Over the medium term, Bosnia andHerzegovina will go through a critical phase of fiscaladjustment and deeper economic reforms as it moves to orientits economy to the market and to increased integration withthe rest of Europe. A key finding of this report is that thepresent size and scope of public spending cannot besustained. This report is aimed at helping the authoritiesidentify the priority fiscal policy and institutional issuesand reform options on which the medium-term adjustmentagenda will need to focus. The report is divided into fivechapters. Chapter 1 describes the evolving governanceframework and assesses its macroeconomic and fiscal stance.Chapter 2 examines government spending. Chapter 3 looks atpresent intergovernmental fiscal relations. Chapter 4assesses public spending in the social sectors. Finally,chapter 5 analyzes public expenditure management andfinancial accountability systems.