Representatives of the EU member states, the Western Balkans and Turkey, the European Commission and the European Central Bank, as well as representatives of the central banks of the Western Balkans and Turkey met for their annual economic policy dialogue. The dialogue aims at preparing the Western Balkans and Turkey for their future participation in the European Semester.
The participants of the dialogue approved conclusions covering Albania, Bosnia and Herzegovina, Kosovo*, Montenegro, North Macedonia, Serbia And Turkey.
*This designation is without prejudice to positions on status, and is in line with UNSCR 1244/1999 and the ICJ Opinion on the Kosovo declaration of independence.
The dialogue will continue in 2023, including on the implementation of these conclusions.
The COVID-19 pandemic and the economic impact of Russia’s war of aggression against Ukraine have confronted EU Member States, the Western Balkans and Turkey with major public health, economic and social challenges. Participants agreed that the economic policy dialogue is of high importance in view of a common interest to define appropriate policy responses to the recent adverse shocks. Participants emphasised the strong common position by the EU and the Western Balkans and Turkey in deploring in the strongest terms the military aggression by the Russian Federation against Ukraine.
In view of high uncertainty about potential further pandemic effects and the impacts of Russia’s war against Ukraine, participants considered it appropriate to stand ready to mitigate, if needed, adverse impacts on growth, employment and social cohesion by adequately targeted, temporary and transparent fiscal and financial measures until a self-sustained recovery is firmly established.
Bosnia and Herzegovina submitted its Economic Reform Programme 2022-2024 with a very significant delay on 24 March 2022, which creates an impediment to perform a substantial dialogue and to properly assess policy plans to address the significant economic challenges the country is facing. The country’s repeated non-compliance with agreed procedures also raises doubts about the commitment of stakeholders responsible for delays in the adoption and submission of the ERP. The policy guidance set out in the conclusions of the Economic and Financial Dialogue of 12 July 2021 has been implemented to a limited extent.
The economy experienced a strong recovery from the COVID-19 crisis, with year-on-year output growth of 7.1% in 2021. Exports and private consumption were the main growth drivers, while investment growth remained muted. The current account deficit narrowed to 2.1% of GDP in 2021, largely thanks to an improvement in the trade balance of goods and services, while net FDI inflows increased and almost covered the current account deficit. Backed by strengthening growth and governmental support measures, employment recovered from losses during the COVID-19 crisis, while the unemployment rate dropped to 16.1% in the fourth quarter of 2021. However, the overall labour force continued to decline, partly as a result of a persistent brain drain. International institutions expect moderate GDP growth in the post-crisis years, of slightly above 3%, partly due to the lack of structural reforms negatively impacting foreign and domestic investment. The Economic Reform Programme (ERP) expects economic growth to accelerate to about 31⁄2% a year on average, supported by an acceleration of structural reforms. Key domestic downside risks are a continuation of the reform stalemate, which would impede investments, while on the external side the COVID-19 pandemic and the fallout from Russia’s invasion of Ukraine could seriously undermine growth prospects, including through accelerating food and energy price pressures and potentially tightening financial conditions.
Concerning public finances, general government data for 2021 has not yet been published. However, entity-level public accounts indicate a marked recovery in revenues and a reduction in social transfers and subsidies compared to the high base in 2020. The public debt ratio rose only moderately, from 32% of GDP at the beginning of the COVID-19 crisis to some 35% in the second half of 2020, and has largely remained at this level since then. However, public finances are weakened by contingent liabilities, in particular in the area of public enterprises. There is a significant degree of non-alignment with EU public sector accounting standards, which strongly impedes the assessment of the country’s actual fiscal position. As a result, both the deficit and debt ratio could be significantly higher than reported. In view of high uncertainty about potential further pandemic effects and the impact of Russia’s war against Ukraine, standing ready to provide targeted and temporary support to vulnerable households and firms if needed would be appropriate.
Monetary policy has continued to be anchored around the currency board arrangement, which enjoys a high level of credibility with the general public and is a key ingredient of monetary stability. Headline inflation has been accelerating in line with global trends, reaching 8.1% y-o-y in February, while there are no published data on core inflation, a key measure for analysing price pressures. The domestic political tensions led to a delay in appointing a new board of the central bank. The financial system appears solid and is closely monitored by the two banking supervision agencies and the central bank. Overall, the banking sector features robust capital buffers and liquidity remains high. Bank profitability started to improve after the fall during the pandemic. The quality of loan portfolios remained solid, despite expiring policy support. While a few support measures are still in place, NPLs are not expected to rise significantly, given the modest take-up of government moratoria and the low share of portfolio still affected by debt relief measures. A comprehensive assessment of risks is hampered by data availability, in particular as regards real estate statistics. There was limited progress on removing remaining obstacles to an effective and swift NPL resolution, such as further enhancing the possibility to negotiate out-of-court restructurings or securitise and sell NPLs. The Deposit Insurance Agency should further increase the coverage of insured deposits and increase its funding.
The country’s determination and ability to tackle the identified structural challenges in a forthright manner, supported by the effective use and implementation of IPA and the Economic and Investment Plan for the Western Balkans, will determine the potential for fostering post-pandemic recovery and economic resilience as well as boosting inclusive growth, competitiveness and accelerating the transition to a greener and more digital economy. The recovery would also benefit from further efforts to tackle corruption, improve the rule of law, including by a swift introduction of a system of verification of asset declarations of judges and prosecutors and members of the High Judicial and Prosecutorial Council in line with European standards, enhance transparency and strengthen institutions and social dialogue.
As regards specific structural reforms, the main challenges in terms of boosting competitiveness and long-term and inclusive growth remain (i) improving the business environment through closer cooperation and coordination at all levels of government, (ii) making the public sector more efficient, in particular improving the performance, transparency and accountability of state-owned enterprises (SOE), and (iii) increasing employment, particularly of young people, women and people in vulnerable situations. Efforts towards coherent countrywide solutions to support the business environment and to strengthen the common internal market within the country have stagnated due to the ongoing political crisis. Policy coordination at all levels is required to implement much needed structural reforms to enhance economic performance. The COVID-19 pandemic and the economic impact of Russia’s war against Ukraine has further increased the importance and urgency of overcoming the political crisis and of addressing structural weaknesses. Some progress was made towards online business registration in both entities, also in view of reducing the significant informal economy. However, further progress is needed, and obtaining licences and permits remains a complex and fragmented process with insufficient countrywide harmonisation. Bosnia and Herzegovina has unfortunately made little progress towards a harmonised, countrywide electronic identity and signature system. More needs to be done to foster digital solutions contributing to a sustainable economy, better public services to businesses and citizens and implementation of customs legislation providing for simplified customs procedures in line with the Digital Agenda for the Western Balkans and the Economic and Investment Plan. Further efforts are also required for enhancing public finance management, as well as significantly stepping up SOE sector reform, starting with enhancing oversight and transparency. A large share of the population is inactive and access to the labour market is especially challenging for young people, women and people in vulnerable situations. However, as labour market policy falls within the competence of the entities, it is necessary for the administration to come up with a solid and coherent countrywide diagnostic and to agree and implement the necessary strategies and reforms. High youth unemployment, even among university graduates, and the high share of young people not in employment, education or training point to a lack of alignment between education and training and labour market needs. The education system needs reforming to address skills mismatch, increase provision of early childhood education, and improve access for vulnerable groups to the education system. Bosnia and Herzegovina has committed to establish a Youth Guarantee scheme, but more active steps are needed to develop an implementation plan. Consultations with the social partners on the design and implementation of economic, employment and social policies are uneven across entities.
Participants welcome that Bosnia and Herzegovina made important progress by the submission of an excessive deficit procedure notification and progress on national accounts by improving the length of time series. Progress in other statistical areas such as labour market statistics and harmonised indices of consumer prices was, however, limited. While efforts should be pursued to improve the coverage and timeliness of all statistics, priority should be given to national accounts, excessive deficit procedure and government finance statistics. Bosnia and Herzegovina has yet to provide monthly data on balance of payments, and needs to align with the new requirements in short-term business statistics, as well as progress in the field of monetary and financial statistics.