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Bosnia and Herzegovina

Published on: 20 May 2019

Capital Sarajevo
Population (million) (2016) 3.8
GDP (current USD billion) (2017) 16.8
GDP per capita (current USD) (2017) 4,409
Life expectancy (years) (2015) 76.4

History and Politics

Bosnia and Herzegovina declared sovereignty in October 1991 and independence from the former Yugoslavia on 3 March 1992 after a referendum boycotted by ethnic Serbs. The Bosnian Serbs – supported by neighboring Serbia and Montenegro – responded with armed resistance aimed at partitioning the republic along ethnic lines and joining Serb-held areas to form a “Greater Serbia.” In March 1994, Bosniaks and Croats reduced the number of warring factions from three to two by signing an agreement creating a joint Bosniak-Croat Federation of Bosnia and Herzegovina. On 21 November 1995, in Dayton, Ohio, the warring parties initialised a peace agreement that ended three years of interethnic civil strife (the final agreement was signed in Paris on 14 December 1995).

The Dayton Peace Accords retained Bosnia and Herzegovina’s international boundaries and created a multiethnic and democratic government charged with conducting foreign, diplomatic, and fiscal policy. Also recognized was a second tier of government composed of two entities roughly equal in size: the predominantly Bosniak-Bosnian Croat Federation of Bosnia and Herzegovina and the predominantly Bosnian Serb-led Republika Srpska (RS). The Federation and RS governments are responsible for overseeing most government functions.

Additionally, the Dayton Accords established the Office of the High Representative to oversee the implementation of the civilian aspects of the agreement. The Peace Implementation Council at its conference in Bonn in 1997 also gave the High Representative the authority to impose legislation and remove officials, the so-called “Bonn Powers.” An original NATO-led international peacekeeping force (IFOR) of 60,000 troops assembled in 1995 was succeeded over time by a smaller, NATO-led Stabilization Force (SFOR). In 2004, European Union peacekeeping troops (EUFOR) replaced SFOR. Currently, EUFOR deploys around 600 troops in theater in a security assistance and training capacity.

Macroeconomic Environment

Bosnia and Herzegovina’s economy has been driven by postwar reconstruction. Trade is an engine of growth, but the overall entrepreneurial environment remains one of the region’s most burdensome, hindering the emergence of a dynamic private sector. The highly decentralized government hampers policy coordination and reform, while excessive bureaucracy, weak rule of law, and market segmentation discourage foreign investment. Public perceptions of government corruption and misuse of taxpayer money motivate many to remain in the large informal economy.

The combined value of exports and imports is equal to 86.9 percent of GDP. The average applied tariff rate is 1.2 percent. The government’s official policy is to treat foreign and domestic investors equally under the law. 

Increasing macroeconomic stability, low inflation rates (below 1% in each of the past three years) and fiscal consolidation have had a positive impact, both in overall terms and on net foreign direct investment, which increased from €161.1 million (3.2% of GDP) in 2000 to €344.4 million (5.2% of GDP) in 20041 . However, two risk factors from a macroeconomic point of view remain to be addressed, namely the high level of public expenditure (reaching 46% of GDP in 2003) and external imbalances2 . Trade liberalisation, in particular with the (Southeast) European region, has opened up the economy but has resulted in a rapid growth in imports rather than exports. In fact, except for a few niche sectors, the export performance of Bosnia and Herzegovina has largely failed to respond to the new market conditions. Consequently the trade deficit has risen to around 35% of GDP during the past four years, mainly because of remittances.

Supported primarily by consumption and to some extent by public investment, economic growth is projected to strengthen to about 4% by 2020. As BiH’s reform agenda advances, a moderate rise in exports is expected, but strong demand for imports implies that net external demand will continue to be a drag on growth. Remittances are likely to remain stable, and together with progress on reforms, will underpin a gradual pickup in consumption, which will remain a major driver of growth. Investments in energy, construction, and tourism will support investment growth generally, as well as job creation in those sectors. Because of these dynamics, real GDP growth is projected to build up gradually from 3% in 2017 to 3.2% in 2018 and up to 4% in 2020. Although external deficits continue to be moderate, on the fiscal side the tax burden is high, and public spending is inefficient, as evidenced by poorly-targeted benefits. Fiscal consolidation and provision of an effective safety net will not be effective if structural rigidities in spending are not addressed— especially the high public wage bill. However, support from international partners can help the BiH authorities to deliver on their challenging reform agenda. Without continued implementation of structural reforms, it would be difficult to address rigidities in public employment, pensions, and debt.

Labor Market

The process of change in Bosnia and Herzegovina has been slower and more painful than in most other transition countries. As a result, several distortions have been created. In the absence of significant new opportunities, workers with formal employment contracts in old enterprises cling to their workplaces, even if the jobs are unpaid and offer no long-term prospects. Many others have been caught in the middle of this slow transition and are performing different temporary jobs when opportunities arise, often in the informal economy. The Labour Market in BiH is characterized by a high share of informal employment as well as high inactivity level of working age population. There is a decreasing trend in the number of the unemployed while the labour demand is still lower than in the pre-recession period. In addition to being extremely high, what particularly causes concern is that the unemployment rate is mostly long-term, accompanied by extremely high inactivity rate of the BiH population.

The number of persons registered as unemployed in Bosnia and Herzegovina as of 31 May 2018 amounted to 450,067. 
The largest share in registered unemployment continues to be made up of persons with third level of education: skilled workers (32.44%) and unskilled workers (27.81%).
Registered unemployment rate in April 2018 was 36.5% which is a drop of 0.5 percentage point in comparison to March 2018.

The European Union and other donors have invested significant funds in Bosnia and Herzegovina in building the capacities of local stakeholders so that they can effectively address a wide range of local labour market needs. Now these capacities need to be put to use in an intervention that adopts a local economic development approach through supporting Local Employment Partnerships (LEPs).

The implementation of new labor laws in both BiH entities, and continuation of support schemes for first-time job seekers are expected to improve labor markets outcomes in the coming years, hence also supporting poverty reduction.

Banking System

The banking sector in Bosnia and Herzegovina is regulated by Entity Banking Laws, which are largely harmonized, regulating the establishment, operation, management and supervision of commercial banks in Bosnia and Herzegovina. The Central Bank of Bosnia and Herzegovina (CBBH) has a coordinating role in banking supervision, which is realized through cooperation with the Banking agency and is based on regular exchange of information and consultations on the banking sector and on financial stability issues. In June 2009, in order to support the banking system in the domestic economy The Memorandum of Understanding, under the name of “Vienna Initiative”, was signed in Vienna with representatives of six-banking groups (Raiffeisen International, Hypo Alpe Adria, UniCredit Bank Austria, Volksbank International, Intesa Sanpaolo International, NLB group) operating in Bosnia and Herzegovina. They have agreed that these banks in BiH will keep the level of exposure and continue their activities as they did before the financial crisis. In 2009, the banking sector in BiH, in addition to the pronounced consequences of the global economic crisis, managed to maintain stability and successfully respond to customer requirements, thus maintaining confidence in the banking system. The consequences of the global financial crisis of 2008 and 2009 were manifested through the withdrawal of deposits in foreign currencies and through the conversion of cash and deposits in domestic currency into cash in foreign currencies. This outburst jeopardized the banking sector’s liquidity, so the CBBH undertook a series of measures to help banks solve the liquidity problem. Another consequence of the economic downturn in the banking sector is the employment reduction.

Healthcare

System structure Health care system in Bosnia and Herzegovina is characterized by extreme fragmentation considering the fact that the system is organized in various ways in the Federation of BiH, Republika Srpska and Brčko District. In terms of the organizational structure and management, this system operates through 13 completely different sub-systems at the level of entities, cantons and Brčko District, which significantly complicates the way health care services are provided, increases management and coordination costs and adversely affects the rationality of management of healthcare institutions, primarily through the prism of untapped opportuinities of economy of scope.

Social Welfare

The existing social assistance system produces inequalities among its users based on their place of residence (territorial inequalities) and based upon the social category to which the user belongs (status-based, i.e. category-based inequalities). Apart from significant criteria-based differences, the volume and profusion of social benefits among entities, inequalities which are a result of differently regulated social assistance systems on the cantonal level in FBiH represent a specific problem. As the amounts for permanent financial assistance for families vary between cantons, certain social services do not exist in some of them. The inequalities between different categories of social as the problem of insufficient coordination and integration of social policies with labor market policies, i.e. the insufficiently developed activation component of social measures, is what is largely neglected in present discussions on disadvantages and possible social protection system reforms.