BiH
Bosnia and Herzegovina Macroeconomic Snapshot1. Overview:
Economic growth in BiH in 2009-10 will be adversely affected by reduced demand from the country's main trading partners. In July 2009, IMF approved a US$1.5 billion loan for Bosnia to help the country cope with the impact of the global crisis. Political analysis denotes that strict fiscal requirements imposed by the IMF can potentially spark social unrest and further destabilize the political situation. In the Muslim-Croat federation, the government found difficult to comply with the IMF conditions and curb spending on war veterans, who comprise a majority of the electorate. Social benefits currently account for 40% of its budget.
2. Growth Performance:
Real GDP growth was 5.4% in 2008. In 2009, BiH is facing declining private consumption, due to public-sector wage cuts, reductions in social welfare benefits and increased unemployment. The recession in Western Europe has already affected the industrial output and exports. Access to credit has become more restricted, as local subsidiaries of foreign-owned banks are facing the repercussions of the financial crisis. EUI forecasts a GDP contraction by 3% in 2009, followed by a modest recovery in 2010.
3. Balance of Payments:
The current account deficit is set to narrow due to slowing import growth from 16% in 2008 to 7.9% in 2009. The C/A deficit in 2007 was fully covered by FDI, owing to large privatization programs. However, deteriorating financial conditions are likely to dampen FDI inflows and limit the region's access to other forms of external finance in 2009.The country depends heavily on remittance inflows that stood at 17% of GDP in 2006 and may decline by some 10-20% in the Western Balkans region in 2009. On the upside, six foreign banks operating in Bosnia committed in June to keep their subsidiaries in the country well capitalized in an attempt to ensure the stability of the banking system.
4. Inflation - Monetary Policy:
Contracting domestic demand is pushing inflation lower. EIU forecasts inflation averaging at a mere 1% this year, while 2008 CPI was forecasted at 7.4%. Monetary Policy is constrained by the currency board regime, whereby the Bosnian marka is begged to euro; consequently the Central bank has few monetary policy tools at its disposal. Under the current framework, it can only lower mandatory reserve requirements (from the current 14%) in order boost economic growth.
5. Fiscal Position:
Budget deficit is projected to deteriorate, with a forecast of -2.5% of GDP in 2009. Under the IMF deal the federation and its 10 cantons will have to make significant reductions in public expenditures and cut their consolidated budget by 207mn euros, about 10% of the annual budgets. IMF also denotes the urgency to tighten public sector wage policies, especially generous handouts to veterans of the 1992-95 war.
6. Business Environment:
The Institutional Investor Country Credit Rating improved, but the WB Control of Corruption and Index of Economic Freedom fell. This drop should be attributed to the decline in monetary and financial freedoms. According to the WEF Global Competitiveness Report, the three most problematic factors in doing business in Bosnia are inefficient government bureaucracy, policy instability and corruption. BiH ranks among the top 15 countries in the Doing Business Getting Credit Indicator, but it is among the bottom 30 in the starting a Business and Dealing with Licenses indicators.
7. Key Vulnerabilities:
The complex political structure of Bosnia complicates decision-making and hinders reforms initiatives. Bosnia currently ranks 92nd out of 180 countries in the Transparency International's Corruption Perception Index, the worst position of Southeast Europe countries. Whereas postwar reconstruction was based on generous foreign aid, such aid has sharply decreased during the last years. Unemployment rate is reported around 40%.