TABLE OF CONTENTS

1........... Introduction. 4

1.1........ Preface. 4

1.2........ Context 4

1.3........ Relations between the EU and Bosnia and Herzegovina. 6

2........... Political criteria. 8

2.1........ Democracy and the rule of law.. 8

2.2........ Human rights and the protection of minorities. 15

2.3........ Regional issues and international obligations. 21

3........... Economic criteria. 23

3.1........ The existence of a functioning market economy. 23

3.2........ The capacity to cope with competitive pressure and market forces within the Union. 28

4........... European standards. 30

4.1........ Internal market 30

4.1.1..... Free movement of goods. 30

4.1.2..... Movement of persons, services and right of establishment 32

4.1.3..... Free movement of capital 35

4.1.4..... Customs and taxation. 35

4.1.5..... Competition. 36

4.1.6..... Public procurement 37

4.1.7..... Intellectual property law.. 37

4.1.8..... Employment and social policies, public health policy. 38

4.1.9..... Education and research. 40

4.1.10... WTO issues. 42

4.2........ Sectoral policies. 42

4.2.1..... Industry and SMEs. 42

4.2.2..... Agriculture and fisheries. 43

4.2.3..... Environment and climate change. 44

4.2.4..... Transport policy. 46

4.2.5..... Energy. 47

4.2.6..... Information society and media. 48

4.2.7..... Financial control 49

4.2.8..... Statistics. 50

4.3........ Justice, freedom and security. 51

4.3.1..... Visa, border management, asylum and migration. 51

4.3.2..... Money-laundering. 53

4.3.3..... Drugs. 54

4.3.4..... Police. 54

4.3.5..... Fighting organised crime and terrorism.. 55

4.3.6..... Protection of personal data. 57

1. Introduction 1.1. Preface

Since March 2002, the Commission has reported regularly to the Council and Parliament on the progress made by the countries of the Western Balkans region. This progress report broadly follows the same structure as in previous years. The report:

– briefly describes relations between Bosnia and Herzegovina and the Union;

– analyses the situation in Bosnia and Herzegovina in terms of the political criteria for membership;

– analyses the situation in Bosnia and Herzegovina on the basis of the economic criteria for membership;

– reviews Bosnia and Herzegovina’s capacity to implement European standards, i.e. to gradually approximate its legislation and policies with the acquis, in line with the Interim Agreement/Stabilisation and Association Agreement and the European Partnership priorities.

This report covers the period from October 2011 to September 2012. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a general rule, legislation or measures which are being prepared or awaiting parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and enables an objective assessment.

The report is based on information gathered and analysed by the Commission. Many sources have been used, including contributions from the government of Bosnia and Herzegovina, the EU Member States, European Parliament reports[1] and information from various international and non-governmental organisations.

The Commission has drawn detailed conclusions regarding Bosnia and Herzegovina in its separate communication on enlargement[2], based on the technical analysis contained in this report.

1.2. Context

Bosnia and Herzegovina is a potential candidate for EU membership. The Stabilisation and Association Agreement (SAA) has been ratified but has not yet entered into force.

The process of consultation between the representatives of the main political parties, which started in December, initially produced a shift of focus towards EU integration. A new political momentum emerged, without external interference, reinforcing domestic ownership of the political process. This momentum was not maintained and political disagreements in the governing coalition emerged well ahead of the municipal elections in October. The political consensus that had emerged was lost and progress on the EU agenda stalled. The tensions linked to the reshuffling of the governments at State level and in the Federation have not been conducive to progress on the implementation of the Sejdić-Finci ruling. A shared vision by the political representatives on the overall direction and future of the country and its institutional set up remains to be agreed as a matter of priority. In order for such a vision to materialise, the political representatives of Bosnia and Herzegovina need to anchor the EU agenda at the heart of the political process and translate political agreements into concrete action.

An international presence under UN auspices— the Office of the High Representative (OHR) — has been in place in Bosnia and Herzegovina since 1995. The Peace Implementation Council Steering Board (PIC SB) has set objectives and conditions to be met for the closure of the Office of the High Representative[3].

Since the decoupling of the European Union Special Representative’s (EUSR) mandate from the OHR, the EU has reinforced its role in the country in line with the relevant Council Conclusions[4]. The enhanced presence of the combined EUSR and the EU Delegation in Bosnia and Herzegovina has become instrumental in communicating EU priorities to citizens and in implementing the objectives of the EU agenda in key areas.

The High Level Dialogue on the Accession Process (HLDAP) was launched in Brussels in June with representatives of the authorities and political parties of Bosnia and Herzegovina. The purpose of the HLDAP is to start a process of explaining what EU accession requires both in political and technical terms. The need for an effective coordination mechanism between various levels of government for the transposition, implementation and enforcement of EU laws remains to be addressed as a matter of priority, so that the country can speak with one voice on EU matters and make an effective use of the EU’s pre-accession assistance. The country’s political representatives agreed to joint conclusions and a roadmap on EU integration to implement the conditionalities for the entry into force of the SAA and for a credible membership application, as defined by the relevant Council Conclusions. The first timeline of the June HLDAP Roadmap was not met: an agreed proposal, based on political consensus, amending the Constitution to ensure compliance with the European Convention on Human Rights (Sejdic-Finci case) remains to be submitted to the Parliamentary Assembly. (See Chapter 2.1 – Constitution)

The country’s Constitution was drawn up as part of the internationally agreed 1995 Dayton/Paris Peace Agreement. It establishes a complex political structure that provides for governments at State, Entity and District levels. The State level comprises a tripartite rotating Presidency, a Council of Ministers (executive branch) and a bicameral Parliamentary Assembly consisting of a House of Representatives (lower chamber) and a House of Peoples (upper chamber). The judicial branch established by Dayton consists of a State-level Constitutional Court, with the State Court of Bosnia and Herzegovina and the High Judicial and Prosecutorial Council being established later.

After 16 months of political stalemate following the October 2010 general elections, the process of establishing executive and legislative authorities was completed with the formation of a State-level Government in February. The establishment of the new Council of Ministers and the adoption in February of two key EU-related laws, the Law on State Aid and the Law on the Household and Population Census, initially brought new dynamism. In May, following the adoption of the 2012 State budget, disagreements between parties in the governing coalition emerged. This started a process of reshuffling at the State, Federation and cantonal levels. Due to political disputes and ongoing legal challenges, the outcome of this reshuffle remains uncertain.

1.3. Relations between the EU and Bosnia and Herzegovina

Bosnia and Herzegovina participates in the Stabilisation and Association Process. The Interim Agreement (IA) has been in force since July 2008. Implementation of the IA remained uneven. The country is still in breach of the IA due to non-compliance with the European Convention on Human Rights (ECHR) and with its obligations on State aid. The State Aid Law has been adopted but the establishment of the State Aid Council, compliance with EU principles on public undertakings and the comprehensive inventory of aid schemes are still pending. Some recent measures introduced at Entity-level to protect the local market, remain to be addressed. The Stabilisation and Association Agreement (SAA) has been ratified by all EU Member States, but has not yet entered into force.

Within the framework of the Stabilisation and Association Process, Bosnia and Herzegovina continued to engage constructively with the EU on a Structured Dialogue on Justice, with plenary meetings held in November and July. The process was established with the aim of further consolidating the judicial system to ensure it is independent, effective, impartial and accountable, in line with the relevant EU standards and acquis. The HLDAP launched in June is another forum for engagement on requirements for the EU integration process.

An inter-parliamentary meeting between Members of the European Parliament and Members of the Bosnia and Herzegovina Parliamentary Assembly took place in December 2011. In May, the Western Balkans Working Group of the Committee of Regions held a meeting in Sarajevo.

The overall pace of reforms remained uneven. The EU provides guidance to the authorities on reform priorities. Progress on these priorities is encouraged and monitored by the bodies established by the IA. Six Interim Sub-Committee meetings and one Interim Committee meeting were held. Furthermore, multilateral economic dialogue between the Commission, EU Member States and potential candidate countries in the context of the pre-accession fiscal surveillance took place at an expert meeting in May 2012.

The single EU representation — EUSR/EU Delegation — continued to facilitate political dialogue and to apply a broad and balanced set of instruments to maximise the incentives provided by the EU. The EU has continued to deploy considerable resources in Bosnia and Herzegovina under the Common Foreign and Security Policy and the Common Security and Defence Policy.

The mandate of the EU Police Mission (EUPM) focused on the fight against organised crime and corruption. The EUPM monitored and assessed implementation of police reform and accountability, and provided training over the last 10 years. The mission officially closed down on 30 June 2012. The EU remains committed to strengthening the rule of law in Bosnia and Herzegovina through other instruments, including the reinforced EUSR Office and the Instrument for Pre-accession Assistance (IPA).

The EUFOR Althea military operation contributed to maintaining a safe and secure environment in the country. In 2011, the UN Security Council extended EUFOR’s mandate until November 2012. The Operation was reconfigured and reduced to 600 troops in theatre as of 1 September, focusing on capacity-building and training, while also retaining the means to contribute to the Bosnia and Herzegovina authorities’ deterrence capacity. A reserve force outside the country will conduct regular in-country reconnaissance and training.

Visa liberalisation for citizens of Bosnia and Herzegovina travelling to the Schengen area has been in force since December 2010. The Commission set up a post-visa-liberalisation monitoring mechanism to assess whether the implementation of reforms introduced by the country was consistent with the visa roadmap and sustainable. This was complemented by an alert mechanism to prevent abuses. The Commission presented its second monitoring report to the European Parliament and the Council in December 2011 and adopted the third in August 2012. A readmission agreement between the European Union and Bosnia and Herzegovina has been in force since January 2008.

As regards the common foreign and security policy (CFSP), during the reporting period Bosnia and Herzegovina aligned itself, when invited, with 39 out of 70[5] relevant EU declarations and Council decisions (56% alignment).

Bosnia and Herzegovina receives financial assistance under the Instrument for Pre-accession Assistance (IPA). The EU Delegation to Bosnia and Herzegovina is responsible for the implementation of financial assistance in the country. The country’s authorities have made little progress on setting up the necessary structure for decentralised management of EU funds (DIS). The legal bases for the operating structure, the appointment of the necessary programme officers and the adoption of the roadmap for a decentralised implementation system have still not been agreed.

The implementation of the 2007-2009 national IPA programmes is ongoing. The Multiannual Indicative Planning Document (MIPD) for the period 2011-2013 has identified the following three priorities for IPA support: supporting the strengthening of the rule of law, improving the capacity and efficiency of the public administration and supporting social and economic development.

The lack of agreement between stakeholders in the country regarding the projects to be financed under the IPA 2012 national programme[6] delayed the completion of the programming exercise in 2012. The difficulties encountered during the programming exercise demonstrate the need to urgently address the issue of coordination on EU matters at every level. Strengthening coordination mechanisms on the programming of future EU financial assistance and on other EU matters, is an issue to be addressed as a matter of urgency.

Implementation of the cross-border cooperation programmes 2007-2009 between Bosnia and Herzegovina and its neighbours Croatia, Montenegro and Serbia is ongoing.

Development of civil society in Bosnia and Herzegovina continues to be supported under the Civil Society Facility, with the emphasis on building the capacity of government institutions and civil society to engage in dialogue, reinforcing local democracy, and tackling environmental and climate change issues.

As regards participation in EU Programmes, Bosnia and Herzegovina participates as a full member in the Seventh Framework Programme for research, technological development and demonstration activities (FP7) and in the COST and the EUREKA networks. The country became an associate member of the Culture 2007-2013 programme and joined the Europe for Citizens Programme. A single contact point is instrumental for enhanced participation by citizens across the country in the Culture and Europe for Citizens programmes. Coordination mechanisms in view of establishing a single contact point endorsed by all stakeholders remain to be agreed.

2. Political criteria

This section examines the progress made by Bosnia and Herzegovina towards meeting the Copenhagen political criteria, which require stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities. It also monitors regional cooperation, good neighbourly relations with enlargement countries and Member States and compliance with international obligations, such as cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY).

2.1. Democracy and the rule of law

Constitution

The Dayton/Paris Peace Agreement (DPA) put an end to the 1992-1995 war and brought peace to Bosnia and Herzegovina. Bosnia and Herzegovina’s Constitution, which is Annex 4 to the Agreement, established a complex institutional architecture, which remains inefficient and is subject to different interpretations. The complicated decision-making process has continued to have a negative impact on structural reforms and the country’s capacity to make progress towards the EU. As a matter of priority, the need for an effective coordination mechanism between various levels of government for the transposition, implementation and enforcement of EU laws remains to be addressed, to enable the country to speak with one voice on EU matters.

Some political representatives are questioning Bosnia and Herzegovina’s capacity to function as a country and are calling for an Entity-level EU agenda separate from the Bosnia and Herzegovina state.

The Federation’s Constitution entails costly and complex governance structures with certain overlapping competences between the Federation, the Cantons and the municipalities.

The Constitution of Bosnia and Herzegovina prevents citizens who do not declare themselves as one of the three constituent peoples (Bosniak, Serb and Croat) from standing as candidates for the Presidency and the House of Peoples of the Parliamentary Assembly. An Interim Joint Parliamentary Committee was set up in October 2011 and tasked with drafting amendments to the Constitution of Bosnia and Herzegovina and the Election Law to comply with the European Convention on Human Rights (ECHR) and the judgment of the European Court of Human Rights (ECtHR) regarding discrimination against citizens on the grounds of ethnicity. An internal Roadmap on EU integration aimed at meeting the conditions for the entry into force of the Stabilisation and Association Agreement (SAA) and for a credible membership application was agreed at the HLDAP. The first timeline (31 August) set in the Roadmap for submission of a joint proposal to comply with the European Court of Human Rights (ECtHR) decision in the Sejdic-Finci case, was not met. (See Chapter 1.2 – Context)

On the basis of the DPA, the international community continued to maintain a presence in Bosnia and Herzegovina. The High Representative used the Bonn Powers[7] to issue three Decisions. The first one lifted an earlier ban by the High Representative on an official removed in July 2005, which was preventing him from standing as candidate for elections and holding certain executive offices. The other two decisions repealed the High Representative’s Decision of 10 July 2007 to seize the travel documents of individuals suspected of involvement in war crimes in and around Srebrenica.

With regard to meeting the outstanding objectives and conditions for the closure of the Office of the High Representative (OHR), a high-level political agreement was reached on the principles for distributing defence and state property in March. In September, the Constitutional Court adopted a decision regulating property distribution, but it remains to be implemented. Following the endorsement by the Peace Implementation Council Steering Board in May 2012, of the decision by the High Representative to close the office in Brcko by 31 August, the Brcko Supervisor suspended his mandate. The EU opened an office in Brcko to facilitate Brcko’s adoption of reforms needed for advancement on the EU path. The EU also opened an office in Mostar and reinforced the office in Banja Luka.

Overall, there has been little progress in compliance with the ECtHR judgement in the Sejdic-Finci case and in establishing functional and sustainable institutions. Establishing an effective coordination mechanism between various levels of government for the transposition, implementation and enforcement of EU laws so that the country can speak with one voice on EU matters, remains an issue to be addressed

Parliament

The Parliamentary Assembly of Bosnia and Herzegovina has made some progress in adopting EU-related legislation. The Parliamentary Assembly adopted 2 key EU related laws[8] and 20 sets of amendments to existing legislation and rejected 21 laws. Delays in forming the State-level Council of Ministers and the ongoing reshuffle, following disagreements within the governing coalition, have hampered the ability of the Parliamentary Assembly to legislate efficiently. Cooperation between the Council of Ministers and the Parliamentary Assembly remains insufficient.

The rules of procedure of the House of Peoples and the House of Representatives have not yet been amended to introduce a fast-track mechanism for EU legislation.

There has been some progress in the functioning of the Parliamentary Assembly. A reorganisation of the Secretariat of the Parliamentary Assembly has been adopted, setting up two new sectors in the Secretariat[9]. A general lack of political will continued to hamper the efficiency of the Parliamentary Assembly’s work. Temporary financing of State-level institutions held back the strengthening of the Parliamentary Assembly’s administrative capacity.

At Entity level, the overall functioning of the Parliamentary Assemblies has continued to be satisfactory, with the EU Integration Committees focusing more on IA/SAA-related obligations. However, the political reshuffle in the Federation hampered the functioning of its Parliamentary Assembly.

In the Federation, the Parliamentary Assembly organised a thematic session on EU integration. The functioning of the Parliamentary Assembly has been hampered by a lack of systematic coordination with other legislators in the Entity and by efforts to establish a new parliamentary majority. The work of the parliamentary committees was affected by frequent lack of quorum and inadequate premises.

In Republika Srpska, the EU Integration Committee of the National Assembly cooperated with the government in assessing the level of compliance of proposed legislation. The appointment procedure of the Bosniak Vice-Chairman of the Council of Peoples was completed.

The two Entity Parliaments have continued to cooperate closely with their respective governments. Three joint meetings of the State-level and Entity Parliamentary Committees for European Integration took place.

Overall, the Parliamentary Assembly has made some progress in adopting EU-related legislation. Delays in setting up the State-level Council of Ministers and disagreements amongst the parties of the governing coalition hampered legislative activities. Cooperation between the Entity Parliaments, the State-level Parliamentary Assembly and the State-level Council of Ministers regarding EU-related matters needs to improve in order to ensure coordinated and harmonised alignment with EU legislation throughout the territory of Bosnia and Herzegovina.

Government

The new State-level Government took office in February. The tripartite Presidency of Bosnia and Herzegovina continued to meet regularly. The Presidency adopted its first eight-month work plan, which calls for the setting of strategic foreign policy priorities, one of which is to submit an application for EU membership. The formulation of foreign policy remained subject to different positions within the Presidency of Bosnia and Herzegovina on some key issues.

The leaders of six political parties[10] reached a political agreement in December on the formation of the State-level Council of Ministers, on the 2011 State-level budget and on laws related to EU integration. The delay in adopting the 2011 State budget delayed the disbursal of funds to cover outstanding obligations under foreign loans. The State budget for 2012 was adopted only in May and was followed by the break-up of the governing coalition. The temporary financing which remained in place until then did not enable adequate financing of the State-level institutions required for the EU accession process. This particularly affected the State Aid Council, the Agency for the Prevention and Fight Against Corruption, and the preparation of the household and population census. (See Chapter 4.2.8 – Statistics)

The Chairman of the Council of Ministers of Bosnia and Herzegovina was appointed in January and the appointments of the other members of the Council of Ministers were concluded in February. The Council of Ministers’ Chairman has attached high priority to activities linked to EU integration. The Council of Ministers adopted the Action Plan for addressing the EU integration roadmap, the Action Plan for overcoming the implications of Croatia’s EU membership, the 2012 Economic and Fiscal Programmes and the 2012-14 and 2013-2015 Global Fiscal Framework.

The State-level, Federation and Cantonal authorities began to be reshuffled in June due to diverging party interests within the governing coalition. The outcome of this process remains uncertain due to political disputes and on-going legal challenges.

As regards policy planning, the development strategy and the social inclusion strategy are in place in the Federation and in Brcko but need to be adopted at State level and in Republika Srpska. Overall, policy planning in Bosnia and Herzegovina remains hampered by the lack of up-to-date census data. Preparations for the census are hampered by organisational and financial constraints. The implementation of the Law on the Household and Population Census remains a priority.

Regarding coordination on EU matters, the Directorate for European Integration (DEI) strengthened its cooperation with State and Entity-level parliaments and governments. The Directorate’s coordinating role on EU matters among all levels of authorities requires further reinforcement. The Directorate’s capacity to assess compliance with the IA/SAA remains weak, notably because its mandate is limited to State level and does not include amendments introduced during the legislative process.

The Government of Republika Srpska often provided analysis and opinions on the level of approximation of draft legislation with the acquis. Its administrative capacity to monitor EU-related legislation remained satisfactory. There was little coordination and cooperation with the State-level Council of Ministers or the Federation Government on harmonising legislation with EU standards.

In the Federation, the formation of Cantonal governments was completed and the 2012 budget adopted in 9 out of the 10 Cantons. The Federation government strengthened coordination of EU-related matters across ministries by setting up a single coordinator’s office and European integration units in all ministries. EU coordination with Cantonal governments was established through a unit for European integration in the Government’s General Secretariat.

The Brcko District has developed a procedure for harmonising legislation with the acquis. The Office for European Integration remains understaffed due to a halt on public service recruitment.

Entity legislation is largely in line with the European Charter for Local Self-Government. The Cantons have not harmonised their legislation with the Federation Law on Principles on Local Self-Government. The 2010 Constitutional Court decision on the Mostar statute remains to be implemented. As a result, local elections will not be held in October in Mostar City.

Overall, little progress was made by Bosnia and Herzegovina in improving the functionality and efficiency of all levels of government, which continued to be affected by fragmented, uncoordinated policy-making. The delays in the formation of the Council of Ministers and political disagreements between parties in the governing coalition delayed progress on the EU agenda. The development strategy and the social inclusion strategy need to be adopted at State level and in Republika Srpska.

Public administration

Little progress has been made in the area of public administration reform.

The Public Administration Reform Coordinator’s Office (PARCO) revised the 2006 Action Plan under the Public Administration Reform (PAR) Strategy, providing a framework for reforms over the next five years. The public administration reform process lacks the necessary political support. There has been little progress in strengthening administrative capacity for legal harmonisation and implementation of the acquis. The issue of financial sustainability of public administration at all levels needs to be addressed.

With regard to appointments to State-level bodies, the directors of the Indirect Taxation Authority (ITA), the State Investigation and Protection Agency (SIPA) and the State Veterinary Office have been appointed. The members of the Central Election Commission were re-appointed. Appointments to some key agencies are still awaited, in particular the Communications Regulatory Agency, the State Aid Council, and the electricity transmission company TRANSCO. These agencies still lack the necessary resources and political support to become fully operational in line with EU requirements.

The State-level Law on Civil Servants has been amended to allow the Civil Service Agency to handle civil servants’ personal data and thus make use of the human resources management information system. There has been no improvement in recruitment procedures that would ensure the application of objective and merit-based criteria for appointments.

Civil service systems have been amended in different directions across the country. In the Federation, amendments to the Law on the Civil Service were adopted, aligning it with the FBiH Constitutional Court decisions and ensuring compliance with the Bologna Process on recognition of diplomas. Republika Srpska amended its Law on Civil Servants, clarifying conditions for appointments and setting retirement age for civil servants at 65. The Brcko District has prepared a set of amendments to the Law on Civil Servants. There has been very little coordination between the State level, the Entities and the Brcko District when preparing amendments to their legislation to ensure a more harmonised approach.

Following a decision by the Federation Constitutional Court, a framework law harmonising the Cantonal legislation was drafted. The adoption in two Cantons of separate laws on the civil service, which are not fully in line with the framework law, contributed to the fragmentation of the civil service system and the establishment of separate civil service agencies at Cantonal level.

The Ombudsman of Bosnia and Herzegovina has issued reports to the UN and the Parliamentary Assembly of Bosnia and Herzegovina on the status of human rights in the country and on the implementation of the anti-discrimination law. Several of the recommendations, e.g. regarding the judiciary, access to information and discrimination, have not been implemented due to weak enforcement capacity and a lack of political support. The reduction in funding had a negative impact on the functioning of the Ombudsman.

Overall, little progress was made in the area of public administration reform. The Action Plan under the PAR Strategy was revised, providing a framework for reforms over the next five years. The coordinating structures at Entity and Cantonal level remain insufficient. The cut in budgetary resources hampered the functioning of the Ombudsman. Fragmentation and politicisation continued to hamper the establishment of a professional, accountable, transparent and efficient civil service based on merit and competence.

Judicial system

Limited progress has been achieved in the area of judicial system reform. The Structured Dialogue on Justice has had a positive effect on the implementation of the Justice Sector Reform Strategy (JSRS) 2009-2013. Increased political support resulted in better coordinated planning among stakeholders and the allocation of more adequate human and financial resources.

The High Judicial and Prosecutorial Council of BiH (HJPC) completed a review of its own Law. Draft amendments provide for a restructuring of the HJPC into sub-councils of judges and prosecutors, new procedures for recruitment and judicial review of appointments, in accordance with European standards of independence and professionalism.

A new Law on the Courts of Republika Srpska entered into force in May, not yet harmonised with the Law on the HJPC. Solutions regarding prerogatives of the Court of BiH and the coordination between this and other instances throughout the country, including the harmonisation of court practice in criminal matters, continued to be explored in line with recommendations of the Structured Dialogue. A debate on the matter was coordinated by the HJPC.

Some shortcomings persist in relation to independence and impartiality. Political attacks on the State-level judiciary continued and the independence of the judicial system is not yet ensured. Draft laws repealing the Law on the Courts of BiH and the Law on the Prosecutor’s Office of BiH were submitted to the Bosnia and Herzegovina Parliamentary Assembly in February, contrary to the spirit of cooperation agreed in the Structured Dialogue on Justice. By May, the adoption procedure for both laws had been halted.

Independence is also affected by budgetary fragmentation. The issue of streamlining budgetary competences is being discussed by the Federation, the judicial professional community and the relevant authorities. In 2011, the total financial resources allocated to the judiciary in Bosnia and Herzegovina was € 100 million, which represented approximately 0,79% of the country’s GDP. The management of cases, particularly their transfer for issues of capacity and lack of human resources in the Federation, has sometimes threatened the principle of the ‘natural judge’.

As regards accountability, the Office of the Disciplinary Council has performed well reducing the number of unresolved cases and increasing the number of disciplinary actions. The disciplinary case involving the former Chief Prosecutor of BiH was concluded in May 2012 with a plea agreement. Vacant positions of the three judges within the FBiH Constitutional Court have still not been filled after more than three years.

As regards efficiency, there has been some progress in addressing the backlog of cases. The HJPC adopted a new ‘Rulebook on time measurements for the work of judges, judicial associates and other employees in BiH Courts’ which is a significant improvement on the previous one. The results of implementing the backlog reduction plan for older cases have been positive. The majority of unresolved cases (53% of the total) still pertain to unpaid utility bills. The HJPC has taken measures to reduce the number of new cases.

Further progress has been made in developing the information and communication system across the judiciary with the expansion of the case management system (CMS) in courts and prosecutors’ offices throughout the country. CMS is increasingly used for statistical analysis and strategic policy by court presidents. Parties to proceedings can access case information online, which facilitates efficiency and transparency and prevents the loss of documentation. The Care of Court Users Strategy is in use throughout the country. All courts and prosecutors’ offices have their own website. The Judicial Documentation Centre ensures online availability of a considerably high number of court decisions.

Whilst a comprehensive assessment of the infrastructure investment needs of courts and prosecutors’ offices across the country has been completed, the physical conditions of several courts at State and Entity levels have improved. Due to budgetary constraints, many of the positions identified in the HJPC decisions on regular and reserve judges have not been filled.

In consultation with the HJPC, the Tuzla Canton is planning to reopen two municipal courts in December, in line with the FBiH Law on the Courts. The new Law on the Courts adopted by Republika Srpska in December 2011 included the opening of eight new basic courts, pending the approval of the necessary financial means.

Moderate, but steady progress has been made in processing the large backlog of unresolved war crimes cases. Implementation of the National War Crimes Strategy accelerated with a significant increase of the transfers of war crimes cases from the State level to the Entities and the Brcko District, with 127 cases transferred in the first six months of 2012. Good progress was made, with enhanced cooperation between the courts and prosecutor’s office of Bosnia and Herzegovina, on the final settlement of jurisdiction based on objective criteria.

The processing of war crimes cases by the Court of Bosnia and Herzegovina has continued to be satisfactory. Following the increasing number of war crimes cases transferred from State level to other instances, additional human resources and facilities are needed in the Cantonal and District courts. The lack of sufficient investigative capacity, as well as human and financial resources at all levels, remain issues to be urgently addressed.

Diverging practices regarding the applicability of different criminal codes between courts at different levels continued to be an issue. With two cases, now merged, pending before the European Court of Human Rights, the application of different criminal codes continued to result in uneven sentencing. Increased coordination between the competent instances throughout the judiciary of Bosnia and Herzegovina is necessary.

The level of prosecution of war crimes cases involving sexual violence remains low, particularly in the Entities and the Brcko District. Efforts to investigate and prosecute these crimes and to protect victims and witnesses need to be stepped up. A comprehensive approach to improving the status of victims of rape and sexual violence remains outstanding. The adoption of a State-level programme for improving the status of victims of war crimes involving sexual violence is pending.

Witness protection and support services are unevenly put in place, though there is some improvement connected to the process of referral of war crimes cases from the State to other levels. The current legal framework remains inadequate and fragmented and varies greatly between District and Cantonal courts and prosecutors’ offices.

Overall, there was limited progress in the area of judicial system reform. A constructive attitude to the need for a comprehensive reform of the judiciary emerged in the Structured Dialogue on Justice, based on domestic ownership, including in the implementation of the Justice Sector Reform Strategy and of the National War Crimes Strategy. Further measures were introduced to reduce the backlog of cases, particularly of utility bill cases, but the overall backlog remains very high. Lack of investigative capacities and appropriate resources is affecting the reduction of the war crime cases backlog. The need to harmonise the application of criminal laws throughout the country and the fragmentation of organisation and budgets remain issues to be addressed. Political attacks continued to affect the independence of the judiciary.

Anti-corruption policy

Bosnia and Herzegovina has made limited progress in addressing corruption, which continues to remain widespread in the public sector and the public-private interface. The legal framework is largely in place but sanctions need to be harmonised across the country. Corruption continues to affect all spheres of life, economic development and the rule of law.

The implementation of the anticorruption strategy and action plan 2009-2014 has been delayed. The rulebook regulating the organisation and structure of the Agency for the prevention of corruption and coordination of the fight against corruption was adopted in July. However, the agency is not yet fully operational. Anti-corruption strategies are in place in the two Entities and the Brcko District. Three bodies were set up with mandates to prevent corruption and to develop and implement anti-corruption strategies.

The Law on Conflicts of Interest is in place. Amendments governing public officials’ participation in company boards were introduced. The harmonisation of conflict of interest legislation across the country is pending. In addition, judicial review of decisions on conflicts of interest is not equally guaranteed at all levels of authority.

Control of political party financing remains weak. Registration of political parties has not been harmonised across the country. Infringements of party financing rules are not effectively prosecuted. The Central Election Commission continues to report asset declarations, but the origin of assets cannot be checked as long as the anti-corruption agency is not operational. The competent prosecutor rarely acts upon false declarations, and the misuse of residence registration for the purpose of drafting electoral lists continues to be a serious problem.

Insufficient implementation of legislation and coordination problems between Entities continue to cause concern. Measures are still required to implement the outstanding recommendations made in the third evaluation report of the Group of States against Corruption (GRECO).

The level of effectiveness of investigation, prosecution and conviction of corruption cases remained low. Both criminal law sanctions and prosecution capacity are weak and ineffective. Proactive investigation into abuse of authority in the public sector is at an early stage. Very few high-level corruption cases involving public officials are pursued. Further specialisation of prosecutors and improved coordination with the police is needed. The level of judicial follow-up to corruption cases remained low. Only a limited number of high-level cases led to prosecution. Nepotism continues to hamper professional performance throughout the public sector at all levels of authority. Access to information remains uneven. Whistleblower protection is not in place.

Corruption in public procurement is widespread and a matter of concern. Areas of special risk of corruption are the issuing of permits and public services such as public health and education.

Overall, Bosnia and Herzegovina is still at an early stage in the fight against corruption. Corruption remains prevalent in many areas and is a serious problem. A legal framework is in place but the political will to tackle the issue and to improve institutional capacity remains weak. The implementation of the strategy and action plan needs to be stepped up. Sustained efforts are needed to establish a convincing track record of proactive investigation, prosecution and conviction of high level corruption cases.

2.2. Human rights and the protection of minorities

Observance of international human rights law

As regards international human rights instruments, Bosnia and Herzegovina has ratified all major UN and international human rights conventions. The principles of the European Convention on Human Rights (ECHR) are entrenched in the Constitution of Bosnia and Herzegovina, which also guarantees the supremacy of this Convention over national legislation.

In a number of cases the decisions of the Constitutional Court of Bosnia and Herzegovina have not been enforced, which led to cases being lodged before the European Court of Human Rights (ECtHR). During the reporting period the ECtHR delivered judgments on 39 applications finding that Bosnia and Herzegovina had violated rights guaranteed by the European Convention of Human Rights. A total of 423 new applications have been submitted to the ECtHR since September 2011, bringing the total of pending applications to 1433.

Little progress has been made in the promotion and enforcement of human rights. The enforcement of the outstanding decisions of the Human Rights Chamber (HRCh) and the Human Rights Commission (HRCom), which is now the competence of the Constitutional Court of Bosnia and Herzegovina, remains to be addressed.[11]

Overall, the legal and institutional framework for the observance of human rights is in place and the main elements of international human rights laws have been incorporated into the legal system. The implementation of human rights standards remains uneven and delays in reporting obligations have continued. It remains essential to implement the ECtHR judgement in the Sejdic-Finci case in order to comply with the ECHR (See Chapter 2.1 – Democracy and the Rule of Law – Constitution).

Civil and political rights

The death penalty is prohibited by the Constitution of Bosnia and Herzegovina and by the Constitution of the Federation. Although there is a moratorium, the death penalty provision in the Constitution of Republika Srpska remains in place. A package of constitutional changes, including this amendment, was adopted by the Republika Srpska National Assembly in 2009 but adoption was subsequently blocked during the legislative procedure. The relevant Article 11(2) of the Constitution of Republika Srpska has to be repealed in line with key principles of the EU human rights policy.

With regard to the prevention of torture and ill-treatment and the fight against impunity, the legal framework is in place and is generally respected. Measures against ill-treatment by police officers, need to be addressed[12]. The appointment of Bosnia and Herzegovina’s representative to the CPT is still pending.

Some progress was made regarding the prison system. The Republika Srpska amended the Law on the Execution of Criminal Sanctions to harmonise it with the State-level law. A new draft Law on the Execution of Criminal Sanctions remains to be adopted by the Federation.

Prison conditions have improved. The female ward of Istocno prison was expanded. Some progress has been made to reduce inter-prisoner violence, particularly in Zenica prison. Some cases of ill-treatment have been reported. Procedures for investigating cases of alleged ill-treatment have improved, particularly in Zenica and Doboj prisons. Some progress was made regarding the use of alternative sanctions. Overcrowding in the country’s prisons is an issue to be further addressed. The construction of a high-security State prison has not yet started. This continues to affect the country’s capacity to deal with high-security prisoners.

Limited progress was made in improving the conditions of vulnerable prisoners. While a new psychiatric facility has been built in Sokolac, it is not yet operational. Prison inspections need to be reinforced. Bosnia and Herzegovina still lacks an effective coordination mechanism among the 15 prison administrations in the country.

Some progress was made in the area of access to justice in civil and administrative trials. A web-based free legal aid providers’ network including governmental and non-governmental organisations was set up. Additional free legal aid agencies have been established. The system of free legal aid in Bosnia and Herzegovina remains fragmented and unregulated in some Cantons of the Federation. The adoption of a State-level Law on Free Legal Aid is still pending. Free legal aid in civil cases continues to be mainly provided by privately funded NGOs. Free legal aid for administrative cases remains problematic.

The Constitution of Bosnia and Herzegovina provides for freedom of expression. Intimidation and threats against journalists and editors have continued. Political pressure on the media and the polarisation of the media along political and ethnic lines remain of concern. Attempts to undermine the independence of the Communication Regulatory Agency (CRA) have increased. The current Law on Communication provides legal safeguards to ensure independence of the CRA and of its management. However, an amendment to the Law on Communications tasking an ad hoc Committee of the Parliament to appoint the CRA Council was submitted in June. The appointments of the CRA Director-General and of the Council Members are still pending. In July, the Federation Parliament attempted to appoint a provisional steering board for the FBiH public service broadcaster. This is not in line with the appointment procedure set out in the Law on RTV FBiH and raises concerns about political interference with the independence of the media.

The Press Council has continued to work closely with judicial institutions and journalists’ associations to improve the quality of reporting and raise awareness among citizens of their legal rights. It has contributed to enforcing professional standards and to improving the quality of the media by involving citizens in providing feedback on media practices. Few efforts have been made to improve the implementation of the Freedom of Information Act. Compliance with recommendations by the Ombudsman of Bosnia and Herzegovina remained limited.

Freedom of assembly and freedom of association are broadly respected. Cases of intimidation and violence against human rights advocates continued.

An institutional mechanism for cooperation with civil society has been established in the two Entities but is not fully operational yet. It is in place in the Brcko District but has yet to be established at State level. A National Civil Society Development Strategy is under preparation. A process for consulting civil society during the legislative drafting process is in place but has not been fully enforced. The lack of transparency in the allocation of funds for civil society organisations remains to be addressed, particularly in the areas of human rights and the environment.

The constitutional and legal guarantees of freedom of thought, conscience and religion are generally respected. Cases of discrimination on religious grounds continued. Incidents aimed at religious symbols, clerics, believers and property continued and in particular affected those who constitute a religious minority in certain communities. An international Meeting for Peace involving the main inter-religious leaders took place in Sarajevo in September.

Overall, civil and political rights in Bosnia and Herzegovina are broadly respected. Further progress has been made in improving prison conditions but comprehensive reform of the prison system remains outstanding. Some progress took place as regards access to justice but the legal and institutional framework in the country remains fragmented. Intimidation and threats against journalists and editors have continued. Political pressure on the media and the polarisation of the media along political and ethnic lines remain of concern. Attempts to undermine the independence of the CRA and appointments affecting public service broadcasters are of concern. The development of civil society requires further support. Transparency in the allocation of funds for civil society organisations needs to be enhanced.

Economic and social rights

Legal provisions guarantee women’s rights and gender equality are in place. The implementation of the Action Plan on UN Security Council Resolution 1325 regarding Women, Peace and Security continued but awareness and financial resources for its implementation need to be strengthened. Political participation by women remains low. The 40% quota for women within the public administration, as stipulated by the Gender Equality Law, has not been reached. Women continue to face unequal access to the labour market and the level of female participation in the workforce remains low.

Limited progress was made to harmonise Entity and Cantonal laws with the State-level Law on Gender Equality. Institutional mechanisms for ensuring gender equality continue to face resource constrains. The availability of statistical data on gender equality remains insufficient. Discrimination in employment with regard to maternity rights remains widespread.

Some progress was made in combating violence against women. In Republika Srpska, the implementation of the Strategy Against Domestic Violence continued and police training was launched. In the Federation the Law on Domestic Violence remains to be amended to enhance victim protection. The implementation of the State-level strategy remains weak. Financing of shelters for victims is not sufficient.

Some progress has been made in the area of children’s rights. An Early Childhood Development Policy was adopted at State level and is in place in both Entities. Some progress was made in strengthening systems of social inclusion and protection. Child allowances vary between Entities and Cantons and are not based on needs. A State-level Action Plan for Children for 2010-2014 is in place but its implementation remained uneven. A universal birth registration system has not yet been established. The percentage of children immunised against preventable diseases remains low.

Some progress was made in promoting alternative care but institutionalisation remains the primary response. A revised State-level Strategy to Combat Violence against Children remains to be adopted. Domestic violence against children, trafficking and organised child begging remain issues to be addressed.

Limited progress was made in the area of juvenile justice, particularly in terms of social protection. Implementation of the relevant national strategy, which is to be revised, remained uneven. The enforcement of the Juvenile Justice Law in Republika Srpska has progressed slowly. In the Federation, the adoption of the Juvenile Justice Law is pending. A Juvenile Justice Law was adopted by the Brcko District in November. The Brcko District and Republika Srpska laws are not fully harmonised.

Limited progress was made in the field of education. The Conference of Ministers of Education in Bosnia and Herzegovina, which was established to improve coordination among the 14 ministers of education, resumed its activities in March but without adopting conclusions. An efficient coordination mechanism on education between Cantonal governments in the Federation remains to be established. Little progress was achieved in making schools more inclusive. The number of Cantons applying the Index for Inclusion has further increased. Only limited efforts have been made to reduce the number of divided schools (‘2 schools under 1 roof’). In some Cantons of the Federation, children continue to be separated along ethnic lines within schools, while mono-ethnic schools continue to be present throughout the country. De facto ethnic-based separation and discrimination in some public schools in the Federation remain a serious concern. Following a complaint by civil society, a judgement by the Mostar Court against school segregation and the issue of ‘2 schools under 1 roof’ was raised and this ruling was appealed.[13]

Little progress was made in improving conditions for the socially vulnerable and/or people with disabilities. The Council of Disabled Persons began its work and set up mechanisms for implementing the Convention on the Rights of Persons with Disabilities. In Republika Srpska, a Law on Social Protection entered into force. In the Federation, a Law on Payment of outstanding benefits was adopted. However, the implementation of the entities strategies remained weak. Entitlement to rights and benefits for disabled persons is not based on needs but on status. As a result, certain categories of persons with disabilities do not receive adequate financial benefits. No significant steps have been taken to harmonise the social protection systems of the Entities and Cantons.

With regard to anti-discrimination policies, an anti-discrimination law is in place but it does not include age and disability as categories for discrimination and allows for a broad range of exceptions. Only limited steps have been taken to ensure its effective implementation. This is partly due to the lack of resources of the Ombudsman of Bosnia and Herzegovina, which has a central role in implementing the law. Public awareness of the legal remedies provided by the law remains weak and the number of discrimination cases brought by citizens remains low. There is still no State-level database of discrimination cases.

Discrimination against lesbian, gay, bisexual and transgender (LGBT) persons remains widespread. LGBT activists continue to be subjected to threats and harassment. Hate speech and intolerance towards LGBT persons by media and politicians remain an issue of concern.

With regard to labour and trade unions rights, little progress was made. The fragmentation of the legal framework for social benefits and pension rights remains to be addressed. No significant steps have been taken to establish a State-level Economic and Social Council. There are no criteria or legal framework for the recognition of social partners at State level.

As regards property rights, the vast majority of cases of property repossession requests have been resolved. The work of the Commission for Real Property Claims of Displaced Persons and Refugees (CRPC) on the remaining requests has not resumed since its mandate expired in 2009. As a result there are still over 110 unresolved cases and approximately 300 cases pending before the Court of Bosnia and Herzegovina in which the CRPC is a respondent party in administrative dispute procedures. There is still no reliable database on outstanding claims and property registers.

Overall, economic and social rights are broadly respected. Some progress has been made on combating violence against women and in the area of early childhood development albeit unevenly. Little progress was achieved on making schools more inclusive. Ethnically based and divided education systems remain an obstacle to achieving inclusiveness in education and to sustainable returns. The implementation of the anti-discrimination law remains to be stepped up. Discrimination against LGBT persons remains widespread. The existing discrimination in the social protection system for persons with disabilities is an issue to be addressed. Labour rights and social dialogue require further strengthening.

Respect for and protection of minorities, cultural rights

The legal framework for the protection of minorities[14] is largely in place, but implementation remains uneven. The National Minority Councils’ influence over policy-making remained limited, partly due to the lack of political and financial support. The appointment of the members of the State-level National Minority Council is still pending. Some progress was achieved in the Federation with the adoption of the Law on National Minorities and appointment of Minority Council members in one Canton with large minority populations. The cultural rights of national minorities, including participation in public life, need to be strengthened.

As the Constitution has not been amended to comply with the ECtHR ruling, minorities continue to be excluded from representation in the State-level House of Peoples and the tripartite Presidency (See Chapter 2.1 – Constitution). No progress has been made in implementing the European Charter for Regional or Minority Languages. Representation of minorities in the media needs to be strengthened. Bosnia and Herzegovina has not yet appointed representatives to the Council of Europe Advisory Committee under the Framework Convention for Protection of National Minorities.

Limited progress was made as regards the Roma minority, who still live in very vulnerable conditions. Legislation on registry books harmonising civil registration in the whole country was adopted by both Entities. Bosnia and Herzegovina is participating in the Roma Decade of Inclusion. Four action plans under the Roma Strategy are in place. While some progress was made with regard to housing, only limited steps have been taken on health, employment and education. The process of revision of the actions plans on housing, employment and health to better reflect the needs of the Roma population, in line with the recommendations of the Roma Inclusion Seminar of July 2011, has been launched. Implementation, in particular proper budget allocation, remains to be thoroughly assessed.

The financial resources for the implementation of the action plans need to be increased and coordination among authorities at all levels strengthened. Participation by Roma representatives in the decision-making process remains very low. Very little progress has been made on improving the situation of Roma women and children who continue to suffer from discrimination and domestic violence. A large number of Roma children are not registered at birth and therefore cannot attend school and have no health insurance. Organised child begging remains an issue of concern. A number of Roma remain at risk of statelessness.

As regards refugees and internally displaced persons, at the end of 2011 there were approximately 113,000 internally displaced persons in Bosnia and Herzegovina, including approximately 8,000 residing in collective centres, and 7,000 refugees. Some steps were taken to implement the revised Strategy for the Implementation of Annex 7 to the Dayton/Paris Peace Agreement, primarily as regards housing and the future closure of a number of collective centres. Little effort has been made to address access to other rights such as social protection, education and employment. Discrimination with regard to access to employment, healthcare and pension rights continued. Transparent procedures for allocating funds to support return based on need have yet to be established. The country still lacks a coordinated policy mechanism to address legislative gaps hampering sustainable return and local integration.

With regard to landmines from the 1992-1995 conflict, some progress was made in the implementation of the Mine Action Strategy but some areas have still not been cleared. As of September 2012, seven persons were killed in landmine accidents. The Law on anti-mines actions has yet to be adopted. In order to meet the goal of clearing the country of mines by 2019, fundraising responsibilities, administrative and management capacity and coordination of demining measures remain issues to be addressed.

Overall, respect for and protection of minorities are broadly ensured. Some progress, albeit uneven, was made on implementing the Roma action plans. The Roma continue to be the most vulnerable minority in Bosnia and Herzegovina. As regards refugees and internally displaced persons, some progress was made on implementing the revised strategy for the implementation of Annex 7 to the Dayton/Paris Peace Agreement, primarily as regards housing and collective centres. Difficulties with access to pension rights, health care and social protection for returnees and internally displaced persons remain a significant obstacle for sustainable return and local integration.

2.3. Regional issues and international obligations

The Parliamentary Assembly of the Council of Europe (CoE) monitors the progress made by Bosnia and Herzegovina in fulfilling the obligations and commitments relating to its membership of the CoE. Bosnia and Herzegovina has not yet appointed the chair of its delegation to the CoE Parliamentary Assembly. Bosnia and Herzegovina has yet to appoint its representatives to the CoE advisory bodies. Implementation of the requirements stemming from the CoE Conventions remains insufficient.

Implementation of the Dayton/Paris Peace Agreement continued. In the framework of the Special Parallel Relations Agreement between the Republika Srpska and Serbia, a joint session took place in Belgrade in December, leading to the signing of four agreements on internal affairs, IT, the environment and agriculture.

Cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY) is generally satisfactory in most areas. The re-arrest in January 2012 of Radovan Stankovic, who was tried and sentenced in Bosnia and Herzegovina under ICTY Rule 11bis[15], represents a significant step forward. Courts and Prosecutors offices across the country have continued to process war crimes cases, but are still behind the schedule set out in the war crimes strategy. Good progress has been achieved with the increased number of war crimes cases transferred from the State level to the Entities and the Brcko District. The provision of adequate resources is needed to secure timely and effective completion of the cases.

Cooperation between the Courts and the Prosecutors’ offices from Bosnia and Herzegovina, Croatia and Serbia is ongoing. Extradition agreements with Montenegro, the former Yugoslav Republic of Macedonia, Croatia and Serbia have been initialled in July. The scope of these bilateral agreements does not include war crimes cases. The Protocol on sharing information and evidence in war crimes cases between the Prosecutors’ offices of Bosnia and Herzegovina and Serbia has yet to be signed. This would represent a significant step forward in terms of regional cooperation and the fight against impunity.

Bosnia and Herzegovina still maintains a 2003 bilateral immunity agreement with the United States granting exemptions from the jurisdiction of the International Criminal Court. This does not comply with the EU Common Positions on the integrity of the Rome Statute or the related EU guiding principles on bilateral immunity agreements. Bosnia and Herzegovina needs to align with the EU position.

Significant progress has been made as regards the Sarajevo Declaration Process, which brings together Bosnia and Herzegovina, Croatia, Montenegro and Serbia and aims at finding sustainable solutions for the refugees who were displaced as a result of the armed conflicts in ex-Yugoslavia during the 1990s. The four countries signed a ministerial declaration in November 2011 in Belgrade, renewing their political commitment to bringing this chapter to a close. They agreed on a Regional Housing Programme assisting some 27,000 households or 74,000 individuals. The programme was presented for international donor support at the Sarajevo April 2012 donors’ conference, which resulted in some € 265 million being pledged. Programme implementation is at an early stage. Good cooperation needs to continue between the four countries on all outstanding issues in the process, including data exchange and statistics, civil documentation and pension rights.

The unresolved fate of missing persons from the conflicts in the 90s remains a humanitarian concern in the Western Balkans. As of August 2012, there were still approximately 13,250 people missing from the conflicts in the region. Of these, some 9,550 were related to the conflict in Bosnia and Herzegovina, approximately 1,900 to the conflict in Croatia and over 1,800 to the conflict in Kosovo*. In the past year approximately 1,100 remains were identified at regional level. The State Prosecutor’s Office took over responsibility from local prosecutors for conducting exhumations of mass graves in January 2011, but it has not been provided with the necessary resources to perform this additional task. Full implementation of the Law on Missing Persons needs to be ensured, especially as regards families’ access to economic and social benefits. The verification of the data in the database of the Central Records on Missing Persons is ongoing. The State-level Missing Persons Institute (MPI) was provided with adequate funds but political pressure and attempts to undermine the MPI’s work have continued. The existence of unidentified grave sites continues to pose a challenge for the identification of missing persons in the country. Renewed political support for the issue of missing persons is needed.

Regional cooperation and good neighbourly relations form an essential part of Bosnia and Herzegovina’s process of moving towards the European Union. Bosnia and Herzegovina has continued its active involvement in regional initiatives, including the South East European Cooperation Process (SEECP), the Regional Cooperation Council (RCC), the Central European Free Trade Agreement (CEFTA), the Energy Community Treaty and the European Common Aviation Area Agreement. Bosnia and Herzegovina took over the Presidency of the Migration, Asylum and Refugees Regional Initiative (MARRI) in April 2012. Bosnia and Herzegovina continues to actively support the Igman initiative on reconciliation, which brings together NGOs from Bosnia and Herzegovina, Croatia, Serbia and Montenegro, and the RECOM initiative.

Bilateral relations with other enlargement countries remained stable. In February, the second trilateral meeting between the Presidents of Bosnia and Herzegovina, Croatia and Serbia took place in Jahorina and focused on cooperation in the fight against organised crime and cross-border cooperation projects in infrastructure, the environment and sport events.

Relations with Albania remained good. Bosnia and Herzegovina ratified the Memorandum on settling Albania’s debt related to goods exchange with the former Yugoslavia.

Relations with Croatia have intensified. Bosnia and Herzegovina has ratified a dual citizenship agreement with Croatia in October. A number of meetings have taken place to address the implications for bilateral relations of Croatia’s accession to the EU. In this context, discussions have continued with regard to the outstanding issues on border management, with limited progress. The agreement on free transit through the port of Ploce, in Croatia, and the Neum corridor, in Bosnia and Herzegovina, as well as the local border traffic agreement should be aligned with the EU acquis. Limited progress was achieved in resolving outstanding issues, including property issues and border demarcation.

Relations with the former Yugoslav Republic of Macedonia continued to be good. Several agreements on judicial cooperation and on cooperation in the areas of health and of education were signed.

Relations with Montenegro remained good. Agreements were signed and/or ratified in various fields of cooperation, including international transport mutual protection of classified information, legal aid and enforcement of court decisions. A dual citizenship agreement was concluded in June. Border demarcation remains pending.

Relations with Serbia remained good. Agreements on veterinary cooperation, police cooperation, tourism, employment, security and communications were ratified. The Minister of Foreign Affairs of Bosnia and Herzegovina visited Belgrade in March 2012. The Speaker of the Serbian Parliament paid a visit to Bosnia and Herzegovina in December and President Tadic visited Republika Srpska on several occasions. In September, Prime Minister Dacic paid an official visit to Bosnia and Herzegovina. Border demarcation remains an open issue.

There are no official relations with Kosovo, as Bosnia and Herzegovina has not recognised Kosovo as an independent state. Steps have been taken by the Council of Ministers to set up procedures for citizens of Kosovo to obtain visas comparable to those issued by EU Member States which do not recognise Kosovo. The Ministry of Foreign Affairs of Bosnia and Herzegovina is now authorised to issue visas to the citizens from Kosovo and assess individual visa requests.

Relations with Turkey intensified. A readmission agreement was signed. The Protocol on the origin of goods of the bilateral Free Trade Agreement entered into force. A number of Presidential and ministerial-level visits have taken place. The Collegium of Bosnia and Herzegovina’s House of Representatives has met with the President of the Turkish parliament and agreed to intensify economic cooperation and ratify agreements on the removal of double taxation for Turkish investment in the country.

Overall, Bosnia and Herzegovina’s cooperation with the ICTY has continued to be largely satisfactory and a number of important steps have been taken to process war crimes. Significant progress was made with regard to the Sarajevo Process on refugees and internally displaced persons. Efforts to find the missing persons from the 1992-1995 conflict continued. The country has continued to participate actively in regional cooperation and to maintain good neighbourly relations. The remaining border and property issues need to be addressed and legal obstacles to extradition with neighbouring countries removed.

3. Economic criteria

In examining the economic developments in Bosnia and Herzegovina, the Commission’s approach was guided by the conclusions of the European Council in Copenhagen in June 1993, which stated that membership of the Union requires the existence of a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union.

3.1. The existence of a functioning market economy

Economic policy essentials

The long-lasting political stalemate following the October 2010 general election had a negative impact on the country’s economic and fiscal policy. The delays in adoption of the 2011 and 2012 State-level budgets and of the Global Frameworks for Fiscal Policies for the periods 2012-2014 and 2013-2015 increased the uncertainty over the short- and medium-term fiscal path. Despite the steps taken by the new central government as of February 2012, the consensus between the authorities at different government levels on the economic policy essentials has weakened. The Stand-By Arrangement (SBA) negotiated with the International Monetary Fund (IMF) in 2009 has, de facto, been non-functional since October 2010, when the last programme review was completed. The country was able to withdraw only about 1/3 of the funds before the SBA expiration. In September 2012, the IMF Board approved a new two-year SBA aimed at supporting the country’s efforts to counter the effects of the worsening external environment and tackle external and domestic vulnerabilities. The budgetary support planned by the World Bank has been delayed mainly due to the lack of tangible outcomes of legislative reforms in the area of cash transfers. In March 2012 the authorities submitted – after a significant delay – their sixth Economic and Fiscal Programme, covering the period 2012-2014. In the absence of a medium-term fiscal framework at country level, the programme remains fragmented and does not present a coherent formulation of economic and fiscal policies. Overall, the consensus on economic and fiscal policy essentials has weakened and hampered progress in reforms at country level.

Macroeconomic stability

In 2011, the economic recovery continued with real GDP growth accelerating slightly to 1.3%, as compared to 0.7% a year earlier. Domestic demand revived, supported by a relatively stable inflow of remittances and slightly accelerating credit growth. Both private consumption and private-sector investment registered positive growth rates after the decline in 2009-2010. After being the main contributor to the expansion of the economy in 2010, external demand weakened in the second half of 2011 and export growth moderated significantly. At the same time, import growth accelerated – spurred by the recovering domestic demand –, thus resulting in a negative contribution of net exports to growth. Industrial production rose by 5.6% in 2011, up from 1.6% in the previous year, driven by export-oriented industries. However, the indicators available for 2012 suggest that the economic recovery stalled, negatively affected by the worsened external environment. Industrial production fell by 6.5% year on year in the first seven months of the year, while exports of goods dropped by 4.3%. Per capita income, measured in purchasing power standards (PPS), decreased to 29% of the EU average in 2011 from 30% in 2010. Overall, economic recovery gained some momentum in 2011 but this positive trend was reversed in early 2012.

After a crisis-led adjustment in 2009-2010, the current account deficit soared from 5.7% of GDP in 2010 to 8.8% in 2011. This deterioration was mainly driven by the expansion of the trade deficit, surging by 12.3% year on year to 27.9% of GDP. Export growth almost halved to 15.6%, while the recovery of domestic demand triggered an acceleration of the growth of imports to 14%. Surpluses in the services and income accounts decreased by 4.1% and 22%, respectively, thus also contributing to the higher current account deficit. At the same time, the net current transfers – covering almost half of the trade deficit – grew only slightly by 2.5%, thus only partially offsetting the negative developments in the goods, services and income balances. In the first quarter of 2012, the current account deficit widened further by 64.6% year on year due to faster expansion of the trade gap. Exports fell by 9.6% year on year, negatively affected by the economic downturn in the EU, while the imports still grew, even though at a significantly reduced rate. The current account deficit was financed mainly by external borrowing and, to a lesser extent, by foreign direct investment (FDI). The stock of official foreign exchange reserves decreased by 0.5% in 2011 and fell further by 4.1% year on year in the first seven months of 2012, though still covering around five months of imports. Bosnia and Herzegovinaʼs external public debt increased by 5.9% to 26.1% of GDP in 2011, while external private debt reached 33.1% of GDP. In the first half of 2012, the external public debt rose further by 5.1% year on year. Public international creditors account for 90% of the countryʼs external public debt. The largest creditor remains the World Bank group. A large part of the debt is contracted on concessional terms with the average interest rate of all debt being at only 1.6%. Overall, external imbalances have widened again after the sharp crisis-led contraction in 2009-2010, thus indicating that the adjustment was just temporary and not structural.

Labour market conditions remained weak. The average unemployment rate reached 27.6% in 2011, as compared with 27.2% a year ago. Employment fell by 1.6% in 2011 and went further down in the first six months of 2012. The highest decline in employment was registered in construction, agriculture and manufacturing, whereas some employment growth was witnessed in real estate, mining and quarrying and financial intermediation. The number of employees in the public administration continued to rise throughout 2011 and the first half of 2012, thus further increasing the size of the already large public sector. The Labour Force Survey (LFS), conducted annually in April/May following the International Labour Organisation (ILO) methodology, showed an increase in the unemployment rate to 28% in 2012 from 27.6% a year earlier. Unemployment was particularly high among the young population (63.1% for people aged between 15 and 24, according to the LFS). The officially registered unemployment rate climbed up to 43.8% in June 2012, compared with 43.1% a year before. The very high unemployment rate and the sizeable difference between the registered and survey-based labour figures point to the existence of a fairly large informal labour market and significant structural rigidities, such as the high rates of social security contributions and poorly targeted social transfers. Average monthly nominal gross wages increased by 4.4% in 2011, but wage growth has been moderating since the beginning of 2012. Adjusted for inflation, the average gross wage rose marginally, by 0.7%, in 2011 before the trend turned negative, at -1.6%, in June 2012. Overall, labour market conditions have remained weak. Unemployment is very high and structural rigidities continue to hamper job creation.

Average annual inflation reached 3.7% in 2011, compared to 2.1% in 2010. The highest increases were registered in transport and food prices, reflecting international price developments. The rising overall price level in 2011 was also driven by an increase in excise duties on tobacco and alcohol. Inflation moderated in the first seven months of 2012, dropping to 1.4% in July, pushing the 12-month moving average inflation rate down to 2.8%. The growth of food and transport prices slowed down, which were the main factors behind the lower inflation. The monetary policy of the Central Bank continued to be conducted under a currency board arrangement, with the euro as the anchor currency, enjoying a high level of confidence and credibility. Monetary policy settings have remained unchanged since February 2011, when the minimum reserve requirement for short-term deposits was lowered from 14% to 10%. The growth of money supply moderated in the course of 2012 and monetary aggregate M2 increased by 4.3% year on year in July, as compared with a 5.8% rise in 2011. Overall, the currency board has continued to function well and monetary and financial stability have been preserved while inflation has moderated.

The consolidated budget deficit reached 1.3% of GDP in 2011, compared with 2.5% in 2010. Fiscal consolidation was achieved partly as a result of rising revenue, fuelled by the economic recovery and increases in tax, contribution and excise rates. The share of general government in GDP remained high, with government expenditure at approximately 45.8% of GDP and revenue at about 44.6% in 2011. Tax revenue increased by 7% due to higher economic activity, an increase in the personal income tax as of February 2011 in Republika Srpska and a rise in excise duties on tobacco which counteracted the continuous reduction of duties and tariffs as set out in the Interim Agreement on trade with the EU. Collected contributions – accounting for over 1/3 of the overall revenues – rose by 5.9%, partly because of the increase in contribution rates in Republika Srpska as of 2011. On the expenditure side, purchases of goods and services plummeted by 19.5%, thus creating some fiscal space. However, expenditures on social benefits and wages increased by 14.9% and 5.3%, respectively, thus further increasing their already high shares in overall expenditure. The higher wage bill was partly caused by the income tax changes in Republika Srpska. Capital expenses surged by 21.6%, although from a very low base following the contractions in recent years. In the first half of 2012, the repercussions of the worsened external environment were increasingly felt in public finances. Tax revenue fell by 0.8% year on year reflecting the downturn in economic activity, while most expenditure categories increased in year on year comparison. Overall, some fiscal consolidation has taken place, but the quality of public finances remains low.

The transparency, sustainability and reliability of public finances in Bosnia and Herzegovina were seriously undermined by the long delay in adoption of the State-level budget and of the Global Frameworks for Fiscal Policies for 2012-2014 and 2013-2015. The State-level budget for 2011 was not adopted until February 2012, while the one for 2012 was approved in May. Temporary financing arrangements were in place throughout 2011 and the first two quarters of 2012. The Parliament of Republika Srpska endorsed the Entity’s 2012 budget in December 2011, planning a 4% rise in total spending (compared with the revised 2011 budget), while the 2012 budget of the Federation – projecting 11% growth in nominal expenditure – was approved in January 2012. Both Entity budgets were adopted in the absence of a medium-term fiscal framework, in violation of the country’s legal framework[16] for the second consecutive year. In March 2012, the Fiscal Council agreed an expenditure ceiling and a fixed revenue allocation from the Single Account for the State-level institutions for the period 2012-2014, thus creating the necessary preconditions for drafting a comprehensive medium-term fiscal strategy. In June 2012, the authorities agreed on the fiscal framework for the period 2013-2015, thus allowing for the timely launch of the 2013 budget preparation process. In September 2012, both Entity budgets have been revised slightly in accordance with the newly reached agreement with the IMF. Total planned spending of Republika Srpska has been corrected downwards by 0.8%, while the Federation has reduced its budget expenditure envelope by about 2%, when adjusted for financing items and reclassification effects. The authorities have reached an agreement on the settlement of disputed indirect tax revenue amounts through end-2011. However, an agreement on a permanent formula for allocation of indirect tax revenue to the State, the Entities and the Brčko District is still pending. In Republika Srpska, the new Pension Law, adopted in December 2011, should improve the long-term sustainability of the Entityʼs public finances, while in the Federation a special working group has been established to tackle this issue and to define a reform strategy by the end of 2012. Overall, the sustainability and credibility of fiscal policy in Bosnia and Herzegovina suffered from the delayed adoption of the State-level budget and of a medium-term fiscal strategy.

General government debt, both domestic and foreign, increased by 6% and stood at 39.5% of GDP at the end of 2011. External debt accounted for 26.1% of GDP and domestic debt for 13.3%. Domestic public debt is managed and served by the Entities. Both Republika Srpska and the Federation started issuing short-term treasury bills and long-term government bonds in 2011 to finance their cash-based budget deficits. For the time being, the offers have met relatively high demand and secured relatively favourable conditions. Overall, even though the debt-to-GDP ratio is still relatively moderate, its upward trend needs to be monitored carefully.

The quality of the policy mix has worsened, thus challenging macroeconomic stability. The currency board arrangement continues to enjoy a high level of confidence and credibility, but the weakened budget planning and lack of fiscal coordination severely threaten the transparency, reliability and sustainability of public finances and are a serious impediment to short- and medium-term economic planning. Overall, financial and monetary stability have been preserved, but the worsening quality of budgetary processes is hampering the conduct of macroeconomic policies.

Interplay of market forces

The private sector’s share in GDP is estimated to have remained stable at around 60% of GDP in 2011. There has been no further progress with the privatisation agenda. In Republika Srpska, some 69% of the initial stock of State-owned capital intended for privatisation had been sold by September 2012, unchanged from a year earlier. In the Federation, none of the ten companies included in the 2012 privatisation plan has been sold. About 58% of the initial stock of State-owned capital intended for privatisation remains State-owned. Most prices are liberalised, even though a number of regulated prices remain (e.g. for utilities). Overall, the planned privatisation process has not advanced for the fourth consecutive year.

Market entry and exit

In 2011, the time needed to start a business was reduced from 55 to 40 days, on average. The time required to obtain a construction permit was shortened significantly from 255 to 181 days. However, companies are still required to register in both Entities before they can do business in the whole country. In Republika Srpska, the new Law on Crafts and Entrepreneurship simplified business registration procedures for entrepreneurs. The Law on Courts was also amended in order explicitly to give jurisdiction over company registration, bankruptcy proceedings and commercial disputes to five regional commercial courts. In the Federation, the second stage of the ʻlegislative guillotineʼ project to reduce the administrative burden has been completed. A total of 27 legal acts were adopted in various ministries to streamline 352 business-related administrative procedures by December 2011. In the first half of 2012, alongside the worsened external environment and decreased economic activity, the number of newly registered companies dropped by around 12% year on year. Overall, some limited improvements have been made to the business environment but significant administrative barriers remain for private-sector development.

The legal system

No substantial improvements can be reported in the complex legal system in Bosnia and Herzegovina. Even though the standard of legislation is relatively high in some areas, implementation and application of laws in practice is often poor due to the weak enforcement capacity of key institutions. The rule of law is weak and the judicial system often does not function efficiently, is subject to obstruction by the parties and does not cover commercial activities adequately. Enforcement of commercial contracts remains a lengthy process, which involves 37 procedures and takes an average of 595 days. Overall, weak rule of law, corruption and unreliable contract enforcement continue to impair the business environment.

Financial sector development

The banking sector continued to dominate the financial system of Bosnia and Herzegovina, with an 83% share in the total assets in 2011. The share of claims on the private sector in relation to GDP decreased marginally year on year to around 55% in July 2012. Twenty-nine banks are operating in the country, out of which twenty-eight are privately owned and one is majority State-owned. Two banks are under provisional administration. Twenty-one banks are under foreign ownership, accounting for slightly below 90% of the total banking system assets in 2011. The five largest banks accounted for 56.3% of the total assets of the banking sector. Banking sector assets rose marginally, by 0.1%, in 2012 (July compared with December 2011), accounting for approximately 86% of GDP.

The financial position of domestic banks has improved. After an aggregate net loss of some € 63.6 million in 2010, the banking sector finished 2011 with an aggregate net profit of € 72.6 million. After the slight improvement at the end of 2011, the quality of the loan portfolio has been deteriorating again since the beginning of 2012. The share of non-performing loans fell slightly to 11.9% in the fourth quarter of 2011, but rose to 12.6% in the second quarter of 2012. The capital adequacy ratio increased from 15.3% in the third quarter of 2011 to 16.8% in the second quarter of 2012, comfortably above the legal minimum of 12%. Banking profitability improved slightly in the first half of 2012. The return on average equity increased from 3.4% in the third quarter of 2011 to 4.2%, while the return on average assets grew from 0.4% to 0.5%. However, liquidity indicators deteriorated during the same period with the ratios of liquid to total assets falling from 27.2% to 24.8% and of liquid assets to short-term financial liabilities from 47.5% to 43%. Twenty-six banks are participating in the deposit guarantee scheme. Its coverage level remained unchanged at around € 18,000. Overall, despite the relatively high non-performing loan ratio, financial stability was safeguarded.

Annual credit growth accelerated from 3.1% in 2010 to 5.3% at the end of 2011 and moderated slightly to 4.3% in July 2012, with total loans accounting for about 60% of GDP. However, loans to private enterprises have been stagnating since the beginning of 2012, while those to the government surged rapidly by over 40% year on year. Loans to households increased by 5% year on year up to the end of July. The recovery of deposits continued though at lower rates. Total banking deposits reached 49.8% of GDP in July. Households remained the main contributors to this development, increasing their savings by 9.5%, while the corporate sector raised its deposits only slightly by 2.7%. As a consequence of these developments, the loans-to-deposits ratio climbed from 118.2% in October 2011 to 121.3% in July 2012. The spread between the average loan and deposit interest rates of commercial banks decreased further by 17 base points from 7.43 percentage points in September 2011 to 7.26 percentage points in early 2012, mainly due to lower lending rates. This level points to still high intermediation costs. Overall, the efficiency of financial intermediation has continued to increase slightly and credit activities have been gaining strength but there are signs that the government is crowding out private investments.

After a slight recovery in early 2011, stock market indices have been on a downward trend. The main index of the Sarajevo Stock Exchange lost 7.9% in the first eight months of 2012, while that of the Banja Luka Stock Exchange fell by 6.3%. The cumulative turnover shrank by 23.5% year on year in the period from January to August 2012. The combined market capitalisation declined to about 30% of GDP from around 44% in 2011. The insurance sector remained small, accounting for approximately 1.9% of GDP in 2011. The annual growth of premiums accelerated slightly to 3.4%, from a 2.9% annual rise in 2010. The market was dominated by the non-life insurance segment, which accounted for 83.6% of the total. Twenty-five companies were operating on the market in 2011, unchanged from the previous year. Overall, financial intermediation by the non-banking sector remained shallow.

3.2. The capacity to cope with competitive pressure and market forces within the Union

Existence of a functioning market economy

External imbalances have increased and the quality of public finances remains low, even though some fiscal consolidation has taken place. The slow pace of economic restructuring, especially in the Federation, combined with the prevailing obstacles to private-sector development and the structure of budgetary expenditures - increasingly dominated by current spending at the expense of growth-enhancing activities - continue to undermine a more growth-oriented allocation of resources and any strengthening of domestic sources of growth. Unemployment remains very high. Progress towards creating a single economic space within the country – which is a key European Partnership priority – has been limited. Overall, the functioning of market mechanisms remains hampered by the large government sector, characterised by low spending efficiency and sizeable interference in the economy.

Human and physical capital

Education and training policy falls within the responsibilities of the Entities and Cantons. Information and statistics on human capital is scattered and scarce, thus preventing effective policy-making. Progress in the field of education has been limited. A new coordination format for education reform has been agreed. However, the mismatch between the qualifications needed on the labour market and the profile of graduates coming out of the education and vocational training systems adds to other structural weaknesses, such as high social security contributions and poorly targeted social transfers, and remains a concern. Cooperation between the education system and employers is still weak. Enrolment rates in higher education decreased slightly in the 2011-2012 academic year. Participation in the labour market is still very low, with an activity rate of 44% in 2012, remaining unchanged in year on year comparison. Overall, the proper functioning of the labour market continues to be hampered by structural rigidities and the weak performance of the education and training system.

The investment-to-GDP ratio remained at a relatively low level of about 20% in 2011, broadly unchanged from a year ago. Net FDI flows more than doubled in 2011 – albeit from a very low level –, reaching 2.3% of GDP. The banking sector accounted for a significant part of the net FDI inflows, while some increase was also evident in retail trade and real estate. A number of projects are underway to upgrade road and railway infrastructure. Maintenance and upgrading of roads continued, but progress was slow. The Federation Parliament adopted the spatial plan for the route of transport corridor Vc in the Entity in December 2011. Overall, infrastructure improved slightly, but still requires repairs and modernisation.

Sector and enterprise structure

Market liberalisation remains insufficient in many sectors as most utility providers still do not apply market prices. Although the utility market was opened for non-household consumers, they have little incentive to change suppliers, as regulated tariffs are still below market prices. No progress has been made on unbundling electricity networks. Progress towards a competitive telecommunications market has been limited. The three incumbent operators continue to act as de facto monopolies in their geographical areas. Their combined share of the fixed telephony market added up to 85% for international calls and 98% for national callsin 2011. New licences were granted for internet services and network operators. The level of broadband internet access has increased further but still remains at relatively low level of slightly over 11%. The Railways Regulatory Body introduced a set of regulations, aiming at reaching compliance with the EU directives. Overall, limited progress was achieved on liberalisation of network industries.

There were no major shifts in the sectoral structure of the economy in 2011. Services accounted for 68.4% of gross value added (up from 68% in 2010), industry and construction for 26.7% (26.8%) and agriculture for 8.4% (8.6%). The traditionally high share of public administration, education and health increased further to 23.1%. The large informal sector which is fuelled by weaknesses in tax and expenditure policies and in law enforcement, including the fight against corruption, remains an important challenge. Overall, there have been no major changes in the structure of the economy. The informal sector is an important challenge.

State influence on competitiveness

No progress has been made towards reducing the state’s influence in the economy. In 2011, direct budget subsidies to industry and agriculture decreased to 1.6% of GDP from 1.9% in 2010. However, in the first half of 2012, they increased by 28.4% year on year. State-level legislation on State aid has been adopted, but a State aid authority has not been established and a State aid inventory has not been compiled. Overall, State aid remained high and the state continued to influence the economy through state-owned monopolies.

Economic integration with the EU

Bosnia and Herzegovina remains an open economy. Total trade (the sum of the volume of exports and imports of goods and services) increased further to 93.2% of GDP in 2011, as compared with 84.2% in 2010. The EU continues to be the countryʼs largest trading partner, with shares of 58% of total exports and 46.6% of total imports in the first eight months of 2012 (goods only). While the share of exports to the EU has increased somewhat, the share of imports from the EU has decreased slightly. The other main trading partners were, once again, the countries of the CEFTA region, which account for 32.2% of exports and 25% of imports. In 2011, the real effective exchange rate based on the country’s 20 largest trading partners appreciated marginally by 0.1%. Overall, the level of trade integration with the EU remained high.

4. European standards

This section examines Bosnia and Herzegovina’s capacity gradually to approximate its legislation and policies with the acquis in the areas of the internal market, sectoral policies and justice, freedom and security, in line with the Stabilisation and Association Agreement (SAA) and the European Partnership priorities. It also analyses Bosnia and Herzegovina’s administrative capacity. In each sector, the Commission’s assessment covers progress achieved during the reporting period, and summarises the country’s overall level of preparations.

4.1. Internal market 4.1.1. Free movement of goods

There was some progress on free movement of goods.

A development strategy for the quality infrastructure as a whole and a horizontal coordination mechanism are not yet in place. A public-private dialogue on the industrial market remains to be established.

Good progress was made in the area of standardisation. The Institute for Standardisation of Bosnia and Herzegovina (BAS) adopted 3,395 European standards (ENs) as national standards, bringing the total to 14,005 ENs. The BAS performed the second annual check on its quality management