account deficits, financed largely by net FDI inflows. BOSNIA AND Key conditions and Steady, albeit low, economic growth has not translated into more and better jobs, challenges HERZEGOVINA with a large share of the workforce active in the informal sector and stalled poverty BiH has been a potential EU candidate reduction according to the latest official since 2016. Yet, little progress has been data from 2015. Implementation of much Table 1 2021 made in competitiveness-enhancing prod- needed structural reforms remains slug- Population, million 3.3 uct market reforms and in improving the gish due to political frictions, pressures GDP, current US$ billion 21.3 business environment. The internal market from frequent elections, corruption that GDP per capita, current US$ 6513.1 and the state institutional set-up are still pervades all levels of society, and fragmen- Life expectancy at birth, years a 77.4 highly fragmented, while country-wide tation of responsibilities between the two Total GHG Emissions (mtCO2e) 28.3 supervisory and regulatory institutions re- entities and Cantons. As a result of the po- main weak. litical impasse and welfare prospects, BiH Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent WDI value (2019). Macroeconomic stability was maintained exhibits the highest stock of emigration over the last decade largely facilitated by across the Balkans. the currency board peg to the euro, which, together with the EU membership Real GDP growth is expected to deceler- prospects remain a critical economic an- ate to 2.9 percent in 2022 after rebound- chor. Despite real income growing roughly Recent developments ing to 6.5 percent in 2021. Meanwhile, over 3 percent per annum since 2015, per inflation surged to 7 percent in January capita GDP continues to hover around The rebound in economic growth esti- one-third of the EU27 average. A more mated at 6.5 percent in 2021 was an ex- 2022 (yoy) compared to the annual rate of pronounced convergence toward the EU27 ceptional performance, which helped real 2 percent last year. Delayed structural re- average will be difficult to achieve with GDP exceed the pre-crises level. Real forms impede EU accession and potential low investment rates and a growth model growth was driven by a surge in exports, output growth. The war in Ukraine will that relies on private consumption. and robust growth in private consump- likely aggravate price pressures resulting The pandemic has inflicted a significant tion. Meanwhile, inflation accelerated to cost on BiH’s economy, yet a full recovery 7 percent in January 2022 (yoy) and to- in an inflation rate of 4.8 percent in 2022. to the 2019 real income level has been taled 2 percent in 2021 compared to a achieved in 2021. That said, BiH is un- 1.1 percent deflation in 2020. The sharply likely to catch up with the pre-pandemic rising prices during the last quarter of growth trajectory, unless political bottle- 2021 and in January 2022 were caused necks are resolved. by stronger consumer demand, continu- BiH built fiscal buffers prior to the pan- ing supply chain problems, and a high demic by running fiscal surpluses between passthrough effect given the currency 1 and 3 percent of GDP from 2015 to 2019. board arrangement. Food and transport These surpluses helped rein in the current prices accelerated to 12 percent and 13.6 FIGURE 1 Bosnia and Herzegovina / Real GDP growth and FIGURE 2 Bosnia and Herzegovina / Labor market sectoral contributions to real GDP growth indicators, 2020-2021 Percent, percentage points Percent 8 50 44.1 2015 2016 2017 2018 45 42.1 6 40 34.3 35 31.9 4 27.7 30 25 22.6 2 18.4 20 15.2 0 15 10 Agriculture Industry -2 5 Services GDP 0 -4 Activity rate Emp. rate Unemp. rate Long-term 2019 2020 2021f 2022f 2023f 2024f unemp. Rate Sources: BiH Agency for Statistics (BHAS), World Bank staff calculations Sources: LFS 2020 - 2021 report, World Bank staff calculations. MPO 11 Apr 22 percent in January 2022 (yoy), likely dis- from IFIs. The extent of this financial sup- barring the implementation of changes to proportionally affecting the less well-off. port will depend on the de-escalation of the VAT law. Despite a renewed acceleration in political tensions, which have risen signifi- With the global energy market disrupted Covid-19 cases toward the end of 2021 and cantly over the past ten months. due to the war in Ukraine, inflationary in January-February 2022, improvements pressures are assumed to last longer than in the labor market participation and em- initially expected, leaving inflation at ployment rate continued through the end around 4.8 percent. of 2021 (Figure 2). Outlook Several risks tilt the outlook to the down- A surge in tax revenues was not fully offset side. First, protracted effects of the war in by higher spending, which resulted in a Real GDP is projected to decelerate to 2.9 Ukraine would have a negative impact on return to fiscal surpluses estimated at 0.5 percent in 2022 and stabilize below 3.5 per- aggregate demand in BiH through lower percent of GDP in 2021 , after a deficit of cent over the medium term. Growth is ex- business and consumer confidence. Sec- 1.8 percent of GDP in 2020. Higher public pected to be driven by a further pick up ond, war-related uncertainties and sanc- wages, and additional spending on goods in private consumption fueled by remit- tions will dampen the recovery in the EU, and services as well as higher social bene- tances, tightening labor market, and do- adversely impacting demand for BiH ex- fits were aimed at softening the effects of mestic lending in the short term. Invest- ports. However, price and volume effects the pandemic. ment in energy and infrastructure will add for BiH’s exports of iron and steel products The sharp rise in exports narrowed the to the growth stimulus over the medium and aluminium could in part offset the traditionally large merchandise deficit term. Higher exports are likely to be offset negative effects of a slowdown in EU and helped narrow the current account by higher imports mainly for infrastruc- growth. Third, slower growth in the EU shortfall to 3.2 percent of GDP in 2021 ture projects. As the impact of the pandem- could also limit remittances, on which the compared to 3.9 percent in 2020. External ic subsides, and the political paralysis is country is dependent (close to 8 percent of financing largely entailed net FDI in- overcome, the Socio-Economic Program , GDP). Finally, these risks would be further flows, mainly into the foreign-owned fulfilling priorities for EU accession, is ex- aggravated, if geopolitical tensions shift to banking sector, which remained stable pected to gain attention. BiH and exacerbate already significant po- during the pandemic. The fiscal deficit in 2022 is likely to be litical frictions. Without access to international markets, driven by pre-election spending activities. the authorities continue relying on support A return to surplus may occur in 2023, TABLE 2 Bosnia and Herzegovina / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 2.7 -3.1 6.5 2.9 3.1 3.5 Private Consumption 2.8 -4.5 4.0 2.7 3.1 3.5 Government Consumption 2.6 0.5 6.1 2.8 3.0 3.0 Gross Fixed Capital Investment 1.9 -20.2 2.5 -2.3 4.4 3.9 Exports, Goods and Services -0.3 -8.5 28.0 9.0 7.0 8.0 Imports, Goods and Services 0.2 -13.4 17.0 6.0 6.5 7.0 Real GDP growth, at constant factor prices 2.8 -3.1 6.5 2.9 3.1 3.5 Agriculture 2.9 -1.5 3.4 3.0 2.9 2.9 Industry 1.9 -3.0 2.0 2.6 3.2 3.2 Services 3.2 -3.3 8.7 3.0 3.1 3.7 Inflation (Consumer Price Index) 1.2 2.0 2.0 4.8 0.9 0.2 Current Account Balance (% of GDP) -2.9 -3.9 -3.2 -2.4 -3.2 -4.0 Net Foreign Direct Investment (% of GDP) 3.5 2.0 3.3 3.5 3.3 3.2 Fiscal Balance (% of GDP) 1.9 -1.8 0.5 -0.8 0.3 1.1 Debt (% of GDP) 34.3 39.9 37.8 37.4 36.9 36.3 Primary Balance (% of GDP) 2.8 -0.5 1.8 0.1 1.2 1.9 GHG emissions growth (mtCO2e) -2.4 -5.6 4.8 2.3 3.1 3.9 Energy related GHG emissions (% of total) 89.0 88.7 89.1 89.2 89.4 89.7 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. MPO 12 Apr 22