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Economic Disturbances and Business Fluctuations In Economy Of Bosnia And Herzegovina – The Ongoing Story

TitleEconomic Disturbances and Business Fluctuations In Economy Of Bosnia And Herzegovina – The Ongoing Story
Publication TypeConference Proceedings
AuthorsGanić, M
Date PublishedJuly 2013
PublisherInternational University of Sarajevo
Place PublishedSarajevo, Bosnia and Herzegovina
Other NumbersISSN 2303-4580

The crisis of economy of Bosnia and Herzegovina is a perennial. For nearly a decade, the economy of B&H had been buffeted by global crisis after transitional crisis which has exacerbated some latent trends and initiated new ones. Its causes have been the external and internal, and it would exist without the global financial crisis. This paper aims to analyze economy of Bosnia and Herzegovina (B&H) and gives a critical overview of ongoing economic crisis in B&H by examining by foreign direct investments flows, trade performance indicators and remittances from abroad.

Structure of the paper is given as follows: Section 2 deals with new economic trends and new developments in the countries of Western Balkans from the moment of their independence.

Section 3 discusses the recent developments in economy of B&H  and also it describes the main specific features of the overall trade performance indicators of Bosnia and Herzegovina for a last decade.

Our findings show that the debt crisis in European Union-27 has indeed affected the countries of B&H to a particular degree through the downslide in the goods trade, unemployment is rising and purchasing power of food consumers is declining, which beside economic causes social and political problems.

Full Text

I   Introduction

For the first time in the past 60 years, the flow of financial resources to developing markets is reduced and the volume of world

 trade, also decreases. Governments of the world economy are facing unprecedented economic challenges and try to prevent or at least reduce the impact of negative trends in the economy, which will allow the eventual recovery. Global economic interdependence has grown extraordinarily as a consequence of technological progress as well as expansion of international trade. Volume and scope of transactions on international financial markets have begun to be increased significantly decades ago, when the markets are electronically connected and networked. The current financial and economic crisis has affected different intensity all countries of the world regardless of their level of development and the structure of the economy, all sectors and all social classes and individuals. The crisis has caused the fall of macroeconomic aggregates and indicators all over the world. The main consequences of the 2008 global financial crisis and, more recently EU debt crises are insolvency, a decline in production and exports, reduced employment and rising unemployment, falling living standards and rising poverty. It has made clear that the world is more connected than ever before and that the problems of neighboring countries, as well as those located in other parts of the world, it can become easily our and global problems. This further implies that in parallel with the implementation of institutional reforms should give greater attention to strengthening global governance in order to ensure the stability and prosperity worldwide. The global economic crisis has significantly increased the rate of unemployment in the 2009th in all countries, and in the 2010th when you have seen a slight economic recovery.  In recent years, the global recession has affected the entire world economy in terms of weak economic recovery, rising unemployment, high fiscal deficit and public debt as well as an unstable national currency.

Transfer of financial and economic crisis in B&H took place in a similar pattern and practical at the same time as in other developing countries. The symptoms of the latest crisis appeared in the second half of 2008, when recorded a fall in exports and industrial production.

Several possible reasons could explain why B&H economy is so weak. First, the private sector is small, with low savings and a modest export. Second, the public sector is too large and mostly redistributive while salaries and pensions are too high compared to the inflow of foreign capital, all of which gives an unfavorable incentive structure. The result is an economy with low productivity, low savings and low exports. The economy of the country, especially the real sector was much more affected by the economic crisis in recent years than the official statistics show. Low rates of GDP growth, rising unemployment, external debt and budget deficits, unsustainable levels of deficit of foreign trade and balance of payments, as well as relatively high inflation, shows that we are still in a deep crisis, with no end in sight.

II Trade performance indicators of Western Balkans

Foreign economic relations of B&H is largely refracted through the international exchange of goods (goods, and to a lesser extent, services), the flow of investment (direct and portfolio) and current transfers (remittances). Expansion of the Western Balkan countries was particularly impressive from 2000 to 2008 when the economies of these countries have experienced continued growth through this period. GDP per capita at market prices (constant 2000-2008 prices) grew by an annual average rate of 6% in B&H, Serbia (5.9%), Montenegro (4.8%), Croatia (4.6%) as well as 4.3% in FYR Macedonia. The trade integration of the WB countries with the EU-27 is high. Even more, the trade with the EU-27 remained for all countries of the WB more significant than intraregional trade in terms of exports and imports. The decade of 2000-2008 is undoubtedly one of the most important periods of trade expansion in the WB region. Greater integration with the EU internal market implies also the need of countries of WB that its policy of economic development harmonizes with the EU strategy of economic development. The aim of these countries is that in the near future become full members of the EU. Since 2000 Europe's Preferential Trade Agreements provides countries of the WB preferential access to the EU market through reduced tariffs creating a strong stimulus to the rapid growth of trade. Among these countries exports from Croatia and Macedonia in the period between 2000 - 2010 were more than doubled, B&H’s exports is quadrupled. While in 2011 the average share of EU-27 in total exports of WB amounted to 70.5% the average share of EU-27 in total imports of WB amounted to 68% (See Fig. 1).

Figure 1.  Percentage Import Growth Rates for Selected economy, 1997-2010

Source: International Trade Statistics 2011 , Authors calculation.

It is indicative that average intraregional import share in total imports amounted only 15.2% for all countries of the WB (included Bulgaria and Romania) indicating a high degree of similarity of productive structure of countries in the region, rather than complementarities (S. Kathuria, 2008, p. 37). The data indicate that income inequality is very much present and ranges from 2 728 € in Albania to 10 367 € in Croatia. While Albania GDP in 2010 was still only 72% of the 1989 level (mainly due to lower statistical basis), B&H, Montenegro and Serbia are still in arrears to catch up with their 1989 level of GDP. The only exceptions are Croatia and FYR Macedonia that have managed to get back up. In international trade region of the WB has achieved a step forward in terms of increasing exports has achieved important progress in terms of the increasing volume of their exports. Strengthening export oriented economy is based on the use of the advantages of preferential exports to the EU market. Comparative data on export and import show that there are significant differences between countries of the region.

As illustrated in Fig. 2, over the period between 1997-2010 exports grew by an average annual rate of 18.05% in Albania, Serbia (11.10%) and B&H (9.65%). On the other hand, over the same period, the highest recorded average annual growth rate of imports was in Albania (16.30%) and B&H (11.15%).

Figure 2. Percentage Export Growth Rates for Selected economy, 1997-


Source: Derived from the International Trade Statistics 2011 , Authors calculation.1997-2010

Although exports of goods and services increased in the period 1997 - 2010 coverage

of imports by exports is still remained unsatisfied. Thus, for example, coverage of imports by exports in the case of Bosnia and Herzegovina more than doubled with the average annual growth rate of 5.94%, while in Macedonia the average growth rate was -2.17%. Also, it is indicative that the average coverage of imports by exports of goods (fob) ranged between 25.5% (in Albania) to 62.3% in Macedonia (Fig. 3). Overall, the following figure summarizes the average distribution of GVA providing the percentage contribution of agriculture, industry, and services to GVA for countries of WB over the period 1991-2010. An analysis of growth trend and changing structure of gross value added (GVA) over the reference period shows the domination of service sector (Fig. 4). Within the services sector, the highest share in services has been telecommunications, trade and financial sectors. The presented data of individual participation in the creation of GVA indicate significant changes that have occurred in the last decade.

And yet this important trend is almost invisible if we look at overall GVA. In 2001, the average GVA by main sectors amounted to 14.63% (agriculture sector), 26.1% (industry sector) and 59.3% (service sector).


Figure 3. Export Coverage of Imports in %  for selected  economy, 1997-2010

Source: Derived from the International Trade Statistics 2011 , Authors calculation.

Figure 4. Gross value added by main sectors, 2010

   (% share of total gross value added)

Source: Derived from the EUROSTAT database, Authors calculation. 

In all of this is indicative that the structure of their economy is becoming more similar the structure economies of EU-27 where agriculture has declined as the manufacturing and services sectors have grown. According to the calculated average value of GVA for all countries of the WB in 2010, agriculture contributed 10.5% of GVA, while the industrial and agricultural sectors contributed 24.8%, 65.62% respectively.The weighted average share of the services sectors in the region's GVA increased from 59.3 % in 2001 to 65.62 % in 2010. At the same time, the highest share services to GVA were in Montenegro 71.3%, at least share services to GVA in FYR Macedonia 60.9%.

It is obvious that structure of GVA by sector during the reference period showed significant differences between countries.

TABLE I.  Trade performance indicators of 

selected countries

Source:Derived from the EUROSTAT database, National statistics,     Authors calculation (column 2  and column 4).

The share of exports in GDP is modest. There were large differences in these ratios across countries. The lowest growth rates of exports during this period were recorded in Montenegro (29.1%) and highest growth rates of exports in FYR Macedonia 58.9 %. On the other hand, over the same period, the lowest share of imports in GDP was in FYR Montenegro 35.7%, and highest in FYR Macedonia 94.8% (Table I). It is shown over the reference period that growth rate of exports has been greater than imports with the exception of Macedonia and Montenegro. The share of imports in GDP in all selected countries exceeded the share of exports due to which merchandise trade balance of WB was in a deficit.

In recent years it has been shown that the FYR Macedonia, Serbia and B&H have the most trade openness in the region (column 2 and column 4). In contrast, Montenegro is most closed in terms of imports or exports in total GDP.

III The crisis in Bosnia and Herzegovina and the outlook today

There is no doubt that the global economic crisis however still had a serious negative impact on economy of B&H. In the years leading up to the crisis it believes optimistically that the crisis will bypass B&H. In the second half of the 2008 and during the 2009 the global recession has strongly affected our economy. The effects of the crisis were manifested varying degrees of financial and real sector and differently affected the main economic indicators. The economic crisis has severely curtailed the export and domestic demand, as well as capital inflow while development industrial production was sharply curtailed. Transition from a socialist to a market-based economy essentially began in B&H in 1998.

Thanks to the revenue from the privatization process in recent times, cash flow of foreign direct investment and commercial lending local economy has felt the sudden impact of the significantly reduced development finance resource flows.

As privatization proceeds spent unproductively and new in a significant extent no, salvation is found in the renewal of credit arrangement with the IMF and the World Bank. B&H has been affected, primarily due to lower availability of foreign capital, which has reduced the lending and broke the domestic demand. The matter is further aggravated by the fall in exports, which is conditioned by the fall in production and import demand in almost all European countries, our trading partners. Also, the global financial crisis has left its mark on the real sector of B&H economy, as indicated by the decline in economic activity, international trade and rising unemployment. B&H has considerable variation in the degree of openness, as indicated by the lower coefficient of openness (ratio of exports and imports to GDP), which is an average of only 62.2%.

How many individual countries, financial institution, company or individual to feel the crisis depends on their sensitivity to external impacts of the crisis? On the one hand, companies with higher borrowing, lower liquidity reserves are more vulnerable to downturns in the crises period because of a reduced inflow of income or its termination during the crisis. At the same time, an incomplete process of transition to a market-oriented economy indicates serious difficulties in adapting to the company during the crisis. The real sector of the economy is not working well and no flexible enough to easily help people in crisis due to the crisis of failed companies.

Table II. Selected Macroeconomic indicators in B&H

The negative effects of the global economic crisis that hit the domestic economy would be as follows:

ü  decline in foreign demand and exports, and hence weak domestic production, especially industrial;

ü  growth of the trade deficit;

ü  increases in the current account deficit and crisis in the balance of payments

ü  fall in foreign direct investment inflows and overall inflow of foreign investment capital;

ü  a persistently high unemployment rate.

A large number of BH's population living in poverty and out of work, while wealth polarization opens the possibility of social tension. And without external threats of the economic crisis on B&H its internal weaknesses, objective and subjective nature increase burden of the crisis that ordinary citizens have to endure. Its economic development and integration into the global economy based on inward flows of FDI which in the years of crisis significantly reduced. As world demand for primary products declined, there was a decrease in exports to markets that are also affected by the crisis, which affects domestic companies to reduce production. The global economic crisis has a strong effect on the economic slowdown in the world due to reduced demand in the developed economies. Consequently, the lower demand for legitimate goods and services from EU which is the largest export market for B&H contributed negative impact on its foreign trade and economic growth. B&H, which mainly exports semi-finished products and raw materials, non-ferrous metals, iron and steel and agricultural goods, suffers from reduced demand, which are at least at the beginning of the crisis were mitigated by exports of agricultural goods.

Some general features of the B&H's economy can be summarized as follows:

ü  incomplete process of privatization- about 60% of state owned enterprises have not been privatized;

ü  unfavorable economic structure (still in transition and re-forming), unemployment rate has remained stubbornly high as well unfavorable structure of job seekers,

ü  unfavorable retiree-to-employee ratio.

The financial and economic crisis through various channels contributed to lower revenues and income of the population of B&H. First channel through which debt crises may affect to B&H are trade linkages between main trading partner such as Austria, Germany, Italy, Slovenia. Trade is certainly one of the main sectors of B&H that may be affected in case of further deepening the crisis and financial disturbances in the euro zone.The importance and interconnectedness of these two regions may be best illustrated by the fact that in 2010 the average value of exports to the EU-27 amounted to 42 % of total exports of B&H (Eurostat, 2012). In addition, the trade linkages between the euro area countries and B&H, are very strong, a leading cooperation with Germany, Austria, Italy and Slovenia. The volume of trade and investment between B&H and the EU is important because Europe Union remains the largest trading partner of the B&H. The EU market is essential for the export-oriented sector of B&H. Therefore, the deepening debt crisis and greater instability in EU may have serious consequences for economy of B&H, of which the exporters have suffered the most damage. Table III shows that in the period between 2007-2011, the averages shares EU-27 of total imports B&H was 64.2%.


Table iii. EU -27 Share of total Import and Exports of Bosnia and Herzegovina  (%)

The second channel through which effects the debt crisis of the EU are transmitted to the economy of B&H in the decline of FDI flow. Germany, Austria and Italy are the countries that are most invested capital in the form of Greenfield investments. More than 60% of the FDI were directed towards the labor-intensive sectors (manufacturing sector), but also in the service sector such as banking, insurance and telecommunications. There are fears that the economic crisis and consequently this problem may cause that large investors from the EU firstly consolidate their position on the domestic market. This would mean to reduce their interest to do business with the B&H. As it can be seen from Table IV the debt crisis in the EU affected the decrease in FDI inflows from year to year.







Table IV. The Bosnia and Herzegovina: FDI flows, 2005-2010 (Millions of dollars)

Although the EU economy was hit by the global financial crisis impact on the economy of B&H was also visible. The next important indicator which reflects the initial impacts of the debt crisis on B&H are remittances from abroad. In last ten years the average weighted annual inflow of remittances and its share in GDP was 19% in B&H. Given inward remittances especially for B&H there is understandable concern how decline in inward remittances may be reflected on national economies.

Figure  V        .  Migrants' remittances, annual,2000-2011 , in  million $   

Source:World Investment Report 2011








Figure  VI. remmitances – Annual change in %

Source:World Investment Report 2011

usignificant downturn inward remittances in B&H over the period 2009 and 2010 can be concluded. In 2010, B&H experienced decline in inward remittances from -11%.


The tendency of deepening crisis in the EU-27 undoubtedly means a lot not only for the B&H but for the rest of the world economy. Of course, these adverse changes in B&H must not be underestimated. There are still masses of problems, many difficulties and obstacles to be overcome. There are still some danger places, such as channels of trade finance and trends in the financial sector that could lead to serious financial problem. The main risks are hampering the fight with the debt crisis for B&H are high current account deficit which expresses the structural imbalances in their economy, slowing GDP growth and exports, the slowdown in foreign capital inflow and the like. The European debt crisis although not in the some measure has affected all economies of B&H. We also should not forget the B&H recorded a failure in the transition of its economy. In addition to the position of those countries in rankings by their competitiveness in recent years has been very unfavorable, and some of them recorded a further decline in competitiveness. According to analysis of economic indicators, it can be concluded that the reduction in investment and a drop in exports caused a decline in disposable income. At the same time, there was low growth in public revenues, which led to a modest increase in public spending. A significant problem in exports of B&H to the foreign market share is unchanged structure of export supply. At the same time, there are significant changes in the structure of import demand in developed countries. Most of the B&H imports come from developing countries and therefore need to increase exports to this region in order to reduce the trade deficit. The effects of debt crisis in the EU-27 has been limited primarily to the direct transmission channels such as trade flows, FDI inflows and remittances decrease, while indirect effects may be manifested by reduced earnings growth in the domestic economy with a tendency to decrease in export earnings. Until now, debt crisis has shown limited effects on the economy development of B&H.



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