bne IntelliNews – OPINION: Bosnia breakup momentum signals weak economy

More than 25 years after the Dayton Accords defined the heavy construction of post-war Bosnia and Herzegovina with a unitary state divided into distinct ethnic enclaves and the district of Brcko, the military and defense officials of the United United and EU have suddenly sounded the alarm over the danger of disintegration after a long period of diverted attention. They immediately cite the long-running machinations of Republika Srpska leader Milorad Dodik, which have come to a head with the encouragement of Russia and Serbia, as he demands an autonomous tax and security authority. President Dodik’s opposition, including to official recognition of the Srebrenica massacre as genocide, has routinely impeded government coordination. Several years ago, this culminated in the halting of an IMF program due to unworkable governance, a rare event that has brought to light an underlying economic dysfunction since the massive body of aid workers and of advisers left immediately after the conflict, with general plans for emerging markets on the shelf. .

The response to the centrifugal political forces Dodik as well as the Bosnian and Croat forces should be a renewed platform for growth and reform to catch up with Bosnia’s Western Balkan neighbors on the road to EU entry. Foreign experts can re-engage, but the work must rely on experienced bankers and business leaders in Bosnia’s constituent parts to regain a common sense of mission.

Unrest at coal mines over minimum wage cut en route to eventual clean energy supply, and arrest of former defense minister for bribery in procurement, reinforce dark chronic headlines that obscure the good points. GDP growth was 11.5% in the second quarter, a nearly two-decade high after an 8% contraction in 2020, the worst in 25 years. The European Bank for Reconstruction and Development (EBRD) forecasts an expansion of 4% for the whole year and 3% in 2022. Exports increased by 20% in the third quarter, mainly agriculture and l mining, both to neighboring countries of the Central European Free Trade Agreement from the former Yugoslavia, Albania and Moldova, as well as to major EU markets . The lingering trade deficit also jumped 10% on manufacturing imports, but the overall good news contributed to a 25% jump in the MSCI Bosnian standalone frontier stock index as the main component at the end of November, although that he never kept his promises of privatization.

The IMF’s latest Article IV review sharply criticizes the performance and governance of state-owned enterprises as permanent drags. SOEs provide a tenth of jobs and account for 40% of fixed assets, with accumulated debt equal to 25% of GDP, including unpaid taxes and social security obligations. The Fund believes this figure is underestimated due to poor data collection, and notes that monitoring lags regional peers and OECD guidelines of wealthier countries, with rampant corruption. Each entity’s prime ministers lack the ability to monitor balance sheets and operations through aggregated websites, and to appoint executives solely on the basis of professional and technical credentials.

These weaknesses spill over to the financial sector, where there are multiple development banks, despite the World Bank’s persistent plans to either shut them down or overhaul them and subject them to central bank regulation. The currency board initiated with foreign aid has been a singular anchor of stability, but also a cramp to export competitiveness. Political agitators and business lobbies united in insisting on a reset of the peg, even as depreciation occurred in real terms with low inflation of 1%. Apart from this externally imposed exchange rate arrangement, representatives of the constituent federation have been unable to agree on prudential rules even as a mass loan guarantee program has been deployed for the Coronavirus (COVID-19) emergency. A deposit insurance law is nascent and a spike in bad debt is expected as repayment breaks expire, with the central bank lacking comprehensive asset classification and resolution criteria.

The full IMF deal was canceled in early 2020 after a long period in limbo. The Fund’s $330 million rapid virus line activated at the outbreak of the pandemic will leave another 5% budget and current account deficits this year. Overall debt stands at 40% of GDP and is deemed sustainable, with the caveat of large unaccounted bad debts from state banks. President Dodik’s tax revenue drain is partly driven by onerous service demands, while relations between Serbia and Republika Srpska are aided by the former’s entry in June into the benchmark local bond index from JP Morgan, which will trigger billions of euros in inflows from foreign investors and boost the credit profile of both jurisdictions. Serbia’s fiscal gap is at the same level as Bosnia’s, but inflation was 7% in the third quarter and a bullish cycle will begin soon ahead of elections scheduled for the first half of 2022 and boost hunters. high yields. Belgrade is also much further along in the EU accession process and concluded a formal policy coordination instrument with the IMF in June. Capital market development is a priority that could enable pilot joint commercial debt and equity operations for the Republika Srpska, without outright sovereign foreign policy approval.

These pragmatic solutions, as well as the overcoming of decades of political inertia, are distant prospects with the intra-governmental standoff that succeeded the brutal one of the 1990s. The international community has invested billions of dollars in reconstruction, then diverted resources to the theaters of Afghanistan and Iraq which have since collapsed just as Bosnia is erupting again. The lesson from all three is that underlying functioning, economies and sound financial systems have often been overlooked as a recipe for long-term conflict reduction. Entities and Brcko can at least find common ground there and can appoint official and private sector representatives to sit on an independent recovery board as an overdue original collaboration to accelerate growth and stability recommendations, and recast post-traumatic solidarity and the EU the spirit of integration a generation later.

Gary Kleiman is a senior partner at Kleiman Intl Consultants, Inc.

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