Bosnia's economic momentum should make new EU envoy's job easier

By bne IntelliNews July 4, 2007

Nicholas Watson in Prague -

With the Slovak diplomat Miroslav Lajcak taking over as the EU's top administrator in Bosnia-Herzegovina on Monday, July 2, hopes have grown he will breathe new life into the Balkan state's reform efforts, which largely stalled under his predecessor's laidback leadership. Luckily for the new envoy, the momentum behind Bosnia's economy is expected to continue through 2007 despite the myriad political problems.

Lajcak's appointment as High Representative and EU Special Representative in Bosnia was greeted with a sigh of relief by the many people who had become disillusioned with the rule of German diplomat Christian Schwarz-Schilling. During Schwarz-Schilling's time, his hands-off approach allowed nationalistic tensions between the various ethnic groups to resurface and reforms, such as the unification of the country's ethnically divided police force and simplifying administrative governance, to stall.

The UN and the EU have urged Bosnian authorities to speed up these reforms, which are essential to smooth the country's progress toward joining the EU, and Lajcak, speaking in fluent Bosnian, specifically addressed these issues on his appointment this week.

"By establishing an atmosphere of confidence and tolerance, we will be able to move forward," he was quoted by newswires as saying. "We cannot and we will not tolerate any activities or statements that push Bosnia-Herzegovina back into an atmosphere of tension and hatred."

Lajcak also said he's prepared to use his powers to fire officials and impose laws if necessary, a move Schwarz-Shilling mostly avoided during his 18-month term of office.

Proof of how concerned the international economy is over Bosnia's progress can be gleaned from the fact another top envoy was appointed at all. The West had intended to abolish the post and allow Bosnia to run its own affairs, but because of the problems, the powers decided to extend the post until mid-2008 and give Lajcak a strong mandate as well as some hard cash. In order to help facilitate political and economic reform, the EU recently granted a total €226m pre-accession financial assistance for Bosnia in the years 2007 to 2009.

Lajcak's main goal during his year-long tenure will be to get Bosnia and the EU to sign a Stabilisation and Association Agreement (SAA), the first step for the Balkan state's accession to the bloc. For this to happen, the Serb Republic and the Muslim-Croat federation must agree those key reforms such as unifying the ethnically split police force and reforming the constitution to take power away from the two autonomous entities.

"The Commission strongly supports [Lajcak's] priorities to stabilise the political climate and to restart the reforms to allow the conclusion of the SAA," EU Enlargement Commissioner Olli Rehn said in a statement.

However, according to a source at Bosnia's Banking Agency, the two sides are, if anything, moving further apart in many respects. She reports that businesses in the Muslim-Croat federation are fed up with the political squabbling and lack of progress, so are upping sticks and establishing businesses in the Serb part of the country, which for ethnic reasons finds it easier to agree reforms. A sign of this is the highly successful privatization of Telekom Srpske last year, which was sold to Serbia’s Telekom Srbija for €646m, with the new owner pledging additional investment totalling €295m by 2012. In May, Czech power company CEZ signed a deal in which it will acquire an existing plant in the Bosnian Serb Republic with a 300-megawatt (MW) capacity and coal mines with 400m tonnes of reserves in return for investing €1.5bn to construct a 660-MW coal power plant in Gacko.

Even so, there are reasons to be optimistic Lajcak can succeed in his mission. If economic growth helps facilitate reform, or at least makes it less painful, the expected continuation of the economic momentum seen in the first quarter should make the new envoy's task somewhat easier.

The "Big Mo"

After recording in 2006 the highest GDP growth rate since 1999 at 6.2%, Bosnia's economy looks to have begun this year strongly too.

Industrial output continued to grow briskly, recording a double-digit growth rate of 10.7% in the first quarter of 2007. And the strong growth of the construction industry, with the value of construction work being higher on year by 80.7% in the Serb Republic and 67.1% in the Croat-Muslim Federation point to an acceleration of investment activity. Strong real net wage growth of 8.2% in the first quarter and rapid credit growth of 28.1% in the retail segment, pointing to robust private consumption, which is also evident from the 24% annual rise in retail sales in the first quarter.

"Leading indicators imply a similar trend for the second quarter [and] given the strong momentum in the first half of the current year, we expect economic growth to accelerate to 6.7% in 2007 as a whole," says Sandor Gardo, an analyst with UniCredit Group.

The fiscal situation also looks healthy. On Tuesday, July 3 the Central Bank of Bosnia-Herzegovina announced a consolidated budget surplus of $357m in 2006, which is equivalent to about 3% of GDP.

"The fiscal surpluses in Bosnia during 2006 were a positive development [and] that is especially true given that both entities recorded surpluses, signalling that fiscal policy is in relative harmony across the country," says Sharon Fisher of Global Insight.

The inflationary pressures that followed the 2006 introduction of a flat 17% VAT rate have also moderated significantly. Retail price inflation averaged a low 1.5% in the first five months of 2007 and UniCredit's Gardo expects inflationary pressures to remain benign for the rest of the year and inflation to average 2.1% in 2007.

While this economic performance is encouraging, analysts say the picture is marred by high unemployment - something that would be hugely helped by the overdue reforms in Bosnia's corporate sector. Despite the robust performance of the economy, no major improvements have been seen in the labour market, with the unemployment rate in the region an unsustainable 44.8% in the first quarter.

While a growing economy is no doubt a good thing, it doesn't in itself create that feel-good factor so beloved of politicians and policymakers. Perhaps Lajcak's success will simply be measured by how many jobs are created on his watch.

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