Bosnia: An IMF Loan and Potential Backlash

The International Monetary Fund (IMF) and the Bosnian government have agreed on a three-year, 1.2 billion euro ($1.61 billion) loan. Bosnia's two political entities — the Muslim-Croat Federation and Republika Srpska (Serb Republic) — will split the loan; two-thirds of the money will go to the Muslim-Croat Federation, which has roughly twice the population of Republika Srpska. The Muslim-Croat Federation and Republika Srpska will have to cut $284 million and $97 million, respectively, from their 2009 budgets according to the terms of the loan. The cuts are intended to rein in the entities' combined federal deficit of approximately $480 million, or 5 percent of gross domestic product (GDP). Budgetary savings will also be required for fiscal year 2010. The IMF's austerity measures come as Bosnia is struggling to overcome the global economic crisis. Unemployment rates are already above 40 percent, and the IMF has forecast that the country's gross domestic product will fall 3 percent in 2009, after having grown by 6.8 percent in 2007 and 5.5 percent in 2008. Slashing public spending will be a particularly daunting challenge, because social welfare cuts could precipitate social unrest, especially in the volatile Muslim-Croat Federation. The Bosnian economy has sputtered along since the end of the brutal civil war that lasted from 1992 to 1995 and devastated much of its labor force and production capacity. Once the centerpiece of Yugoslavia's military-industrial complex, Bosnian industry suffered immensely from the effects of the war and the loss of its primary market — the Yugoslav federal government — following independence. The post-civil-war arrangement the international community imposed on Bosnia's warring sides through the Dayton Accords split Bosnia into the Muslim-Croat Federation and the Serbian Republika Srpska, bloating the government with essentially two bureaucracies (or more, considering the federal level of government) running two separate political units under the aegis of a single country known as Bosnia and Herzegovina. The two political units' independence extends into economic activity. Republika Srpska moved ahead with the privatization of formerly nationalized factories and industrial complexes quicker than the Muslim-Croat Federation mainly because of its greater political coherence (the civil war and consequent ethnic cleansing left Republika Srpska with a nearly 90 percent Serbian population). Meanwhile, the Muslim-Croat Federation has been rendered politically impotent by conflicts between the Muslim and Croat political elements and by high public spending on social welfare for veterans and those left injured by the war. Tensions between the Muslim and Croat groups in the Muslim-Croat Federation have also been heating up recently. A group of Croat soccer hooligans set a bus of Muslim fans ablaze in late April in the ethnically divided city of Mostar. Croatian calls for greater autonomy and outright independence (to create a third political entity separate from the Muslim-Croat Federation) have also increased; a supposed alternative (and at this point symbolic) "Croatian Republic" government has been set up in Mostar to protest the ineffectiveness of the Muslim-Croat Federation. As tensions rise within the Croat community, similar discontent is spreading within the Muslim establishment regarding political arrangements stemming from the Dayton Accords. According to STRATFOR security sources in Bosnia, the head of the Islamic Community in Bosnia and Herzegovina, Reis-ul-Ulema Mustafa Ceric, recently urged Muslim religious leaders to take a political stance on the issue of creating a distinct Muslim nation within Bosnia. IMF's austerity measures therefore come at a time when political tensions left over from the civil war are rising in Bosnia. They will certainly raise tensions in Republika Srpska, although there the social unrest and angst will not have an ethnic character to it due to the relatively homogenous population. It is unclear whether the government of the Muslim-Croat Federation will be able to implement the serious budgetary cuts required for the loan. If the government does make the cuts, social tension could coalesce in an interethnic conflict between Croats and Bosnians that might become violent — the kind of conflict not seen since the end of the civil war.