Rapid privatisation and more rigorous regulation need to be implemented before the flood of international donor aid to Bosnia dries up over the next 18 months, leaving the onus squarely on domestic financing to keep the economy ticking over.

A $5.1-billion target aid package has anaesthetised the former socialist economy from the dual shocks of the 1992-1995 war and the delayed transition to a market economy.

When it is gone, experts say Bosnia could suffer a severe hangover unless a restructured and functioning banking system softens the blow.

"The authorities and bankers are in a race with high stakes for the Bosnian economy and the opportunities for its citizens to work and provide for their families," said Mike Markels, the US treasury's bank privatisation adviser to Bosnia.

"The race isto change the banks such that they can attract funding from savers and foreign lenders before donors cut back their transfers to the country," said Markels. "Right now the banks are simply unable to serve their role to society."

Bank privatisation laws have been passed this year but the mess they aim to clear up is ugly. Bosnia has far too many banks, partly because of the extremely low minimum capital requirements. There are almost 60 banks in a country of less than four million people.

More than half are either fully or partly owned by the former socialist state and most of these are technically insolvent. The bulk of the rest are small private operations, processing foreign currency and money transfers from abroad, and most fall well below international standards for registered banks.

In the Moslem-Croat federation, one of the two autonomous areas of post-war Bosnia, banking assets and liabilities are concentrated in the seven largest state banks. These are mainly parts of the old state PrivrednaBanka and Yugo Banka, now Union Banka, and were deeply insolvent even before the war.

The banks have been shattered by war damage, pre-war debts to domestic depositors and foreign creditors, bad loans to failed state-run industries, political abuse and a complete lack of depositor confidence. "The banking system is one of the big weaknesses of this country," said Paul Monnory, resident representative of the European Bank for Reconstruction and Development in Sarajevo. "Without a stable basis for local finance, industry cannot hope to operate efficiently."

The Bosnian economy is now almost completely cash-based and "plastic" money is virtually non-existent, as any visitor to Sarajevo's hotels and restaurants will testify.

Those who have deposited money since the war at even the more reputable private banks have learned to regret it. The banks, as a result, have little or no access to capital from either depositors, industry or foreign credit. They subsist largely on fee incomes.

For industry, financingof any sort is scarce. Where available, it is strictly limited and rarely available beyond three to six months.

The vicious circle that links a lack of confidence with no liquidity and industrial paralysis can only be broken by foreign capital injections, experts say. "The goal of bank privatisation is to change the banks so that once again they can attract funding from savers and from foreign lenders," said Markels.

Two laws passed by the federation this year pave the way for the opening of the balance sheets of state banks. Chunks of pre-war foreign and domestic debts will be stripped out and the remaining healthy concerns will be sold to the highest bidder.

Bosnia's share of the former Yugoslavia's external debt, some of which was renegotiated with the London Club of commercial bank creditors last year, will be transferred from the books of the state banks to the country's two autonomous authorities and resolved at that level.