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COUNTRY REPORT

Bosniaand Hercegovina

February 2001

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

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Bosnia and Hercegovina 1

EIU Country Report February 2001 © The Economist Intelligence Unit Limited 2001

Contents

3 Summary

4 Political structure

6 Economic structure6 Annual indicators

7 Outlook for 2001-027 Political outlook9 Economic policy outlook

10 Economic forecast

12 The political scene

20 Economic policy

23 The domestic economy23 Output and demand24 Employment, wages and prices

27 Foreign trade and payments

List of tables

10 BiH: international assumptions summary11 BiH: forecast summary14 BiH: parliamentary elections23 BiH: industrial production25 BiH: labour statistics, 200027 BiH: retail prices, 200029 BiH: current account, Jan-Sep 2000

List of figures

12 BiH: gross domestic product12 BiH: current-account balance26 BiH: retail prices, 2000



Summary

February 2001

The new ten-party Alliance for Change represents a shift in Bosnia andHercegovina (BiH) away from the politics of nationalism, but the obstacles to adecisive breakthrough are daunting. The two main leaders, Zlatko Lagumdzijaand Haris Silajdzic may clash, and the fact that the Alliance gathers together somany parties does not bode well for its stability. Maintaining macroeconomicstability will continue to dominate economic policy, which is closelymonitored by the IMF and other international institutions involved in assistingeconomic reform. Low export receipts and a decline in external funding maydestabilise the currency, and loss of control over public finance in 2000 hasprovided a warning of the fragility of BiH budgets. The real GDP growth ratewill fall to 7-8% in 2001-02, held back by slow progress in structural reform. In2001 the EIU expects the current-account deficit to remain wide, at overUS$1bn, primarily as a result of a foreign trade deficit of US$1.7bn.

Federation non-nationalists formed the Alliance after the November 2000election. Two camps are vying for control of the BiH parliament, and forming agovernment may take time, with the nationalists backing Martin Raguz forprime minister. The Alliance has taken control of the Federation parliament,although Bosnian Croat nationalists have threatened a boycott. A Federationgovernment will be delayed for constitutional reasons. Mladen Ivanic hasformed a new RS government. Western pressure has kept Serb nationalists outof the cabinet, and Mr Ivanic’s position is delicate.

The IMF stand-by credit has been extended, with loans conditional on furthereconomic reform. Reform of the payment bureaux has begun. The authoritieshave encountering difficulties paying pensions and lack of interest threatensthe privatisation programme.

Industrial output growth is levelling off. Construction has picked up in theFederation. Retail sales are continuing to grow. Inter-entity trade is uneven, withthe Federation selling more to Republika Srpska (RS) than it buys. Job creationremains weak. Retail price inflation accelerated towards the end of 2000.

The trade deficit has contracted. Exports to the EU have fallen slightly, butother markets in the region look increasingly promising. Most Federationimports still come from Croatia. RS is importing less from Yugoslavia (Serbia-Montenegro). The current-account deficit has widened, although foreign directinvestment inflows have risen.

Editors: Michael Taylor (editor); Gavin Gray (consulting editor)Editorial closing date: February 8th 2001

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2001-02

The political scene

Economic policy

The domestic economy

Foreign trade andpayments

4 Bosnia and Hercegovina


Political structure

Bosnia and Hercegovina (BiH) has legal existence within the boundaries of the formerYugoslav republic of the same name. It comprises two entities: the Federation of Bosniaand Hercegovina (which is often referred to simply as the Federation), set up by theWashington Treaty of March 18th 1994, and the Republika Srpska (RS)

BiH has the following limited responsibilities under the Basic Principles agreed inGeneva and New York in September 1995, and confirmed at Dayton, US, onNovember 21st: the establishment of a Constitutional Court, a Commission forDisplaced Persons, a Human Rights Commission, a central bank, public corporations tomanage and operate transport and telecommunications, a Commission to PreserveNational Monuments, and a system of arbitration between the two entities. Foreigntrade is also supposed to be managed by the government of BiH

BiH has a bicameral parliament comprising the House of Representatives and the Houseof Peoples, two-thirds of whose members are elected from the Federation and one-thirdfrom the RS. A valid majority requires the support of at least one-third of the membersrepresenting each entity. The Federation and the RS have their own parliaments

November 11th 2000. Next elections: parliamentary, November 2002; presidential, bySeptember 2002

BiH has a rotating collective presidency of three, elected on September 12th-13th 1998:Halid Genjac (Muslim; acting, pending the election of a successor to Alija Izetbegovic,who resigned on October 14th 2000), Zivko Radisic (Serb), Ante Jelavic (Croat)

The Council of Ministers as reorganised in April 2000 comprises six ministers, one ofwhom is appointed chairman (prime minister) on a rotating basis for eight months at atime. A new government is to be formed following the November 2000 election. Theentities have their own governments

Croatian Democratic Union of BiH (HDZ BiH); New Croatian Initiative (NHI); Party ofDemocratic Action (SDA); Party for BiH (SzBiH); Social Democratic Party (SDP);Democratic Socialist Party (DSP); Party of Democratic Progress (PDP); Party ofIndependent Social Democrats (SNSD); Serb Democratic Party (SDS); Serb People’sAlliance (SNS); Serbian Radical Party of Republika Srpska (SRSRS); Socialist Party ofRepublika Srpska (SPRS)

The Dayton agreement called for the appointment of a high representative, a seniorforeign diplomat charged with monitoring the implementation of the agreement andco-ordinating the activities of international organisations operating in BiH. The highrepresentative is advised by the Peace Implementation Council (PIC), which includes allthe signatories to the Dayton agreement. Since December 1997 the high representativehas been able to impose decisions in cases of disagreement and to dismiss officials whoobstruct the Dayton agreement

Chairman & human rights & refugees Martin Raguz (Croat)Civil affairs & communications Tihomir Gligoric (Serb)European integration Bisera Turkovic (Muslim)Foreign affairs Jadranko Prlic (Croat)Foreign trade & economic relations Mirsad Kurtovic (Muslim)Treasury minister Spasoje Tusevljak (Serb)

Peter Nicholl

Wolfgang Petritsch

Official names

Form of state

Legislatures

National elections

Head of state

National government

Main political parties

International involvement

National governmenta

Central Bank governor

High representative



President Ejup GanicVice-president Ivo Andric LuzanskiPrime minister vacantDeputy prime minister & minister of finance Dragan Covic

Defence Miroslav PrceEnergy, mining & industry Mirsad SalkicEnvironment Ramiz MehmedovicHealth vacantInterior Mehmed ZilicJustice Barisa ColakScience, culture & sports Fahrudin RizvanbegovicSocial affairs & refugees Sulejman GaribTrade Branko IvkovicTransport & communications Besim Mehmedic

President Mirko SarovicVice-president Dragan CavicPrime minister Mladen Ivanic

Agriculture Rajko LatinovicDefence vacantFinance Milenko VracarForeign economic relations Fuad TuralicHealth & social security Milorad BalabanInterior Perica BundaloJustice Biljana MaricRefugees & displaced persons Mico MicicReligion Dusan AnteljTrade & tourism Zeljko TadicWar veterans & soldiers’ affairs Dragan Solaja

a Outgoing.

Federationa

Key ministersa

Key ministers

Republika Srpska



Economic structure

Annual indicators

1996 1997 1998 1999 2000a

GDP at market prices (KM m) 4,192 6,367 7,244 8,014 8,956

GDP (US$ bn) 2.8 3.7 4.1 4.4 4.3

Real GDP growth (%) 69.0 30.0 13.0 10.0a 8.5

Retail price inflation (av; %) Federation –20.1 10.8 5.2 –0.7 1.5b Republika Srpskac 17.2 –6.8 2.0 15.1 15.0

Population (year-end; m) 4.16 4.20 4.23 4.28 4.32

Exports of goods fobd (US$ m) 336 575 697 649 830

Imports of goods fobd (US$ m) 1,882 2,333 2,656 2,502 2,580

Current-account balanced (US$ m) –748 –1,060 –789 –971 –1,033

Foreign-exchange reserves excl gold (US$ m) 235 80 175 455 485b

Total external debtd (US$ bn) 3.6 4.1 3.0 3.1 2.6

Exchange rate (av; KM:US$)e – – 1.76 1.83 2.12b

February 8th 2001 KM2.09:US$1; KM1.96:€1

Origins of gross domestic product 1998 % of total Components of gross domestic product 1998 % of total

Agriculture, fisheries & forestry 16.0 Consumption 100.4

Industry & utilities 22.4 Gross investment 38.0

Construction 5.7 Exports of goods & services 35.1

Services 55.8 Imports of goods & services –73.5

Total 100.0 Total 100.0

Principal exports 1999 % of total Principal imports 1999 % of total

Federation FederationIndustrial products 26.9 Machinery & transport equipment 26.5Miscellaneous manufactures 24.8 Industrial products 21.0Crude material excl fuels 23.9 Food & live animals 15.8Machinery & transport equipment 9.6 Miscellaneous manufactures 11.3

Main destinations of exports 1999 % of total Main origins of imports 1999 % of total

Federation FederationCroatia 24.9 Croatia 28.3Switzerland 14.7 Slovenia 16.5Italy 13.1 Germany 11.8Germany 10.8 Italy 9.0

Republika Srpska Republika SrpskaYugoslavia (Serbia-Montenegro) 43.2 Yugoslavia (Serbia-Montenegro) 23.1Italy 16.6 Slovenia 11.1Germany 4.7 Italy 9.6Slovenia 3.2 Hungary 7.6

a EIU estimates. b Actual. c KM-based index. d Source: IMF Country Report, January 2001. e Convertible marka (KM) introduced in June 1998and fixed at KM1:DM1.



Outlook for 2001-02

Political outlook

The creation of a ten-party Alliance for Change after the November 2000general election represents a significant development in the politics of Bosniaand Hercegovina (BiH). The election continued the steady decline of thehardline nationalists who have obstructed reform since the end of the war in1995, and created a window of opportunity for gathering together non-nationalist forces to assume a larger role in the formation of governing bodiesat the various levels of political authority, allowing the possibility of better co-operation both within BiH and with international agencies.

The Alliance, which gathers together parties of a social-democratic and civic-liberal orientation and pensioners’ campaign groups across BiH’s three mainethnic groups, has a platform of the reunification of BiH and its social,economic and political rehabilitation. However, the obstacles against it makingdecisive breakthrough in the country’s political life are daunting, for severalreasons. When the Alliance was initially contemplated, it was hoped that itwould include the main non-nationalist parties in the Serb part of BiH,Republika Srpska (RS)—the Party of Independent Social Democrats (SNSD) andthe Party of Democratic Progress (PDP)—which would make it a truly country-wide political force. This did not happen, although both parties have pledgedto support the Alliance. In the meantime, the PDP has agreed to form acoalition with the nationalist Serb Democratic Party (SDS), restricting its roomfor manoeuvre (see The political scene). As a result, the Alliance does notcommand a reliable majority in the state parliament. Its position is stronger inthe Muslim-Croat entity, the Federation, where it has supplanted the CroatianDemocratic Union of BiH (HDZ BiH) and the Party of Democratic Action (SDA)as the dominant force in the parliament. However, the former ruling partiesremain strong enough to impede the work of the Federation parliament.

The Alliance itself is not without friction. Its two core parties—the SocialDemocratic Party (SDP) and the Party for BiH (SzBiH)—differ significantly inboth their profile and their respective constituencies. Whereas the core of theSDP consists of offshoots of the former League of Communists, the SzBiH ispositioned closer to the political centre-ground. Both parties claim to havemulti-ethnic constituencies, but their support is by far the greatest amongBosnian Muslims. This is particularly the case with the SzBiH, which isperceived by many as a non-nationalist alternative to the SDA, formerly thedominant Muslim party. The personalities of the two parties’ leaders, ZlatkoLagumdzija (SDP) and Haris Silajdzic (SzBiH), are such that avoiding clashesmay prove difficult, which could undermine the Alliance. On a more generalnote, the fact that the Alliance includes so many parties does not bode well forits stability.

RS has its own internal political dynamics, which are no more conducive tostability than its equivalents at the Federation and BiH levels. It is unlikely thatthe SDS will accept the marginalised position that the international

Domestic politics



community has assigned to it, and it will certainly try to reassert its influence.This may well undermine the unity of the four-party coalition, block thegovernment and push RS back into political turmoil.

BiH’s political institutions face an extremely turbulent year in which, once themajor hurdle of forming the government is over, difficult tasks are in store. Theimplementation of the Constitutional Court’s decision on the constitutivestatus of BiH’s three main peoples across the country represents a milestone inBiH’s post-war history. This was a task not even attempted while the nationalistparties had the upper hand in government. The country’s newly emergingbalance of political forces offers a feeble hope that this task will beaccomplished soon. A more fundamental realignment—a renegotiation of theDayton settlement or a change in the status of the entities—seems too difficultto achieve. Mr Silajdzic is pushing for a return to the pre-war unitary state; theBosnian Croats continue to feel that their interests are not served by theirposition, under the 1994 Washington agreement, within the Muslim-CroatFederation; the Bosnian Serbs want to improve their relations with fellow Serbsin Serbia. These aims are largely mutually exclusive, and there is little externalsupport for any of them; Western policy will be to try to preserve the fragilestatus quo for fear of triggering instability elsewhere in the Balkans.Constitutional change will have to remain within the Dayton framework. Inthe longer term, however, moves towards integration will be inevitable becauseof the economic shortcomings of the present structure.

The other equally immense task is the continuation and deepening ofeconomic reform. Enormous pressure is coming from the internationalcommunity for BiH’s authorities to make a breakthrough in this direction nolater than mid-2001. However, the Alliance is still a fragile political creation,and economic and social problems abound. The international community willhave a decisive role to play in all these processes. Provided that it plays a moreforceful and responsible role—one of the preconditions for the creation of theAlliance for Change—2001 could prove to be a turning point for BiH.

Relations between BiH and its immediate neighbours, Croatia and Yugoslavia(Serbia-Montenegro), will continue to improve as issues of trade and businessincreasingly come into focus. This is an important precondition forstrengthening regional co-operation, which has recently become the frameworkfor international assistance to BiH’s economic and political reconstruction.There is a danger, however, that as emphasis shifts to regional processes, and asthe future of Kosovo remains on the agenda, interest in BiH’s specific problemsmay diminish—a risk pointed out by Wolfgang Petritsch, the internationalcommunity’s high representative, in a speech in January to the externalrelations committee of the European Parliament. With donor funding likely todecline, BiH will be hard-pressed to fulfil the tasks on the EU “road map” so thatit can start to prepare for a stabilisation and association agreement.

International relations



Economic policy outlook

A new IMF facility will probably follow the current stand-by agreement due toexpire in May 2001. Maintaining macroeconomic stability will continue to bethe focus of the government’s economic policy, which is closely monitored bythe IMF and other international institutions involved in assisting BiH’seconomic reform. Hitherto favourable macroeconomic development has beena result of strict adherence to the currency board rules, and of largely prudentfiscal practices of the entity and state governments. This is the policyorientation that the government will continue to pursue.

However, there are challenges over the forecast period. The sustainability of thebalance of payments hinges on capital inflows, in particular by generous donorsupport, which is expected gradually to decline. Strong export growth is mostlyfrom a low base; volumes remain modest and export receipts insufficient tocompensate for an impending decline in external funding. The EIU thereforebelieves that the current account could become one of the main concerns overthe forecast period.

This brings a sense of urgency to structural reforms, which are needed toimprove the efficiency and competitiveness of local production and its exportperformance, in order to strengthen foreign-currency inflows. Protractedgovernment negotiations carry a risk of blocking the implementation of thenecessary reforms, which could undermine the macrostabilisation framework.We assume that the high representative will continue to use his powers to pushthe reform processes forwards, although possibly more slowly than desired.

Following a serious deterioration in public finances in 2000, further cuts inpublic spending and restructuring away from recurrent spending are likely tocontinue over the forecast period. The 2001 budgets, as in earlier years, allowno recourse to domestic borrowing, and external borrowing is on concessionalterms only. The authorities are likely to focus more on increasing revenue thanon a reduction in public expenditure, which is limited by the specific needs ofthe post-war economy, such as the return of refugees. Tax reform will continue,aimed at reducing tax rates while simultaneously broadening the base forcollection, although the introduction of value-added tax (VAT) may bepostponed until 2003. We expect an improvement in revenue collection as thepayment system is reformed.

The main reason for the deterioration in public finances was larger thanprojected spending on wages, refugees, transfers to pension funds, andincreased foreign debt service, owing to the depreciation of the convertiblemarka against the US dollar. Revenue in the Federation, particularly exciserevenue, was much lower than projected; similarly, the state budget recorded afall in revenue from administrative and other fees. A series of correctivemeasures on the expenditure side was undertaken, including a freeze onpublic-sector wages and employment, further military cuts and theintroduction of monthly limits on spending commitments in each ministry.

Fiscal policy

Policy trends



Progress in privatisation should help fill the government coffers, but the fiscalposition of the entity governments will remain strained. The budgets assume a2001 real GDP growth rate of 13-14%, and a decline in foreign grants andconcessionary loans. We believe that such a high rate of growth is unrealistic,and that a revenue shortfall is likely. We expect that significant budgetarysupport will remain indispensable over the forecast period.

Economic forecast

The prospects for the international environment over the next two years are notas good as in our previous forecasts, influenced by poor economic results in theUS, with a significant impact on global trade, investment and confidence.However, the EU, BiH’s largest export market, obtains only 13% of GDP fromexternal trade, and therefore the slowdown there is expected to be less markedthan in the US, with growth of 3.3% in 2000 falling to 2.8% in 2001 and 2.6%in 2002; nevertheless, euro-zone interest-rate rises in 2000, the sharp increase inoil prices, weaker global demand and a stronger euro will still have adecelerating effect on the EU and the transition region. The world economy isunlikely to stall, however, and there should be a recovery from mid-2002.

External pressure on inflation will ease in 2001, after the jump in oil prices in2000, with the average price of Dated Brent crude expected to be 14.7% lower,at US$24.25/barrel, and to continue to fall into 2002. The increase wasreinforced by the depreciation of the euro (to which the BiH currency is linkedvia the D-mark) against the US dollar. This effect should go into reverse in2001, when the euro is expected to appreciate against the US dollar, if not asrapidly as it fell in 2000, and again in 2002.

BiH: international assumptions summary(% unless otherwise indicated)

1999 2000 2001 2002

Real GDP growthOECD 3.0 4.1 2.6 2.8EU 2.4 3.3 2.8 2.6

Exchange rates (av)US$:€ 1.07 0.92 1.00 1.09

Financial indicators€ 3-month interbank rate 2.97 4.48 4.58 4.50US$ 3-month Libor 5.18 6.32 5.63 5.65

Commodity pricesOil (Brent; US$/b) 17.86 28.43 24.25 23.06Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.2 10.8 14.2Industrial raw materials (% change in US$ terms) –4.2 14.6 3.7 9.9

Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP)exchange rates.

Economic growth in BiH has been decelerating since 1998, representing partlya return to more sustainable levels from the sharp increase in the immediatepost-war years. We expect the slowdown to continue in 2001-02, to around

International assumptions

Economic growth



7-8%, based on the assumption of a further contraction in public spending as aresult of corrective measures to balance the budget, as well as a decline inreconstruction-related activities.

We estimate that real GDP grew by about 8.5% in 2000, driven by publicconsumption and externally funded public investment. The rate fell to singledigits for the first time since the end of the war in 1995, because of slowinggrowth in industrial output, coupled with a contraction in agricultural outputowing to a severe drought and forest fires in mid-2000.

Slow progress in structural reforms because of political impediments will holdback a more robust revival in output across many sectors of economic activity.Exports should continue to rise, but not strongly enough to provide a majorboost to growth. Similar assumptions will broadly hold for the rest of theforecast period, with some additional impetus towards the end likely to comefrom an increase in foreign investment and a slight pick-up in domestic invest-ment. Another favourable factor could be progress in the implementation ofvarious regional investment projects, which could benefit local production.

Inflation was successfully brought under control with the introduction of theconvertible marka in 1998. The average inflation rate in the Federation rose to1.5% in 2000, owing to an increase in prices of electricity, food and services.Prices in RS rose faster (by an estimated 15%) because of the drought and theneed to catch up with prices in the Federation. The inflation rate differentialbetween the two entities is likely to narrow further over the forecast period.Assuming that the currency board arrangement remains in place and there areno major deviations from the fairly firm fiscal policy stance, we expect theannual average inflation rate to hover around 2.5% in the Federation in 2001-02, and to fall to 4% in 2002 in RS.

The convertible marka, now widely accepted throughout BiH, is fixed at paritywith the D-mark; it depreciated along with the euro against the US dollar in1999-2000. We forecast nominal appreciation from an annual average ofKM2.12:US$1 in 2000 to KM1.97:US$1 in 2001 and KM1.80:US$1 in 2002.

BiH: forecast summary(% change year on year unless otherwise indicated)

1999a 2000b 2001c 2002c

Real GDP 10.0b 8.5 8.0 7.0

Industrial output 10.5 9.5 9.0 8.0

Retail prices (av) Federation –0.7 1.5a 2.5 2.5 Republika Srpska 15.1 15.0 7.0 4.0

Exports fob (US$ m) 649 830 900 980

Imports fob (US$ m) 2,502 2,580 2,600 2,500

Current-account balance –971 –1,033 –1,079 –936 % of GDP –22.2 –24.5 –21.6 –15.5

Exchange rate (year-end; KM:US$) 1.95 2.08a 1.86 1.73

a Actual. b EIU estimates. c EIU forecasts.

Exchange rates

Inflation



In 2001 we expect the current-account deficit to remain wide at over US$1bnprimarily as a result of a foreign trade deficit of US$1.7bn. The economy’sdependence on imports will keep import volumes high, although they areexpected to decline steadily from 2001 onwards. We expect exports to continue togrow moderately as more opportunities open up within the region. BiH has beenrunning surpluses in other components of the current account but these willnarrow, particularly the net transfers surplus, owing to a fall in official transfers.

On the basis of developments in the fourth quarter of 2000, we expect a pick-up in foreign investment as the privatisation of large enterprises progresses.Although these are minuscule amounts, they should nevertheless contribute toan overall gradual improvement in BiH’s external position over 2001-02. Webelieve, however, that the external funding requirement will remain large andthat another donors’ conference to secure pledges for funds at concessionalterms is likely.

The political scene

The November 2000 general election in Bosnia and Hercegovina (BiH) resultedin an almost even split in parliamentary seats between the non-nationalistparties on the one hand, and the three main nationalist parties on the other—the Serbian Democratic Party (SDS), the Croatian Democratic Union of BiH(HDZ BiH) and the Party of Democratic Action (SDA), which represents Musliminterests. The Social Democratic Party (SDP) emerged as the largest single partyin the BiH lower house of parliament and the second largest in the lower houseof one of BiH’s two entities, the Federation. It immediately began negotiationswith nine other parties to create an alliance that would outweigh thenationalists, and form the Federation and state governments. Some parties wereinitially reluctant to formalise their co-operation, although the alliance wasalready working on the ground in the Central Bosnia and Tuzla cantons. TheAlliance for Change was officially inaugurated on January 13th in Sarajevo.

Federation non-nationalistsform Alliance for Change

External sector



However, there has already been one significant defection from an importantmember of the Alliance, the Party for BiH (SzBiH). The SzBiH’s deputypresident, Enes Karic, a highly respected lecturer at the Department of IslamicStudies in Sarajevo, has left the party, explaining that he was unhappy aboutthe SDP’s leading role within the Alliance, which he had begun to see as athreat to the political interests of Bosnian Muslims.

Alliance for Change

Social Democratic Party (SDP)Party for Bosnia and Hercegovina (SzBiH)New Croatian Initiative (NHI)Croatian Peasant Party of BiH (HSS BiH)Republican Party (RS)Bosnia and Hercegovina Patriotic Party (BPS)Liberal Democratic Party (LDS)Civic Democratic Party (GDS)Federation Pensioners’ PartyDemocratic Party of Pensioners of BiH

The negotiations to form the Alliance were protracted largely because theSzBiH was determined that the international community’s high representative,Wolfgang Petritsch, meet a number of conditions first. The SzBiH leader, HarisSilajdzic, has for some time insisted that, given the decisive role that theinternational community plays in BiH, it has to take some responsibility forthe implementation of key political decisions necessary for the future of thecountry. In particular, the SzBiH asked for guarantees that the decision of theBiH Constitutional Court granting constitutive status to all three peoples acrossBiH (August 2000, pages 17-18) be implemented, and that the highrepresentative be more robust in punishing obstruction of the Dayton peaceagreement and the decisions of the Peace Implementation Council.

Mr Silajdzic has often been at loggerheads with international representatives inBiH—most recently, in the run-up to the election, over his proposal to alter theDayton agreement to abolish the two entities, the Federation and RepublikaSrpska (RS). His party’s good showing in the November election, when itemerged as the Federation’s fourth strongest party after the SDA, the SDP andthe HDZ BiH, gave it leverage with an international community eager to seethe inauguration of the Alliance.

On January 11th Mr Petritsch issued a decision establishing an interimmechanism for the implementation of the Constitutional Court’s ruling. Itrestructures the constitutional commissions in both entities, each of which willconsist of 16 members—Muslims, Serbs, Croats and others—appointed by thehigh representative. A deadline of March 15th was set for the two entityparliaments to present proposals for the implementation of the ConstitutionalCourt’s ruling. In the meantime, the two commissions will be responsible forseeing that the vital interests of all BiH’s peoples, including freedom fromdiscrimination, are respected throughout the country.

SzBiH seeks internationalguarantees first



BiH: parliamentary elections

1998 2000 Seats % of vote Seats % of vote

Bosnia & Hercegovina House of RepresentativesSocial Democratic Party (SDP) 4 10 9 22Party of Democratic Action (SDA) – – 8 20Serb Democratic Party (SDS) 4 10 6 15Party for BiH (SzBiH) – – 5 12Croatian Democratic Union of BiH (HDZ BiH) 6 14 5 12Party of Democratic Progress (PDP) – – 2 5Democratic National Community (DNZ) 1 2 1 2Bosnia & Hercegovina Patriotic Party (BPS) – – 1 2Democratic Party of Pensioners of BiH – – 1 2New Croatian Initiative (NHI) 1 2 1 2Party of Independent Social Democrats- Democratic Socialist Party (SNSD-DSP) – – 1 2Socialist Party of Republika Srpska (SPRS) – – 1 2Serb People’s Alliance (SNS) – – 1 2Coalition for a Single & Democratic Bosnia (KCD)a 17 40 – –Slogab 4 10 – –Social Democrats of BiH (SD BiH) 2 5 – –Serbian Radical Party of RS (SRSRS) 2 5 – –Radical Party of RS (RSRS) 1 2 – –Total 42 100 42 100

Federation House of RepresentativesSDA – – 38 27SDP 19 14 37 26HDZ BiH 28 20 25 18SzBiH – – 21 15DNZ 3 2 3 2BPS 2 1 2 1Bosnian Party (BOSS) 1 1 2 1NHI 4 3 2 1Pensioners’ Party of the Federation – – 2 1Civic Democratic Party (GDS) – – 1 1BiH Pensioners 2 1 1 1Croatian Party of Right (HSP) 2 1 1 1Liberal Democratic Party (LDS) – – 1 1Republican Party (RS) – – 1 1SNSD-DSP – – 1 1Croatian Christian Democratic Union (HKDU) – – 1 1Croatian Peasant Party of BiH (HSS BiH) 1 1 1 1KCD 68 49 – –SD BiH 6 5 – –SPRS 2 1 – –BSP 1 1 – –Centre Coalition 1 1 – –Total 140 100 140 100

continued



1998 2000 seats % of vote seats % of vote

Republika Srpska National AssemblySDS 19 24 31 38PDP – – 11 13SNSD 6 7 11 13SDA – – 6 7SPRS 10 12 4 5DSP – – 4 5SDP 2 2 4 5SzBiH – – 4 5Democratic National Alliance (DNS) – – 3 4SNS 12 14 2 2Democratic Party of RS (DSRS) – – 1 1NHI 1 1 1 1Pensioners’ Party of RS – – 1 1KCD 15 19 – –SRS 11 13 – –RSRS 3 4 – –Serb Coalition for RS 2 2 – –For King & Homeland 1 1 – –HDZ BiH 1 1 – –Total 83 100 83 100

a SDA, SzBiH, GDS and Liberal Party. b SNS, SPRS and SNSD.

Mr Petritsch’s decision was strongly criticised by the HDZ BiH, which said thathis real motive was to assist the Alliance’s ascent to power. The SDA accusedthe SzBiH of sowing discord among the Bosnian Muslims and worsening theirposition. In reality the party was angry that the SzBiH, having attracted to it alarge number of former SDA voters, had dashed any hopes of forming acoalition with the SDA and joined the Alliance instead.

The election of a deputy speaker for the state parliament from the BosnianCroat deputies revealed how finely balanced the two main camps are in theBiH House of Representatives. An SDP member, Senad Avdic, was electedspeaker at the first session on December 29th. Zeljko Mirjanic, of the Party ofIndependent Social Democrats-Democratic Socialist Party (SNSD-DSP), waselected deputy speaker from the Bosnian Serb deputies. However, when twoCroat deputies, Ivo Lozancic of the New Croatian Initiative (NHI) and MariofilLjubic of the HDZ BiH, each obtained 20 votes for their candidacy, Mr Ljubicwas declared the winner on the grounds that he had attracted two fewer votesagainst. The NHI and the SDP protested, arguing that under parliamentaryrules the vote should have been held again. Zlatko Lagumdzija, the SDP leader,said that an HDZ BiH candidate should not be elected to the parliamentaryleadership, as the three nationalist parties did not command a majority, withonly 19 seats out of 42 between them. However, the deputies probably electedMr Ljubic in order to appease the HDZ BiH, which since the election has beenthreatening to boycott all governing bodies.

This fine balance between the nationalists and non-nationalists in parliamenthas made forming a government a complex and lengthy process. Mr Lozancicfailed to secure election by two votes: an SzBiH deputy abstained and the

SDA and HDZ criticiseMr Petritsch

Two camps vie for controlof BiH parliament

Forming a government maytake time



Democratic National Community (DNZ) deputy was absent. The Alliance forChange had not been formed when parliament held its inaugural session. TheDNZ has opted to stay out of the Alliance, but has promised to support it. Theabsence of its deputy has aroused speculation regarding the true intentions ofthe DNZ leadership, whose controversial leader, Fikret Abdic, tried to set up anindependent statelet around Bihac during the 1992-95 war, and now lives inCroatia; it is disconcerting for the Alliance that it may need DNZ support toform a government.

The voting also made plain the co-operation between the SDS, HDZ BiH andSDA, despite denials by the parties themselves. SDS and SDA deputies voted forMr Ljubic. The SDS’s Mirko Banjac said that his party would support an HDZBiH candidate for prime minister, under the pretext that it was the party thatenjoyed the support of most Bosnian Croat electors; the SDA has said that aminority Alliance government may be disastrous for the country.

The three nationalist parties are clearly determined to prevent the Alliancefrom taking over the central state institutions. They control the BiH presidency,which delayed nominating a prime minister, saying that it was waiting forparliament’s upper house, the House of Peoples, to be constituted, although theconstitution gives the house no role in the process. The presidency has refusedto enter into negotiations with the Alliance, although the constitution saysthat it should offer the mandate to a candidate likely to command a majorityin parliament. When it finally proposed a candidate, the presidency chose theincumbent chairman of the Council of Ministers, Martin Raguz of the HDZBiH. He was proposed by the Croat member of the presidency, Ante Jelavic ofthe HDZ BiH, and supported by his two colleagues—Zivko Radisic of theSocialist Party of Republika Srpska (SPRS) and Halid Genjac of the SDA.

However, at the vote in the BiH parliament on February 7th, Mr Raguz failed tobe approved. He was supported by a mere six deputies out of 42 (five fromthe HDZ BiH and the SPRS representative, Tihomir Gligorov); 21 voted against,including the 17 deputies from the Alliance. The eight SDA representatives andthe single DNZ deputy abstained, while the SDS refused to take part in the voteat all. Among the four who sided with the Alliance against Mr Raguz, theSNSD had promised its support, while the Party of Democratic Progress (PDP),also from RS, had said that it would accept an SDP candidate. The Alliance willnow try to put forward its own candidate for prime minister and form a newstate government.

It will not find the process plain sailing, however, and it seems likely that it willbe a while before a government is formed. Among its potential supporters, thePDP has insisted on certain conditions being met before it will accept anAlliance candidate from the SzBiH. During the run-up to the November electionthe PDP objected to the call from Mr Silajdzic to abolish BiH’s two entities.However, since the SzBiH deputies in the RS parliament voted for the PDPcandidate for prime minister, Mladen Ivanic, the PDP seems to have softened itsstance. Opposition will be strongest not in parliament but in the statepresidency, whose three members must approve the candidate; Mr Jelavic of theHDZ BiH is firmly opposed to the Alliance, supported by Mr Radisic of the SPRS.

Alliance blocks Mr Raguz asBiH prime minister



The deadlock will probably have to be resolved by the international officials inBiH, and the EIU expects that the Alliance will eventually succeed, aided by thealmost complete isolation of the HDZ BiH in the vote on February 7th.

The inaugural session of the Federation House of Representatives waseventually held on January 15th, after it had been postponed twice; the HDZBiH said that the meeting was deliberately delayed until the Alliance had beenformed. The session, which was interrupted several times, elected a leadershipfrom the Alliance: Enver Kreso (SzBiH) as speaker, Ivan Brigic (SDP) as deputyand Slavica Geber (NHI) as secretary. The three votes of the DNZ proveddecisive for outvoting the SDA and HDZ BiH, which became the opposition forthe first time since the Federation was established in 1994.

The HDZ BiH staged a massive display of anger and frustration over the out-come of the assembly session, from which they walked out. The following dayan extraordinary session of the HDZ BiH presidency was convened in Sarajevoto discuss the party’s further course of action. Ever since the Organisation forSecurity and Co-operation in Europe (OSCE) amended the rules for theNovember election (November 2000, pages 17-18), the HDZ BiH has threatenedto boycott the Federation and state institutions, and to establish parallel

Alliance takes control ofFederation parliament

HDZ threatens a boycott



authorities, accusing the international community of pursuing a genocidalpolicy against the Bosnian Croats. The possibility has even been raised of areaswith a Croat majority seceding from the Federation. However, the onlyconcrete decision coming out of the Sarajevo meeting was to suspend theparticipation of HDZ BiH deputies in the Federation House of Representatives.

However, the HDZ BiH’s protests have not ended there. Niko Lozancic, the HDZBiH president of the House of Peoples, was due to convene the new house afterthe November election. He has refused to do so, saying that the rules for itselection must first be clarified. This follows the complaint lodged by thepresident of the HDZ BiH, Mr Jelavic, to the Constitutional Court over thechanges to the election rules and procedures introduced by the OSCE. The HDZBiH is particularly incensed with the rule allowing non-Croats to vote for theBosnian Croat representatives in Federation and state institutions, which hasweakened the hold over Bosnian Croat voters that the HDZ BiH has enjoyed sofar. In another act aimed at delaying the formation of the Federation’sgoverning bodies, the HDZ BiH has blocked the constitution of cantonalauthorities even in the two cantons in which it won a majority of seats. If theConstitutional Court upholds the changes to the electoral law, the HDZ BiHstill has the majority of the 30 Croat delegates in the Federation House ofPeoples, enabling it to block the work of both Federation houses of parliament.

The House of Peoples plays an important part in forming a Federationgovernment. The Bosnian Croat and Muslim delegates in the House of Peoplesnominate candidates for president and vice-president of the Federation, whoare then confirmed by the House of Representatives, opening a way forforming the government. As the House of Peoples has not yet beenconstituted, a new government will not be formed for some time. At themoment the Federation does not have a prime minister, now that EdhemBicakcic has resigned to preside over the state-owned power company,Elektroprivreda. The health minister has also resigned and several others aresaid to be considering leaving, aware that there will be no place for them in thenew government. Meanwhile, the international community is insistent thatthe Federation cannot afford to lose time in carrying out the many reformsstarted over the past couple of years.

In RS the SDS emerged victorious from the November election. It secured thepresidency and remains the single largest party in parliament, taking 31 of thetotal of 83 seats. There has been concerted pressure from the internationalcommunity on Mr Ivanic, the leader of the PDP, who emerged from the electionsas king-maker, to put together a “parliamentary majority” (the term “coalition”has been avoided) from the plethora of smaller parties and avoid bringing theSDS back into power. However, Mr Ivanic argued that this was not a realisticoption; instead, the PDP joined a four-party coalition with the SDS, SPRS andDemocratic National Alliance (DNS). The four parties, which together have amajority with 49 seats in parliament, backed Mr Ivanic for prime minister; hewas duly elected on January 12th by 61 votes to 15 with four abstentions,including support from SzBiH and SDP deputies in the RS National Assembly.

A Federation governmentwill also be delayed

Mr Ivanic heads a new RSgovernment



The next step that Mr Ivanic had to take was to persuade the SDS not to playan active role in the government, for fear that this would prompt the West toisolate the RS. Mr Ivanic has for several years argued for a technocratic govern-ment as the only solution for the RS’s problems. This time he introduced theadditional criterion that no minister could have served in any previousgovernment. Caught between the SDS demanding an equal number of cabinetseats and international pressure to give it none, Mr Ivanic came up with agovernment that he said had only one SDS member. His government receivedless support than he did, with 29 deputies voting against, including deputiesfrom the SNSD and the DSP, compared with 51 in favour.

Mr Ivanic was defiant, hoping that he would find sympathy among Europeanrepresentatives if not from the US. The US ambassador in Sarajevo, ThomasMiller, has been the most outspoken in conveying the internationalcommunity’s readiness to keep the SDS out of power, describing it as a criminalorganisation still under the influence of its founder, Radovan Karadzic, theBosnian Serbs’ wartime leader who has been in hiding since 1997. He evenadvocated that the SDS be banned from the election. Although Mirko Sarovic,the RS president, signed a document pledging that the SDS would co-operatewith the international community including the International CriminalTribunal for former Yugoslavia (ICTY) at The Hague, there have been similargestures before, on behalf of the SDS-led government that was replaced in 1997.

No compromise could save Goran Popovic, the SDS member who wasproposed as minister of trade and tourism; another name was found and hewas appointed head of the RS customs administration. Mr Ivanic tried tounderline the government’s professional expertise by refusing to reveal theparty affiliations of ministers, insisting that they were either members of thePDP, SPRS or were independents. He also proposed that they freeze their partymembership. However, according to one report, four of his nominations arebacked by the SDS—the ministers for refugees, energy, industry and science.His nomination for defence minister of the former National Assembly speaker,Petar Djokic of the SPRS, was reportedly blocked by Mr Petritsch because of hisprevious support for Slobodan Milosevic, and the post is still vacant.

Mr Ivanic is in a delicate position and is unlikely to have an easy time in office,trying to manage conflicting demands at home and abroad. In negotiationswith the Alliance over the state-level government, he has confirmed that hisparty will support an SDP candidate for prime minister, which would put himat odds with his SDS supporters. The SDS is clearly frustrated by theinternational community’s action against its members and will almostcertainly use the levers of power that it holds to reassert its influence. Mr Ivanicpledged to include non-Serbs in his government, but his appointment of theRS’s first Muslim minister, Fuad Turalic, is flawed. Since his ministry, foreigntrade, has no function at the entity level (as the constitution leavesresponsibility for foreign trade with the BiH state), the nomination puts indoubt Mr Ivanic’s commitment to non-Serb participation in the government.

Western pressure keeps SDSout of government

Mr Ivanic’s position isdelicate



The stability of the new government therefore faces serious challenges. Yetstability is what the RS needs, having wasted several years in the parties’ strugglefor power, which has undermined the work of all state institutions. Mr Ivanic, arespected economics professor, is aware that without international aid thechances that the RS will pull out of its economic difficulties are bleak. In caseinternational assistance is withdrawn, his party has prepared a “conservative”economic strategy, which in reality would be difficult to implement.

Economic policy

After some delay, caused by the failure of the authorities of Bosnia andHercegovina (BiH) to comply with the conditions attached to the stand-bycredit, the IMF completed the fourth and fifth reviews of the country’seconomic programme in December 2000, making SDR16.2m (US$21m)immediately available. The stand-by agreement for a total of SDR94.4m, whichwas initially scheduled to expire in March 2001, was extended for a further twomonths and will probably be followed by a new facility.

Earlier in 2000, both BiH entities, the Federation and Republika Srpska (RS),had to revise their budgets to take account of rising expenditure. The IMFdemanded that public spending, particularly on defence, be reduced, whileenhanced tax enforcement was urged. The IMF commended efforts to improvefiscal transparency and to continue with sales tax and pension reforms. Themeasures undertaken are likely to close the budget gaps for 2000, but medium-term fiscal sustainability will require further adjustments to both revenue andexpenditure, as the main fiscal policy line prohibiting deficit finance willremain unchanged.

On December 20th the international community’s high representative,Wolfgang Petritsch, imposed a wide-ranging package of laws and legalamendments aimed at maintaining the momentum of economic reform,which was under threat from political bickering before the November electionand the uncertainties of the post-election period. The package includes anumber of laws and amendments regarding the RS internal payment systemand transactions, as well as three Federation laws on privatisation, taxation ofwages and contributions to benefit schemes. Both reform of the paymentsystem and privatisation have been obstructed by local power structures.Amendments to the BiH law on customs policy and the Federation law on jobplacement and social security for the unemployed, which bring BiH customsand labour legislation in line with that of the EU, are also part of the package.

The new package, which came only a month after Mr Petritsch had imposedanother similar set of laws and amendments (November 2000, pages 23-24), isnecessary for completing the legal framework of a market-based economy,which is one of the main tasks of the BiH’s economic reform programmesupervised and financed by the international community. The Novemberpackage paved the way for the release of the second tranche of US$24m fromthe World Bank’s second public finance structural adjustment credit (PFSAC II):

Loans are conditional onfurther economic reforms

The IMF stand-by creditis extended



US$14m in budgetary support to the Federation and US$10m to RS. Furtherprogress in public finance reform is necessary in order to secure BiH access toUS$130m in budget support in 2002 envisaged by the World Bank’s countryassistance strategy.

In the Federation the transfer of internal payment transactions from paymentbureaux to the commercial banks officially took place on January 5th 2001.The bureaux had a monopoly over internal payments and were used as asource of cash by the dominant nationalist parties; their non-transparentpractices were largely perceived as one of the main deterrents to potentialforeign investors. Preparations for the introduction of the new payment systemhad been under way since the 1998 Madrid conference of the PeaceImplementation Council, which called for the elimination of the paymentbureaux and the outmoded system that they operated. The Central Bank ofBiH (CBBiH) has temporarily taken over the clearing and settlement system,while the Treasury function is to be performed by the finance ministry andtaxes collected by the tax administration. Responsibility for the two mainstatistics surveys has been transferred to the Federal Office of Statistics. Theclosure of the bureaux is to take six months, and the procedure will be adoptedin RS soon.

The introduction of the new payment system has not passed withoutproblems, however, because of BiH’s underdeveloped banking sector andgenerally dysfunctional economic environment. Most of the banks thatobtained licences have no experience in conducting internal payment trans-actions, which is causing significant delays in payment operations.Co-ordination of the various operations that were once performed under oneroof is going to take time. Whereas these problems are likely to disappear indue course, a much more serious issue is that of a large number of firms withfrozen accounts, which face bankruptcy once the payment bureaux are closed.These companies cannot open accounts with commercial banks unless theirdebts recorded on payment bureaux accounts are cleared. For a number ofthese companies the government is the main debtor and it is not yet clear howthe government will deal with this problem. Many companies have theiraccounts blocked because they failed to pay social contributions or taxes, andunless they pay up they will probably go into liquidation. The increase inunemployment and social hardship that will ensue will have seriousimplications for authorities that are already insecure and would have difficultyfacing widespread protests.

On January 1st new laws on pensions imposed by the high representative(November 2000, pages 23-24) came into effect in the two BiH entities. Thelocal authorities asked for a postponement because of serious underfunding ofthe pension and disability funds, which in the Federation have accumulatedfive months of arrears. The Federation government has asked that theimplementation of the law be postponed until March, by which time it hopesto come up with a consolidation programme for the two funds. This wouldinvolve identification of additional revenue for the two funds, includingprivatisation proceeds and credits from international financial institutions.

Pensions are in arrears

Reform of paymentsystem begins



However, the international agencies overseeing public finance reform havemaintained their position, and the January pensions are to be paid accordingto the new law. The main change is that pensions will only be paid as revenueis collected.

It appears, however, that already the Federation pension fund may not able topay January pensions, as part of the necessary funds were used in December topay pensions due in July in Tuzla canton—an act that the internationalagencies said was unlawful. Lack of money in the two funds is beingexacerbated by the reform of the payment system; many enterprises are late inpaying the contributions because of the transfer of accounts from paymentbureaux to the banks. The Federation government will transfer KM3m(US$1.44m) of budgetary funds towards the January payment of minimumpensions, and is expected to come up with a programme to pay pension arrearsfor August-December 2000.

There are some 274,000 pensioners in the Federation and they have recentlystaged a number of protest meetings. The situation is similar in RS. Theprospect of receiving barely adequate minimum pensions (KM117 in thefederation and KM80 in RS), or even less than the law guarantees, is likely toresult in a new wave of protests.

The long-delayed privatisation of large-scale companies in the Federationstarted on October 30th 2000. Shares in some 550 companies with a bookvalue of around KM3bn (US$1.37bn) were offered in exchange for vouchersheld by the public. In the first round of public offering scheduled to end onFebruary 26th, only KM45m of vouchers were invested, posing the threat thatthe value of companies for sale will be significantly reduced in the subsequentrounds. This has prompted the Federation Privatisation Agency to extend thedeadline for the first offering to March 26th and to ask the internationalagencies overseeing privatisation to help with the public campaign. Of11 investment funds granted a licence by the Security Commission, only threehave managed to secure the minimum limit of vouchers in order to be eligibleto take part in the purchase of company shares.

Lack of information and lack of trust in the privatisation model are thought tobe the main reasons for the low level of interest that the public has expressed sofar in the sale of these companies. Under pressure of time, the Sarajevo cantonprivatisation agency has proposed that those companies that have failed toattract buyers should be leased out—an option that the privatisation lawenvisages after several failed attempts to sell public companies, and one that theprivatisation authorities may have to resort to more frequently than expected.

Lack of interest threatensprivatisation



The domestic economy

Output and demand

Strong industrial output growth in the Federation in the first six months of2000 (15.3% year on year) began to level off in the second half of the year, with4.5% year-on-year growth in the third quarter and 2.2% growth in October-December. In the year as a whole industrial output in the Federation rose by8.8%, compared with 10.6% growth in 1999—below the target projected by theFederation government, and the first time since the end of the war in Bosniaand Hercegovina (BiH) in 1995 that the rate has been in single figures.

The slowdown in the fourth quarter in the Federation output was mainlyattributable to a contraction of 0.2% year on year in manufacturing, which in1999 was the most important branch of industry (63% of total output).Manufacturing was itself held back by a year-on-year contraction of 3.3% infood products and beverages (14% of total industrial output). However,electricity, gas and water supply, the second most important branch of industry(26% of industrial output), grew by 9.7%; mining (the third branch, with 11%of total industrial output) grew by 28% year on year in October-December 2000.

The picture is somewhat different when the results of particular industries arecompared with those of a year earlier. Both mining and electricity recordedstrong year-on-year annual growth rates in 2000 of 10.4%. In both cases thisrepresents a recovery, as mining had contracted by 0.6% in 1999 and electricityhad managed growth of only 1.4%. Manufacturing grew by 7.9% year on year in2000, but its growth rate the previous year had been 17.9%. Recovery in themanufacturing sector remains fragile owing to its concentration in a handful ofindustries, which are facing the problem of maintaining steady production flows.

In Republika Srpska (RS) the latest available data also suggest a slowdown inindustrial output growth. A sharp decline in annual growth rates started in Julyand continued in the following months. In January-September 2000 industrialoutput rose by 7% year on year. The slowdown was attributable mainly to poorperformance in electricity production, which contracted by 7.2% in annualterms; non-metal minerals, paper and paper products, which reduced outputby 37.8%; and textiles, which recorded a 14.5% fall in output compared with ayear earlier.

BiH: industrial production(% change, year on year)

1999 20001 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Federation 13.6 18.8 10.9 4.5 2.2

Republika Srpska –8.1 5.6 17.8 –1.2 n/a

Sources: Federal Office of Statistics (FOS), Statistical Data on Economic and Other Trends; Office of the High Representative (OHR),Economic newsletter; Central Bank of Bosnia and Hercegovina (CBBiH), Bulletin 3—January-September 2000; US Agency for InternationalDevelopment (USAID), BiH Economic update, 2000—third quarter.

Industrial output growth islevelling off



An unusually mild winter has enabled an extended construction season in BiH.Construction activity in the Federation picked up towards the end of 2000—the construction project volume index rose by 5% year on year in September,22% in October and 24% in November. The total hours worked rose by 12% inNovember compared with November 1999, and the number of workers onbuilding sites rose from 8,690 to 12,020. In January-November 38% ofconstruction activity was devoted to civil engineering projects and 62% tobuildings. Two-thirds of building contracts were for new construction ratherthan maintenance and repair; one-half was for residential and one-half forbusiness use.

Construction activity in RS recorded higher growth rates than in theFederation up to August 2000, which was partly attributable to a lower startingbase. In the year to end-August 2000 construction activity in RS rose by 4.1%compared with the year-earlier period (by 1% in the Federation).

Retail sales in the Federation continued to grow strongly in the third quarter,resulting in a 36.9% increase year on year in January-September 2000, withsales totalling KM843m (US$396m) in this period. Non-foodstuffs accountedfor 67.7% of total retail sales in that period. Strong growth in real wages sincethe war ended in 1995 is the main factor behind the buoyancy of retail trade.An additional boost is provided by the spending of the international staffstationed in BiH, as well as remittances from BiH citizens abroad. However,stocks were up by 37% in September compared with a year earlier, whichindicates that household demand is weakening.

Increasing Federation sales to RS continue to outweigh sales in the otherdirection. Total sales to RS for 2000 came to KM108.6m, growing steeply in thefourth quarter by 68% year on year; the Federation bought goods worthKM36.3m from RS. The largest category sold to RS in 2000 was miscellaneousindustrial products (KM26.6m), closely followed by electrical products(KM21.6m). Purchases from RS fell by 32% year on year in October-December.The main category (nearly 50%) bought from RS was food products (KM15m).According to the Federation’s Federal Office of Statistics (FOS), goods tradedoriginate from not only the Federation and RS, but also Croatia, Yugoslavia(Serbia-Montenegro), Hungary, Italy and Germany. Inter-entity trade is,however, tiny compared with foreign trade.

Employment, wages and prices

The number of people in work in the Federation increased slightly in the thirdquarter of 2000. Registered employment stood at 412,799 in November, anincrease of just 0.4% from January. Employment in November was 1.2% higherthan the average employment level in 1999, indicating a continuing decline injob generation. In 1999 annual average employment rose by 3.1% year on year,and in 1998 it increased by 5.9%.

Construction picks up inthe Federation

Retail sales continueto grow

Inter-entity trade is uneven

Job creation remains weak



Where there has been a fall is in the number of employed who are on the so-called waiting lists—people retained on firms’ books but with no work assignedto them. The number of such people declined by one-third in the year toNovember. As the number of registered unemployed rose by just 0.1% over thesame period, this suggests that increasing business activity involves activatingthe waiting-list workers attached to existing firms, rather than the creation ofnew job opportunities by business start-ups. The problem of continuing highunemployment in the Federation is therefore attributable partly to a lack ofstrong and sustained economic recovery, partly to the problem of overstaffing,which is typical of centrally planned economies, and partly to the difficultiesplaced in the way of new firms entering the market. The highest number ofwaiting-list workers is in manufacturing, which was traditionally the mainsource of employment in BiH.

High unemployment is likely to continue over the medium term as structuralreforms gather pace and pressure on companies to restructure increases. Forexample, recent reforms—the reform of the payment system involving theclosure of payment bureaux, the increased likelihood of bankruptcy for anumber of firms (see Economic policy) and reductions in military personnel—will result in substantial job losses in the near future.

No recent data on employment in the RS have been released but it is believedthat the number of employed stagnated over most of 2000. The growth in thenumber of registered unemployed, which in July was 4.4% up on December1999, is estimated to have slowed down in the second half of 2000. Anaccurate picture of the labour market in either of the two entities is difficult toconstruct, as both are believed to have a sizeable black economy; labourstatistics, particularly in the RS, are unreliable.

BiH: labour statistics, 2000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

FederationEmploymenta (no.) 411,020 411,199 411,595 411,821 412,708 412,726 412,746 412,760 412,767 412,788 412,799 of which: “waiting list” 54,638 53,379 52,597 52,349 52,978 52,059 51,004 51,123 47,121 45,106 42,087Unemployment (no.) 263,028 264,602 264,828 265,236 264,665 264,585 267,261 268,172 265,954 264,219 265,971 %b 39.0 39.2 39.2 39.2 39.1 39.1 39.3 39.4 39.2 39.0 39.2Net wage (KM) 381 398 399 410 406 408 410 418 428 427 437

RSEmployment (no.) n/a n/a n/a n/a n/a 228,834 n/a n/a n/a n/a n/aUnemployment (no.) n/a n/a n/a n/a 154,027 157,026 154,027 154,358 154,646 n/a n/aNet wage (KM) 222 237 291 272 272 259 285 286 289 n/a n/a

a Registered employment; includes waiting-list workers on stand-by, not actually working. b Unemployed divided by unemployed plusemployed; includes waiting-list workers.Sources: Federal Office of Statistics (FOS), Statistical Data on Economic and Other Trends; Office of the High Representative (OHR), Economic newsletter; Central Bank of Bosnia and Hercegovina(CBBiH), Bulletin 3—January-September 2000; US Agency for International Development (USAID), BiH Economic update, 2000—third quarter; Reuters.

The average nominal wage in the Federation has continued to increase, reachingmuch faster year-on-year rates of growth between June and Novembercompared with the first half of 2000. That workers can command higher wagesdespite a high unemployment rate suggests rigidities and skills shortages in the

Annual wage growthhas slowed



labour market. The November nominal wage amounted to KM436.91 (US$205),an increase of 14.2% year on year. A recent survey of the most profitablecompanies in the Federation placed the communications firm, PTT Sarajevo, topof the list: post and telecoms workers received the highest wage in November(KM1,200). Wages are also high in tobacco manufacturing, which was thehighest paying branch of industry in 1999. The main tobacco manufacturer,Fabrika duvana Sarajevo, ranked third in the survey. Another sector thatrecorded a sharp rise in the average nominal wage in 2000 was fishing—anindustry that has been expanding rapidly since the end of the war in 1995.

At the other end of the labour market, the lowest paid in November wereemployees in cellulose and paper production (KM167). Wage arrears can alsobe a problem, especially in publicly owned firms. Workers at the state-ownedInpak bakery in Zenica began a hunger strike in mid-December because theyhad not been paid for ten months.

The average nominal wage in RS increased slightly from KM285 in July toKM289 in September. Lower wages in RS compared with the Federation areaccompanied by lower living costs, although an official estimate assesses thebasic monthly needs of a family of four at KM421, well in excess of the averagewage. RS doctors were on strike providing only emergency care in Novemberand December, in protest over arrears, which have also affected pensioners,teachers and railway workers.

Retail price inflation (RPI) gathered pace in the Federation in the fourth quarterof 2000, rising to 4.3% year on year, compared with 2.7% in July-September.Annual average RPI was 1.5%; a breakdown of the RPI index into itscomponents reveals that services prices rose the most, by 4.3%, whereas foodprices fell by 1.3%. Prices for manufactured goods rose by a mere 0.8%.

The Federation government decided to liberalise oil prices in December 2000,under pressure from private oil dealers, following a similar move by the RSauthorities. However, instead of the drop in oil prices that the Federationgovernment had hoped for, the state-owned oil distributor, Energopetrol,announced that it would increase oil prices by 5%. Whether so high anincrease will be tolerated by the government, which reserved the right tomonitor price formation and intervene if it considered it appropriate, remains

RPI accelerates towards theend of 2000



to be seen once the new Federation government is in office. The outgoingprime minister, Edhem Bicakcic, who is taking over at the state-ownedelectricity distributor, Elektroprivreda BiH, agreed to a 20% increase inelectricity prices from January 2001. Upward pressure on prices is thereforelikely to remain in the coming months.

BiH: retail prices, 2000(% change)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

FederationMonth on month 0.4 0.8 –0.3 –0.6 0.3 0.1 0.6 0.0 1.5 0.4 0.3 0.0Year on year –1.1 –0.3 –0.8 –0.3 –0.6 0.6 2.2 2.3 3.5 4.5 4.4 4.0

Republika SrpskaMonth on month 1.0 2.6 0.1 0.6 0.6 1.0 1.1 0.7 4.2 n/a n/a n/aYear on year 10.8 14.1 13.5 13.2 13.2 11.0 10.0 12.5 16.5 n/a n/a n/a

Sources: FOS, Statistical Data on Economic and Other Trends; OHR, Economic newsletter; Reuters.

Foreign trade and payments

Although the Federation’s trade deficit widened by almost 50% betweenAugust and November 2000, the cumulative January-November deficit was22% below its level of a year earlier, at US$1.37bn. While exports (fob) grew by15% to US$555m (albeit from a low base), the main factor underpinning theimprovement in the trade account was a 14% year-on-year fall in imports (fob),which amounted to US$1.93bn. The same declining trend appears when thetrade deficit is expressed in convertible marka; the annual fall in the nominalconvertible marka trade deficit is, however, much smaller, owing to theexchange-rate effect (the convertible marka depreciated sharply against the USdollar over the past year).

The principal Federation imports of machinery, industrial products and foodcontracted by 17%, 30% and 15% respectively in January-November, whenexpressed in US dollar terms. By contrast, imports of oil and oil derivatives roseby 51% year on year, with part of the increase attributable to a sharp rise intheir US dollar-denominated prices. The rise in exports was driven by a 64%increase in sales abroad of base metals, of which exports of aluminiumconstituted by far the greatest share. Exports of wood, the Federation’s secondmost important export item in 1999, fell slightly in January-November.

Available data for Republika Srpska (RS), the other entity in Bosnia andHercegovina (BiH), also suggest a large fall in the trade deficit. The cumulativetrade deficit for January-September fell by 17% year on year to US$370m(expressed in convertible marka, it shrank by 4%). In the first nine months of theyear exports (fob) amounted to US$250m, while imports (fob) stood at US$618m.

Switzerland became the Federation’s largest single export market in 2000,ahead of both Italy and Germany. Boosted by sales of aluminium from theMostar plant, Tvornica Aluminijuma Mostar, exports to Switzerland in January-

The trade deficit contracts

Exports to the EUfall slightly



November rose by 84.5% year on year. Exports to the EU accounted for 41% ofthe Federation’s exports, 3 percentage points lower than a year ago. This fallwas mainly the result of an almost 10% drop in exports to Italy, which hadbeen the Federation’s largest EU export market in 1999. Exports to Italy inJanuary-November stood at US$94.6m, compared with US$95.7m toSwitzerland. Exports to Germany, the second most important EU partner, roseby 31.4% in January-November to total US$84.2m. The EIU expects thatFederation exporters will take advantage of a recent extension of the EU’s tradepreferences for most exports from BiH (August 2000, page 22) and therebymake up for the loss.

However, there are signs that other markets, particularly those of BiH’simmediate neighbours, are becoming increasingly important. Federationexports to Yugoslavia (Serbia-Montenegro) more than doubled in January-November compared with a year earlier to reach US$58.6m, overtaking exportsto Croatia and Slovenia (US$57.7m and US$49.2m respectively). Exports toSlovenia rose by 13.7% year on year. Total sales to the region were draggeddown, however, by a fall in exports to Croatia by 44%, a consequence of thetermination of the free-trade agreement between the two countries in 1998.Federation exports to Croatia, Slovenia, Yugoslavia and Macedonia—once in acommon state with BiH—formed 38% of total exports in 1999 (31% inJanuary-November 2000).

Before the NATO intervention in Kosovo in 1999, some 80% of RS exports hadbeen channelled to Yugoslavia. Following political changes in both RS andYugoslavia, economic links between the two countries will be restored, so thatBiH’s total volume of exports to Yugoslavia is likely to continue to grow.

Croatia and BiH recently concluded a new free-trade agreement, allowing BiHtax-free exports to Croatia from January 1st 2001, which is likely to boost BiH’sexports to Croatia. In January, under the auspices of the Stability Pact forSouth-eastern Europe, BiH, along with Albania, Bulgaria, Croatia, Yugoslavia,Macedonia and Romania, agreed to work towards establishing a free-trade areaas a preparatory step to joining the EU. This initiative, if followed through,could also help BiH open up new export opportunities for its products, whichare facing strong competition in the EU market.

There was a sharp decline in imports from Croatia in 2000. In January-November Croatia’s share of the Federation total fell to 18%, from 22% a yearearlier. The deterioration in trading relations, which started in 1998, turnedinto a tit-for-tat policy in 2000, when Croatia first imposed a ban on imports ofmeat and meat products from BiH under the pretext of suspected cattle diseasein BiH. The Federation authorities retaliated in late 2000 by imposing a similarban on imports of meat and meat products from Croatia. However, despitethese problems, the bulk of Federation imports in January-November 2000 stillcame from Croatia (US$339m). Imports from Slovenia, which increased by5.8% in January-November, ranked second (US$306.3m). There was a steepdecline in imports from Italy in January-November, by 52.1% (US$205.4m).Imports from Italy fell behind those from Germany (US$271.7m), which alsodropped by 2% year on year.

Other markets lookincreasingly promising

Most Federation importsstill come from Croatia



The main feature of RS import flows in 2000 was a depressed level of importsfrom Yugoslavia, from 75% in 1998 to 23.5% (January-September). In 1999Slovenia accounted for 11% of total RS imports, followed by Italy (10%),Hungary (8%) and Austria (5.7%). However, whereas trade with Yugoslavia isfairly balanced, there is a huge gap in trade with Hungary, Slovenia, Croatiaand Austria, with imports by far surpassing exports.

The current-account deficit increased sharply in the third quarter of 2000,according to data from the Central Bank of BiH (CBBiH; however, the entriesfor services and income in particular are incomplete). The cumulative January-September BiH deficit rose to US$1.27bn, exceeding the full-year deficit for1999. The Federation deficit totalled US$891m and the RS deficit US$358m.The deterioration in the external position was caused by a widening of thetrade deficit since the first half of the year. Federation foreign trade data for thefourth quarter of 2000 indicate a large full-year current-account deficit.

BiH: current account, Jan-Sep 2000(US$ m)

Exports fob 520

Imports fob –1,870

Trade balance –1,349

Services balance –33

Income balance –7

Current transfers 122

Current-account balance –1,267

Source: Central Bank of BiH.

There was a marked improvement in inflows of foreign direct investment(FDI), mainly in the banking sector, in 2000. It started earlier in the year withthe acquisition by an Austrian bank of stakes in several local banks (August2000, page 28; November 2000, page 31), to which a number of new ventureswere added in the fourth quarter. Croatia’s leading bank, Zagrebacka banka,bought a majority US$18.9m stake in Universal banka; together, the two bankshave put up a joint bid to acquire assets of Komercijalna banka Tuzla. InDecember Austria’s Hypo Alpe Adria and the European Bank for Reconstructionand Development (EBRD) bought an initial 26% stake in Auro banka andannounced plans to become a majority owner by the end of 2001. Foreigninvestors’ focus on the financial sector is not surprising after their experiencein other transition countries. In the case of BiH, an additional attraction hasbeen the existence of an internationally sponsored programme to rehabilitatethe banking sector, which gives added guarantees to potential investors wary ofinvesting in a post-conflict country. The authorities have also stepped up theirefforts to restore public trust in the banking sector; one of the latest initiativescame from the Federation Deposit Insurance Agency, which announced inJanuary that it was to sign its first deposit insurance contracts with selectedbanks.

RS imports less fromYugoslavia

Current-account deficitwidens

FDI inflows improve



Privatisation as the main channel for acquiring foreign capital at the presentstage of BiH’s transition has offered little in the way of attractive blue-chipcompanies. Just as the EBRD has given a lead by buying into local banks, theWorld Bank has taken a similar move regarding blue-chip companies. TheInternational Finance Corporation (IFC), the World Bank’s private-sectorlending arm, decided to convert its loan to BiH’s only pharmaceuticalcompany, Bosnalijek, into an equity stake. The IFC granted Bosnalijek aUS$2.7m loan to rebuild a tablet and capsules manufacturing plant in 1998,which is due to open in April 2001, in return for a 13% holding. Bosnalijek’scapital is estimated at US$23.6m. The company is 51.3% privately owned. A48.7% government stake will probably be sold, perhaps to a Croatian orSlovene investor.

There has also been investment in other areas. A Swiss company, Geva, hassigned a US$3.17m contract to build a small hydropower plant in centralBosnia. The company will obtain a 20-year concession for operating the plant;it has also signed a deal to sell its output to Elektroprivreda, the state-ownedpower company. Although the deal is modest in terms of total value, it isapparently just the beginning of a much larger project aimed at building moresuch power plants in BiH. It follows a similar deal by an Austrian company,Tiwag, which in August signed a contract to invest US$5.45m in building fourhydropower plants in central Bosnia.

Slovenia’s largest food retailer, Mercator, opened a shopping mall in Sarajevo inDecember. Mercator Centre Sarajevo is a US$20.8m joint venture with thestate-owned Trzni centar, in which Mercator has a 51% stake and the Trznicentar holds the remaining shares, of which 19% are held by its employees.Mercator is planning to open two more shopping centres in BiH. Other Sloveneinterest in BiH includes the acquisition by Banka Domzale of a 51% stake inCommercial Bank Sahinpasic, renamed Commercebank, and a strategicpartnership between breweries in Ljubljana and Sarajevo, Union andSarajevsko Pivo.

The prospects of attracting foreign investors recently improved forEnergoinvest, an engineering conglomerate which, with a turnover ofUS$2.5bn before the war, used to be one of BiH’s largest and most successfulexporters. The company, which produces electrical power and processingequipment, has been struggling to recover from the effects of the war. Itrecently won a US$21m contract to build transformer stations in northern Iraqunder the UN-funded oil-for-food programme, and another US$30m contractwith Libya is due to be signed soon. The company’s export revenue increasedby 100% in 2000, the main markets being the US, Mexico, Turkey, Malaysia,Algeria and Germany. The company is slated for privatisation in March; a 67%stake will be offered for sale via tender and a 27.7% stake to citizens inexchange for privatisation vouchers.

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