IMF Executive Board Concludes 2024 Article IV Consultation with Bosnia and Herzegovina
June 20, 2024
Washington, DC: On June 13, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Bosnia and Herzegovina (BiH) on a lapse-of-time basis.[2]
Growth has proven resilient despite the continued fallout from the war in Ukraine. It decelerated to 1.7 percent in 2023 from 4.2 percent in 2022 but is projected to rise to 2.5 percent this year and remain subdued at around 3 percent in the medium term. Inflation has gradually decreased from a peak of 17.4 percent in October 2022 to 6 percent, on average, in 2023 and is expected to further decline to 3 percent in 2024. However, inflation excluding food and energy prices is proving to be stickier reflecting persistent wage pressures.
Uncertainty around the outlook is high and downside risks outweigh, including an abrupt slowdown in Europe, increased commodity price volatility, and rising domestic political tensions. On the other hand, progress on the European Union accession path could provide a reform boost, with positive spillovers.
The fiscal balance deteriorated from a surplus of 0.9 percent in 2022 to a deficit of 1.7 percent in 2023, reflecting the accumulated impact of several permanent increases in public wages and social benefits. The increased deficits and large debt repayments led to a large drawdown of government deposits, eroding buffers. Total government debt increased to 32.2 percent in 2023, and financing needs are high in both entities.
Executive Board Assessment
BiH’s economy has shown resilience in a difficult environment. Growth is projected to strengthen starting this year, albeit to levels that will not lead to convergence to the EU. Inflation will continue to decline, but wage pressures linger. Risks remain elevated, including from an intensification of regional conflicts and an abrupt slowdown in Europe, and domestically, from rising political tensions and more expansionary macroeconomic policies. On the other hand, opening of EU accession talks could boost reform momentum and confidence.
Fiscal policy should focus on curbing current spending while preserving growth-enhancing investment expenditures. The overall fiscal balance is projected to widen to 2.4 percent of GDP in 2024 from 1.7 percent in 2023, reflecting the accumulated impact of several permanent increases in public wages and social benefits. The authorities should move to contain deficits by containing the public sector wage bill, avoiding discretionary increases in social benefits and new support measures, and revisiting other current spending. They should preserve growth-enhancing public investment outlays. Fiscal risks from minimum wage increases and capped electricity prices should be mitigated.
The authorities should reduce financing needs and prepare contingency plans in case financing cannot be secured. Fiscal buffers have been eroded due to increased budget deficits, large debt repayments, and drawdown of government deposits. Both entities face large financing needs this year that are unlikely to be met solely in the domestic market. Their budgets envisage large debt issuances, some of which are yet to be firmly identified. The authorities should reduce deficits to contain financing needs, firm up borrowing plans, and identify additional cuts to current spending to prepare for potential financing shortfalls.
Reforms are needed to rebuild fiscal buffers while improving spending quality. Reforms, including a review of public employment, wages, and social benefits are needed to support a return to surplus over the medium term. Resources should be reallocated from current to capital spending, primarily on infrastructure, green energy, and digitalization. Ultimately, additional revenue must be mobilized, including by reducing tax exemptions.
The currency board arrangement remains an anchor of stability and should be preserved. Pressure for the central bank to finance government budgets or to provide credit to banks should be strongly resisted.
CBBH should further strengthen the reserve requirement framework, including by increasing remuneration rates on bank reserves. It should continue fulfillment of required reserves on foreign exchange deposits in foreign exchange and move from partial to total fulfillment after the transitional period. Narrowing the gap with euro area interest rates would reduce incentives for banks to place funds abroad, thus containing capital outflows. Assuming the remuneration increase is passed through to lending rates, this could also help further reduce inflation.
Financial sector risks should continue to be closely monitored and crisis preparedness enhanced. Bank asset classifications and loan-loss provisions should accurately reflect credit risks and losses. Temporary measures that aim to contain increases in lending rates should be allowed to lapse this year as scheduled. The introduction of systemic risk buffers is welcome; introducing additional buffers and borrower-based measures would further enhance the macroprudential toolkit. Establishing a BiH-wide financial stability fund to facilitate bank restructurings and provide liquidity on an exceptional basis would substantially strengthen the financial safety net. The authorities are encouraged to request an FSAP, which would help assess resilience amid rising risks and provide a roadmap for financial sector reforms, including linked to EU accession.
Transitioning to green energy and preparing for the introduction of EU carbon pricing require immediate action. The authorities should introduce carbon pricing as soon as possible. They should phase out electricity subsidies and establish an EU-aligned ETS, with interim carbon pricing alternatives such as a tax or excise as a possible step, given that an ETS may take several years to implement.
Reforms to improve governance, protect financial integrity, fight corruption, and step up digitalization should be accelerated to boost growth. The oversight, transparency, and operations of public enterprises should be improved, weaknesses in public procurement addressed, and public investment management strengthened. The recent adoption of the AML and conflict of interest laws are welcome steps, and the authorities should move decisively and effectively to implement the new laws. The authorities are encouraged to request a comprehensive IMF governance diagnostic assessment to help inform and prioritize reforms. Placing BiH on a higher growth path and providing its people with more opportunities will ultimately reduce emigration.
Table 1. Bosnia and Herzegovina: Selected Economic Indicators, 2020-2029
|
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
|
|
|
|
|
|
Prel. |
Projections |
|||||
|
|
|
|
|
|
|
|||||
|
Nominal GDP (KM billion) |
34.7 |
39.1 |
45.6 |
48.9 |
51.8 |
54.8 |
57.9 |
60.9 |
63.9 |
67.2 |
|
Gross national saving (in percent of GDP) |
19.7 |
23.7 |
23.1 |
22.5 |
22.3 |
21.7 |
21.7 |
21.8 |
21.8 |
21.9 |
|
Gross investment (in percent of GDP) |
22.6 |
25.5 |
27.5 |
25.3 |
25.6 |
25.6 |
25.7 |
25.8 |
25.8 |
25.8 |
|
(Percent change) |
||||||||||
|
Real GDP |
-3.0 |
7.4 |
4.2 |
1.7 |
2.5 |
3.0 |
3.0 |
3.0 |
3.0 |
3.0 |
|
GDP deflator |
0.1 |
5.0 |
11.8 |
5.5 |
3.2 |
2.7 |
2.6 |
2.1 |
2.0 |
2.0 |
|
CPI (period average) |
-1.1 |
2.0 |
14.0 |
6.1 |
3.0 |
2.7 |
2.5 |
2.0 |
2.0 |
2.0 |
|
Money and credit (end of period) |
||||||||||
|
Base money |
10.7 |
17.4 |
3.3 |
-1.7 |
3.5 |
-- |
-- |
-- |
-- |
-- |
|
Broad money |
7.1 |
12.4 |
5.5 |
7.6 |
2.9 |
-- |
-- |
-- |
-- |
-- |
|
Credit to the private sector |
-2.8 |
4.0 |
4.9 |
7.4 |
5.2 |
-- |
-- |
-- |
-- |
-- |
|
(Percent of GDP) |
||||||||||
|
Operations of the general government |
||||||||||
|
Revenue, of which: |
40.8 |
40.5 |
39.6 |
40.8 |
41.4 |
41.1 |
41.1 |
41.2 |
41.3 |
41.3 |
|
Taxes |
21.5 |
22.0 |
21.8 |
22.3 |
22.7 |
22.6 |
22.6 |
22.7 |
22.8 |
22.8 |
|
Social security contributions |
15.5 |
14.8 |
14.2 |
15.1 |
15.3 |
15.3 |
15.3 |
15.3 |
15.3 |
15.3 |
|
Expenditure |
45.4 |
39.9 |
38.6 |
42.5 |
43.8 |
43.5 |
43.2 |
42.9 |
42.5 |
42.3 |
|
of which: Investment expenditure |
5.4 |
4.1 |
3.8 |
4.0 |
4.2 |
4.3 |
4.3 |
4.3 |
4.3 |
4.3 |
|
Fiscal balance |
-4.6 |
0.6 |
0.9 |
-1.7 |
-2.4 |
-2.4 |
-2.1 |
-1.7 |
-1.2 |
-0.9 |
|
Primary fiscal balance |
-3.9 |
1.3 |
1.5 |
-0.8 |
-1.3 |
-1.1 |
-0.7 |
-0.2 |
0.2 |
0.6 |
|
Total general government debt |
37.1 |
35.6 |
31.0 |
32.2 |
34.2 |
35.3 |
36.1 |
36.9 |
37.7 |
38.0 |
|
Domestic general government debt 1/2/ |
10.9 |
9.0 |
8.0 |
12.1 |
13.6 |
15.2 |
16.6 |
18.2 |
19.5 |
20.6 |
|
External general government debt |
26.2 |
26.7 |
23.0 |
20.1 |
20.7 |
20.1 |
19.5 |
18.7 |
18.2 |
17.3 |
|
(Percent of GDP) |
||||||||||
|
Balance of payments |
||||||||||
|
Exports of goods and services |
34.6 |
42.5 |
48.1 |
44.1 |
43.6 |
43.6 |
43.5 |
43.4 |
43.3 |
43.1 |
|
Imports of goods and services |
48.0 |
53.8 |
61.9 |
56.9 |
56.6 |
57.0 |
57.0 |
56.9 |
56.9 |
56.6 |
|
Trade balance |
-13.4 |
-11.3 |
-13.8 |
-12.8 |
-13.0 |
-13.4 |
-13.5 |
-13.5 |
-13.6 |
-13.5 |
|
Current transfers, net |
11.1 |
10.8 |
10.6 |
10.2 |
10.1 |
10.1 |
10.1 |
10.1 |
10.0 |
9.9 |
|
Current account balance |
-2.8 |
-1.8 |
-4.3 |
-2.8 |
-3.3 |
-3.9 |
-4.1 |
-4.0 |
-4.0 |
-4.0 |
|
Foreign direct investment (+=inflow) |
2.0 |
2.7 |
3.0 |
3.3 |
3.0 |
2.9 |
2.8 |
2.8 |
2.8 |
2.7 |
|
Gross official reserves (Euro million) |
7,105 |
8,372 |
8,228 |
8,342 |
8,684 |
9,080 |
9,348 |
9,670 |
10,034 |
10,388 |
|
(In months of imports) |
7.9 |
7.0 |
6.9 |
6.7 |
6.5 |
6.5 |
6.3 |
6.2 |
6.2 |
6.1 |
|
(In percent of monetary base) |
112.9 |
113.3 |
107.8 |
111.2 |
-- |
-- |
-- |
-- |
-- |
-- |
|
(In percent of IMF ARA metric) |
121.8 |
127.3 |
115.8 |
113.4 |
111.9 |
110.3 |
-- |
-- |
-- |
-- |
|
External debt 3/ |
63.9 |
57.4 |
51.7 |
49.5 |
49.4 |
48.8 |
48.1 |
47.5 |
47.0 |
46.5 |
|
Memorandum Items: |
||||||||||
|
Unemployment rate (national definition) 4/ |
15.9 |
17.4 |
15.4 |
13.2 |
-- |
-- |
-- |
-- |
-- |
-- |
|
GDP per capita (in euros) |
5,092 |
5,750 |
6,716 |
7,225 |
7,660 |
8,127 |
8,612 |
9,082 |
9,569 |
10,086 |
|
Output gap (in percent of potential GDP) |
-4.1 |
0.3 |
1.6 |
0.4 |
0.0 |
0.1 |
0.1 |
0.1 |
0.1 |
0.1 |
|
REER (Index 2016=100) |
98.7 |
98.5 |
102.3 |
103.6 |
-- |
-- |
-- |
-- |
-- |
-- |
|
NEER (Index 2016=100) |
115.9 |
117.1 |
117.4 |
120.4 |
-- |
-- |
-- |
-- |
-- |
-- |
|
|
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|
|
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|
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. |
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|
2/ The stock of general government domestic debt does not include domestic arrears and those of public enterprises. |
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|
3/ Includes inter-company loans in private external debt. |
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|
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. The 2020 unemployment rate is not comparable with 2019 due to change in sample design, which was defined separately each year prior to 2020 and has been replaced since with a panel component sample design where households have been re-surveyed four times. |
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[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] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
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