Bosnia and Herzegovina

major macro economic indicators

(e): Estimate (f): Forecast

Risk assessment

Continuing moderate economic recovery

In 2022, a moderate economy recovery will continue, but at lower rate due to a less favourable base effect, still driven by household consumption, exports, and external support. Private consumption (75% of GDP) remains the main driver of growth as the economy has revived and wage growth has improved in the last four years. Exports (39% of GDP) remain undiversified and exposed to commodities price movements, but will pursue their gradual upturn as demand improves especially from European states. Aluminium, iron and steel, and wood exports will increase as global demand thrives and commodity markets remain favourable. Exports of furniture, electrical machinery and clothing will moderately rise and benefit from regional demand. The economy will remain constrained by the deep and paralysing political and ethnic divisions in the country. External support from international development bodies such as the European Commission, European Investment Bank, European Bank for Reconstruction and Development and IMF will increase in 2022/23. Government expenditure (20% of GDP) will continue to be constrained by fiscal retightening and see its efficacy minored by the country’s divisive political system. Fixed investment (23% of GDP) will be held back by political instability and unwelcoming business environment, which heavily weighs on investor sentiment. Although the country received vaccine doses from the EU, potential wave(s) of infection might undermine its recovery, as the vaccination rollout is weak (around 25% of people were fully vaccinated by the end of December 2021), and the country’s economy is strongly influenced by the activity of the Eurozone.

Public deficit  sharply decreasing

The public accounts of the country's three constituent entities (Central State, Federation of Bosnia and Herzegovina and Republika Srpska) are expected to improve markedly in 2022 in line with the ongoing economic recovery. Public debt should almost stabilize at a moderate level. The public funding requirement is mainly provided by public, multilateral or bilateral partners, as the government does not have access to markets. Financing from the EBRD is focused on infrastructure, agriculture, mobility and digitalization (around EUR 105 million in 2021 in partnership with the private sector). The European Commission secured macro-financial assistance (EUR 250 million in June 2021) and grants for immediate needs and socio-economic response of EUR 80.5 million (September 2021).

 
The current account deficit is expected to slightly narrow in 2022. Exports will continue to gradually rise as regional demand is increasing, but remain vulnerable to commodities and intermediate goods prices. Meanwhile, imports will rise as domestic demand, including new investment projects, increase. We expect inbound tourism flows (EU, Serbia, Saudi Arabia, Turkey - 7% of GDP in 2021) to continue on their gradual recovery path and a further increase in remittance inflows (9% of GDP in 2021). These will still partially cover the trade in goods deficit (19% of GDP in 2021). Bosnia has the lowest FDIs in the Balkan region, 4% of GDP. They come from Austria, Croatia and Serbia. FDI and predominantly public international financing will finance the current account deficit, while maintaining foreign exchange reserves at a comfortable level equivalent to 8 months of imports as of September 2021. Additionally, the country received an SDR allocation from the IMF in August 2021, equivalent to USD 355 million.

Complex and fragile political and institutional system 

Following the Dayton Accords (1995), Bosnia and Herzegovina was divided into two autonomous entities: the Federation of Bosnia and Herzegovina (FBiH) with Bosnian and Croat dominance, and the Republika Srpska, to which is added the district of Brčko managed by the central state. The central state is headed by a collegial Presidency that represents the three "constituent peoples" and rotates every eight months. The presidential and parliamentary elections of October 2018 put the nationalist parties in the lead. Municipal elections in November 2020, the first since 2008, gave weight to opposition parties (especially in Sarajevo and other major cities) rather than the ruling nationalist parties. This is expected to make room for new actors on the political scene. The next parliamentary and presidential elections are scheduled to be held in October 2022. Changes are looming in the political arena because the Bosnian Serbs are threatening to leave central institutions, while Croats plan to boycott the 2022 elections. The latter want to obtain an electoral reform based on the carving of a territorial entity of their own, as they complain they are not well represented within the FBiH. The position of external players such as the EU, the U.S., Russia and neighbouring Serbia will influence the political scene. 

Last updated: February 2022