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Bosnia and Herzegovina: Market Profile

Picture: Bosnia and Herzegovina factsheet
Picture: Bosnia and Herzegovina factsheet

1. Overview

Bosnia and Herzegovina is an upper middle-income country that has made good progress in terms of its development since the end of the Bosnian War in the mid-1990s. Its complex political system reflects the constitutional provisions made by the Dayton Agreement (to end the ethnic conflict), as well as the subsequent amendments introduced under the auspices of the international community through the Office of the High Representative. It is a European Union (EU) potential candidate country that is embarking on a new growth model. In July 2015, the governments of the respective regions adopted a joint structural reforms programme.

Sources: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

March 2015
EU foreign ministers and Bosnia-Herzegovina signed the Stabilisation and Association Agreement (SAA) that had been on hold since 2008, increasing the likelihood of Bosnia joining the EU if it carries out key political and economic reforms.

February 2016
Bosnia submitted formal application to join the EU.

September 2018
Bosnian utility EPBiH announced that a BAM1.8 billion (USD1.1 billion) generating unit at its Tuzla coal-fired power plant has received backing from Mainland China-based firms. Under a deal signed in November 2017, the state-funded Export-Import Bank of Mainland China is to provide a BAM1.2 billion loan for what will be the largest investment in Bosnia’s post-war energy infrastructure.

October 2018
Bosnia held presidential and parliamentary elections on October 7. The new three-person presidency is made up of Bosnian Serb leader Milorad Dodik, Šefik Džaferović from the Party of Democratic Action (the main Islamic party in Bosnia), and Social Democrat Željko Komšić who represents Croat voters.

Sources: BBC Country Profile – Timeline, Fitch Solutions

3. Major Economic Indicators

Graph: Bosnia and Herzegovina real GDP and inflation
Graph: Bosnia and Herzegovina real GDP and inflation
Graph: Bosnia and Herzegovina GDP by sector (2017)
Graph: Bosnia and Herzegovina GDP by sector (2017)
Graph: Bosnia and Herzegovina unemployment rate
Graph: Bosnia and Herzegovina unemployment rate
Graph: Bosnia and Herzegovina current account balance
Graph: Bosnia and Herzegovina current account balance

e = estimate, f = forecast
Sources: IMF, World Bank, Fitch Solutions
Date last reviewed: June 13, 2019

4. External Trade

4.1 Merchandise Trade

Graph: Bosnia and Herzegovina merchandise trade
Graph: Bosnia and Herzegovina merchandise trade

Source: WTO
Date last reviewed: June 13, 2019

Graph: Bosnia and Herzegovina major export commodities (2018)
Graph: Bosnia and Herzegovina major export commodities (2018)
Graph: Bosnia and Herzegovina major export markets (2018)
Note: Area NES accounts for 12.6% of 2018 exports
Graph: Bosnia and Herzegovina major export markets (2018)
Note: Area NES accounts for 12.6% of 2018 exports
Graph: Bosnia and Herzegovina major import commodities (2018)
Graph: Bosnia and Herzegovina major import commodities (2018)
Graph: Bosnia and Herzegovina major import markets (2018)
Note: Area NES accounts for 10.9% of 2018 imports
Graph: Bosnia and Herzegovina major import markets (2018)
Note: Area NES accounts for 10.9% of 2018 imports

Sources: Trade Map, Fitch Solutions
Date last reviewed: June 13, 2019

4.2 Trade in Services

Graph: Bosnia and Herzegovina trade in services
Graph: Bosnia and Herzegovina trade in services

Source: WTO
Date last reviewed: June 13, 2019

5. Trade Policies

  • Bosnia and Herzegovina is not yet a member of the World Trade Organization (WTO). The Working Party was established on July 15, 1999, when the country started its accession negotiations for the WTO. In February 2018, the 13th meeting of the Working Party on the Accession of Bosnia was held, where WTO members supported the prompt conclusion of negotiations and welcomed the commitment by Sarajevo to finalise its accession process over the course of 2018. As of May 2019, this is ongoing.

  • The customs policy law and the rates of customs tariffs to be applied are largely based on EU standards. Bosnia has signed the SAA and the Central European Free Trade Agreement (CEFTA).

  • The tariff rate on imports to Bosnia averages a comparatively low 1.1% of the value of goods (for international trade), which is the lowest figure regionally and the third-lowest figure in the wider Emerging Europe region. Bosnia’s import tariffs are harmonised each year with the combined imported nomenclature of EU and legislative regulations.

  • Customs duties on all commodities into Bosnia are also paid ad valorem at rates of 0%, 5%, 10% and 15%.

  • An excise tax is paid on certain imported and domestic goods, including coffee, oil derivatives, tobacco, beverages and alcoholic drinks.

  • In 2009, Bosnia introduced a law for the protection of domestic products against imports from Croatia and Serbia. The law stipulates that safeguard measures were necessary owing to the influx of imports and the dumping of agricultural products (in particular) from Croatia and Serbia, as well as a conceivable decrease in exports from Bosnia to Serbia.

  • As a result of Bosnia not having EU member status, even though the majority of its trading partners are EU member states, export and import supply chains will face more onerous border and documentary times and costs when compared with those of EU states. The most salient risk is the high cost associated with the import border compliance process, which is higher than that of countries such as North Macedonia, and contributes to Bosnia's status as regional underperformer in relation to customs burdens.

Sources: WTO - Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

Bosnia formally applied for EU membership in February 2016. Accession would open up trade, investment and growth opportunities for the economy. The country has already made great strides in establishing free trade and preliminary agreements to speed up the process of EU accession, but the process is currently ongoing. Bosnia is also currently discussing the possibility of the creation of a Western Balkans Customs Union with its South East European counterparts. The customs union would look to build on the current CEFTA by eliminating existing non-tariff trade barriers between member states.

6.2 Multinational Trade Agreements

Active

  1. Bosnia and Herzegovina-EU: The SAA between the EU and Bosnia entered into force on June 1, 2015, and has caused a shift in the latter's export and import partners and goods. The SAA establishes a close partnership between the EU and Bosnia and deepens the political, economic and trade ties between the two parties. It is from now on the main framework for relations between the EU and Bosnia, further preparing the latter for future EU membership. The entry into force of the SAA has also increased the confidence of domestic and international investors in Bosnia. It allows both Bosnian and EU companies to access their respective markets. This is conducive to enhanced business opportunities for the EU and Bosnia-based companies and would stimulate economic growth and employment. The SAA will also contribute to the progressive alignment of Bosnian norms and legislation with EU legislation, thus benefitting Bosnian citizens through better quality, healthier and safer goods. The EU accounts for approximately 50% of imports and exports to and from Bosnia.

  2. Bosnia-Herzegovina-European Free Trade Association (EFTA): The EFTA consists of Switzerland, Norway, Iceland and Liechtenstein. The main focus of this free trade agreement (FTA), which came into force in January 2015, is the liberalisation of trade in goods. The agreement abolishes all customs duties on industrial products as of its entry into force. Additional agricultural agreements between individual EFTA states and Bosnia form an integral part of the instruments establishing the free trade area.

  3. The CEFTA: CEFTA consists of Albania, Bosnia-Herzegovina, Serbia, Moldova, Montenegro, North Macedonia and Kosovo. It came into force in May 2007 and helps increase trade between regional counterparts as well as foster non-EU bilateral relations.

  4. Bosnia-Herzegovina-Turkey: An FTA with Turkey, which came into force in July 2003, provides additional free access to a consumer market of 80 million people.

Under Negotiation

Bosnia-Herzegovina-Malaysia: The agreement, which is expected to materialise by 2020, will help businesses exploit opportunities in manufacturing and the import and export of halal products owing to the large population of Muslim consumers in both markets. This will also boost service exports in terms of tourism in both countries.

Source: WTO Regional Trade Agreements database

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Bosnia and Herzegovina FDI stock
Graph: Bosnia and Herzegovina FDI stock
Graph: Bosnia and Herzegovina FDI flow
Graph: Bosnia and Herzegovina FDI flow

Source: UNCTAD
Date last reviewed: June 13, 2019

7.2 Foreign Direct Investment Policy

  1. The Foreign Investment Promotion Agency (FIPA) of Bosnia and Herzegovina works to attract foreign direct investment (FDI) and encourage existing investors to expand their businesses in Bosnia. FIPA has identified sectors such as manufacturing, energy and wood processing as key industries that are likely to see high investment growth in the coming years.

  2. Overall, there are no restrictions on foreign investment or ownership, with the exception of the defence and media sectors, where foreign control is capped at 49%.

  3. FDI has mostly gone into the manufacturing sector and supported the privatisation of many key industries after the Bosnian War, such as the metals, agriculture, food processing, textile and chemical industries. FDI also contributed to the rapid development of banking and financial services in Bosnia.

  4. Currently, there are 20 energy projects, valued at more than EUR2 billion, under development in Bosnia. The estimated value of investment in the development and rehabilitation of the electricity transmission network is expected to reach EUR279 million by 2020. Projects worth more than EUR1.5 billion for new coal-fired power plants were signed in May 2016.

  5. In August 2018, Autoceste FBiH launched a EUR235 million (USD272 million) tender for the construction of two priority Corridor Vc sections along Pan-European Transport Corridor Vc. The project covers construction of the section Tarcin-Konjic, the subsection Tarcin-Ivan (length 6.8km), lot 2 Tunnel Ivan (length 2km) and the Poprikuse-Nemila section (length 5.1km). The European Bank for Reconstruction and Development will loan EUR120 million and the European Investment Bank will loan EUR90 million towards project financing.

  6. Businesses operating in Bosnia face a high import burden as infrastructure development, industrial capacity and diversification remain weak owing to a dearth of fixed capital formation and the lack of political resolve in the country. Imports are, therefore, driven by the country's need for complex machinery and manufactured goods that cannot be produced locally, as well as some of its energy requirements, such as oil and gas.

  7. A bonus to foreign investors is the Law on the Policy of FDI, which accords foreign investors the same rights as domestic investors, including during the bidding process for privatisation tenders. Existing investors are also granted protection from amendments to the Law on Foreign Investment. If the Bosnian government were to make changes to this law, the individual investor may select the most favourable version of regulations to apply.

  8. Despite the various investment incentives of the Bosnian market, some short-term risks as well as long-term barriers to FDI still exist. State-owned enterprises (SOEs) – which affect sectors such as defence, media and telecommunications – are mostly owned by the sub-national governments and are thus controlled by various political parties. By law, private enterprises can compete under the same conditions as public ones, but in practice, SOEs have the upper hand as some of them hold a near-monopoly and make large profits due to their dominant market position.

  9. Corporate income tax laws are rather complicated owing to the fragmentation of Bosnia into two territorial entities. The Federation of Bosnia-Herzegovina (FBiH) distinguishes between resident business entities (whereby actual management or supervision is in the FBiH), which have to pay corporate income tax on their worldwide income, and non-resident businesses (whereby actual management and supervision is based outside the FBiH), which pay taxes on income realised in the FBiH only.

  10. Although Bosnian law states that foreign investors will have the same ownership rights of real estate as domestic persons, the Law on Agricultural Land prohibits foreigners from acquiring ownership of agricultural land unless international agreements state otherwise. The rights of foreigners to own real estate in Bosnia may also be subject to reciprocity. This may present risks to investors or simply dissuade them from investing or seeking ownership of property in the country.

Sources: WTO - Trade Policy Review, ITA, US Department of Commerce, Fitch Solutions

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
Bosnia and Herzegovina operates a number of Free Trade Zones (FTZs) which offer a range of incentives for investment. There are six FTZs which are located at Vogošća, Sarajevo, Holc, Lukavac, Mostar and Visoko.- Investors in these zones do not pay taxes or contributions, and are free to invest and re-transfer capital, as well as transfer their profits

- The FTZs are exempt from Value Added Tax (VAT), contributions and import duties

- Investment and the transfer of profit and investments are free of charge

- Reduced Municipal fees for facilities construction, allowing for payment in instalments

- Faster administration for acquisition of construction permits

- Reduced costs for certificates of occupancy for usable areas

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2019

  • Value Added Tax: 17%
  • Corporate Income Tax: 10%

Sources: Indirect Taxation Authority of Bosnia and Herzegovina, Fitch Solutions

8.1 Important Updates to Taxation Information

Bosnia-Herzegovina has a complex tax system owing to the fragmentation of the state into semi-autonomous entities. Despite a generally low corporate tax rate and an array of tax exemption schemes, the country has a high VAT rate and prohibitive payment procedures.

8.2 Business Taxes

Type of TaxTax Rate and Base in Federation of Bosnia and HerzegovinaTax Rate and Base in Republika SrpskaTax Rate and Base in District of Brčko
Corporate Income Tax (standard)10% on operating profits10% on operating profits10% on operating profits
Capital Gains TaxTaxable as part of operating profits at 10%Taxable as part of operating profits at 10%Taxable as part of operating profits at 10%
VAT
17% on value of the products in all regions17% on value of the products in all regions17% on value of the products in all regions
Dividends5% withholding tax10% withholding tax10% withholding tax
Property TaxNot applicable for corporate entities0.05% to 0.5% of property value0.05% to 1.0% of property value
Social security contributionsTotal rate 41.5% applicable to gross salary; out of that, 31% is employee contribution and 10.5% is paid by employerTotal rate 33.0% applicable to gross salary – all payable by employee; no employer contributionTotal rate 31.5% applicable to gross salary – 25.5% is payable by employee; 6% employer contribution

Source: Indirect Taxation Authority of Bosnia and Herzegovina
Date last reviewed: June 13, 2019

9. Foreign Worker Requirements

9.1 Localisation Requirements

Since unemployment in Bosnia and Herzegovina is high, requirements for businesses to hire foreign workers are rigorous. Quotas on the number of work permits which may be issued to foreign workers for each sector of the economy are decided on an annual basis by the Council of Ministers. Only the highest level of educational degrees are accepted as a legitimate reason to hire a foreigner instead of a local.

9.2 Foreign Worker Permits

The permit application process is lengthy, with 45-50 days required for a work permit and 30 days for a residence permit. Work permits are valid for a period up to one year and are only valid for the specific job and specific employer for which they are originally issued. The risks associated with such rigorous demands and lengthy visa processes will deter businesses requiring highly skilled workers from setting up in Bosnia and Herzegovina, as the low skill level of the domestic labour force means that foreign labour will often be required.

9.3 Visa/Travel Restrictions

A visa application will take approximately 30 days and citizens of all African, some Latin American and most Asian and Middle Eastern states require a visa before arrival. Owing to various visa arrangements, foreign nationals from 79 jurisdictions that including Europe (except Belarus), North America, Australia, Hong Kong, Mainland China, New Zealand and some parts of Latin America enjoy access to Bosnia and Herzegovina without a visa for up to 90 days.

Sources: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
B3 (Stable)
16/02/2018
Standard & Poor'sB (Stable)
08/03/2019
Fitch Ratings
Not Rated
N/A

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201720182019
Ease of Doing Business Index
81/19086/19089/190
Ease of Paying Taxes Index
133/190137/190139/190
Logistics Performance Index
N/A72/160N/A
Corruption Perception Index
91/18089/180N/A
IMD World CompetitivenessN/A
N/AN/A

Sources: World Bank, Transparency International

10.3 Fitch Solutions Risk Indices


World Ranking
201720182019
Economic Risk Index RankN/A132/202133/202
Short-Term Economic Risk Score35.036.535.8
Long-Term Economic Risk Score44.846.347.0
Political Risk Index RankN/A132/202133/202
Short-Term Political Risk Score40.641.039.4
Long-Term Political Risk Score55.855.855.8
Operational Risk Index RankN/A116/201114/201
Operational Risk Score45.146.046.8

Source: Fitch Solutions
Date last reviewed: June 13, 2019

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
Economic activity continues to show resilience despite political uncertainty, and GDP growth is expected to accelerate slightly over the coming years. Household consumption will be the main driver of the expansion, and investment activity has strong potential but remains highly vulnerable to political and funding risks. External headwinds from a regional slowdown will weigh on export growth and on Bosnia-Herzegovina’s industrial sector, although the impact on headline growth should be modest.

OPERATIONAL RISK
Bosnia and Herzegovina offers an operating environment with significant operational risks, mainly relating to weak transport infrastructure, the limited size of the labour force, a fractured political environment and weak cross-border relationships. Even though the country has a relatively open investment climate, with no restrictions on foreign direct investment and a low rate of corporate income tax, its small market size, shortages of skilled workers, complicated regulatory barriers, and  legal risks weigh down investor confidence. The transport network's poor coverage and quality increase the costs of freight transport and the risk of supply chain disruption. However, there are several projects in the works to bring Bosnia's railway network up to par with EU railway legislation guidelines, including plans to build a high-speed rail connection between Sarajevo and Belgrade.

Source: Fitch Solutions
Date last reviewed: May 10, 2019

10.5 Fitch Solutions Political and Economic Risk Indices

Graph: Bosnia and Herzegovina short term political risk index
Graph: Bosnia and Herzegovina short term political risk index
Graph: Bosnia and Herzegovina long term political risk index
Graph: Bosnia and Herzegovina long term political risk index
Graph: Bosnia and Herzegovina short term economic risk index
Graph: Bosnia and Herzegovina short term economic risk index
Graph: Bosnia and Herzegovina long term economic risk index
Graph: Bosnia and Herzegovina long term economic risk index

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: June 13, 2019

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Bosnia and Herzegovina Score46.846.346.448.545.9
Southeast Europe Average57.9
54.058.859.559.4
Southeast Europe Position (out of 12)12
111212
10
Emerging Europe Average57.655.959.158.656.8
Emerging Europe Position (out of 31)27
28
2827
22
Global Average49.7
50.349.849.049.8
Global Position (out of 201)114
125116
97
108

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Bosnia and Herzegovina vs global and regional averages
Graph: Bosnia and Herzegovina vs global and regional averages
Country
Operational Risk Index
Labour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Security Risk Index
Slovenia
69.356.8
63.3
73.583.4
Croatia64.553.3
56.7
71.376.7
Romania62.959.161.263.068.5
Cyprus62.756.764.161.368.8
Bulgaria
61.058.763.960.161.1
Serbia57.760.160.957.0
52.5
Montenegro57.5
55.958.456.659.3
North Macedonia55.745.364.256.257.3
Turkey54.852.359.864.942.0
Kosovo51.554.958.652.040.7
Albania50.848.448.349.756.8
Bosnia and Herzegovina46.846.346.448.545.9
Regional Averages57.954.058.859.559.4
Emerging Markets Averages46.048.146.544.744.8
Global Markets Averages49.750.349.849.0
49.8

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: June 13, 2019

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Bosnia and Herzegovina

Graph: Major export commodities to Bosnia and Herzegovina (2018)
Graph: Major export commodities to Bosnia and Herzegovina (2018)
Graph: Major import commodities from Bosnia and Herzegovina (2018)
Graph: Major import commodities from Bosnia and Herzegovina (2018)

Note: Graph shows the main Hong Kong exports to/imports from Bosnia and Herzegovina (by consignment)
Date last reviewed: June 13, 2019

Graph: Merchandise exports to Bosnia and Herzegovina
Graph: Merchandise exports to Bosnia and Herzegovina
Graph: Merchandise imports from Bosnia and Herzegovina
Graph: Merchandise imports from Bosnia and Herzegovina

Note: Graph shows Hong Kong exports to/imports from Bosnia and Herzegovina (by consignment)
Exchange Rate HK$/US$, average
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
7.83 (2018)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: June 13, 2019


2017
Growth rate (%)
Number of Bosnian residents visiting Hong Kong775
0.4

Source: Hong Kong Tourism Board


2017
Growth rate (%)
Number of European residents visiting Hong Kong1,929,824
-0.2

Sources: Hong Kong Tourism Board, Fitch Solutions
Date last reviewed: June 13, 2019

11.2 Commercial Presence in Hong Kong


2017
Growth rate (%)
Number of Bosnian companies in Hong Kong N/A   N/A
- Regional headquarters
- Regional offices
- Local offices


11.3 Treaties and Agreements between Hong Kong and Bosnia and Herzegovina

  • The agreement between Mainland China and Bosnia and Herzegovina on the Promotion and Protection of Investments entered into force in January 2005. The duration of the initial treaty term is 10 years, with its purpose being to extend and intensify the economic cooperation between the two countries.

  • The agreement on the abolition of visa requirements for holders of ordinary passports between Bosnia and Herzegovina and Mainland China was signed by the two countries in November 2017. The agreement stipulates that citizens of Bosnia and Herzegovina and Mainland China who are holders of valid passports will have no obligation to obtain visas for entry, exit, stay or transit through the territory of the other contracting party for up to 90 days within a 180-day period.

  • The agreement on agricultural cooperation between Bosnia and Herzegovina and Mainland China was signed in November 2017. The signing of this agreement is opening the process of intensive communication between institutions and business communities in the field of agriculture and rural development in both countries, as well as providing further promotion of economic, scientific and technological cooperation in the aforementioned sectors.

  • Bosnia and Herzegovina has a Double Taxation Agreement with China, which entered into force in December 1989.

Sources: Government Sources, Fitch Solutions

11.4 Visa Requirements for Hong Kong Residents

A tourist visa is not required for Hong Kong residents for a stay up to 90 days. All travelers will need a passport valid for at least 90 days from the date of first entry into the territory of Bosnia and Herzegovina.

Source: Hong Kong Immigration Department
Date last reviewed: June 13, 2019

Content provided by Picture: Fitch Solutions – BMI Research
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