Bosnia and Herzegovina

Details

Country assessments

Highlights

• Economic performance has been weak. Bosnia and Herzegovina slipped back into recession in 2012, and there have been only limited signs of recovery in the first half of 2013. The European Union (EU) approximation process is at a standstill.
• Macroeconomic stability has been preserved. Bosnia and Herzegovina successfully completed the third review under its 24-month, US$ 520.6 million, Stand-By Arrangement (SBA) with the International Monetary Fund (IMF), in June 2013.
• Important pension reforms were implemented. The new Pension Law sets a more sustainable structure for pension expenditures for the country's war veterans.

Key priorities for 2014

• Progress on the large outstanding structural reform agenda needs to be accelerated. This would also help the EU approximation process. Better coordination among the various levels of administration is imperative if any progress is to be made on this front.
• Bosnia and Herzegovina needs to implement concrete reforms to improve its investment climate. The country remains one of the most challenging in which to start a business, and the administrative and regulatory burdens on existing businesses are very high.
• The development and upgrade of the road infrastructure should be accelerated next year. This is crucial for advancing Bosnia and Herzegovina’s regional integration.

Macroeconomic performance

Weak domestic demand, an unfavourable external environment and political stalemate have held back economic recovery. Feeble domestic demand has been the main hindrance on growth in Bosnia and Herzegovina over the past two years. Consumption has been negatively impacted by factors including austerity measures, a weakened contribution from remittances – which are significantly below crisis levels – and high (and growing) unemployment, which is currently near 30 per cent. At the same time, weaker growth in the eurozone has negatively affected Bosnia and Herzegovina’s exporting activity and capital inflows, although some improvement in exports occurred in the first half of 2013. In 2012 the economy contracted by 0.5 per cent. Inflation remains low – reflecting subdued domestic demand – standing at 1 per cent year-on-year in June 2013.

A new Stand-By Arrangement with the IMF, approved in September 2012, has remained on track. The 24-month, US$ 520.6 million, SBA provides a buffer against external shocks from the eurozone crisis, as well as an anchor for structural reforms envisioned in the country’s 2012-14 economic programme. The new arrangement follows the expiration of a 36-month SBA, which was put on hold in 2011 due to a political stalemate that left the country without a central government for more than 15 months, from the October 2010 elections. The third review of the SBA was completed in June 2013.

Continued weak economic performance is expected in 2013. The weak external and domestic environment will constrain growth in Bosnia and Herzegovina over the next two years. GDP growth is likely to be only mildly positive in 2013, following the 2012 economic contraction. The economy remains vulnerable on many fronts, not only because the entire region is struggling, but also because the internal complexity of the country’s political structure and the poor investment climate are major deterrents to investment.

Major structural reform developments

EU approximation remains stalled because of the limited progress on reforms. The country’s complex political structure remains a key obstacle to the advancement of Bosnia and Herzegovina’s extensive reform agenda. The European Commission concluded, in October 2013, that the country needs to implement, without delay, the Sejdic-Finci judgement of the European Court of Human Rights, and establish a coordination mechanism on EU matters in order to move forward on the EU accession path. In its October 2013 progress report, the Commission noted that results achieved so far by the political leadership in Bosnia and Herzegovina are below expectations and that relations with the EU are at a standstill.

Reforms in the Pension Law were implemented. The new law, which was passed by the parliament in April 2013, sets a sustainable framework for public expenditure on retirement benefits for the country's war veterans.

Large challenges remain in the business landscape. Bosnia and Herzegovina continues to perform very poorly on indicators of the quality of the business environment. In the World Bank 2014 Doing Business report the country was ranked one hundred and thirty-first, of 189 countries. Over the past two years some progress was made in respect of easing the regulatory burden on business. The computerisation of the commercial registry has made the transfer of property between companies easier. Also, by implementing electronic filing and payment systems, Bosnia and Herzegovina has reduced the administrative burden of filing and paying social security contributions. However, large challenges remain in many areas. Bosnia and Herzegovina remains one of the most difficult countries globally in which to start a business (one hundred and seventy-fourth, of 189 countries according to the World Bank 2014 Doing Business report). Other major obstacles include dealing with construction permits, getting access to electricity, paying taxes and enforcing contracts.

Large-scale privatisation remains stalled. There are no plans to privatise major public utilities, and a number of large enterprises remain effectively in public ownership. The ownership of one of the country’s biggest enterprises, and its main exporter, Bosnia Aluminij, has been resolved. Under the agreed structure, signed in June 2013, the government of Bosnia and Herzegovina and small shareholders (in aggregate) each receive 44 per cent of the equity of the country’s sole aluminium smelter, while the government of Croatia has ownership of the remaining 12 per cent. However, no decision was made regarding privatisation of Aluminij, which remains majority state-owned.

The extension and upgrade of Bosnia and Herzegovina’s road transport network continues. In February 2013 the government announced the tender for the construction of the Banja Luka-Prnjavor motorway, which is part of a 72 km cross-entity motorway, linking the cities of Banja Luka and Doboj. Construction of this project is expected to start in the second half of 2013. A construction contract for the other section of the motorway was awarded in August 2012, to the same consortium, and works are in progress. Similarly, the authorities have made progress in the implementation of the construction of a number of sections of the transnational transport route – Corridor Vc – with the aim of more than doubling the length of motorways in Bosnia and Herzegovina by the end of 2014. Last year the tender for the first public-private partnership (PPP) in the transport sector was launched for the construction of the Doboj-Vukosavlje motorway in Republika Srpska, which is part of Corridor Vc. The tender process is ongoing, and is expected to be completed by mid-2014. Similarly, a contract with PPP advisers covering another section of Corridor Vc in Bosnia and Herzegovina was signed in the first half of 2013.

Construction of the Stanari thermal plant is under way, but one of the country’s biggest hydropower contracts has been cancelled. The Chinese company, Dongfang Electric, was hired in March 2013 to build the 300 MW Stanari thermal power plant, which is part of the UK’s EFT Energy Group, and construction began two months later. The €600 million project also involves the rehabilitation of the Stanari lignite mine. More recently, EFT Energy also received a permit to build the 35 MW Ulog hydropower plant in Serbia. The UK company hired its Chinese counterpart, Sinohydro, to build the run-of-the-water hydropower plant, which it is estimated will cost over €60 million. Meanwhile, one of the country’s largest hydropower projects has been cancelled. The €460 million project, which entailed the building of four hydropower plants with a combined capacity of 260 MW on the Upper Drina, should have been a 60:40 joint venture between Germany’s RWE Innogy and Republika Srpska’s power generation company, Elektroprivreda Republike Srpske. However the contract was cancelled because the parties could not agree on the terms of the joint venture.

The financial sector is liquid and well-capitalised, but credit growth has slowed further, and non-performing loans are rising. Non-performing loans have risen to around 14 per cent of total loans, while provisioning stands at around 65 per cent. With banks’ tightening of credit standards, and demand weakening due to the subdued level of economic activity, private sector credit growth has slowed further over the past year, falling below 2 per cent year-on-year in May 2013.

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