Essential political reform yet to be implemented
Overview:
Macroeconomic performance in Bosnia and Herzegovina (BiH)1 remains relatively sound with GDP growth, export performance and FDI inflows encouraging although a tendency to populism threatens to exacerbate an already large current account deficit and complicate the disinflation process. Some notable achievements in terms of structural reforms (police reform, the passage of the Law on the Fiscal Code) helped to facilitate the signing of an important agreement with the EU in June. However, the general state of implementation of structural reforms remains poor. Moreover, the international community has expressed concern at the continuing use of nationalist rhetoric. This complicates the implementation of political reform that is essential to move to a more workable constitutional settlement.
Recommendation:
A political agreement signed on November 8th between key parties of the different ethnic groups offers the possibility of progress in unblocking the reform process. But political competition within ethnic groups is just as strong now as between them which will make the agreement difficult to implement. Fiscal co-ordination should start to improve given the initiation of the Fiscal Council but recent developments suggest that populist/nationalist sentiment will continue to be an issue in pushing for larger budget deficits and higher wage increases. We are neutral on BiH external debt.