bne IntelliNews – OPINION: Bosnian Dissolution Dynamics Signals Weak Economy
More than 25 years after the Dayton Accords established the heavy construction of postwar Bosnia and Herzegovina with a unitary state divided into distinct ethnic enclaves and the Brcko District, United States military and defense officials and the EU suddenly sounded the alarm bells about the danger of disintegration after a long period of distracted attention. They immediately cite the long-standing machinations of Republika Srpska leader Milorad Dodik, which results in encouragement from Russia and Serbia, as he demands an autonomous tax and security authority. President Dodik’s opposition, including to official recognition of the Srebrenica massacre as genocide, has systematically hampered government coordination. Several years ago, this resulted in the IMF’s program halting due to impractical governance, a rare event that highlighted an underlying economic dysfunction since the massive corps of aid workers and advisers left. in the aftermath of the conflict, with the major plans of emerging markets on a shelf.
The response to the Dodik political centrifugal forces as well as the Bosnian and Croatian forces should be a platform for renewed growth and reform to catch up with the neighbors of the Western Balkans on the way to EU entry. Foreign experts can re-engage, but the work must rely on experienced bankers and business leaders in the constituent parts of Bosnia so that they regain a common sense of the mission.
Coal mine unrest after minimum wage cut en route to eventual clean energy supply and arrest of former defense minister for corruption in procurement reinforce grim chronic headlines that obscure the positives . GDP growth was 11.5% in the second quarter, a high of almost two decades after contracting 8% in 2020, the worst in 25 years. The European Bank for Reconstruction and Development (EBRD) forecasts an expansion of 4% for the full year and 3% in 2022. Exports increased by 20% in the third quarter, mainly agriculture and mining, both to the neighboring countries of the Central European Free Trade Agreement of the former Yugoslavia, Albania and Moldova, and to key EU markets. The persistent trade deficit also jumped 10% on manufactured imports, but the overall good news contributed to a 25% jump in Bosnia’s MSCI border stock index as a major component at the end. November, although it never kept its privatization promises.
The IMF’s latest Article IV review bluntly criticizes the performance and governance of state-owned enterprises, which are perpetual brakes. State-owned enterprises provide a tenth of jobs and account for 40% of fixed assets, with an accumulated debt equal to 25% of GDP, including unpaid taxes and social security obligations. The Fund considers this figure to be underestimated due to poor data collection, and notes that surveillance lags behind regional peers and OECD guidelines in richer countries, with widespread corruption. . The prime ministers of each entity do not have the capacity to monitor balance sheets and operations through aggregated websites, and to appoint executives solely on the basis of professional and technical credentials.
These weaknesses spill over into the financial sector, where there are several development banks, despite persistent World Bank plans to either shut them down or reorganize them and bring them under central bank regulation. The currency board initiated with foreign aid has been a unique anchor of stability, but also a brake on the competitiveness of exports. Political agitators and business lobbies have joined in insisting on a reset of the peg, even though the depreciation has occurred in real terms with low inflation of 1%. Apart from this exchange rate agreement imposed from the outside, the representatives of the constituent federations could not agree on prudential rules even though a mass loan guarantee program was deployed for the COVID-19 emergency. A deposit insurance law is emerging and a surge in bad debts is expected as repayment breaks expire, as the central bank lacks comprehensive asset classification and resolution criteria.
The entire IMF deal was canceled in early 2020 after a long period in limbo. The Fund’s $ 330 million rapid virus line activated when the pandemic broke will leave another 5% in budget and current deficits this year. Overall debt stands at 40% of GDP and is considered sustainable, with the caveat of large unrecognized bad loans from state banks. President Dodik’s grabbing of tax revenues is partly due to onerous demands for services, while relations between Serbia and Republika Srpska are facilitated by the entry in June of the former into the benchmark local bond index of JP Morgan which will trigger billions of euros in inflows of foreign investors and increase the credit profile. of the two jurisdictions. Serbia’s budget gap is at the same level as Bosnia’s, but inflation was 7% in the third quarter and a cycle of hikes will begin soon ahead of the elections scheduled for the first half of 2022 and will boost top hunters yield. Belgrade is also much further along in the EU accession process and in June reached an official policy coordination instrument with the IMF. The development of the capital market is a priority which can allow joint pilot operations of commercial debt and equity investments for the Republika Srpska, without the pure and simple endorsement of sovereignty in terms of foreign policy.
These pragmatic solutions, as well as overcoming decades of political inertia, are distant prospects with the intra-governmental tug-of-war that followed the brutal one of the 1990s. The international community has invested billions of dollars in advocacy. reconstruction, then diverted resources to theaters of operations in Afghanistan and Iraq, which have since come to a standstill as Bosnia reappears. The lesson to be learned in all three cases is that underlying functioning and healthy economies and financial systems have often been overlooked as a recipe for long-term conflict reduction. The Entities and Brcko can at least find common ground there and can nominate public and private sector representatives to sit on an independent recovery board as the original overdue collaboration to accelerate recommendations for growth and stability, and recasting post-traumatic solidarity and the EU spirit of integration a generation later.
Gary Kleiman is a senior partner at Kleiman Intl Consultants, Inc.