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Country Report Bosnia and Herzegovina

Country Report

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Bosnia's economy is recovering slightly with the help of IMF support and real GDP growth is expected to be positive again in 2013. However, Croatia's EU accession and the lack of structural reforms as a result of the enduring political deadlock negatively affect Bosnia's economic outlook.

Author: Iris van de Wiel (intern)

Strengths and weaknesses

Strengths

Likely (Western) donor support

Financial support from the European Union and the IMF helps the Bosnian economy to recover. 

Weaknesses

Political stalemate hinders structural reforms

The complex political system in Bosnia hinders the country’s policy making process. The structural reforms necessary to improve the country’s business environment are thereby stalled.

Vulnerability to social unrest

Civil opposition against the political system and the ethnic division in Bosnia’s administration is a source of public unrest. 

Export dependence on Croatia

Bosnia is no longer able to export food products to Croatia after it joined the EU on July 1st 2013. The adoption of changes needed to meet the new export requirements has been delayed as a result of Bosnia’s slow decision making process. This affects the Bosnian food industry as this sector is highly dependent on exports to Croatia.

Key developments

1. Political stalemate starts taking its toll on multiple fronts

Bosnia’s political landscape is polarized as a result of the coexistence of three ethnic groups of Bosniaks, Bosnian Croats and Serbs within the country. As a result, Bosnia consists of two entities, both with their own president, government, parliament and police force. Besides these semi-autonomous states, a central government with a parliament, government and a rotating presidency exists. As a result of this complicated and divided political system, the central government lacks authority. Altogether, Bosnia is one of world’s most over-governed countries. The complexity of the political system led to a political stalemate between the October 2010 elections and February 2012, when the prolonged formation of a new state-level government was finally completed. This slightly tempered the enduring political and economic crisis in Bosnia and Herzegovina. Both social and political unrest did, however, increase during the first half of 2013. This unrest was caused by a decision of the constitutional court last February, stating that the existing law on national identification numbers was unconstitutional. Due to the complexity of the political system, a solution regarding the identification numbers issue was not found. As a result, newborns did not receive official documents until a few months after they were born, which meant they couldn’t cross the border. Last June, the death of an infant that was in need for medical treatment abroad sparked anti-government demonstrations. Citizen not only expressed their dissatisfaction with the identification numbers issue; the whole country’s political decision making process was criticized. The protesters required politicians to cut their salaries by 30% and the money saved should go to a fund for sick children. Furthermore, protesters asked for better education, more jobs and the end of the ethnic division. The demonstrations even appeared to be transcending ethnic boundaries.

As a result of the political impasse, Bosnia and Herzegovina has made only little progress in its process towards European Union accession after the country signed the stabilization and association agreement (SAA) in 2008. In contrast to Bosnia’s neighbor Serbia, which also signed the SAA in 2008 and received the status of ‘candidate country’ last year, Bosnia is still a ‘potential candidate country’. One of the requirements for Bosnia to also acquire this candidate status is the harmonization of its constitution with the European Convention on Human Rights. Until now, each ethnical group has initiated its own reform proposal, and it is questionable whether the parties will reach an agreement on the harmonization of these proposals, which is required to eventually meet the EU requirements. Besides Bosnia’s internal problems that impede the EU accession process, the country’s actual EU accession will likely be hindered by leading EU members that are currently not enthusiastic about further EU enlargement.

2. Adverse impact on trade as a consequence of Croatia’s EU accession

With the EU accession of Bosnia’s neighbor Croatia on the 1st of July 2013, several implications arose for the Balkan region as a whole. For Bosnia, Croatia’s EU accession has both political and economic implications. One of the political implications is a fear of a break-up of the ruling coalition, as the party representing the Bosnian Croats expects its political position to strengthen as a result of Croatia’s EU accession and recently indicated they might therefore leave the coalition. Economic implications have been clearly visible from the first day of Croatia’s accession onwards; kilometers-long queues were created on all Bosnia’s border crossings with Croatia as a result of strict fitosanitary requirements for exports to the European Union. As a result of these strong requirements, Bosnia has been unable to export fresh meat, milk and other dairy products to Croatia since July. This hits Bosnian farmers and the country’s food industry hard, as the total value of Bosnian exports within this industry towards Croatia is over EUR 200m on an annual basis. Due to its political complexity, Bosnia failed to implement a legal framework that would ensure the necessary requirements are met and it is uncertain when such a framework will be put into place. Clear is that it will not be implemented before the end of this year. Until then, Bosnia will not be able to export fresh meat and dairy products to Croatia, which is likely to have both an impact on the country’s balance of payments via the trade balance as well as on farmers’ income, which could result in social unrest. The size of impact on the trade balance is, however, unclear and not (yet) visible in the balance of payments data, as Croatia only entered the EU recently. The longer the Bosnian government takes to implement the necessary framework, the more likely it is that social unrest will arise; the association of farmers already announced demonstrations against the authorities for not having put enough effort in preparing Bosnia for Croatia’s EU accession.

Next to the problems in the food sector, other problems for Bosnia’s export sector had risen, as weak demand in the EU has caused liquidity problems for the country’s main export industries; the metals and energy sectors. Currently, only an ad-hoc approach is taken to deal with these companies’ problems. A clear economic policy is needed to prevent Bosnia’s export companies from going bankrupt and thereby continue to support the country’s trade balance.

3. Modest economic recovery underway with the help of IMF support

After the economic decline in 2012, the Bosnian economy is estimated to recover modestly in 2013. The new Stand-By Arrangement (SBA) with the IMF is expected to contribute to the economic recovery, as it allows access to USD 521m for a period of two years. This money is intended to help strengthening the coordination of domestic economic policies, sustain fiscal discipline, safeguard financial sector stability and improve the business climate. Despite the new SBA, negative spillover effects from the weak growth in the Eurozone create uncertainty on the country’s near-term economic outlook. Furthermore, the complex process of structurally reforming Bosnia’s business environment contributes to the uncertainty. Only when reforms are approved, the country will be able to attract more foreign direct investment that will help to diversify the economy, in turn, should reduce both the high level of unemployment and external deficits.

Factsheet of Bosnia and Herzegovina
National facts of Bosnia and HerzegovinaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

The history of Bosnia and Herzegovina is characterized by a devastating three-year war that followed its declaration of independence from the former Yugoslavia in the early 1990s. With the end of the war and the implementation of the Dayton Peace Accords in 1995, two separate entities were established; the Bosniak-Croat Federation of Bosnia and Herzegovina and the Bosnian Serb Republic, Republika Srpska. Both entities have their own government including an own president, government, parliament and police. On top of these two entities, a multi-ethnic, joint government was created. The presidency of this Central Bosnian government is rotating between the three ethnical groups. Besides the two entities and central government, the district of Brcko, represents a neutral area under joint authority of the Bosniak, Bosnian Croat and Serb community. Together with the Dayton Peace Accords, the Office of the High Representative (OHR) was established. The authority is meant to supervise the implementation of civilian aspects of the Dayton Peace Accords.

Although Bosnia experienced a slight economic recovery after the war, the country is still among the poorest European countries, with a high level of corruption according to European standards and a low level of human development. According to Eurostat, Bosnia and Herzegovina is moreover the poorest country within Europe in terms of GDP per capita. The services sector is with 66% of GDP the greatest contributor to Bosnia’s GDP. Nevertheless, the country’s banking systems is currently controlled by foreign banks, mainly from Austria and Italy. Furthermore, the Bosnian economy heavily relies on the export of metals, which accounts for 38% of the country’s exports. 

Economic indicators of Bosnia and Herzegovina
Economic indicators of Bosnia and HerzegovinaSource: EIU
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