Economic studies
Bosnia and Herzegovina

Bosnia and Herzegovina

Population 3.8 million
GDP 4140 US$
C
Country risk assessment
B
Business Climate
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Synthesis

major macro economic indicators

  2014 2015  2016 (e) 2017 (f)
GDP growth (%) 1,1 3,1 2,5 3,0
Inflation (yearly average) (%) -0,9 -1,0 -0,7 1,1
Budget balance (% GDP) -2,9 -0,1 -0,8 -0,8
Current account balance (% GDP) -7,5 -5,6 -5,3 -5,9
Public debt (% GDP) 44,0 44,7 44,2 43,2

 

(f) Forecast

STRENGTHS

  • IMF financial aid
  • Substantial remittances from workers abroad
  • Signing of the Stabilisation and Association Agreement between EU and Balkans

WEAKNESSES

  • Limited diversity in exports
  • High unemployment
  • Size of the informal sector
  • Shortcomings in terms of infrastructure and business climate
  • Institutional and ethnic fragmentation

Risk assessment

Economy sustained by consumption and investment

Growth in 2017 is likely to remain steady at a moderate level. The key driving forces will be private consumption and investment. Inflation is expected to return in 2017, acting as a brake on any growth in consumption by reducing real wages. Remittances from workers abroad will however remain at a high level, despite a slowing in the rate of growth (2.9 % in 2017 compared with 5.1 % in 2016), and rising employments are likely to mitigate the wage effect on consumption. Public investment should continue on its upwards trajectory that has begun in 2016 and made possible thanks to finance provided by the European Bank for Reconstruction and Development, Kreditanstalt für Wiederaufbau, the German development bank, and the IMF. Private investment is expected to remain at a low level against its potential and will continue to be limited in a changeable business climate and an inflexible employment market, although significant investments in tourism and energy sector infrastructures were made. There is likely to be a steady but limited growth in exports, reflecting the slow pace of the recovery in the European Union. The contribution of foreign trade to growth should however be negative with consumption stimulating increased imports. The service sector should help boost growth thanks to the performances of the trade, information systems and financial services sectors.

 

IMF aid to facilitate budget consolidation, but current account deficit remains high

The public accounts will remain in slight deficit in 2017. The reduction in the budget deficit has been achieved under the consolidation plan launched in 2015 and including improvements in tax collection. The budgetary consolidation has however been hindered by institutional complexity and the dispersal of expertise between the central State and the two Entities that form the Federation. In September 2016, the IMF agreed a three-year 555 million Euro Extended Arrangement. This plan should make it possible for the government to carry out reforms, whilst easing the financial constraints on the country. Thanks to this Arrangement, it should be possible to cut the level of public debt.

The current account deficit will continue at a high level in 2017. With the growth in imports resulting from strong domestic demand, the trade deficit (28.2% of GDP) will widen. Remittances from workers abroad and international grants will, as usual, help partly offset the trade deficit. FDI (2.9% of GDP) and short-term private sector debt (up 3.6% against 2016) will also have a significant positive impact on the balance of payments. Its currency reserves are likely to hold at a comfortable level, equal to approximately 7 months of imports.

 

A political environment marked by ethnic divisions and two coexisting governments

Following the 1995 Dayton Accords, Bosnia Herzegovina was divided into two distinct autonomous entities: The Federation of Bosnia-Herzegovina, predominately Bosniak (Muslim) and Croat, and the Serb Republic of Bosnia. The State is headed by a collegial Presidency that is representative of the three "constitutive peoples" with an alternating presidency every 8 months. The Constitution grants only very limited powers to the central State and responsibility for foreign and monetary policy, transport and defence. The complexity of public administration has resulted in deficiencies in terms of governance and weakened the power of the central executive.

Municipal elections were held in October 2016. There has been very little change in the political stratification following these, with the positions of the nationalists confirmed in each of the entities. The political instabilities remain, with the Bosniak Muslim politicians attempting to increase the role of the central government, whilst Croat politicians strive to establish their own autonomous entity, and the Serb politicians work to block the legislative process. The announcement of the extension of the IMF program should help to encourage the Croat and Serb parties to fulfil their commitments in terms of the fiscal reforms to be implemented. There will be general elections for both the federal Presidency and the two entities in October 2018. These elections are likely to be a critical test for the current governments and should pass judgement on their performances in terms of the implementation of the reforms agreed as part of the Stabilisation and Association Agreement.

 

 

Last update : January 2017

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