Credit Crunch

Tuesday, 6 July, 1999

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Ibrahim Polimac

The United States Agency for International Development (USAID) has filed suit in the Bosnian courts against 19 Bosnian companies which have failed to repay business loans worth more than 17 million German Marks (DM).

This unprecedented move is the latest sign that Bosnia will remain dependent on international financial assistance even after the $5.1 billion (9.9 billion DM) of aid earmarked for reconstruction over four years has been spent. Despite more than three and a half years of peace, the country has failed to attract commercial international investment on a scale necessary to achieve self-sustaining growth.

The loans - for sums of between 180,000 DM and 1.74 million DM - are part of a $278 million (530 million DM) revolving credit established in 1996 to help kick-start the Bosnian economy. All were secured against various company assets, including plant, machinery and, in particular, real estate.

Among the assets which USAID is now attempting to seize is the Sarajevo headquarters of Hidrogradnja, one of Bosnia's largest companies, which currently houses the mission of the World Bank, the agency co-ordinating reconstruction, to the country. Hidrogradnja owes 1.7 million DM.

The payback period for most USAID loans is between three and five years. The rate of interest is substantially lower than commercial loans.

Although USAID generally tries to lend exclusively to the private sector, many early loans were made to state-owned companies, since, at the time, few privately-owned companies had the necessary collateral for a loan. Both state and private companies are therefore among the defaulters.

Attempting to seize the collateral on which loans have been secured is a reluctant last step for USAID, the biggest lender in Bosnia, which has granted a total of 450 loans - 105 in Republika Srpska and 345 in the Federation - providing employment to an estimated 20,000 people.

"The purpose of this programme is to create new jobs and to restart the economy," says Craig Buck, head of USAID in Bosnia. "We want companies to flourish and grow and if some company has difficulties paying off its loan, we are prepared to examine the problem together and work something out.

"But where there is no willingness to carry out necessary reforms, where co-operation is refused, or where there is a belief that the loans are gifts, we have to take measures to protect the means that belong to the people of Bosnia and Herzegovina."

Since all loan repayments are recycled and lent on within Bosnia, defaulting companies impact other Bosnian companies seeking low-interest credit.

A lack of financial discipline has plagued reconstruction in Bosnia during the three and a half years since the war ended.

Evasion of taxes, customs fees and other dues is rife and estimated at about 50 per cent. In other words, of each DM which the state is entitled to collect, only half ever reaches the public coffers. Moreover, some Bosnian businessmen effectively perceive loans as gifts, possibly as a result of practices dating back to the communist period.

At the end of 1998, nearly 4,000 bank accounts - containing close to 400 million German Marks - were blocked because account holders had failed to meet financial commitments. Several banks have faced liquidity problems after lending to borrowers who have failed to maintain repayments.

Attempts to collect debts via the Bosnian courts have to date proved disappointing as a result of slow procedures and inadequate regulations.

According to one US financial expert, who did not wish to be named: "It appears that Bosnian courts and laws aim to protect debtors and not creditors as is the case in the rest of the world." USAID is aware of these problems but remains confident that it will, nevertheless, be able to recoup its bad debts.

To head off problems, USAID has made it a practice to advertise details of all impending loans, including the assets which companies have placed as collateral, and invited other creditors to report whether potential borrowers do indeed own what they claim to.

USAID initiated its first law suit in October last year against the company Sokolina from Kladanj which owes 1.34 million DM, then Makom from Zenica (1.22 million DM) and Fimex from Zepce (180,000 DM), and in November against Teppsa Holding from Sarajevo (1.14 million DM).

A further 15 law suits have been initiated so far this year. The list includes:

* Sipad Enterijeri, Sarajevo (856,000 DM) * Sipad Neretva, Konjic (1.74 million DM) * Integral , Zepca (1.29 million DM) * Fering, Gracanica (896,000 DM) * Agrebt, Srebrenik (364,000 DM) * Mesopromet, Tuzla (910,000 DM) * Dino Sabanovic, Breza (611,000 DM) * Gradacacpromet, Gradacac (691,000 DM) * Pilana, Kakanj (421,000 DM) * MMR, Gracanica (898,000 DM) * Pasko, Kresevo (829,000 DM) * Hidrogradnja, Sarajevo (1.72 million DM) * Ting Promet, Lukavac (358,000 DM) * Frasuda, Tuzla (1.04 million DM) * Pingo Ice, Lukavac (520,000 DM).

Ibrahim Polimac is a journalist with Sarajevo daily Oslobodjenje.