Both governments and citizens of BiH survive on credit!

Centri civilnih inicijativa (CCI) recently published the "State of the Nation" report, which monitors the implementation and effects of reforms in Bosnia and Herzegovina. This report contains a comprehensive overview of information on the formal implementation of measures from the Reform Agenda, and the measurement of effects in various areas such as public finances, business climate, labor market, rule of law, social policy, etc.

One of the areas of analysis is the indebtedness of the population and governments. Countries borrow for a number of reasons such as financing public spending, reducing taxes, mitigating the effects of recession, financing new investments, mitigating the effects of natural disasters, etc. Bosnia and Herzegovina, in the last decade, has directed most of its borrowing towards public spending, while much less money was borrowed for capital investments or significant infrastructure projects.

Graph 1

In Graph 1, we can see the five-year relationship between GDP, public debt (divided into domestic and foreign), and private debt (household debt). A growth trend is visible, with a historical maximum of 43% of GDP reached in 2015, while a slight decrease was recorded in 2016. Gross Domestic Product (GDP), as well as public and private debt, are growing proportionally. In 2016, GDP growth was only 3.1%, which is insufficient for a noticeable increase in living standards and significant growth of the domestic economy. Percentage-wise, the share of public debt in GDP is around 40%, which is not alarming, but it is not insignificant given the very fragile domestic economy, which does not generate enough public revenue and exports, so new borrowing is the only way to repay old debts.

If structural reforms are not implemented, which will have positive outcomes on real economic growth, this borrowing trend can continue for some time, and ultimately lead the country into debt slavery, so the Greek scenario is not far from reality. Unfortunately, in the last two years, no major capital or infrastructure projects have been recorded that would significantly stimulate economic growth.

Graph 2 shows the trend of government debt growth in BiH with commercial banks since 2012, when total debt was around 1.2 billion KM, and by mid-2017, debt reached 2.4 billion KM! The fastest and easiest way for governments to borrow is by borrowing from commercial banks, by issuing treasury bills and bonds. Governments thus compensate for the lack of revenue in their budgets, financing the debt burden by borrowing from commercial banks. This type of borrowing is multiply risky.

Graph 2

First, governments have no motivation or obligation to carry out any reforms, because, unlike international financial institutions (e.g., IMF) that condition financing on reforms, commercial banks do not require this. Second, this type of lending is generally more expensive and harmful to the domestic economy, as interest rates are higher, repayment is faster, budgets are thus exposed to pressure, and lending is usually in the domestic currency. The interdependence of governments and commercial banks reduces lending to the economy, and thus economic growth and development.

Graph 3 shows the trend of the share of public debt in the GDP of the entities, where a disparity is visible. At the end of 2016, this share was as high as 58% in Republika Srpska, while in FBiH the share was only 36%. It is evident that, considering the share of debt in GDP, FBiH is significantly less indebted compared to RS.

Graph 3

Over the past five years, the share of public debt in the Federation of BiH has stagnated at 36-37% of GDP, compared to the trend of debt growth in RS from 51% in 2012 to 58% in 2016, which is a serious approach to the Maastricht threshold of 60%. This debt growth in RS is, in addition to other borrowings, a consequence of intensive short-term borrowing from commercial banks through loans, bonds, and treasury bills. However, it is important to emphasize here that one entity, due to unsustainable borrowing, can create a financial crisis in the entire country, so this way of managing public finances indicates a high risk of abuse.

Graph 4 shows public debt per capita in BiH. It is clear that debt has continuously increased in the period 2012-2015, and currently averages 3,424 KM. Over 5 years, the debt per capita has increased by 696 KM or by about 26%, with the debt per capita in Republika Srpska being about 50% higher than in the other entity.

Graph 4

When we add private debt to public debt, we arrive at the figure that every inhabitant of BiH is currently indebted by at least 5,712 KM! Due to the very low standard of living, low wages and pensions, an increasing number of citizens are also borrowing to cover living expenses, usually from commercial banks and at very unfavorable interest rates. During the first 8 months of 2017, 75% of all citizen loans taken out were for consumer or non-purpose loans, leading us to the conclusion that both governments and citizens are actually surviving thanks to borrowed money.