RECENT ECONOMIC DEVELOPMENTS
Economic growth is estimated to have reached 2.8% in 2016, driven primarily by consumption but also investments. The labor income contribution for poverty reduction was limited in the absence of improvements in employment and with wages largely stagnant. As the reform agenda advances, economic growth is projected to accelerate to 4% in the medium term.
Unemployment remains high, with modest improvements in the labor market. The unemployment rate fell from 27.7% in 2015 to 25.4% in 2016, masking a reduction in employment in absolute terms, in spite of the positive economic growth. Unemployment among the youth has decreased but remains high at 54.3%. Given the strong connection of the income of the bottom 40% to labor income, poverty is expected to have remained unaltered.
Consumer price deflation (consumer price index [CPI]) provided a small boost to real incomes. The CPI dropped by 0.3% year-on-year (y-o-y) in November, the 23rd consecutive month of decline. The biggest driver of the fall was imported goods, reflecting low prices, such as food (down 0.6% y-o-y), clothing and footwear (down 8.4%), and outpatient services (down 4.7%). In contrast, notable price rises were seen for alcohol and tobacco, with smaller increases for education, housing, and utilities.
Although strong fiscal consolidation was seen in 2015, fiscal accounts are likely to have deteriorated in 2016. The fiscal balance of BiH was in a positive surplus of 0.7% of GDP in 2015. With the 2016 revenues-to-GDP ratio projected to have remained stable, an increase in social spending and a recovery in capital spending are estimated to have moved the fiscal balance to a deficit of 0.6% of GDP in 2016.
Supported primarily by domestic demand, economic growth is projected to strengthen from 2.8% in 2016 to 4% by 2019. The strengthened growth performance will be underpinned by (i) a pickup in investment resulting from expected improvements in the business environment and new energy, transport, and tourism projects; and (ii) higher consumption due to the steady flow of remittances, persistent deflation, and low oil prices.
As poverty is strongly associated with unemployment and inactivity in BiH, for economic growth to translate into poverty reduction, improvements in labor market participation and employment will remain key. The implementation of new labor laws in both FBiH and RS, as well as the introduction of support schemes for first-time job seekers, may support improved employment outcomes in 2017.
The current account deficit (CAD) is forecast to improve in the short run due to favorable external conditions (low oil prices and improved external demand for exports). In the medium run, with slow progress on ongoing structural reforms, the CAD is expected to deteriorate from 5% of GDP in 2016 to 6.7% by 2019. As the Government proceeds with its ambitious fiscal adjustment, the consolidated overall fiscal balance is projected to move to a surplus of 1.6% of GDP in 2019. A balanced budget is projected in 2019, on the assumption of progress on the ongoing structural reform agenda.
Political uncertainties that could hold back the reform agenda are seen as the highest risk for the medium-term outlook. Still, continued progress on the reform agenda is evident as the country received a detailed Questionnaire from the European Commission in December 2016 on which its readiness to be granted EU candidate status will be evaluated—the first step in the accession process.
Last Updated: Apr 20, 2017