Sarajevo - The International Monetary Fund (IMF) and Bosnia on Tuesday signed a letter of intent to realize a three-year, 1.2- billion-euro (1.6 billion dollars) stand-by arrangement aimed at easing the financial pressures on the war-scarred Balkan country.

But Bosnia, consisting of nearly independent entities, the Muslim-Croat Federation Bosnia-Herzegovina and the Serb Republic (RS), must cut budget spending to qualify for the funds, officials told a news conference in Sarajevo.

Cuts would particularly hit in the Federation, which must save 211 million euros, or more than one-fifth from the 2009 budget. The RS would cut 74 million from the 852-million euros it planned to spend.

The IMF managing board must approve the agreement to before the funds are released. The former Yugoslav republic faced a dramatic shortage of funds after the international crisis bit into its state revenues.

Bosnia had two stand-by arrangements with the IMF, worth 240 million dollars between 1998 and 2004. Today it has 3 billion dollars in foreign debts, or some 17 per cent of its gross domestic product.

Economic growth was projected to be 5.5 per cent, along with a 7.4-per cent inflation rate in 2009, but those figures would certainly be strongly revised downwards.