FEDERATION OF EURO-ASIAN STOCK EXCHANGES
ANNUAL REPORT JUNE 2012
BOSNIA AND HERZEGOVINA ECONOMY
Difficulties with forming governments at State and
Federation levels after the general elections in
October 2010 and the failure of the Fiscal Council
to adopt the Global Framework for Fiscal Policies
for 2011-13 had a bearing on economic and fiscal
policy. In a situation of increased uncertainty over
the short- and medium-term path of fiscal policy,
the authorities submitted their fifth Economic and
Fiscal Programme for 2011-13 in January 2011.
The programme is thus fragmented and does
not reflect a coherent formulation of economic
and fiscal policies. It is not fully integrated into
budgetary procedures and its objectives are not
adequately quantified or backed by concrete policy
measures. The performance under the International
Monetary Fund (IMF) Stand-By Arrangement
remained broadly satisfactory until October 2010
when the IMF Board approved the second and third
reviews. However, due to the difficulty of forming
a government at State-level, further programme
discussions were delayed. The first World Bank
Development Loan was disbursed in October 2010.
Overall, the consensus on economic and fiscal
policy essentials has weakened.
Macroeconomic Stability
After the recession in 2009 with a drop in real GDP
of 2.9%, the country moderately recovered in 2010.
It recorded a positive real growth rate of 0.7%,
driven by external demand. Domestic demand
picked up, supported by a relatively stable inflow
of remittances. Industrial production increased
slightly in 2010 led by export-oriented industries,
but unemployment remained very high. Per capita
income, measured in purchasing power standards
(PPS), fell to 30% of the EU-27 average in 2010
from 31% in 2009. As a result of fiscal adjustment
measures implemented under the IMF programme
and increased revenues, the budgetary situation
eased. Due to improvements in the trade and
current account deficits and the comfortable level
of foreign reserves, the external financing needs
decreased in 2010. The indicators available for
2011 suggest that the economic recovery is gaining
strength as industrial production increased by 8.1%
year-on-year in the first seven months of the year.
Overall, the economy is slowly gaining steam after
the 2009 recession, but the recovery is fragile.
The current account deficit fell further from 6.2%
of GDP in 2009 to 5.6% in 2010. The trade deficit
fell by 4.8%, shrinking from 27.8% of GDP in
2009 to 25.9% in 2010, which contributed to the
improvement of the current account. Exports
rose by 27.7% nominally, and imports by 10.2%.
Surpluses in the services and income accounts
decreased by 8.6% and 23.2%, respectively, while
that of the current transfer account increased
by 3.1%, supported by the relatively stable flow
of remittances. The current account deficit was
financed mainly by new loans from abroad.
However, the trend of an improving trade balance
was reversed in the second half of 2010 when
the nominal increase of imports exceeded that of
exports. This deterioration continued in the first
half of 2011 when the trade gap increased by
18.3% yearon-year. Imports and exports increased
both by 18.3%, mining and manufacturing being
the main sectors recording export growth. Bosnia
and Herzegovina’s external public debt increased
by 20.2% in 2010, from 21.8% of GDP in 2009 to
25.7% in 2010, mainly due to the disbursements
made in the context of the IMF and World Bank
programmes. In the first half of 2011, the external
public debt decreased slightly by 1.5%. Public
international creditors account for 89% of the
country’s external public debt. The largest creditor
remains the World Bank group. Official foreign
exchange reserves decreased by 5.7% in the first
half of 2011 from end-2010, though still covering
around five months of imports. Overall, external
imbalances have slowly started to rise after the
sharp contraction experienced in 2009 and the first
half of 2010, although the current account deficit is
still much lower than before the crisis.
The average unemployment rate in 2010 stood
at a very high 27.2%. Registered unemployment
reached 43.1% in June 2011, while according
to the Labour Force Survey (LFS) following
the International Labour Organisation (ILO)
methodology conducted annually in April/May,
unemployment increased to 27.6% in 2011 from
27.2% in 2010. It was particularly high among
the young population (57.9% for people aged
between 15 and 24, according to the LFS). In the
first half of 2011 the highest year-on-year growth
in employment was registered in education,
real estate and health, while employment fell in
agriculture, mining and manufacturing industries,
as well as in trade and construction. Despite the
already large size of the public sector in Bosnia
and Herzegovina, the number of employees in
the public administration increased further, by
2.1% year-on-year in the first six months of 2011.
Average monthly nominal gross wages increased
by 1.8% in 2010 and remained relatively stable in
the first seven months of 2011. Structural rigidities
such as the high rates of social contributions,
poorly targeted social transfers and low labour
mobility, are continuing to hamper job creation
and the propensity to work. Overall, labour market
conditions remained poor and were not supported
by the weak growth dynamics. Annual inflation
reached 2.1% in 2010, up from -0.4% in 2009. The
inflationary trend was mainly driven by the rise in
food and transport prices towards the end of the
year. Inflation continued to rise in the first seven
months of 2011, reaching 3.9% in July, pushing
the 12- month moving average inflation rate up
to 3.1%. The monetary policy of the Central Bank
continued to be conducted under a currency board
arrangement, with the euro as the anchor currency,
enjoying a high level of confidence and credibility.
Monetary policy settings remained unchanged
throughout 2010. As of February 2011 the minimum
reserve requirement for short-term deposits was
lowered from 14% to 10%. Nevertheless, the
banking system’s reserves with the Central Bank
remain significantly above the minimum required
level. The M2 monetary aggregate increased by 6%
year-on-year in July. Overall, monetary and financial
stability have been preserved while inflation is
picking up.
The fiscal performance in 2010 benefitted
from the recovering economic activity, whichb
resulted in increasing revenues, and from the
adjustment measures implemented under the bIMF
programme. The consolidated budget deficit fell to
2.5% of GDP, which is well below the 2009 outcome
of 4.5%. However, the share of general government
in GDP remains high, with 2010 revenues at 44.4%
of GDP. Adjustment measures on the expenditure
side included cuts in wages and benefits in the
public sector, which resulted in only a marginal
0.5% rise of the consolidated wage bill in nominal
terms. Consolidated revenues increased by 5%
in 2010. 44% of the revenues originated from
indirect taxes which increased by 6.7%, driven by
the recovering economic activity, the development
of imports and import prices and the increase of
excise duties on tobacco and oil derivatives which
counteracted the continuous reduction of duties
and tariffs as set out in the Interim Agreement on
trade, in force since mid-2008. Expenses increased
by 1.6% year-on-year in 2010. Current spending
dominates the budget with wages accounting
for 29.2% of overall expenditure and subsidies
and transfers (mainly social benefits) for 39.2%.
The balance of the collected social contributions
against the paid out social benefits returned on
the positive side due to the simultaneous rise of
the contributions and drop of the benefits. The flat
income tax rate in Republika Srpska was raised
from 8% to 10% as of 2011 and the non-taxable
income threshold was abolished. Following
amendments to the Law on Social Contributions
in Republika Srpska, the overall social contribution
rate increased from 30.6% to 33% of the gross
salary as of January 2011.Excise duties on tobacco
were raised as of 2011.
Budget planning for 2011 and beyond, as well as
the sustainability and credibility of fiscal policy in
Bosnia and Herzegovina, were seriously hampered
by the non-adoption of the Global Framework
for Fiscal Policies for the periods 2011-2013 and
2012-2014. The Parliament of Republika Srpska
adopted the Entity’s 2011 budget in December
2010. It planned the same nominal expenditure
as the budget for 2010. In the Federation, a
temporary budget was in place in the first quarter.
The Federation 2011 budget was adopted in March
and showed a total amount of expenditure planned
9% lower than in 2010, with high uncertainties
surrounding its financing. At the State-level,
temporary budgets were in place during the
first three quarters of 2011. The 2011 State-level
budget was adopted by the Presidency in April,
showing an increase in volume by 2% compared
to 2010. However, it remains to be adopted by the
Parliament. All budgets were established in the
absence of a medium-term budgetary strategy.
The Federation revised in July its 2011 budget to
allow for some increase of specific social benefits,
partly compensated by cuts in investment and
the wage bill. Republika Srpska is planning to
rebalance its 2011 budget in October. In May 2011,
the distribution coefficients for the allocation of
indirect revenues from the Single Account of the
Indirect Taxation Authority were corrected for the
first time since 2008. The share for the Federation
was lowered slightly from 64.39% to 63.98% in the
benefit of Republika Srpska’s share which went
up slightly from 32.06% to 32.47%. The share for
Brcko District remained at 3.55%. The shares are
based on final consumption data. Overall, the
reliability and predictability of fiscal policy in Bosnia
and Herzegovina suffered from the failure to agree
on Global Fiscal Frameworks which is a serious
obstacle for medium-term budgetary planning and
sustainability.
General government debt, both domestic and
foreign, stood at 38.8% of GDP in 2010, up from
34.5% in 2009. External debt accounts for 25.7%
of GDP and domestic debt for 13.1%. Domestic
public debt is managed and served by the Entities
(49.5% Federation, 49% Republika Srpska, 1.5%
Brcko District). Verification of claims related to
old foreign currency savings has advanced. Both
Republika Srpska and the Federation continued
issuing bonds in 2010 and 2011 to service the
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