World Bank Analysis: Economy in BiH Stagnates, Floods Worsen Situation

Devastating floods in some countries brought the economy of Southeast Europe to a standstill in 2014, with growth of only 0.2 percent, according to the latest Regular Economic Report for Southeast Europe (SEE RER) of the World Bank, reports the Bosnian news agency Patria.

- External demand for exports from SEE6 was a positive driver of economic growth in 2014, despite the weak performance of the eurozone and a disappointing global recovery - said Ellen Goldstein, World Bank Country Director for Southeast Europe.

However, political uncertainty and delays or reductions in investments exacerbated the consequences of the devastating floods that hit the region in 2014.

Goldstein added that “growth of only 0.2 percent is insufficient to improve living standards or reduce the high unemployment rate in the region.”

The region's weak economic performance masks significant differences between SEE6 countries, the report states. Serbia is estimated to have experienced a contraction for the third time since the start of the global crisis in 2013, while Bosnia and Herzegovina stagnates. Economic growth rates in Kosovo and Montenegro are estimated to have slowed in 2014. Only Albania and FYR Macedonia show signs of a more sustainable recovery, thanks to increased exports.

Weather disasters were a major factor affecting economic performance

The SEE RER states that weather disasters are primarily responsible for the weak economic performance in SEE6, building on evidence that the economic performance of SEE6 countries is particularly sensitive to weather conditions.

The May 2014 floods are estimated to have cost Bosnia and Herzegovina around 15.0 percent of GDP and Serbia around 4.7 percent of GDP in lost output and damages. Damage to electricity generation facilities harmed Serbia's economy, while destroyed crops affected agricultural production in Bosnia and Herzegovina. Hardly any segment of the economy was spared in these flood-affected economies. The significant consequences of the recent weather disasters in 2014 indicate that SEE6 countries are not well prepared for major weather variations.”

Structural challenges continue to hinder growth

The report states that structural challenges continue to hinder potential growth in SEE6. Gallina A. Vincelette, Program Leader and one of the authors of the SEE6 RER explains:

- Labour market functioning across the region is anaemic, with persistently high unemployment rates, low labour force participation rates, and slow formal job creation. Although some progress has been made in easing the investment climate, there is still ample room for improvement. The public sector is large and inefficient in many countries. Better connectivity of the region through physical and institutional links between SEE6 countries, with the European Union and the rest of the world, will help competitive firms from the region reach new markets and attract foreign investors to the region.

Outlook

According to the report, the SEE6 region is expected to recover moderately in 2015, with a projected aggregate growth of 1.3 percent.

Growth in 2015 will likely be dampened by a weak recovery in Bosnia and Herzegovina. The rest of the region is expected to grow by over 3 percent in 2015, with economic growth in FYR Macedonia reaching 3.8 percent.

Growth prospects depend on external factors, including maintaining the recovery of external demand, particularly in Europe, and the stabilisation of international energy prices at or around current levels.

Economic activity in SEE6 is slowed by weak domestic demand, while consumer and business confidence remains low due to prolonged political uncertainties, chronically high unemployment, and a banking system burdened by non-performing loans. Therefore, the report emphasises that economic growth in the short and medium term in SEE6 can be supported through prudent economic policies with well-established priorities.

SEE6 consists of Albania, Bosnia and Herzegovina, Kosovo, the Former Yugoslav Republic of Macedonia (FYR Macedonia), Montenegro, and Serbia.