A financial crisis, compounded by poor budget management and massive spending on redundant administration has left BiH with a budget deficit of 500m euros annually since 2009.
By Anes Alic for Southeast European Times in Sarajevo -- 10/04/12
BiH may increase of the VAT from 17% to 25%, although the Sarajevo-based company KLAS has suggested that the increase not apply to food staples. [Anes Alic/SETimes]
In response to an ongoing economic crisis, the Federation Bosnia and Herzegovina (FBiH) is considering increasing the value-added tax (VAT) from 17% to 25% -- a move analysts and businessmen say is unnecessary and will negatively impact the market.
While authorities in the FBiH announced the possible VAT increase, Republika Srpska (RS) did not comment, though its budget is also critical.
According to Damir Miljevic, a Banja Luka economist, BiH’s massive administration and the cost of maintaining a state government and two separate entity governments are bankrupting the country.
"Our country has 180 ministers. Far more developed countries like Germany could not financially bear such administrative expenses," Miljevic told SETimes. "With budget deficits at all levels, the authorities would rather bury themselves deeper through borrowing than implement reforms covering losses."
BiH spends about 13% of its GDP – about 1.6 billion euros annually – to maintain its administration. According to Miljevic, if the authorities reduce expenditures by 10%, as they promised the IMF in 2009, the government would save 420m euros annually.
BiH officials are currently negotiating with the IMF to review the existing stand-by arrangement. If the negotiations are not successful, increased VAT will be the only alternative to fill in budget gaps.
The VAT is a tax on profit on a product -- the difference between what an item costs to manufacture and the price for which it is sold. Collections occur every time a business in the supply chain purchases or produces a product and resells it.
In 2009, the IMF agreed to give the country a 1.2 billion-euro loan. According to the agreement, BiH will pay back 400m euros by 2014 – a deadline the authorities are now seeking to extend.
If the IMF agrees to reprogramme the loan, it would make further demands on BiH to reduce public spending and trim the administration.
Increasing VAT is seen as the easiest way out, but it is not the best, Miljevic said. He claims that such a measure will slow down economic growth and jeopardise living standards.
"Understanding that nearly 50% of BiH citizens live on the edge of poverty, increasing VAT would push them under that line. Prices would increase, while private spending decrease. At this point, a decrease in private spending can lead to a serious economic crisis," he said.
In 2005, after three years of political negotiations and under pressure from international organizations, BiH introduced the VAT system, one of the last countries in Europe to do so. The tax revenues boosted entity and state budgets, and in the first three years BiH collected 1 billion euros more than expected.
However, rather than using that revenue for capital investments, authorities propped up administrations and bought social peace, according to Miljevic.
"Salaries and benefits for the administration rose 300% in that period, and in order to satisfy the citizens, social welfare for war veterans increased. Now, when there is no money, the authorities are facing [possible] social unrest."
Ismet Bajramovic, the president of the Confederation of Bosnian Independent Trade Unions told SETimes that his organisation would not stand for a VAT increase, as it would lead to further layoffs.
"Our union and the government signed an agreement to decrease VAT in order to improve the lives of the workers, many of whom live in poverty. Now they want to violate that agreement because of their unreasonable spending," said Bajramovic.
In order to prevent an overall increase in prices, some influential businessmen have proposed a differential VAT rate.
Irmela Cero, spokeswoman of the Sarajevo-based KLAS company, the city's main manufacturer of grain-based food, told SETimes that KLAS proposed to the government a reduction in VAT for staple products and an increase in VAT for luxury goods.
"Not only would it improve the living standard, but also boost local products consumption and the local economy," Cero said.
According to local and international experts, including Miljevic, this proposal is not feasible as BiH does not have the operational capacity to deal with differential tax rates, which would leave room for massive fraud.
In early March, the Croatian government increased the country's VAT from 23% to 25%, causing an immediate rise in prices. Since then, Croatians are visiting BiH to stock up on supplies, mostly food and gas, as the prices are lower.
At 17%, BiH has the lowest VAT in the region -- one argument the authorities are using to justify the increase. Yet BiH citizens have the lowest income in the region, with more than 65% spent on basic food.