The economy of Bosnia and Herzegovina is expected to continue to grow at a moderate but steady pace in 2014 with stronger rates of growth expected in the medium term. An export recovery along with improvements in industry and construction are driving economic activity. An increase in foreignfunded infrastructure projects provides additional support. The jobless rate is falling but remains one of the highest in Europe. More than 75% of the unemployed have been out of work for over two years. Bosnia enjoyed a remarkable period of growth in 2003-2008 when real GDP expansion averaged 6.0% per year. During that period, the country's economy was driven by domestic demand. The private sector was fuelled by a credit boom financed from abroad. However, the country experienced a sharp recession in 2009 when exports fell and inflows of FDI disappeared. A feeble recovery began in 2010 and 2011 but prospects were subsequently undermined by the eurozone crisis. Since then, the economy has struggled mightily with real GDP contracting in 2012 and growing moderately in 2013. Weak domestic demand and tight fiscal policies slowed the pace of growth.
A large portion of all economic activity is conducted in the informal sector. Growth in the formal economy remains partially dependent on the international aid going to the country but these funds are now being supplied in smaller amounts and with conditions. Macroeconomic policies are sometimes disjointed and poorly designed. Gains in export-oriented industries have not spread to the larger economy.
Real GDP is expected to grow by 2.0% in 2014. An export recovery along with improvements in industry and construction are driving the economy. An increase in foreign-funded infrastructure projects provides additional support.
Prices fell by 0.1% in 2013 and another decline of 1.2% is expected in 2014.
Countrywide unemployment was 27% in 2013 and is expected to fall to 25.5% in 2014. This is still one of the highest rates in all of Europe. Youth unemployment exceeds 60%. Because labour mobility is limited, unemployment in depressed areas is very high. More than 75% of the unemployed have been out of work for over two years. Skill mismatches and a poorly trained work force are major problems.
Domestic consumption remains subdued owing largely to austerity measures and lim-
ited gains in household income. The real value of private final consumption increased by 1.0% in 2013 and growth of 2.2% is expected in 2014.
Bosnia relies heavily on remittances from overseas workers. This is especially important since the country has failed to attract much foreign investment. As a share of GDP, the country's remittances are one of the highest in Europe.
Evaluation of market potential
Annual rates of growth should rise to around 4.0% in the medium term. Both exports and remittances are expected to strengthen but domestic demand should eventually take over as the main driver of the economy as incomes rise. The investment-to-GDP ratio has fallen to less than 20%, from 28% in 2008, but it, too, should gradually rise in the medium term. Private investment is expected to grow at a double-digit pace after 2015. Further reforms are still needed but the political divisions within the government are growing in the run-up to the next election, in late 2014, making such moves unlikely.
Employment should begin to grow in the next few years.
Exports consist mainly of commodities and low value-added manufactures. Basic manufactures accounted for 23.7% of the total in 2013 while miscellaneous manufactured goods made up another 23.6%. The EU took 87.2% of all exports in 2013.
The ratio of exports to GDP is modest but has been slowly rising for several years. In 2013, exports represented 31.9% of GDP. There has been a gradual diversification of export markets as the country's industrial base has broadened. The dollar value of exports rose by 10.2% in 2013 and gains of 10.3% are expected in 2014.
The current account deficit was 5.5% of GDP in 2013 and is expected to widen to 6.6% in 2014.
The Serb Republic – one of the two autonomous entities forming Bosnia and Herzegovina along with the Muslim-Croat Federation - is pursuing several programmes for privatisation with sales conducted at the entity level by separate agencies. The Federation has sold more than 70% of the companies identified for privatisation, but these are mainly small firms and represent only 40% of total assets slated for privatisation. The informal sector is estimated to account for nearly two-fifths of GDP in the Federation and more than one-fifth in the Serb Republic. The large informal economy undermines tax revenue collection.
Large differences in the corporate income tax between the Serb Republic and the Federation make it difficult for businesses operating in both entities. In the Republic, corporate taxes are 10% while they are 30% in the Federation. A new corporate income tax law will be adopted in the Federation in 2014 to broaden the tax base. To improve enforcement and reduce VAT tax fraud, the country's four tax agencies have agreed to share taxpayer information.