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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.

Eco­nomic out­look

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.

For­eign trade

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.

Busi­ness en­vi­ron­ment

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.

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