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COUNTRY ASSESSMENTS Transition Report 2012

BOSNIA AND HERZEGOVINA

HIGHLIGHTS OF THE PAST YEAR
Economic growth has been weak but some progress has been made on policies. Only minimal growth has been recorded over the past year. Following the nalisation of the state and entity budgets, progress was made towards re-engaging with the IMF, culminating in the signing of a new programme. Private sector involvement in the road sector is advancing. A tender for a public-private partnership (PPP) in the transport sector based on best international practice has been announced for a concession of a section of a key international transport corridor in Republika Srpska. Non-performing loans (NPLs) are rising in the banking sector, but liquidity remains sound. The level of NPLs still remains below that of some regional peers and the direct impact of the international nancial crisis on the local banking sector has been limited so far.

MACROECONOMIC PERFORMANCE Weak domestic demand, an unfavourable external environment and political stalemate have held back economic recovery. Following a year of anaemic growth in 2010, the economy showed some signs of revival in early 2011. However, weaker growth in the eurozone has negatively aected Bosnia and Herzegovinas exporting activity and capital inows in the second half of the year and the beginning of 2012. Exports fell by 8.6 per cent between Q2 and Q4 of 2011. At the same time, domestic consumption has remained subdued, largely owing to the austerity measures implemented by the authorities in the past two years as well as the weakened contribution from remittances, which are signicantly below pre-crisis levels. As a result, overall growth in 2011 was a modest 1.3 per cent. Ination remains low. The disinationary pressures that dominated much of the post-crisis period were reversed for a brief interval in early 2012, but ination has been on a generally downward path since, and it stood at 1.8 per cent in August 2012. A new Stand-By Arrangement (SBA) with the IMF was approved in September 2012. The 24-month US$ 520.6 million SBA will provide a buer against external shocks from the ongoing eurozone crisis as well as an anchor for important structural reforms envisioned in the country's 2012-14 economic programme. The new arrangement follows the expiration of a 36-month SBA, which was put on hold in 2011 due to the political stalemate that left the country without a central government for over 15 months after the October 2010 elections. The authorities are planning a budget decit of 3 per cent of projected GDP in 2012. The economic programme envisages continued scal consolidation accompanied by structural scal reforms to safeguard medium-term scal sustainability. The economic outlook for 2012 and 2013 remains bleak. The weak external and domestic environment will constrain growth in Bosnia and Herzegovina this year and beyond. GDP growth is forecast at close to zero per cent in 2012 and only slightly higher in 2013. The economy remains vulnerable on many fronts, not only because the whole region is struggling but also because the internal complexity of the countrys political structure and the poor investment climate are major deterrents to investment.

KEY PRIORITIES FOR 2013

Further progress is needed on EU approximation. Bosnia and Herzegovina is the only SEE country that has not yet submitted an application for EU membership. Key priorities include political reforms, boosting competitiveness, reforming the social benets system and improving the countrys infrastructure. Some basic investment climate reforms should be introduced. The countrys persistently low scores on many cross-country indicators suggest there is a lack of consensus on the need for deep economic reforms, as well as plenty of scope for improvements in areas such as licences and permits, and enforcement of contracts. Major reforms are needed in the energy sector. Bosnia and Herzegovina has signicant potential in renewables, but the legal and institutional framework for sustainable energy remains weak.

Main macroeconomic indicators (% unless indicated)

2009 GDP growth Ination (end-year) Government balance/GDP Current account balance/GDP Net FDI (in million US$) External debt/GDP Gross reserves/GDP Credit to private sector/GDP -2.9 0.0 -5.9 -6.3 245 55.8 19.0 54.4 2010 0.7 3.1 -3.9 -5.7 188 52.3 20.5 63.8 2011 estimated 1.3 2.7 -3.1 -8.8 416 46.5 19.9 55.1 2012 projected 0.1 1.7 -2.8 -8.0 253 na na na

2012 sector transition indicators

Sector transition score
4.0 3.5 3.0 2.5 2.0 Sustainable energy Natural resources 1.5 General industry Agribusiness Real estate 1.0 0.5 0.0 Telecommunications

Capital markets

Urban transport

Corporate

Energy

Infrastructure

FI

Source: EBRD. Note: Water Water and wastewater; IAOFS Insurance and other nancial services; PE Private equity.

MSME nance

Electric power

Railways

Banking

Roads

IAOFS

Water

PE

COUNTRY ASSESSMENTS Bosnia and Herzegovina

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MAJOR STRUCTURAL REFORM DEVELOPMENTS Limited progress has been made on EU approximation over the past year. In its annual Progress Report published in October 2012, the European Commission (EC) once again urged the country to make greater headway on economic and structural reforms. It highlighted the need for reforms to boost the productive capacity and competitiveness of the economy, including labour market reforms, and to improve the business environment and upgrade the countrys infrastructure. The EC also emphasised the need for reforms in the social benets system particularly the high and poorly targeted social transfers to boost job creation and reduce the high unemployment rate. Bosnia and Herzegovina is the only SEE country that has not yet submitted an application for EU membership. In June 2012 the European Union and the Bosnian authorities launched a High Level Dialogue on the Accession Process. However, the results so far have been uneven. Business environment indicators remain poor. In the 2012 World Bank Doing Business Report, Bosnia and Herzegovinas ranking rose by two places compared with the previous year, mainly due to improvements in the ease of obtaining construction permits. However, at 125th place, Bosnia and Herzegovina remains the lowest ranked SEE country with respect to the overall ease of doing business and it has the second lowest ranking in the entire EBRD region of operations after Uzbekistan. The country continues to perform particularly poorly on construction permits, starting a business, obtaining electricity connections and enforcing contracts. Some progress is occurring in promoting private sector involvement in transport. In August 2012 the government in Republika Srpska announced an open, competitive tender, based on best international practice, for the concession to the private sector for the design, construction and long-term maintenance of the Doboj-Vukosavlje motorway, a part of the trans-national transport corridor Vc. If successful, this would be the rst PPP in the transport sector in Bosnia and Herzegovina. An agreement was signed for the construction of a new thermal power plant. According to the terms of the agreement, the 300MW Stanari thermal power plant will be built by UK-based EFT Group with nancing from the Chinese state development bank, and the project will also entail the expansion of the neighbouring EFT-owned Stanari Coal Mine. The benets of the project, if fully implemented, are twofold. It will provide a welcome increase in domestic power generation capacity and it will increase private sector participation in the energy sector, which is currently very limited.

The quality of, and access to, broadband services are improving. The market for broadband internet and cable TV services in Bosnia and Herzegovina is nascent and dominated by the three incumbent telecommunications operators which operate within the boundaries of their respective entities. The rest of the market, including cable TV operators which oer broadband services, is highly fragmented and cannot eectively compete against the incumbents. Moreover, access to high-speed broadband is limited outside of the largest cities. Financial support is currently being provided for consolidation of small cable TV operators in the regions so as to allow for wider access to better quality internet and telephony services at more aordable prices. The consolidation in the sector will enable certain service providers to operate across the two entities, which is a rare case in the country today. Micro and small enterprises (MSEs) are gaining access to more nance and a wider range of nancial services. The key providers of nance for MSEs are non-prot micronance institutions (MFIs), set up as NGOs and focusing on a narrow range of services while beneting from favourable tax treatment. Since 2008 the micronance sector has been in decline with gross loans from MFIs falling from 570 million at end-2008 to only 345 million at end-2011. With support from international nancial institutions, the sector is being transformed into a commercially sustainable model, fully integrated with the rest of the nancial sector, which will give MSEs better access to nancial services and should improve transparency and corporate governance in the micronance sector. The banking sector in Bosnia and Herzegovina remains liquid and well-capitalised, but the level of NPLs is rising. Out of the 29 banks that operate across the two entities, 19 are foreign owned. More importantly, the foreign banks accounted for 92.1 per cent of total assets as of the end of 2011. The banking sector was not subject to the large credit outows to parent banks, and the system remains fairly liquid. However, NPLs have been increasing substantially. In mid-2012 they stood at 12.6 per cent of total loans, compared with 7.1 per cent in 2010 and 5.9 per cent in 2009. Bosnia and Herzegovina has been a participant in the Vienna Initiative since 2009.

Real GDP (1989 = 100)

Bosnia and Herzegovina EBRD-33

Fiscal balance and current account balance

Fiscal balance (% of GDP) Current account balance (% of GDP)

200 180 160 140 120 100 80 60 40 20 0

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

4 2 0 -2 -4 -6 -8 -10 -12 -14 -16

2006 2007 2008 2009 2010 2011 2012