Population 3.884 million
GDP 16.551 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
0.7 |
1.3 |
-0.2 |
0.5 |
|
Inflation (yearly average) (%)
|
2.1 |
3.7 |
2.2 |
2.1 |
|
Budget balance (% GDP)
|
-3.9 |
-3.1 |
-2.8 |
-3.2 |
|
Current account balance (% GDP)
|
-5.7 |
-8.8 |
-8 |
-7.7 |
|
Public debt (% GDP)
|
39.4 |
40.3 |
43.7 |
41.3 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Substantial private transfers thanks to increasing mobility of workers in the region
- Banking reform (strengthening equity)
- Financial assistance from IMF: Stand-By Arrangement renewed in September 2012
- Stabilisation and Association Agreement with the European Union concluded in June 2008
WEAKNESSES
- Weak diversification of exports and dependency on world price movements
- Borrowers highly exposed to foreign exchange risk
- Shortcomings in infrastructure and business environment
- Very high unemployment rate
- Scale of informal economy
- Institutional and ethnic fragmentation
Risk assessment
Weak growth vulnerable to deterioration in European activity
The country went into recession in 2012, due to weak domestic demand dampened by austerity measures and falling wages, as well as weak external demand, mainly from the EU (especially Slovenia and Italy, both in recession). As a result, manufacturing, chiefly focused on exports (metals, wood, miscellaneous manufactured products), slowed significantly. At the same time, drought and maintenance work at the country’s largest thermal plants led to a strong fall in energy production. In 2013, growth is expected to increase slightly, driven by investment: products exported to Croatia (15% of exports) are expected to be brought up to European standards by July 2013, date of Croatia’s EU accession. Moreover, investment is set to accelerate in Republika Srpska (Serb majority).
Meanwhile, inflation slowed in 2012 following a sharp rise in 2011 linked to high food prices. In 2013, weak domestic demand and more moderate international food prices will enable inflation to be controlled.
Persistently high current account deficit
The current account deficit will have remained high in 2012 as the country imports twice as much as it exports, and exports have been hit by the contraction in European activity as over half of exports are destined for the EU. In 2013, neither European activity nor consumption are likely to recover so exports and imports are expected to stagnate. The balance of trade deficit will therefore be relatively unchanged (at about 10% of GDP). Transfers from expatriate workers and foreign aid will enable coverage of a large portion thereof (almost 60%), while FDIs will only cover a fifth of the current account balance meaning the country will have to borrow abroad.
Public finances weakened by political instability
In September 2012, the IMF renewed its two-year $520.6 million Stand-By Arrangement in recognition of the country’s efforts at fiscal consolidation. In 2012, the central government initiated a programme of cuts in spending especially on public administration. Nonetheless, the fiscal deficit will only narrow slightly due to a marked fall in indirect tax revenues due to the contraction in activity. The 2013 budget needs to satisfy the IMF’s requirements on spending cuts (in particular a freeze on civil service recruitment and a 10% cut in salaries and the sale of shares in state-owned enterprises). As in the past year, political instability could, however, make it hard to obtain official approval of the budget and thus delay the payment of IMF aid. Further, public debt will remain vulnerable to currency risk as two thirds of stock are denominated in foreign currencies.
Political instability and difficult business environment
The complex nature of the country’s political and administrative structure, broken up into two entities, the Serbian Republic of Bosnia (Srpska) and the Bosnian-Croatian Federation (Bosnian and Croatian majority), weakens the power of the central executive, making it difficult to implement the structural reforms necessary for the country to sustainably emerge from the crisis of 2009 and achieve EU membership - especially since the political system has been unstable since the 2010 presidential elections. Three months after the formation of a coalition government in February 2012 between the two parties representing the Bosnian Muslims, the SDP-BiH (social democrats) and the SDA (Bosnian conservatives), disagreement over passing the 2012 budget led to six months of paralysis and a ministerial reshuffle. The October municipal elections went against the SDP, in contrast to the SDA, which could result in policies being blocked at local level. On top of this political uncertainty, there is a risk of heightened social tension due to the austerity measures implemented by the central executive and the persistently strong ethnic tensions between the Bosnian Muslim, Croatian Catholic and Serbian Orthodox communities. With regard to governance, the business environment remains difficult: corruption, ineffectiveness of the administration and legal system, and further the size of the informal sector.
