Čavalić and Karamujić analyze for NAP: To what extent is BiH feeling the Middle East war 'on its skin'?

(Patria) - To what extent is Bosnia and Herzegovina economically feeling the Middle East war 'on its skin' today?

Can we expect a continuation of price hikes, do we have effective mechanisms to prevent 'fishing in troubled waters' by large retail chains and uncontrolled price increases of basic foodstuffs?

Can a parallel be drawn between the war in the Middle East and the Russian aggression in Ukraine in terms of rising prices of goods and services, which, it seems, will never return to their previous state.

These are some of the questions we posed to the Doctor of Economic Sciences and Member of the Parliament of the Federation of Bosnia and Herzegovina, Admir Čavalić, and Professor at the Faculty of Economics of the University of Sarajevo, Muharem Karamujić.

Čavalić: It all depends on the duration of the conflict

Čavalić believes it is still too early to fully assess the negative economic consequences of the Middle East conflict for Bosnia and Herzegovina.

However, he adds, it is evident that even in this short period, we are already experiencing exceptional pressure on the oil and petroleum products market, i.e., an increase in their prices, which directly affects individuals first, and then legal entities.

- Sooner or later, this will spill over to the prices of final products, services, and further emphasize the inflation that we already have in Bosnia and Herzegovina. However, all of this primarily depends on the duration of the conflict in the Middle East.

We know when the conflict started, but we don't know when it will end. If it ends in the coming days or weeks, and if the issue of Hormuz is resolved, I am convinced that the markets will stabilize very quickly - Čavalić told the Patria News Agency (NAP).

He notes that food prices have never been lower on the global market, but the main problems now are the energy crisis, supply chain issues, and blockades.

- Markets adapt quickly, but if this conflict lasts for a few months or even a few years like in Ukraine, I fear it will have the biggest impact on energy sources and their stability. Not only on oil and petroleum products, but also on gas and other alternative energy sources, as well as on general inflation.

Therefore, central banks around the world will likely react by increasing interest rates, which in turn can cause a recession. Thus, a global, or European, or some other recession, and unfortunately, this can reflect on BiH by slowing down its economy - said Čavalić.

Regarding regulation, he points out that Bosnia and Herzegovina has laws, regulations, and inspections. However, he adds that everyone must understand that this is a general global geopolitical crisis and that the room for maneuver is very limited.


Admir Čavalić

- So, even if we had the best inspections in the world, if the price of inputs, imported energy sources, increases, as is the case with us, it is difficult to expect any fixed solutions, any miracles, and so on. What the state can do is forgo its own revenues.

For example, if we talk about oil and petroleum products, it is this initiative at the state level regarding the temporal limitation or abolition of excise taxes, which would be the discretionary right of the executive authorities at the state level - emphasized Čavalić.

He also noted that margins on oil and petroleum products in the Federation of Bosnia and Herzegovina have been limited for many years. So, he adds, it is difficult to talk about some kind of 'fishing in troubled waters' there.

- Simply, when the price of imported oil rises, it rises through wholesalers to retailers and is later passed on to the end consumer. First diesel, then gasoline. Depending on whether the demand for diesel or gasoline is stronger - Čavalić underlined.

He emphasizes that the situation in Ukraine is special, not only because of supply chain problems but also because of the country's natural importance for the whole of Europe and the fact that Russia, and its energy resources, are blocked, and its contribution to the Western economy.

- We should also consider Ukraine in the context of sanctions. The duration of the conflict in Ukraine plus sanctions on Russia - all of this has caused a series of economic problems. Let's hope this does not happen in the Middle East.

Let's hope it will be localized, that Hormuz will be unblocked, and that the suffering and conflict in Iran will stop, which is becoming increasingly expensive in energy terms. Everyone who depends on energy, especially oil and petroleum products, is affected by this.

And we are an economy that is absolutely dependent on that energy source. I am talking about the entire economy of Bosnia and Herzegovina - its competitiveness is decreasing - Čavalić underlined.

One of the most affected sectors in BiH by the Middle East crisis, he points out, is certainly tourism, and we will see and feel this more clearly in the spring and summer, when Arab tourists traditionally visit our country.

- The question is whether our diaspora will also come to their homeland in significant numbers this year due to rising prices and travel costs - said Čavalić.

He assesses that the BiH export sector will also face certain difficulties due to problems with global supply chains, as well as sectors that particularly depend on oil as an energy source - transport, metal industry...

- All in all, this Middle East crisis brings no winners. It brings losers, everyone is more or less a loser, including oil and petroleum product traders. Even if it is not perceived that way - Čavalić concluded in his conversation with NAP.

Karamujić: There will be an additional increase in inflation

Professor Karamujić, in a conversation with NAP, says that we in Bosnia and Herzegovina are witnessing an increase in fuel prices, which is more or less an integral part of the cost structure of all products and services, and that it is extremely difficult to find a sector that is not directly affected by fuel, and it affects indirectly - everywhere.

- In addition to fuel becoming more expensive, there will be an increase in other prices, i.e., more significant inflation. We already have significant inflation, and these events in the Middle East will further increase it.

Production costs are increasing, products are becoming less competitive, the standard of living is decreasing, not only here but also elsewhere, primarily in the European Union, which is our main export market.

There is already talk that the European Central Bank will increase its discount rate, which it must do, because inflation has long exceeded its limits. The European Central Bank tries to keep inflation within the range of two to three percent.

And in Europe, inflation is already significantly higher than three percent, so the European Central Bank must also increase interest rates. And this is done to reduce the level of economic activity in society.

Interest rates are increased to reduce the level of aggregate demand and try to reduce inflation. However, when the level of aggregate demand decreases, it logically leads to a decrease in demand for products imported from Bosnia and Herzegovina.

In short, the Middle East conflict has extremely negative consequences for Bosnia and Herzegovina, affects the decline of its economic activities, and consequently a further reduction in the standard of living - Karamujić stated.

According to him, oil prices are an exogenous factor, we do not influence them, it is something outside the system, and we cannot do anything about it. But we can influence the price of fuel at gas stations.

- I would like to welcome this initiative to abolish excise taxes at the state level, because excise tax is a tax. And if we abolish the tax, the burden on the price of oil will decrease, and thus there will be a marginal decrease in the price by that amount.

I say marginal, which does not mean there will be a nominal decrease, because if prices on the world market continue to rise, this will only have a mitigating effect - Karamujić told us.

Regarding global oil prices, the professor says he does not see them returning to their previous state in the foreseeable future - in six to twelve months.


Muharem Karamujić

- Even if the war in the Middle East stops tomorrow, it will continue to have negative effects for the next year or two, which will, however, be much smaller than the current ones. And the longer the war lasts, the longer the negative effects will be.

As long as normal supply of oil and petroleum products on the world market is not restored, we will have an increase in their prices, and thus these exceptional additional inflationary pressures on the global economy - warned Professor Karamujić.

While this fierce crisis lasts, he adds, BiH regulations and inspectorates can definitely intervene, primarily in the shorter term and above all by limiting the margin on oil and petroleum products.

- The inspectorate has a significant role in preventing 'fishing in troubled waters'. They cannot stop price increases when the price of raw materials rises, but they can limit the margin on these products. They can even annul it in marginal cases. And I think such measures are justified in these situations.

Not annulment, no one can work for free, right? But limiting it to five to ten percent maximum would make sense in such cases. Of course, only for a short period. I am not in favor of such measures in the long term - Karamujić stated.

The professor also believes that the impacts of the war in Ukraine and the one in the Middle East on price increases in Bosnia and Herzegovina are different.

- Russia is a significant producer of natural gas and oil. However, Western countries have decided to impose an embargo on these products themselves to prevent it from generating revenue which it then uses to continue the war.

And that part is significantly smaller than these twenty percent of global oil trade that is connected to the Strait of Hormuz and the region where military operations are taking place. Therefore, the impact of the Middle East war on price increases in BiH is significantly greater.

We are witnessing a significant impact here in a very short period because, as I said, we are talking about at least twenty percent of the world's oil transport capacity. That is a huge blow, and the market has to recalibrate - Karamujić emphasized.

Consequently, he adds, supply has decreased, demand remains constant or even increases as many want to build stocks, and this automatically leads to an increase in oil prices.

He shares the same opinion as Čavalić - the tourism sector in Bosnia and Herzegovina is affected by the Middle East conflict.

- When there is instability, when there are war events, when there are increased risks, people do not decide on tourist trips. When there is inflation, people will reduce expenses, and the first thing they will reduce is travel expenses.

If this is not resolved quickly, Bosnia and Herzegovina could record a significant decline in the tourism sector. But I truly hope that this will be resolved very quickly. This entire aggression against Iran is not logical. It does not benefit America and is not motivated by economic, but by other interests - Karamujić concluded in his conversation with NAP.

(D. Kovač)