Bosnia and Herzegovina is a middle-income country with an official gross national income per capita of US$45,300 in 2008 (GNI, Atlas method). Approximately 53 percent of GDP is created in the service sector, 23 percent in industry, and 8 percent in agriculture.
The Dayton Peace Agreement, which ended the war in Bosnia and Herzegovina in 1995, established the current governance structure in the country. The structure is comprised of a state level Council of Ministers and two entities that enjoy substantial autonomy - the Federation of Bosnia and Herzegovina (FBH) and Republika Srpska (RS). An autonomous Brcko District was added to the structure in 1999.
The war caused extensive destruction to the people and the country's economy. Real GDP plummeted by 80 percent, and over 2 million people - nearly half the prewar population - became refugees, either abroad or internally. In 1996, a major donor assistance program set the stage for reconstruction and economic recovery. Overall, donor commitments were estimated at US$ 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) and membership in the World Trade Organization (WTO).
The World Bank Group has played a significant role in this development story. 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.” In addition to IDA commitments (credits and grants) totalling over US$ 1.27 billion, the IFC invested nearly US$ 250 million, and about US$ 310 million was provided in guarantees from MIGA. This constituted one of the largest per capita assistance programs received by any post-conflict country.
Economy
Developments Since Independence
Since 1995, Bosnia and Herzegovina has seen robust economic growth. The growth was initially driven by reconstruction efforts, but as of late it is mostly driven by private sector investments. 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 and amounted to 3.8 percent in 2008 (year-on-year), despite the accelerated growth during the first half of the year as a result of fuel and food price growth. The level of external public debt has been relatively low and shrinking, but it has been widening with the onset of the global crisis; it was estimated at 17 percent of GDP in 2008 and is expected to increase to 19.5 in 2009. Until recent years, the size of the current account deficit was estimated at around 20 percent and was seen as a significant external risk. However, the deficit has been reduced in recent years because of improved accounting at the Central Bank, as well as rapid growth of exports and remittances; it amounted to 13 percent of GDP in 2007 and around 14.5 percent in 2008 (widened in 2008 largely as a result of higher fuel and food prices). Foreign reserves have steadily grown until October 2008, but have since started shrinking, albeit at a pace that is not alarming. The growth of exports was also faster than anticipated, reaching 38 percent of GDP in 2007.
While significant progress has been made on structural reforms since 1995, the reform pace over recent 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 a number of other countries in the broader region. At almost 50 percent of GDP, government spending is high and rather inefficient.
Recent Economic Developments
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 by around 6 percent in 2006 and even accelerated to 6.8 percent in 2007. Preliminary estimates for 2008 put the 2008 GDP growth to 5.4 percent. The growth of BH exports in recent years has been remarkable, surpassing that of all other countries in the Balkans region. Exports growth was 36 percent in 2006, 15 percent in 2007 and 13 percent in 2008. While exports are still dominated by steel and aluminum, the shares of more technologically sophisticated products have been increasing, as evidenced by rapid growth in exports of machinery, car parts, and furniture. However, all of the above export industries are suffering from weak export demand.
Poverty decreased in recent years but it still remains a concern. The analysis of the 2007 data shows a drop in poverty rate to 14 percent from 18 percent in 2004, but another 20 percent of the population is at risk of falling into poverty in case of an income shock. As most poverty is income related, employment growth is the solution for the bulk of the poverty problem. However, employment is even likely to shrink in 2009 as a result of the global crisis. To mitigate poverty, the authorities will have to make efforts to improve the targeting of social assistance, as the vast majority of social benefits are currently not targeted to the poor.
As to be expected with a small open economy, the global economic crisis has spread quickly in BH over recent months, reversing some of the effects of strong growth of the last years and putting at risk macroeconomic stability and some important economic reforms. The economy has clearly entered a recession and GDP is expected to drop 3 percent in 2009. Specifically, during the first half of 2009, exports dropped 44 percent and imports dropped 45 percent (yoy). In the same period, indirect tax revenues dropped almost 15 percent. The current account deficit is expected to shrink to below 9 percent in 2009. The Government has agreed a Stand by arrangement with the IMF in the amount of US$ 1.6 billion to deal with the effects of the crisis.
Annual Real GDP Growth
NOTE: The GDP Growth for 2008 (6%) is a World Bank staff estimate.
Challenges Ahead
In the short term the economic top priority for BH is to mitigate the impact of the global slowdown on the real economy. Beyond that, 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 to compete with other transition economies, as it strives for deeper integration into European and global markets. In the medium run, improving the skills base of BH labour force will be a key determinant of competitiveness. More short-term reforms include efforts to reduce the cost and duration required to comply with regulations to start and run a business further privatization of strategic enterprises, as well taking measures to enable restructuring and exit of poorly performing 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 a single economic space and a single domestic market are also needed, particularly to support BH EU aspirations.
Improving the effectiveness and efficiency of public spending should also be made a priority. Existing expenditure levels are too high and their structure is largely neither growth nor poverty-reduction oriented. The composition of spending can be improved by introducing better control of the public wage bill, improving the targeting of social assistance to benefit the most vulnerable, increasing the efficiency and raising the level of public investments. Above all, the efficiency of spending should be enhanced through better controls and improved budgeting processes. 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.
Bosnia and Herzegovina joined IBRD 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, gasification, de-mining, housing, health, education, public works, agriculture, and micro-credits. During the period of reconstruction and recovery, the World Bank provided about 18 percent of total donor pledges ($5.4 billion) and leveraged another seven percent in project co-financing. 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 subsequent CASs 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 (2004-2007), 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.
International standards are being met in solid waste management.
Overall, since 1996, the World Bank has committed over US$1.31 billion (US$ 1.24 IDA credits; US$ 25 million in IDA grants, US$ 18.3 million in GEF grants; and US$ 25 million IBRD loan) to BH through 62 projects.
The current Country Partnership Strategy (CPS) for fiscal years 2008-2011 which was endorsed in December 2007, supports country's 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 marks a transition from an exceptional level of IDA resources to IBRD lending. The new CPS for Bosnia and Herzegovina estimates provision of about US$ 380 million in IDA and IBRD lending during FY 2008-2011 period.
World Bank lending for 2010-11 has been reprogrammed in May 2009 to assist the Government mitigate the impact of the global economic crisis. The revised program includes a US$70 million (IBRD) SME Enhancement credit line; and (ii) a US$100 million DPL (blend IDA-IBRD), which will complement the recently approved IMF SBA (US$ 1.57 billion) and help the government implement much needed reforms in the social protection system.
World Bank Commitments (US$ millions)
The World Bank portfolio in Bosnia and Herzegovina currently includes 14 active projects (11 IDA credits, 1 IBRD loan, and 3 GEF grants), with total commitments of US$ 247.4 million.
NB: Lending is per fiscal year, July 1-June 3
Active Portfolio by Sector as of November, 2009 (US$ millions)
The World Bank portfolio in Bosnia and Herzegovina currently includes 14 active projects (11 IDA credits, 1 IBRD loan, and 3 GEF grants), with total commitments of US$ 247.4 million.
The Country Brief report provides more data on all World Bank products for Bosnia and Herzegovina
RSS