Politics 

Bosnia & Herzegovina entered 2022 in its most perilous state since the signing of the Dayton Peace Agreement that ended the 1992-1995 war. 

At a session of the Republika Srpska National Assembly in December 2021, Bosnian Serbs adopted a non-binding decision to withdraw the entity from the joint armed forces, the tax system and the judiciary, announcing the creation of entity institutions.

Following on from years of secessionist rhetoric from the Serb member of Bosnia’s tripartite presidency Milorad Dodik, this immediately raised fears of a move towards the breakup of Bosnia and a potential new conflict.

However, there were signs that this may be averted as Dodik announced in mid-January that he would soon hold talks with all government and opposition partners on the return of Serbs to Bosnian state institutions. The turnaround followed a request from Serbian President Aleksandar Vucic. 

Bosnia & Herzegovina was internationally recognised as an independent state in March 1992, when the breakup of the former Yugoslavia began. Immediately after the recognition of Bosnia, the war in the country began, which ended at the end of 1995 with the signing of the Peace Agreement. 

According to the Peace Agreement, which today is also called the Dayton Constitution, Bosnia consists of three parts: the Federation of Bosnia and Herzegovina, Republika Srpska and the Brcko District. Bosniaks and Bosnian Croats mainly live in the Federation, Bosnian Serbs in Republika Srpska and all three peoples in the Brcko District. The Bosnian Federation consists of ten cantons that have great autonomy.

Bosnia’s main political problems are related to the cumbersome administration established by the Dayton Accords. For example, in the Bosnian Federation alone there are 11 ministries of health, ten in the cantons and one at the entity level, 11 parliaments and governments and so on.

There have been numerous blockades of work at various levels of government in recent years, and currently the two most important issues are changes to the election law and the withdrawal of Serbs from state-level institutions.

Bosnian Croats are insist on a new election law, according to which only a Croat from certain political parties could be elected to the three-member Bosnian presidency. For example, the Croat member of the Bosnian presidency at the moment is Bosnian Croat Zeljko Komsic, whose only “fault” is coming from the Democratic Front political party.

The strongest political parties in Bosnia that are in power today are the Bosniak SDA party, Dodik’s SNSD and the Croatian HDZ. 

 

Macroeconomy

GDP growth: Bosnia’s Directorate for Economic Planning (DEP) estimates GDP growth of 2.8% in 2021 and growth of 3.2% in 2022. The DEP assumes that the key pillar of economic growth will be domestic demand and estimates an average growth rate of private consumption of about 2% over the next three years (2021: 1.7%, 2022: 1.9%, 2023: 2.1%).

However, the Central Bank of Bosnia & Herzegovina (CBBH) published more optimistic estimates at the end of the year. According to the CBBH, GDP growth in 2021 should be 5.8%, and in 2022 growth should be 3.9%. The International Monetary Fund (IMF) forecasts Bosnia's GDP growth at 3.5% in 2021 and 3.3% in 2022. In the same period, the European Bank for Reconstruction and Development (EBRD) forecasts Bosnian GDP growth of 4.5% and 3.0%, respectively.

As for the risks to the outlook for the period 2021-2023, the DEP says they are mostly related to the migration of the population from Bosnia — especially young, educated and qualified people — which could result in reduced productivity and slower GDP growth than projected.

External environment: The DEP estimates that in the period 2021-2023, the current account deficit could be expected to remain in the range of 2.7% to -3.3% of GDP. The IMF estimates that the current account deficit was around 4.9% in 2021. 

According to the DEP, the main factors likely to increase or decrease the current account deficit are in the foreign trade deficit, ie changes in export and import rates of goods and services, as well as changes in world market prices.

Inflation and monetary policy: The Bosnian currency is the convertible mark (BAM) which is fixed at BAM1.935583 to the euro by the Law on the Currency Board. The law also stipulates that Bosnia can only print as much money as it has foreign exchange reserves. Therefore, the monetary policy of the CBBH has been reduced to only one lever, the reserve requirement rate. However, this monetary lever does not work in Bosnia either, given that commercial banks hold significant amounts of money above the prescribed required reserves.

The DEP estimates that, assuming that food prices and utility prices grow moderately, in the period 2021-2023 prices can be expected to prices in the range of 1.2-1.4%. The IMF forecasts 1.1% inflation in 2021 and 1.1% in 2022. The DEP adds that inflation projections in the baseline scenario rely on crude oil and food price developments as factors that significantly determine price developments in Bosnia. 

Industrial production: According to the DEP industrial production in Bosnia in the coming period is currently very difficult to predict. The movement of the physical volume of industrial production in the medium term will mainly depend on economic movements in the markets of Bosnia’s main trading partners, as has been the case so far.

If the consequences of the coronavirus pandemic are remedied in the short term, more significant economic progress can be expected in Bosnia, within which developments in industrial production should play a central role. Given these circumstances, it is expected that Bosnia should achieve slightly higher growth rates of physical volume of industrial production in 2021-2023, says the DEP.

According to the Bosnian Agency for Statistics, industrial production in Bosnia rose 8.2% year-on-year in October 2021, easing from a 9.3% increase in the previous month.

 

Real economy 

Retail: Retail trade turnover in Bosnia in October 2021, observed in current prices, increased by 18.9% in compared to the same month last year. Trade in food products (food, beverages and tobacco products) achieved a growth of 10.9%, while trade in non-food products grew by 10.1% compared to October 2020. 

Compared to the base year (2015), the real index of trade in food products in October 2021 was growth of 39.1%, while trade in non-food products grew by 58.0%. Turnover from motor retail fuels grew by 18.4%.

The DEP estimates an average growth rate of private consumption of about 2% over the next three years (2021: 1.7%, 2022: 1.9%, 2023: 2.1%).

Russian discounter Mere is expected to enter the Bosnian market in 2022, with plans to initially open in Ilidza, Sarajevo, followed by the opening of stores in other amor cities such as Mostar, Banja Luka, Tuzla, Zenica, and Bijeljina. German discounter Lidl is also understood to be preparing for a Bosnian launch. 

Currently, the market leaders are local Bingo and Croatia’s Konzum. In 2021, the European Bank for Reconstruction and Development announced plans to extend a €20mn loan to Bingo to develop its Sarajevo shopping centre make further investments into its retail network. 

Banks: The banking sector is well capitalised and generates significant profits from year to year. In the first six months of 2021, banks in the Bosnian Federation made a net profit of BAM150mn, and in the Republika Srpska in the amount of BAM64.4mn.

The DEP estimates the growth of credit activity in Bosnia at 2.0% in 2021, and in 2022 there could be a moderate growth of credit activity with a rate of 3.2%.

Industry: Bosnia's economy relies heavily on electricity generation, mining and the processing sector.

The processing industry mainly depends on exports, so the projections for this branch of industry are mainly reduced to estimates of purchases from abroad. 

This is particularly true for the manufacturing sector, whose performance depends heavily on orders from abroad, mostly from Germany, mainly for production of simpler parts for the auto industry. 

Before the war, Bosnia had a developed car industry, near Sarajevo in the town of Vogosca was the production plant of the German Volkswagen. Today, Bosnian industry mainly makes, for example, car seat covers, leather covers for car gearboxes and so on. 

Among the recent investments in this sector are German Ringspann’s new plant to produce drive components and parts for motors and electric bicycles in Bosanska Krupa, and Slovenian Iskra mehanizmi’s Mehanizmi B plant in Catrnja. 

Bosnia’s coal mining sector was in crisis in late 2021, when miners from seven mines in the Bosnian Federation went on strike and held mass protests in Sarajevo, gaining widespread support from local residents. Miners demanded a minimum wage in the sector of BAM1,000 (€511.29), the the dismissal of the general director of Elekroprivreda BiH Sarajevo, the abolition of the Decision on the Rulebook on reducing their salary from BAM850 to BAM570, as well as dismissal of coal directors who started applying the regulation.

Elektroprivreda BiH Sarajevo, the main company of the concern Elektroprivreda BiH, operates the seven mines providing coal to the entity’s coal power plants. In Republika Srpska, each thermal power plant has its own mine.

In the metals mining segment, Adriatic Metals has started construction of its flagship high-grade Vares Silver Project in Bosnia. The project is one of the highest grade undeveloped polymetallic mining projects in the world, with an ore reserve of 7.3Mt at 485g/t silver equivalent. Adriatic’s main priority for 2022 is to build the Vares Silver Project, with a view to starting production in the second quarter of 2023.

Energy & power: More than two-thirds of Bosnia’s electricity comes from thermal power plants. However, due to the age of the plants, thermal power plants in Bosnia are among the biggest air polluters in Europe. The rest of the electricity was obtained from hydropower plants, and very little from alternative energy sources.

However, recently, wind farms, solar power plants and so on have been rapidly built throughout Bosnia. Bosnia has surplus electricity, but mainly due to low industrial consumption in the country and not due to high production.

Construction: According to the Agency for Statistics, in the first nine months of 2021 the number of completed dwellings was 1,866, a year-on-year increase of 10.5%. The number of uncompleted dwellings at the end of the third quarter of 2021 was 4,563, up 4.4% y/y. 

The most profitable company in Bosnia is the public company Autoceste FBiH Mostar, which deals with financing the construction of traffic infrastructure in Bosnia. Bosnia has a very outdated road transport infrastructure, but the construction of new road is progressing very poorly — at about 100 kilometres a year.

Major Sectors: The key business sectors in Bosnia are energy, manufacturing and tourism. 

Tourism has significantly weakened due to the coronavirus pandemic, though there was a revival in 2021 as international travel resumed. During the winter 2020-21 season, skiers have been seeking out those resorts near Sarajevo that don’t come under the jurisdiction of the Sarajevo Canton government, and therefore do not require skiers to show COVID certificates. 

Bosnia is a producer of timber with 53% of the country is covered in forests, and there is an associated furniture manufacturing industry. According to Bosnia’s Foreign Investment Promotion Agency, growing stock of forests is estimated at about 340mn cubic metres. The wood processing sector accounts for around 11% of Bosnia’s exports.

 

Budget and debt

Neither the state-level government nor the government of the Bosnian Federation have yet adopted their budget for 2022. At state level, the reason for not adopting the budget is the constant political blockades of the parliament as well as the governments. 

The government of the Republika Srpska has drawn up the Budget proposal for 2022, amounting to BAM4.02bn. 

Bosnia's indebtedness reached its peak in 2014, when public debt amounted to 43.4% of GDP, followed by a period of declining indebtedness. In the period from 2015 - 2018 Bosnia implemented fiscal consolidation, bringing the debt down, but it was pushed up again since the start of the pandemic. 

According to the DEP, in 2020 Bosnia's public debt was €6.4bn, having increased by €711mn since 2019. This means that the debt in 2020 reached 36.72% of Bosnia’s GDP, a 4.19 percentage point rise from 2019, when it was 32.53% of GDP.

The DEP does not have an estimate of public debt for 2021 and 2022. But, the IMF estimates that public debt will increase to 38.6% of GDP in 2021 and is expected to rise further in 2022 to 40.2%. The latest data from the Bosnian Ministry of Finance and Treasury for the third quarter of 2021 put Bosnia’s public debt at 34.44% of GDP.

 

Markets 

There are two stock exchanges in Bosnia - the Sarajevo Stock Exchange (SASE) in the Bosnian Federation, and the Banja Luka Stock Exchange (BLSE) in Republika Srpska.

On both stock exchanges in recent years, most of the turnover relates to trading in entity government securities, with very modest amounts of trading in company shares.

According to the official data of the stock exchanges, in 2020, the total turnover on SASE was BAM541mn, and on BLSE it was BAM734mn. In the first six months of 2021, the total turnover on SASE was BAM276mn, and on BLSE 238mn.

The volume of trading on the stock exchanges in Bosnia in 2022 will depend mostly on the supply of bonds and treasury bills of the entity governments.