Macroeconomic performance

Serious flood damage in mid-2014 has checked the modest economic recovery. Feeble domestic demand has been the main drag on growth in Bosnia and Herzegovina in recent years. Consumption continues to be negatively impacted by a weakened contribution from remittances – which are significantly below pre-crisis levels – and high unemployment, currently near 30 per cent. At the same time, weaker growth in the eurozone has negatively affected Bosnia’s exporting activity and capital inflows, although some improvement in exports occurred in 2013. For the year as a whole, GDP growth is estimated at 2.1 per cent. Growth in 2014 has been modest so far and the severe floods in mid-2014, which caused an estimated €2 billion (15 per cent of GDP) in damages, have been a huge setback for the country.

The IMF Stand-By Arrangement (SBA), approved in September 2012, was extended and augmented twice. The arrangement with the International Monetary Fund (IMF) is an important anchor for reforms. The 24-month, SDR 338.2 million (about €379 million) SBA was extended by nine months in January 2014, and augmented with an additional SDR 135.3 million (about €152 million). In June 2014, when the combined sixth and seventh reviews were completed, the amount of the SBA was augmented for a second time by SDR 84.6 million (about €95.7 million) to help the country cope with balance-of-payments problems arising from the flood damage. In September 2014 the IMF noted that the authorities would need more time for the implementation of policies required for consideration of the eighth review. Separately, in July 2014, donors and international financial institutions pledged €809 million to help the country meet financial needs arising from the floods.

The weak external environment and the devastating floods, combined with low competitiveness, will constrain economic performance in the short term. Disruption from the floods will delay the country’s economic recovery. Efficient and prompt use of donor support will be crucial for mitigating the fallout from the floods and supporting post-flood reconstruction. In the medium term, the economy remains vulnerable on many fronts, not only because the whole region is struggling, but also because of the poor investment climate and lack of competitiveness, which are major deterrents to investment. The complex political situation and dysfunctional central institutions continue to hinder the implementation of a comprehensive and much-needed reform agenda.

Major structural reform developments

EU approximation remains stalled. Bosnia and Herzegovina has not yet made constitutional changes to implement the Sejdic-Finci verdict from the European Court of Human Rights and has not established a coordination mechanism at the state level for EU affairs. This has hampered progress in the EU approximation process in the past year. At the end of 2013, the European Commission cut funding for Bosnia and Herzegovina under the Instrument for Pre-Accession Assistance programme, referring to the above-mentioned problems. However, the European Union has been working with key domestic and international stakeholders on a “Compact for Growth and Jobs” initiative in the country. The compact, which was finalised in mid-2014, has developed a set of concrete proposals, mostly relating to business environment improvements, tax reforms, the fight against corruption and social welfare reform.

Progress has been made towards World Trade Organization (WTO) accession. The authorities are now confident that the necessary final steps for WTO membership can be completed in 2014. The remaining laws to be adopted are a new law on trade in the Federation and a country-wide by-law on genetically modified organisms (GMOs).

Business environment reforms have advanced but doing business remains difficult. Business registration has picked up in the Republika Srpska following the establishment of a one-stop registration shop in late 2013. A new system for online registration is also being introduced in the Republika Srpska. In the Federation, notary tariffs for setting up new businesses have been reduced. Also, the Federation’s parliament has approved a new inspection law and amendments to the Law on Business Registration, but a new law on companies is still awaiting parliamentary approval. Despite these steps, doing business remains problematic in Bosnia and Herzegovina, as evidenced by the country’s latest score on the World Bank Doing Business 2015 report, with the country ranking 107th among 189 countries on the ease of doing business index, the lowest among its regional peers.

A significant large-scale privatisation programme remains in the Federation. Key assets in which stakes could potentially be sold include two power generation firms (Elektroprivreda BiH and Elektroprivreda HZ HB) and two telecommunications operators (BH Telecom and HT Mostar). Although the ownership structure of the largest exporter in Bosnia and Herzegovina – aluminium smelter Aluminij – was resolved in September 2013, there are no signs of movement on selling off the Federation’s 44 per cent stake. Other assets for potential sale include major companies in the construction, manufacturing and agriculture sectors.

The construction of key energy and road infrastructure is advancing. Projects under way in the energy sector include: the 300 MW Stanari and 400 MW Ugljevik 3 thermal power plants; the 51 MW wind farm, Trusina; new power plant blocks in Tuzla; and a few smaller hydropower plants. In addition, upgrades to the country’s road transport network continues, including the construction of the west-east Banja Luka-Doboj motorway in the northern part of the country, and preparatory works for the construction of the north-south Banja Luka-Mliniste (to Split) motorway connecting the continental parts of the country with the Adriatic Sea. Furthermore, progress has been made on a tender for the first public-private partnership in the transport sector. The tender, launched in August 2012, is for the construction of the part of the Trans-European Corridor Vc that sits between the Croatian border and Doboj. In April 2014 a detailed bid was submitted by a consortium led by French firm Bouygues and Austria’s Strabag.

The banking sector in Bosnia and Herzegovina remains liquid with relatively high levels of capital, but the level of non-performing loans is rising. Foreign banks account for over 90 per cent of total assets in the Bosnia and Herzegovina financial system, but the banking sector has not been subject to large credit outflows to parent banks, and the system remains fairly liquid. However, NPLs are steadily increasing and reached 15.5 per cent of total loans as of mid-2014 compared with 5.9 per cent in 2009. These reflect the still weak economy and constitute a significant drag on bank lending.

Labour market reforms are being prepared. Draft employment laws are being prepared in the Federation and the Republika Srpska. The authorities have committed to bringing the new legislation before their respective parliaments by the end of 2014. They have also committed under the IMF programme to ensure that the legislation includes certain key features, such as promoting differentiated wage-setting based on skills, qualifications, experience and performance, reducing hiring disincentives, stepping up inspections and penalties for law violations, and protecting workers’ rights. Securing buy-in from social partners for these reforms remains a significant challenge. The aim is to make the labour market more flexible, with a view to reducing the country’s high rate of unemployment which, as of mid-2014, stood at just below 30 per cent.