RECENT ECONOMIC DEVELOPMENTS
Growth reached 3.1% in 2016, 0.1 percentage points lower than envisaged by official estimates (BiH Global Fiscal Framework 2017–2019). Consumption remains the main driver of growth. On the production side, agriculture and manufacturing contributed about 80%, together offsetting a contraction in services.
Although beginning to decline, unemployment, especially among the youth, remains high, despite significant improvements in the labor market. The unemployment rate fell from 25.4% in 2016 to 20.5% in the first half of 2017, driven by a fall in the activity rate and a slight rise in the employment rate. Unemployment among the youth has also decreased from 54.3 to 45.8 percent in 2017. These positive outcomes should have translated into a slight poverty reduction in 2017.
2017 marked the end of deflation. The consumer price index declined by an annual average of 0.8% in 2016, as low global energy prices placed downward pressure on overall prices. However, a long winter and a rebound in global energy markets led to increasing prices for fuel and imported food after December 2016, raising consumer prices by 1.1% year-on-year in June 2017. Given the limited growth in nominal salaries, higher consumer prices led to a reduction in real incomes.
Strong fiscal consolidation in 2015 resulted in a fiscal surplus of 0.6% of GDP. Still, fiscal accounts are likely to have deteriorated in 2016 and 2017 to a deficit of 0.6% of GDP due to a stable revenue-to-GDP ratio, combined with an increase in social spending and some recovery in capital spending. Recent Debt Sustainability Analysis confirms BiH is moderately indebted country with public debt to GDP ratio slightly above 40 percent of GDP.
Political uncertainties that could hold back the reform agenda are the highest risk for the medium-term outlook.
Supported primarily by rising domestic demand, economic growth is projected to strengthen from 3.1% in 2016 to 3.5% by 2019. This is considerably lower than the estimated 6% growth needed for BiH to catch up to EU income levels by 2037 and close the gap with other transition economies that are already EU members.
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, is expected to support improved employment outcomes in 2018. However, as unemployment remains high and real wages are expected to remain largely flat due to the substantial persistent slack in the labor market, poverty is projected to decline at a slow pace over the next couple of years.
The current account deficit is forecast to widen in the short to medium term due to the stronger demand for imports and consumer preference for imported goods.
Overall, in the medium term both fiscal and external deficits will persist until 2019 when a balanced budget is expected to be helped by progress with ongoing structural reform agenda and an ambitious fiscal adjustment. Fiscal consolidation will not be effective if structural rigidities on the expenditure side are not addressed, especially the large public wage bill and sizeable and poorly targeted social assistance.
Last Updated: Oct 26, 2017