Bosnia and Herzegovina strategy overview

Full strategy  (0.5Mb) Approved 4  Sep 2007

Strategija za Bosnu i Hercegovinu  (0.7Mb)

Bosnia and Herzegovina (BiH) is committed to, and applying, the principles of multiparty democracy, pluralism and market economics in accordance with the conditions specified in Article 1 of the Agreement establishing the Bank. The country has continued to play a constructive role in regional cooperation, which, besides bringing practical benefits in and of itself, is an essential part of the process of EU approximation. Integration into the euro-atlantic institutions remains BiH’s key foreign policy priority.

The economy

The economy has continued to show robust growth and increasing dynamism in the private sector, within a generally stable macro-environment. Economic growth in recent years has remained steady at around 5-6 per cent per annum, with particularly strong industrial growth in 2006 in the RS. Inflation has remained subdued, in spite of the introduction of VAT in January 2006, and the currency board is functioning well.

Challenges remain

Numerous challenges remain, however, many of which stem from the legacy of the Dayton-Paris peace agreement. The agreement ended the war in 1995 and paved the way to peace and stability in BiH. At the same time, the complex Dayton constitutional set up, increasingly perceived by many as cumbersome, has generated a fragmented policy-making apparatus in BiH. This is additionally complicated by the fact that ethnic-based political parties continue to dominate the political scene in BiH’s two entities, Federation of BiH and Republika Srpska (RS). At the central level, the decision-making process is based on a unique system of checks and balances that were designed to protect the interests of the three ‘constituent’ peoples (Bosniaks, Croats, and Serbs) and which encourage their representatives in the central bodies to continue to demonstrate their commitment to their Entity and their constituent people rather than to the State.

The major challenge for the country in the near future will be constitutional reform, without which further progress towards a more democratic and efficient state, implementation of a comprehensive reform agenda and EU approximation will be difficult to achieve. This process is very sensitive, and may take quite some time. Although the reforms towards greater integration and streamlining the government have so far been mainly driven by the international community, constitutional reform cannot be imposed from outside, but will have to be in the first place a result of consensus among the political stakeholders of BiH.

Key transition challenges

The current structure has contributed to the generally slow pace of transition, and key transition challenges lie ahead. These include restoring momentum to the large-scale privatisation process (especially in the Federation), introducing a more commercial approach to infrastructure services, reforming the judiciary and enforcing laws on competition and bankruptcy. Without significant progress in these areas, the encouraging economic growth of recent years is likely to falter, leaving much of the country mired in poverty and unemployment.

Operational objectives

The Bank has achieved the operational objectives set out in the previous country strategy. The Bank was the largest lender for the third year in a row in BiH with eight new projects, with 2006 being a record year in terms of commitments and disbursements. As a result, cumulative commitments as of 31 July 2007 have reached €685 million. The Bank also developed a good pipeline of private sector projects, reflecting the increased interest of private investors in BiH economy. In light of the transition challenges and government priorities, the Bank’s focus over the next three years will be on the following operational priorities:

• Infrastructure: The Bank will continue to play a crucial role in developing the infrastructure in the country. In the transport sector, the Bank has recently signed the third road rehabilitation project, co-financed with the World Bank and the EIB. The focus of the Bank’s activities will be on assisting the country in upgrading its core road network, including the most important transport artery in BiH, Pan European Corridor Vc. Support will also be given to the commercialisation of this sector, through the implementation of measures aimed at improving efficiency and institutional strengthening. In the railway and aviation sector, the focus will be on the implementation of ongoing projects including implementation of institutional reforms initiated in both sector. The Bank will structure and implement projects in the municipal infrastructure sector initially under a sovereign guarantee focusing both on sector reform within each entity and on institutional strengthening at the level of operating companies. In energy, the focus will be on the implementation of existing projects and continued policy dialogue on re-establishing the central government’s authority and facilitating the country’s regional integration along the lines of the Athens treaty. Emphasis will also be given to the sector commercialisation and in particular bringing private operations in the electricity generation and distribution activities, in parallel with the promotion of renewable energy in accordance with best international practices.
  
  
• Financial Sector: The Bank will build on its previous success in the sector and continue its support to MSMEs through the local banking sector and non-bank microfinance institutions (NBMFIs). In addition the Bank will also seek to diversify its support by considering mortgage lending, leasing, insurance and additional equity investments (including in NBMFIs). The Bank will also seek to support the development of the remaining locally owned banks and facilitate the entry of new investors in the sector.
  
  
• Enterprise Sector: The Bank will continue its support to strategic foreign investors and will support large enterprise privatizations. The Bank will also seek to support medium-sized local and foreign private companies for which long-term debt (including smaller size transactions) or equity will be envisaged. The EBRD-Italy Western Balkans Local Enterprise Facility (WB-LEF) enables the Bank to support smaller, fast-growing companies through debt, quasi-debt and equity finance, which is still relatively scarce in BiH. Turn Around Management and Business Advisory Services (TAM and BAS) programmes will continue to provide advisory services to small and medium sized businesses. The Bank will actively seek projects in the industrial, property and tourism, wood processing and agribusiness sectors. During the next three years, the Bank will explore the opportunity for setting up energy efficiency and renewable energy credit lines through local financial intermediaries. Also, the Bank will continue to support energy efficiency investments particularly in the energy intensive industries and municipal infrastructure.

In carrying out the above priorities, the Bank will continue to co-ordinate very closely with other IFIs, the EU, the EUSR Office, the Office of the High Representative and the international donor community.