IMF deal bars Bosnia cbank law change -cbanker

SARAJEVO Thu Nov 8, 2012 10:55am EST

SARAJEVO Nov 8 (Reuters) - The terms of a loan deal with the International Monetary Fund (IMF) do not allow for changes to the law on Bosnia's central bank proposed by top politicians, the central bank governor told Reuters on Thursday.

Leaders of Bosnia's two main political parties proposed last week to amend the legislation so as to allow commercial banks to include state securities in the mandatory reserves kept with the central bank.

Zlatko Lagumdzija and Milorad Dodik, seen as informal leaders of Bosnia's two rival autonomous regions, said banks could in this way use 10 percent of cash deposited at the central bank for investing in development projects.

"The Letter of Intent (to the IMF) clearly states there can be no changes to the law on the central bank as long as the standby arrangement is in force," Kemal Kozaric said in an interview.

Bosnia has a 24-month, 405.3 million euro ($516.96 million) loan arrangement with the IMF, approved in September, when the lender disbursed around 60 million euros.

An IMF mission arrived in Bosnia on Wednesday for a two-week visit to review the terms of the standby arrangement and decide whether to disburse the second tranche of around 100 million euros in December.

"They will not give up on conditions from the letter of intent," said Kozaric who met the IMF representatives after their arrival.

Some economic experts criticised the proposed legal changes as political interference in the independence of the central bank, which keeps the Bosnian marka in a currency board, pegged to the euro.

In neighbouring Serbia, legal changes that introduced tighter parliamentary control of the central bank earlier this year have delayed talks on a new loan with the IMF, after the lender said they had undermined the institution's independence.

In Bosnia, the central bank has limited powers as monetary policy is under the authority of the country's three-man inter-ethnic presidency.

Kozaric said the politicians' proposal would not improve the liquidity and he was sceptical whether commercial banks would want to keep government securities which he said were seen as volatile.

Kozaric said the central bank had not been consulted about the proposal, but the currency board would not be endangered even if changes were implemented.

"It would only mean the broadening of the basis for mandatory reserves to make it possible that 10 percent (of reserves) can be securities," Kozaric said.

Bosnia's two regions, the Bosniak-Croat federation and the Serb Republic, which are linked via a weak central government, are running high budget deficits and badly need the IMF cash to plug the gaps.

Kozaric said a key requirement was for the three governments to pass the 2013 budgets by end-December.

The central parliament also needs to pass changes to the law on financing state institutions, to avoid the situation from January, when servicing of foreign debt was delayed because the budget was not adopted, he said.

The governor said Bosnia's economy was seen stagnating with growth of 0.3 percent this year, and predicted a modest rise next year of up to 1 percent.

The banking sector was well capitalised at an average 16 percent, with lending to businesses up 6 percent and profit of 108 million marka ($70.3 million) in the first half of 2012, but bad loans accounted for 12.6 percent of the total loans, Kozaric said.

$1 = 0.7840 euros) (Reporting By Daria Sito-Sucic; editing by Zoran Radosavljevic and Stephen Nisbet)