Subchapters:
- Basic data
- Public finances and the state budget
- Banking system
- Tax system
Basic data
The economy of Bosnia and Herzegovina has successfully recovered from the consequences of the pandemic, with export-oriented sectors driving the economic recovery. Domestic companies were able to successfully return to the EU market and re-engage in international supply chains. In terms of economic impact, Bosnia and Herzegovina was among the least affected countries in the region at the beginning of the pandemic. At the same time, however, in the past year, after the initial economic shock had subsided, it achieved a lower rate of economic growth than most countries in the region. The country’s potential for economic development is limited by delayed structural reforms. Check ebizdir for economical facts of Bosnia and Herzegovina.
BA has a great wealth of mineral resources (brown and black coal, iron ores and non-ferrous metals, exploration of potential deposits of oil and natural gas) and the potential for the development of renewable energy sources. It has a tradition of industrial production (energy, metallurgy, engineering, chemical, electrotechnical, woodworking industries), but its competitiveness was weakened by the armed conflict in the early 1990s and the unfinished process of economic transformation.
In addition to problems in the area of the rule of law and corruption, the continuing large influence of inefficiently managed public companies in the economy is an obstacle to further economic development. At the same time, some small and medium-sized companies in sectors such as the automotive component industry, engineering or furniture are successfully participating in global value chains.
It is expected that, in this direction, BA could benefit from the process of partial deglobalization predicted in connection with the economic consequences of the COVID-19 pandemic. In BA, thanks to the availability of young qualified labor, industries such as the IT industry and shared services are also starting to thrive.
The business environment in BA is rated as complex and difficult to predict. The problem is a confusing legal system, low quality of state administration and a high level of corruption, a complex system of social contributions and a large informal sector of the economy. The advantages of the BA market include qualified cheap labor, proximity to the EU and low direct and indirect taxes (for information on the investment environment, we recommend the Business Barometer published by the BA Chamber of Foreign Investors).
| Pointer | 2019 | 2020 | 2021 | 2022 | 2023 |
| GDP growth (%) | 2.9 | -5.5 | 5.7 | 3.4 | 3 |
| GDP/population (USD/PPP) | 16,494.90 | 16,608.30 | 18,160.00 | 19,310.00 | 20,420.0 |
| Inflation (%) | 0.6 | -1.1 | 1.6 | 1.8 | 1.3 |
| Unemployment (%) | 33.3 | 33.8 | 34.4 | 35 | 35.6 |
| Export of goods (billion USD) | 6.6 | 6.1 | 6.6 | 6,7 | 6.6 |
| Import of goods (billion USD) | 11.1 | 9.8 | 12.8 | 12.9 | 12.9 |
| Trade Balance (Billion USD) | -4.6 | -3.7 | -4 | -4 | -4.3 |
| Industrial production (% change) | -0.5 | -8 | 8 | 4 | 3 |
| Population (millions) | 3.3 | 3.3 | 3.3 | 3.3 | 3.3 |
| Competitiveness | ON | ON | ON | ON | ON |
| OECD export risk | 07.VII | 07.VII | 07.VII | ON | ON |
Source: EIU, OECD, IMD
Public finance and state budget
| Public finance | 2021 |
| State budget balance (% of GDP) | -4.3 |
| Public debt (% of GDP) | 38.6 |
| Current account balance (billion USD) | -0.7 |
| Taxes | 2022 |
| AFTER | 10% |
| F.O | 10% |
| VAT | 17% |
BA’s public finances are generally in good shape, although the costs associated with dealing with the COVID-19 pandemic have placed an additional burden on them. Thanks to the consolidation of public budgets that occurred in the five years preceding the crisis, BA could afford this increased expenditure, which represented about 2.5% of GDP.
The ability to get spending back under control in the coming years will be critical now. In the long term, the low expenditure of public budgets on investments, compared to the relatively high consumption expenditure, poses a problem.
In 2020 and 2021, public budgets ran into a deficit due to the pandemic for the first time since 2014. Total indebtedness does not exceed 40%, so it corresponds to the possibilities of the economy. It is important for BA that it can use loans from international financial institutions, because the country’s ability to finance its obligations on the financial markets is limited.
In 2021, BA recorded the lowest balance of payments deficit in more than ten years. This was contributed by the reduction of the trade deficit during the COVID-19 pandemic, a record volume of remittances (which represent more than 10% of GDP in the long term) and also an increase in foreign direct investment compared to the previous two years. The Central Bank of BA has sufficient foreign exchange reserves.
Banking system
BA’s banking system is stable and has sufficient liquidity. The central bank is trusted and its independence is guaranteed by the constitution. The stability of the currency (Convertible Mark, BAM) is guaranteed by a fixed exchange rate against the EUR.
Subsidiary banks of Western European banking houses such as UniCredit, Raiffaisen and Sparkasse operate in the country. Turkish ZiraatBank and domestic Bosna Bank International, founded by the Islamic Development Bank and other banks from the Persian Gulf countries, are also present on the market. Several smaller purely domestic banks such as Union Banka and ASA Banka also offer their services.
The functioning of banks and their approach to clients are relatively bureaucratic, which also applies to branches of foreign banks. It is common to charge for a wide range of services. Banks take a restrictive approach to providing business loans, and local entrepreneurs often have difficulty obtaining a bank loan. Low availability of financing hinders the development of small and medium-sized companies. Banks are dealing with a relatively high proportion of defaulted loans from the past.
Tax system
Competencies in matters of tax collection are also decentralized. At the national level, only value added tax is collected. Income taxes are the responsibility of entity authorities or Brčko District. Income tax rates for individuals and legal entities are the same in both entities, but tax regulations and procedures differ. The amount of social contributions is also different. The share of social contributions in the total cost of labor is relatively high in Bosnia and Herzegovina, but the situation is similar in most other countries of the region. Compared to the EU, the cost of labor is low.
The rate of corporate income tax and personal income tax in the Federation of Bosnia and Herzegovina and Republika Srpska is 10%. In the Federation of Bosnia and Herzegovina, social contributions are partly paid by the employer (10.5% of the gross salary) and partly by the employee (31%). In Republika Srpska, only employees pay social contributions (32.8%). Labor law entitles employees in both entities to various tax-exempt benefits. The value added tax rate is 17%.
BA does not have a standard reduced rate of VAT, however some public and health services are exempt from VAT.
At the moment, there is a discussion about the possibility of introducing a differentiated VAT rate. In the entity of the Federation of Bosnia and Herzegovina, a package of changes in the area of personal income tax is in the legislative process. The possibility of electronic communication with tax authorities is slowly expanding.
