IMF: Political situation hinders progress, unemployment remains high

SARAJEVO, (Patria) - The International Monetary Fund stated in its economic analysis that macroeconomic conditions in Bosnia and Herzegovina (BiH) remain stable, but job creation is inadequate, with a wide income gap with the EU.

- Job creation in the private sector is limited, and unemployment remains high - especially among young people. The slowdown in productivity growth since the onset of the global economic crisis and continuous emigration, particularly of young and educated people - caused largely by limited employment opportunities at home - affect the country's economic potential.

The authorities have made significant efforts and undertaken structural reforms, and are progressing on the path towards EU accession. During 2015, the governments adopted a comprehensive Reform Agenda, outlining the basic plans for socio-economic and related reforms at all levels of government. In September 2016, the EU Council adopted BiH's formal application for EU candidate status. However, the implementation of the Reform Agenda and progress towards EU accession (candidate status) have been slower than expected.

The first EFF review was delayed for a year, although the extended arrangement during this period served as an anchor for the authorities' economic policies. The failure to adopt the law on amendments to the Excise Tax Law, which was supposed to enable access to external financing for multi-year investments in growth-enhancing infrastructure, was a key reason for the delay in concluding the first review, until the law was finally adopted at the end of 2017.

Although the implementation of some key policies was slower than envisaged at the time of the program request, the authorities have made evident progress in maintaining fiscal discipline, preserving financial stability, and improving the business climate.

- The complicated political situation continues to hinder policy implementation and cooperation among governments. The political stalemate during 2017, combined with BiH's complex constitutional setup and weak cooperation among governments, made it difficult to introduce policy changes and implement reforms. During 2017, parliaments at the BiH and FBiH levels convened sporadically due to coalition turmoil and ethno-nationalist tensions, slowing the reform momentum.

The upcoming elections at the end of 2018 represent uncertainty.

The analysis states that economic growth is expected to increase in the medium term. Although private consumption will continue to have the largest share in GDP growth in the medium term, a significant increase in public investment is expected, in conjunction with the continued implementation of structural reforms.

The IMF also highlights that private sector activities could enable growth at a rate of around 4 percent by 2022. The recently adopted amendments to the Excise Tax Law, which increased the excise tax on fuel, are expected to free up external funds for significant infrastructure construction that will enhance growth.

Inflation should be moderately subdued at 1.6 percent during 2018 after the dissipation of second-round effects of the 2017 commodity price increases, but is expected to rise to around 2 percent with a gradual reduction in the output gap in the medium term. Although the current account deficit is expected to increase in the 2018-2019 period, reflecting import needs for large public investments, it should stabilize at around 5 percent of GDP by 2022.

However, the IMF also believes there is an increased risk that political support for sound policies will wane in the period leading up to the general elections in October 2018.

- With expectations that ethno-nationalist politics will continue to take center stage during the pre-election period, the risk of widening cracks in the single economic space and worsening regulatory coherence cannot be ignored. Uncertainty regarding the election law in the Federation (FBiH) and government formation in the post-election period compound the downside risks. Given that the extended arrangement serves as an external anchor for economic policies and reforms, a lack of progress in program implementation could lead to a deterioration in budget quality and deviations in the implementation of structural reforms aimed at reorienting the economy towards the private sector and, ultimately, undermine BiH's ability to achieve its medium-term development goals.

On the other hand, externally, negative shocks in Europe could pose a risk of crisis spillover into BiH, although, conversely, higher-than-expected growth in Europe and the US would have a positive impact on BiH.