Analysis: Economic Development of BiH on its Way to the EU

March 4, 2019 5:00 PM

‘In February 2016, the country applied for EU membership and in September 2016 the European Council invited the European Commission to submit its Opinion on the merits of Bosnia and Herzegovina’s application. In December 2016, the Commissioner for European Neighbourhood Policy and Enlargement Negotiations handed over a comprehensive Questionnaire covering all EU accession criteria. The country’s consolidated answers were finalized in February 2018 and the answers handed over to the President of the European Commission. The Commission has started the work on its Opinion, which will be prepared on the basis of the country’s answers to the Questionnaire and follow up inquiries, dedicated peer reviews as well as Commission’s consultations with international organizations and civil society.

Concerning the economic development and competitiveness, Bosnia and Herzegovina has made some progress, but is still at an early stage of establishing a functioning market economy. Some improvements of the business environment have been achieved and the financial sector has been strengthened. Key remaining issues are a weak rule of law, a still poor business environment, a fragmented and inefficient public administration and major labour market imbalances, related to a poor education system, weak institutional capacities, and an unsupportive investment climate. Moreover, the informal economy remains significant.

Bosnia and Herzegovina has made some progress and remained at an early stage in achieving the capacity to cope with competitive pressure and market forces within the Union. The overall level of education and spending on research and development has remained low. The quality of the physical capital suffers from underinvestment. Transport and energy infrastructure is insufficiently developed. The speed of structural adjustment has been slow, although there has been some diversification in the country’s regional trade structure.

Migration management capacity, particularly in dealing with vulnerable groups, remains to be strengthened. In this context, Bosnia and Herzegovina needs to put in place a return mechanism for irregular migrants in line with EU standards and policies.

Public financial management reform programmes have been adopted at all levels of government, except in Republika Srpska entity. A country-wide reform strategy remains to be developed.

Considerable shortcomings exist regarding institutions’ internal control mechanisms at all levels, rendering the system vulnerable to inefficiency and waste, particularly in the area of public procurement. Ministries of Finance at various levels lack administrative capacity for further implementation of reforms in public finance management.

Bosnia and Herzegovina has not yet achieved sufficient budget transparency. Annual budgets are published, but no consolidated monthly reports exist at any level of administration. The lack of harmonisation on the charts of accounts at state and entity level hampers access to consolidated data. Follow-up on external audit findings needs improvement. There have been initiatives to prepare and plan a citizens’ budget, especially for some institutions at the level of the Council of Ministers, but their development needs still to be followed through.

The organisation and the typology of public administration bodies remains unclear, with no detailed functional criteria for differentiating between independent bodies and bodies which are subordinated to ministries. Also, there are no clear procedures for establishing, merging or abolishing administrative bodies. Clear lines of accountability are not ensured among institutions. Also, decision-making is very centralised, with little delegation from political level to senior civil servants. Performance management is not developed.

The financial independence of the Ombudsman from the executive remains a concern and the implementation of its recommendations remains low, thus affecting citizens’ right to good administration. The right to access public information is not ensured uniformly across government levels due to shortfalls in legislation and inconsistent implementation at all levels. Mechanisms for monitoring implementation remain weak. Efficiency of courts in dealing with administrative cases has improved, thus strengthening citizens’ right to administrative justice. The citizens’ right to seek compensation in cases of wrongdoing is regulated at all levels, but implementation cannot be verified due to lack of data on practical implementation.

The country’s physical capital stock suffers from decades of underinvestment. Public and private spending on improving the country’s capital stock remained very low in recent years. Despite political commitments to raise investment, public investment has suffered from a prioritisation of consumption and transfer payments while private investment is impeded by slow progress in improving the business environment. This hinders improving the growth potential and labour productivity, impeding efforts to improve income levels and living standards. The country’s digitalisation is still at a very low level.

Transport and energy infrastructure remains insufficiently developed. Necessary investment is delayed by a lack of coordination and cooperation between government levels, by financial constraints due to delays in securing agreed external financing and by the absence of a single or harmonised legal and regulatory framework. The markets for electricity and gas remain fragmented and dominated by key incumbent companies. The natural gas sector is regulated at entity level which impedes the development of adequate regulation and a common market.

The country’s economic structure has changed very little. During the last five years, there seems to have been remarkably little change in the sectoral structure of the economy. However, lack of information on the informal sector might mask important changes. The company structure is dominated by small and micro businesses, with companies of less than 50 employees accounting for 93 % of all companies. Their access to bank lending remains difficult. Support schemes are in place for small and medium-sized enterprises, but they are very cumbersome to implement.

 

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