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Bosnia and Herzegovina: Transforming the Economy to Achieve Sustainable Prosperity

April 12, 2016


Despite a complex political composition, Bosnia and Herzegovina (BiH) has achieved significant progress since the end of the war that followed the breaking of Yugoslavia. Infrastructure has been rebuilt, governing institutions at all levels have been established, and an economic and fiscal management framework has brought macroeconomic stability. Reform efforts have improved economic links between the entities and begun to promote private sector development and job creation. Yet, more efforts are needed for BiH to achieve sustainable prosperity and join the ranks of the European Union (EU).

Challenge

BiH’s key economic challenge is the country’s unbalanced economic model. Public policies and incentives favor the public over the private sector, consumption over investment, and imports over exports. BiH needs to unleash its private sector potential and at the same time reduce the footprint of the very large and inefficient public sector. A shift is needed toward a business environment that is more favorable to private investment, supports both vibrant small and medium-sized enterprises (SMEs) and the growth of larger companies, facilitates export performance and productivity improvements, and delivers much-needed private sector employment generation. Despite improvements, BiH’s private sector still struggles with a complex business environment, high labor taxes, inflexible labor market policies, and uneven and inefficient economic infrastructure. Yet when addressing these imbalances, the sustainability and inclusiveness of future growth must be safeguarded, for example, through improving the quality of public service and social protection delivery and building resilience to adverse natural events, such as the massive flooding in 2014. The Reform Agenda agreed by the BiH Council of Ministers and the Governments of the Federation of Bosnia and Herzegovina (FBiH) and Republika Srpska (RS) in mid-2015 recognizes many of these challenges and targets reforms to foster economic growth, create jobs, and improve the efficiency of social assistance, while setting a path toward fiscal consolidation and macroeconomic stability.


Approach

With BiH set on joining the EU, supporting the integration process became the overarching theme of the World Bank Group’s country partnership strategy for FY12-15, along with helping improve competitiveness of the BiH economy, improve services for the most vulnerable groups, and ensure sustainable use of the natural resources. The program implementation was flexible, enabling the WBG to respond to shifts in client’s priorities as well as to increased needs in the aftermath of the global crisis and natural disasters.

Results

Results achieved under the FY12–15 Country Partnership Strategy include:

  • The SME Access to Finance projects have provided loans to a total of 316 SMEs, 125 of which are owned/managed by women, to help ease the impact of the economic downturn and contribute to the recovery.
  • Improved real estate registration processes and the greater availability of integrated online cadastre information have helped develop more transparent and efficient land markets. In addition, the backlog of pending cases has been reduced.
  • RS streamlined business registration processes, reducing the previous 11 steps before the reform to the current five, and also reducing the time needed to obtain business registration from up to 30 days to three, at a cost of only 1 BAM.
  • FBiH has also reduced the time, documents, and tariffs required for business registration, which now takes only 15 days.
  • 1,800 hectares were covered with improved irrigation systems, and 5 million cubic meters per year of water were added.
  • The share of collected solid waste disposed of in regional sanitary landfills was increased, and regular environmental monitoring improved. The number of unserved households was reduced by 50,000, or 6.5 percent.
  • Five wastewater treatment plants are now operational, and another two have been constructed under the Global Environment Facility (GEF) Neretva and Trebisnjica Rivers Basin Management Project and GEF Water Quality Project. An average of 15,000 cubic meters of wastewater per day is currently being treated.
  • More than 17 kilometers of sewage lines were completed and over 32,000 households have benefited from sewage network rehabilitation.
  • The institutional and technical capacities for sustainable protected area management were strengthened, and areas under protection increased from 0.5 to 5.5 percent.

IDA RESULTS

BiH graduated from International Development Association (IDA) eligibility to International Bank for Reconstruction and Development (IBRD)-only status in June, 2014. Although its per capita income has long exceeded the threshold, IDA eligibility was extended to accommodate post-conflict needs. IDA results achieved under the FY12–15 Country Partnership Strategy include:

  • IDA investments in road infrastructure, in partnership with the European Bank for Reconstruction and Development (EBRD) and European Investment Bank (EIB), rehabilitated 293 kilometers of roads and helped reduce user costs by almost 18 percent in FBiH and by 11.2 percent in RS, exceeding the target of 10 percent.
  • The efficient registration of real estate helped develop transparent land markets. Property registration transactions, which used to require several months, now take one day in larger urban centers, thanks to the IDA-financed Land Registration Project, which also helped reduce the backlog of pending cases from 80,000 in 2006 to 18,200 in 2012.
  • IDA financing proved effective in enhancing health system efficiency through the strengthening of primary health care (PHC) along the family medicine (FM) model. The restructuring and strengthening of PHC through the FM model has been the single largest reform implemented in the health sector and was supported by the Bank-financed Health Sector Enhancement Project. Patients are now registered with family medicine teams, and about 95 percent of the population has access to basic PHC coverage through social insurance and dedicated public (direct subsidized) programs.  Coverage by FM teams increased from 5 to 80 percent (national average) between 2004 and 2014.
  • Extraordinary rainfall in May 2014—the largest precipitation in 120 years—generated floods that affected about 1 million people and caused damages and losses equivalent to nearly 15 percent of GDP. The Bank promptly provided support to finance emergency goods and rehabilitation through a US$100 million IDA credit from the Crisis Response Window. More than 160,000 people have benefited from rehabilitated infrastructure thus far, and about 94,000 beneficiaries have received construction materials and other emergency goods.

Bank Group Contribution

The WBG-financed program in BiH has achieved impressive results over the past 20 years. Financial assistance during the FY12-15 CPS period slightly exceeded expectations. The CPS envisaged IDA/IBRD lending of US$348 million of which US$148 million would be IDA and US$200 million IBRD lending. At the end of this CPS cycle, US$400 million was committed (US$230 million IDA; US$170 million IBRD). Commitments exceeded original targets as the WBG responded to financial needs in the aftermath of the global crisis, e.g. by supporting SMEs’ access to finance, and for post-floods emergency recovery and reconstruction with resources obtained through IDA’s Crisis Response Window.

Partners

Development partners in BiH are working effectively together, with the country’s Reform Agenda providing a natural coordination vehicle. The engagement of all the development partners is highly complementary. The WBG in particular took the lead among the development partners and provided the bulk of the analytic work that underpinned the Reform Agenda document, and the Bank continues to conduct active policy dialogue in most areas of reform. The WBG was also the lead partner in five of the six parts of the agenda: (i) Fiscal Sustainability, (ii) Business Climate and Competitiveness, (iii) Labor Market, (iv) Social Welfare and Pension Reform, (v) Rule of Law, and (vi) Public Administration Reform. Most of the financing is provided as loans, and the WBG and EBRD were the largest lenders. The EU is by far the largest source of grant funding to BiH.

Moving Forward

The recently approved 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. In view of this historic opportunity, the World Bank Group’s (WBG) Country Partnership Framework for 2016-20, approved in December 2015, will provide 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: (1) increasing public sector efficiency and effectiveness; (2) creating conditions for accelerated private sector growth; and (3) building resilience to natural shocks. The framework includes a cross-cutting theme of inclusion that will inform the choice and design of specific interventions under the strategy to ensure that reforms are socially sustainable and that vulnerable groups are not left behind as new opportunities open up. In addition to budget support, the Bank will continue to provide financing for specific investment projects, such as upgrading and rehabilitating the road network and reforming the health sector. The framework envisions roughly US$750 million in new lending from the World Bank in the next four years, depending on the scope and pace of reform implementation. Private investors in BiH may also receive funding from the International Finance Corporation (IFC) in the range of US$70–120 million, depending on demand and market conditions, as well as guarantees from the Multilateral Investment Guarantee Agency (MIGA).

Beneficiaries

Mirsad Lavić, beneficiary of the Social Safety Nets and Employment Support Project:

“I found out through the employment agency that there is an employment project to employ people that were listed in the employment bureau. So we applied for the project through which we employed four women to work in the bakery. This has certainly been of great help from the very beginning, where in that one year we were helped in paying contributions, taxes, so we were able to employ these four workers full time. So even after the project was over, the four women continue to work in this company.”


316
SMEs received loans through the Access to Finance projects.