Bosnia Herzegovina country profile

Economic structure

Bosnia and Herzegovina is a small economy. According to the Central Bank of Bosnia and Herzegovina official GDP reached around EUR 9.2  billion in 2006, which would be approximately 85% of pre-war level. The services sector accounts for a large part of the economy, 64.9% of GDP, while industry accounts for 24.7% and agriculture for 10.4.% of GDP. Bosnia and Herzegovina is a very open economy, where the ratio of exports and imports of goods and services to GDP in 2005 equalled 87%. However, the high ratio is driven mainly by imports. The EU is the main trading partner, accounting for 69.4% of Bosnia and Herzegovina’s exports and 60.20% of its imports.

Structural reforms

Privatisation has made some progress in Republika Srpska, but remains limited in the Federation. The size of the public sector remains large. Reluctance to transfer competencies from entities to state political/administrative level persists. Coordination and efficiency problems remain, and improvement is needed at all levels. A few institutions and functions have been transferred to state level, for example a state ministry of defence and a state-level Indirect Taxation Authority (ITA) were created.

The banking sector has continued to expand significantly and total assets increased from 58% of GDP in 2003 to 80% in 2005. The banking system is one of the sectors in Bosnia and Herzegovina where the most rapid reforms and structural transformation have taken place. State ownership in this field substantially declined as a result of privatizations. Banking supervision is conducted by two separate entity banking agencies and is coordinated by the Central Bank.

Bosnia and Herzegovina has started its process of negotiation to join the World Trade Organisation (WTO). Bosnia and Herzegovina is part of the regional free trade agreement concluded in the framework of an enlarged and amended Central European Free Trade Agreement (CEFTA). Bosnia and Herzegovina benefits from autonomous trade measures introduced by the EU in September 2000 which allow more than 95% of all exports (including agricultural products) to enter the EU duty and quota free.

Macroeconomic situation

GDP growth remained robust in 2006, at 6.2 %. The economy continued to be based strongly on raw materials and related manufacturing. Rising raw material prices as well as volume increases played an important role in supporting growth. Privatisations, mainly in the Republika Srpska, also triggered some production increases in other sectors. In the Republika Srpska total industrial production rose by nearly 20% in 2006. The Federation experienced a more moderate growth rate of industrial production of 7.5%.

Inflation (Retail Price Index) reached 7.0% in 2006, compared with only 2.8 % in 2005. This increase was mostly due to the introduction of VAT. Upward inflationary pressures have thereafter decreased to 1%. Inflation rates in the two entities have been converging over the last five years, but inflation remains higher in the Republika Srpska.

According to official figures, unemployment amounted to 44.2% in 2007. However, this figure overestimates true unemployment. According to the Labour Force Survey conducted in April 2007, unemployment was estimated at 29%. Taking informal employment into account, unemployment is estimated to be closer to around 20% of working-age population, although no recent official estimate is available.

The consolidated budget balance turned from a deficit of 0.6% of GDP in 2004 to a surplus of 0.9% in 2005. This change stemmed from stronger sales and excise tax revenues and a reduction in expenditures. Nevertheless, the state and entity budgets for 2006 were expansionary and the surplus has therefore dropped to 0.7% of GDP. Despite some rebalancing of budgets in mid 2006, government expenditure is therefore set to increase from an already high level of around 50% of GDP.

The current account deficit almost halved from 19.8% of GDP in 2006, primarily due to a reduction of the trade deficit by around 11 percentage points of GDP from 53-42% of GDP.

Inflows of foreign direct investment (FDI) decreased from over 7% of GDP in 2004 to 3.7% in 2006, mainly as a result of lower privatisation-related inflows. However, in the first 7 months of 2007 FDIgrew to above 10% of  GDP, partly as a result of a privatisation of Telekom Srpska and a pick-up in green-field investments. External public debt continued to decrease and reached 23% of GDP at end of 2006. However, total external debt increased (as private sector borrowing rose) and total debt was estimated to be close to 55% of GDP.

Relation with International Financial Institutions

The International Monetary Fund (IMF) stand-by arrangement adopted in August 2002 (approx. USD 100 million) was successfully concluded in February 2004. The programme focused on policies to achieve post-reconstruction growth and further significant fiscal consolidation. A new stand-by agreement has not been concluded.

After an initial post-war strategy based on reconstruction needs, the World Bank operations’ emphasis has shifted towards helping Bosnia and Herzegovina achieve sustainable growth. In September 2004, the World Bank adopted its Country Assistance Strategy for 2005-2007, which focuses on reforms in the areas of public finance and administration, private sector development and key social and economic infrastructure. The total volume of the assistance package is USD 120 million. A new strategy is being prepared.

The European Bank for Reconstruction and Development (EBRD) is currently the largest tender in Bosnia and Herzegovina. As of 1 August 2006, the EBRD had signed 47 investments in the country, totalling EUR 554.5 million. This has helped to generate an additional EUR 770 million from other sources. A total of 30% of investments are in the private sector.

More details on the economic situation can be found in the Candidate and Pre-Accession Countries' Economies Quarterly (CCEQ) published by the European Commission.