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Bosnia and Herzegovinacountry diagnostic:Private investment challengesand opportunities2022
Country diagnostics are a European Bank for Reconstruction and Development (EBRD) tool for identifyingthe main obstacles to entrepreneurship and private-sector development in the economies where it operates.They also help to shape the Bank’s priorities and project selection in formulating new country strategies.Each diagnostic informs the EBRD’s policy engagement with the authorities in that country.Each diagnostic assesses national progress and challenges in developing a sustainable market economy.Private-sector development and entrepreneurship are at the heart of the Bank’s mandate, but in all of the Bank’sinvestee economies, the private sector faces a range of problems and obstacles. The country diagnostic highlights thekey challenges facing private companies and shows where each economy stands relative to its peers on the Bank’s sixtransition qualities – competitive, well governed, green, inclusive, resilient and integrated – highlighting the maindeficiencies and gaps in each.The diagnostics draw on a range of methodologies and best practices for assessing how big certainobstacles are. Extensive use is made of the Bank’s in-house expertise and surveys, such as the Business Environmentand Enterprise Performance Survey (BEEPS) and the Life in Transition Survey (LiTS), as well as other cross-countrysurveys and reports from institutions such as the World Bank, the World Economic Forum and the Organisation forEconomic Co-operation and Development (OECD). For some larger countries, the diagnostics also draw on speciallycommissioned studies of selected issues that are critical to private-sector development.The EBRD’s Country Economics, Strategy and Policy (CESP) team lead the diagnostics, drawing substantiallyon the expertise of sectoral, governance and political experts in the Policy Strategy and Delivery (PSD)Department and consulting widely with experts across the Bank in preparing the final product. The diagnosticsare shared with the EBRD Board during the country strategy process and published during the public consultation period.The views expressed in the diagnostic papers are those of the authors only and not of the EBRD or its shareholders.For more information, go to ics.
This report was prepared by Ana Kresic, Acting Lead Economist for the Western Balkans, and Olja Belic, Economic Analyst for the Western Balkans. Thereport is based on the draft prepared by Sanja Borkovic, under the supervision of Rika Ishii. The political economy part of the report was written by OlegLevitin. The authors are grateful for contributions and comments provided by Anna Sali, Svenja Petersen, Federica Foiadelli, Meryem Uyar, Cherry Khalil,Dragana Marjanovic, Margherita Calderone, Pavle Djuric, Dejan Zlatkovic, Sebastian Kriticos, Srdjan Kokotovic, Chris Basinski, Damin Chung, AnnaVasylyeva, Sung-Ah Kyun, Mirjana Grkovska and Mine Isik. Editor: Poilin Breathnach. The views expressed in this paper are those of the authors alone andnot necessarily those of the EBRD. The report is based on data available as of 27 May 2022.3
ContentsExecutive summary . 51.Political economy . 72.Economic background and outlook. 83.Key challenges in the economy . 103.1.Improving governance and the business environment . 103.2.Increasing private-sector competitiveness . 163.3.Building back better – greening the energy sector and strengthening inclusion . 20References . 25Annex 1: Qualities of a sustainable market economy . 30Competitive . 31Well governed. 33Green. 35Inclusive . 37Resilient . 39Integrated . 424
Executive summaryBosnia and Herzegovina is a small Western Balkans economy of 3.3 million people. Due to a complexconstitutional set-up stemming from its post-conflict reconstruction, the country is institutionally andeconomically fragmented, without a common economic space. Such a system makes decision-making slowand suboptimal and frequently delays or halts necessary structural reforms.The key challenges to private-sector development are weak public governance, which makes thebusiness environment rather difficult, and the low competitiveness of the private sector. To boosteconomic growth and make it more sustainable, the country also needs to reduce its reliance on highlypolluting coal and increase the use of its untapped human capital resources, as there are large cohorts ofinactive women and unemployed youth in the labour market.Based on this diagnostic paper, the economy could grow at a faster and more sustainable pace if theauthorities were willing and able to conduct the necessary structural reforms, including:1. Enhancing the business environment for the private sector by aligning business laws and regulationsbetween the national entities (the Federation of Bosnia and Herzegovina and the Republika Srpska),strengthening their implementation and fighting corruption. Legal and administrative complexitycreates significant obstacles for businesses in the country. Strengthening the rule of law (also byimplementing existing legislation consistently), while at the same time aligning laws and regulationswith those in the European Union (EU), could facilitate the EU accession process. Example of a potential action: Review the current legal and administrative frameworks of eachentity (in a selected number of areas) that affect the business environment, such as starting abusiness, and undertake the necessary reforms to streamline the process and establish identicalrules across the two entities.2. Improving the governance of state-owned enterprises (SOEs) by establishing clear ownership policy.Bosnia and Herzegovina still has a large SOE sector, which performs poorly compared with SOE sectorsin central, eastern, southern and south-eastern Europe (CESEE) and local private-sector companies.The establishment of clear ownership rationale, key performance indicators and an effectivegovernance system would support the overall improvement of SOEs and potentially facilitate theprivatisation of some of these enterprises. This would help to create a level playing field between SOEsand the private sector. Exampl
Country diagnostics are a European Bank for Reconstruction and Development (EBRD) tool for identifying the main obstacles to entrepreneurship and private-sector development in the economies where it operates. They also help to shape the Bank's priorities and project selection in formulating new country strategies.
