Bosnia and Herzegovina (BH) hopes tosuccessfully conclude the Stabilization and AssociationAgreement (SAA) with the European Union (EU) by the end of2006, upgrading BH as a potential candidate for EUmembership.Entry into the EU will increasingly shape thefuture reform program of BH in several areas, includingpublic financial management. Strategic planning hasimproved, and ownership is more evident. A key developmentwas the country-wide Poverty Reduction Strategy Paper(PRSP), known as the Medium Term Development Strategy(MTDS), which was prepared jointly by the three governments.These efforts have helped to familiarize the governmentswith policy-based frameworks in a multiannual context, yetthe link between policy and budget is still very weak.Externally financed technical assistance has helped toameliorate the lack of capacity within the financeministries. It is too early to say whether the medium-termexpenditure framework (MTEF) will be sustained withoutcontinuing external support although there are indicationsthat it is becoming the starting point for the preparationof annual budget rather than remaining as a standalonedocument. The overall financial management risk to Bankdevelopment policy lending (DPL) funds is moderate. Amplesafeguards exist in the central bank to record and trackforeign currency funds received under the Bank's DPLprogram. However, future DPL operations should includemeasures to develop public financial management capacity andto address the weaknesses and risks, particularly in themanagement of budgetary resources identified in this report.In doing so, it is important that conditions and triggersfocus on results rather than inputs/processes while clearlystating the expected outcomes.
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