Bosnia and Herzegovina

Subdued growth and structural weaknesses

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General Information

GDPUSD16.0bn (World ranking 114, World Bank 2015)
Population3.81mn (World ranking 131, World Bank 2015)
Form of state Emerging Federal Democratic Republic
Head of government Denis ZVIZDIC (Chairman of the Council of Ministers)
Next elections 2018, presidential and legislative

 

 

Country Rating D4note-circle-high-risk

Strengths

  • A currency board has helped to provide a stable exchange rate and fairly low inflation
  • Foreign exchange reserves currently cover more than six months of imports

Weaknesses

  • Persisting ethnic-nationalistic pressures. Highly ethnically fragmented government hinders efficient policymaking
  • Widespread poverty and high unemployment
  • Small manufacturing base concentrated on low-value-added products
  • Main export destinations are other emerging Eastern European countries
  • Continued large current account deficits
  • High external debt burden
  • High vulnerability to external shocks, including natural disasters 

 

 

Economic Overview

Subdued growth in 2016-2018

Real GDP growth decelerated from +3% in full-year 2015 to +1.9% y/y in Q1 and +1.4% y/y in Q2 2016. In the first half of 2016, robust growth was recorded in manufacturing (+6.5% y/y), financial services (+5.5% y/y) and other private-sector services (+5.3% y/y) while construction (-1.6% y/y) and pubic-sector services (-1.2% y/y) contracted. Modest growth was posted by trade, transport, accommodation and food services (+1.6% y/y). EH forecasts full-year growth of about +1.6% in 2016, followed by +1.7% in 2017 and +2% in 2018.

Consumer prices have been in deflationary territory since end-2014, but EH expects modest positive inflation to return in 2017 (+0.7% on average).

 

Structural weaknesses limit economic prospects

The economic structure is weak. The relatively small manufacturing base is concentrated on low-value-added products and the economy is dependent on emerging Eastern European markets, which account for around 50% of exports. Services account for about 66% of GDP, industry for 26% and agriculture for 8%. Meanwhile the economy is classified as an upper middle income economy by the World Bank with GNI per capita of USD4,680 in 2015. However, unemployment is large at 28% and 18% of the population lived below the national poverty line in 2011.

Moreover, the economy is highly vulnerable to external shocks, for example revealed by the 2008-2009 global economic crisis which pushed the economy into recession as well as by the severe adverse effects of the 2014 natural disaster on the economy (sharp growth slowdown, markedly rising twin deficits and external debt). 
Subsequent IMF financial support packages have been in place since 2009. The latest follow-up facility was eventually agreed in September 2016, after it had been at risk for more than a year due to a political crisis, thereby further increasing already high external liquidity and debt risks, reflected in ongoing large current account deficits (over -5% of GDP) and high external debt (over 60% of GDP).
On a positive note, current foreign exchange reserves are adequate (USD5.3bn in September 2016), providing over six months import cover, supporting the currency board and limiting exchange rate and transfer and convertibility risks. The fiscal position is also adequate, with low fiscal deficits and moderate public debt. 
Overall, however, Bosnia and Herzegovina will remain highly dependent on international transfers in the foreseeable future and is still far from attaining self-sustaining growth.

 

 

Last review: 12-1-2016