Bosnia and Hercegovina - iuj.ac.jp fileBosnia and Hercegovina 1 Country Report October 2002 ' The...

Country Report October 2002

Bosnia and Hercegovina

October 2002

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

The Economist Intelligence Unit

The Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.

The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where thelatest analysis is updated daily; through printed subscription products ranging from newsletters to annualreference works; through research reports; and by organising seminars and presentations. The firm is amember of The Economist Group.

LondonThe Economist Intelligence Unit15 Regent StLondonSW1Y 4LRUnited KingdomTel: (44.20) 7830 1007Fax: (44.20) 7830 1023E-mail: [email protected]

New YorkThe Economist Intelligence UnitThe Economist Building111 West 57th StreetNew YorkNY 10019, USTel: (1.212) 554 0600Fax: (1.212) 586 0248E-mail: [email protected]

Hong KongThe Economist Intelligence Unit60/F, Central Plaza18 Harbour RoadWanchaiHong KongTel: (852) 2585 3888Fax: (852) 2802 7638E-mail: [email protected]

Website: www.eiu.com

Electronic deliveryThis publication can be viewed by subscribing online at www.store.eiu.com

Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databasesand as direct feeds to corporate intranets. For further information, please contact your nearest EconomistIntelligence Unit office

Copyright© 2002 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,electronic, mechanical, photocopying, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author's and the publisher's ability. However, theEconomist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.

ISSN 1462-673X

Symbols for tables�n/a� means not available; �� means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

Bosnia and Hercegovina 1

Country Report October 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002

Contents

3 Summary

4 Political structure

6 Economic structure6 Annual indicators7 Quarterly indicators

8 Outlook for 2003-048 Political outlook11 Economic policy outlook13 Economic forecast

15 The political scene

19 Economic policy

23 The domestic economy23 Economic trends24 Employment, wages and prices26 Sectoral trends

27 Foreign trade and payments

List of tables13 International assumptions summary15 BiH: Forecast summary20 Federation budget, Jan-Aug23 BiH: industrial production25 BiH: labour statistics25 BiH: unemployment by age group26 BiH: retail prices27 Inter-entity turnover, Jan-Jun28 Federation: foreign trade, Jan-Jun29 Federation: trading partners, Jan-Jun30 Republika Srpska: trading partners, Jan-Jun

List of figures

15 BiH: gross domestic product15 BiH: current-account balance24 BiH: industrial production26 BiH: retail prices



Summary October 2002

The good performance by nationalist parties across BiH in the general electionon October 6th is likely to lead to high levels of political obstruction during theforecast period, as each party will try to promote the interests of its own ethnicgroup as government policy. Serious tensions with the international communityare likely to result, and organisations such as the IMF could become reluctant toextend further credits. This will have a serious effect on an economy which stillrelies on international funding to drive growth. Real economic growth in BiH isforecast at 2.3% in 2002 and 4.0% in 2003-04, with the current-account deficit setto narrow from 20% of GDP in 2002 to 17% in 2003 and 12% in 2004. Inflation inthe Federation will be flat throughout 2002-03, measuring just 0.1%, before risingto 1.3% in 2004, while in Republika Srpska (RS) it will be higher, at 2.8% in 2002,1.6% in 2003 and 3.2% in 2004.

Nearly all the votes have been counted from the October 6th general election,although the results will not be certified until October 22nd. Owing to the lowturnout, the nationalist parties across BiH have done well. The governingAlliance for Change coalition alienated voters by its lack of cohesion andstability and failure to improve the economy. It seems unlikely that the Alliancewill be reconstituted.

The government will need to adjust the economy to be less reliant on aid.Despite the change in government, fiscal prudence, maintaining the currencyboard and deepening structural reforms are likely to remain policy aims. TheIMF has applauded these aims and praised the country�s macroeconomicstability. Privatisation has proceeded slowly, particularly in RS, mainly owing toa lack of interest from abroad.

Industrial output growth has decelerated since the last quarter of 2001, althoughthis may be the result of a base effect. Manufacturing performance has beenstrong, although this is often owed to a handful of producers. Unemployment isrising, although many work in the grey economy. Wages are rising while priceinflation, already low, is falling.

The Federation�s six-month trade balance deteriorated sharply: the worseningexport performance was caused by a sharp contraction in manufacturingexports. Federation imports remain high, particularly in agriculture. Trade withthe EU plummeted in the first half of 2002 as the recovery there proved moresluggish than expected. The RS trade balance also worsened, althoughYugoslavia (Serbia and Montenegro) remains the most important trading partnerfor RS. The external debt service will rise to 7.5% of BiH exports in 2002-03,while the financing requirement is expected to reach US$2.7bn in 2002. Foreigninvestors had brought in US$867m by the end of 2001.

Editors: Christopher Peters (editor); Laza Kekic (consulting editor)Editorial closing date: October 14th 2002

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2002-03

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Bosnia and Hercegovina


Political structure

Bosnia and Hercegovina (BiH) has legal existence within the boundaries of the formerYugoslav republic of the same name. It comprises two entities: the Federation of Bosniaand Hercegovina (which is often referred to simply as the Federation), set up by theWashington Treaty of March 18th 1994, and Republika Srpska (RS). Brcko District is underthe sovereignty of BiH

BiH has the following limited responsibilities under the Basic Principles agreed in Genevaand New York in September 1995, and confirmed at Dayton, US on November 21st: theestablishment of a Constitutional Court, a Commission for Displaced Persons, a HumanRights Commission, a central bank, public corporations to manage and operate transportand telecommunications, a Commission to Preserve National Monuments, and a systemof arbitration between the two entities. Foreign trade is also supposed to be managed bythe government of BiH

BiH has a bicameral parliament comprising the House of Representatives and the Houseof Peoples, two-thirds of whose members are elected from the Federation and one-thirdfrom the RS. A valid majority requires the support of at least one-third of the membersrepresenting each entity. The Federation and the RS also have their own parliaments

General elections took place on October 6th 2002 (full results not available at time ofwriting)

BiH has a rotating collective three-member presidency: Jozo Krizanovic (Croat; electedMarch 30th 2001; current chairman), Beriz Belkic (Muslim; elected March 30th 2001) andZivko Radisic (Serb; elected September 13th 1998)

The Council of Ministers comprises six ministers, one of whom is appointed chairman(prime minister) on a rotating basis for eight months at a time. The current governmentwas formed on February 22nd 2001. The entities also have their own governments

Social Democratic Party (SDP), Party for BiH (SzBiH), New Croatian Initiative (NHI), BiHPatriotic Party (BPS), List for Progress (List), Party of Democratic Action (SDA), CroatianDemocratic Union of BiH (HDZ); Serb Democratic Party (SDS), Party of DemocraticProgress (PDP), Party of Independent Social Democrats (SNSD), Democratic Socialist Party(DSP), Serb People�s Alliance (SNS), Serbian Radical Party of Republika Srpska (SRSRS),Socialist Party of Republika Srpska (SPRS)

The Dayton agreement called for the appointment of a high representative, a seniorforeign diplomat charged with monitoring the implementation of the agreement andco-ordinating the activities of international organisations operating in BiH. The highrepresentative is advised by the Peace Implementation Council (PIC), which includes allthe signatories to the Dayton agreement. Since December 1997 the high representative hasbeen able to impose decisions in cases of disagreement and to dismiss officials whoobstruct the Dayton agreement

Chairman and European integration Dragan Mikerevic (Serb)Civil affairs and communications Svetozar Mihajlovic (Serb)Foreign affairs Zlatko Lagumdzija (Muslim)Foreign trade and economy Azra Hadziahmetovic (Muslim)Human rights and refugees Kresimir Zubak (Croat)Treasury Ante Domazet (Croat)

Peter Nicholl

Paddy Ashdown

Official names

Form of state

Legislatures

National elections

Head of state

National government

Main political parties

International involvement

National government (somepositions may change following the

elections on October 6th 2002)

Central Bank governor

High representative



President Karlo Filipovic (SDP)Vice-president Safet Halilovic (SzBiH)Prime minister Alija Behmen (SDP)Deputy prime minister and minister of finance vacant

Agriculture, water and forestry Behija Hadzihajdarevic (SzBiH)Defence Mijo Anic (NHI)Education, science, culture and sports Mujo Demirovic (SDP)Energy, mining and industry Hasan Becirovic (SDP)Environment Ramiz Mehmedagic (SzBiH)Interior Ramo Maslesa (SzBiH)Justice Zvonko Mijan (SDP)Social affairs and refugees Rifet SkrijeljTrade Andrija Jurkovic (SDP)

President Mirko Sarovic (SDS)Vice-president Dragan Covic (SDS)Prime minister Mladen Ivanic (PDP)

Agriculture Rodoljub TrkuljaDefence Slobodan BilicEducation Gojko SavanovicEnergy and mining Bosko LemezFinance (acting) Mladen IvanicForeign economic relations Fuad TuralicHealth and social security Milorad BalabanInterior Perica BundaloJustice Biljana MaricRefugees and displaced persons Mico MicicTrade and tourism Boro Babica Officially, the party affiliations of ministers have not been revealed.

Federation

Key ministers

Key ministersa

Republika Srpska



Economic structure

Annual indicators1997 1998 1999 2000 a 2001 a

GDP at market prices (KM bn) 6,367 7,244 8,603 9,457 10,111GDP (US$ bn) 3,672 4,113 4,690 4,463 4,630

Real GDP growth (%) 36.6 9.9 9.9 5.9 5.6 b

Retail price inflation (Federation; %; av) 14.4 5.3 -0.6 1.5 b 1.7 b

Retail price inflation (Republika Srpska; %; av)c -6.8 2.0 15.1 14.6 b 6.5 b

Population (m; mid-year; resident) 3.74 3.65 3.73 3.80 3.87Exports of goods fob (US$ m) 303 593 749 1,066 1,002

Imports of goods fob (US$ m) -1,643 -2,723 -3,077 -2,896 -2,670Current-account balance (US$ m) -642 -844 -758 -565 -1,008

Reserves excl gold (US$ m) 80 175 452 497 b 920 b

Total external debt (US$ bn) 4.1 3.0 3.1 2.6 2.8Exchange rate (KM:US$; av)d - 1.76 1.83 2.12 b 2.18 b

October 11th 2002 KM1.98:US$1; KM1.96:¤1

Origins of gross domestic product 2000 % of total Components of gross domestic product 1998 % of totalAgriculture, fisheries & forestry 13.3 Public & private consumption 100.4Industry & utilities 23.1 Gross investment (incl stockbuilding) 38.0

Construction 5.9 Exports of goods & services 35.1Services 57.7 Imports of goods & services -73.5

Total 100.0 Total 100.0

Principal exports 2001 % of total Principal imports 2001 % of totalFederation FederationBase metals 23.7 Food & beverages 15.2Clothing 18.0 Chemicals 10.7Wood products 11.1 Machinery & equipment 8.8Leather products 7.3 Fuel 8.6

Main destinations of exports 2001 % of total Main origins of imports 2001 % of totalFederation FederationItaly 23.3 Croatia 17.1Germany 16.8 Italy 16.0Switzerland 12.6 Slovenia 13.0Croatia 11.3 Germany 12.5Republika Srpska Republika SrpskaYugoslavia (Serbia-Montenegro) 50.6 Yugoslavia (Serbia-Montenegro) 24.3Italy 17.8 Slovenia 13.7Germany 6.0 Croatia 9.6Slovenia 4.5 Hungary 8.6

a Economist Intelligence Unit estimates. b Actual. C KM-based index. d Convertible marka (KM) introduced in June 1998 and fixed at KM1:DM1;since January 2002, KM1.95583:�1.



Quarterly indicators2000 2001 20023 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Financial indicatorsExchange rate KM:US$ (av) 2.164 2.252 2.121 2.243 2.199 2.186 2.234 2.131Exchange rate KM:US$ (end-period) 2.164 2.252 2.121 2.306 2.142 2.219 2.242 1.961Deposit rate (av; %) 15.12 14.67 16.50 n/a n/a n/a n/a n/aLending rate (av; %) 30.50 30.50 30.99 n/a n/a n/a n/a n/aM1 (end-period; KM m) 1,362 1,463 1,504 1,672 1,890 2,790 3,028 3,117M1 (% change, year on year) 129.3 27.3 26.1 33.4 38.8 90.7 101.3 86.4M2 (end-period; KM m) 2,437 2,564 2,668 2,853 3,150 4,922 5,175 5,173M2 (% change, year on year) 26.3 10.2 17.1 20.5 29.3 92.0 94.0 81.3

Foreign trade (US$ m)a

Exports fob 189.9 194.8 196.6 184.3 187.6 179.0 190.9 n/aImports cif -701.4 -713.0 -640.6 -692.4 -726.1 -821.4 -666.3 n/aTrade balance -511.5 -518.2 -444.0 -508.1 -538.5 -642.4 -475.4 n/aForeign reserves (US$ m)Reserves excl gold (end-period) 422 497 478 497 588 1,221 1,134 1,229

a DOTS estimates.

Sources: IMF, International Financial Statistics; IMF, Direction of Trade Statistics.



Outlook for 2003-04

Political outlook

According to the near-finalised results of the general elections on 6th October2002, the Party for Democratic Action (SDA), the Croatian Democratic Union ofBiH (HDZ) and the Serb Democratic Party (SDS)�the three main nationalistparties which dominated the political scene between 1990 and 2000�polledmost of the votes among their respective ethnic groups. Results are due to befinalised and certified on October 22nd. As the Economist Intelligence Unitexpected, the low turnout of just over 53% had a major influence on the resultsof the vote, which went against more moderate parties, especially in theFederation. The major beneficiary has been the mainly Muslim SDA, whichmanaged to recover some of the vote lost to the Social Democratic Party (SDP)in 2000. The vote comes as a setback to the international community, which hasduring the past four years openly supported moderate political forces in BiH andplayed a vital role in the formation of the Alliance for Change, which has led thegovernment since the 2000 general election.

In recent years there has been notable progress in the functioning of commoninstitutions both at the state and the Federation level, with the reform processbecoming unblocked. However, the Alliance for Change has paid a heavyelectoral price for the fact that numerous issues have remained only partiallyaddressed, in particular the question of the country�s ailing economy, whichleaves BiH dependent on continued international assistance and its citizensinsecure about their future. The reform agenda has been driven largely by theinternational community, and has demanded painful measures which haveproved unpopular with the public. Pensions and war veterans� benefits havebeen cut, unemployment has increased and public services have deteriorated.

The Alliance for Change has, since its inception, faced a difficult challenge indeveloping a sense of cohesiveness and stability, owing to its heterogeneousmembership. It has failed to develop mechanisms for internal co-ordination anddecision-making that would enable it to reconcile ethnic, political and economicdifferences among its members. The government�s handling of some sensitiveissues�such as the extradition to the US of six suspected Algerian terrorists, andthe acceptance of a compromise solution on the implementation of theConstitutional Court�s decision on the constitutional status of BiH�s threepeoples�contributed to the perception among many Bosnian Muslims that thegovernment harboured anti-Muslim sentiment. All this was certainly costly tothe SDP� the main Alliance for Change party�in terms of votes and helped toincrease support for the SDA. The future of the SDP leader, Zlatko Lagumdzija,the present BiH foreign minister, is now seriously in doubt, with many SDPcandidates openly calling for his resignation and citing his alleged egotisticaldespotism as the main reason for their party�s defeat.

The uncertified results suggest that, out of 57 registered parties, ten earned thenecessary 3% of the vote required to enter the BiH state parliament. The SDAwon 32.1% of the Federation vote for the state parliament, while the other main

Domestic politics

Election watch



Federation parties, the SDO, the Party for Bosnia and Hercegovina (SzBiH) andthe Croatian Democratic Union (HDZ), won approximately 15% each. In RS, thenationalist SDS leads the vote for the state parliament with 38.1%, followed bythe moderate Party of Independent Democrats (SNSD) with 25.4% and the Partyof Democratic Progress (PDP), which is led by the RS prime minister MladenIvanic, with 11.6%.

In terms of seats in the Federation parliament, the SDA leads with 32.6%,followed by the HDZ with 15.9% and the SDP with 15.7%. In the RS parliament,the SDS leads with 34.7%, followed by the SNSD with 24.9% and the PDP with12.2%. For the three-member presidency of BiH, the SDA�s Sulejman Tihic leadsthe vote for the Bosnian Muslim seat with 37.7%, while the SzBiH�s Haris Silajdzicis close behind with 34.3%. Many expect that diaspora votes, which have yet tobe counted, will push Mr Silajdzic�s vote above that of Mr Tihic. This willbecome clear on October 22nd. The HDZ�s candidate for the Bosnian Croat seat,Dragan Covic, leads with 61.8%, and the SDS�s candidate, Mirko Sarovic, leadswith 39.7% of the vote for the Bosnian Serb seat.

Coalition-building to form parliamentary majorities is likely to be tortuous. TheSDA leader, Mr Tihic, has described as unrealistic a coalition with the SDP, whilenot ruling out the possibility of a coalition with the SzBiH, which was itselfcreated from a breakaway faction of the SDA led by Haris Silajdzic. Mr Tihic alsosaid at one stage that a coalition with the HDZ was possible, contradicting hisassertion a few days earlier that such an alliance was out of the question. TheHDZ in turn said it was confident of reaching a coalition agreement with theSDA, and possibly also with the SzBiH. However, it ruled out any partnershipwith the New Croatian Initiative (NHI), which was part of the Alliance forChange. The Alliance for Change is now highly unlikely to be reconstituted.

In RS, the SDS is likely to try to maintain its coalition with the PDP, which is saidto be favoured by PDP leader, Mladen Ivanic, as it would almost certainly allowhim to remain as RS prime minister. The SNSD appears to be against anycoalition, according to statements by its leader Milorad Dodik, and thus is set foropposition. He has said it will only enter a partnership with the SDS if thatparty commits itself to fighting corruption, which Mr Dodik said he doubtedwas realistic. He also described the PDP as merely an extension of the SDS.

The most plausible scenario is one in which the nationalist parties will take partin the government but their action will be closely monitored by the inter-national community. The situation has been further complicated within the lastfew days by reports that the Office of the High Representative (OHR) is seeking anew interpretation of the section of the election law on compensatory man-dates. The basic election law stipulates that candidates for the entity and stateparliaments are elected partly from multi-member constituencies according tothe principle of proportional representation, and partly from the territory of theentity as a whole; the latter are compensatory mandates. In the elections to theBiH House of Representatives from the Federation, 21 members are elected frommulti-member constituencies and seven are compensatory mandates electedfrom all of the Federation territory; in the elections from RS, nine members areelected from multi-member constituencies and five from RS as a whole.



In the election law there are complicated rules about how the compensatorymandates are worked out, which allow for a new interpretation. This wouldallow the OHR to increase the number of parties represented in the parliaments,thereby diluting the power of the nationalists in each entity. Whatever steps theOHR takes, Paddy Ashdown, the high representative, has a difficult job ahead ofhim. Lord Ashdown has tried to put a brave face on what has been a serioussetback for him. He has stated that the election results do not signal a resurgenceof extreme nationalism but are, rather, the product of voter frustration with thegovernment, the economy and unfulfilled promises.

The Alliance for Change government started many important reform processesand the new government will face a difficult task in implementing them, even ifit has the will to do so. International assistance remains the internationalcommunity�s strongest form of leverage in trying to ensure the compliance oflocal parties. However, if past experience with the three nationalist parties in thegovernment is anything to go by, the bargaining process will be difficult. Thiswill slow down the reform process and keep BiH�s political outlook unstable. Itis quite possible, therefore, that none of the governments which eventually formwill last for their full four-year mandate.

Regional co-operation and inclusion into Euro-Atlantic institutions shouldremain the focus of BiH foreign policy, though relations may become more tensein the aftermath of the elections. BiH�s relations with its immediate neighboursCroatia and Serbia remain prone to incidents, but the overall trend is one ofimproved communication and greater political will to address contentiousissues. This pattern may, however, be disrupted by the victory of the nationalistsin the recent elections. For example, the leading candidate for the Bosnian Serbseat on the federal presidency has already said that he will do everything withinhis power to block BiH�s lawsuit against Yugoslavia (Serbia and Montenegro) forgenocide and war crimes. Nevertheless, the regional co-operation framework,promoted through various internationally sponsored initiatives such as theStability Pact for South-east Europe, leaves little alternative to co-operation. TheEU has made it a condition of the Stabilisation and Association Agreement(SAA) candidate countries that they actively promote regional co-operation.

BiH has formally met all the conditions of the EU Road Map (agreed in 1999) forthe start of the feasibility study on the SAA. Both the EU Commissioner forExternal Affairs, Christopher Patten, and the EU envoy to BiH, Hans JorgeKretschmer, have said that work on the feasibility study might start soon, but theoutcome of the October elections may well have an influence on when the SAAcan actually be signed. This process is important for BiH, as it will compel it toremain focused on the EU accession agenda. BiH has yet to implement some ofthe conditions attached to its membership of the Council of Europe, whichbecame effective in the spring of 2002.

Relations with the US became tense when in August the BiH government wasasked to sign a bilateral agreement consenting to a demand that US citizens beexempted from the International Criminal Court obligations. The governmentfinally decided to wait until the EU and a number of other countries objecting tothe American proposal had taken a stand on the issue. The other source of

International relations



friction was the allegation by US intelligence sources that a company in RS soldarms to Iraq. The present US administration however remains supportive of BiH.On September 10th the US Senate adopted a resolution on BiH in which fullsupport for the territorial integrity of BiH, and the equality of its three con-stituent peoples, were affirmed.

Economic policy outlook

The outline of BiH economic policy for 2002-03, as submitted to the IMF, is acontinuation of the course the government has been following over the past fewyears. It aims to adjust the economy so that it can withstand the decline inforeign assistance, which has been essential to its survival since the war endedin 1995. The policy framework is based on three main elements: improving fiscalprudence, maintaining the currency board and deepening structural reforms.

The initial improvement in fiscal consolidation in 2002 provides a starting pointfor further efforts towards fiscal stabilisation. An ambitious programme has beenagreed with the IMF which could, if successful, result in substantial cuts inpublic spending, and restructuring away from current and towards capitalspending. The BiH government and the IMF estimate the overall 2002 con-solidated general government deficit at 5.5% of GDP (on a commitment basis),declining to 3% in 2003.

Monetary and exchange-rate policy will be determined by the currency boardrules. According to the Dayton agreement, the stipulation on the currency boardrequirement expires in mid-2003, but BiH authorities appear to be determined tokeep it beyond that date. Implementation of the currency board regime hasbeen one of the most successful aspects of economic policy in BiH. Politicalcircumstances in BiH are still such that abandoning the currency board regime isnot yet feasible. Furthermore, the IMF stand-by programme, approved in August2002, stipulates the operation of the currency board as one of the structuralperformance criteria.

The incumbent government has made advances in implementing structuralreforms, but a major effort to strengthen them further is needed. Improving theoverall business environment is of the highest priorities, and governmentpolicies are likely to focus on several important areas, notably facilitating entryand exit, lowering administrative costs and strengthening the legal frameworkfor foreign investment. Substantial progress has been achieved in consolidatingthe financial system, but it remains inadequate to the needs of the economy interms of the volume of credit as well as the breadth of financial instrumentsavailable. The completion of bank privatisation, the enforcement of prudentbanking regulation and the creation of an infrastructure for capital and securitymarkets will be the main areas of activity in 2002-04.

Privatisation has proceeded at an uneven pace and much more slowly thaninitially envisaged. There have been delays in the submission of companies�opening balance sheets and in calls for tenders and the establishment of invest-ment funds, which have not been caused by political obstructions exclusively.There are still many enterprises that have failed to attract sufficient interest frominvestors, and several banks await privatisation. The most problematic area has

Policy trends



been the sale of strategic companies: in the Federation, these sales involve assetsestimated to be worth US$483m�more than 50% of the entity�s total capital. Thegovernment is trying, with the help of foreign experts, to address these problemsand to strengthen the Agency for the Promotion of Foreign Investment.

In 2001 BiH made initial progress in fiscal consolidation. Public spending wascut, partly as a result of the decline in foreign grants, and the accumulation ofnet arrears slowed down. However, the fiscal position at all levels of gover-nment (state, entity, canton and municipality) will remain precarious throughoutthe forecast period. Demands on public resources remain high, and meetingthem will be difficult owing to the slowdown in economic activity. Tax incomeaccounts for over 60% of BiH public revenues (of which customs constitutes thelargest item), while the remainder is covered by social insurance contributions.The 2002 half-year budget results showed an increase in customs receiptsresulting from the improved efficiency of the customs service, which has beenoverhauled with the assistance of the EU Customs and Fiscal Assistance Office.However, customs will cease to be an important source of revenue over thenext few years as BiH becomes part of an expanding free-trade zone in south-east Europe.

Social contributions will, if anything, have to be cut to ease the profit squeezeon enterprises. The efficient recovery of tax revenue will therefore become allthe more important. Tax policy and tax enforcement, along with the strength-ening of the legal framework for the execution of the budget, will be essentialfor fiscal consolidation.

These measures, however, will only partially address the fiscal problems BiHfaces; sustaining economic growth remains its key problem. Given BiH�scomplex economic situation, characterised by a continuing dependence oninternational assistance, there is a high degree of uncertainty regarding thecountry�s growth prospects. In 2001 there was an unexpected slowdown ingrowth, and no major recovery is expected in 2002-04. This is largely becausegrowth will continue to depend heavily on continuing foreign assistance, whichis not only declining but could face lengthy delays in disbursement owing to thenecessity of bargaining with the new authorities. This will do little to ease theprecarious fiscal position. The method of funding the central state budget willhave to be reconsidered as foreign assistance declines.

BiH authorities have indicated their long-term commitment to the currencyboard regime. The IMF will insist that the currency board be strictlyimplemented. This is particularly important because of the country�s weak fiscalposition, which in itself is a threat to the currency board. The local currency istied to the euro at KM1:�0.51, and must have full backing in it. The central bank�sforeign-currency reserves have grown continuously, and received a significantboost towards the end of 2001 from the conversion of the D-mark to the euro.

Fiscal policy

Monetary policy



Economic forecast

International assumptions summary(% unless otherwise indicated)

2001 2002 2003 2004Real GDP growthWorld 2.0 2.7 3.7 4.0OECD 0.7 1.6 2.3 2.7EU 1.5 0.9 1.7 2.2Exchange ratesUS$:� 0.896 0.955 1.073 1.053SDR:US$ 0.785 0.768 0.734 0.745Financial indicatorsUS$ 3-month Libor 3.78 1.87 2.19 4.57� 3-month interbank rate 4.26 3.36 3.25 3.83Commodity pricesOil (Brent; US$/b) 24.5 25.2 24.7 19.7Natural gas (Europe; % change in

US$ terms) 5.2 -10.8 -2.3 -2.4Food, feedstuffs & beverages

(% change in US$ terms) -1.9 14.6 13.6 0.4Industrial raw materials

(% change in US$ terms) -9.8 0.2 6.1 9.8

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The global economy is recovering from the slowdown of 2001, but the pace ofrecovery has been much slower than was previously expected. Our centralforecast is that world GDP at purchasing power parity (PPP) exchange rates willpick up to 2.7% in 2002, rising to 3.7% in 2003 and to 4% in 2004. However, theupturn has proved to be particularly weak in the EU, and real GDP growth inthe EU is now expected to be just 0.9% in 2002, considerably lower than in 2001.Growth in the EU should accelerate to 1.7% in 2003 and to 2.2% in 2004.

The performance of BiH�s small economy is closely tied to developments in theEU, which took over 40% of BiH�s exports in 2001. It is particularly stronglyaffected by Italy (22% of BiH�s exports) and Germany (14% of exports), in both ofwhich economic recovery has been more sluggish than in other EU countries.EU import demand is expected to remain stagnant for at least another year, andis not expected to rebound in 2003-04 as quickly as previously thought.

There are two main downside risks to our global forecast: that long-standingimbalances in the US economy will rapidly be corrected; and that US militaryaction in the Middle East will lead to a prolonged oil price spike. Both scenarioswould almost certainly extend the current global downturn, hitting BiH�s exportsand its access to foreign capital. The worsening outlook for the US has led us torevise our forecast for the US dollar, with the euro expected to strengthen toUS$1.05:�1 by the end of the year, before averaging around US$1.06:�1 in 2003-04. Oil prices have risen sharply as the markets react to the perceived risks of aUS attack on Iraq. Oil prices are likely to spike even higher if the US does launcha military strike. However, assuming there are no sustained disruptions tosupply, average oil prices in 2003 will be slightly lower than in 2002, and priceswill fall back further in 2004 as the fundamental excess supply in the marketreasserts itself.

International assumptions



Despite its relatively sound macroeconomic performance, seven years after theend of hostilities BiH has been unable to revive its economy to anywhere nearits pre-war performance. At the end of 2001, GDP was about 40% of the 1991level, industrial output was below 40% and GDP per head stood at around 47%of the pre-war level. Poverty remains a serious problem: the incomes of almost20% of the population are below the poverty line of KM1.5 (about US$0.75) perday. The internationally financed post-war reconstruction boom has lost itsmomentum, and BiH is entering a difficult period during which it will have tomake the transition to a reliance on its own developmental resources. Theeconomic challenge in BiH is to stimulate growth in the private sector and tointegrate the two entities to create a single economic space . The continuation ofeconomic reforms, the inflow of international assistance and the maintenanceof macroeconomic stability are the essential preconditions for keeping theeconomy afloat.

The decline in international assistance will have a major influence on BiH�sgrowth dynamics during the next two years. We forecast GDP growth of 2.3% in2002 and of approximately 4% in 2003-04, slightly lower than our previousforecast in the light of the six-month Federation performance indicators.

We expect that the stabilising effect of the currency board regime will besustained, thus providing the main check on an increase in prices. Convergencein prices between the two entities is nearly complete, although inflation is likelyto remain a little higher in Republika Srpska than in the Federation.

From January 2002 the euro replaced the D-mark as the reference currency. Theconvertible marka is now fixed at KM1.95583:€1, and will follow the euro�sfortunes. The euro has gained ground against the US dollar, and in 2002 wetherefore expect the BiH currency to strengthen to a full-year average exchangerate of KM2.05:US$1, a nominal appreciation of 6.3% against the US dollar. Giventhe expected differential in inflation rates between the US and BiH, this wouldconstitute a real appreciation against the US dollar of 3.2%. In 2003 realdepreciation is forecast at 6.3%, as the marka depreciates nominally toKM1.82:US$1. The trend will continue in 2004, when the marka is forecast toshow real depreciation of 11.0%, although in nominal terms it will depreciateonly slightly, to KM1.86:US$1. This will have some impact on US dollar-denominated trade (and on oil in particular), although it will be limited as BiHconducts most of its trade with the euro zone.

A large foreign trade deficit and declining concessional funding will result in arecurring and large (though falling) current-account deficit in BiH, and thisremains a source of concern. The inaccurate foreign trade statistics make itdifficult to pinpoint the actual movements in various items, which is whyestimates of the foreign trade deficit vary according to the source. The slowdownin economic activity caused by declining economic assistance will reduceimport demand, which will nevertheless remain buoyant owing to foreignremittances to households. A fall in imports will cut the foreign trade deficit in2002-04. Export growth is likely to remain modest as it is closely linked to EUdemand. The RS is also heavily reliant on Serbian demand for its exports, as is

Economic growth

Inflation

Exchange rates

External sector



the Federation on Croatian demand. Growth in the EU as a whole, andparticularly in Germany and Italy, BiH�s main EU trading partners, will bemodest over the forecast period. The current-account deficit will thus remainlarge, and will have to be financed primarily through international assistance(which is, however, expected to decline) as no big increase in FDI is expected. Asubstantial rise in foreign debt service will contribute to BiH�s vulnerableexternal position.

BiH: Forecast summary(% change year on year unless otherwise indicated)

2001a 2002 b 2003c 2004 c

Real GDP growth 2.3 b 2.3 4.0 4.0

Industrial output 9.0 b 7.0 6.5 6.0Retail price inflation (av)Federation 1.7 0.1 0.1 1.3Republika Srpska 6.5 2.8 1.6 1.4Merchandise exports fob (US$ m) 1,002 1,150 1,400 1,700

Merchandise imports fob (US$ m) -2,670 -2,800 -3,050 -3,000Current-account balance (US$ m) -1,008 -1,033 -1,069 -762 % of GDP -22.1 b -20.2 -17.5 -11.9

Exchange rate (av; KM:$) 2.18 2.05 1.82 1.86

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

The political scene

Strengthening common institutions, at state as well as Federation level, has beenone of the government�s priorities. Towards the end of its term in office, animportant advance was made in the creation of state-level defence structures.This has been a highly sensitive issue in relations between the two entities.

According to BiH�s constitution, defence falls under the jurisdiction of theentities. As a result, BiH has two armies. However, under the Dayton PeaceAgreement the Standing Committee on Military Matters (SCMM) was establish-ed in June 1997, charged with the co-ordination of armed forces in BiH and withbecoming an active forum in which to discuss military issues. The SCMM gotoff to a slow start, but under pressure from the international community apermanent secretariat was established in July 1999, which was supposed to

Common institutions arestrengthening



drive the work of the SCMM. The SCMM met fairly regularly and initiated someimportant processes, such as military downsizing, but it failed to develop into aninstitution contributing significantly to the reintegration of BiH.

When the Alliance for Change government took office in January 2001, one ofits first steps was to draft the BiH Defence Policy Document, which resulted inthe adoption of the BiH Defence Policy in May 2001. The government early onexpressed an interest in joining NATO�s Partnership for Peace Programme, butdifferences remained regarding the appropriate institutional form. The messagefrom NATO was that a common defence structure was a prerequisite for joiningthe programme. A NATO Stabilisation Force spokesman stated that NATO�sconditions for BiH membership were a state-level defence ministry, a jointdefence policy, parliamentary control over the armed forces and a joint armycommand. This alarmed Bosnian Serb officials, who remained firm in theiropposition to any reorganisation that would lead to the creation of a state-leveldefence ministry and the unification of the entity armies.

Muslim members of the government, on the other hand, have been the mostvocal advocates of a state-level defence ministry and a unified army, referring tothe constitutional provision allowing the entities to transfer some of theirpowers to the state level. Bosnian Croats have also been supportive of the idea,but have insisted on the preservation of separate army components. During itsvisit to NATO headquarters in March 2002, the BiH presidency announced thatit would take immediate action to restructure and upgrade the SCMM and itssecretariat into an effective state-level mechanism with regard to defencematters. The conclusion from this meeting seemed to be that it should bepossible to meet the necessary requirements through the SCMM, although thevictorious nationalist parties in RS have said they will strongly oppose anyattempts to create a single unified BiH ministry of defence. The post of generalsecretary of the SCMM secretariat was created, with responsibility for co-ordinating activities in military matters. In addition, in accordance with thesuggestion of the RS government, the entity presidents will be co-opted into theSCMM. The SCMM will now consist of the three BiH presidency members, thepresidents of the entities, the chairman of the Council of Ministers and theminister of foreign affairs.

In August the Federal Information and Security Agency officially commenced itswork. This followed the long and difficult process of abolishing the two separatesecret agencies: the Bosnian Croat Agency for National Security, and the MuslimState Information Agency. Under the government led by the Party forDemocratic Action (SDA) and the Croatian Democratic Union (HDZ), the twosecurity agencies grew into powerful political lobbies and were perceived as theforemost guardians of each ethnic group�s interests. Munir Alibabic, a retiredpoliceman and a Muslim, was named as the head of the Federal Informationand Security Agency, which replaced these organisations.

Only weeks after the Agency was inaugurated, a report that had originally beensent to the highest officials in the Federation government was leaked to thepress. It concerned the misuse, by a number of high-ranking officials in the SDA-led government, of funds received for the defence of the country during the

Leaked federal security reportprovokes a stormy reaction



1992-1995 war. The report exposed a network of SDA officials and their cronies,who appropriated huge sums in foreign donations for use in their own businessdealings. The report was condemned by many influential Muslims and theirorganisations, who accused its author of attempting to incriminate those whowere defending the country. Some went further, asserting that it was part of ananti-Muslim crusade following the terrorist attacks of September 11th 2001, andthat the BiH government was seeking to encourage anti-Muslim sentiment. TheAgency�s director, Mr Alibabic, was accused of trying to avenge himself againstthe powerful SDA members who had brought about his removal by sendinghim into early retirement. Mr Alibabic held a top police job during the war inthe area of BiH which was controlled by the SDA-led government, and wouldhave had access to substantial incriminating evidence.

The report was a breakthrough in the government�s campaign against corruptionand criminality. The government has often been criticised for having shied awayfrom pursuing this agenda�which is perceived as vital not only in order tostrengthen the rule of law, but also to bring about social rehabilitation byexposing the criminal activities of the national oligarchies that were pursued inBiH under the guise of ethnic conflict.

The difficult situation in various sectors of BiH�s economy has been fuellingworker discontent. Strikes were staged across the country during the summermonths. Workers protested against wage arrears and in some cases the way theprivatisation of their companies has been handled. In September, the start of theschool year in parts of the Federation had to be postponed because of ateachers� strike.

The Federation government has throughout its term in office shown readiness toenter into dialogue with workers, and has handled some disputes successfully.In September the Federation minister for industry and mining and his deputymet the management of BiH Steel. Hailed as one of the Federation�s mostsuccessful foreign ventures, BiH Steel has nevertheless been saddled withproblems. The company is jointly owned by the Federation government and theKuwaiti Investment Authority (each owns 50%). Around 2,000 workers faceredundancy, but the Kuwaiti partner has insisted that the Federation governmentfind a solution. When the government convened a meeting to discuss the finalplan, the Kuwaiti partner failed to turn up. The government has taken the taskupon itself, and is considering selling off part of its stake in the company. TheFederation government also agreed to an international audit of the sale ofAluminium Mostar, one of BiH�s most profitable companies, whose privatisationis suspected of infringing Federation law. Former workers of the company whowere made redundant by the company�s Bosnian Croat management have longdemanded an inquiry into privatisation and asked for compensation. Theprevious SDA-HDZ government never examined the issue.

The government has also tried to honour its commitment to pay pensionarrears. When the government entered office, pensions were five months inarrears. The Federation government has on the whole managed to ensureregular payments of pensions, but the clearance of arrears has not gone asplanned. The government was not satisfied with the work of the managers of

The government is trying todeal with economic grievances



the Federation Pension Fund, and therefore decided to remove them andappoint a new management team in August. In September, 30% of the second offive pensions still owed was paid, together with the regular August pension.

The rift between the New Croatian Initiative (NHI), the leading Bosnian Croatparty in the Alliance for Change, and other Alliance parties was triggered by ascandal in the Federation finance ministry which led to the sacking of theminister, an NHI member (July 2002, p.18). The split widened when the Sarajevocantonal prosecutor requested an inquiry, to cover the 1997-2001 period, into thefinancial affairs of the Federation ministry of defence, which was headed byMijo Anic, the deputy president of the NHI. The Bosnian Muslim contingent atthe defence ministry provided the requested evidence to Federation financialpolice officials. However, Bosnian Croat officials at the ministry claimed theywere only able to submit financial records for 2001, and that no records wereavailable for earlier years. In response, the Financial police blocked the defenceministry account. Mr Anic accused his deputy, Ferid Buljubasic, a member of theParty for BiH (SzBiH), of plotting against him. Mutual accusations followed in thepress, revealing the deep antagonism between the NHI and SzBiH and thustarnishing the credibility of any government body in which the two parties havehad to share power. The two parties contain many converts from the HDZ andthe SDA respectively, which explains why the arguments employed during theseincidents always finally ended in ethnic recrimination.

When the audit of the financial records for 2001 was published in July itrevealed, besides numerous unclear entries and dubious loans, that the financeministry had overspent by KM73m (US$3.3m). Mr Anic protested, saying thatprevious years�which were not audited�were crucial in explaining the 2001overspend. According to Mr Anic, the ministry of defence inherited a KM73mdebt from the previous government, which failed to pay two months� worth ofsalaries to the Federation army. Mr Anic�s chief of staff continued to assert thatthe financial police were trying to discredit Mr Anic. Earlier, Mr Anic complainedthat he had become the target of some members of the previous Federationgovernment, some of whom remained influential.

The border crossing between Croatia and BiH in Kostajnica soured relationsbetween the two countries during the summer. The contentious issue was theexact demarcation line between the two countries, which, according to theBosnian side, was too far into its own territory. The dispute was settled,however, following a series of high-level talks.

In his speech during his visit to the town of Mali Zvornik in north-east BiH,Vojislav Kostunica, the president of Yugoslavia, said that Republika Srpska was amember of the all-Serb family and was only separated temporarily from itsmotherland, Serbia. His statement provoked an official protest from the BiHgovernment as well as drawing considerable international criticism. It wasinterpreted as a return to dangerous ideas concerning redrawing the borders ofthe region as part of a greater Serbia project�one of the main reasons that BiHwas plunged into war in 1992. Although the Yugoslav authorities attempted todistance themselves from the statement and Mr Kostunica claimed that hisremarks had been misinterpreted and taken out of context, some political figures

Tensions intensified within theAlliance for Change

Dispute with Croatia overborder at Kostajnica is settled

Tensions rise in relations withYugoslavia



suggested that the BiH government should demand a public apology fromMr Kostunica. This provoked condemnation from Bosnian Serb parties, whichsaw no reason for such an apology. The affair pointed up the close politicalinterconnections between the two countries. Mr Kostunica�s remarks should beinterpreted primarily in the light of his election campaign for the presidency ofSerbia, in which he has appealed to nationalist segments of the population andto supporters of the former president, Slobodan Milosevic.

Despite these tensions BiH, Croatia, and Yugoslavia (Serbia and Montenegro)have been making steady progress in improving their mutual relations. Since thenew governments took over in BiH and Yugoslavia, diplomatic contacts havebeen intensified. The three-member presidency of BiH met the presidents ofCroatia and Yugoslavia in Sarajevo in July. They reaffirmed their determinationto work towards the implementation of the Dayton agreement, to reach aspeedier solution to the problem of refugees and displaced people, to co-operatein the fight against terrorism and international crime, and to support each otherin their efforts to join the EU. Such high-level agreement is, however, only a first(though necessary) step in the effort to improve neighbourly relations. Moreover,steps taken to implement such measures often face problems and obstacles atlocal level. A case in point is the dual-citizenship agreement between BiH andFR Yugoslavia which, though approved, has been stalled for some time.

Economic policy

In August the IMF approved a US$89m stand-by arrangement to support BiH�seconomic programme over the next 15-month period. The new agreement hadbeen under negotiation since May 2001, when the previous stand-by arrange-ment ended. The delay was caused by the local authorities� failure to meet theconditions attached to the new stand-by credit. The last area of contention wasthe Federation government�s proposal to increase war veteran benefits and theRS government�s plan to pay pensions to a total greater than the funds availablefor that purpose. The Federation�s draft law on veterans envisaged a substantialincrease in veterans� pensions and other benefits, thus potentially underminingbudget projections agreed with the IMF. War veterans� claims are a highlycharged issue and the government was reluctant to stand up to this wellorganised group, despite being aware that their demands were excessive giventhe Federation�s precarious fiscal situation. The timing of the bill�just before thegeneral elections�made things even more difficult for the government, whichwas fearful of an election backlash from a large number of war veterans andtheir families.

On July 12th a meeting took place between the BiH Coordination Committee forEconomic Development and European Integration and representatives of theIMF, the Office of the High Representative and the US Embassy. Here, localauthorities were warned that they risked failing to obtain the stand-by arrange-ment and with it an additional KM220m (US$111m) in international assistance.Despite the warning, the discussion of the war veterans� bill was put on theagenda for the next parliamentary session, upon which the IMF�s executiveboard postponed the meeting at which the stand-by loan was to be approved.

Improving relations withneighbours remains a priority

The IMF approves a stand-byagreement



The veterans� bill was eventually withdrawn after the Federation governmenthad decided not to support it. The RS government also gave in to pressure andagreed a schedule of pension pay-outs in line with the IMF�s recommendations.As part of the agreement, the RS government and the pension fund will take upcommercial loans to the tune of KM9m to secure funds for the full payment ofJuly pensions and part of the May pension arrears.

The IMF has praised BiH�s macroeconomic stability and efforts of the authoritiesin moving forward with essential structural reforms. The Fund has pointed tothe authorities� success in cutting the fiscal deficit and implementing fiscalreforms, but has said that self-sustained growth has yet to take root. The mainthrust of the economic programme supported by the latest IMF facility remainsfurther fiscal consolidation and improvement in the business environment,which are essential to cutting the budget deficit and the negative externalaccount balance.

The programme envisages beginning clearance of the large number of out-standing claims on the public sector, such as citizens� foreign currency savingsand arrears of wartime pensions and salaries. BiH�s public debt, including theseclaims, is estimated to equal 150% of GDP and could lead to a financial crisis ifleft unaddressed. The IMF projects an acceleration of economic growth in 2003,continued low inflation and a favourable external environment, which wouldenable the authorities to continue with vital economic reforms. The newagreement is expected to be the last of the three successive stand-by loansprovided since BiH became a member of the IMF, and is likely to be succeededby a three-year Poverty Reduction Facility. The World Bank-sponsored BiHPoverty Reduction Strategy is being finalised and is expected to be adopted bythe end of the year.

Federation budget, Jan-Aug(KM m)

2001 2002Jan-Aug Jan-Aug

Revenue 679.9 786.6Expenditures 657.7 792.8

Deficit 22.2 6.2

Source: Federation Ministry of Finance, September 2002

The Federation budget deficit in January-August totalled KM6.2m, a substantialdrop compared with the deficit of KM22m a year earlier. Revenue grew by 15.6%year on year, while expenditure rose faster at 20%. The figures for the two yearsare not fully comparable, as the 2002 budget for the first time reportsexpenditures based on commitments actually incurred by the budget users. Theeight-month figure is broadly in line with the 2002 draft budget. January-Augustexpenditures amounted to 50.8% of the 2002 budget projection. The Federationhas agreed with the IMF to delay spending commitments until at leastSeptember to ensure that the 2002 fiscal balance targets are met.

As part of the reform of the tax system, an agreement was reached to unify taxrates across the entities and Brcko district. From mid-July excise duties will be

The economic programmeis ambitious

The Federation cuts its budgetdeficit

Tax policy is strengthened



paid at the point of consumption. In the past, goods produced in one entity andconsumed in the other or in Brcko district were subject to double taxation, at thepoint of production and at the point of consumption. This has provided fertileground for tax fraud, and worked as an important obstacle to investment.Coca-Cola, one of BiH�s largest foreign investors, threatened to close down itsoperations over the issue of double taxation. The company, based in Sarajevo,was planning to expand its bottling capacity into Republika Srpska but wasdiscouraged by an opaque tax system that allowed double taxation of inter-entity trade. The new tax agreement is an important step towards the unificationof the economic space. However, its implementation is complicated by thedifferent billing procedures in the entities and Brcko district.

Upon entering office in 2000, the entity governments vowed to tackle the graveproblem of tax evasion, which was costing the budget millions of convertiblemarka (KM) in lost revenues. A range of measures have been put in place, andthese have produced particularly notable results in Republika Srpska (RP), largelybecause of the centralised structure of that entity. In the Federation, progress hasbeen more modest as the tax system is not yet functioning in a unified manner,owing to the lack of full co-operation between the Bosnian Croat and BosnianMuslim authorities. The Federation government has recently adopted a law ontax authorities and a law on inland revenue, granting the tax authoritiesextensive powers to deal with tax evaders (July 2002, page 20). The governmentis determined to clamp down on tax evasion, as taxes will eventually become itsmain source of revenue. The importance of customs revenue will graduallydiminish as the number of countries with which BiH operates a free-traderegime continues to rise.

A low level of savings has been one of the features of BiH�s post-war economicrecovery, and is largely explicable by the lack of public trust in the bankingsystem. The depth of depositors� mistrust towards banks, particularly in RS, wasrevealed at the end of 2001 when the D-mark replaced the euro as the referencecurrency in BiH. The amount of foreign currency that households exchanged forthe KM was twice the level of deposits recorded with the banks. In theFederation the problem had been addressed through the establishment of theDeposit Insurance Agency, which has resulted in savings of KM1.34bn(US$683m) by mid-2002, compared with KM107m (US$55m) in RS, where nosuch institution exists.

The reform of the financial system in BiH has so far focused primarily onconsolidation of the banking sector. Some important advances have been made,on the basis of which deeper reform can now be pursued. As part of this drive,the state-level Deposit Insurance Agency was established in August, which willinsure savings to the amount of KM5,000 (US$2,550). The founding capital of theagency totals KM35m (US$18m), and consists of donations by the US andGerman governments together with funds transferred from the FederationDeposit Insurance Agency, which will cease to exist. Seven banks in theFederation are licensed to insure deposits; none are licensed to do so inRepublika Srpska. The next step in the reform programme is likely to be the

A clampdown on tax evasionwill intensify

Savings need a boost



establishment of a state-level banking agency to replace the existing entity-levelagencies charged with the licensing and oversight of the entity banks.

The reform of the pensions system has been underway since November 2001when Wolfgang Petritsch, the High Representative at that time, imposed laws onpension and disability insurance in both entities. The main stipulation in thenew law on pensions is that they are paid according to the amount of revenuecollected. Before this law came into effect, both entities applied the regulationsinherited from the former Yugoslavia, which led to pensions arrears of severalmonths. The new law has cut pension entitlements in both entities.

The new law faced strong opposition from local parties, particularly in theFederation, where the two pension funds�one each in the Bosnian Croat andBosnian Muslim majority areas�would have to be merged as part of the reform.Under pressure from the international community, however, the two funds havebeen merged during 2002, and further reforms are now planned. Entity pensionlaws need to be harmonised, and the BiH presidency is to initiate the adoptionof the state-level law on privatisation. This is a necessary prerequisite for theeventual privatisation of pension funds. The reform of the pensions system is anessential element in the consolidation of BiH public finances.

Privatisation of strategic companies in the Federation gathered speed in the yearto July, suggesting that the target of selling 40% of these companies by the year�send could be met. The sale of strategic companies in Republika Srpska hasadvanced much more slowly, owing partly to the late start on privatisation andpartly to deficiencies in the process itself caused by inadequate staffing and lowexpertise in the overseeing bodies. The uneven pace of privatisation betweenthe two entities is likely to remain, following the implementation of thePrivatisation Technical Assistance Credit in the Federation. Under this scheme,World Bank experts have been assigned to a number of strategic companies andwill prepare them for privatisation. The sales of the first of these companies areexpected by the end of the year.

There have been difficulties in attracting strategic, and particularly foreign,investors in the privatisation of strategic companies. Of the 55 enterprises fromthe Federation list of strategic companies international tenders were opened for29, but only a few of these managed to attract strategic investors. The tenders forsome of BiH�s pre-war flagship companies, such as Borac konfekcija (clothing),Unis Tadiv (motor vehicles), Soko zrakoplovstvo (aircraft), Fabrika sode and Dita(chemicals), were unsuccessful, and they therefore had to be sold by the directsales method. The shortage of strategic investors in the sales of large companieshas to a rise in the number of management and employee buy-outs.

The special status of Brcko district has been the main reason behind the latestart on privatisation there. After some initial confusion�in which RS offeredsome of the Brcko companies for sale, and later these same companies wereoffered by the Brcko district�it was decided to follow a different privatisationprocedure. The companies will be offered for cash first, rather than for vouchersas in the two entities. A Minority Share Fund, set up on the recommendation of

Pension reform will continue

Privatisation in the twoentities remains uneven

Strategic investors are in shortsupply

Privatisation starts in Brckodistrict



the Office of the High Representative, will manage the 33% of capital reservedfor voucher privatisation. The first privatisation contract was signed in June,when Brcko Bimal vegetable oil mill was sold to an Austrian buyer.

In July the BiH House of Peoples ratified a free-trade agreement with Slovenia,following prolonged negotiations between the two countries. Relations betweenthe two countries have been soured by the problem of the old foreign currencysavings of BiH citizens in Slovenia�s now defunct Ljubljanska Banka. While bothcountries were still part of Yugoslavia, Ljubljanska Banka operated across theFederation and was one of its main banks. When SFR Yugoslavia fell apart in1990, Ljubljanska Banka ceased its operations in other former republics, leavingthe question of citizens� foreign currency deposits, estimated at KM250m(US$128m) in BiH, unresolved. BiH and the other successor countries to SFRYugoslavia have been trying to negotiate an agreement to compensate citizensfor their lost savings.

BiH has already signed free-trade agreements with other successor countries offormer Yugoslavia, and that with Slovenia is the last of these. The agreement isan asymmetric one, allowing BiH customs-free export to Slovenia, with whichBiH has a large foreign trade deficit. BiH is also negotiating free-trade agreementswith both Bulgaria and Turkey, thus honouring one of the commitments it madeas a participant in the creation of the free-trade zone under the Stability Pact forSouth-east Europe initiative.

In September a new border crossing between BiH and Croatia was openedacross the Sava river between the towns of Srbac and Davor. It took five years toreach an agreement and to build the necessary infrastructure for the ferrycrossing. The new border crossing will ease the pressure on the Gradiskacrossing, and shorten the journey to Zagreb and western Europe.

The domestic economy

Economic trends

The trend of decelerating industrial output growth in the Federation, whichstarted in the last quarter of 2001, continued to July 2002. January-July industrialoutput was up by 6.2% year on year, considerably lower than a year earlier. Thisis in part because of a base effect, since growth in 2001 was the strongest in athree-year period. Nevertheless, the Federation�s whole-year industrial output for2002 is unlikely to repeat double-digit growth rate witnessed in 2001.

BiH: industrial production(% change, year on year)

2001 20022 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Federation 14.5 13.7 6.6 4.8 5.8Republika Srpska 7.0 8.2 9.3 -12.3 -12.3

Sources: Federal Office of Statistics (FOS), Statistical Data on Economic and Other Trends; Office of the High Representative (OHR),

Economic newsletter; Central Bank of Bosnia and Hercegovina (CBBiH), Bulletin (various issues); Republika Srpska Institute of

Statistics, Monthly Statistical Review.

Free trade agreement withSlovenia is ratified

New border crossing opens

Industrial output growth isdecelerating



Manufacturing grew by 12.3% overall year on year in January-July on the back ofgood performances in food and beverages (12.4%), non-metal mineral products(21.7%) and wood processing (16.2%). Furniture, which was an important industrybefore the war but now accounts for only 3.7% of total manufacturing output,posted strong growth at 48.5%. Manufacture of chemicals and chemical products,one of BiH�s mainstay pre-war industries, grew by 85.4% year on year, albeitfrom a low base. The largest increase was in the output of medicines anddetergents. In most cases the increase in output and the overall growth figure islargely owed to one or two manufacturers, against a background of generallydepressed levels of industrial output. Solid performances were also recorded inleather processing (principally shoes) and in the manufacture of metal products(not including machinery). Output contracted in a number of importantmanufacturing industries, such as clothing (5.8%) and base metals (5.6%).

Mining, which accounts for 12.9% of the Federation�s industrial output, increasedoutput by 11.4%, propelled by a 10.9% rise in coal output and 16.4% rise in othermining and quarrying. Over the January-July period, electricity output con-tracted by 8.5% year on year, in line with a slowdown in overall industrialactivity and the relatively mild weather at the end of winter.

According to the revised data of the Federal Office of Statistics, Federationconstruction output declined for two consecutive months (by 4% in April and 6%in May). Despite a recovery in June, when output rose by 5.1% in annual terms,January-June construction output was down by 4.3% year on year. This declinewas owed primarily to a 35.2% drop in January output. The decline in theconstruction industry is related to the overall slowdown in reconstructionactivity funded by foreign aid, which has been gradually diminishing.

Employment, wages and prices

In the year to June, the Federation jobless figure rose from 269,004 to 282,838. Alarge share of this increase is attributable to job losses in the defence sectorcaused by the downsizing of the military. The number of people unemployed inJune was 6% higher than the 2001 average. Employment in the defence and

Manufacturing performanceremains good

Construction output falls

Official unemployment isrising



public administration sectors in June was down by 18.7% compared with the2001 average. The number in official employment dropped to 390,970 in Junefrom 405,689 at the beginning of the year.

BiH: labour statistics(No. unless otherwise indicated)

2001 2002Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

FederationEmploymenta 406,147 406,244 406,269 406,275 405,689 404,690 404,318 402,608 390,736 390,445 390,970 390,708 �Waiting list� 31,959 31,807 31,755 31,752 31,596 -b -b -b -b -b -b -b

�Active�c 374,188 374,437 374,514 374,523 374,093 -b -b -b -b -b -b -b

Unemployment 267,976 269,639 270,344 270,202 269,004 270,749 271,822 272920 277,740 281,360 282,838 287,302 Rate (%)d 39.8 39.9 40.0 39.9 39.9 40.1 40.2 40.4 41.5 41.9 42.0 42.4Net wage (KM) 445 446 459 461 458 457 467 470 475 476 471 484Republika

SrpskaEmployment n/a 221,628 n/a n/a 227,740 n/a n/a n/a n/a n/a n/a n/aUnemployment 153,242 153,231 152,580 153,057 147,749 146,569 147,555 147,728 147124 144,918 143,832 n/aNet wage (KM) 312 309 313 312 332 342 334 342 349 350 340 n/a

a Registered employment; includes waiting-list workers on stand-by but not actually working (system discontinued in 2002). b Discontinued.c Employed minus waiting list. d Unemployed divided by unemployed plus employed; includes waiting-list workers.

Sources: FOS, Statistical Data on Economic and Other Trends; OHR, Economic newsletter; CBBiH, Bulletin (various issues); BiH Foreign Investment Promotion Agency, Recent economic trends

(website); Republika Srpska Institute of Statistics, Monthly Statistical Review; Reuters.

The official rate of unemployment reported in June stood at 42%. The actual rateof unemployment is probably lower, as the grey economy is widespread. TheWorld Bank estimate put the unemployment rate in the Federation at around20%. The first UN Development Programme Human Development Report forBiH reveals that poverty rates are between three and five times higher amongthe unemployed than among those working. According to data from a survey onliving standards, unemployment is most widespread among the young, and is2.6 times higher among those aged 19-24 than among those aged 25-49.

BiH: unemployment by age group(%)

Age group Unemployment19-24 34.8

25-49 13.450-60 9.7

Source: UN Development Programme, BiH Human Development Report 2002, p36.

The Federation average net nominal wage in June 2002 was KM470.9 (US$240),a year-on-year rise of 6.9%. A slight deceleration of growth in June, comparedwith previous months, was caused by a fall in wages in a number of industrieswhich pay some of the highest average nominal wages. These include electricity,gas and water supply (down 13.8% on the 2001 average), tobacco (down 6.2%)and transport (down 7.2%). Despite the government�s commitment to a freeze,the net average wage in public administration rose by 9.1% compared with the2001 average, and the June net average wage stood at KM653 (US$333). Despiteslowing in June, the Federation average nominal wage grew in January-June at a

Growth in wages continues



rate of over 8% year on year, or 1% higher than the growth recorded for 2001 as awhole. The Republika Srpska average salary reached KM348 (US$178) in August.

The year-on-year Federation rate of retail price inflation continued to decline inthe third quarter. In July it fell by 0.1%, both in monthly terms and year on year,bringing the January-July rate down by 0.2% compared with the year-earlierperiod. This suggests a likely sharp decline in the overall 2002 rate of inflation ascompared with the 1.7% rise in 2001 (the Economist Intelligence Unit forecaststhat Federation retail price inflation will be 0.1% in 2002). The drop in January-July prices of manufactured non-food products (2% year on year) was the mostimportant factor behind a downward slide in prices. Much of this decline wasrelated to a cut in the price of heating fuel. Services, which are typically one ofthe main sources of pressure on prices, experienced a fall in prices of 0.2%. Thehighest rise was for agricultural goods, at 3% year on year. Producer price in-flation fell, and in January-July prices rose by just 1.3% year on year.

BiH: retail prices(% change)

2001 2002Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

FederationMonth on month -0.4 0.3 0.4 0.3 0.6 0.5 -0.2 -0.3 -1.0 0.7 -0.9 -0.1 0.0Year on year 0.8 -0.4 -0.5 -0.2 0.3 0.2 -0.1 -0.2 -0.2 -0.2 -0.9 -0.1 0.3

Republika SrpskaMonth on month 0.3 0.0 1.0 -1.0 0.0 1.0 -1.0 0.0 -2.0 1.0 0.0 n/a n/aYear on year 9.2 5.0 4.0 3.0 3.0 4.0 5.1 5.1 3.0 3.0 1.0 n/a n/a

Sources: FOS, Statistical Data on Economic and Other Trends; OHR, Economic newsletter; CBBiH, Bulletin (various issues); Republika Srpska Institute of Statistics, Monthly Statistical Review;

Reuters.

Sectoral trends

The Federation recorded a surplus of KM72m (US$37m) with RS in the first sixmonths of 2002, selling goods worth KM100m (US$51m), an increase of 408%on the same period in 2001. In the same period it purchased goods from RSworth KM28m (US$14m), an increase of 616% over the first half of 2001.

The Federation has a largetrade surplus with RS

Retail price inflation is lowand falling



Inter-entity turnover, Jan-Jun(KM m unless otherwise indicated)

2001 2002 % changeFederation goods sold to RSFood products 7.7 28.8 274.4Textile products 0.5 1.7 229.9Leather products 0.2 0.9 359.3Fuel materials 0.1 1.3 2231.8Metal products 2.2 7.2 231.2Glass, ceramics & porcelain 0.4 2.2 425.6Electrical engineering 3.0 19.3 554.8Chemicals 1.4 11.1 705.0Wood products 1.0 6.4 550.5Liquid fuel & lubricant oil 0.1 1.8 2126.0Non-metal building materials 1.1 5.4 396.8Other 1.1 13.5 1152.8Total 18.6 99.6 435.5Federation goods bought from RSFood products 0.8 9.4 1014.2Textile products 0.03 0.3 896.9Leather products 0.1 0.4 245.4Fuel materials 0.0 0.4 -Metal products 0.2 2.1 878.5Glass, ceramics & porcelain 0.01 0.2 1405.0Electrical engineering 0.3 0.8 153.7Chemicals 0.9 4.9 418.3Wood products 0.3 2.1 514.8Liquid fuel & lubricant oil 0.2 1.3 669.4Non-metal building materials 0.1 0.8 581.9Other 0.8 5.0 552.9Total 3.9 27.6 615.6

Source: Federal Office of Statistics (FOS), Statistical Data on Economic and Other Trends.

Foreign trade and payments

The Federation balance of trade deteriorated sharply in the second quarter of2002. April-June exports reached US$167m, but were surpassed by importstotalling US$646m. The January-June trade deficit reached US$846m, an increaseof 12.5% compared with one year earlier. This was primarily the result of anannual 22.4% fall in exports, which amounted to US$306m. Imports reachedUS$1,152m, an increase of 0.6% compared with the previous year.

The worsening export performance was caused by a sharp contraction inmanufacturing exports: in January-June manufacturing exports fell by 25.4% yearon year. They were pulled down by sharp falls in exports of clothing (76.6%),leather (59%), base metals (18.5%) and wood products (9.4%), which account forthe largest share of Federation exports. Much of BiH�s clothing and leatherexporting takes place under outward processing contracts, mainly to the EU,with the result that the slowdown in the EU was reflected in a fall in orders.

Six-month Federation tradebalance deteriorates sharply



Federation: foreign trade, Jan-Jun(US$ m unless otherwise indicated; by NACE production classification; fob-cif)

2001 % of total 2002 % of total % changeExports (incl unclassified)Agriculture & fisheries 5.0 1.3 6.0 2.0 19.6Mining 3.2 0.8 5.3 1.7 64.6Manufacturing 363.8 92.3 271.5 88.7 -25.4 Base metals 105.7 26.8 86.1 28.1 -18.5 Wood products 48.5 12.3 44.0 14.4 -9.4 Furniture 22.0 5.6 22.3 7.3 1.4Electricity, gas & water supply 19.1 4.8 19.1 6.2 0.0Other 3.2 0.8 4.2 1.4 33.3Total 394.4 100.0 306.2 100.0 -22.4Imports (incl unclassified)Agriculture & fisheries 47.1 4.1 58.0 5.0 23.2Mining 4.6 0.4 2.1 0.2 -53.8Manufacturing 1051.9 91.8 1041.8 90.4 -1.0 Food and beverages 167.0 14.6 182.4 15.8 9.2 Machinery & equipment 95.1 8.3 109.1 9.5 14.7 Chemicals 134.3 11.7 104.8 9.1 -22.0Electricity, gas & water supply 12.1 1.1 12.3 1.1 2.1Other 30.5 2.7 38.7 3.4 27.0Total 1146.2 100.0 1153.0 100.0 0.6Balance -751.8 -846.8 12.6

Source: Federal Office of Statistics (FOS), Statistical Data on Economic and Other Trends.

The main component of the Federation�s consistently high imports, agriculturalgoods, was up by 23.4% year on year in January-June 2002. The single largestitem, imports of food and beverages, rose by 9.2% compared with one yearearlier, totalling US$182m. Besides agricultural goods, imports rose strongly inbase metals manufactures(39.2%) and machinery (14.7%). This growth was,however, offset by a contraction in a number of other industries, such as coke(22.9%) and chemicals (22%), and overall manufacturing imports consequentlyfell by 1% in January-June. The trends in the individual import items reflectweakening domestic demand resulting from declining reconstruction aid (whichfuelled the immediate post-war reconstruction) as well as hefty remittances andhigh oil prices.

BiH exports remain concentrated at the lower value-added end of the scale, andconsist mainly of raw materials and semi-processed items. Furthermore, inJanuary-June exports of miscellaneous manufactured goods, which accountedfor 27.7% of total exports a year earlier, were halved�indicating a fairly narrowand unstable industrial export base. On the import side, machinery andtransport equipment imports rose by 17.4%, mainly because of an increase in carimports and, to a lesser extent, a re-equipping of industry.

In the second quarter of 2002 exports to the EU, already down by 28% year onyear in the first quarter, continued to decline, thus bringing the full six-monthfall to 34.8% compared with a year earlier. Goods worth US$306m were sold tothe EU in the first six months of 2002. Exports to Italy, which stood at US$38.9m,were less than one-half of January-June 2001 exports; exports to Germany,amounting to US$46m, fell by 37.7% over the same period. This fall in exports to

Trade with the EU falls sharply



the EU is a result both of the economic slowdown in the EU and of BiH�s weakexport capacity.

Federation: trading partners, Jan-Jun(US$ m unless otherwise indicated)

2001 % of total 2002 % of total % changeExports fobCroatia 43.9 11.1 53.1 17.4 20.9Switzerland 56.4 14.3 47.7 15.6 -15.4Germany 74.0 18.8 46.1 15.1 -37.7Italy 85.9 21.8 39.0 12.7 -54.6Yugoslavia (Serbia and Montenegro) 33.9 8.6 25.6 8.4 -24.6Slovenia 39.8 10.1 24.1 7.9 -39.4Austria 17.2 4.4 14.9 4.9 -13.3UK 4.3 1.1 11.4 3.7 162.9US 5.5 1.4 5.9 1.9 5.7France 2.6 0.7 5.7 1.9 122.5Other countries 30.8 7.8 32.7 10.7 6.1Total 394.4 100.0 306.2 100.0 -22.4Imports cifCroatia 185.3 16.2 202.2 17.5 9.2Germany 144.6 12.6 162.6 14.1 12.4Slovenia 158.6 13.8 135.5 11.8 -14.6Italy 185.3 16.2 125.6 10.9 -32.2Austria 59.5 5.2 61.1 5.3 2.6Hungary 32.3 2.8 40.4 3.5 24.8Switzerland 38.6 3.4 33.1 2.9 -14.3US 27.2 2.4 30.0 2.6 10.4Czech Republic 24.6 2.2 27.0 2.3 9.6Yugoslavia (Serbia and Montenegro) 11.5 1.0 17.1 1.5 48.3Other countries 278.5 24.3 318.4 27.6 14.3Total 1,146.2 100.0 1,153.0 100.0 0.6Balance -751.8 -846.8 12.6

Source: derived from Federal Office of Statistics (FOS), Statistical Data and Other Trends.

Imports from the EU dropped by 6.1% year on year, pulled down by a 32.2% fallin imports from Italy, which account for the bulk of the import total ofUS$1,152m. Imports from Germany, amounting to US$162m, were 12.4% higheryear on year, and Germany thus overtook Italy in January-June 2002 in terms ofthe value of goods sold to the Federation.

Croatia has been one of the Federation�s main trading partners: January-Juneexports to Croatia totalled US$53m, an increase of 20.9% compared with a yearearlier. This suggests that the Federation is benefiting from the asymmetricaltrade agreement that allows tariff-free sales to Croatia. Imports from Croatiareached US$202m and were up by 9.2% over the same period, making for aUS$149m trade deficit�an increase of 5.7% year on year.

Federation exports to other countries of former Yugoslavia recorded a fall. Thiswas most notable with regard to Slovenia, exports to which contracted byaround 40%, although a 15% contraction in imports nevertheless caused thetrade gap to narrow slightly, from US$119m to US$111m.

Croatia is Federation�s maintrading partner



According to the RS Customs Office data, the RS January-June 2002 trade deficitamounted to US$377m, fuelled by imports totalling US$511m. Export perform-ance was sluggish, with exports reaching just US$133m. RS�s most importanttrading partner was FR Yugoslavia, from which RS bought goods worthUS$126m; RS exports to SR Yugoslavia in this period reached US$68m. The tradebalance with the EU also deteriorated. In January-June RS recorded a US$100mdeficit in trade with the EU. Of RS imports from the EU, the most originatedfrom Austria (US$40m), followed by Italy (US$37m) and Germany (US$35m).

Republika Srpska: trading partners, Jan-Jun(US$ m unless otherwise indicated)

2001 % of total 2002 % of total % changeExports fobYugoslavia 64.7 50.8 61.3 50.6 -5.3Italy 19.7 15.5 17.2 14.2 -12.5Croatia 7.8 6.1 11.9 9.8 53.1Slovenia 5.7 4.4 7.6 6.3 34.0Germany 7.7 6.1 6.1 5.0 -21.2Austria 3.3 2.6 2.4 2.0 -25.6Hungary 1.2 1.0 0.9 0.7 -28.0Other countries 17.3 13.6 13.8 11.4 -19.9Total 127.2 100.0 121.1 100.0 -4.8Imports cifYugoslavia 81.5 22.9 113.6 24.6 39.3Slovenia 46.3 13.0 52.1 11.3 12.6Croatia 32.3 9.0 46.1 10.0 42.9Austria 26.2 7.3 36.1 7.8 37.8Hungary 30.5 8.5 35.8 7.8 17.5Italy 21.7 6.1 33.3 7.2 53.2Germany 19.5 5.5 31.5 6.8 61.8Other countries 98.7 27.7 113.5 24.6 15.0Total 356.6 100.0 461.9 100.0 29.5Balance -229.3 -340.7 48.6

Source: derived from Republika Srpska Institute of Statistics, Monthly Statistical Review.

The new IMF data on BiH, published on approval of the stand-by agreement inAugust 2002, reveal a much larger 2001 current-account deficit than forecast inthe Fund�s March 2002 data. The BiH 2001 current-account deficit reachedUS$1,008m, an increase of 9.5% compared with one year earlier (US$919m). Thecurrent-account deficit as a share of GDP was up from 20.1% in 2000 to 22.1% in2001, reflecting both the rise in the current-account deficit and also the lowerestimate of 2001 GDP.

From 2000 to 2001 BiH�s trade deficit rose by US$13m to US$1,668m, contrary tothe earlier estimate of a US$174m decline. The breakdown of foreign trade datareveals that the major source of the increased trade deficit was a surge inimports. The IMF�s March 2002 data showed 2001 imports to be US$2,299m (aUS$259m fall from 2000), but the new data gives a revised imports figure ofUS$2,670m (a US$112m increase compared with 2000). While reconstruction-related imports fell slightly, other imports rose by US$178m to US$2,154m.

The large discrepancy in the data is a result of the fact that, in its August report,the IMF based its estimates of merchandise trade on partner country reporting

Republika Srpska�s tradedeficit deteriorates

Widening trade gap threatenscurrent-account balance



rather than local BiH sources. The poor quality of BiH statistics has been a majorobstacle to the accurate depiction of economic trends and the formulationeconomic policy. Foreign trade statistics in particular are unreliable and subjectto frequent revision. In its explanation for the balance of payments items, theCentral Bank of BiH estimates unrecorded imports (consisting of undeclared andundervalued imports) at around 27-30% of total imports, which suggests a largemargin of error in the reporting of imports.

At the time of writing, the only available BiH-wide foreign trade data for 2002were those published by the central bank. The Economist Intelligence Unit usesthe data provided by the IMF as the most comprehensive and accurate in thecase of BiH. However, the central bank data can be taken as indicative of foreigntrade dynamics. According to the central bank, the BiH foreign trade deficitincreased by 32% in January-March 2002 against the same period of 2001,indicating the possibility of a large full-year deficit.

The IMF August data estimate the 2001 capital account surplus at US$1,759m.This is US$285m above the estimate contained in its March report. The mainreason for the increase is that the capital account surplus is larger than theforecast �other capital� item, which includes the effects of the conversion of thepeg from the D-mark to the euro.

The stock of BiH external debt amounted to US$2,609.3m in 2001, of which over60% was owed to multilateral creditors, principally the IMF and the World Bank.External debt as a percentage of GDP fell to 57.7% in 2001 as a result of debtcancellation with the Paris and London clubs of creditors. External debt servicewas equal to around 5% of the country�s exports in 2001 but is expected to riseto 7.5% in 2002-03, largely as a result of obligations to the IMF and the WorldBank. The BiH gross external financing requirement is forecast by the IMF toreach US$2,684m in 2002, which is likely to be covered to a large extent byconcessional funding.

Although an increase in foreign direct investment (FDI) is anticipated, largely asa result of further progress in privatisation, this is unlikely to become asignificant source of capital for some time. Many barriers to foreign investmentremain, and more reforms to remove them will be necessary. According to theFederation Agency for the Promotion of Foreign Investment, by the end of 2001foreign investors had channelled KM1.7bn (US$867m) into BiH, of which two-thirds went towards restarting production. Around 70% of the total of FDI camefrom investors within Europe. The biggest individual investors were fromCroatia, the United Arab Emirates, Holland, Austria and Germany. The agencyalso reported a decline in foreign investment in RS from 2001 levels during thecourse of 2002.

External debt repayment willincrease

Date post:	25-Feb-2018
Category:	Documents
Upload:	hoangthuy
View:	215 times
Download:	3 times

Bosnia and Hercegovina - iuj.ac.jp fileBosnia and Hercegovina 1 Country Report October 2002 ' The...

Documents