Bosnia and Herzegovina Country Brief

About Bosnia and Herzegovina-2001

Population: 4.0 million
Population per sq. km: 60
Population growth: 2.6%
Life expectancy: 70 years
Population below national poverty line: 19 %
GDP per capita(current US$): 1,206
GDP (current US$): 4,808 million
GDP Growth: 6%
Sources: National Statistical Offices, IMF, IFS, WDI 2002 and Staff estimates.

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September 2002

Overview

Since 1996, Bosnia and Herzegovina (BiH) has seen a remarkable transformation of its devastated society and economy. In the post-war period, GDP grew at an annual average of 25 percent, the country's critical infrastructure was rebuilt, and modern political and economic institutions and processes were born.

While political stability has been established, and significant improvements in public finance management have taken place within both entities*, economic development has markedly decelerated from its peak following the Dayton Peace Accord in 1995. Real GDP growth in 2001 was only 5 percent. This was due to an environment that continues to be unfavorable to the mobilization of domestic savings and local and foreign investment, as well as declining foreign aid flows.

Development has also been uneven across the two entities. While GDP growth in FBH exceeded 7 percent in the last two years, in RS it fell from 2.6 percent in 2000 to only 1.9 percent in 2001 due, in part, to the RS's resistance to integrate their economy more fully into the wider economic space of BiH.

In 2001, for the first time since the war (1991-1995) and the establishment of BiH as an independent state (March 1992) , the Bosnian authorities at both the state and federal levels joined forces to produce an Economic Development Strategy (EDS) and an Interim Poverty Reduction Strategy Program (I-PRSP). Preparation of these documents enabled the authorities to start broad consultations with non-governmental organizations, the media, other parts of civil society, as well as with bilateral donors and international agencies. It is expected that by early 2003 this process will yield a Poverty Reduction Strategy Program (PRSP) and paper serving as the basis for internal development policy and spending decisions, as well as a framework to guide external assistance. The World Bank is actively supporting this process.

* Bosnia and Herzegovina consists of two entities, the Federation of Bosnia and Herzegovina (FBH) and Republica Srpska (RS), in accordance with the Dayton Peace Accord.

Focus of World Bank Assistance

Bosnia and Herzegovina joined the World Bank and the International Development Association (IDA) in 1996, with membership retroactive to 1993. In the immediate post-war years, during the first Country Assistence Strategy (CAS) period between 1996-1999, a wave of emergency projects helped jump-start the reconstruction effort. These projects were part of the Bank's overall strategy of funding a wide range of sectors including transport, power, de-mining, housing, health, education, public works, agriculture, and micro-credit.

With the budgetary support of its adjustment operations and technical assistance, the World Bank also assisted in the implementation of numerous critical reforms, including privatization and demilitarization.

With most basic reconstruction work completed and with infrastructure levels raised to almost pre-war levels, during the second CAS period between 2000-2002, the Bank placed greater emphasis on fundamental structural reforms critical to the emergence of a market based economy. The main thrusts of World Bank assistance are:

Fostering private sector-led growth and employment.

Strengthening institutions and governance, including public sector reform.

Building social sustainability.

For further details please see the World Bank's Country Assistance Strategy for 2000-2002, and the Country Assistance Strategy Progress Report of September 2001.

Impact on the Ground

The country’s capital base has been effectively restored. Transport infrastructure was rebuilt, schools and medical facilities constructed, a family health care system established, the education system reformed, housing rehabilitated or rebuilt, and energy supply restored throughout the country. During the period of reconstruction and recovery, the Bank provided nearly 15 percent of total donor pledges (US$5.4 billion) and leveraged another 7 percent in project cofinancing.

New jobs have been created and sustained. Through the first and second Local Initiatives Credits, some 160,000 jobs were created or sustained. Almost 50 percent of these jobs are held by women and 25 percent by displaced persons and returning refugees, some of the most vulnerable groups in Bosnian society. So far, some 115,984 loans have been disbursed to low-income micro-entrepreneurs... more

The return of refugees and displaced persons has increased. In the past two years, the number of returnees has exceeded expectations, surpassing the number of those who returned earlier. Bank projects are designed to facilitate BiH’s refugee return program.

Flexibility in labor markets has increased. Since 2000, as part of demand -driven reform, labor laws were passed to bring labor conditions in line with those of modern European market economies. Employment conditions have improved and legislation regarding job placement has been enacted under the Social Sector Adjustment Credit.

The banking sector has improved dramatically, particularly in FBH. Private banks, especially those owned by international strategic investors, now dominate the market in both entities. They account for almost 90 percent of the banking sector’s KM 4.6 billion assets. The Enterprise and Bank Privatisation Adjustment Credit brought improvements in the sector by the creation of a single, country-wide deposit insurance agency, establishment of deposit insurance schemes, growth of citizens' savings by more than 300 percent, and the conversion of the DM (earlier used interchangeably with the local currency, KM) to the Euro.

A modern banking system has replaced the old payment bureaus. As a result, the banking system's performance improved, liquidity in the economy increased, and public finance management was strengthened.

Public spending is being rationalized and government consumption reduced. In 2002, the number of military personnel was downsized from 23,000 to 13,000 in FBH, and from 7,000 to 5,000 in RS, with the Bank’s Labor Redeployment Project providing a model to policy makers.

The privatization process has been firmly launched. Targeted numbers of small and medium enterprises have been privatized, as has the public subscription of shares in large-scale enterprises. The privatization of telecommunications and electric power generation has been made easier by the establishment of a regulatory framework.

State institutions have been strengthened. A State Transmission Company has been created and a State Electricity Law adopted as part of the unbundling and privatization of the power sector under the Third Power Project. A single country-wide deposit insurance agency, a state audit institution, a single border service and an Inter-Entity Education Standards and Assessment Agency have been created, the latter promoting coordination across the three main constituent groups in an effort to reduce inefficient resource use and build a professional basis for stakeholder dialogue under the Enterprise and Bank Privatisation Adjustment Credit, the Second Public Finance Adjustment Credit, and the Education III.

Public finance management has been significantly improved. Under the Second Public Finance Structural Adjustment Credit, independent audit institutions and new treasury systems were established and overall budget management strengthened. Health financing reforms were initiated. The pension system in FBH improved significantly on account of the merger of the Bosniak and Croat pension funds. To encourage the free flow of goods across BiH, core legislation was enacted to improve the attribution of excise tax revenues.

A National Action Plan for Environment (NEAP) has been prepared. Expected to be approved by the FBH and RS Governments in September 2002, the NEAP reflects broad stakeholder involvement. Recent breakthroughs in forest legislation in both FBH and RS, together with initial steps taken in forest administration reform, also mark good progress in natural resource management.

For details of World Bank projects in Bosnia and Herzegovina please click here.

Challenges Ahead

Tackling poverty. Poverty remains a serious problem. The recently completed Living Standards Measurement System shows that 25 percent of the population in RS and 16 percent in FBH is below the poverty line. The Bank is assisting the government in building sustainable social programs and addressing the inequities that exist between the two entities.

Greater economic integration of the two entities. This is a prerequisite for association with the European Union. More effective integration will also enable the RS to keep pace with the FBH and the countries of SE Europe.

Improving the business environment as a means of fostering private-sector led growth. Unless there is a dramatic acceleration in the pace of reform, the informal sector will continue to grow and the structures of a modern self-sustaining economy will not develop. Reforms include faster registration of businesses, an improved inspection system, adoption of bankruptcy and liquidation laws, and further privatizion of strategic enterprises.

Strengthening institutions and governance. Governments currently consume over 60 percent of GDP in BiH, while the average for the transition economies is about 43 percent. Reforms must reduce government consumption and spending and shift to development / social sector spending. Governments must continue to reduce military spending and rationalize veterans' benefits, since together these consume nearly 50 percent of entity budgets. Also, for BiH to be considered credit-worthy by 2007/2008, exports must grow at 14 percent.

Full and sustainable implementation of the government's Anti-Corruption Action Plan. Prepared in concert with the PRSP process, this is a crucial prerequisite for the success of economic reforms and is strongly advocated by the international community.

World Bank Partners in Bosnia and Herzegovina

SECTOR	LEAD NATIONAL AGENCY	PARTNERS
Agriculture, Fishing & Forestry	Ministry of Agriculture, Water Management and Forestry (FBH) Ministry of Agriculture Forestry and Water Resources (RS)	*Local:* FBH Government *Foreign:* EC, IFAD, Germany, Netherlands, Saudi Arabia, Italy, Norway, International NGOs
Education	Ministry of Education, Science, Culture and Sport (FBH) Ministry of Education (RS)	*Local:* Governments of BH *Foreign:* EC, ECHO, UNDP, UNHCR, Japan, Italy, Germany, Greece, Islamic Fund, Netherlands, Norway, Sweden, Soros Foundation, USA
Electric Power and Other Energy	Ministry of Energy, Mining and Industry (FBH), Elektroprivreda BH, Elektroprivreda HZHB, Elektroprivreda RS, District Heating companies (FBH & RS)	*Local:* Various Counterparts *Foreign:* EC, EBRD, Agency for International Development, British Department for International Development, EIB, KfW, NORAD, SDC, Denmark, Finland. Netherlands, Austria, Belgium, Czech Republic, France, Germany, Ireland, Japan, Norway, Switzerland, UK, USA, Canada, Netherlands, Spain
Environment	Ministry of Urban Planning and Environment (FBH)	*Local:* Government of BH
Finance	Ministry of Finance (FBH) Ministry of Finance (RS)	*Local:* Governments of BH, Foundation for Sustainable Development (Federation), Development and Employment Foundation (RS) *Foreign:* Netherlands, Austria, Germany, Sweden, UK, USA
Health, Nutrition & Population	Ministry of Health (FBH) Ministry of Health and Social Welfare (RS)	*Local:* Governments of BH *Foreign:* UNDP, WHO, ECHO, CoE, Canda, Iceland, Italy, Greece, Netherlands, UK
Industry	Ministry of Finance (RS)	*Local:* Governments of BH, Banks, Enterprises, Development and Employment Foundation (RS) *Foreign:* Bilateral Agencies (Unidentified)
Law & Justice & Public Administration	Ministry of Foreign Trade and Economic Relations, Ministry of Finance (FBH), Ministry of Finance (RS)	*Foreign:* Netherlands, Switzerland
Oil & Gas	Sarajevo Gas Company (FBH)	*Local:* Sarajevo Canton, SarajevoGas *Foreign:* EC, Qatar Relief Fund, Saudi Arabia /IRC, USAID / IRC, IIHO, MDD Merhamet, UK, Netherlands
Private Sector Development	Ministry of Transport and Communications (FBH), Ministry of Traffic and Telecommunications (RS), Ministry of Finance (FBH), Ministry of Finance (RS), Ministry of Energy, Mining and Industry (FBH), Ministry of Industry and Technology (RS), Communications Regulatory Agency (BH State Level)	*Local:* Privatization Agency (FBH), Directorate for Privatization (RS), Various Counterparts, Investment Guarantee Agency (FBH & RS) *Foreign:* EBRD, OHR, IMF, Private Sector Insurers, Japan, Netherlands, Sweden, Switzerland
Social Protection	Ministry of Foreign Trade and Economic Relations, Ministry of Finance (FBH), Ministry of Finance (RS)	*Local:* Goverments of BH, Foundation for Sustainable Development (FBH), Development and Employment Foundation (RS), Local Initiatives Department (FBH), Employment and Training Foundation (FBH & RS) *Foreign:* UK / DFID, UNHCR, UNDP, Netherlands, Norway, Austria, Italy, Japan, Switzerland, Sweden
Transportation	Ministry of Foreign Trade and Economic Relations, Ministry of Transport and Communications (FBH), Ministry of Traffic and Telecommunications (RS)	*Local:* Goverments of BH, Road Directorate (FBH & RS), Customs Administration (FBH & RS), Natioanl Demining Commission *Foreign:* EC, EBRD, EIB, USA, UN, Austria, Czech Republic, Germany, Italy, Japan, Malaysia, Netherlands, Sweden, UK, Canada, France, Saudi Arabia
Urban Development	City of Mostar, Ministry of Finance (RS), Ministry of Urban Planning and Environment (FBH)	*Local:* City of Mostar, International Stari Most Foundation, Foundation for Sustainable Development (FBH), Development and Employment Foundation (RS), *Foreign:* UNESCO, UNHCR, EC, IFAD, CoE, The Aga Khan Trust Fund, Austria, Japan, Croatia, Italy, Netherlands, Turkey, Norway, UK, Germany, Saudi Arabia
Water, Sanitation & Flood Protection	Mostar Water Supply and Sewerage Utility (FBH), Vodoprivreda BH	*Local:* Water Utility *Foreign:* EC, USAID, Austria, France, Italy, Kuwait, Netherlands, Saudi Arabia, Switzerland

World Bank Lending to Bosnia and Herzegovina

Total IBRD / IDA Commitments from FY91 to FY02: US$ 812 million for 21 active and 23 implemented and closed projects*
* does not include the refinanced/ rescheduled overdue charges of $168 million
(by fiscal year,in nearest US$ million)

	up to 1995	1996	1997	1998	1999	2000	2001	2002	Total
Commitments		10	198	177	163	38	124	102	812
Disbursements	43	168	133	75	116	81	70	43	729

Total Commitments by Sector* since 1991
(in nearest US$ million)

* A new Bank sector and thematic coding system was introduced in FY02. Under this new system, themes represent the development objectives of the operation, whereas sector codes for investment operations reflect the parts of the economy receiving direct support, and for adjustment operations, the sectors being impacted by the operation's conditionalities. Thus, a given adjustment operation may span a number of sectors depending on the reform measures being implemented by the loan and may, for example, show up in education, health, trade and industry or other categories, even though there may not be a direct investment in that sector.

Fiscal year from July 1-June 30.

For more information please contact:

In Sarajevo: Srecko Latal phone: + (387 - 33) 44 - 02 - 93
E-mail: slatal@worldbank.org

September 2002