J.1 Background.doc

Attachment J.1 Background information

Country background The country consists of two entities and one district: Federation of Bosnia and Herzegovina (FBiH), the Republic of Srpska (RS), and Brcko District (BD). All three entities have government structure with often overlapping competencies (executive, legal and judicial).

FBiH is a highly decentralized entity consisting of three levels of government, with shared multiple competencies and a complex internal administrative structure; Republika Srpska is a highly centralized entity with two levels of government; the District of Brčko has a special status, it has governance of its own and autonomy to make decisions. The BD has fields of competence that are nearly the same as those of the Entities, as well as social systems that are shared with the entities (e.g. pension system). Federation of BiH consists of ten cantons. There are 78 municipalities and 2 cities in the FBiH and 57 municipalities and 6 cities in the RS. State-level institutions are very limited in their capacities and have limited authority over number of issues. State level has mainly coordinating role and it is mainly tasked with donor and international relations. Competencies shared between the state and Entities (often with Cantons in FBiH) are configured in such a way that there are inadequate mechanisms even to ensure compliance within the Entity, nevertheless with state or joint policy. This is a major problem for establishment of the single-economic space and creation of the business predictable environment that is often sought by the potential investors. (The EU’s Stabilization and Association Agreement (SAA) requires BiH to ensure proper policy-making coordination between all levels of government.)

The 2019 EC Progress report for BiH shows that the country has made very limited progress towards meeting SAA criteria. The report noted the most important reasoning behind recommendation for strong support for fiscal reforms. Below are the excerpts from the Report:

“The currency board arrangement with the euro as the anchor currency was maintained. This approach has served the economy well so far. However, it also implies that the burden of adjustment to external shocks has to be accommodated by other policy areas, in particular responsible fiscal policy, necessitating the building-up of sufficient fiscal buffers and a stronger emphasis on medium-term stability, and structural reforms to improve the functioning of markets. (EC PROGRESS REPORT 2019, pg. 31)

Considerable shortcomings exist regarding institutions' internal control mechanisms at all levels, rendering the system vulnerable to inefficiency and waste, particularly in the area of public procurement. Ministries of Finance at various levels lack administrative capacity for further implementation of reforms in public finance management. (EC PROGRESS REPORT 2019, pg. 7) Bosnia and Herzegovina is at an early stage with the reform of its public administration. No progress has been achieved in the past year and the Commission's recommendations from 2016 have not been implemented. There has been an increase in political support for development of a country-wide public administration reform strategy. The civil service in the Federation entity and at cantonal level remained fragmented. Weaknesses in policy development and coordination and accountability remain to be addressed.” (EC PROGRESS REPORT 2019, pg. 6) The stagnation of BiH is reflected in economic reports as well: In the World Economic Forum’s Global Competitiveness Reports for 2017 and 2018, inefficient bureaucracy and corruption were rated the two most problematic factors for doing business in BiH. The reports ranked BiH at 100th place (out of 138 countries) and 91st (out of 140 countries) respectively in irregular payments and bribes.

The World Bank‘s Doing Business (DB) Report bluntly illustrates BiH’s development stagnation or even downfall. In 2016, DB ranked BiH at 79thth place out of 189 countries. Although positive reforms were implemented in BiH during the last year, Bosnia progressed 18 places in Paying Taxes- other economies improved at a faster pace than BiH and as a result the country’s overall rank still plunged by 2 places: The slow pace of reforms in the last year resulted in BiH being pushed to 81st place out of 190 economies in the 2017 World Bank’s DB report – the worst performance in Europe. And finally, the Doing Business report for 2019 ranked BiH at 89th place out of 190 countries, again the worst in Europe. Further decline was recorded in almost all aspects of the report. All other countries in the region are ranked way better than BIH, with Albania being the worst at 63rd place, and the closest ranked European country to BiH is Ukraine at 71st place.

The EC’s Economic Review Program’s (ERP) baseline projection for BiH reflects the lack of government policies to lift the country’s growth potential through stronger public and private investment. Key downside risks identified in the report are a continuation in delays to implement reform measures. The fiscal framework forecasts increasing budgetary surpluses, based on significant expenditure driven consolidation. Like in previous programs, both revenues and expenditure are scheduled to fall substantially as a share of GDP. The already-low share of public investment is set to fall from its 2018 level, hampering the country’s needs. The country lacks a comprehensive action to improve the quality of public spending, such as by allocating more resources to investment and education; tackling an oversized public sector; reforming state-owned enterprises (SOEs); or better targeting social transfers. Driven by fiscal surpluses and solid nominal output growth, public debt is forecast to fall from 33 % of GDP in 2018 to below 30 % in 2021. (Source: 2019 Economic Reform Programmes of Albania, Montenegro, North Macedonia, Serbia, Turkey, Bosnia and Herzegovina and Kosovo/ INSTITUTIONAL PAPER 107 | JULY 2019)

The overall quality of public finances remains low. Comparing the planned spending structure for

2019-2021 with the 2018 budget points to a significant cut in overall spending. This cut in spending will affect not only general public services and social protection, but also health and education. The 2018 was the election year, and spending plans for that year may therefore have been driven by short-term-oriented priorities. However, even taking this into account, the data for the whole program period shows insufficient focus on the type of public spending that stimulates growth. The country’s reform program presents plans to decrease social-security contributions in order to reduce the disincentive to register in the formal sector. However, there seem to be no concrete plans to address inefficiencies in the social-security sector, such as the poor targeting of social transfers. According to the EC, it is critically important to address these inefficiencies to compensate for the lower revenues caused by reduced rates. The challenge of oversized public sector has not yet been fully addressed — planned registers of public employment appear still not to be completed. A significant issue is the broad use of para-fiscal fees, such as excise taxes, at municipal and cantonal level: this practice impedes the establishment of new companies, and thus has strong negative implications for the country’s business environment.

Clearly from the above, the BiH challenges remained the same as in previous years. They can be summarized into one statement: Lack of transparency and accountability coupled with the oversized public sector resulting in excessive public spending.

Therefore, there have been increasing calls from international community and opposition parties for greater transparency and accountability from all levels of government addressing issues such as nonexistence of check and balances in budgeting /treasury processes, poor service delivery and weak IT sector for added transparency in fiscal sector. Considering the current economic downturn, the recent talks about renewing some sort of the EU reform agenda, which has and will in the future mostly focus on public administration and public finance reforms at the entity and local government levels, this appears to be an especially appropriate time to consider the issue of economic condition and fiscal discipline that are often stressed as the key issues for the country’s stability.

Problem Statement and Major Issues One of the core economic responsibilities of any government to its citizens is financial accountability and transparency. The governments must develop systems that enable the stakeholders to hold the government in power accountable. Unlike in businesses, where financial disclosures are known to shareholders of the business, the public sector in Bosnia and Herzegovina does not resemble this mechanism. Taxpayers and electoral constituency like shareholders in private sector, should be entitled to a detail accounting for all public revenues collected and expanded by local governances at all levels. Hence, e-governance platforms increasingly become vital tool for all practical governments who desire to reach a wider public in term of achievements, while reducing cost and time for administration. In addition, developing countries such as Bosnia and Herzegovina, that are facing serious issues related to corruption and misuse of public funds must engage such IT platform at all levels of the government to disclose its financial transactions and reduce expenditures. This is rarely the case in Bosnia where excessive multiple layers of administration use approximately 45% of GDP just to facilitate its existence, and where app. 95% of all expenditures are considered a current expenditure. Since fully disclosing its financial activities in a transparent manner would enable stakeholders to analyze government’s performance and ask educated questions on the financial rationalization. This added transparency would prevent corruption and misuse of public wealth. Further, in Bosnia and Herzegovina, the government is not accountable to the people and because of the level of corruption and misuse of funds, government officials or agencies are not willing to make the financial reports public in a manner that would be appropriate for a wider public.

The readiness of Bosnia and Herzegovina Government towards the implementation of e-administration reforms in the fiscal sector has been very encouraging. However, the government is yet to fully take advantage of this development in carrying the business of governance and connecting with the private sector and/or citizens. According to the United Nations E-Governance Survey Report Bosnia and Herzegovina rank at 105 positions out of 193 countries in terms of its e-governance status, but only 125th place in E-Participation Index which measures e-services provided by the government. The survey also revealed that Bosnia and Herzegovina is among those countries with upper middle income and it had 0.53 as its e-governance development index figure. As the e-government refers to the use of information and communications technology in different aspects of daily operations of public administration, in Bosnia and Herzegovina this process has not be fully engaged for good governance. In Europe and other developed countries, basic interactive functionality of e- administration services has been adopted at multiple if not at all levels of public administration, including economy, tax, services, leisure, safety etc. This is still not the case in BiH, where there is very limited interactive functionally within many sectors, including the fiscal. The implementation of e-governance systems and services would lead to greater transparency in fiscal sector, accountability and efficiency in economic governance which would increase competitiveness and wealth for the general well-being of the citizens.

The recent undertakings of the USAID Mission in Bosnia and Herzegovina will hopefully contribute to resolving some of the most cumbersome obstacles hampering the further digitization of the economy in BiH, including both the economic governance and services which they provide. USAID funded Responsive E-Services is expected to assist other donors and host-government officials at the entity governments to introduce some of the critical reforms which will complement fiscal reporting, tax filing, etc. Namely, introduction of the e-signature would revolutionize the way in which the taxes are filed and reported, or the way in which government will make financial reports available to public, communicate with the private sector and citizens in general.

Background on planned activities A.1.

Assistance for improved fiscal planning and analysis

Beneficiary:

State (Indirect taxes), FBiH, RSBiH, Brcko District BD, Parliament members, non-governmental groups Focus of assistance:

Fiscal policy/ fiscal discipline

Background: BiH has an aging population, an extraordinary level of brain-drain among young and educated people, but also in qualified workforce, as well as a behavioral/consequential effects of policy changes. This has had an immediate impact on certain sectors (such as health and IT where there is a steady decline in number of doctors, nurses and IT experts for several years now). This exodus of qualified workers has several long-lasting impacts that can be forecasted only by scientific modeling. This inevitably will result in further worsening of the demographic picture in BiH. The lack of young and educated workforce will inevitably affect the country’s ability to cope with international market pressures, (low quality of services, resulting in loss of competitiveness) but it may have a long term effect on the fiscal stability of the entire country, since it will negatively affect employment, tax revenues, budget planning, pension system, investments, etc. In order to be able to predict such changes and to launch efficient preventive policies to mitigate such negative trends, fiscal authorities in BiH must be equipped and trained to further advance the static modelling and to develop skills for the dynamic revenue/tax analysis. Currently, such skills do not exist within the responsible authorities.

The capacity for economic modeling has been significantly improved by USAID over the course of the past 4 years. Before USAID’s project, the local fiscal authorities at all levels of the BIH government literally did not have any capacity to model the fiscal policies or to efficiently and reliably forecast revenues. This deficiency hampered and regressed the budget planning and the processes for formulation of fiscal policies, since its disallowed projections of policy effects. To mitigate this, the USAID funded FAR project provided two entity and BD governments with software (US STATA software) for efficient tax and revenue static modelling. It also trained the selected number of MOF staffers in modeling/revenue forecast techniques. Due to increased interest for modeling, this component of the FAR project was further expanded to include the biggest canton in FBiH (Sarajevo) in the modeling training. Training on two types of modelling has been provided to the local authorities: the macro models which rely on the aggregate data; and the micro-simulation models which rely on the micro-data, usually associated with tax or welfare policy changes.

The macro aggregated revenue forecasting models provided by USAID were based on the time series data which incorporated simulated effects of tax changes on public revenues calculated through the microsimulation models. Those models put in relations the macroeconomic variables and revenues. Such models rely heavily on macroeconomic forecasts of GDP and other macro indicators and they are used on a regular basis when preparing the budgets and a three-year budget projection.

In addition to the macro forecasting models, USAID assisted the host governments to develop the static microsimulation models that simulate the effects in the near future without considering any demographic and economic changes (i.e. “day after effect”). Such models were the starting point in model building for policy impact analysis and redistribution effects, and they were used as part of analysis for legislative changes and in discussions and consultations that fiscal authorities had with the international creditors. The models developed by USAID included direct taxes, social security contributions and fees in FBiH, RS and BD, and Sarajevo Canton, as well as property tax in Sarajevo Canton. However, static modeling is just a first step in policy projections and forecasting. Considering the ever-changing political, demographic and economic context of the country, the modeling skills need to adopt and appropriately respond to changes.

A.2 Strengthening of the FBiH and Republika Srpska Health Sector Treasury Systems Beneficiary:

Federation of BiH (Cantons and municipalities) Republika Srpska (Health Sector Institutions) Focus of assistance:

Public revenue/expenditure, fiscal discipline

Estimated budget:

The US Government has a long history assisting BiH’s Treasury system (TS). The first intervention efforts started back in 2000 with the USG (USAID and US Treasury) dismantling the Payment Bureaus (PB). The TS system was introduced immediately after that as a replacement for the socialist legacy PBs.

Created by the US Treasury and supported by USAID, the establishment of the treasury business operations was conducted in phases. In the Federation (FBiH), the treasury system was implemented at the Cantonal level, while Republika Srpska (RS) expanded the process of introducing local treasuries to include municipalities and cities. An identical Oracle platform was used in both entities. Since then the treasury system was introduced at several levels of government administration and budget planning. This was a productive intermediate step. However, TS still does not cover all levels of public administration.

The health care system in FBiH is mainly government-operated and highly decentralized (at cantonal level). The FBiH Health Sector does not operate within a treasury system (TS), and there is little transparency in spending practices. Healthcare finance derived mainly from FBiH Health Social contributions is hardly monitored and controlled, and auditors and citizens know very little on how their mandatory healthcare contributions are used. Also, arrears are hard to trace and can accumulate out of sight. At the same time the FBiH Government is often asked to reduce social contributions for health insurance (to reduce associated labor costs). Since healthcare is organized at the cantonal level, the treasury system could be incorporated into the cantonal TSs or it can be centralized, based on the restructuration of the health sector. The cantonal TSs are in a bad shape – most of the existing cantonal TS are not supported by the principal provider (Oracle) anymore as they were unable to pay for the ongoing support and licensing. Any upgrade to the health sector that relies on cantonal TS should thus have a strong focus on the ongoing sustainability of the cantonal TSs. Presently, cantonal governments are procuring Treasury systems independently, using different platforms. USAID’s reform of the Health Sector would have to wait until the reforms of the cantonal treasuries, and reforms associated with restructuring of the entire health sector are completed. Hence, the development of the TS solution for the FBIH Health sector would have a phased approach and would commence not before the third year of implementation.

The situation is somewhat better in Republika Srpska. USAID/FAR funded procured hardware and installed software for inclusion of the RS Health sector (HS) into treasury operation. However, the integration of the 20 HS institutions into TS is implemented in phases given the extreme level of HS arrears. So far, only two RS HS institutions are integrated into the TS. The World Bank in coordination with USAID has conditioned its future assistance to the RS Government with further advancing of the HS Treasury. Since TS is a service encompassing all public administration and important in formulating entity budgets, it is paramount that it integrate all levels of public administration, including the health sectors without exceptions. FITRA is expected to continue work in RS on further phased introduction of health institutions into the TS system.

Putting all health institutions into the TSs would allow for greater control, understanding and awareness of healthcare expenditures and for their more effective and transparent planning. Moreover, the use of TS will eliminate the discretion of the public officials in the health sector since TS allows only for budgeted items to be procured. One potential problem to be addressed, however, is that the TS in healthcare could make the overall health sector more restrictive and less responsive to demand. FITRA will work closely with the WB and Swiss government, currently heavily engaged in reform of the health sectors in both entities. Also, further support by the IMF and US Embassy ECON and POL is required/anticipated in order to accelerate this reform.

A.3 Strengthening of the business environment in BiH Beneficiary:

Federation of BiH (FBiH)/Cantons, Republika Srpska (RS), Brcko District (BD) Focus of assistance:

Business environment/parafiscal fees

In the last couple of years, the international community (EU Progress Report, Foreign Investors Council, USAID as well as Associations of Employers in both entities) was repeatedly stressing that radical reforms are needed to transform the current business-unfriendly environment which repels foreign investors and is highly unfair to private companies operating in BiH. Fewer, well-targeted and legally justified local fees/surcharges are more effective instruments in terms of budget financing and community life improvement than huge number of taxes randomly imposed on all businesses (e.g., environmental, infrastructure reconstruction, forestry, natural resources, water protection).

This reform is increasingly important provided that other countries in the region have already implemented such reforms, while BiH continues to lag behind: (e.g. efforts in 2013 by USAID Mission in Republic of Serbia that eliminated 108 para-fiscal taxes for businesses; Republic of Croatia activities to improve the business environment by targeting the para-fiscal fees for forests and tourism).

Previous USAID fiscal reform project followed these regional examples for creation of a better business environment by eliminating para-fiscal/nuisance taxes that are burdensome for the private sector. In Bosnia and Herzegovina, both entity governments recognized the importance of transparent and investor-friendly procedures for economic growth. Creating better business environment by eliminating cumbersome and costly procedures and taxes will enhance the environment for foreign direct investments (FDI). To date, USAID/FAR prepared comprehensive registers of fees in the FBiH, RS, and Brcko District and had taken a lead in reform proposals. In the RS and Brcko District, the new Tax System Law adopted with USAID assistance requires that all fees and charges must have a legal basis and comply with principles or such fees cannot be charged. USAID and the RS Finance Ministry are currently reviewing all RS fees and so far, 45 fees were eliminated. The similar draft Law is adopted in BD while the most updated version of the law was recently submitted to FBiH MOF for further submission to the FBiH Parliament.

In the FBiH, USAID identified several para-fiscal fees that require either reform or abolition. These proposals have been extensively lobbied and feature in the World Bank’s Doing Business Guide as a measure and assessment of BiH’s reform progress (forestry fee, tourism fee, natural disaster fee, general water fee, sign fee). So far in FBIH, there is progress on tourism and forest fee. The current tourism fee levied at rates between 0.01% to 0.05% of gross turnover and forestry fee levied at between 0.015% - 0.07% of gross turnover both charge all businesses a levy on their gross receipts, regardless of whether they make profit or not and regardless of whether they are involved in tourism or use and exploit forestry resources. The current proposed replacement(s) for this tourism fee is under legislative processes at both FBiH and Cantonal level. At FBiH level, the levy on gross turnover is proposed for abolition and this would be replaced by Cantonal level laws that levy charges based on actual tourist overnight stays and by mandatory tourist agency fees on those business engaged in tourism. Currently, four cantons have introduced their own tourism laws (Sarajevo, Tuzla, HNK and USK) with the other six expected to follow. Regarding the forestry fee, in July the FBiH Government adopted a proposed law that would abolish the turnover tax and replace this with environmental charges levied during vehicle registration. Also, Canton Sarajevo recently significantly reformed the company sign fee saving an estimated 2 million KM for businesses.

The lobbying for abolition/reduction of other two para-fiscal fees that FAR and the WB has identified (General Water Fee and Special Fee for Natural Disaster Protection), both of which increase net employment costs by 0.5%, continues.

This component of the project will continue to work jointly with the 3 governments (FBIH, BD, RS) and the lower levels of government to identify new fees to be reformed. Simultaneously, this component will work hand in hand with the governments to identify other, more useful and productive sources of revenue for local administrative units in order to replace the revenues lost.

A.4 Strengthening Public Debt Management

State, FBiH, RS, BD

Fiscal Sustainability – Debt Management

The Public debt portfolio is of a great importance for the fiscal stability of the country, the two Entities as well as the lower levels of the government. It is imperative for all countries, and particularly transitional ones such as BiH to develop good debt practices and risk management to reduce the vulnerability of the domestic economy.

The Council of Ministers of Bosnia and Herzegovina (BiH) adopted the Information on the State of Public Debt of Bosnia and Herzegovina on June 30th, 2019, which was submitted by the Ministry of Finance and Treasury and the BiH Parliamentary Assembly.

The public debt of Bosnia and Herzegovina on June 30 this year amounted to 11 billion and 157.49 million BAM, of which the external debt amounted to 8.2 billion BAM while the domestic debt amounted to 2.9 billion BAM. The share of BiH public debt in gross domestic product (GDP) is 31.42%.

In the total state of public debt, the Federation of BiH participates with 59.91%, the Republika Srpska with 47.97%, the institutions of BiH with 0.65% and the Brcko District with 0.47%. The public debt in the last few years had a downward trend, however, it increased in the first 6 months of 2019. Compared to the end of 2018, the total public debt increased by 50.85 million BAM, or 0.46%, with external debt reduced by 1.49 million BAM, while domestic debt increased by 52.34 million BAM.

The position of Bosnia and Herzegovina, as compared with the rest of the world, has improved in 2018 in terms of GDP percentage. Currently, the country is ranked at 44th place in the list of debt-to-GDP and at 83rd place in debt-per-capita, out of the 186 countries.

This represents a moderate level of public debt, and the country is in much better position than vast majority of neighboring countries. In the structure of the total public debt, approximately 70% is external debt where the major creditors are the “low interest rate” financial creditors, such as the IMF, World Bank, and EBRD. The internal debt represents app. 30% of the total debt, where most of it is the pre-war debt (old currency savings), and war claims. Hence, it is extremely important for BiH to control and manage the public debt properly.

In 2014/2015, USAID intended to procure the debt management software for all 3 levels of the government under the ongoing FAR project. The contract with FAR implementer observed that several software options are available) and FAR was required to evaluate all options. FAR’s report, issued in 2015, after the analysis was completed clearly recommended UNCTAD’s Debt Management and Financial Analysis System (DMFAS). As part of this evaluation exercise, USAID organized a debt software evaluation seminar attended by all Finance Ministries which all agreed by official letters signed by Finance Ministers that out of a choice of three main debt software systems analyzed, UNCTAD’s DMFAS was the most suited (and incidentally, by far the best value option for purchase and maintenance). Other options included CS-DRMS (Commonwealth Secretariat- Debt Recording and Management System) or DSM+ (Debt Sustainability Modell Plus).

UNCTAD is the forum for sharing experiences among Governments, international organizations, on current developments related to debt and debt management. As such, UNCTAD has a technical department for development and implementation of the debt management solutions. UNCTAD has offered technical assistance to BiH, which would include a free Debt Management software solution.

The main features that prevailed in making such recommendation were:

The reports in DMFAS can be exported in Word, Excel, XML and PDF. Since report can be created on any data that exists in the database, this practically means that all the data is available in those formats.

Data between several DMFAS servers can be exchange online or via file transfer.

Since the software is built on Oracle platform, it is possible to create standard interfaces for communication with other Oracle software systems commonly used by the host government. Interfaces are usually created for communication with treasury software or business intelligence modules. In this situation, they can also be used for interoperability, i.e. exchanging data between relevant institutions.

The system supports data export and exchange of reports in the format required by IMF or World Bank.

The lowest cost associated with DMFAS software procurement and maintenance

Based on the report’s recommendations, UNCTAD’s Debt Management and Financial Analyses System (DMFAS) had been selected by all levels of the host government to be the debt management software for BiH. The cost for implementation of this system was supposed to be minimal and would include the advisory cost for additional analysis of business requirements, software installation and minimal training hours. However, during 2014 the World Bank’s classification of BiH’s status changed to “upper-middle income” country status meaning that UNCTAD could no longer provide this for free and it now would cost slightly under US$400,000. USAID strived to find alternate sources of funding for the financing of DMFAS. USAID extensively lobbied PARCO and its management board members to use the exceptional provision of the BiH Procurement Law to purchase DMFAS. Due to institutional resistance and lack of insight of PARCO, and its board members the funding from PARCO did not materialize, and in 2018 USAID terminated this component due to a lack of funds. However, in 2019, both MOFs pitched this idea again to USAID.

A.5 Increased tax compliance

MOFs in FBiH, RS, and BD (and Tax Administrations)

Tax compliance – reducing tax evasion and improving services to citizens; Domestic Resource Mobilization

To increase the tax compliance and improve public revenue collection, while simultaneously leveling the playfield for compliant businesses, USAID will implement several initiatives under this component. All IT solutions will be deployed on the current TA FBiH and TA RS infrastructure and environment, which satisfies all IT security concerns.

A.6 Improved quality of budgeting and public spending

Beneficiary:

FBiH & Cantonal Ministries of Finance; Brcko District

Focus of assistance:

Public Finance Management/Budget planning/Public expenditures

Estimated budget:

BiH is a transitioning society characterized by extreme size of the public sector and corelated spending. Hence, the excessive cost of the government leaves very small margin for the economy to invest in growth and capital projects, as current expenditures account for 95% of all spending. To address these issues the country urgently needs to improve fiscal discipline by improving the efficiency of public spending, reduce fiscal burden on businesses to attract and increase investments, and reduce the size of government. Further, BiH’s public finances is a focus area for the EU which has been continuously reviewed and evaluated by the EC, as well as by other creditors. To address the above described issues, USAID will initiate actions which will improve the quality of public spending. In developing this component of the activity, USAID heavily leaned on 2019 assessment report “NEEDS FOR POTENTIAL ASSISTANCE TO BIH GOVERNMENTS IN THE AREA OF THE QUALITY OF GOVERNMENT SPENDING” which was produced by the USAID-funded FINRA project. Specifically, the Assessment concluded that all three Government levels (State level, FBiH Government, and RS Government) have planned for further adoption of program and performance-based budgeting. Further, the same Assessment concluded that the adopted 2017-2020 PFM Strategies of the BiH Institutions stress importance of linking budgeting to strategic planning as well as program and performance budgeting. The Mission already started some of the Public Finance Management activities in the Sarajevo Canton through its ongoing FINRA project, and it is anticipated that FINRA will lay the foundation for assistance that can be further expanded by this component. Further, as it seems that EC will be funding a major reform that targets PFM issues, among which is program and performance budgeting, the implementing partner will have to coordinate its activities with the EC.