Bosnia and Herzegovina (BH) hopes to successfully conclude the Stabilization and Association Agreement (SAA) with the European Union (EU) by the end of 2006, upgrading BH as a potential candidate for EU membership. Entry into the EU will increasingly shape the future reform program of BH in several areas, including public financial management. Strategic planning has improved, and ownership is more evident. A key development was the country-wide Poverty Reduction Strategy Paper (PRSP), known as the Medium Term Development Strategy (MTDS), which was prepared jointly by the three governments. These efforts have helped to familiarize the governments with policy-based frameworks in a multiannual context, yet the link between policy and budget is still very weak. Externally financed technical assistance has helped to ameliorate the lack of capacity within the finance ministries. It is too early to say whether the medium-term expenditure framework (MTEF) will be sustained without continuing external support although there are indications that it is becoming the starting point for the preparation of annual budget rather than remaining as a standalone document. The overall financial management risk to Bank development policy lending (DPL) funds is moderate. Ample safeguards exist in the central bank to record and track foreign currency funds received under the Bank's DPL program. However, future DPL operations should include measures to develop public financial management capacity and to address the weaknesses and risks, particularly in the management of budgetary resources identified in this report. In doing so, it is important that conditions and triggers focus on results rather than inputs/processes while clearly stating the expected outcomes.