Bosnia divided but economy shows signs of strength

By bne IntelliNews October 7, 2010

Kester Eddy in Sarajevo -

There's been little good news out of Bosnia-Herzegovina lately as the elections on October 3 look to have produced more political deadlock with leaders and parties divided down ethnic lines, but Kemal Kozaric, governor of the country's central bank, tells bne that there's light at the end of the tunnel for the beleaguered economy.

Kozaric notes that exports have grown 33% this year, primarily as a result of a turnaround in demand for steel and aluminium as the global economy eases out of recession, and companies from both sides of the political divide have benefited, including Mittal Steel, Aluminium Mostar, and Prevent (in the Bosnian-Croat Federation) and Birac Zvornik (in the Bosnian Serb Republic).

Further, he believes that government moves to curb state spending will mean the International Monetary Fund (IMF), due to visit Bosnia in November, will free up the fifth tranche of the €1.2bn standby facility granted to in 2009. "We have drawn down approximately €400m so far. The government has worked to comply with the IMF requirements; the IMF is flexible and understanding" regarding the difficult situation we are in, he says.

Part of those measures include a recent crackdown on fraudulent claims for war veteran pensions - the government has uncovered some 4,000 false claimants, he says.

The governor is also eager to point out that domestic savings are on the up - albeit by only 2% - this year, after being rocked by a rush of withdrawals of some €400m in the winter of 2008-2009 when the global crisis was at its peak. "Savings are now at €3.11bn, and this [turnaround] is proof that the financial sector is stable," he says, though laments that the commercial banks are essentially foreign owned. "We have no control over strategic decisions. If the foreign owners decide to pull out, we can't influence that."

Economic issues

But these indicators are barely glimmers of hope compared to the enormity of the task Bosnia's new political leaders will face after the parliamentary and presidential elections. With most votes for the national parliament counted, Muslims supported parties favouring a united Bosnia, Serbs backed nationalists urging secession, and Croats voted for parties seeking their own entity within Bosnia, meaning it will be hard to form a national coalition and begin reforms needed for EU membership and to improve the economy.

The global economic downturn cost some 30,000 jobs in 2008-2009, the economy contracted by 3.2% last year, and unemployment is estimated at around 24% (and this after factoring in the grey economy, which Kozaric puts at 30%). And with non-performing loans rising to 8.6% of the total, even the financial sector is far from rock solid, the governor admits.

Kozaric, however, prefers to dwell on the positives, for example stressing the value of the currency board, which gives credibility to the local currency, the Bosnian marka. "Monetary stability is the most important point. Inflation is only 2%, and anyone can change money, from domestic currency to euros, at any time. It's very important, and we will maintains this [currency board]," he says.

Bosnia has important development potential, such as hydro-power and food processing, he emphasises. "We are the only country in the region with a surplus in hydro generation, but we only utilise about 39% of the total [theoretical capacity] As for food, we are ideally placed to develop this sector, yet we import food."

Other areas ripe for exploitation include organic farming and, especially, tourism. "There is enormous potential for rural tourism, winter tourism, even religious tourism. We have to change the image of Bosnia-Herzegovina. Once people pay a visit they all say it's nothing like they imagined," he argues.

But to lure investment to underpin economic growth, whether from domestic or foreign sources, will require political stability and good-will, scarce commodities in Bosnia's fractious and distrustful political environment since the bitter wars of the 1990s.

Even here, Kozaric insists on optimism. "Politicians are focussing on the elections, not the economy. After October 3, they will turn to the economy. They must, it's what feeds us," he says.

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