Economic Analysis: BiH Economic Freedom, Rule of Law and Investments

August 14, 2018 5:00 PM

Bosnia and Herzegovina’s economic freedom score is 61.4, making its economy the 91st freest in the 2018 Index. Its overall score has increased by 1.2 points, with improvements in the government spending, fiscal health, and judicial effectiveness indicators outweighing declines in government integrity and property rights. Bosnia and Herzegovina is ranked 38th among 44 countries in the Europe region, and its overall score is below the regional average but slightly above the world average.

Bosnia and Herzegovina’s economy has been driven by postwar reconstruction. Trade is an engine of growth, but the overall entrepreneurial environment remains one of the region’s most burdensome, hindering the emergence of a dynamic private sector. The highly decentralized government hampers policy coordination and reform, and excessive bureaucracy, weak rule of law, and market segmentation discourage foreign investment. Public perceptions of government corruption and misuse of taxpayer money motivate many to remain in the large informal economy.

It is generally acknowledged that registration of property titles is a significant barrier to the development of a real property and mortgage market. The complexity of government itself leads to deadlock and has bred a large informal economy. The judiciary is influenced by nationalist political parties and faces pressure from the executive branch. Inefficiency, incompetence, and corruption are widespread at all levels of government.

The top income and corporate tax rate is 10 percent, but various governing entities have different tax policies. The overall tax burden equals 38.1 percent of total domestic income. Over the past three years, government spending has amounted to 44.1 percent of total output (GDP), and budget deficits have averaged 1.0 percent of GDP. Public debt is equivalent to 44.4 percent of GDP.

Entrepreneurs face significant obstacles, exacerbated by complex legal and regulatory frameworks and government structures and nontransparent business procedures. High tax rates on labor discourage the hiring of new workers and increase incentives for unregistered employment. Labor legislation makes it hard to dismiss unneeded workers. The government subsidizes energy and inefficient state-owned enterprises and targets its agricultural subsidies poorly.

Trade is significant for Bosnia and Herzegovina’s economy; the combined value of exports and imports equals 88 percent of GDP. The average applied tariff rate is 1.1 percent. Nontariff barriers impede some trade. Government openness to foreign investment is above average. The banking sector remains well capitalized, but the level of nonperforming loans has risen. Foreign-owned banks account for over 80 percent of total banking assets.

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