Weekly Briefing, Vol. 46. No. 2 (BH) December 2021
Bosnia and Herzegovina’s economy in 2021
Summary
This briefing provides an insight into the general situation of the countries’ struggling economy, additionally heavily affected by the COVID-19 pandemic, which is producing the strongest recession in the last 25 years. Further more, this briefing will also present several important specific cases, current in 2021, like the new fiscalisation law, or the long-term blockade of an important financial institution, the Securities Commission. A brief overview is given in the years’ developments in the energy sector, focusing on thermal-electric power plants and the interconnected decarbonization process, stone exploitation industry, as well as specific investments and, finally, an important change in the gas transport route.
Introduction
COVID-19 pandemic had produced the strongest recession in Bosnia and Herzegovina in the last 25 years, creating a great abruption in the standard functioning of the general economy. The pandemic itself only added another level of complexity to the economic insecurities in the country and the speeding up of the vaccination process is crucial for the start of the economic recovery.
Economic situation during the pandemic
Commenting on the current economic prospects of Bosnia and Herzegovina in May, two economy experts, macroeconomist Faruk Hadžić and Branimir Muidža, president of the council of the Board of Foreign Investors, agree that the main problem of the low rate of economic growth and low foreign investments is the state handling of the pandemic, administrative and tax barriers and overall political stance towards practical economy issues in Bosnia and Herzegovina. A special problem is the severe youth unemployment. Currently around 777,000 young people between the age of 15 and 30 live in Bosnia and Herzegovina, out of which more than 60 % are unemployed. Seasonal work is the current economic answer for the negative pandemic affect and the youth and general unemployment trends, but it stays out of statistical control. Alongside this, the demographic structure of the country’s population has also a very negative outlook. Bosnia and Herzegovina has one of the lowest fertility rates in the world, a high migration and population aging level. Unpaid domestic work done by women in Bosnia and Herzegovina remains a significant problem as well, being highly disproportionate in all aspects. The UN Women in Bosnia and Herzegovina and the Agency for Gender Equality of Bosnia and Herzegovina demand stronger action in this field by the state and private sector as well, as it presents a great part of the countries’ economy and it severely affects personal and professional aspects of women. They call for acknowledgement and valorization of unpaid housework by women, which is one of the highest in Europe.
From the general perspective it is important to mention the forthcoming fiscalisation law in Republika Srpska. The first law was implemented in 2009, then changed in 2014 with the exclusion of small entrepreneurs form the fiscalisation system. The new outline of the new law, introduced to reduce grey economy, tends to modernize the process with new fiscal registers and software but also leaves the possibility of including the small entrepreneurs again, who were negatively impacted by the COVID-19 pandemic, so further taxation would put them in an even worse situation.
Situation with the state and private enterprises and the blockade of the Securities Commission
Considering the stated owned enterprises, as stated in the latest and most significant IMF report on the issue, reforms to the governance frameworks are necessary to foster transparency and improve accountability. More fundamental reform of the SOE sector might increase significantly overall GDP (approx. by 3 % per year). From the list of the enterprises with most employees in the Federation of Bosnia and Herzegovina, we can conclude that, although the biggest employer is a private company, the state-owned enterprises are still very dominant (16 out of the 20). Concluding on the list based on the growth and development criteria’s set up by Poslovne novine [Business papers], it is the private enterprises that dominate. In regards to the significant data on any major shifts occurred in the field within the last years, these are, due to the COVID-19 pandemics economic standstill, currently not analyzed yet.
A good illustration of the even wider economic standstill is the case of the Securities Commission of Federation of Bosnia and Herzegovina, which has been institutionally on halt for almost two years due to political reasons. Namely, after the previous Commission members had lost quorum, the Parliament of Federation of Bosnia and Herzegovina did not approve new candidate suggested by the Federation presidentship, on the basis of national incompatibility. This situation has caused serious problem in the investments and general market economy in Bosnia and Herzegovina, since some of important business decisions cannot be implemented without the Securities Commission approval.
State of the energy industries, specific investments and a new gas transport route
The energy industry of the coal-based thermal-electric power plants has for years been a part of the Bosnia and Herzegovina state supported economy that is in continuous decline. In specific cases, the industry continues to be heavily subsidized, not due to the positive business outcomes, but due to a large number of people employed and families depending on it. Whilst the companies are still state owned in the Federations of Bosnia and Herzegovina and of mixed ownership in Republika Srpska, they are all gradually entering phase three of the restructuring process. In this phase, layoffs of redundant workforce, mostly from the administrative sectors, is expected in significant numbers this year. Bosnia and Herzegovina had signed the Green Agenda for Western Balkans which calls for gradual and complete shutdown of the industry by 2050. However, according to some analysts and people within the industry this may happen sooner due to the non-competitiveness of the coal-mining thermo power plants when faced with renewable energy solutions. The decarbonization process is closely linked to Bosnia and Herzegovina’s wishful accession to the European Union, as a condition which will push the energy sector in the country towards a “greener economy”. This means closing of coal mines and related businesses. Obvious direction towards it can be found in the heavily polluted city of Zenica with its biggest coal-related employing company in the Bosnia and Herzegovina, ArcelorMittal.
Another kind of industry, the quarry and architectural-building stone exploitation industry, had been a significant economic segment in Bosnia and Herzegovina before the 1990’s. Bosnia and Herzegovina holds significant stone resources in all three forms: magmatic, metamorphic and sediment stone, thus holding major potential for the country’s struggling economy. But the lack of strategic planning, coordination at all levels of interest as well as overwhelming export present important challenges that hold the progress of this industrial sectors. While quality stone materials and products from local companies hold a small local market and are oriented towards export, the cheaper and less qualitative imported stone is prevalent in constructions projects in Bosnia and Herzegovina, holding stone import at around 85 %. Most obvious case is that of the former stone exploiting giant company “Granit” from Jablanica which produces quality granite and had been in a bankruptcy status for the last decade. While there are some positive examples like the Chinese invested company “Kremnica”, the industry is not being supported by the state enough to become significant in the countries’ economy. The companies remain at a microlevel and local investors are disinterested in the business that takes years to gain back investments on such an unstable market as is that of Bosnia and Herzegovina.
This year both entities in Bosnia and Herzegovina had in a course of several months apart changed a decade’s long gas transport route that supplied Russian gas via Ukraine and Hungary to a new Turkish route. Due to this change, the state-owned company BH-gas had filled charges against parties held responsible for breaking up the previous route contract, as they see it illegal and harmful to the country’s interests, fore mostly resulting in instantly higher gas prices. The decision also compromises the EU and US backed up Southern interconnection project which can make Bosnia and Herzegovina less dependent on the Turkish route.
Conclusion
The 2021 has been another harsh year for the struggling economy of Bosnia and Herzegovina. As we had seen in the report, no significant positive trends can be identified, only old problems recognized. The country remains very dependent on strong and informed political decisions in order to economically prosper, but that is not happening. The state continues to run enterprises and industries that are either in decline, while important decisions, like the gas route, go against the countries’ best interests.