IMF on BiH: Reforms needed in public sector employment, wages and social benefits, public procurement...

(Patria) - The Executive Board of the International Monetary Fund (IMF) has concluded the Article IV consultation with Bosnia and Herzegovina. The authorities have agreed to the publication of the IMF Staff Report prepared for this consultation.

Growth has proven resilient despite domestic and global challenges. It accelerated to 2.5 percent in 2024 (2024: 2.0 percent). Although political uncertainty affected a decline in consumption in the first quarter, high-frequency indicators point to a recovery from the second quarter, with a slight slowdown in growth expected at 2.4 percent in 2025 before returning to its potential of 3 percent by 2027, driven by consumption and exports.

After a sharp decline to 1.7 percent in 2024 (2023: 6.1 percent), average headline inflation rose to 2.3 percent by May 2025, while core inflation remained largely stable at around 4 percent. Inflation is projected to rise to 3.8 percent in 2025 due to higher import food prices, before stabilizing at 2 percent in the medium term.

The external position is expected to remain broadly unchanged in 2025, while
credit growth is projected to slow slightly. The current account deficit is expected to widen to 4.1 percent of GDP, from 4.0 percent of GDP in 2024, with a recovery in electricity exports after last year's droughts, and lower oil prices could mitigate the negative effects of US tariffs on exports. Gross foreign exchange reserves stood at EUR 9 billion, covering 6.9 months of imports and providing adequate coverage for the currency board arrangement.

Private sector credit growth is projected to slow to 7.7 percent in 2025, slightly exceeding nominal GDP growth.

The economic outlook is subject to downside risks. Trade uncertainty, a slowdown in Europe, volatile commodity prices, tighter global financial conditions, and further escalation of political tensions pose significant downside risks to growth. Strong growth in real wages and private sector credit could further increase inflationary pressures.

Deviations from policies ahead of the 2026 elections could worsen the fiscal position and the current account deficit. On the upside, progress in the EU accession process could boost investor confidence and growth.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff's assessment. They noted that while growth has remained resilient despite a challenging domestic and external environment, it continues to lag behind potential, slowing Bosnia and Herzegovina's convergence towards the European Union. Given the elevated downside risks, Directors stressed the importance of preserving political stability, avoiding policy slippages, and leveraging the EU accession process to accelerate reforms. Continued strong engagement with capacity development partners will be crucial to support this process.

Directors agreed that fiscal policy should prioritize medium-term consolidation, rebuilding fiscal buffers, broadening the revenue base, and improving the efficiency of public spending. In the short term, it is crucial to avoid measures that would further increase the deficit and strengthen contingency planning. To enhance policy credibility, Directors called for improvements to fiscal frameworks, with greater harmonization and stronger oversight and enforcement of fiscal rules.

Reforms are also needed in public sector employment, wages and social benefits, as well as in public investment management, public procurement processes, fiscal risk oversight, and public enterprise governance.

Directors stressed the importance of preserving the central bank's independence and further strengthening its policy instruments to maintain the credibility of the currency board, which remains an anchor of stability.

They called for close monitoring of financial stability risks associated with rapid credit growth, as well as for improvements to the macroprudential framework. Directors highlighted the need to strengthen crisis preparedness, including by establishing a country-wide financial stability fund to support bank restructuring. They also supported the gradual phasing out of market-distorting temporary regulatory measures and called for a joint commitment to implement the Financial Sector Assessment Program (FSAP).

Directors emphasized the importance of enhancing structural reforms under the EU Growth Plan to support the EU accession process and enable faster and more sustainable economic growth. They highlighted that reforms in the energy sector—including the gradual phasing out of electricity subsidies, improving the operational efficiency of state-owned energy companies, and introducing a carbon pricing system—are crucial for attracting private investment and positioning the sector as a long-term growth driver.

Directors also stressed the need for reforms to increase labor force participation, reduce the shadow economy, enhance digitalization, and strengthen governance and anti-corruption efforts. They also pointed to the urgency of effective implementation of priority MONEYVAL measures to avoid being placed on the grey list and ensure further growth benefits.