Thewesternbalkans
The office the World bank made an assessment about the macroeconomic developments of Bosnia and Herzegovina in 2023. The main conclusions are as follow:
• With real GDP growth continuing to slow to 1.1 percent in Q1 2023, economic activity in Bosnia and Herzegovina (BiH) is set to further decelerate to 2.2 percent in 2023.
• Softer private consumption and a drop in transport prices should result in an inflation rate of 5.8 percent in 2023, a significant slowdown from 14 percent seen in 2022.
• A sharp deceleration in exports is expected to broaden the external deficit somewhat to 4.7 percent of GDP in 2023.
• The labor market is characterized by declining unemployment, particularly among women, although this is because fewer women were looking for jobs.
• Stronger tax revenues supported by high inflation resulted in a fiscal surplus of 0.4 percent of GDP in 2022 but a return to a deficit is expected in 2023 in part due to municipal elections in 2024.
• Real output growth is expected to improve to 2.8 percent in 2024 and 3.4 percent in 2025 as private consumption recovers, together with EU demand for BiH’s goods.
• EU candidacy status received in December 2022 could serve as a catalyst for much-needed structural reforms. Quicker formation of entities’ governments following the October 2022 elections than in the previous cycle yields some confidence.
Following the WB Report, after surging to 7.4 percent in 2021, real GDP grew by 3.9 percent1 in 2022, as the rebound from the post-pandemic period subsided. Economic activity in 2022 slowed consistently from 5.9 percent in Q1 2022 to 1.7 percent in Q4 2022 (yoy), mainly due to an output deceleration in manufacturing on the supply side and a slowdown in final domestic consumption on the demand side. This trend of rapid deceleration persisted into Q1 2023, with real GDP rising a mere 1.1 percent. The latter is primarily due to the contraction in private consumption of 0.5 percent as remittance inflows dropped by 4.8 percent in real terms in Q1 2023. Meanwhile, gross capital formation grew by 12.6 percent, which partly offset the decline in private consumption.
The impetus on the demand side will be moderated, however, by the poor performance of industrial production on the supply side. Specifically, industrial production dropped 3.9 percent during the period January–July 2023, largely driven by a fall in sales on foreign markets totaling 11 percent, whereas turnover in the domestic market declined 2 percent.
Net exports shrank by 0.3 percent of GDP in Q1 2023, a significant decline from 6.7 percent of GDP posted in Q1 2022.
The compression in net exports is the result of an almost total standstill in both exports and imports. More precisely, exports slowed by 1.7 percent (real terms) in Q1 2023 from a jump of 38.6 percent the previous year, while growth in imports dropped to 2 percent (real terms) in Q1 2023 from a jump of 31.9 percent one year ago. This net export performance is driven by weaker demand from the EU, but also represents a base effect considering the high growth rates in early 2022. On the import side, lower growth is due to a decline in private consumption and, similar to the case of exports, represents a base effect due to high import growth in Q1 2022.
During the period January–July 2023, inflation amounted to 8.5 percent, a 3.7-percentage-point drop vis-а-vis the same period in 2022. Inflation slowed to 4.0 percent in July (yoy), a considerable slowdown from 14.1 percent (yoy) seen in January 2023.
Inflation dynamics represent a confluence of stubbornly high food prices, together with high prices of housing, water, electricity, and gas on the one hand, and sharply declining transport prices on the other hand. Food prices grew by 15.5 percent during January–July 2023 compared with a rate of 19.3 percent during the same period in 2022. Meanwhile, transport prices declined 12.7 and 13.2 percent in June and July of 2023 (yoy), respectively, which translated into a negative rate of 2.9 percent during January–July. As the impact of lower transport prices exerts downward pressure on input costs, and spreads through the economy, the inflation rate is likely to decelerate to 5.8 percent in 2023.
Key labor market indicators remain static.
1. The overall employment rate (ages 15–89) increased marginally to 40.8 percent in Q1 2023 compared with 40.1 percent in Q1 2022, while the unemployment rate (ages 15–74) shrank to 13.3 percent, a 3.4-percentage.
2. The methodology of the Labor Force Survey was changed in 2021, which makes direct comparisons between 2021 and 2020 data difficult.
3 BiH Global Fiscal Framework for 2022–2024 and World Bank staff estimates; estimates for H1 2023 by CBBiH are expected by end-September 2023.
4. Central Bank of BiH 2023 (data available at Panorama web portal), World Bank staff calculations. point decline vis-а-vis Q1 2022. However, the decline in the unemployment rate was driven by people moving from employment into inactivity, rather than improvements in employment itself. The overall activity rate declined by 1 percentage point during this
period. The decline in the unemployment rate has been particularly pronounced among women, amounting to 4.1 percentage points between Q1 2022 and Q1 2023 compared with 2.8 percentage point decline among men, but this was driven by a larger decline in the activity rate among women. Furthermore, the female unemployment rate remains high compared with other Western Balkans countries.
Stronger tax revenues supported by a high inflation rate were not offset by higher nominal public spending, which resulted
in a fiscal surplus of 0.4 percent of GDP in 2022.3 This compares with a deficit of 0.3 percent of GDP in 2021, and 5.2 percent of GDP in 2020. The fiscal surplus is the result of a fiscal surplus in the Federation BiH and a fiscal deficit in RS. Expenditures in 2022 in both entities were driven by social measures softening the inflationary impact on households and pre-election spending, including wage and pension hikes, as well as higher capital expenditures. However, spending in the RS compared with the Federation was much higher on wage increases, pension outlays, and social assistance, in GDP terms. Gross public debt in BiH remains sustainable at just below 30 percent of GDP.
The current account deficit (CAD) widened to 4.5 percent in 2022 from 2.4 percent of GDP in 2021, driven by a rise in the
merchandise trade deficit. The merchandise trade deficit rose by 3.8 percentage points to 22.1 percent of GDP in 2022, and was driven by high import prices of fuel, food, and other commodities, amid strong domestic demand.
Higher goods imports growth (13.1 percent) more than offset higher growth in goods exports (8.8 percent), which was also driven by higher prices, notably of metals and electricity. Exports of goods were helped by stronger services exports due to a recovery in tourism. BiH’s 5.8 percent of GDP in travel inflows in 2022 exceeded pre-pandemic-level inflows, which had come to 3.2 percent in 2019. The contribution of net remittances remained the same as in 2021, totaling 7.8 percent of GDP, while the primary income balance improved. After capital account adjustments, the CAD amounted to 3.8 percent of GDP in 2022, two-thirds of which were financed by net FDI inflows, which were equivalent to 2.5 percent of GDP. Portfolio investment outflows of 0.4 percent of GDP were more than offset by other investment inflows of 0.9 percent of GDP. The latter was dominated by trade credits, whereas net disbursements on government loans dropped significantly.
Preliminary data suggest an improvement in the CAD as the merchandise trade deficit in Q1 2023 narrowed and the services surplus widened. This resulted in an external account deficit of 3.6 percent of GDP in Q1 2023 compared with 4 percent in Q1 2022. Nevertheless, as private consumption strengthens, the CAD is expected to widen marginally to 4.7 percent of GDP. This should be largely financed by net FDI inflows, which improved significantly in Q1 2023 amounting to 3.6 percent of GDP, a 1.6-percentage-point increase compared with the same period in 2022.
The banking sector is well-capitalized and profitable. Banks are liquid, and profitable, with non-performing loans (NPLs) at their lowest level in a decade (4.1 percent in Q2 2023). There have been no direct spillovers from financial stress in advanced economies due to the limited reliance on international and wholesale funding, and fixed-income assets of BiH banks.
The WB assed following outlooks and risks:
Real output growth in BiH is estimated to decelerate further to 2.2 percent in 2023 driven by slower private consumption and
exports. In the medium term, real GDP growth is projected at 2.8 percent in 2024, and 3.4 percent in 2025, as private consumption regains momentum driven by a strengthening of real disposable income. Inflation is expected to stabilize in 2024–25 at around 2 percent per year on the back of lower transport prices, and in line with inflation rates prior to the pandemic. Stronger exports on the back of a gradual growth recovery in the EU are likely to be offset by higher imports of consumer goods, resulting in a further widening of the CAD from 4.7 percent of GDP in 2023 to 5.1 percent by 2025.
The return to fiscal surplus in 2022 is likely to be short-lived due to the upcoming municipal elections in 2024. An overall higher wage bill, pension outlays, and social benefits are expected in 2023 and 2024, since governments’ measures in 2022 were permanent. This spending will further increase as part of the municipal pre-election expenditure cycle. Nevertheless, by 2025 the fiscal stance is expected to be balanced again. Public debt is projected to remain sustainable at below 30 percent of GDP during 2023– 2025, although debt levels vary significantly across the two entities.
With general elections completed in October 2022, and entities’ governments formed, it would be opportune for policy makers to turn to the structural reform agenda and the fulfillment of legislative priorities for EU accession. In this respect, three of 14 required legislative steps—which are part of the often-referenced European package—have been passed recently by parliaments. These laws define free access to information at the level of BiH, address human rights, and define the role of courts.
Downside risks dominate the outlook. Protracted market disruptions following the pandemic and uncertainties fanned by the war
in Ukraine could have a negative impact on aggregate demand through depressed consumer and business confidence. Furthermore, the recovery in the EU remains fragile, potentially adversely impacting demand for BiH exports, except for energy. A weaker labor market across the EU, most specifically in Germany, could limit remittance inflows, which support private consumption. Finally, geopolitical risks could further aggravate domestic political frictions with adverse consequences for the muchneeded structural reform push.
Comments: Regardless of attempts at political destabilization in Bosnia and Herzegovina, the facts speak of relative macroeconomic stability in 2023. The most important factor for this is the increased commitment of the EU in the last two years, not only as an enlargement policy related to demanding the necessary reforms, but also as purely economic support related to the implementation of the Stabilization and Association Agreement. The main risk to the BiH economy is the geopolitical confrontation, as the country tries to take a balanced approach and accordingly does not have a clearly expressed position on the main geopolitical events. With the decision to start negotiations on the enlargement of the EU to BiH, it is very likely that the country will gradually reassess its positions and that the pragmatic approach of integration with the stronger player in the region will prevail.
