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Economy

Bosnia and Herzegovina was among the poorer areas of the old Yugoslav Federation and remains one of the poorer countries in Europe. Following a slight contraction of the economy of 1.1% in 2012, the economy started to recover slightly in early 2013. Nevertheless, unemployment is still very high. Consensus on economic and fiscal policy essentials remains weak, impeding reforms at the country level. The complex political and administrative structure of the country is unlikely to be fiscally sustainable. The legal system is equally complex, with the implementation of laws hampered by a weak enforcement capacity, which, together with an inefficient judicial system, is a clear deterrent for investment and a source of corruption.

The International Monetary Fund‘s (IMF) 2010 Country Report summarizes BiH‘s ability to cope with global economic and financial crisis as ?vulnerable?. Unemployment is cripplingly high. Official unemployment is over 40%; the unofficial estimate when factoring in the gray economy is 22%. The majority of unemployed young people fall into the =permanently unemployed‘ category. According to the 2009 Labor Force Survey, young people had the highest unemployment rate (48.7 %), and women in both Entities have higher rates of unemployment than men.

For the most part, agriculture remains in private hands, but farms have been small and inefficient, and net food imports increased dramatically in the aftermath of the 1992-1995 war. Many industries are still overstaffed, reflecting the legacy of the centrally-planned economy, though limited privatization has improved efficiency in certain sectors. Under Tito, military industries were widespread in Bosnia, which hosted a large share of Yugoslavia's defense plants. During the war, three years of interethnic strife damaged or destroyed much of the economy and infrastructure in Bosnia, caused the death of about 100,000 people, and displaced half of the population.

Considerable progress has been made since peace was reestablished following the Dayton Accords. Still regarded as a transition economy, Bosnia and Herzegovina (BiH) sees the long-term goal of EU membership as a driver to further economic growth and development. Due to Bosnia and Herzegovina's strict currency board regime, which links the Konvertibilna Marka (BAM or KM) to the Euro, inflation has remained relatively low and, as a result, the BAM is one of the most stable currencies in Southeast Europe. The banking sector has been fully reformed, with a significant inflow of foreign banks (foreign ownership currently stands at 85% of the banking sector) providing businesses with easier access to capital and a better range of banking services. Lending has slowed significantly since 2008.

Per capita GDP in 2008 was approximately U.S. $4,814, with a total nominal GDP of approximately U.S. $17.9 billion. The estimated real GDP growth rate for 2008 was 5.5%, and projected growth for 2009 is around 1.5%. While official unemployment is approximately 40%, "unofficial" estimates of unemployment that include the large gray economy are approximately 18%-22%. Bosnia and Herzegovina's most immediate task remains economic revitalization. The country needs meaningful progress in structural reforms to strengthen the basis for sustained, private sector-led growth. In order to improve the business climate, private sector growth--especially small and medium enterprises (SMEs)--and foreign direct investment (FDI) acceleration are needed to spur increased economic growth and job creation. Creating a single economic space will be key to attracting increased foreign investment. Privatization has been slow, and unemployment remains high.

Bosnia's post-war telecommunications sector, like electric power production and other infrastructure, was divided along "ethnic" lines following the 1992-1995 war. In the post-war period, the telecom assets previously owned by the Yugoslav state monopoly were divided into three, with infrastructure in the Federation split between the Bosniak-dominated BH Telecom in Sarajevo and Croat-dominated HT Mostar. Based in Banja Luka, Telekom Srpske's fixed lines cover the territory of the Republika Srpska (RS). The three incumbent operators -- BH Telecom, Telekom Srpske, and Hrvatske Telekomunikacije Mostar ("HT Mostar") -- are the only licensed providers of mobile telephony services.

With a climate and terrain suitable for a variety of fruits and vegetables, the greatest investment potential in the agricultural sector lies in the production and processing of fruits and vegetables. The majority of farms are small, family-owned units. This structure best facilitates crops that require intensive manual labor such as berries, cabbage, cucumbers, tomatoes, potatoes, and peppers. The current total market potential for fruit is estimated to be 700 million Bosnian Marks (KM) per annum. Industrial processing of fruit in BiH involves mainly drying and production of fruit juices or pulp (i.e., concentrated juice) and jams. Fruit processors note that there are fruit shortages, not just in the off-season, but throughout the year, affecting all types of fruit juice processors except for plum, apple, orange, and grape. It will be necessary to introduce new varieties of trees and new hybrids that are better suited to local soil and climatic conditions and that offer higher annual yields.

BiH's top economic priorities are: acceleration of EU integration; strengthening the fiscal system; public administration reform; World Trade Organization (WTO) membership; and securing economic growth by fostering a dynamic, competitive private sector. To date, work on these priorities has been inconsistent. The country has received a substantial amount of foreign assistance and will need to demonstrate its ability to implement its economic reform agenda in order to advance its stated goal of EU accession. In 2009, Bosnia and Herzegovina has undertaken an International Monetary Fund (IMF) standby arrangement, necessitated by sharply increased social spending and a fiscal crisis precipitated by the global economic downturn. The program aims to reduce recurrent government spending and to strengthen revenue collection.

BiH has an educated workforce with relatively low labor wage costs. However, several industry sectors (construction, IT, healthcare) have experienced a significant loss of skills and staff over the past decade, due to a lack of educational opportunities and emigration. Tax rates on labor are high, discouraging hiring of new workers and increasing incentives for unregistered employment. In addition, a rigid wage determination system stands in the way of job creation and worker mobility. This is a result of a collective bargaining system that retains most of its socialist era characteristics. Employees and employers share the costs of health care, pension, and unemployment insurance in the Federation while in the Republika Srpska all of these costs are borne by employers. In the Republika Srpska, employers also bear child care contributions. Many employers underreport their labor force in order to avoid paying taxes and benefits. While official unemployment is approximately 40 percent, "unofficial" estimates of unemployment that include the large gray economy are approximately 18-22 percent.

With many rural areas experiencing official unemployment rates above 40 percent, the difficult economic situation in the country remained a primary factor inhibiting refugee returns. According to UNHCR, there were an estimated 117,345 registered displaced persons in the country still seeking return to their prewar places of residence. When jobs were available, minority returnees often complained of discrimination in hiring. In returnee areas throughout the country, the percentage of minorities holding municipal employment was neither representative of current populations, nor consistent with legally mandated percentages based on the 1991 census, indicating local government failures to implement and enforce the provisions of the law.

Ethnic discrimination in employment and education remain key problems. In most cases, employers did not reverse the widespread firing of members of ethnic minorities during and after the 1992-95 conflict, and employers often hired members of the local ethnic majority over minorities. Many smaller enterprises were owned by politically connected individuals, usually members of the majority group in their communities, and did not employ minorities. State and entity-level officials generally did not act to prevent such discrimination.

Although the main elements of a market economy are present, in terms of private sector activity and the presence of broad price and trade liberalization, the country continues to face broad structural reform challenges across the board. BiH is still an economy in transition to privatization; the economy is still dominated by state-owned enterprises. BiH‘s average score for transition to a private sector-driven economy, as measured by the EBRD and reported in the Transition Report, is the lowest in central or south-eastern Europe.

BiH needs to improve competitiveness and productivity, attract investment, and make economic policy reforms. The country has economic potential in specific sectors such as energy and in sub-sectors such as high-value agriculture, wood products, tourism, and light manufacturing. The agribusiness sector is critical for alleviating poverty because a substantial share of those living below the poverty line depends on agriculture and are in rural areas. Private enterprises need improvements in capacity and efficiency, which can only be attained by improvement in technology and human capital. In spite of high unemployment rates, particularly among youth ages 15-24 and females, recent World Bank assessments indicate that 83% of firms have an unfilled need for workers, citing a lack of supply of qualified applicants as the reason for unfilled positions.