Weekly Briefing, Vol. 27, No. 2 (BH), March 2020
Economy of Bosnia and Herzegovina in March 2020
Although very much troubled by various political and administrative issues, the overall economy of Bosnia and Herzegovina at the beginning of March 2020 initially did show some improvements, which roughly corresponded with the World Bank and International Monetary Fund (IMF) average economic growth forecasts for the year 2020 of 3.4% and 2.6%, respectively. The emergence of the SARS-CoV-2 coronavirus epidemics, however, completely nullified even the notion of any positive economic trends in Bosnia and Herzegovina. The negative effects of quarantine measures on Bosnia and Herzegovina economy, which include self-isolation of a large number of people, prevention of movement, closing of the border crossings, etc., were already felt by the end of the month.
Despite of the relatively positive projections of the World Bank and IMF regarding the average economic growth of the Bosnia and Herzegovina economy for the year 2020, the many analyses and reports emerging in January and February showed that the general economic outlook of Bosnia and Herzegovina for the year 2020 will continue to be grim. The new numbers, brought in March, only further supported this line of reasoning. The Bosnia and Herzegovina Agency for Statistics showed that the industrial production in 2019 declined by as much as 5.1% compared to 2018. In 2019, Bosnia and Herzegovina’s foreign trade recorded a 3.4% drop in exports compared to 2018, with imports increasing by 1.2%, making the foreign trade deficit rise to €4.3 billion. Further more, Bosnia and Herzegovina ranked 90th out of 190 countries in the The World Bank’s “Ease of Doing Business” list, falling one rank below in comparison to the year 2018 and making it the worst-ranked country in the region (Serbia ranked 44th, Montenegro 50th, Croatia 51st). The only positive trend, showed by Central Bank of Bosnia and Herzegovina’s preliminary data in March, was the rise in the foreign direct Investment (FDI), which was 29% higher in the first nine months of 2019, when compared to the same period in 2018. These numbers however, according to the experts, especially when they are put in the proper unhealthy context made by the political instability and legal insecurity which continue to plague Bosnia and Herzegovina, cannot always be taken as a positive indicator. Mostly because, according to the economist Željko Šain, this particular rise of FDI does not in reality contributes to economic growth at all. According to Šain, the current rise of FDI shows no effect on the increase of gross domestic product, living and working standards of people living in Bosnia and Herzegovina. The unsolvable problem of Bosnia and Herzegovina continues to be the complete lack of the adequate reforms and inability of the government to make even the most trivial administrative and legal changes which would help facilitate the better business conditions and help the private sector to grow. Currently, the private sector contributes only to 65% of Bosnia and Herzegovina’s gross domestic product, while officially only 15% of the working population is working in it.
Just before the coronavirus epidemics outbreak, another significant economics issue appeared in Bosnia and Herzegovina: the question of the new arrangement with the International Monetary Fund. Between 1998 and 2016, Bosnia and Herzegovina entered a total of five arrangements with the IMF: 1) Stand By 1998-2001, 94.420.000 Special Drawing Rights drawn (SDR; on March 1 2020, 1 SDR worth was 1,22685 EUR); 2) Stand By 2009-2012, 338.200.000 SDR drawn; 3) Stand By 2002-2004, 67.600.000 drawn; 4) Stand By 2012-2014, 442.750.000 SDR drawn, and 5) Extended Fund Facility (EFF), 2016-2019, 443.042.000 SDR approved, 126.825.000 SDR drawn. Until now, Bosnia and Herzegovina withdrew 1,176,620,000 SDR, which correspond approximately to €1.44 billion. All debts, except the last one (EFF, 2016-2019) were repaid. The EEF arrangement is scheduled to be repaid from March 2021 until February 2028. Now, since the last arrangement with IMF ended, Bosnia and Herzegovina could prepare to make a new one. However, the continuous political instability, along with the fact Bosnia and Herzegovina’s Government still did not pass a budget for 2020, puts the new arrangement under the question mark. The IMF’s aid to Bosnia and Herzegovina was useful until now, and could be useful again. However, before Bosnia and Herzegovina enters the new arrangement, the country itself first must meet the agreed terms, which even before the coronavirus epidemics seemed difficult, due to the longterm paralysis of the Government and its subsequent inability to make any kind of reforms.
The first case of SARS-CoV-2 coronavirus in Bosnia and Herzegovina was registered on March 5. As soon as the first case appeared, the country’s government began treating the outbreak of the epidemics seriously, slowly working first into restricting and then completely stopping traveling, international transportation, public transpiration within and between cities, etc. The general quarantine became a reality on March 17 and 18, after the Governments of Bosnia and Herzegovina entities banned all forms of public gathering, such as cafes, bars, restaurants, shopping centers, service facilities, playrooms, gyms, beauty salons, cinemas, theaters, museums, galleries, etc. This temporary halt of travel and exchange of goods, combined together with fear, created an unnatural and destructive episode for the economy of Bosnia and Herzegovina, one which is far from over. Just as in the other neighboring and European countries, the first reaction of the general population to the emergence of coronavirus epidemics was the stockpiling of the food and general goods. Although the government continuously reassured the citizens that the usual flow of goods will not be discontinued, already by mid-March the shops experienced temporarily lack of some goods such as flour, yeast or oil. As a preventive measure, on March 16, the Government of the Federation of Bosnia and Herzegovina banned the increase in the cost of basic foodstuffs and returned all prices to a those valid on March 5. After this measure, prices remained stable for the most commodities, while the only unreasonable price increases were registered in some pharmacies, which were consequently sanctioned by the inspections. As the coronavirus epidemics progressed, the entities’ governments acted quickly to ease the effects the epidemics had on the businesses. According to the governments’ statements, the lack of food was not the issue, since the domestic manufacturing industry has enough supplies to sustain the population during the epidemics crisis. The main issue was the decrease of non-essential and export oriented production, as well as the closing of borders. A quick survey of 250 businesses in Bosnia and Herzegovina showed that the largest issues are currently experienced within the tourism, transport and catering, as well as some manufacturing sectors, with small and medium-sized businesses being stricken the most. Republika Srpska was the first entity to react, and already on March 13 it adopted several measures which were to mitigate at least some of the economic damage created by the epidemics. The first measures included the postponement of the payment of corporate income tax and all accounts payable for 2019 until end of June 2020 and an urgent payment of tax reimbursement and wage increase contributions for the most vulnerable businesses working with countries most severely affected by the coronavirus. After the governments of Federation of Bosnia and Herzegovina and Republika Srpska separately proclaimed the state of emergency on March 16, new measures for mitigating the negative effects on economy were proposed. Proposals included a formation of a Guarantee Fund that would enable the liquidity of the economy, tax exempts and breaks, and would serve as a link to the international financial institutions. The Serb member of the Presidency of Bosnia and Herzegovina Milorad Dodik proposed reducing the reserve requirement rate for banks from 10% to 5%, which would allow more money for citizens and the economy. At the end of the months banks announced credit breaks for private and legal subjects.
Conclusion
The economy of Bosnia and Herzegovina in March 2020 showed practically no positive trends at all. Just as the country was still making amends with the analysis of the troubling results of year 2019 and weighting the possibility of additional aid from the international financial institutions, the epidemics of SARS-CoV-2 coronavirus created new issues. Already by mid-March, the quarantine of the country negatively and heavily affected almost all businesses, many of which will have difficult time surviving the epidemic crisis. By March 26, the Government of Bosnia and Herzegovina, for example, already was aware that 3,543 workers lost their jobs due to the epidemics. To make things worse, Andrew Jewell, the IMF’s representative for Bosnia and Herzegovina, announced on March 10 that the initial IMF’s average economic growth forecasts for the year 2020 will definitely be reduced, possibly by as far as just little less than one percent.