OREANDA-NEWS. October 29, 2015. Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bosnia and Herzegovina.

Economic growth in Bosnia and Herzegovina is expected to rebound to over 2 percent this year as economic activity is picking up in Europe. Industrial activity and exports have been gathering momentum and, together with the decline in fuel prices, boost incomes and consumption. Deflation has been imported through the currency board arrangement.

The economy of Bosnia and Herzegovina fell into recession in the aftermath of the global crisis. After several starts and stops, the economy started to recover in 2013, with growth reaching 2.5 percent, but this progress was interrupted by the floods that hit the country in May 2014. Nonetheless, the economy proved more resilient to the impact of this natural disaster than initially expected and growth still reached over 1 percent in 2014.

Bosnia and Herzegovina still faces major challenges. Convergence to European Union (EU) income levels has been slow for both cyclical and structural reasons. A lack of progress in structural reforms—partly reflecting the country’s complex constitutional set up—has held back private investment, limiting potential output and keeping unemployment high, especially among the youth. The authorities recently adopted a comprehensive Reform Agenda—prepared in cooperation with the EU and the international financial institutions—aiming to accelerate reforms and to move forward on the path toward EU accession.

Domestic political risks weigh heavily on the outlook. The risk of policy slippages and delays in implementation of the Reform Agenda is significant given the complex political set up and the strong opposition to reforms from vested interests. On the external side, risks are more balanced, as stagnation in Europe, possible financial market strains, or geopolitical tensions could dampen growth, while a faster recovery in Europe or the resolution of trade issues with the EU could spur exports.

Executive Board Assessment2

Executive Directors welcomed the recent pickup in Bosnia and Herzegovina’s economic activity following last year’s devastating floods and an unfavorable external environment. Directors commended the authorities for maintaining sound macroeconomic policies, and noted that the widening of external and fiscal imbalances, as well as the impact on the banking system, were much more limited than initially feared, despite the substantial damage and hardship caused by the natural disaster. Directors noted, however, that the economy still faces major challenges, and called on the authorities to accelerate critical reforms in order to achieve more sustainable growth and reduce high unemployment.

They agreed that fiscal policy will need to strike a balance between resuming consolidation—to place public debt on a firm downward path—and supporting the nascent recovery. Improving revenue collection, enhancing the quality and efficiency of public expenditure, and containing non-priority spending to create room for infrastructure investment are important priorities.

They recommended that financial policies address remaining vulnerabilities in the banking system, particularly among domestically-owned banks, while creating a stronger financial sector safety net and enabling banks’ balance sheet repair. They welcomed the authorities’ commitment to address the remaining shortcomings in the framework for anti-money laundering and combating the financing of terrorism.

They stressed that, more than anything, strong progress is needed to complete the still largely unfinished structural reform agenda, including by further improving the business environment and the functioning of the labor market, to attract investment, raise potential output, and reduce high unemployment.

They welcomed the authorities’ recent adoption of a comprehensive Reform Agenda aimed at accelerating private sector growth and job creation while maintaining macroeconomic stability. They were encouraged by the country’s broad support for this agenda, and noted that its implementation was off to a good start. Directors stressed, however, that reforms will take time and that the authorities will need to overcome strong opposition from vested interests. Moreover, the uncertain and fragile domestic political situation poses considerable risks to its timely implementation. Against this backdrop, Directors emphasized that strong and sustained implementation of reforms and sound economic policies will help mobilize external support, achieve faster growth, and make stronger progress toward EU accession. Developing adequate capacity to absorb external support will also be crucial.