The escalation of the conflict in the Middle East and the rise in energy prices represent a serious external shock for the economy of Bosnia and Herzegovina, which is already facing slow growth and inflationary pressures, warned Anto Domazet, professor emeritus of the Faculty of Economics in Sarajevo, in an interview with Fena, assessing that the country is facing a painful period of adjustment to the rising prices of fuel, food and other basic necessities.
As Domazet says, along with the real situation of the war in the Middle East, there goes the perception of market actors that determines the economic flows in “shock situations”. Oil prices have increased significantly more than this disruption means in reality. Prices have also increased in the USA, which is self-sufficient in both oil and natural gas, and is even an exporter of liquefied natural gas (LNG).
The professor points out that the Western Hemisphere is not dependent on oil from the Middle East, but is equally affected by price increases and the threat of inflation.
“Of course, oil is not the only problem, Europe is to a lesser extent dependent on LNG from the Middle East (dominated by Qatar), but there is a significant dependence on other strategic materials (petrochemical products, fertilizer, aluminum). The interruption of the supply of these products can therefore lead to the endangerment of value chains in a number of industries in Europe,” warns Domazet.
He points out that the future development of the situation in the Middle East is not clear even after the address of US President Donald Trump to the nation on April 1. With the announcement of an imminent US withdrawal, he announces heavy strikes on Iran. The Strait of Hormuz leaves the Allies to enable the normalization of traffic, and Great Britain is already undertaking a rather vague diplomatic initiative to achieve this.
“In the end, even with the withdrawal of the USA, the situation remains unclear, and the multitude of local conflicts looks like a realistic scenario of an uncertain calm,” Domazet assesses.
Be that as it may, he adds, BiH is now faced with the threat of shortages of oil, gas and strategic materials, and prices are rising.
“This is a crisis as a phenomenon that threatens an economic system that has been functioning until now. It causes difficult supply and availability of energy and raises prices. Price shocks raise production costs and the cost of living. Together they lead to inflation, which will mean an external shock for most countries and raise the question of the resilience of national economies,” said Professor Domazet.
He further explains that since the 2020 crisis, resilience has been a frequently used word and refers to the ability of an economy to absorb the first shock of an external shock, then to adapt to new conditions and finally to recover from the shock. So far, both the world and Europe are in, he said, the first phase of absorbing external shocks. Some countries are facing oil shortages, almost all with high “surge” prices. Adaptation includes a wide range of measures, from price restrictions to limiting quantities for purchases at pumps to tax reductions (Australia, some EU countries) and the preparation of special funds to help the vulnerable population.
“The International Energy Agency (IEA) warns the governments of the world not to resort to general (horizontal) subsidies in response to the crisis, advising them to direct support to those who need it most. Thus, New Zealand announced weekly cash payments to almost 150 thousand families with a threatened budget as part of an aid package to compensate for higher fuel prices. The minister of the Labor government in Great Britain is considering proposals to increase funds in local funds to help the vulnerable, excluding universal support such as was offered earlier in similar situations. Countries that are entering the second phase of responding to an external shock are resorting to measures that mean postponing the decarbonization program (Italy, Germany). For now, there are no announcements of EU measures, and they would certainly be significant for BiH, at least when it comes to the funds from which the necessary interventions for the absorption of price shocks related to energy and food can be carried out, he emphasized.
The professor notes that we have one specific support in strengthening resilience. Referring to the victory of the BiH football team over Italy and going to the World Cup, Domazet says that, although there will be a short-term impact on productivity during the duration of the championship, “there are immeasurable effects on strengthening social cohesion in the country and drawing on the economic and psychological strength of people for resistance to the coming economic hardships”.
When it comes to facing Bosnia and Herzegovina with a new wave of inflation, Domazet states that the latest energy price shock finds BiH. economy in a state of secular stagnation, i.e. long-term low growth between 2 and 3 percent per year. GDP growth in 2026 is estimated at 2.7 percent according to the IMF, after an estimated growth of 2.1 percent in 2025. Core inflation was around 4.2 percent, while core inflation was around 3.9 percent. The fiscal deficit for 2025 is about 2.6 percent of GDP, and for 2026 it is estimated at 2.9 percent of GDP.
In order to assess the effects of the new crisis on the BiH economy, Domazet believes, it is important to determine the time horizon in which disruptions in the oil and gas market will last. If this situation were to extend until the middle of the year, and then recover slightly by the end of the year, the biggest disturbance will be in the increase in the value of energy imports in the amount of about 1.8 to 2 billion KM. This will have the effect of lowering the growth rate to around 1.5 percent, and inflation by an additional around 3 percent. Bearing in mind the multiplicative effects, it can be calculated that the growth of inflation would gain momentum and amount to around 6 percent.
“Does BiH have the resilience to absorb these shocks? It is a matter of very limited capabilities and therefore the absorption of energy price shocks will be painful. The export of goods and services from BiH is significant for economic growth as it accounts for about 50 percent of GDP. Incorporating import inflation into export products will be difficult to achieve, mostly due to the structure of exports, which is technologically low-complexity and exposed to fierce price competition. In this sense, a price shock through imports cannot be avoided, and an increase in export prices is questionable. which means that the ratio of export to import prices (Terms of Trade) will deteriorate. The situation is similar, with the assessment that the increase in the income of the population is as uncertain as the possibility of an increase in export prices. Those who have a fixed income or no income at all, i.e. the population who are still below the level of income that covers the consumer basket, will worsen the fiscal deficit and the ability of governments to act in an expansionist manner policy, which is otherwise advisable in this kind of situation situations. In other words, even without the latest crisis, the fiscal policy for this year was extremely expansionist, supported by high borrowing,” Domazet assessed.
As he points out, from these circumstances it is difficult to draw a conclusion about any active policies to combat inflation, especially not those related to the reduction of excise taxes or tolls and VAT on fuel.
“We need to get rid of the illusion that it is possible to prevent the rise in the prices of fuel, food, transport and other goods and services through these reliefs. A small country cannot, in this type of economic structure with low energy efficiency, an import-dependent energy sector and a low level of meeting the needs for domestically produced food, lead an active policy of combating inflation. In addition to the abolition or reduction of excise taxes, tolls and VAT, it would be fiscally risky and expensive, it would also be socially extremely unfair, because the majority of the benefits would be those in society the classes that drive cars the most, and at the same time they are predominantly the most economically capable social classes that can withstand price shocks”, is Professor Domazet’s view.
In addition, he believes, it seems irresponsible to carry out fiscal relief in a situation where it is uncertain what scale the crisis will have in the future, that is, what kind of intervention will be required from the government in achieving social tolerability of inflation.
“In other words, it is quite clear that a painful period of absorption of the impact of fuel prices on the economy and the population is ahead, while it should be taken into account that it will be necessary to direct a certain amount of public money to help the economically weakest parts of the population who do not have any resistance to face the price increase, initially of fuel and later of food and other vital necessities (previously supported through a package of measures to reduce energy poverty). As inflation grows, an increasing part of the population will demand subsidies and the increasing amounts to be requested for those purposes,” he adds.
However, the professor says that one should not lose hope that economic growth is possible even in conditions of inflation.
“On the contrary, inflation stimulates economic growth, but it is necessary to ensure skill in the implementation of policies and measures that will still keep it within certain limits. On the other hand, the resilience of the business sector is a big unknown, and this is important for maintaining employment and for maintaining growth. In the Covid-19 crisis, the business sector showed high resilience, BiH was among the countries with the lowest rates of decline, and then among the highest rates of recovery. The sector of public enterprises can play a particularly stabilizing role, and there is room for strengthening government policies resistance”, he said.
He pointed out that the period of absorption of price shocks and adjustments is not possible to estimate more fully, because these are external shocks.
“You don’t dig a well when you feel thirsty, and it’s also not appropriate to remind about the lost chances in the energy transition of BiH. It is certain that the priority goal in the short term is to ensure an orderly supply of fuel and gas and to strengthen the production of electricity. The government of the FBiH and the oil business sector showed a high operational ability in dealing with the first price shock and thanks to this, despite the low level of reserves, there was no shortage of oil derivatives in In addition to social support measures for the most vulnerable parts of the population, all the necessary support should be provided for the maximum possible dynamism of the economy, the realization of priority investments and the control of energy prices,” says Professor Domazet, Fena reports.
