In June 2000, the European Council declared Western Balkan countries as potential candidate countries for EU accession. Negotiations on a Stabilisation and Association Agreement were finalised at technical level but the agreement is yet to be signed due to Bosnia and Herzegovina's non-compliance with some political preconditions set by the EU.
Since 1998, relations between Bosnia and Herzegovina (BiH) and the EU have been based on the EU-BiH Consultative Task Force, which was replaced in January 2006 by the Reform Process Monitoring (RPM). The RPM encourages and monitors reforms on the basis of the European partnership document adopted by the EU Council in November 2005. Since 2006, Economic Dialogues between Bosnia and Herzegovina and the Commission have been held annually.
Following the end of the war in 1995, Bosnia and Herzegovina experienced a reconstruction phase with large aid inflows and strong economic growth rates. While the reconstruction boom subsided after 2000, growth continued to be sustained at 5.1% on average, between 2002 and 2006. Gross domestic product (GDP) reached an estimated 80% of its pre-war levels in 2006. GDP per capita is estimated at about €2 535 for 2006, which classifies Bosnia and Herzegovina as a lower middle-income economy.
The political efforts were initially focused on reconstruction, but have gradually shifted towards more structural reforms in combination with institution building. The speed of structural reforms has, however, been mixed, both in terms of sectors and regions. Privatisation has proceeded at a slow pace overall, although with more progress in the Republika Srpska (RS) than in the Federation of Bosnia and Herzegovina (FBiH). Privatisation of the banking sector has been successful, contributing to rapid expansion of banking sector activities. Overall, the government sector remains large and constitutes around 45% of GDP.
Unemployment is high, but its level is difficult to monitor due to weaknesses in statistics. Official figures show unemployment at 44%, but real levels are estimated to be lower. A Labour Force Survey conducted in April 2007 estimated unemployment to be around 29% in the country, 25% in the RS and 31% in the FBiH. The country-wide employment rate was fairly low at about 31% in April 2007. It increased to around 35% in the RS and remained almost flat in the FBiH at about 29% from the year before. A monetary regime of ‘currency board arrangement’, which has been in place since 1998, has played an important role in supporting price stability. Inflation was 7.5% in 2000, and declined to below 1% per year during 2001 to 2004. In 2005 and 2006, inflation rose somewhat again, mostly due to price increases related to VAT introduction, but receded in 2007.
Export growth was initially slow but took off in 2004 and has
been above 20% a year since. However, the expansion started from a low export
level. Exports of goods and services expanded as a share of imports from a low
38% in 2000 to around 55% in 2006. During the same period, aid inflows have
gradually been reduced as a means of financing. As a consequence, the current
account deficit widened after 2002 to levels around 20% of GDP, but shrank
significantly in 2006 to below 11% of GDP on the back of strong export
performance, a front-loading of imports in the second half of 2005 and better
inclusion of the grey economy. The favourable trend did not continue into 2007,
when imports rose by around 24% year-on-year in the first six months, widening
the trade deficit by around 30%. The current account deficit is mainly financed
by inflows of private-sector capital through the banking sector, remittances
and foreign direct investments. Exchange reserves with the Central Bank have
continued to grow and amount to around five months of imports.
Public external debt has been on a declining trend and totalled around 21% of GDP at the end of 2006. However, the debt stock is expected to rise significantly in the near future, owing to large unsettled domestic debt claims related to the war and pre-war period.
To support continued strong economic growth rates and to allow for an expansion of the private sector in the economy, further structural reforms are urgently needed, particularly in the FBiH. Such reforms include further privatisations, improved corporate governance practices, an improved business climate, labour market reforms and educational outcomes in order to support the private sector.
The EU is Bosnia and Herzegovina’s main trading partner. In 2006, around 69.4% of the total BiH exports and 60.2% of the imports were conducted with EU Member States. Bosnia and Herzegovina mainly exports metal, minerals and related products, wood products and certain manufactured goods. Metal and mineral products account for almost 40% of total exports. The share of FDI inflows from the EU is large, but declined temporarily in the first half of 2007, following the large sale of Telecom Srpske to a non-EU company.
As a potential EU candidate country, Bosnia and Herzegovina is taking part in the instruments of the pre-accession strategy, such as a Stabilisation and Association Agreement (yet to be signed), the European Partnership, which defines specific priorities where progress must be made in view of further EU integration, a bilateral economic dialogue, as well as an Economic and Fiscal Programme, which is submitted annually to the European Commission by the national authorities. The Commission's annual Progress Report, usually published in autumn, assesses progress in meeting the Copenhagen accession criteria.