and braver creation of new jobs.

In this regard, a key measure of the Republic of Srpska Government in the area of labour market in 2016 is the new labour legislation and support to the employment in the real sector.

The new Labour Law will enable greater flexibility of the labour market and better connection between the amount of wage and the work performance, reduce negative incentives for employment, provide better protection of the workers’ rights and reduce informal employment, thus significantly contributing to the improvement of the position of workers and companies. After the adoption of the new Labour Law, the amendment of other legal solutions in the field of labour and employment will be initiated, with the aim of their harmonization with the new Labour Law (the Law on Amendments to the Law on Employment Mediation and Unemployment Rights, the Law on Amendments to the Law on Records in the Field of Labour and Health Insurance), as well as the conclusion of a new General Collective Agreement.

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Support to the employment in the real sector will be defined by the Employment Strategy and other documents in the field of employment, while the priority will be given to the categories of families of fallen soldiers and the best students of public universities. The mandatory multi-year planning of human resources will be introduced in the public sector and it will include plans for regular and early retirement, solving of the issue of surplus employees and the controlled reduced new employment, taking into account the priorities defined in the preceding paragraph. Also, redefinition of the role of the Republic of Srpska Employment Bureau, in terms of strengthening of the function of employment mediation services and implementation of programmes and measures of active employment policy is an important Government activity in 2016. The availability of list of unemployed persons will be provided for the needs of employers, for faster and easier communication between employers on one side, and persons seeking employment, on the other side. The Law on Incentives for Employment, which will be prepared in cooperation with the Chamber of Commerce, will create measures stimulating the employers for the number of newly employed in 2016 compared to the number of employees in the previous year. This Law will include companies and entrepreneurs. When it comes to the dynamics of the implementation of this measure, the Labour Law was adopted in 2015 so that the regulations will be adopted and the harmonization of other laws with the new Labour Law will be initiated in 2016. At the same time, the solutions from the Labour Law will be analysed, in order to avoid problems arising out of its implementation. The Employment Strategy will be prepared by the end of 2016, as well as the Public Sector Human Resources Plan. Redefining of the role of the Employment Bureau in terms of its greater openness towards employers will be implemented in 2016, while the Law on Incentives for Employment will be prepared and adopted by the end of the year, which will complete the measures supporting employment in the real sector. The fiscal effects of the mentioned measure will be reflected in an increase in income tax and contributions for new employees, while a negative effect on the budget will be expressed through a refund of taxes or contributions, through the support for employment through a new Law on Incentives for Employment, depending on the solution defined. However, it is important that the net effect on the budget will be certainly positive.

4.2.10. Fostering social inclusion, fighting poverty and promoting equal opportunities The analysis of social protection of the Republic of Srpska clearly shows that the Republic of Srpska key reforms in this area ended in the previous period and that in the period 2016-2018 it does not intend to address this area with the higher priority, which was confirmed and adopted through the Reform Agenda and Action Plan of the Republic of Srpska for the implementation of Reform Agenda. In this regard, when it comes to analysis of the situation in the area of pension system, it can be said that the pension system reforms from 2000 and 2011 tightened the requirements for entitlement to old-age pension, which had positive effects in terms of slowing of the growth in number of beneficiaries, but however, the main indicator of the system, the ratio of the number of the insured and the number of beneficiaries, has a declining trend each year as a result of the continuing increase in the number of beneficiaries and of the stagnation or decline in the number of insured. However, positive trends were recorded in the structure of pensions, in terms that the percentage of old-age pension beneficiaries in the total number of beneficiaries is increasing while the percentage of disability pension beneficiaries is decreasing. A positive trend can be seen in the reduction of the number of recognized rights in one year. Also, the effective age of the old-age pension beneficiaries at the time of exercising of their rights is gradually increasing which should be emphasized as a positive trend for the system. Taking into account the above-mentioned, it can be concluded that there are several positive trends for the pension and disability insurance, but that the most important indicator of the system, i.e. the ratio of the number of the insured and the number of beneficiaries has a negative trend and that it will have the long-term negative impact on the stability of the system, if not improved in the future. In this regard, starting from 2016, it is necessary to

33

examine the need for a reform of the parameters of pension system in order to be able to react timely and ensure its sustainability. In order to ensure regular payment of pension, the Amendments to the Law on Pension and Disability Insurance were adopted in 2015, as well as to the Law on Budget System, Law on Treasury and Law on Contributions, whose main aim was the introduction of the Pension and Disability Insurance Fund of the Republic of the Srpska into the treasury system from 1 January 2016. The essence of the changes is to fully include the revenues and expenditures relating to the payment of pensions and functional operations of the Pension and Disability Insurance Fund in the Budget of the Republic of Srpska and thereby achieve additional security in the timely provision of resources for payment of pensions. Also, in accordance with the obligations under the Reform Agenda we will prepare a scheme for voluntary retirement in 2016, and also initiate the establishment of the first voluntary pension fund. In 2016, the Republic of Srpska Government will implement the activities resulting in the improvement of social protection so that the aid is received by the poorest and those most in need. In this way, we will improve the targeting of social protection, through better targeting of priority groups and the most vulnerable residents of the Republic of Srpska, greater control of social benefits, and the decrease of the cost of municipal and state budgets.

4.3. BRIEF SUMMARY OF REFORM PRIORITIES

Therefore, analysing all the above, we can single out ten key reforms that the Republic of Srpska will carry out or start to implement in 2016, and they relate to the following:

Sector "Public Finance Management" (4 measures): 1. Reduction in the tax burden on labour, while finding a realistic and reliable sources of

financing, from which the resources to non-budgetary funds will be compensated, due to the loss of revenues from contributions;

2. Increase of fiscal responsibility and improvement of the system of public internal financial control;

3. Fight against the grey economy; 4. Health system reform;

Sector "Infrastructure" (1 measure):

5. Restructuring of the Republic of Srpska Railways;

Sector "Industry" (1 measure): 6. Re-industrialization in all areas of the processing industry;

Sector "Services" (1 measure):

7. Modernized legal framework of the banking sector of the Republic of Srpska, and created conditions for the implementation of the process of bank restructuring;

Sector "Business Environment" (2 measures):

8. The elimination of barriers for companies business and investments (para-fiscal charges); 9. Adoption and implementation of the Bankruptcy Law;

Sector "Employment and Labour Market" (1 measure):

10. New labour legislation and support for the employment in the real sector.

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5. BUDGETARY IMPLICATIONS OF STRUCTURAL REFORMS

Table 10: Matrix of policy commitments (in millions of BAM)

Description of policy

2015 2016 2017 2018

X - 1 X X +1 X +2

1. Reduction in the tax burden on labour

Reduction in the tax burden on labour, through the reduction in contributions, which began with the implementation in 2015, will be implemented in 2016, providing at the same time the unburdening of the economy, and reliable and realistic sources from which the resources to non-budgetary funds will be compensated due to reduced revenue from contributions. Keeping in mind the significant resources necessary to compensate the loss of revenue of non-budgetary funds, the key task for all levels of government in BiH will be to come up with reliable and realistic sources to compensate the loss of revenue from contributions, so that the net effect on the budget will be fiscally neutral. According to calculations of the Ministry of Finance of the Republic of Srpska, the financial effects of the proposed changes would lead to a drop in revenues of non-budgetary funds in the total amount of approximately BAM 72.4 million. In this case, 53.3 million would remain available to the real sector. In this connection, the reliable and realistic sources of financing of non-budgetary funds should be provided, which will replace the loss of revenue from contributions.

А. Duration of the reform *

Х

B. Net direct budgetary impact (if any)

0.0 0.0 0.0 0.0

B.1 Direct impact on budgetary revenue

0.0 0.0 0.0 0.0

B.2 Direct impact on budgetary expenditure

0.0 0.0 0.0 0.0

B.3 Possible non-budgetary financing

0.0 0.0 0.0 0.0

-B3 Of which committed IPA funding, including WBIF funding

0.0 0.0 0.0 0.0

2. Increasing fiscal responsibility and improving public internal financial control system

The implementation of the Law on Fiscal Responsibility in the Republic of Srpska, which was adopted in 2015, will improve fiscal responsibility and discipline in spending public funds throughout the budget system of the Republic of Srpska. The aim is that all subjects of the Republic of Srpska budget system show the total unsettled liabilities, make realistic plans for their settlement in the future, and prevent the creation of liabilities beyond the level defined by budgets. The following activities are planned within this measures: 2a) Preparation of regulations based on the Law on Fiscal Responsibility in the Republic of Srpska 2b) The establishment of the Republic of Srpska Fiscal Council, 2c) The adoption of the Law on Public Internal Financial Control of the Republic of Srpska in the form of a proposal to the Republic of Srpska National Assembly. The mentioned legal solutions will disable the creation of liabilities exceeding the amount of resources given to budget beneficiaries for disposal, which will create savings, both in the Republic budget and local self-government units budgets.


Х



35




3. Fight against the grey economy

Fight against the grey economy through the adoption of necessary legal solutions, which will improve the work of all control bodies, is a measure which implementation began in 2015. Preparation of the necessary legal solutions will be implemented in 2016. One of the main goals of the Republic of Srpska Government is the prevention and fight against grey economy in the future period on its path to achieving the fiscal sustainability, i.e. fiscal consolidation.


Х






4. Reform of the Republic of Srpska health sector

The following activities will be carried out within the reform of the health system: 4a) Analysis of the debt of the health system, i.e. of the community health centres and the hospital sector in cooperation with experts from the World Bank in order to determine the amounts of liabilities and propose the models for their solution. The amount of costs will be determined only after completion of the analysis; 4b) The introduction of community health centres into the treasury system - significant additional costs are not expected given that it is planned to be done within the existing administration; 4c) The introduction of secondary and tertiary level of health care into the treasury system, and the Health Insurance Fond of the RS - cost estimates will be determined by the USAID in the future. 4d) Finding new models and sources of financing of the health system, and 4e) Standardization of the network of health care institutions.


Х





36


5. Restructuring of the Republic of Srpska Railways

The following activities were planned within the restructuring of the Republic of Srpska Railways 5a) the restructuring of the Republic of Srpska Railways - there is no direct cost to the Republic of Srpska Budget since the proposal is prepared by the World Bank, and funded by the Swedish Government; 5b) The consolidation of ownership of the Republic of Srpska Railways - the cost of around BAM 4.0 million is expected for the purchase of the remaining portion of ownership. Restructuring of the Republic of Srpska Railways is done in order to result in the equal position of the Republic of Srpska Railways in the market, which will create a framework for independent functioning of the company without subsidies from the Republic of Srpska budget.


Х


0.00 0.00 4.00 0.00


0.00 0.00 0.00 0.00


0.00 0.00 4.00 0.00


0.00 0.00 0.00 0.00


0.00 0.00 0.00 0.00

6. Reindustrialization in all areas of the processing industry

The process of re-industrialization in all areas of the processing industry, initiated in 2016 and continued in 2017 and 2018, is aimed to launch / revive the production, increase the volume of industrial production and employment. This process includes the general cleaning and storage in the companies with majority state ownership, some of which do not operate or do the business with a minimum capacity, and as such are inefficient and illiquid. By the end of 2016, a list of sustainable and non-sustainable public companies will be prepared, as well as the Restructuring Programme and Privatization Programme, while the issue of addressing the unsustainable public companies will be a measure in 2017 and 2018. At the moment it is not possible to estimate the amount of possible savings, because it is necessary to first thoroughly review the situation in each company individually, which will be one of the activities in 2016.


Х





37


7. Modernized legal framework of the Republic of Srpska banking sector, and created conditions for the implementation of bank restructuring process

Modernization of the legal framework of the Republic of Srpska banking sector, the creation of conditions for the restructuring of banks within which the following activities are planned: 7a) Improvement of monitoring function of Banking Agency functions and the introduction of bank restructuring function; 7b) The adoption of the new Law on Banks; 7c) The adoption of the action plan for implementation of recommendations of the FSAP mission; 7d) The implementation of BASEL I and BASEL II. The implementation of measure does not provide a significant direct financial impact on the budget.


X


0.0 0.0 0.0 0.0


0.0 0.0 0.0 0.0


0.0 0.0 0.0 0.0


0.0 0.0 0.0 0.0


0.0 0.0 0.0 0.0

8. Removing the barriers to business and investments

Establishment of the register of para-fiscal charges, in order to prevent the creation of new para-fiscal charges. After that, the analysis of the para-fiscal charges included in the register will be continued with the help of USAID. Based on the results of analysis the decision will be made about the abolition of certain charges proven to be unjustified. The effects will be known after completion of the analysis. The abolition of Special Republic fee is planned within this measure, based on which the lower revenue in the Republic of Srpska budget will be achieved (approximately BAM 10.0 million), as well as unburdening for business entities.


Х


0.0 0.0 -10.0 -10.0


0.0 0.0 -10.0 -10.0


0.0 0.0 0.0 0.0


0.1 0.1 0.0 0.0


0.0 0.0 0.0 0.0

9. Adoption and implementation of the Bankruptcy Law

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The Draft Bankruptcy Law was adopted in 2015 and it passed through the public consultation, while the adoption of the Law is expected in the first quarter of 2016. The following objectives will be achieved through this Law: timely initiation of the restructuring procedure and bankruptcy proceedings, financial and operational restructuring of the debtor in the restructuring procedure, shortening of the duration of the bankruptcy proceedings, reduction of costs, especially the cost of the advance payment, the manner of appointment of the bankruptcy trustee respecting the principle of uniformity and equality during the appointment, as well as the age limit for bankruptcy trustees and the amount of their compensation, protection of the rights of creditors in bankruptcy proceedings, the improvement of the reorganization process, in terms of its simplification, harmonization of regulations affecting the application of the Law on Bankruptcy Proceedings and the determination of the authority that would supervise the application of legislation provisions concerning the timely initiation of the procedure and would impose sanctions on the debtor or body authorized to represent the debtor as a result of untimely initiation of proceedings. Fiscal effects relate to the reduction of costs of the bankruptcy proceedings and restructuring procedure, and will also enable better control and collection of receivables from business entities, thus increasing the liquidity of the economy.


Х






10. New labour legislation and support to the employment in the real sector

In 2015, new Labour Law was adopted whose application will allow greater labour market flexibility, a better connection between the amount of wages and work performance, reduce negative incentives for employment, provide better protection of the workers’ rights and reduce informal employment. The following activities will be implemented in 2016 by implementation of this measure: 10a) the regulations will be adopted, and the harmonization of other laws with the new Labour Law will be initiated, 10b) the solutions of the Labour Act will be analysed, in order to avoid problems arising out of its implementation, 10c) preparation of the Employment Strategy and Public Sector Human Resources Plan, 10d) redefining the role of the Employment Bureau in terms of its greater openness towards employers, 10f) the adoption of the Law on Incentives for Employment, which will complete the measures supporting the employment in the real sector. The fiscal effects of the mentioned measure will be reflected as an increase in income tax and contributions for new employees, while a negative impact on the budget will be reflected through a refund of taxes or contributions, support for employment and new Law on Incentives for Employment, depending on the defined solution. The net effect on the budget is expected to be positive.


Х




39



T O T A L


0.0 0.0 -14.0 -10.0


0.0 0.0 -10.0 -10.0


0.0 0.0 4.0 0.0


0.1 0.1 0.0 0.0


0.0 0.0 0.0 0.0

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6. INSTITUTIONAL QUESTIONS AND INVOLVEMENT OF INTERESTED PARTIES The Directorate for Economic Planning (hereinafter DEP), which is the coordinator on the preparation of the BiH Economic Reform Programme sought the appointment of the coordinator from the Republic of Srpska for the preparation of the 2016 BiH Economic Reform Programme by its letter number 01-23.1-21-21/15 of 6 July 2015. By the letter No. 06.01/111-100-1 15 of 13 July 2015 the Ministry of Finance informed the DEP on the appointment of coordinator on the preparation of the 2016 BiH Economic Reform Programme on behalf of Republic of Srpska. The regional meeting of coordinators for the preparation of the 2016 Economic Reform Programmes, attended by a representative of the Republic of Srpska (Dalibor Tomaš), was held on 21 September 2015, in Paris, during which the representatives of the European Commission and the OECD presented New guidelines, and recommendations regarding the major changes and key deadlines and dates, and the possibility of technical assistance available from the OECD for the preparation of 2016 Economic Reforms Programme. At the 42nd session held on 1 May 2015 the Government of the Republic of Srpska became familiar with the Information of Ministry of Finance of the Republic of Srpska about the activities on the 2016-2018 BiH Economic Reform Programme, No. 06.01/152-316-3/15 of 30 September 2015, and adopted the Conclusion No. 04/1-012-2-2119/15, which obliged the Coordinator for making the Economic Reform Programme for the Republic of Srpska, to draft 2016-2018 Economic Reform Programme for the Republic of Srpska in cooperation with other ministries and institutions of the Republic of Srpska, within the deadlines and by the methodology required by the European Commission, and to submit it to the Government of the Republic of Srpska for the review and approval before it is sent to the Directorate for Economic Planning, for the unification. At the same time, by the same Conclusion, the Republic of Srpska Government obliged the line ministries to which the reform areas relate under the new guidelines of the European Commission, to appoint one representative (in the rank of assistant minister) who will participate in the development of the 2016-2018 Economic Reform Programme for the Republic of Srpska not later than 2 October 2015. In this connection, the Team of the Republic of Srpska for the process of drafting the 2016-2018 Economic Reform Programme for the Republic of Srpska was appointed consisting of the representatives of: the Ministry of Agriculture, Forestry and Water Management, the Ministry of Industry, Energy and Mining, the Ministry of Transport and Communications, the Ministry of Labour and Veterans Affairs, the Ministry of Health and Social Welfare, the Ministry for the Economic Relations and Regional Cooperation, the Ministry of Finance and the Ministry of Justice. Also, all other ministries of the Government of the Republic of Srpska are obliged to be actively available to the Team of the Republic of Srpska On 27 November 2015 the working version of the 2016-2018 Economic Reform Programme of the Republic of Srpska was prepare and submitted to the European Commission and the OECD, which have given us very useful comments and suggestions towards better definition of the reform measures of the Republic of Srpska. At the same time with the development of the Economic Reform Programme of the Republic of Srpska, the RS Government also started to prepare the 2016 Economic Policy of the Republic of Srpska, which essentially include all the reforms defined in the 2016-2018 Economic Reform Programme of the Republic of Srpska, so that we included the same policy in both documents and jointly entered the consultation process with all partners of the RS Government. In this regard, the RS Government discussed the draft version of the Economic Policy Programme and Economic Reform Programme at the 8th and the 25th special working-consultative session and established the text that was distributed to all partners. In addition, a letter was sent to all partners to submit their written comments concerning the Government policy, which was followed by the public debate held on 7 December 2015 to which all partners of the Government were invited.

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Also, the policies of the Government of the Republic of Srpska were considered at the 34th regular session of the Economic and Social Council of the Republic of Srpska which was held on 12 September 2015, and with certain remarks and suggestions of the social partners, the Government received unanimous support. All acceptable written and oral proposals and comments were incorporated in the proposal of the Economic Policy of the Republic of Srpska which was adopted at the 15th special session of the National Assembly of the Republic of Srpska held from 21 to 23 December 2015, and therefore in the 2016-2018 Economic Reform Programme of the Republic of Srpska. After the adoption of the 2016 Economic Policy of the Republic of Srpska by the National Assembly of the Republic of Srpska, and after working with the TAIEX experts to estimate the fiscal impact of reform measures (from 21 to 23 December 2015 in Banja Luka) the Team of the Republic of Srpska prepared the 2016-2018 Economic Reform Programme of the Republic of Srpska and delivered it to the Government of the Republic of Srpska for consideration and adoption. At its session held on 30 December 2015 the RS Government discussed and adopted the 2016-2018 Economic Reform Programme of the Republic of Srpska. By virtue of the Conclusion, the Government asked from the Ministry of Finance of the Republic of Srpska to submit the 2016-2016 Economic Reform Programme of the Republic of Srpska to the Directorate for Economic Planning, in order to unite it in the 2016-2018 Economic Reform Programme for BiH. At the same time, the RS Government asks from the Directorate for Economic Planning to deliver to the Ministry of Finance of the Republic of Srpska a unified BiH 2016-2018 Economic Reform Programme, prior to submitting the same to the Council of Ministers for approval, and obliges the Ministry of Finance of the Republic of Srpska to inform the Government about the 2016-2018 BiH Economic Reform programme, immediately after receiving it from the Directorate for Economic Planning.

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7. SUMMARY DATA

ANEX 1: TABLES

Table 1d: Sectoral balances

2014 2015 2016 2017 2018

% of GDP % of GDP

ESA code

Year Year Year Year

X-2 X-2 X -1 X X + 1

1.

Net lending/borrowing vis-à-vis the rest of the world

B.9 option

al optional

of which:

- Balance of goods and services

- Balance of primary incomes & transfers

0.0 0.0 0.0

- Capital account

2. Net lending/borrowing of the private sector

B.9/ EDP B.9

0.0 0.0 0.0

3. Net lending/borrowing of general government

-284.7 -115.4 -153.0 -79.4 183.4

4. Statistical discrepancy optional optional option

al optional

Table 2a: General government budgetary prospects - Republic of Srpska

2014 2015 2016 2017 2018

ESA code

Year Year Year Year Year

X -2 X-1 X X + 1 X + 2

in 000 BAМ

Net lending (B9) by sub-sectors

1. General government S13 -284.7 -115.4 -153.9 -79.4 183.4

2. Central Government S1311 -237.0 -45.8 -169.4 -115.1 125.5

3. State government S1312

4. Local government S1313 -3.9 42.4 43.4 41.2 46.8

5. Social security funds S1314 -43.8 -112.0 -27.9 -5.5 11.2

General government (S13)

6. Total revenue ТР 3.652.0 3.801.8 3.787.6 3.857.1 3.982.7

7. Total expenditure ТЕ 3.936.6 3.917.1 3.941.6 3.936.5 3.799.3

8. Net borrowing/lending ЕDP.B9 -284.7 -115.4 -153.9 -79.4 183.4

9. Interest expenditure

EDP.D41 incl.

ФISIM 92.4 118.6 121.3 124.9 125.6

10. Primary balance -192.2 3.2 -32.7 45.5 309.0

11. One-off and other temporary measures

Components of revenues

12. Total taxes (12 = 12а+12b+12c)

1.755.7 1.830.6 1.889.1 1.944.1 2.029.8

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12.a Taxes on production and imports

D2 1.356.3 1.402.3 1.467.7 1.516.5 1.587.6

12.b Current taxes on income and wealth

D5 362.5 385.0 381.8 390.0 403.4

12.c. Capital taxes D91 36.8 43.3 39.6 37.7 38.8

13. Social contributions D61 1.429.5 1,496.3 1,462.8 1,486.0 1,518.8

14. Property income D4 41.4 31.5 39.4 30.2 29.9

15. Other (15 = 16-(12+13+14))

425.4 443.3 396.4 396.8 404.2

16=6 Total revenue ТР 3,652.0 3,801.8 3,787.6 3,857.1 3,982.7 p.m.: Tax burden (D2+D5+D61+D91-D995) 3,185.2 3,326.9 3,351.9 3,430.1 3,548.6

Selected components of expenditures

17. Collective consumption P32 1,253.6 1,268.1 1,251.5 1,251.1 1,248.7

18. Total social transfers

D62 + D63

2,033.6 2,037.8 2,041.5 2,036.0 2,043.8

18.а. Social transfers in kind

P31 = D63

18.b. Social transfers other than in kind

D62

19=9. Interest expenditure (incl. ФISIM)

EDP.D41 + ФISIM

92.4 118.6 121.3 124.9 125.6

20. Subsidies D3 110.1 111.7 109.2 107.7 109.7

21. Gross fixed capital formation P51 283.7 212.3 253.1 267.2 123.2

22. Other (22 = 23-(17+18+19+20+21)

163.2 168.6 165.0 149.6 148.3

23. Total expenditures ТЕ 3,936.6 3,917.1 3,941.6 3,936.5 3,799.3

p.m. Compensation of public sector employees

D1 940.1 960.8 961.3 964.2 967.9

NOTE: Figures for the level of the General Government of the Republic of Srpska which includes the Central Governments of the Republic of Srpska (the Republic of Srpska Budget, the Republic of Srpska budget beneficiaries inside and outside the Treasury General Ledger, which have their own accounts, data about the resources from projects financed from abroad and with resources from escrow account), the level of local self-government units and social security funds) are the consolidated in the table.

Table 3: General government expenditure by function

2014 2018

% of GDP COFOG Code

Year Year

X-2 X+2

1. General public services 1 471.2 611.7

2. Defence 2 9.5 4.2

3. Public order and safety 3 307.8 263.7

4. Economic affairs 4 557.0 198.4

5. Environmental protection 5 15.4 16.0

6. Housing and community amenities 6 61.2 117.4

7. Health 7 683.3 580.1

8. Recreation, culture and religion 8 62.4 61.3

9. Education 9 489.9 447.8

10. Social protection 10 1,278.8 1,498.6

11. Total expenditure (item 7 = 26 in Table 2) ТЕ 3,936.6 3,799.3

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Table 6: Divergence from previous programme

2014 2015 2016 2017 2018

Year Year Year Year Year

X-2 X-1 X X +1 X +2

1. GDP growth (% points)

Previous programme

Current programme

Difference

2. General government net lending

Previous programme -258.7 -105.9 -146.1 58.7

Current programme -284.7 -115.4 -154.0 -79.4 183.4

Difference -25.9 -9.4 -7.9 -138.1 183.4

3. General government gross debt

Previous programme

Current programme 0.0 0.0 0.0 0.0 0.0

Difference

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Table 11: Timetable of structural reform measures


Q1 2016 Q2 2016 Q3 2016 Q4 2016

Analysis of the possibilities of reducing the contribution

Determination of real and safe financing sources

Preparation of the draft legal solutions

Public consultation

Adoption of the draft legal solutions

Adoption of the proposal legal solutions

Q1 2017 Q2 2017 Q3 2017 Q4 2017

Q1 2018 Q2 2018 Q3 2018 Q4 2018

2. Increasing fiscal responsibility and improving internal financial control system in the public sector

Q1 2016 Q2 2016 Q3 2016 Q4 2016

Regulations for the Law on Fiscal Responsibility

The establishment of the Fiscal Council

Regulations for the Law on Internal Financial Control System at the National Assembly of the RS

The draft Law on the Internal Financial Control System at the National Assembly of the RS

The regulations of the Fiscal Council

Appointment of the Fiscal Council members

Proposal Law on Internal Financial Control System at the National Assembly of the RS

Q1 2017 Q2 2017 Q3 2017 Q4 2017

Q1 2018 Q2 2018 Q3 2018 Q4 2018

3. Fighting the grey economy

Q1 2016 Q2 2016 Q3 2016 Q4 2016

Preparation of the Law for Fighting Grey Economy

Public consultations

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Adoption of the Draft Law for Fighting Grey Economy at the Government

Adoption of the Proposal Law for Fighting Grey Economy at the Government

Adoption of the Draft Law for Fighting Grey Economy at the National Assembly of the RS

Adoption of the Proposal Law for Fighting Grey Economy at the National Assembly of the RS

Q1 2017 Q2 2017 Q3 2017 Q4 2017

Q1 2018 Q2 2018 Q3 2018 Q4 2018

4. Health system reform

Q1 2016 Q2 2016 Q3 2016 Q4 2016

Establishing the continuous system of reporting of health care institutions and analysis of the situation

The introduction of the treasury system in community health centres

Inclusion of secondary and tertiary levels in the treasury system, as well as of Health Insurance Fund

Inclusion of secondary and tertiary levels in the treasury system, as well as of Health Insurance Fund

Establishing the continuous system of reporting of health care institutions and analysis of the situation

Q1 2017 Q2 2017 Q3 2017 Q4 2017

Finding of new models and sources of financing of the health system

Finding of new models and sources of financing of the health system

Standardization of the network of health institutions

Standardization of the network of health institutions

Q1 2018 Q2 2018 Q3 2018 Q4 2018

5. Restructuring of the Railways of the Republic of Srpska

Q1 2016 Q2 2016 Q3 2016 Q4 2016

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Proposal of the organizational restructuring, based on the analysis of the World Bank

Consolidation process under way

Analysis of the World Bank completed, the proposal of restructuring submitted to the Government of the Republic of Srpska for consideration




Q1 2017 Q2 2017 Q3 2017 Q4 2017

Consolidation process completed

Q1 2018 Q2 2018 Q3 2018 Q4 2018


Q1 2016 Q2 2016 Q3 2016 Q4 2016

Analysis of the situation

Preparation of the Restructuring Programme and Privatization Programme

Preparation of the Restructuring Programme and Privatization Programme

Preparation of the list of sustainable and unsustainable public companies

Q1 2017 Q2 2017 Q3 2017 Q4 2017

Addressing unsustainable public companies




Q1 2018 Q2 2018 Q3 2018 Q4 2018

7. Modernized legal framework of the banking sector of the Republic of Srpska, and created assumptions for the implementation of bank restructuring process

Q1 2016 Q2 2016 Q3 2016 Q4 2016

Gradual implementation of BASEL II and BASEL III




Adoption of the new Law on Banks of the Republic of Srpska

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Amendment to the Law on the Republic of Srpska Banking Agency

Adoption of the regulations

Q1 2017 Q2 2017 Q3 2017 Q4 2017





Preparation of the Action plan for implementing the FSAP recommendations

Adoption of the Action plan for implementing the FSAP recommendations

Q1 2018 Q2 2018 Q3 2018 Q4 2018






Q1 2016 Q2 2016 Q3 2016 Q4 2016

The beta version completed Analysis is under way

The final version of the register completed

Analysis of para-fiscal charges completed

Change of the law

Q1 2017 Q2 2017 Q3 2017 Q4 2017

Q1 2018 Q2 2018 Q3 2018 Q4 2018

9. Adoption and implementation of the Law on Bankruptcy

Q1 2016 Q2 2016 Q3 2016 Q4 2016

Adoption of the Draft Law on Bankruptcy at the Government

Adoption of the proposal Law on Bankruptcy at the Republic of Srpska National Assembly

Q1 2017 Q2 2017 Q3 2017 Q4 2017

Q1 2018 Q2 2018 Q3 2018 Q4 2018

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Q1 2016 Q2 2016 Q3 2016 Q4 2016

Adoption of regulations for the Labour Law

Plan of human resources in the public sector

Redefining of the role of the Employment Bureau

Employment Strategy

Harmonization of other legal solutions with the new Labour Law

Analysis of the solution of the Labour Law

Law on Incentives for Employment

Q1 2017 Q2 2017 Q3 2017 Q4 2017

Q1 2018 Q2 2018 Q3 2018 Q4 2018

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Table 12: summary of structural reform measures


Short description

Reduction in the tax burden on labour will be implemented through the reduction of contributions, ensuring at the same time the unburdening of the economy, and reliable and realistic sources from which the resources to non-budgetary funds will be compensated due to the reduced revenue from contributions. The RS Government expects the full involvement of all levels of government in BiH and the IMF representatives, given that this is one of the priority areas defined by the Reform Agenda, whose implementation was initiated by the Republic of Srpska back in 2015, when it was mentioned that the additional measures, including a VAT increase would be considered by the end of 2015.

Summary of implementation timeline

By the end of second quarter the situation will be analysed and the clear and reliable sources which will compensate resources to non-budgetary funds for loss of revenue from contributions will be established. The Drafts will be prepared and adopted in the third quarter, while, following the public consultations, the Proposals of legislation will be prepared and adopted in the fourth quarter, which will enable the tax unburdening of labour, but also the sources of additional financing of non-budgetary funds, particularly of the Health Insurance Fund. In this way, by adopting the necessary legal solutions at all levels of BiH, the conditions would be created to perform the tax unburdening of the labour from 1 January 2017, ensuring the sustainability of the budget of non-budgetary funds, which is in accordance with the Proposal Letter of Intent of the IMF.

Cost of implementation

The proposal of the RS Government went in the direction of reducing the aggregate rate of contributions from 33.0% of gross wage to 31.6% of gross wage, or by 1.4 percentage points (reduction of the rates for the health insurance contributions by 1.0 percentage points, for the child protection by 0.1 percentage points and for the unemployment by 0.3 percentage points). According to calculations of the RS Ministry of Finance, the financial effects of the proposed changes would lead to a drop in revenues of non-budgetary funds in the amount of approximately BAM 72.4 million (of which of the Health Insurance Fund for BAM 43.3 million, of the Child Protection Fund for BAM 4.5 million and of the Employment Bureau for BAM 11.1 million, as well as of the Pension and Disability Insurance Fund for BAM 13.4 million due to the decrease in gross wage). In this case, a total of BAM 53 million would remain available to the real sector.

Expected impact on competitiveness

Due to the reduction of the tax burden on labour, companies would be more competitive on the international market.

2. Increasing fiscal responsibility and improving public internal financial control system

Short description

The mplementation of the Law on Fiscal Responsibility in the RS, which was adopted in 2015, will significantly improve fiscal responsibility and discipline in spending public funds throughout the RS budget system, as well as at the state level and at the level of local self-government units and non-budgetary funds. The primary objective is that all subjects of the RS budget system express their total unsettled liabilities, make realistic plans for their settlement in the following period, and prevent the creation of liabilities exceeding the levels defined by budgets. The Law on Public Internal Financial Controls of the RS will regulate the system of internal financial controls in the public sector, which includes the financial management and control and internal audit, determines the methodology and standards and other issues of importance for the establishment, development and implementation of the public internal financial control. In this way, with the Law on Fiscal Responsibility of the RS, which is already in force, and with the adoption of the Law on Public Internal Financial Controls in the RS, we will complete the system that will allow a significant improvement of fiscal discipline and responsibility in the Republic of Srpska.

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We will prepare all the necessary regulations under the Law on Fiscal Responsibility of the RS, and establish the RS Fiscal Council in the first two quarters. The Law on Public Internal Financial Control of the RS was adopted by the Government as the Draft, and the intention of the Government is to adopt it in the form of the Proposal at the RS National Assembly by the end of the second quarter so that it can come into force from 7 January 2016. The second half of the year would be reserved for the adoption of the necessary regulations, so that this legal solution can be fully applied from 1 January 2017.


These legal solutions will disable the creation of liabilities exceeding the amount of funds given to budget beneficiaries for the disposal by the budget, which will create significant savings, both in the Republic budget and the budgets of local self-government units. The analysis of the implementation of budget for the period 2010-2014 indicates that the budget beneficiaries created liabilities which exceed for approximately BAM 25 million the resources given to them by the budgetary framework, given that the additional liabilities in the amount of BAM 35.7 million, i.e. BAM 48.9 million in 2011 and 2012 were created for incentives for agriculture. Based on the analysis, we can conclude that will achieve savings in the amount of BAM 25 million annually by implementation of the aforementioned legal solutions through the disabling of creation of liabilities exceeding the level of resources given by the budgetary framework of 1 January 2017.


It will be possible to direct the savings achieved in capital investment, primarily in infrastructure, which would indirectly increase the competitiveness of the Republic of Srpska Government.

3. Fight against the grey economy

Short description

Fight against the grey economy through the adoption of necessary legal solutions, which will improve the work of all control bodies, is a measure whose implementation began back in 2015, and which will be implemented in 2016 by preparation of the necessary legal solutions. The grey economy significantly worsens fiscal sustainability, i.e., grey economy is a multiple and from several aspects negative phenomenon that largely prevents quality economic development primarily by creation of unfair competition, by decrease in revenue of the budget and non-budgetary funds, by disabling to the employees in the grey area to exercise their rights under the social insurance. Therefore, one of the main goals of the RS Government is the prevention and fight against grey economy in the future period on its path to achieving the fiscal sustainability, i.e. fiscal consolidation.


Legal solutions should be adopted by the end of the second quarter of 2016, in order to start with their application from 1 July 2016.


The financial effects of the mentioned measure are reflected in the efficient collection of tax revenue, and larger coverage of taxpayers, i.e. the extension of tax base, which should improve the fiscal position of both the RS budget and the budgets of municipalities and cities, as well as the fiscal position of the budget and non-budgetary funds. However, the analysis of the RS Ministry of Finance shows clearly that these measures will not be sufficient to compensate the loss of resources to the non-budgetary funds due to the reduction of the tax burden on labour, but it is necessary to find realistic and stable sources from which the resources will be provided to non-budgetary funds, by involving all levels of government in BiH, which is one of the key commitments from the Reform Agenda.


Reduction of the grey economy will affect the reduction of unfair competition, and it will contribute to the competitive position of the companies which do not perform business in a "grey zone".

4. Reform of the health system

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Short description

The reform of the health system will be implemented in several phases. Like in the previous measure, the analysis of the debt of the health system, and community health centres, and hospital sector will be carried out, in order to clearly determine the amount of liabilities, and propose a model for their solution. Experts from the World Bank will be the partner in the overall and comprehensive reform of the health sector. The second step in the health system reform is the introduction of the treasury system of business operations, which will be implemented in two phases. The treasury system will be first introduced in the community health centres, while the secondary and tertiary level of health care and the Health Insurance Fund of the Republic of Srpska will be included in the treasury system during the second phase. In this way, with the expert help of the World Bank we would create a space to find new models and sources of funding of the health sector, and carry out standardization of the network of health care institutions.


Establishment of the continuous system of reporting of health institutions and analysis of the situation should be completed by the end of the first quarter of 2016. The intention is to introduce community health centres in the treasury system by the end of the second quarter of 2016, while the introduction of secondary and tertiary levels in the treasury system will be completed by the end of 2016. The finding of new models and sources of finding of the health system is planned to be realized in the first half of 2017, in order to complete the standardization of network of health institutions by the end of 2017.


Detailed analysis of the liabilities of the health system is currently under way, and it is conducted by the Republic of Srpska with the World Bank experts, so that the detailed information about the financial system and estimate of the fiscal effects will be available only after the completion of the analysis by the World Banks experts.


The achieved savings could be directed in capital investments, and thus increase the quality of health services.

5. Restructuring of the Republic of Srpska Railways

Short description

Financial and corporate restructuring of the Republic of Srpska Railways according to the Proposal of the World Bank within which the following activities are planned: 3a) of the restructuring of the Republic of Srpska Railways 3b) Consolidation of ownership of the Republic of Srpska Railways. Financial and corporate restructuring of the Republic of Srpska Railways is done in order to result in the equal position of the Republic of Srpska Railways in the market, which will create a framework for independent functioning of the company without subsidies from the Republic of Srpska budget


3a) Restructuring of the Railways of the Republic of Srpksa - The proposal of the World Bank about organizational restructuring of the Republic of Srpska Railways will be completed in the first quarter of 2016 , while it will be referred for consideration to the RS Government in the third quarter of 2016 3b) Consolidation of ownership of the RS Railways - the consolidation of ownership of the RS Railways will be completed in the first quarter of 2017, when the RS Railways will be owned by the RS Government.


3a) Restructuring of the Republic of Srpska Railways - there is no direct cost to the Republic of Srpska Budget since the proposal is prepared by the World Bank, and funded by the Swedish Government; 3b) Consolidation of ownership of the Republic of Srpska Railways - the cost of around BAM 4.0 million is expected for the purchase of the remaining portion of ownership. After the adoption of the Proposal about the manner of restructuring of the RS Railways, the other effects on the RS budget will be known.


The increase in volume of transport is expected, and thus the increase of revenue of the RS Railways, which will result in the decrease in subventions from the RS Budget.


53

Short description

Bearing in mind that the processing industry is an important sector of the Republic of Srpska industry, the RS Government will in 2016 start, and in 2017 and 2018 continue the process of re-industrialization in all areas of the processing industry, which is aimed to launch / revive the production, increase the volume of industrial production and employment. This process includes the general cleaning and storage in the companies with majority state ownership, some of which do not operate or do the business with a minimum capacity, and as such are inefficient and illiquid.


To the end of 2016 the intention of the Republic of Srpska Government is to prepare, in cooperation with the Republic of Srpska Investment and Development Bank which manages funds that are the owners of the state capital in enterprises, the list of sustainable and non-sustainable public companies as well as the Restructuring Programme and Privatization Programme, while the issue of addressing the unsustainable public companies will be a measure in 2017 and 2018.


By the analysis of the fiscal impact of these measures, it is clear that the creation of new losses in companies owned by the Republic will be prevented, and in this way, public resources that would be necessary to provide for the continuation of the "survival" of these companies will be directed to capital investment. At the moment, it is almost impossible to estimate the amount of possible savings, since it is necessary to first thoroughly review the situation in each company individually, which will be one of the activities in 2016.


Competitiveness of the Republic of Srpska economy will be increased, given that the companies willing and able to "deal with" with market challenges will remain in the market.

7. Modernized legal framework of the Republic of Srpska banking sector, and created conditions for the implementation of bank restructuring process

Short description

In 2016, the legal framework which will tighten creditworthiness requirements of the banking business will be modernized, including more adequate assessment of the risk profile of banks, better risk management, consistent application of the standards of corporate management, and will improve the supervising function of the Banking Agency of the Republic of Srpska by introduction of additional measures of early intervention, development consolidated supervision, and creation of conditions for conducting the bank restructuring.


By the end of 2016 a new Law on Banks of the Republic of Srpska will be adopted, and the Law on the Banking Agency of the Republic of Srpska will be amended in order to comply with the new Law on Banks of the Republic of Srpska, especially in the segment of bank restructuring, and at the same time, the RS Banking Agency will adopt regulations necessary for implementing the new Law of Banks of the Republic of Srpska. In 2017, the RS Banking Agency will adopt the action plan for implementing the recommendations of the FSAP mission, which will cover the period from 2015 to 2017, while in the period 2016-2018 the RS Banking Agency plans to gradually implement Basel II and Basel III in accordance with the adopted Strategy and amendments to the Strategy for the introduction of the International Convergence of Capital Measurement and Capital Standards BASEL II.


The new Law on Banks of the Republic of Srpska introduces to the banks the obligation of payment of ordinary and extraordinary contributions to the Bank Restructuring Fund in accordance with the requirements of the new EU Directive on the recovery and resolution of credit institutions, which includes that the future restructuring of systemically important banks is done at the expense of the banking sector, and not at the expense of budget funds. Since it is provided that the restructuring of banks is done by the RS Banking Agency and that the Bank Restructuring Fund is established within the same, it will lead to additional costs for establishment of a separate organizational unit in charge of the restructuring of banks, and the cost for training of employees who will perform these tasks, which will be financed from the own Agency's revenue.

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Although the reform will require additional costs of the Agency for the purpose of adjustment of new tasks, this solution represents a lower cost compared to other possible solutions for the restructuring of banks (e.g. the establishment of special institution for the restructuring and management of the Fund). Also, potential cost may represent the use of extraordinary public financial support, but only in the event that the funds of the Banks Restructuring Fund are not sufficient, and that the restructuring of bank is of the public interest


The proposed measure aims to provide a stable and reliable financial system and protection of depositors, as well as greater market discipline of banks' business operations.


Short description

Establishment of the register of para-fiscal charges, in order to prevent the creation of new para-fiscal charges. After that, the analysis of the para-fiscal charges included in the register will be continued with the help of USAID. Based on the results of analysis the decision will be made about the possible abolition of certain charges proven to be unjustified. The effects will be known after completion of the analysis. In addition, the abolition of Special Republic fee is planned within this measure, based on which the lower revenue in the Republic of Srpska budget will be registered, as well as unburdening for business entities.


1a) Establishment of the registrar of para-fiscal charges - Beta version completed in the first quarter of 2016, the final version of the register is expected in the second quarter of 2016. 1b) Analysis of para-fiscal charges - analysis is in under way; the completion of the analysis is expected in the third quarter of 2016. 1c) Abolition of Special republican fee is planned in the fourth quarter of 2016.


There are no significant costs related to the first two activities, while the abolition of Special Republic ree will result in a reduction of revenue in the budget of the Republic of Srpska by approximately BAM 10.0 million.


Unburdening of the business entities concerning the payment of para-fiscal charges

9. Adoption and implementation of the Bankruptcy Law

Short description

The Bankruptcy Law regulates the procedure of restructuring and bankruptcy proceedings, the legal effects of opening and implementing procedure of restructuring and bankruptcy proceedings, reorganization of the debtor under the bankruptcy plan, and international bankruptcy. Bearing in mind the existing problems and difficulties in the bankruptcy proceedings, the following objectives will be achieved through new law: timely initiation of the restructuring procedure and bankruptcy proceedings, financial and operational restructuring of the debtor in the restructuring procedure, shortening of the duration of the bankruptcy proceedings, reduction of costs, especially the cost of the advance payment, the manner of appointment of the bankruptcy trusteeс respecting the principle of uniformity and equality during the appointment, as well as the age limit for bankruptcy trustees and the amount of their compensation, protection of the rights of creditors in bankruptcy proceedings, the improvement of the reorganization process, in terms of its simplification, harmonization of regulations affecting the application of the Law on Bankruptcy Proceedings and the determination of the authority that would supervise the application of legal provisions concerning the timely initiation of the procedure and impose sanctions on the debtor or body authorized to represent the debtor as a result of untimely initiation of proceedings.


Since the draft Bankruptcy Law was adopted in 2015, and since that it passed though the public consultation, we expect its adoption in the first quarter of 2016.


Fiscal effects relate to the reduction of costs of the bankruptcy proceedings and restructuring procedure, and will also enable better control and collection of receivables from business entities, thus increasing the liquidity of the economy. That is, we expect the positive fiscal impact because the Law provides for financial and

55

operational restructuring of the debtor in the process of restructuring, which results that the company does not go into bankruptcy, and that ultimately there is no shutdown of the company, but it continues with the economic activity, while its debts will be reprogrammed according to the agreement on the financial and operational restructuring, which leads to the company paying its tax and other fiscal liabilities, contribution public funds and making payment of the workers.


This Law will result in the companies in the Republic of Srpska being more competitive compared to companies in other countries and the region because this Law affects the creation of better business environment in the Republic of Srpska, so that through the process of restructuring, i.e. through more efficient, safer and shorter bankruptcy proceedings creditors can collect their claims. This Law leads to safer and more efficient achievement of claims in relation to the applicable law, which leads to foreign companies investing in the Republic of Srpska and do business with companies from the Republic of Srpska.


Short description

A key measure of the Republic of Srpska Government in the area of labour market in 2016 is the new labour legislation and support to the employment in the real sector. The new Labour Law will enable greater flexibility of the labour market and better connection between the amount of wage and the work performance, reduce negative incentives for employment, provide better protection of the workers’ rights and reduce informal employment, thus significantly contributing to the improvement of the position of workers and companies. After the adoption of the new Labour Law, the amendment of other legal solutions in the field of labour and employment will be initiated, with the aim of its harmonization with the new Labour Law as well as the conclusion of a new General Collective Agreement. Support to the employment in the real sector will be defined by the Employment Strategy and other documents in the field of employment, while the priority will be given to the categories of families of fallen soldiers and the best students of public universities. The mandatory multi-year planning of human resources will be introduced in the public sector and it will include plans for regular and early retirement, solving of the issue of surplus employees and the controlled reduced new employment, taking into account the priorities defined in the preceding paragraph. Also, redefinition of the role of the Republic of Srpska Employment Bureau, in terms of strengthening of the function of employment mediation services and implementation of programmes and measures of active employment policy is an important Government activity in 2016. The availability of list of unemployed persons will be provided for the needs of employers, for faster and easier communication between employers on one side, and persons seeking employment, on the other side. The Law on Incentives for Employment, which will be prepared in cooperation with the Chamber of Commerce, will create measures stimulating the employers for the number of newly employed in 2016 compared to the number of employees in the previous year. This Law will include companies and entrepreneurs.


The Labour Law was adopted in 2015 so that the regulations will be adopted and harmonization of other laws with the new Labour Law will be initiated in 2016. At the same time, the analysis of the solutions from the Labour Law will be done, in order to avoid problems arising out of its implementation. The Employment Strategy will be prepared by the end of 2016, as well as the Human Resources Public Sector Plan. Redefining of the role of the Employment Bureau in terms of its greater openness towards employers, will be implemented in 2016, and by the end of the year the Law on Incentives For Employment will be prepared and adopted, which will complete measures supporting employment in the real sector.

56


The fiscal effects of the mentioned measure will be reflected as an increase in income tax and contributions for new employees, while a negative impact on the budget will be reflected through a refund of taxes or contributions, through the support for employment and new Law on Incentives for Employment, depending on the defined solution. The net effect on the budget is expected to be positive.


Greater flexibility of the labour market will significantly improve the competitiveness of the Republic of Srpska economy.

ANNEX 2: EXTERNAL CONTRIBUTIONS

We used written remarks and suggestions on the document 2016 Economic Policy of the Republic of Srpska as remarks to the document 2016-2018Economic Reform Programme of the Republic of Srpska, given that those are the same policies. In this respect, an integral part of this document is the Annex 2, given in the form of written Remarks from the public consultation.

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