Country brief 2007 Updated April 2008
Bosnia and Herzegovina is a middle-income country with an official gross national income per capita of US$3,240 in 2006 (GNI, Atlas method). Approximately 56 percent of GDP is created in the services sector, 29 percent in industry, and 9 percent in agriculture.
The Dayton Peace Agreement, which ended the war in Bosnia and Herzegovina in 1995, established the current governance structure in the country. The structure is comprised of a state level government and two entities that enjoy substantial autonomy - the Federation of Bosnia and Herzegovina (FBH) and Republika Srpska (RS). An autonomous Brcko District was added to the structure in 1999.
The war caused extensive destruction of physical capital and a huge loss of output. Real GDP plummeted by 80 percent, and over 2 million people - nearly half the prewar population - became refugees, either abroad or internally. In 1996, a major donor assistance program set the stage for reconstruction and economic recovery. Overall, donor commitments were estimated at US$ 5.4 billion.
Since the Dayton Peace Agreement, the country has made remarkable progress in post-conflict reconstruction, social integration, and state building. Based on its impressive economic recovery and sustained social stability, which have been supported by high levels of international assistance, the country can be considered a post-conflict success story. It is now working towards accession to the European Union (EU), membership in the World Trade Organization (WTO), and membership in NATO’s Partnership for Peace program.
The World Bank Group has played a significant role in this development story with commitments totaling more than US$ 1.1 billion of IDA credits and grants since 1996, nearly US$ 250 million original commitments from IFC, and about US$ 310 million in guarantees from MIGA. This constituted one of the largest per capita assistance programs received by any post-conflict country. The vast bulk of this support came in the reconstruction phase. A review carried out by the Independent Evaluation Group (IEG) in 2004 found the Bosnia and Herzegovina reconstruction program to be an example of “the Bank at its best.”
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Economy
Developments Since Independence
Since 1995, Bosnia and Herzegovina has had robust economic growth. The growth was initially driven by reconstruction efforts, but as of late it is mostly the result of private sector growth. GDP has more than quadrupled and merchandise exports have been growing 20 percent on average for the past 8 years. Inflation was moderate during this period remained below 3 percent in 2007 in spite of a one-off increase to 7.5 percent in 2006 due to introduction of the VAT. The level of public debt has remained relatively low and is currently around 20 percent. The size of current account deficit was until recent years estimated at around 20 percent and was seen as a significant external risk. However, improved accounting at the Central Bank has confirmed that the deficit is much lower than earlier estimated and is running at close to 10 percent. Foreign reserves have steadily grown to a safe level of 28 percent of GDP.
While significant progress has been made on structural reforms since 1995, the reform pace over the last two years has been slow and there is a large and overdue reform agenda. The banking sector has been largely privatized and modernized, and other financial sector reforms have been well advanced. Yet privatization of other state-owned companies has occurred at a slow pace, and the private sector’s contribution to GDP is still lower than in most other countries in the broader region. Early attempts at privatization have resulted in diluted ownership and weak governance, and large-company divestiture has been slow. Some privatized companies, however, have become major contributors to real sector growth. The government ought to be praised for a large degree of trade liberalization and the inclusion of Bosnia and Herzegovina into the regional free trade network through the CEFTA agreement.
Recent Economic Performance
Economic activity has remained robust in recent years despite slower implementation of reforms. As a result of earlier reforms, higher metal prices, and generally favorable external conditions, GDP growth increased to around 6 percent in 2006 and is likely to persist at that level in 2007. Exports have grown by as much as 36.5 percent in 2006 and are relatively well diversified. However, they are largely dominated by low-value-added products.
Confidence in the currency is high, as evidenced by steadily increasing local currency deposits. Successful rescheduling agreements have helped reduce external debt to sustainable levels. With net capital inflows exceeding the large current account deficit, foreign exchange reserves have increased, although at a somewhat slower pace of accumulation than in the past.
Despite high rates of growth and an impressive recovery, poverty still remains a concern. Its levels were estimated at around 18 percent, and a further 30 percent of all citizens are in danger of falling into poverty in the event of an income shock1. As most poverty is income related, employment growth is the solution for the bulk of the poverty problem. Growth in employment in recent two years has most likely made a dent in poverty numbers.
1The most recent estimates of poverty were made in the 2004 Living Standards Measurement Survey (LSMS)
Challenges Ahead
The most pressing economic reform challenges can be classified into two broad categories:
Improving competitiveness and fostering private sector-led growth.Faster reforms are needed for Bosnia and Herzegovina (ranked 105th by Doing Business 2008) to compete with other transition economies, as it strives for deeper integration into European and global markets. These reforms include faster registration of businesses, an improved inspection system, effective implementation of bankruptcy laws, and further privatization of strategic enterprises. The government should continue with the reforms of the tax system and should particularly aim to reduce the rates of social contributions. Further efforts towards the creation of single economic space and a single domestic market are also needed.
Improving the effectiveness and efficiency of public spending should also be made a priority. Existing expenditure levels are too high and should be rationalized. The composition of spending should be shifted towards growth-enhancing expenditure categories. Above all, the efficiency of spending should be enhanced through better controls and performance-based budgeting. To improve public sector efficiency, fiscal coordination ought to be strengthened between various levels of government. The capacity of public administration also ought to be strengthened should it be able to cope with these challenges.
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Program to Date
- Landmark Projects
- More projects
Bosnia and Herzegovina joined the World Bank and IDA in 1996, with membership retroactive to 1993. In the immediate postwar years, the Bank's first Country Assistance Strategy (CAS) in 1997 helped reinvigorate the reconstruction effort through a series of emergency projects.
Financial support was provided to a wide range of sectors including transport, power, de-mining, housing, health, education, public works, agriculture, and micro-financing. During the period of reconstruction and recovery, the Bank provided nearly 15 percent of total donor pledges ($5.4 billion) and leveraged another seven percent in project co-financing. The Bank assistance had a significant impact in restoring basic infrastructure and services, and creating pre-conditions for sustainable return of refugees and displaced persons, economic growth, and employment. Water supply, gas, electricity, and heating systems were restored. 82 primary schools were rehabilitated and textbooks provided to all primary schools in the country. 5 clinics and 15 hospitals were rehabilitated and equipment provided to 24 hospitals. About 1,100 kilometers of roads and 39 bridges were reconstructed. Over 320,000 microcredits were disbursed to entrepreneurs throughout the country helping create or sustain thousands of jobs.
Since 2000, with most basic reconstruction work completed and infrastructure levels raised to almost prewar levels, the Bank’s second CAS prepared in 2004 placed greater emphasis on fundamental structural reforms critical to the emergence of a market economy. In accordance with priorities outlined in the country’s Medium Term Development Strategy, the World Bank program focused on fostering private sector-led growth and employment, strengthening institutions and governance, reforming the public sector, and fostering social sector sustainability.
Since 1996, the World Bank has committed over US$1.1 billion to BH through 57 projects.
The proposed new Country Partnership Strategy (CPS) FY08-FY11 will support the country’s current priorities by focusing on two pillars:
(a) improving the environment for private sector-led growth and convergence with Europe;
(b) improving the quality of Government spending and the delivery of public services for the vulnerable.
The new CPS will mark a transition from an exceptional level of IDA resources to IBRD lending. The new CPS for Bosnia and Herzegovina estimates provision of US$ 50 million a year in IDA and IBRD lending during 2008 – 2011.
Trade and Transport Facilitation: The percentage of firms that stated that bribery was frequent at Customs dropped from 30% in 2002 to 15% in 2005.
Read moreThe CASfor fiscal 2005-2007 is anchored in the country’s first MTDS and links the Bank's strategy with the country's medium-term objectives. The strategy focuses on three key areas:
1. Improving public finance and strengthening institutions
2. Promoting sustainable private sector–led growth
3. Investing in key social and economic infrastructure
These three objectives are mutually reinforcing. To ensure a self-sustaining economy and a fiscally sustainable public sector in the medium to long term, the strategy strives to help government reduce the weight of the public sector in the economy. This is a prerequisite to giving the private sector room to grow and, thereby, stimulating productive activity, domestic private and public savings, and export growth.
Since 1996, the World Bank has committed US$1.1 billion to BH through 52 projects. The latest CAS for Bosnia and Herzegovina estimates provision of some US$30-40 million a year in lending during 2005-07.
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of October 2007
(US$ millions)
The Country Aggregate Reportprovides more lending data for Bosnia & Herzegovina
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World Bank Office
Fra Andjela Zvizdovica 1/17/B Tower
71000 Sarajevo, Bosnia and Herzegovina
Tel: (387 33) 251-500
Fax: (387 33) 440-108
Email: mail_to_bosnia@worldbank.org
Website: http://www.worldbank.org.ba
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