ANNUAL REPORT JUNE 2010
FEDERATION OF EURO-ASIAN STOCK EXCHANGES
BANJA LUKA STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment Economic Performance
The rising political temperature in BiH makes it
highly unlikely that the main parties will reach
agreement in the near future on the internationally
backed reform agenda. The most important
element of this is the reform of BiH's constitutional
structure, with Bosniak (Bosnian Muslim) leaders
pushing for greater centralization, and Bosnian
Serbs and Bosnian Croats favoring decentralized
structures. Economic growth in BiH in 2009-10 will be
influenced by the demand from the country's
main trading partners in the EU and in south-
eastern Europe. Growth forecast for the Euro
zone in 2009 has gone down to 0.8% (from a
previous forecast of 0.9%) following weaker than
expected second-quarter GDP data. Rapid
expansion elsewhere in south-eastern Europe
should boost import demand in several of BiH's
main regional export markets. However, overall
deceleration in growth of import demand in BiH's
top export markets in 2009 is expected. The
external picture should improve in 2010 as a
consequence of a modest recovery in the Euro
zone.
BiH signed a stabilization and association
agreement (SAA) with the EU in June. Talks on
visa facilitation began recently, but there are
doubts as to whether BiH will be granted EU
candidate status during the forecast period. BiH's
progress in EU integration will depend in part on
the pace of reforms and the EU's own appetite for
further enlargement following the rejection of the
Lisbon treaty by Irish voters in June 2008.
The SAA will set the broad policy framework for
the forecast period. The immediate consequence
is the reduction or abolition of customs duties on
a wide range of imports from the EU, which took
effect on July 1st 2008 and will greatly increase
competition for local producers in some sectors.
The SAA will require the BiH authorities to
implement a wide range of reforms affecting
business, but there are likely to be further delays
during 2009-10 in strengthening policy co-
ordination between the entity governments and
creating a single economic space in BiH.
Developing a single economic space entails
liberalizing labor markets and making pension
and health benefits transferable across the
country.
Price growth will be only partly held in check by
the continued stabilizing influence of the currency
board arrangement, and it is estimated that the
average inflation in 2008 of 8%. A deceleration of
price growth over the forecast period is also
expected, reflecting base-period effects and
some policy tightening. The marka appears to be
considerably overvalued, but the likelihood of a
change in the exchange-rate regime over the
forecast period is very low. The Central Bank of
BiH maintains sufficient reserves to cover the
whole of its monetary liabilities, although the
recent surge in the current-account deficit has
forced the authorities to use some of these to
finance the deficit. Despite the large external
deficit, a speculative attack on the marka is as
unlikely. This is because of the continuing trust in
the currency board arrangement by investors, and
BiH's low levels of integration with global financial
markets.
Real GDP growth in 2008 is estimated at 5%. This
primarily reflects strong expansion of private
consumption, driven by rapid growth in real
wages and consumer borrowing. Large energy
and road building projects will boost construction
in 2009-10, and industry should grow strongly as
leading metals producers expand capacity.
Private consumption is expected to continue to
grow robustly, from a relatively low base,
reflecting further growth in bank lending and real
wages.
Inflation decelerated to 9.5% year on year in
August after rising steadily for more than a year.
There are signs that inflationary pressures may
have peaked for now, because international oil
prices have fallen and food prices are rising less
sharply. As expenditure on food, housing and
heating accounts for 55% of average household
consumption in BiH, prices of these goods and
services are the main determinants of inflation.
Nonetheless, rapid growth of wages and bank
credit, as well as increases in administered
prices, will continue to feed inflationary pressures.
The current-account deficit widened to an
estimated 16.1% of GDP in 2008, from 13.5% of
GDP in 2007. Import costs will continue to rise
rapidly over the forecast period as a
result of strong growth in private consumption,
high food and oil prices, new investment in
industry and infrastructure, and the reduction or
abolition of import tariffs on many goods from
July 1st under the SAA. Export expansion will be
supported by productivity gains stemming from
recent investment in heavy industry. However,
BiH's export base will remain relatively narrow and
vulnerable to swings in international commodity
prices, and growth of import demand in BiH's
leading export markets is forecast to slow. We
forecast average annual current-account deficits
equivalent to more than 15% of GDP in
2009-10.*
* The Economic Intelligence Unit Ltd., October 2008.
Key Information Contacts
Ministers Council of Bosnia and Herzegovina www.vijeceministara.gov.ba
Ministry of Foreign Affairs of Bosnia and Herzegovina www.mvp.gov.ba
Republic of Srpska Government www.vladars.net
Central Bank of Bosnia and Herzegovina www.cbbh.ba
Republic of Srpska Securities Commission www.sec.rs.ba
Central Registry of Securities of Republic of Srpska www.crhovrs.org
Foreign Investment Promotion Agency of Bosnia and Herzegovina www.fipa.gov.ba
Directorate of European Integration www.dei.gov.ba
REAL GDP
(BAM millions)
CONSUMER PRICES (% CHANGE PA; AV)
(%)
14 8
12 7
10 6
5
8
4
6
3
4
2
2
1
0
0
2005
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