Donor Co-Financing Assessment for New Country Strategy
Executive Summary
European Bank
for Reconstruction and Development
Bosnia and Herzegovina's commitment to and application of the political principles stated in Article 1 of the Agreement Establishing the Bank has continued
since the adoption of the previous Country Strategy, although the intricacies of the country's constitutional setup adversely affects the functioning of its
democratically elected institutions, as well as civil and political rights of the citizens.
A small Westem Balkans economy, Bosnia and Herzegovina is institutionally and economically fragmented, without a common economic space. Over the past
decade, GDP growth averaged around 2 per cent, primarily led by domestic consumption, however, falling behind the growth rate of countries at a similar level
of development. The country has a relatively strong manufacturing base, but economic activity is largely reliant on the service sector (56 per cent of GDP in
2020). The economy is burdened by an oversized and often inefficient public sector, lack of level playing field between the public and private sector and the
lack of single economic space. The country's currency board arrangement, together with prudent fiscal policy, has provided a credible anchor for the stability of
the financial system and has helped to maintain low inflation.
Economic growth was already decelerating when the Covid-19 crisis hit the country, causing a 3.2 per cent contraction in 2020. The tourism sector was most
severely affected, however manufacturing also declined drastically, while the economy experienced deflation. Recovery is underway, but the environment
remains challenging, especially if commodity prices continue increasing. The country needs investments and reforms to entrench recovery, avoid transition
backsliding and enhance growth potential.
Bosnia faces material transition gaps in all qualities, obstructing the economy's growth and sustainable income convergence. Legal and administrative
complexity and corruption create significant obstacles for doing business in the country, while large and inefficient SOES impede productivity. The restructuring
and privatization of SOES has stalled and significant reforms have been delayed. While SMEs provide 70 per cent of employment and created 65 per cent of
value added, their integration in global value chains is low and they are less competitive than regional peers. FDI inflow remains low and the stock of FDI is one
of the lowest in the region. Skills mismatches and emigration are a prominent feature of the labour market, while digital awareness and IT skills need
development to support greater competitiveness. The energy sector is dependent on coal and needs urgent attention to address significant air pollution and
embark on a well-managed just transition to ensure that the economy is not hit by significant and rising social and economic costs.
EBRD is well placed to support Bosnia and Herzegovina's recovery and help address its outstanding transition challenges in line with reform efforts of the
authorities. The Bank aims to strengthen the competitiveness and digital readiness of the private sector, stimulate inclusion and skills upgrades and promote
green and sustainable growth models. The EBRD will also continue its support for regional transport connectivity, green municipal infrastructure and the
country's overall low carbon transition, including decarbonisation of the energy sector and its transition from coal to cleaner energy sources. Financing, efforts
will be extended to accelerate structural reforms and provide policy support to reduce transition gaps in governance, inclusion and integration. The Bank will
maintain close cooperation with other IFIs and donors, whose co-financing and support are key to successful delivery of the strategy.
The Bank will pursue the following strategic priorities in Bosnia and Herzegovina in 2022-2027:
i.
Strengthen the private sector role, including through upgrade of skills and digitalisation
ii.
iii.
Close key infrastructure gaps pursuing governance improvements and further regional integration
Support energy diversification away from coal and promote low carbon transition
PUBLIC
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