## 1. Underlying Current Account Balance Estimates, 2003-07

## Source details

**Canonical URL:** [1. Underlying Current Account Balance Estimates, 2003-07](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08326.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08326.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08326.pdf.json)

---

### I. BOSNIA AND HERZEGOVINA: Catching up or falling behind?
- Growth and structural reform findings:
  - Annual GDP growth rates of 5-6 percent since 2004, with rapid export growth and strong inflows of foreign investment, underpinned by the currency board and donor assistance.
  - Priority reforms: enterprise restructuring, privatization, improving the business environment, reducing labor taxes, and meaningful structural fiscal reforms.
- Income and remittances:
  - GNI per capita (including remittances): US$11,500; Balkan average: US$10,300.
- Transition timing and comparison:
  - Transition started in 1995 (later than most European emerging economies that began during 1990–92); war effects from 1992–1995 affect comparisons.
  - Comparing BiH’s 2007 income with other transition economies in 1999 (eight-year lag) suggests BiH broadly in line with peers at similar phase of transition.
- Catch-up dynamics:
  - Controlling for income level differences, BiH’s growth 2000–07 appears to fall short of that achieved by other countries at a similar transition phase.
  - An upward adjustment of some 30 percent to official GDP would be required to bring BiH in line with the typical convergence path (within range of grey economy estimates).
  - Data uncertainties (under-measurement of grey economy, differential EU funding vs donor aid) complicate interpretation.
- Risks and policy implications:
  - Persistent growth deficit risks falling behind other transition economies and delaying EU integration and euro adoption ambitions.
  - Closing the gap requires strong structural reforms while maintaining macroeconomic stability.
  - Heavy reliance on large remittance inflows exposes BiH to vulnerability if remittances slow.

### II. ACCELERATING INFLATION—Reason for concern?
- Recent inflation dynamics:
  - CPI rose from near zero in June 2007 to 4.9 percent in December 2007; by May 2008 it reached 8.2 percent.
  - About three quarters of the 8.2 percent rise in the CPI in 12 months to May 2008 attributable to energy and food; one quarter to other factors.
- External drivers and pass-through:
  - International food price index increased by 44 percent in dollar terms since May 2007, but by only 25 percent in euro terms; euro-linked currency partly mitigated dollar-denominated commodity surges.
  - Pass-through to the CPI about half of international commodity price increases.
- Underlying domestic pressures:
  - Core inflation (excluding food and energy) rose to 3.2 percent in May 2008 from near zero a year earlier.
  - Trimmed mean CPI suggests underlying inflation around 5 percent.
  - Signs of intensifying domestic demand: accelerating wage growth and widening trade deficit.
- Policy recommendations:
  - Under the currency board, restraining domestic demand falls mainly to fiscal policy and public wage policy.
  - General government should avoid loosening the fiscal stance and adopt a disciplined public wage policy to signal restraint and avoid wage competition among government levels.
  - Cutting VAT rates for selected products is discouraged because pass-through to final prices is uncertain and VAT cuts complicate tax administration.

### Impact of food and energy on CPI
- Consumer expenditure weights:
  - Food weight: 34 percent.
  - Energy weight: 11 percent.
- May 2008 contribution to 12-month CPI increase:
  - Food: 55 percent of the increase.
  - Energy: 20 percent of the increase.
  - The rest: 25 percent of the increase.
- International and price-level context:
  - Comparable food weights: Albania, Bulgaria, Macedonia, Romania: 40–50 percent; euro area: about 20 percent.
  - Eurostat: BiH average personal consumption price level about 45 percent of the EU average in 2006.
  - Specific food categories (2006) at 74–87 percent of corresponding EU average levels.
  - Change 2005–06: overall individual consumption rose by 1.6 percentage points (as percent of EU level); food categories rose by 3.7 percentage points (simple average).
- Core inflation and risks:
  - Core inflation (excluding food and energy): 3.2 percent in May 2008; euro area core inflation cited at 2.4 percent.
  - Risk of second-round effects if food and energy inflation triggers sharp wage adjustments.
  - Labor market: 2007 LFS unemployment rate is 29 percent (much structural unemployment).
  - Public sector wage increases risk feeding into private-sector settlements via indexation mechanisms.
- Measuring core inflation:
  - Trimmed-mean CPI method described; empirical result (January 2005–May 2008): trimmed inflation shows no bias versus actual monthly CPI and is smoother; excluding food and energy deviates significantly from household experience.
  - Trimmed-mean CPI recommended as a better guide to underlying inflation and wage policy.

### Policy conclusions on inflation and fiscal/tax measures
- Recent global food and energy shocks have quickly pushed up the overall price level.
- Fiscal restraint and moderated public sector wage policy are central under the currency board arrangement to manage overheating risks.
- Coordination in public wage policy recommended to avoid wage competition among government levels.
- Differentiated VAT rates for food and energy are not recommended because:
  - Uncertain pass-through to final prices.
  - Rising prices reflect relative scarcity and should incentivize production and efficient use.
  - Differentiated VAT complicates tax administration and raises costs.

### Underlying current account (CA) balance — forward-looking estimate and historical decomposition
- Forward-looking underlying CA deficit:
  - Projected for 2013: 13.7 percent of GDP (method uses medium-term projection, assumes no output gap and no change in real exchange rate).
  - Working value used subsequently: upper-bound figure of 13.5 percent of GDP.
- Policy-change adjustment judged unnecessary as fiscal policy stance in 2013 expected similar to 2008.
- Historical decomposition (percent of GDP):
  - Official current account deficit: 2003: 19.4; 2004: 16.3; 2005: 18.0; 2006: 8.4; 2007: 13.0
  - Impact of VAT introduction: 2003: -2.7; 2004: -2.7; 2005: -4.8; 2006: 1.8; 2007: 0.0
  - Impact on imports: 2003: 0.0; 2004: 0.0; 2005: -2.1; 2006: 1.8; 2007: 0.0
  - Impact on exports: 2003: -2.7; 2004: -2.7; 2005: -2.7; 2006: 0.0; 2007: 0.0
  - Bosnian business cycle: 2003: -1.4; 2004: -0.2; 2005: -1.1; 2006: 0.1; 2007: 0.8
  - Trade partners' business cycle: 2003: -0.4; 2004: -0.4; 2005: -0.6; 2006: -0.2; 2007: 0.1
  - Real exchange rate movements: 2003: -0.9; 2004: -0.7; 2005: 0.1; 2006: 0.0; 2007: -0.8
  - Underlying current account deficit: 2003: 16.9; 2004: 12.8; 2005: 13.8; 2006: 9.8; 2007: 11.5

### Equilibrium CA estimates (multiple approaches) and adjusted norms
- CGER (pooled OLS, 54 countries): estimated equilibrium CA deficit for 2013: 7.0 percent of GDP; forecast errors imply possible range 3.5–10.4 percent.
  - CGER estimated CA norm, 2013: -6.9
  - CGER adjusted for capital transfers (-1.8): adjusted = -8.7
- ALM (2007) financial integration approach: ALM-based estimated CA norm for BiH: -11.5 percent of GDP.
  - ALM adjusted for capital transfers (-1.8): adjusted = -13.3
- External sustainability approach (stabilize NFA): Jahjah (2007) estimate: CA balance required to stabilize NFA around 5.5-5.7 percent of GDP.
  - External sustainability adjusted for capital transfers (-1.8): adjusted = -7.4
- Summary range (without capital transfers): 6–12 percent of GDP (estimated equilibrium CA deficit).
- With capital transfers projected at 1.8 percent of GDP, adjusted equilibrium CA deficit range: 7.5–13.5 percent of GDP.
- Data uncertainty: workers’ remittances and individual resident assets abroad create large margins of error; CBBH increased private transfers estimates from around 14 percent of GDP to an average of about 18 percent of GDP.

### Real exchange rate (RER) assessment and misalignment estimates
- PPP-based undervaluation estimates:
  - 2001–06 average income and price data (all IMF members): BiH’s RER undervalued by 43 percent.
  - Coudert and Couharde equations: undervalued by 31–34 percent.
- ERER (CGER-based CEE panel) medium-term estimate (2013) and misalignment:
  - Estimated REER (in log scale), 2013: 4.71
  - Estimated REER (Index, 2000=100): 111.2
  - 2007 REER index (Index, 2000=100): 94.9
  - Estimated undervaluation (in percent): 17.2
  - Forecast error about 12 percent; sensitive to productivity differential assumptions.
- Productivity differential (average growth 2004-2006, gross value-added per employee):
  - Tradables / Nontradables ratio: Bosnia & Herzegovina: 13.4 / 3.4 -> 9.6
  - Euro Area: 3.4 / 0.4 -> 2.9; Slovenia: 7.1 / 2.7 -> 4.3
- RER based on CA-gap elasticities (imports elasticity 0.92; exports elasticity -0.71):
  - Using underlying CA balance 13.5 percent of GDP and adjusted CA gaps:
    - CGER adjusted equilibrium -8.7; CA gap = 4.8; implied overvaluation: 23.1 (percent)
    - ALM adjusted equilibrium -13.3; CA gap = 0.2; implied overvaluation: 1.0 (percent)
    - External sustainability adjusted equilibrium -7.4; CA gap = 6.1; implied overvaluation: 29.3 (percent)
- Overall range of RER misalignment estimates: from 17 percent undervaluation to 29 percent overvaluation; large uncertainties from regression forecast errors, business-cycle assumptions, and elasticity assumptions.

### Export performance, structure, and market shares
- Export volumes and growth:
  - Exports of goods rose from about 18 percent of GDP in 2003 to 29 percent of GDP in 2007.
  - Average export growth rate 2004–2006: 26 percent; slowed to 15 percent in 2007.
  - Real export growth 2003–2007: 69 percent.
  - BiH exceeded NMS average real export growth (69 percent vs. 61 percent).
  - Market share in world exports rose by 42 percent from 2003 to 2007 (regional average ~30 percent); caveat: as a newer entrant some catch-up potential exists.
- VAT-related data quality effects:
  - VAT introduction (January 2006) caused a temporary import jump in 2005 and temporary drop in 2006.
  - Underreporting of exports estimated at 2.7 percent of GDP in 2006; VAT-related impact on exports in 2006 (~14 percent) removed from growth calculations.
- Sectoral and commodity composition shifts (2003–2007):
  - Machinery and mechanical appliances: 8.2% → 12.9% of exports.
  - Metal exports (base metal and articles): 22.4% → 27.7%.
  - Mineral products (including electricity): 9.5% → 11.1%.
  - Textile and footwear: 12.1% → 10.6%.
  - Wood and wood products: 16.8% → 8.9%.
  - Chemical products: 2.7% → 5.5%.
  - Others: 19.3% → 15.7%.
- Metals and non-metals:
  - Metal exports account for about 1/4 of total exports.
  - Iron and steel overtook aluminum as most important metal exports (2003–2007).
  - World metal price nearly tripled during 2003–2007; metal-price effect contributed substantially to export value growth.
  - Non-metal export growth mainly driven by volume (machinery, mineral/electricity, chemicals).
- Technology and skill composition:
  - Resource-intensive products share: 48% (2003) → 56% (2006).
  - Medium- to high-tech exports: 31% → 25% (2003–2006).
  - Low-tech labor-intensive exports: 21% → 19%.
  - By labor-skill: low-skill exports rose from ~50% (2003) to ~56% (2006); medium-skill declined; high-skill stayed ~4%.
  - Shift toward resource-intensive and low-skill increases vulnerability to global commodity-price swings.
- Export markets (2003 → 2006):
  - Neighbors: 39.9% → 44.1% (Croatia 20.3 → 18.7; Slovenia 10.6 → 12.2; Serbia 9.0 → 13.2).
  - Advanced European countries: 53.1% → 40.9% (Germany 18.7 → 12.9; Italy 14.1 → 13.8).
  - Other emerging European countries: 3.4% → 10.2%.
  - Rest of world: 2.8% → 1.3%.
- Constant Market Share Analysis (2003–2006):
  - Change in exports (USD billions): 2.4; growth rate: 233.6 percent.
  - Contributions to total increase:
    - Global growth effect: 21.6 percent.
    - Commodity composition effect: 0.4 percent.
    - Market distribution effect: 6.4 percent.
    - Competitiveness (residual): 71.6 percent.
  - Competitiveness effect by commodity group (share of total competitiveness effect):
    - Manufactured goods: 32.7; Crude materials, inedible, except fuels: 18.8; Miscellaneous manufactured articles: 20.3; Machines, transport equipment: 12.6; Food and live animals: 4.8; Chemicals: 5.1; Fuels (including electricity): 4.6; others smaller.

### External balance sheet and vulnerability
- Net international investment position (net IIP): worsened from -44 percent of GDP to -51 percent of GDP at end-2007, mainly due to increased FDI inflows while external debt remained stable.
- External debt and assets:
  - External debt: 48.5 percent of GDP.
  - Short-term external liabilities: estimated at 7 percent of GDP (about 14 percent of total external debt at end-2007).
  - External assets increased by more than 10 percentage points of GDP (stronger reserves and banks’ foreign assets).
  - CBBH foreign reserves can easily cover all short-term external liabilities.
- Composition shifts:
  - External debt shifted toward more commercial banks’ borrowing and less public sector borrowing.
  - Increase in external assets in 2007 partly due to RS Telekom privatization.
- Overall assessment:
  - Net IIP not high by regional standards.
  - External liabilities manageable and maturity structure favorable; external balance sheet does not indicate serious near-term vulnerability.

### Conclusions and policy implications
- Current account assessment:
  - Underlying balance estimated around 12–14 percent of GDP; equilibrium CA deficit estimates range 6–12 percent of GDP (without capital transfers).
  - Including capital transfers (projected 1.8 percent of GDP) yields equilibrium CA deficit estimates around 7.5–13.5 percent of GDP.
  - Implied CA gap could range between 0 and 6 percentage points of GDP.
- Real exchange rate and uncertainty:
  - No strong evidence of a significantly overvalued RER that would imply imminent external instability, given robust export performance and stable RER movements.
  - Wide variation in RER/CA-gap estimates (17 percent undervaluation to 29 percent overvaluation) and large uncertainties.
- Near-term risks:
  - Projected terms-of-trade shock in next 2-3 years and widening CA deficit in 2008 imply larger financing needs and exposure to shifts in investor sentiment.
- Policy recommendations:
  - Stabilizing the external account and preserving external competitiveness will require tight fiscal and public sector wage policies.
  - Enterprise reform and privatization are necessary to maintain external competitiveness, boost productivity gains, and sustain export momentum.

*Source: IMF staff report text, "1. Underlying Current Account Balance Estimates, 2003-07."*

### 1. Underlying Current Account Balance Estimates, 2003-07...........................................21

### 1. Underlying Current Account Balance Estimates, 2003-07

### I. BOSNIA AND HERZEGOVINA: Catching up or falling behind?
- Growth and structural reform summary
  - Bosnia and Herzegovina (BiH) maintained annual GDP growth rates of 5-6 percent since 2004, with rapid export growth and strong inflows of foreign investment, underpinned by the currency board and donor assistance.
  - Accelerated structural reforms and macroeconomic stability are key to achieving higher and sustained growth rates. Priority reforms include enterprise restructuring, privatization, improving the business environment, reducing labor taxes, and meaningful structural fiscal reforms.
- Income level and remittances
  - BiH’s GDP per capita (adjusted for purchasing power) is broadly similar to immediate neighbors.
  - Once remittance inflows are included, BiH’s Gross National Income (GNI) per capita is US$11,500 versus the Balkan average of US$10,300.
- Late-comer and war effects
  - BiH started transition in 1995, later than most European emerging economies (which began transition during 1990–92), and suffered the 1992–1995 war—factors affecting contemporaneous comparisons.
  - Comparing BiH’s 2007 income level with other transition economies in 1999 (using an eight-year lag) suggests BiH’s GNI per capita is broadly in line with peers at a similar phase of transition.
- Catch-up dynamics and growth deficit
  - Controlling for income level differences, BiH’s rate of growth between 2000–07 appears to fall short of that achieved by other countries at a similar phase of transition.
  - An upward adjustment of some 30 percent to official GDP would be required to bring BiH in line with the typical convergence path—an adjustment that falls within the range of estimates of BiH’s grey economy activity. However, similar adjustments to other transition economies could reopen the growth gap.
  - Data uncertainties (e.g., under-measurement of the grey economy) and differential access to EU funding versus donor aid complicate the interpretation of the apparent growth deficit.
- Policy implications and risks
  - A persistent growth deficit risks BiH falling behind other transition economies and delaying convergence and integration with the European Union, including ambitions to adopt the euro.
  - Closing the growth deficit requires strong progress on structural reforms (enterprise restructuring, privatization, fiscal reforms) while maintaining macroeconomic stability to encourage private investment, job creation, and growth.
  - BiH’s income depends heavily on large remittance inflows, exposing the economy to vulnerability if these flows slow.

### II. ACCELERATING INFLATION—Reason for concern?
- Recent inflation dynamics
  - Inflation accelerated sharply in the second half of 2007, rising from near zero in June 2007 to 4.9 percent in December 2007; by May 2008 it reached 8.2 percent.
  - About three quarters of the 8.2 percent rise in the CPI in 12 months to May 2008 can be attributed to energy and food prices; one quarter of that increase to other factors.
- External drivers
  - International energy and food prices surged over the past 12 months amid strong demand growth from emerging markets and the biofuels industry and tightening supply.
  - For a euro-linked currency like BiH’s, the euro’s strength against the dollar partly mitigated the impact of commodity price surges (example: international food price index increased by 44 percent in dollar terms since May 2007, but by only 25 percent in euro terms).
  - Measured at the consumer level, the pass-through to the CPI was about half of the international commodity price increases (not all food items are internationally traded; processing and transport mute pass-through).
- Underlying domestic inflation pressures
  - Core inflation (excluding food and energy) rose from near zero a year ago to 3.2 percent in May 2008, signaling that domestic demand may be growing in excess of potential.
  - An alternative measure (the trimmed mean CPI) suggests underlying inflation may be around 5 percent.
  - Other signs of intensifying domestic demand pressures include accelerating wage growth and a widening trade deficit.
- Policy recommendations
  - Under the currency board arrangement, restraining domestic demand mainly falls to fiscal policy and public wage policy.
  - Fund policy advice: general government should avoid loosening the fiscal stance and adopt a disciplined public wage policy that signals restraint to the private sector and avoids wage competition among levels of government.
  - Cutting VAT rates for selected products is discouraged: such cuts are unlikely to be effective or desirable because pass-through to final prices is uncertain, and rising food and energy prices reflect relative scarcity that should instead incentivize increased production and more efficient use.

*Source: IMF staff report text, "1. Underlying Current Account Balance Estimates, 2003-07."*

### 14.      Both the food and energy

### _cr08326 - 14.      Both the food and energy

### Impact of food and energy on CPI
- Food weight in the consumer expenditure basket: 34 percent.
- Energy weight in the consumer expenditure basket: 11 percent.
- In May 2008, contribution to the 12-month increase in the CPI:
  - Food: 55 percent of the increase.
  - Energy: 20 percent of the increase.
  - The rest: 25 percent of the increase.
- Food and energy components have had a disproportionately large impact on changes in BiH’s CPI—in excess of their respective weights in the basket (34 percent for food; and 11 percent for energy).

### Food weight and international comparisons
- BiH food weight in total consumption basket: 34 percent.
- Comparable countries:
  - Albania, Bulgaria, Macedonia, and Romania: food weight ranges between 40 and 50 percent.
  - Euro area: food accounts for about 20 percent of the total consumer basket.
- Implications:
  - Compared to Albania, Bulgaria, Macedonia, and Romania, BiH’s general inflation rate would be expected to be less affected by the recent surge in international food prices.
  - For the same reason, BiH would be expected to be outperformed by the euro area on inflation, given the euro area’s lower food weight.

### Price level convergence and food categories
- BiH’s average personal consumption price level (Eurostat): about 45 percent of the EU average price level in 2006.
- Specific food categories at 2006 levels (percent of corresponding average EU level):
  - Non-alcoholic and alcoholic beverages, oils and fats, milk, cheese and eggs: in the 74–87 percent range.
- Change 2005–06:
  - Relative price level of overall individual consumption (as percent of the EU level) rose by 1.6 percentage points.
  - Increase for the food categories (calculated as a simple average) was 3.7 percentage points.
- Interpretation:
  - There is considerable room for BiH’s general price level to rise toward the euro area level, although the room for a number of food categories appears limited.
  - Convergence of wages and prices in emerging European countries toward average EU levels, supported by increased economic integration and growing trade in food products, appears to be part of the explanation for BiH’s food price increases.

### Core inflation developments
- Core inflation (excluding food and energy) moved up from a zero percent range to 3.2 percent in May 2008.
- Euro area core inflation figure cited for comparison: 2.4 percent.
- Interpretation:
  - Core inflation has trended upward, but remains low for now.
  - Purely domestic price and cost pressures appear to have been successfully contained thus far, though they contributed to the rise in core inflation.

### Risks from second-round effects and wages
- Risk of intensifying inflationary pressures if spillovers and second-round effects from food and energy inflation materialize.
- Wage growth:
  - Described as already rapid in both entities, but so far broadly in line with productivity gains.
  - Wage growth has been accelerating, reflecting cumulative effect of years of fast aggregate demand growth and diminishing slack in labor markets.
- Labor market context:
  - According to the 2007 Labor Force Survey (LFS), BiH’s unemployment rate is 29 percent; much of this is structural unemployment.
- Public sector wage adjustments:
  - Recent upward wage adjustments in the public sector (state and RS governments) led to sharp upward adjustments in public wages.
  - Given the still-large role of the public sector in BiH’s economy, these increases may have repercussions for private sector wage settlements.
  - Wage indexation mechanisms that tie public sector wages to changes in economy-wide wage developments may accelerate wage escalation through a feedback loop.
- Policy implication:
  - Resisting wage escalation is necessary to avoid setbacks to external competitiveness.

### Measuring core inflation: trimmed-mean CPI
- Rationale:
  - Excluding food and energy entirely is not ideal in BiH because food and energy account for almost half of the consumer expenditure basket and not all items within these categories are highly volatile.
- Trimmed-mean method:
  - For a given month, price changes for each CPI component are sorted; extreme observations in both tails are trimmed; trimmed mean is the weighted average of remaining components.
- Empirical result (January 2005–May 2008):
  - Trimmed inflation shows no bias compared to actual monthly CPI increases and gives a smoother profile than headline inflation.
  - The measure of core inflation that excludes food and energy deviates significantly from the inflation faced by a typical household over this period.
- Conclusion:
  - The trimmed-mean CPI is a useful gauge of underlying inflationary pressures and may provide a better guide to wage policy decisions than headline inflation.

### Conclusions and policy recommendations
- Recent developments:
  - Fast-rising inflation is a new phenomenon in BiH after years of relatively good inflation performance relative to other emerging European economies.
  - Recent global food and energy price shocks have quickly pushed up the overall price level.
  - There is a risk these shocks become entrenched if they trigger sharp upward wage adjustments.
  - Signs indicate BiH’s growth has been running close to its potential and domestic demand pressures have intensified.
- Fiscal and public sector wage policy:
  - Given the currency board arrangement, fiscal restraint remains the key policy tool for managing overheating risks.
  - Public wage policy is a primary channel through which the government can influence wage developments; the system for adjusting wages in the future should exert a moderating influence on wage settlements in the rest of the economy.
  - Coordination in public wage policy would be useful to head off wage competition among levels of government that could lead to wage escalation.
- VAT policy on food and energy:
  - Differentiated VAT rates for food and energy are not helpful as a policy response to higher prices.
  - Reasons cited:
    - The extent to which VAT cuts are passed on to final prices is uncertain.
    - Rising prices signal relative scarcity, providing incentives for increased production and more efficient use.
    - Differentiated VAT rates complicate tax administration, raising the cost to the taxpayer and the government.

*Source: IMF staff report content provided in the supplied document.*

### 29.      The underlying CA balance can also be estimated in a forward-looking

### _cr08326 - 29.      The underlying CA balance can also be estimated in a forward-looking

### Underlying current account (CA) balance — forward-looking estimate
- Methodology: uses medium-term projection and removes any change in policy, assuming no output gap and no change in the real exchange rate.
- Forward-looking underlying CA deficit: 13.7 percent of GDP (projected for 2013).
- Policy-change adjustment: judged unnecessary because fiscal policy stance in 2013 is expected to remain more or less the same as in 2008.
- Caveat: BiH faces a large terms of trade shock in 2008; the projected CA deficit implicitly assumes some change in the real exchange rate, so the forward-looking estimate differs from the estimate based on the 2007 outturn.
- Working value used in subsequent calculation: upper-bound figure of 13.5 percent of GDP.
- Note on business cycle computation: HP filter (lambda = 1600) on annual GDP data from 1998 to 2007.

### Historical decomposition of CA (2003–07) — key figures (in percent of GDP)
- Official current account deficit: 2003: 19.4; 2004: 16.3; 2005: 18.0; 2006: 8.4; 2007: 13.0
- Impact of VAT introduction: 2003: -2.7; 2004: -2.7; 2005: -4.8; 2006: 1.8; 2007: 0.0
- Impact on imports: 2003: 0.0; 2004: 0.0; 2005: -2.1; 2006: 1.8; 2007: 0.0
- Impact on exports: 2003: -2.7; 2004: -2.7; 2005: -2.7; 2006: 0.0; 2007: 0.0
- Bosnian business cycle: 2003: -1.4; 2004: -0.2; 2005: -1.1; 2006: 0.1; 2007: 0.8
- Trade partners' business cycle: 2003: -0.4; 2004: -0.4; 2005: -0.6; 2006: -0.2; 2007: 0.1
- Real exchange rate movements: 2003: -0.9; 2004: -0.7; 2005: 0.1; 2006: 0.0; 2007: -0.8
- Underlying current account deficit: 2003: 16.9; 2004: 12.8; 2005: 13.8; 2006: 9.8; 2007: 11.5

### Macroeconomic balance (CGER) approach — equilibrium CA estimates
- CGER pooled OLS regression uses data from 54 industrialized and emerging markets between 1973 and 2004; independent variables include fiscal balance, demographics, lagged current account, oil balance, relative income and growth, and crisis/financial center dummies.
- CGER estimated equilibrium CA deficit for BiH: 7.0 percent of GDP (2013).
- Forecast error / confidence: forecast errors of 2-3.5 percent of GDP imply a possible range of 3.5-10.4 percent.

CGER coefficient contributions to estimated CA norm (selected)
- Fiscal balance/GDP: coefficient 0.189, contribution: -0.1
- Old-age dependency: coefficient -0.123, contribution: 1.5
- Population growth: coefficient -1.029, contribution: 0.2
- Lagged CA/GDP: coefficient 0.366, contribution: -5.0
- Oil balance/GDP: coefficient 0.169, contribution: -1.5
- Output growth: coefficient -0.157, contribution: -0.2
- Relative income: coefficient 0.020, contribution: -1.6
- Estimated CA norm, 2013: -6.9

### Macroeconomic balance (ALM 2007 / financial integration) approach
- Including financial integration (sum of foreign assets and liabilities) changes results: in EU sample, financial integration has a strong significant effect.
- ALM-based estimated CA norm for BiH: -11.5 percent of GDP.

ALM coefficient highlights and contributions
- Log GDP per capita (Real PPP GDP per capita): coefficient -0.008, contribution: -7.0
- Lagged NFA/GDP: coefficient -0.028, contribution: 2.8
- Old-age dependency ratio: coefficient -0.292, contribution: -7.0
- Trade/GDP: coefficient -0.014, contribution: -1.5
- Financial integration effect: contribution -7.3
- Constant: 0.137, contribution: 13.7
- Estimated CA norm: -11.5

### External sustainability approach
- Method: compute CA that stabilizes net foreign asset (NFA) position given assumptions on growth and rates of return; then compute RER adjustment to close CA gap.
- Jahjah (2007) estimate: CA balance required to stabilize NFA is around 5.5-5.7 percent of GDP (range depends on stabilized NFA level and assumed adjustment paths).

### Summary of equilibrium CA estimates and adjustments
- Range of estimated equilibrium CA deficit (without capital transfers): 6-12 percent of GDP.
- Capital transfers (mitigating factor): projected at 1.8 percent of GDP in the medium term; including them yields adjusted equilibrium CA deficit between 7.5 and 13.5 percent of GDP.
- Data uncertainty: large margins of error in CA data due to size of workers’ remittances and individual resident assets abroad. CBBH increased private transfers estimates from around 14 percent of GDP to an average of about 18 percent of GDP, but uncertainty remains because remittance estimates are model-based.
- Adjusted equilibrium CA balances (Table 4):
  - CGER: equilibrium -6.9; mitigating factor -1.8; adjusted = -8.7
  - ALM (2007): equilibrium -11.5; mitigating factor -1.8; adjusted = -13.3
  - External Sustainability: equilibrium -5.6; mitigating factor -1.8; adjusted = -7.4

### Real exchange rate (RER) assessment — PPP and ERER approaches
- PPP approach:
  - Using 2001–06 average income and price data for all IMF member countries: BiH’s RER is undervalued by 43 percent.
  - Using Coudert and Couharde (2005, 2002) estimated equations (cross-country data from 2003 and 2000, sample without very poor countries): BiH’s RER undervalued by 31-34 percent.
- ERER (CGER-based panel regression, CEE-specific coefficients) variables: NFA, productivity differential, commodity terms of trade, government consumption, trade restriction index, price controls, fixed effects.
- Productivity differential contribution: rapid growth of productivity in tradables is a main factor predicting a more appreciated RER than actual for 2004–2007.
- Average productivity growth (2004-2006, gross value-added per employee):
  - Tradables / Nontradables ratio: Bosnia & Herzegovina: 13.4 / 3.4 -> 9.6
  - Main trading partners (examples): Euro Area: 3.4 / 0.4 -> 2.9; Slovenia: 7.1 / 2.7 -> 4.3
- ERER medium-term estimate (2013) and misalignment:
  - Estimated REER (in log scale), 2013: 4.71
  - Estimated REER (Index, 2000=100): 111.2
  - 2007 REER index (Index, 2000=100): 94.9
  - Estimated undervaluation (in percent): 17.2
- Caveats: sensitive to productivity differential assumptions; if productivity differential relative to trading partners is reduced to half of most recent actual value, the estimated undervaluation would be essentially eliminated. Forecast error about 12 percent.

CGER ERER coefficients (selected)
- NFA (as share of country's trade) CEE-specific: 0.04; estimated value contribution: -0.04
- Productivity differential: CEE-specific coefficient 1.42; estimated value contribution: 0.31
- Commodity terms of trade (log of index): CEE-specific coefficient 0.39; estimated value contribution: 1.75
- Government consumption (as share of GDP) relative to trade partners: contribution 0.00
- Price controls (Number of administered price categories, EBRD): contribution -0.08
- Fixed effect: 2.77

### RER assessment based on current account gap (elasticities method)
- Assumes real exchange rate movements are sole factor to close CA gap.
- Import and export elasticities to the real exchange rate used: imports 0.92; exports -0.71 (Isard and Faruqee, 1998).
- Using adjusted CA gaps and underlying CA balance (13.5 percent of GDP), implied REER over(+)/under(-)valuation estimates:
  - CGER approach: equilibrium CA -6.9; adjusted equilibrium -8.7; CA gap = 4.8; implied overvaluation: 23.1
  - ALM (2007) approach: equilibrium CA -11.5; adjusted equilibrium -13.3; CA gap = 0.2; implied overvaluation: 1.0
  - External Sustainability approach: equilibrium CA -5.6; adjusted equilibrium -7.4; CA gap = 6.1; implied overvaluation: 29.3

### Overall assessment of RER and CA-gap estimates
- Range of RER misalignment estimates: from 17 percent undervaluation to 29 percent overvaluation.
- Large uncertainties arise from: regression forecast errors, assumptions about BiH’s business cycle, assumed import and export elasticities to RER movements.

### Export performance and structure
- Export growth: value of exports of goods rose from about 18 percent of GDP in 2003 to 29 percent of GDP in 2007.
- Export growth rates: average of 26 percent between 2004 and 2006; slowed to 15 percent in 2007.
- Real export growth, 2003–2007: registered 69 percent for BiH.
- Comparative performance:
  - BiH’s 2003–07 real export growth (69 percent) vs. average for new member states (NMS): 61 percent; BiH exceeded regional average.
- Market share in world exports: BiH’s market share rose by 42 percent from 2003 to 2007, exceeding the regional average of around 30 percent; caveat that gains may partly reflect BiH being a newer entrant with catch-up potential.
- VAT-related adjustments:
  - VAT introduction (January 2006) produced temporary import jump in 2005 and temporary drop in 2006; underreporting of exports became evident in 2006 with introduction of VAT, estimated underreported exports in 2006 at 2.7 percent of GDP. VAT-related impact on exports in 2006 (~14 percent) is taken out from export growth calculations.

*Source: _cr08326 - 29.      The underlying CA balance can also be estimated in a forward-looking*

### 45.      The gains in market share have been broad-based across sectors, especially in

### _cr08326 - 45.      The gains in market share have been broad-based across sectors, especially in

### Market-share gains and sectoral patterns
- Market share gains have been broad-based across sectors, concentrated in those with relatively faster growth in global trade.
- Market share gains are largest in iron-steel and wire products.
- All of BiH’s 15 top manufacturing products are in the sectors with relatively faster growth in global trade, and BiH has gained positive market shares in most of these sectors from 2003 to 2006.

### Metal exports and prices
- Metal exports account for about ¼ of total exports.
- From 2003 to 2007, iron and steel took over aluminum as the most important metal exports of BiH.
- World price of metal nearly tripled during the same period (2003–2007).
- The metal price, calculated based on BiH’s mix of metal exports, tripled over recent years.
- Contribution to metal export growth decomposes into price and volume effects (2004–2007): both price and volume contributed to growth (charts referenced).

### Non-metal export growth drivers
- Non-metal export growth has been mainly driven by growth in volume.
- Strong growth in machinery and mechanical appliances, mineral products and chemical products contributed to non-metal export growth.
- Mineral products are mostly electricity exports due to growing regional demand for electricity.
- Contribution to non-metal export growth decomposes into price and volume effects (2004–2007): volume effects dominated (charts referenced).

### Shifts in export composition (2003–2007)
- Machinery and mechanical appliances: increased from 8.2 percent to 12.9 percent of exports.
- Metal exports (base metal and articles thereof): increased from 22.4 percent to 27.7 percent of exports.
- Mineral product, including electricity: increased from 9.5 percent to 11.1 percent of exports.
- Textile and footwear: decreased from 12.1 percent to 10.6 percent of exports.
- Wood and wood products: fell from 16.8 percent to 8.9 percent of exports.
- Miscellaneous furniture: fell from 9.0 percent to 7.7 percent of exports.
- Chemical products: rose from 2.7 percent to 5.5 percent of exports.
- Others: changed from 19.3 percent to 15.7 percent of exports.

### Technology, factor intensity, and labor-skill composition
- Share of resource-intensive products increased from 48 percent in 2003 to 56 percent in 2006.
- Share of medium- to high-tech exports fell from 31 percent to 25 percent (2003–2006).
- Share of low-tech labor-intensive exports fell slightly from 21 percent to 19 percent (2003–2006).
- Exports by labor-skill requirements:
  - Low-skill exports rose from about 50 percent of merchandise exports in 2003 to about 56 percent in 2006.
  - Medium-skill exports declined correspondingly; high-skill exports remained small around 4 percent and fell slightly over the period.
- The shift toward resource-intensive and low-skill products increases BiH’s vulnerability to swings in global commodity prices.

### Export markets
- The share of exports to "neighbors" (Croatia, Slovenia, Serbia) increased from 39.9 percent in 2003 to 44.1 percent in 2006.
  - Croatia: 20.3 (2003) to 18.7 (2006)
  - Slovenia: 10.6 (2003) to 12.2 (2006)
  - Serbia: 9.0 (2003) to 13.2 (2006)
- Advanced European countries’ share fell from 53.1 percent in 2003 to 40.9 percent in 2006.
  - Germany: 18.7 (2003) to 12.9 (2006)
  - Italy: 14.1 (2003) to 13.8 (2006)
  - Other advanced European countries: 20.4 (2003) to 14.1 (2006)
- Other emerging European countries’ share rose from 3.4 percent to 10.2 percent (2003–2006).
- The rest of the world declined from 2.8 percent to 1.3 percent (2003–2006).

### Constant Market Share Analysis (CMSA) results (2003–2006)
- Change in exports:
  - Change in exports (In USD billions): 2.4
  - Growth rate (in percent): 233.6
- Contributions to total increase in exports (in percent of total increase):
  - Global growth effect: 21.6
  - Commodity composition effect: 0.4
  - Market distribution effect: 6.4
  - Competitiveness: 71.6
- Interpretation:
  - World trade development accounts for about 20 percent of export growth.
  - The competitiveness (residual) effect contributes about 72 percent of the increase in exports over 2003–2006, reflecting changes in quality and composition of BiH exports and favorable export prices.
  - Market distribution effect (~6 percent) reflects increased exports to growing markets such as Serbia, Slovenia and other emerging European countries.
- Competitiveness effect by commodity group (share of total competitiveness effect, 2003–2006):
  - Food and live animals: 4.8
  - Beverages and tobacco: 0.3
  - Crude Materials, inedible, except fuels: 18.8
  - Fuels, lubricants, including electricity: 4.6
  - Animal, vegetable oil, fat, wax: 0.8
  - Chemicals: 5.1
  - Manufactured goods: 32.7
  - Machines, transport equipments: 12.6
  - Miscellaneous manufactured articles: 20.3
  - Goods not classified: 0.0
- Note: About 80 percent of the overall growth of manufactured goods is from metal products, whose world price rose over the period.

### External balance sheet and external vulnerability
- Net international investment position (net IIP) worsened from -44 percent of GDP to -51 percent of GDP at end-2007, mainly reflecting the increase in FDI inflows while external debt remained stable.
- External debt and assets:
  - External debt at 48.5 percent of GDP (noted as "at 48.5 percent of GDP").
  - Short-term external liabilities are estimated at 7 percent of GDP or about 14 percent of total external debt at end-2007.
  - External assets increased by more than 10 percentage points of GDP, reflecting stronger international reserve position and commercial banks’ foreign assets.
  - The CBBH’s foreign reserves can easily cover all the short-term external liabilities.
- Composition shifts:
  - External debt composition shifted towards more commercial banks’ borrowing and less public sector borrowing.
  - The sizable increase in external assets in 2007 was due to RS Telekom privatization.
- Overall assessment:
  - BiH’s net IIP is not high by regional standards.
  - External balance sheet analysis does not indicate serious near-term vulnerability: size of external liabilities manageable and maturity structure favorable.

### Conclusions and policy implications
- Current account (CA) assessments:
  - The CA deficit currently exceeds sustainable levels.
  - Compared to an underlying balance of 12-14 percent, estimates of BiH’s equilibrium CA deficit range from 6 to 12 percent of GDP.
  - If capital transfers are taken into account, the equilibrium CA deficit is estimated to range from around 7.5 to 13.5 percent of GDP.
  - Implication: the CA gap could range between 0 and 6 percentage points of GDP.
- Real exchange rate and valuation uncertainty:
  - No strong evidence of a significantly overvalued real exchange rate at present that could result in future external instability, given robust export performance and stable movements in the RER.
  - Estimates of BiH’s real exchange rate over- and undervaluation, and current account gaps vary widely from 17 percent undervaluation to 29 percent overvaluation and are subject to large uncertainties.
- Risks and near-term outlook:
  - Projected terms-of-trade shock in the next 2-3 years and the widening current account deficit in 2008 imply larger financing needs, which could expose BiH to shifts in investor sentiment.
- Policy recommendations:
  - Stabilizing the external account and preserving external competitiveness will require tight fiscal and public sector wage policies.
  - Enterprise reform and privatization are necessary to maintain external competitiveness, and boost productivity gains and export momentum.

*Sources: UN Comtrade; CBBH; IMF staff calculations and estimates.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08326.pdf_