# **1- Political and economic context**

The result of a political compromise to end a terrible war, Bosnia and Herzegovina (BiH) has been on a kind of international community life support. Since 1995, more than 5 billion USD of assistance has poured in, primarily to rebuild destroyed infrastructure and the homes of hundreds of thousands of refugees and displaced people. With much of the post-war reconstruction work complete, the focus is now on rebuilding the economy.

## **1a- Political environment**

Bosnia’s economic recovery is burdened by the complex and multi-layered political structure created under the Dayton Peace Accords. The political compromise reached in 1995 sought to reconcile three peoples living on the same territory: the Bosniaks, who are Muslims; the Serbs, who are Orthodox; and the Croats, who are Catholic. It led to the establishment of two Entities (the Federation of BiH (FBiH) and the Republika Srpska (RS)), 10 Cantons (all located in the Federation) and a semi-independent Brcko District, all loosely connected under a light state structure.

This enormous administration is headed by no less than 139 ministers and is supported by public expenditure at the excessive level of approximately 60% of GDP. Moreover, it is governed by 14 legal jurisdictions, which must be harmonized in order to achieve a single economic space. Reform efforts face the dual challenge of this cumbersome bureaucracy and the acute political sensitivity to change.

In this context, structural reforms are moving extremely slowly, despite strong oversight from the Office of the High Representative, mandated to supervise implementation of Dayton’s civilian provisions, and endowed by the Peace Implementation Council with the power to impose legislation.

## **1b- Economic indicators**

Due in part to strong international conditionality, BiH has made significant progress in achieving macroeconomic stability. On the monetary side, the BiH Central Bank and Currency Board guarantee the most stable currency in South Eastern Europe, which contributed to the near-zero inflation rate of 0.2% in 2002.

## **Table 1: BiH Economy**

||**2000**|**2001**|**2002**|
|---|---|---|---|
|**GNI, Atlas method**<br>**(current US$)**|4.3 billion|5.1 billion|5.2 billion|
|**GNI per capita, Atlas**<br>**method(current US$)**|1,150|1,270|1,270|
|**GDP(current $)**|4.3 billion|4.8 billion|5.2 billion|
|**GDP growth**<br>**(annual %)**|15.6|4.5|3.9|

Source: World Development Indicators database, August 2003 Economic stability is reinforced by a treasury system that is running well and sustained by budgets that are kept within required limits (under the guidance of very tight constraints set by the IMF). The Gross Domestic Product has risen steadily since 1997, and despite unreliable statistical data, it is estimated that the GDP growth rate for 2003 reached 5 percent. Even if this is a considerable slow-down compared to the 25% average of the post-war reconstruction years (1995 – 1997), this rate is now more sustainable and similar to those recorded in neighboring countries.

Nonetheless, eight years into peace building, and despite a heavy reconstruction bill and an ICled agenda of structural reforms, the economy in Bosnia and Herzegovina is still lagging. With a population of 3.5 million, 20% live below the poverty line and another 30% are on or just above it. Official unemployment is 40%. GDP per capita is now estimated at around US$1,800, which is one of the lowest in Europe. BiH is burdened with a total debt - external and internal - of approximately 2.5 billion euros. In 2002, the value of BiH’s exports equaled 25% of its imports.

Page 4 of 51