FEDERATION OF EURO-ASIAN STOCK EXCHANGES
ANNUAL REPORT APRIL 2009
BANJA LUKA STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
The rising political temperature in BiH makes
it highly unlikely that the main parties will
reach agreement in the near future on the
internationally backed reform agenda. The
most important element of this is the reform
of BiH’s constitutional structure, with Bosniak
(Bosnian Muslim) leaders pushing for greater
centralization, and Bosnian Serbs and
Bosnian Croats favoring decentralized
structures.
BiH signed a stabilization and association
agreement (SAA) with the EU in June. Talks
on visa facilitation began recently, but there
are doubts as to whether BiH will be granted
EU candidate status during the forecast
period. BiH’s progress in EU integration will
depend in part on the pace of reforms and
the EU’s own appetite for further
enlargement following the rejection of the
Lisbon treaty by Irish voters in June 2008.
The SAA will set the broad policy framework
for the forecast period. The immediate
consequence is the reduction or abolition of
customs duties on a wide range of imports
from the EU, which took effect on July 1st
2008 and will greatly increase competition for
local producers in some sectors. The SAA
will require the BiH authorities to implement a
wide range of reforms affecting business, but
there are likely to be further delays during
2009-10 in strengthening policy co-ordination
between the entity governments and creating
a single economic space in BiH. Developing
a single economic space entails liberalizing
labor markets and making pension and
health benefits transferable across the
country.
Economic Performance
Economic growth in BiH in 2009-10 will be
influenced by the demand from the country’s
main trading partners in the EU and in south-
eastern Europe. Growth forecast for the Euro
zone in 2009 has gone down to 0.8% (from a
previous forecast of 0.9%) following weaker
than expected second-quarter GDP data.
Rapid expansion elsewhere in south-eastern
Europe should boost import demand in
several of BiH’s main regional export
markets. However, overall deceleration in
growth of import demand in BiH’s top export
markets in 2009 is expected. The external
picture should improve in 2010 as a
consequence of a modest recovery in the
Euro zone.
Real GDP growth in 2008 is estimated at 5%.
This primarily reflects strong expansion of
private consumption, driven by rapid growth
in real wages and consumer borrowing.
Large energy and road building projects will
boost construction in 2009-10, and industry
should grow strongly as leading metals
producers expand capacity. Private
consumption is expected to continue to grow
robustly, from a relatively low base, reflecting
further growth in bank lending and real
wages.
Inflation decelerated to 9.5% year on year in
August after rising steadily for more than a
year. There are signs that inflationary
pressures may have peaked for now,
because international oil prices have fallen
and food prices are rising less sharply. As
expenditure on food, housing and heating
accounts for 55% of average household
consumption in BiH, prices of these goods
and services are the main determinants of
inflation. Nonetheless, rapid growth of wages
and bank credit, as well as increases in
administered prices, will continue to feed
inflationary pressures. Price growth will be
only partly held in check by the continued
stabilizing influence of the currency board
arrangement, and it is estimated that the
average inflation in 2008 of 8%. A
deceleration of price growth over the
forecast period is also expected, reflecting
base-period effects and some policy
tightening. The marka appears to be
considerably overvalued, but the likelihood of
a change in the exchange-rate regime over
the forecast period is very low. The Central
Bank of BiH maintains sufficient reserves to
cover the whole of its monetary liabilities,
although the recent surge in the current-
account deficit has forced the authorities to
use some of these to finance the deficit.
Despite the large external deficit, a
speculative attack on the marka is as
unlikely. This is because of the continuing
trust in the currency board arrangement by
investors, and BiH’s low levels of integration
with global financial markets.
The current-account deficit widened to an
estimated 16.1% of GDP in 2008, from 13.5%
of GDP in 2007. Import costs will continue to
rise rapidly over the forecast period as a
result of strong growth in private
consumption, high food and oil prices, new
investment in industry and infrastructure, and
the reduction or abolition of import tariffs on
many goods from July 1st under the SAA.
Export expansion will be supported by
productivity gains stemming from recent
investment in heavy industry. However, BiH’s
export base will remain relatively narrow and
vulnerable to swings in international
commodity prices, and growth of import
demand in BiH’s leading export markets is
forecast to slow. We forecast average annual
current-account deficits equivalent to more
than 15% of GDP in 2009-10.*
* The Economic Intelligence Unit Ltd., October 2008.
Key Information Contacts
Ministers Council of Bosnia and Herzegovina www.vijeceministara.gov.ba
Ministry of Foreign Affairs of Bosnia and Herzegovina www.mvp.gov.ba
Republic of Srpska Government www.vladars.net
Central Bank of Bosnia and Herzegovina www.cbbh.ba
Republic of Srpska Securities Commission www.sec.rs.ba
Central Registry of Securities of Republic of Srpska www.fipa.gov.ba
Foreign Investment Promotion Agency of Bosnia and Herzegovina www.fipa.gov.ba
Directorate of European Integration www.dei.gov.ba
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