IMF Executive Board Concludes 2023 Article IV Consultation with Bosnia and Herzegovina
September 7, 2023
Washington, DC : On August 30, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Bosnia and Herzegovina (BiH).
Russia’s war in Ukraine continues to place significant headwinds on the European economy, with implications for BiH. Moreover, the global tightening of financial conditions is expected to weigh on the country’s economic activity. While all new governments have been formed following elections in 2022, political tensions continue to hamper economic policy and reforms. The European Union candidacy status, granted in December 2022, has yet to create reform momentum.
Economic growth declined to 3.9 percent in 2022 from 7.4 percent in 2021 and is projected to decelerate further to 2 percent this year on weaker domestic and external demand. Inflation peaked at 17.4 percent in October 2022 and has since been on a declining trend but remains elevated. In line with falling international food and energy prices, average inflation is projected to fall to 6 percent in 2023. Downside risks are high and include a possible abrupt slowdown in Europe, an intensification of domestic political tensions, and the materialization of financial risks.
The fiscal stance improved in 2022 as the overall fiscal surplus increased to 0.9 percent of GDP from 0.6 percent in 2021. A surge in current spending reflecting measures to mitigate the cost-of-living crisis was accompanied by a smaller increase in capital spending. Total government debt declined below 30 percent of GDP in 2022, also because of slow project disbursement and implementation. With expenditures rising faster than revenues, the fiscal balance is expected to turn to a deficit of 1.5 percent of GDP in 2023. Financing needs have increased in 2023 given large debt repayments.
Executive Board Assessment[2]
Executive Directors noted that following a rebound in 2021, growth in Bosnia and Herzegovina has slowed down, while inflation, although declining, remains elevated. Given continued high risks and uncertainty related to the outlook, Directors stressed the need for determined policy and reform efforts to strengthen macroeconomic stability and spur medium-term growth. In this context, they highlighted the importance of greater political consensus and encouraged leveraging the EU candidacy to promote the necessary reforms. Strengthening the implementation of the Fund’s recommendations, supported with capacity development, will also be important.
Directors underscored the need to restrain the fiscal expansion to help contain inflationary pressures given limited monetary policy tools, and ease financing pressures. To strengthen fiscal sustainability, Directors encouraged the authorities to further contain current spending, including by containing the public wage bill, improve targeting of social spending, boost public investment, and improve revenue collection. They also noted that investment in infrastructure, green energy, and digitalization, supported by public financial management reforms, will help spur sustainable growth.
Directors welcomed the authorities’ timely steps to strengthen the currency board arrangement, which has served the country well. They advised the authorities to allow interest rates to rise in response to market conditions, while taking measures to preserve financial stability. Directors also urged against calls on the central bank to finance entity budgets or provide credit to the private sector. The central bank should further increase remuneration rates on bank reserves to narrow the interest rate gap with the euro area and reduce the risk of capital outflows. Directors emphasized that banking agencies should eliminate measures that distort interest rates and enhance monitoring and crisis preparedness, including by strict and timely enforcement of all prudential and corrective actions. They highlighted the need to improve information exchange and establish a country-wide financial stability fund to facilitate bank restructuring and provide liquidity in exceptional cases.
Directors emphasized the importance of structural reforms to accelerate
growth, promote green and digital transition, and raise living standards.
They called for accelerating governance reforms and encouraged the
authorities to request an IMF governance diagnostic to help identify key
weaknesses and prioritize reforms. Directors also encouraged the
authorities to urgently adopt a new anti-money laundering law and
prioritize the implementation of the anti-corruption legal frameworks.
Continuing efforts to strengthen public enterprise oversight and
transparency also remain important. On the climate front, they recommended
stepping up efforts to decarbonize the economy, coupling the electricity
market with the EU market, and transitioning to renewables.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing ups can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
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Bosnia and Herzegovina: Selected Economic Indicators, 2021-2024 |
|||||
|
2021 |
2022 |
2023 |
2024 |
||
|
Est. |
Projections |
||||
|
Nominal GDP (KM billion) |
39.1 |
45.6 |
49.9 |
52.8 |
|
|
Gross national saving (percent of GDP) |
23.2 |
23.6 |
21.9 |
22.8 |
|
|
Gross investment (percent of GDP) |
25.6 |
28.0 |
26.6 |
27.0 |
|
|
(Percent change) |
|||||
|
Real GDP |
7.4 |
3.9 |
2.0 |
3.0 |
|
|
GDP deflator |
4.9 |
12.2 |
7.3 |
2.7 |
|
|
CPI (period average) |
2.0 |
14.0 |
6.0 |
3.0 |
|
|
Money and credit (end of period) |
|||||
|
Base money |
17.4 |
3.3 |
2.1 |
-- |
|
|
Broad money |
12.4 |
5.5 |
7.5 |
-- |
|
|
Credit to the private sector |
4.0 |
4.9 |
5.7 |
-- |
|
|
Operations of the general government |
(Percent of GDP) |
||||
|
Revenue, of which: |
40.5 |
39.7 |
40.1 |
39.9 |
|
|
Taxes |
22.0 |
21.8 |
21.5 |
21.6 |
|
|
Social security contributions |
14.8 |
14.2 |
14.5 |
14.5 |
|
|
Expenditure |
39.9 |
38.8 |
41.6 |
41.4 |
|
|
of which: Investment expenditure |
4.2 |
3.9 |
4.3 |
4.5 |
|
|
Fiscal balance |
0.6 |
0.9 |
-1.5 |
-1.5 |
|
|
Primary fiscal balance |
1.3 |
1.5 |
-0.4 |
-0.1 |
|
|
Total general government debt |
34.6 |
29.6 |
27.9 |
27.7 |
|
|
Domestic general government debt 1/ 2/ |
9.0 |
8.0 |
8.7 |
9.7 |
|
|
External general government debt |
25.7 |
21.6 |
19.3 |
17.9 |
|
|
Balance of payments |
(Percent of GDP) |
||||
|
Exports of goods and services |
42.0 |
46.9 |
41.6 |
42.1 |
|
|
Imports of goods and services |
53.8 |
61.0 |
55.7 |
55.9 |
|
|
Trade balance |
-11.7 |
-14.1 |
-14.1 |
-13.7 |
|
|
Current transfers, net |
10.8 |
10.4 |
10.4 |
10.6 |
|
|
Current account balance |
-2.4 |
-4.5 |
-4.7 |
-4.2 |
|
|
Foreign direct investment (+=inflow) |
2.4 |
2.5 |
2.1 |
2.2 |
|
|
Gross official reserves (Euro million) |
8,372 |
8,228 |
8,123 |
8,348 |
|
|
(In months of imports) |
7.1 |
6.9 |
6.5 |
6.3 |
|
|
(In percent of monetary base) |
113.3 |
107.8 |
-- |
-- |
|
|
(In percent of IMF ARA metric) |
126.1 |
119.8 |
-- |
-- |
|
|
External debt 3/ |
58.5 |
51.6 |
47.7 |
45.8 |
|
|
Memorandum Items: |
|||||
|
Unemployment rate (national definition) 4/ |
17.4 |
15.4 |
-- |
-- |
|
|
GDP per capita (Euros) |
5,744 |
6,714 |
7,366 |
7,812 |
|
|
Output gap (percent of potential GDP) |
0.2 |
1.2 |
0.3 |
0.3 |
|
|
REER (Index 2016=100) |
98.5 |
102.3 |
-- |
-- |
|
|
NEER (Index 2016=100) |
117.1 |
117.4 |
-- |
-- |
|
|
Sources: BiH authorities; and IMF staff estimates and projections. |
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|
1/ On average, half of the domestic debt stock is indexed to the Euro. 2/ The stock of general government domestic debt does not include domestic arrears and those of public enterprises. 3/ Includes inter-company loans in private external debt. 4/ The 2021 unemployment rate is not comparable with 2020 due to redesign of BHAS Labor Force Survey (LFS) methodology in line with EU regulations. |
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Meera Louis
Phone: +1 202 623-7100Email: MEDIA@IMF.org