45187 THE WORLD BANK OFFICE IN BOSNIA AND HERZEGOVINA NEWSLETTER No. 2/2008 · JUNE 2008 ECONOMIC UPDATE BOSNIA AND HERZEGOVINA CANNOT DODGE THE GLOBAL RISE The movements of several macro- IN FOOD AND ENERGY PRICES economic indicators in recent Globally, food prices have doubled over the last three years. In the past year, wheat price has months could have negative ef- increased by 120% and the cost of bread has doubled. In Central and Eastern European fects on economic growth and countries during the past 12 months, food and energy prices increased on average by 12% poverty of BiH. Consumer prices and 8% respectively. While less so than in other parts of the world, the poverty in the region in April 2008 were 7.5% higher has also been on the rise. than a year ago, mostly as a result Rising fuel costs have been (both directly and indirectly) the main driver of rising food prices. of growing food and energy Higher oil prices have significantly increased costs of agricultural production, as well as the prices. cost of getting products to markets. Moreover, some governments have instituted subsidies Second, average wages in March for production of bio fuels, and farmers started cultivating bio fuel crops in place of food were 16% higher than last year crops. Finally, as a result of economic growth in China and India, the demand for food is and the growth is largely the result growing. Consequently, food stocks are decreasing and prices continue to grow and this of pay raises in the public sector. process might last for several years. Public sector wage growth in In BiH, consumer prices in April this year were on average 7.5% higher than a year ago. Food Republika Srpska was driven by prices, however, are up by 12% and housing, energy, and fuels by 7%. While significant, the doubling of health sector price increases in BiH have so far been moderate compared to the region. Nevertheless, wages and an increase by 70% of rising prices could have a substantial impact on poverty and the economy. The overall effects the education wages. In the Fede- of rising food and other prices on poverty in BiH are not yet clear. The poverty profile has not ration, public sector wages also been updated since 2004. At that time 19.5% of BiH population lived below the poverty line, grew faster than average - not only the majority of them in rural areas. Higher food prices almost certainly have had a negative increasing the strain on the budg- impact on poverty rates in urban areas. However, their effect on poverty in rural areas is not ets, but also affecting the real known, as many rural households produce food for their own consumption and some of them economy competitiveness. market a part it. Thus, by strengthening the incentives for agricultural production, higher food Finally, trade imbalance continues prices might even reduce poverty in rural areas with existing agricultural activity and potential. to widen, as imports have grown Rise in food and energy prices require strategic, focused, and cost-efficient policy measures much faster than exports during to prevent the rise of poverty and turn the threat into a growth opportunity. Social assistance the January - April period (by 12 should be targeted in order to ensure that it is provided to those who really need it, which pp on a year on year basis). requires solid understanding of the poverty profile, and the introduction of means-testing for Consequently, the current account potential beneficiaries. Higher food prices provide incentives to increase domestic agricultural deficit will most probably widen production. The authorities can support growth in agricultural production and activity by further in 2008. However, there are taking measures to improve the liquidity of the land market, investing to remove infrastructure no yet signs of slowdown of the bottlenecks to sector productivity, as well as improving the cost-efficiency of its financial economy. assistance to farmers (e.g. focusing on strategic sectors, switching assistance from price subsidies to capital investments, and providing other support to increase agriculture productivity). Annual Quarterly Monthly 2007 2008 2007 2008 2006 2007 Q2 Q3 Q4 Q1 XI XII I II III Industrial Production FBH (% change y-y) 7.5 9.1 12.9 9.2 2.9 -1.3 1.2 -1.6 7.8 13.7 -5.7 RS (% change y-y) 19.1 1.4 2.8 -8.5 -5.7 9.0 10.1 2 4.8 6.3 6 Gross Monthly Wage FBH (% change y-y) 8.2 9.7 9.8 9.6 11.0 12.2 12.3 10.2 12.0 11.8 13.0 RS (% change y-y) 12.0 10.3 10.3 8.2 11.0 22.3 11.1 12.3 8.6 29.2 28.4 Cost of Living /CPI* FBH (% change y-y) 6.0 1.5 0.4 0.7 3.8 6.8 3.7 4.9 6.3 6.6 7.4 RS (% change y-y) 9.4 1.8 -0.3 1.5 5.9 6.1 6 7.4 5.8 5.8 6.7 Current Account Balance (Millions of ) -816 -1,401 -386 -342.6 -484.7 n/a n/a n/a n/a n/a n/a Trade Balance (Millions of ) -3,134 -4,072 -1053 -1074 -1172 -1077 -381 -385 -263 -388 -426 Exports of Goods (Millions of ) 2,640 3,035 766 791 780 801 270 237 248 279 274 % change y-y 36.5 15.0 11.9 12.5 11.3 14.8 11.3 13.8 12.1 27.4 6.4 Imports of Goods (Millions of ) 5,823 7,106 1820 1865 1947 1878 651 622 512 667 699 % change y-y 1.9 22.0 20.3 16.6 16.9 27.4 16.7 11.9 28.1 38.4 18.0 Foreign Exchange Reserves (Mil. of ) 2,787 3,425 3,016 3,311 3,425 3,376 3,279 3,425 3,393 3,360 3,376 Broad Money (Millions of ) 5,151 6,263 5,724 5,979 6,263 6,341 6,098 6,263 6,251 6,279 6,341 % change y-y 24.8 21.6 27.2 22.8 21.6 18.1 22.0 21.6 20.4 18.4 18.1 Credit to Non-govt Borrowers (Mil. of ) 4,724 6,052 5,370 5,687 6,052 6,450 5,928 6,052 6,112 6,279 6,450 % change y-y 23.3 28.1 26.6 29.4 28.1 28.7 29.3 28.1 28.1 28.9 28.7 Sources: BH statistics agencies, Central Bank and World Bank calculations. / * As of January 2008 both entities report CPI ACTIVE WORLD BANK PROJECTS NEW ENVIRONMENTAL PROJECTS IN BOSNIA AND HERZEGOVINA The World Bank approved two Global Envi- Available for ronmental Fund (GEF) grants for the Neretva Project Status Commitment disbursement and Trebisnjica Management Project and the (US$ million) (US$ million) Forest and Mountain Protected Areas Project. Community Development effective 20.00 4.64 The objective of US$ 6 million grant for the Neretva and Trebisnjica Management Project is Employment Support effective 12.00 2.23 to provide mechanisms for efficient and Education Restructuring effective 10.00 9.62 equitable water allocation amongst the users of the Neretva and Trebisnjica river basin at the Health Sector Enhancement effective 17.00 11.23 transboundary level, and for enhancing ecosystems and biodiversity through improved ECSEE APL 3 (Power IV) effective 36.00 38.55 water resources management. Solid Waste Management effective 26.00 17.46 Grant financing in the amount of US$ 3.4 million for the Forest and Mountain Protected Urban Infrastructure and Service Delivery effective 25.00 17.69 Areas Project will assist the Government in GEF ­ Water Quality Protection effective 8.90 8.46 conserving its globally significant biodiversity in critical forests and mountain ecosystems. The Forest Development and Conservation effective 7.10 3.92 Project will also help the country on its path towards European Union integration through Land Registration effective 15.00 15.43 support in meeting the EU nature and Small Scale Commercial Agriculture effective 12.00 2.23 biodiversity policy (Natura 2000) requirements. These investments represent continuation of Agriculture and Rural Development effective 21.00 21.95 the World Bank assistance to Bosnia and Avian Influenza Preparedness effective 5.00 5.43 Herzegovina to protect and conserve its highly diverse and rich landscape. Road Infrastructure and Safety approved 25.00 25.97 GEF - Neretva and Trebisnjica Management approved 6.00 6.00 GEF - Forest and Mountain Protected Areas approved 3.40 3.40 TOTAL 249.40 194.21 KNOWLEDGE BANK - ANALYTIC WORK UNDERPINS PARTNERSHIP STRATEGY FOR BOSNIA AND HERZEGOVINA The World Bank Country Partnership (CPS) for BiH, approved in December 2007, is structured along two mutually reinforcing pillars: pillar I aimed at improving the environment for private sector led growth and convergence to Europe; and pillar II aimed at improving the quality of Government spending and the delivery of public services for the vulnerable. These themes are supported with fresh lending of about US$ 200 million over the period 2008-2011, and the current portfolio which consists of 15 active projects (see above). The lending program is based on the analytic work that underpins the World Bank financed operations. More importantly, analytic and advisory services are expected to inform policy dialogue in several important areas. Currently, the World Bank teams in partnership with the local authorities, are conducting research in the following areas: Proxy Means Targeting Study - the objective of this study is to help the Entity Governments rationalize their expenditures on social assistance. Although the focus will be on non-war veterans' benefits, in the medium-term the discussion on PMT will help the Government acquire knowledge and build capacity on how to rationalize all cash transfers, including those to war veterans. The study will be completed in September 2008. Investment Climate Assessment - The main diagnostics mission took place in the late February-early March, 2008. The highlights of the mission findings were: i) weaknesses of socially privatized companies; and ii) business environment - business friendly laws were passed in both entities but there remain significant barriers for attracting new investments. The team is currently finalizing the report covering these issues. The report was completed in June 2008. Country Economic Memorandum is also under preparation. The CEM will focus on the competitiveness of export and import competing sectors. The CEM will be delivered in early 2009. PROJECT PIPELINE Projects that are currently under preparation include: Solid Waste Management II; Municipal Development Project; Sava Waterway Rehabilitation Project. All three projects are scheduled for appraisal, negotiations and Board approval within next 12 months. Information about The World Bank in Bosnia and Herzegovina is available on our website: www.worldbank.ba Contact: Goran Tinjic, gtinjic@worldbank.org The World Bank Country Office in Bosnia and Herzegovina Fra Anela Zvizdovia 1 (B17), 71000 Sarajevo; Phone: (+387 33) 251-518 and/or 251-500, Fax: (+387 33) 440-108