bne IntelliNews – Bosnian central bank raises growth forecast for 2021 as economy beats expectations in first quarter


The Central Bank of Bosnia and Herzegovina (CBBH) revised its forecast for economic growth upward by 70 basis points to 3.4 percent in 2021 and 40 basis points to 3.4 percent in 2022 on May 24, citing the strong recovery in key indicators in the first quarter.

According to the current projection, economic activity is expected to grow by 3.4% in 2021, 70 basis points more than expected six months ago. Although the start of 2021 was affected by coronacrisis, a stronger than expected recovery of some high-frequency indicators, such as industrial production and exports of goods, in the first quarter, indicates more dynamic economic activity in 2021, the central bank said on its website.

The projections of variables representing foreign demand have also been revised to higher values. It also influenced the assessment that economic activity in Bosnia and Herzegovina in 2021 will be stronger than expected at the end of 2020.

With these corrections in economic activity rates projected to higher levels, the level of real GDP from 2019 could almost be reached by the end of 2021. Personal consumption growth in 2021 is based on positive indicators Related to the labor market, the forecast is for a decline in the number of unemployed, a slight increase in employment and average net wages, and growth in remittances from abroad. Compared to the previous round of projections, the central bank slightly raised its forecast for a recovery in personal consumption by the end of 2022, saying that the situation in 2020 has exceeded its expectations in terms of labor market flexibility and speed of recovery, particularly in the service sector. . However, the CBBH said it remains “fairly conservative” about trends in the unemployment rate and the speed at which Bosnian labor could be employed in the EU in the short term, which affects personal consumption.

According to the first data available for 2021, the growth of goods exports and a somewhat slower recovery in domestic demand (which slows import growth) will translate into a less negative contribution of net exports to GDP growth. With the growth of economic activity, in 2022, the bank expects a further deepening of the foreign trade deficit. Tourism revenue growth is projected in 2021, but he doesn’t expect the trend to intensify until the second half of 2022.

In the previous set of projections, GDP growth in 2021 was also based on growth in public spending. In this cycle of projections, the bank has revised downwards the positive impact of public spending on economic activity in 2021. The first quarter of the current year has been marked by the tightening of measures by commercial entities, mainly in the service sector, which affected tax revenues and extended subsidies. In the medium and long term, the intensity of public expenditure could be further limited by the amount of public debt, but also by the commitments due in respect of the service of the public debt.

Over the projection period, a slight increase in inflation is expected. Price growth in 2021 will be influenced by higher transport prices, following the expected growth in energy prices in international markets. The central bank expects the impact of aggregate domestic demand on consumer prices to strengthen in 2022. Inflation projections are consistent with the projected trend in economic activity. However, prices are subject to stronger shocks and the inflation projection in the coming periods could be revised upwards significantly. Factors likely to provoke an inflationary shock include continued growth in world freight prices, possible strong growth in metal prices, and large variations in exchange rates related to international merchandise trade.

Overall, the central bank stressed that its forecasts are subject to an extremely high degree of uncertainty linked to the development of the epidemiological situation.

The CBBH said the risks are balanced. On the upside risks include higher vaccine coverage of the population by the end of 2021, strong growth in industrial production and stimulus tourism. However, the Bosnian economy could perform worse if there was a strong inflationary shock delaying the pickup in personal consumption, or a new wave of pandemic. The shrinking fiscal space could have a negative effect on public investment and the lengthening of the period of weak economic activity would slow down banks’ lending activity, the bank warned.

The CBBH will publish its next round of medium-term macroeconomic projections for the period 2021-2023 in November.


About Eleanor Blackburn

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