Bosnia and Herzegovina
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Bosnia and Herzegovina is classified as a lower middle-income country. Approximately 62 percent of GDP is created in the services sector, 29 percent in industry, and 9 percent in agriculture. Since the Dayton Peace Agreements ended the war in the former Yugoslavia in 1995, Bosnia and Herzegovina has made tremendous progress in post-conflict reconstruction, social integration, and state building. It is now working towards accession to the European Union (EU), membership in the World Trade Organization (WTO), and membership in NATO’s Partnership for Peace program. Based on its impressive economic recovery and sustained social stability, which have been supported by high levels of international assistance, the country can be considered a post-conflict success story.
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The country was among the last of the republics of the former Socialist Federal Republic of Yugoslavia to declare independence, following a referendum in 1992. The Dayton Peace Agreements, which ended the war, set the current administrative framework for Bosnia and Herzegovina. The framework is comprised of a central state government and two separate and distinct entities that enjoy substantial autonomy - the Federation of Bosnia and Herzegovina (FBH) and Republika Srpska (RS), covering 51 percent and 49 percent of the land area, respectively.
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The war caused extensive destruction of physical capital and a huge loss of output. Real GDP plummeted by 80 percent and over 2 million people - nearly half the prewar population - became refugees, either abroad or internally. In 1996, a major donor assistance program set the stage for reconstruction and economic recovery. Overall, donor commitments are estimated at US$5.4 billion.
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General government spending remains high at over 50 percent of GDP, and the current account deficit is still outsized at 24 percent of GDP. Since 1995, GDP has more than tripled and merchandise exports have increased tenfold. However, after remaining at less than one percent from 2002-2004, inflation picked up in 2005 due to increases in excise taxes and higher oil prices. Inflation is likely to increase further in 2006, following the introduction of the Value Added Tax (VAT) and increases in regulated prices.
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Progress on structural reforms has been uneven. The banking sector has been largely privatized and modernized, and other financial sector reforms have been well advanced. Yet privatization of other state-owned companies has occurred at a slow pace, and the private sector’s contribution to GDP is still lower than in most other countries in the broader region. Early attempts at privatization have resulted in diluted ownership and weak governance, and large-company divestiture has been painfully slow. The business environment is not as investor-friendly as it needs to be.
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A liberal trade policy has been pursued, but several restrictions on this front were introduced in 2005. Impressive output expansion notwithstanding, the economy has yet to reach its prewar level. Poverty levels are at close to 18 percent, and a further 30 percent of all citizens are in danger of falling into poverty in the event of an income shock.
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Economic activity has remained robust in recent years despite slow implementation of reforms. Domestic demand has increased steadily, underpinned by strong wage and credit growth. Inflation picked up in 2005 and again in early 2006. Fiscal accounts have improved, with the general government broadly in balance following significant fiscal adjustment, after the deficit peaked at nearly eight percent in 1999. Confidence in the currency is high, as evidenced by steadily increasing deposits in local currency. Successful rescheduling agreements have helped reduce external debt to sustainable levels. With net capital inflows exceeding the large current account deficit, foreign exchange reserves have increased, although at somewhat slower pace of accumulation than in the past.
