Country Report Bosnia-Hercegovina February 2009

Outlook for 2009-10

• The three main ethnically based parties that won the October local elections in Bosnia and Hercegovina (BiH) are pushing for a government reshuffle.
• If no reshuffle takes place, a parliamentary election may be called in BiH's Bosniak (Bosnian Muslim)-Bosnian Croat Federation 18 months early.
• The three dominant parties are edging towards compromise on constitutional amendments and other reforms, which, if implemented, would help to facilitate BiH's integration with the EU.
• Plans to replace BiH's international High Representative with a less powerful EU Special Representative (EUSR) have been complicated by the surprise resignation of the incumbent holder of the post, Miroslav Lajcak.
• There is a risk of further delays in structural reforms and privatisation, owing to political disagreements, sharply reduced investor interest and a slump in asset prices in the wake of the global economic downturn.
• The Economist Intelligence Unit forecasts a slowdown in real GDP growth to an annual average of 2% in 2009-10, reflecting an expectation of tighter macroeconomic policies and a recession in BiH's euro zone markets.
• We expect a current-account deficit of 15.7% of GDP in 2008 to be followed by a contraction to an average of about 11% in 2009-10, as a result of slowing import demand and low international oil prices.

Monthly review

• The international community's High Representative in BiH, Mr Lajcak, has unexpectedly tendered his resignation.
• The three main political parties have reached an outline agreement on the reshaping of BiH's territorial organisation, the division of state property and the status of Brcko District.
• The Indirect Taxation Authority has increased excise duties on tobacco, coffee and motor fuel tax to offset a sharp fall in customs receipts.
• The resumption of work at the Bosanski Brod oil refinery in November helped to boost year-on-year industrial output growth to 16.8% in Republika Srpska (RS) in 2008, whereas growth in the Federation amounted to 7.9%.
• The consumer price index (CPI) decreased by 0.6% month on month in December, owing to a steep drop in transport prices, bringing the year-end rate of inflation down to 3.8%, from 5.5% in November.
• The merchandise trade gap in 2008 amounted to KM9.57bn (US$7.2bn), an increase of 20.3% on 2007, reflecting increased import demand until the fourth quarter of the year, when imports declined by 7% quarter on quarter.