Overview

Country Context

Bosnia and Herzegovina 2015
Population, million 3.8
GDP, current US$ billion 15.5
GDP per capita, current US$ 4078
Poverty rate ($2.5/day 2005PPP terms) 2.9
Gini Coefficient 0.33
Life Expectancy at birth, years 76.1


The political system in Bosnia and Herzegovina (BiH) is complex, reflecting the provisions of the country’s constitution established to end ethnic conflict and subsequent changes to the system introduced under the guidance of the international community through the Office of the High Representative.

In July 2015, the Council of Ministers of Bosnia and Herzegovina, Government of Republika Srpska, and Government of the Federation of Bosnia and Herzegovina adopted a joint program of structural reforms – known as the Reform Agenda. This Reform Agenda presents a rare window of opportunity for structural reform in BiH, underpinned by a broad national consensus on the country’s critical challenges and priorities and the sustained support of key development partners.

The key economic challenge faced by Bosnia and Herzegovina is the imbalance of the country’s economic model: public policies and incentives are skewed towards the public sector rather than the private sector; consumption rather than investment; and imports rather than exports. BiH needs to unleash the potential of the private sector while at the same time reducing the footprint of the very large and inefficient public sector.

There needs to be a shift towards a business environment that is conducive to private investment that supports both vibrant small- and medium-sized enterprises and the growth of larger companies, that facilitates export performance and productivity improvements, and which can deliver the much-needed private sector employment generation.  At the same time as addressing these imbalances in the country’s economic model there is also a need to ensure the sustainability and inclusiveness of future growth.

Strategy

Number of active projects 13
Lending $503.3 million
IBRD 3 loans ($245.7 million)
IDA 6 loans ($245.1 million)
GEF 3 grants ($14.5 million)

The World Bank Group’s (WBG) Country Partnership Framework for 2016-20, provides analysis, advice, and financing to accelerate implementation of reforms designed to restore economic growth.

To design this new strategy, a systematic diagnostic analysis was carried out to clarify the challenges that BiH faces on the road to growth and prosperity and to identify possible solutions.

The fundamental conclusion is that BiH can attain sustainable growth that will benefit broad groups of society only if it takes decisive steps to make the public sector leaner and more efficient and to unleash the growth and job creating potential of the private sector. Through the strategic framework, the WBG will support reforms in three areas:

  • Increasing public sector efficiency and effectiveness
  • Creating conditions for accelerated private sector growth
  • Building resilience to natural shocks


Key Engagement

In May 2014 unprecedented rainfall in Bosnia and Herzegovina affected more than 1 million people and caused estimated damages and losses of nearly 15 percent of that country’s Gross Domestic Product (GDP).  In response to this crisis, the Bank promptly met the government’s request to provide financial support for emergency goods and the rehabilitation of high priority infrastructure by approving a $100 million IDA credit from the WBG’s Crisis Response Window.

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Emergency funds were made available to rebuild this bridge in in the Celinac Municipality
In order to facilitate this process, the WBG quickly made adjustments to the portfolio to enable access to funds for affected agribusiness entrepreneurs and farmers.

This credit was approved on the very last day BiH was eligible to receive IDA financing as the country graduated from IDA as of FY15. Preparation of the project saw an unprecedented effort by the multi-sector World Bank Group team, including staff of IBRD and IFC, to rapidly design and deliver a high quality project in response to the emergency. The project was declared effective within a record two and a half months after approval, which confirmed that the authorities can partner to deliver results quickly when forced into action.

As part of this effort, the Bank participated in a systematic recovery needs assessment, led by the BiH authorities and supported also by the European Union and the United Nations. The assessment provided a basis for developing effective rehabilitation measures for infrastructure and services in the affected areas.

The project consisted of three components:

  1. $40 million for emergency goods, including food and water, medical supplies, building materials and equipment, fuel, and agricultural goods;
  2. $57 million for the rehabilitation and reconstruction of high priority, public service delivery infrastructure in the worst-affected areas.
  3. $3 million in support for project implementation and capacity building, including technical assistance and capacity building to help ensure future improved disaster resilience.

Economy

RECENT ECONOMIC DEVELOPMENTS

Economic growth performed better-than expected in 2015. Net exports were the main driver of growth, with consumption also supportive and investment a drag on growth. Real GDP expanded by 4.3 percent year-on-year (y/y) in Q2 –the highest rate in the last five years – and by 3.1 percent in Q3.

On the production side, manufacturing and retail trade contributed around half the growth of real value added in the first three quarters of 2015. We project growth to be 2.8 percent for 2015 as a whole. The growth pick-up has not been reflected in labor market performance. Unemployment remains high, at 27.7 percent.

Consumer price deflation persists, driven by lower imported goods prices, including those linked to international oil prices. The consumer price index declined by 1.3 percent y/y in December (the 13th consecutive month of y/y declines). Declining consumer prices provided some boost to real incomes given the limited growth in nominal earnings. However, they also increase the real burden of debt, potentially adding to the asset quality concerns faced in the banking system (with the non-performing to total loan ratio at 13.7 percent).

Credit growth remains weak, giving limited support to economic activity. Falling oil prices contributed to declining imports and improved external demand supported exports. Imports fell by 2.1 percent y/y in 2015 while exports, mainly to regional neighbors and the EU, increased by 3.5 percent.

While the fiscal deficit in 2015 is projected to remain broadly unchanged, at 2 percent of GDP, there are some positive signs of improvements in budgetary processes and steps towards much-needed improvements in the quality and structure of spending. In another important development, BH formally submitted its application for EU membership in mid-February 2016.

ECONOMIC OUTLOOK

Supported primarily by domestic demand growth, we project economic growth to strengthen to above 3 percent in the medium term. Investment is projected to pickup as a result of improvements in the business environment from implementation of the Reform Agenda, as well as from a number of specific investments in the energy and tourism sectors.

External conditions will support a stable inflow of remittances which, combined with sustained lower oil prices, will underpin a gradual pick up in consumption, which will remain a key driver of growth. The recovery in EU import demand will also lead to a moderate rise in exports. However, net external demand will continue to be a drag on growth, given the relative strength of domestic demand for imports.

As a result of these dynamics, we project real GDP growth to strengthen gradually from 2.8 percent in 2015 to 3.5 percent in 2018. Adverse shocks to external trade and financial conditions, along with limited progress in implementing the reform agenda are the main risks to this outlook, impacting in particular net exports and investment.

Since 1996, the World Bank has financed 74 projects in Bosnia and Herzegovina, for a total value of about $2 billion, including budget support. Currently, 10 investment projects, worth $404.74 million, are under implementation.

Active Projects

Highlighted Project

Environmental Sustainability. The World Bank portfolio in BiH continues to contribute to the environmentally sustainable development through a number of projects, primarily aimed at sustainable use of natural resources, cleaner production and reduction of pollution and emissions.

In the past year, a number of wastewater treatment plants have become operational, including those in Ljubuski and Konjic. Konjic is the first settlement on the Neretva River – an international waterway flowing through BiH and Croatia before feeding into the Adriatic Sea. Due to the harsh nature of the area, wastewater from Ljubuski, if untreated, would directly impact drinking water supplies in Croatia.   

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More than 300,000 stand to benefit from the SWWTP Project

 

The Sarajevo Waste Water Treatment Plant is in the final stage of refurbishment and once completed will serve 300,000 people, raising the percentage of treated municipal waste water discharged into the Miljacka River. 

More than 17 kilometers of sewage lines were completed and over 32,000 households have benefited from sewage network rehabilitation. Progress has been made in strengthening institutional systems, including improvements to the Sarajevo Water Utility Management Information System to reduce processing time of financial transactions. New water tariff was introduced in 2013 and revenues started increasing during 2014. Following the initiation of activities by the WBG, the governments, both in FBiH and RS, started developing new programs with other IFIs (EIB, EBRD, etc.).

Under the GEF Water Quality project, the Mostar wastewater treatment plant is also expected to be completed and start working, further treating the wastewater from approximately 100,000 people that was discharged into the Neretva River. Once these two treatment plants become operational it is expected that the percentage of treated municipal wastewater will increase to at least 30%, where prior to the World Bank involvement this percentage was as low as 5-6%. The Sarajevo Wastewater Project is also supported by the European Commission in order to help manage the treatment sludge generated on site. 


LENDING

Bosnia and Herzegovina: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments