Economic Analysis
Bosnia and Herzegovina

Bosnia and Herzegovina

Population 3.5 million
GDP per capita 6,712 US$
C
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Synthesis

major macro economic indicators

  2020 2021 2022 (e) 2023 (f)
GDP growth (%) -3.2 7.5 3.9 2.0
Inflation (yearly average, %) -1.1 2.0 14.0 8.0
Budget balance (% GDP) -4.1 0.7 0.5 1.1
Current account balance (% GDP) -3.3 -2.3 -4.0 -3.5
Public debt (% GDP) 36.7 35.4 32.0 31.0

(e): Estimate (f): Forecast

STRENGTHS

  • Significant transfers from expatriate workers
  • Candidate status for EU membership since 2022
  • Currency board ensuring anchoring with the euro
  • Tourism (12% of employment and 10.5% of GDP in 2019) and hydroelectric potential (already 37% of electricity produced)
  • Member of various trade agreements such (CEFTA,  Regional Common Market of 6 Balkan countries)
  • Wage competitiveness

WEAKNESSES

  • Institutional, regulatory, economic and community fragmentation
  • Lack of public investment
  • Exports sector undiversified
  • Corruption, and defective rule of law
  • High emigration, lack of skilled workforce
  • Large informal sector (one-third of the economy), low labour force participation (48%), high youth unemployment (one-third)
  • Dependent on external financing

Risk assessment

Moderation in economic activity

The economy should continue to experience modest growth in 2023, in particular for domestic demand, its main growth driver, accounting for 91% of GDP in 2021. Household consumption (71% of GDP) will contribute modestly due to continued inflation. Indeed, although it is expected to recede below the double-digit mark in 2023, inflation is expected to remain well above its 2021 and pre-pandemic levels, and will be higher than the increase in net wages, despite a sharp increase of the latter to more than 12% during 2022. As a result, real wages will fall and the loss of household purchasing power will slow household consumption. In 2022, the central bank (CBBH) imposed aggressive monetary policy by reducing its key rate in an attempt to contain inflation, and carried out subsequently incremental increases every month over six months. In order to continue its fight against inflation and maintain its peg with the euro, the CBBH will have to further tighten its monetary policy to keep in step with the European Central Bank (ECB), which is expected to do the same. Despite a slight reduction in the key rate in November 2022 (from 3.77% to 3.66%), the Governor of the CBBH, Senad Softić announced in a press release published at the end of December that the era of low nominal interest rates was over. Growth in private investment (28% of GDP, 31% with foreign direct investment (FDI)) is expected to slow, not only via domestic investment, but also as a result of a slowdown in FDI flows from Switzerland, Turkey and Great Britain, which were the main investors in 2021. Last, net imports will contribute negatively to growth.

 

Persistent budget surplus and current account deficit

The current account will be the most affected by a deficit in the trade balance. The latter can be explained by a slowdown in external demand in key sectors (furniture, wood, iron and steel), but also by more imports of energy, minerals and weapons. The balance of services will help reduce the current account deficit: tourism, one of the two main components, experienced significant growth in inflows during 2022, but did not return to pre-pandemic levels, which leaves growth potential in 2023. On the other hand, the contribution of transport services, which saw record growth in 2022, will fall as the increase in 2022 was mainly attributed to the increase in transport costs linked to the price of oil derivatives. Primary income (notably including investment expenditure and income from employees abroad) will contribute negatively to the current account balance, but this impact will be small. Expatriate remittances will have a positive impact on the current account, but they will not be enough to offset the deficit. In addition, the inflow of rebates will be directly impacted by weaker growth of European Union countries.

With regard to public finances, the government should seek to continue the budgetary consolidation provided for in the overall public finance management strategy published for 2021 to 2025, which consists of reducing the expenditure of the three entities of the three constituent entities of the country (Central State, Federation of Bosnia and Herzegovina and Republika Srpska). Easing inflation will have an impact on expenditure, but also on state revenue. On that score, if government aid were reduced, incomes would also be reduced, because the surplus of receipts collected in 2022 resulted mainly from indirect taxation (in particular value added tax), which increased with inflation. The economy should nevertheless maintain a budget surplus in 2023. In 2022, public debt, as well as external debt as a % of GDP decreased (despite higher nominal levels), benefiting from high deflators, i.e., the ratio between nominal GDP and real GDP. This effect will be mitigated in 2023, which will contribute to raising the share of these two indicators in the country's GDP. The need for public funding is mainly provided by public, multilateral or bilateral partners as the government does not have access to financial markets.

 

Fractured and identity-based political and institutional system

Following the Dayton Agreement (1995), Bosnia and Herzegovina was divided into two autonomous entities: the Federation of Bosnia and Herzegovina (FBiH), which is predominantly Bosniak and Croat, and the Republika Srpska, to which is added the centrally administered district of Brčko. The central state is headed by a collegiate presidency representing the three “constituent peoples” which rotates every eight months. In the October 2022 presidential elections, two candidates were elected from within the Federation of Bosnia and Herzegovina: a Bosniak candidate, Denis Bećirović, a member of the Social Democratic Party (SDP BiH), and a Croatian candidate, Željko Komšić, a member of the Democratic Front (DF) and one other candidate who was elected from the Republika Srpska, the Serbian Željka Cvijanović, a member of the Alliance of Independent Social Democrats (SNSD). The central government was elected in late January 2023, with the support of 23 out of 42 parliamentary members of the House of Representatives (representing 8 parties). The approach of the new government is pro-European: the leader of the Council of Ministers, Borjana Kristo, a Croatian national and member of the Croatian Democratic Union of Bosnia and Herzegovina (HDZ-BiH), declared when taking office that he wanted to restart the integration process with the European Union.

In December 2022, the country was granted candidate status for EU membership. In January, the EU reiterated a request to Bosnia and Herzegovina to comply with EU rules, including the introduction of visas for Russian citizens. The request came on back of an increased presence of Russians on the country's territory after the Russian authorities decided to mobilise its citizens to fight in war with Ukraine.

At the end of January 2023, the French ambassador to Bosnia and Herzegovina announced that the country should harmonise its visa policy with that of the EU, in particular by introducing visas for Russians fleeing conscription to Bosnia, whence they can apply for asylum in an EU country. The announcement caused political dissension and risks sparking tensions within the country, which has bilateral agreements with Russia.

 

Last updated: June 2023

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