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Overseas Business Risk - Bosnia and Herzegovina

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Overseas Business Risk - Bosnia and Herzegovina

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Information on key security and political risks which UK businesses may face when operating in Bosnia and Herzegovina.

1.Political and economic

1.1 Political overview

The Dayton Peace Agreement, which ended the war in Bosnia and Herzegovina in 1995, established a complex and highly devolved governance structure, which affects efficiency at all levels. The state has few competences whilst the two entities - the Bosniak and Croat-dominated Federation of Bosnia and Herzegovina and Serb-dominated Republika Srpska - enjoy substantial autonomy.

The Federation is further divided into ten cantons. Additionally there is the tiny Brcko District, a unit of local self-governance. Many of the challenges common to other Western Balkans’ countries therefore, such as underdeveloped institutions, low capacity of the civil service, and a weak judiciary are multi-layered in Bosnia and Herzegovina. This means that doing business in Bosnia and Herzegovina is more difficult than in many other countries in the region, even if local businesses have learnt over the years how to overcome various barriers.

The most recent general elections were held in October 2018, but over two years later Federation and some cantonal governments had still not formed. The previously appointed governments continue in technical mandates which hampers socioeconomic reform efforts.

1.2 Economic overview

Bosnia and Herzegovina is a relatively small, open transitional economy with strong import needs. In 2020, the country’s nominal GDP was EUR 16.97 billion, with a real annual GDP reduction of 5.5%.

Pre-pandemic, Bosnia and Herzegovina’s economy was growing, but at a pace below the more successful countries in Eastern Europe. The pandemic generated substantial output contractions in 2020.

Real unemployment continues to be high at approximately 20% posing a constraint on consumption. Average net monthly salary is €450.00. Government spending is large, at approximately 50% of GDP. The IMF forecasts GDP growth of 3.5% in 2021, depending on the COVID-19 pandemic.

Bosnia and Herzegovina’s economy became the focus of domestic and international attention after the protests and floods of 2014, the latter causing further damage to the economy. All this resulted in a stronger EU focus on socio-economic reforms, and over the last seven years BiH undertook reforms in the area of labour legislation, pensions, tax and the business climate to attract more foreign direct investment to the country.

The current EU focus on BiH is set out in the 2019 European Commission Opinion on candidacy status, prioritising democracy, functionality, the rule of law, human rights and public administrative reform. Socio-economic reforms also condition a potential Extended Fund Facility Arrangement with the IMF. If successfully negotiated, the country will undertake reforms in the area of taxation, energy, digitalization and transparency.

On 1 June 2015, the Stabilization and Association Agreement (SAA) between the EU and Bosnia and Herzegovina entered into force. The SAA establishes a closer partnership between the EU and Bosnia and Herzegovina; deepens the political, economic and trade ties necessary to increase the confidence of international and domestic investors.

It is the main framework for relations between the EU and Bosnia and Herzegovina. In 2020 the EU accounted for 60% of imports and 72% of exports. But to meet its legal obligations under the SAA, Bosnia and Herzegovina still needs to develop a national programme for the adoption of the EU acquis, as set out in the European Commission’s Opinion.

Recovering GDP growth in the Eurozone is expected to have a positive impact on the country’s industrial production. Export growth is observed across all traditional industries: electric power, steel, aluminium, furniture, as well as primary agricultural products. Although investors are guaranteed free transfer of capital as well as repatriation of profit, foreign direct investment remains modest and is hindered by excessive layers of bureaucracy and corruption.

According to Central Bank data, most investments between 1994 and 2014 came from Austria, Serbia and Croatia. In March 2021, Standard & Poor affirmed its sovereign credit rating of B with a stable outlook. The economy is underpinned by a convertible currency with fixed parity to the Euro. As a result, the convertible mark is one of the most stable currencies in Southeast Europe. The banking sector in Bosnia and Herzegovina remains reasonably liquid and well capitalised. Foreign banks account for over 90% of total assets in the financial system, but the banking sector has not been subject to large credit outflows to parent banks.

The IMF approved disbursements of €330 million through a Rapid Financing Instrument in 2020. In addition, BiH signed a EUR 250 million macro-financing package with the EU and is seeking an Extended-Fund-Facility Arrangement with the IMF, valued at over EUR 700 million.

The government can provide finance or credit insurance specifically to support UK exports through UK Export Finance – the UK’s export credit agency. For up-to-date country specific information on the support available see UK Export Finance’s country cover policy and indicators.

The frequent political stalemates and the resulting low predictability for investors have a negative bearing on the business environment. This is further hampered by poor rule of law, substantial red tape, corruption and lengthy and complex administrative procedures, partly as a result of the high degree of fragmentation of the country’s internal market. As a result of a poor business environment and of weaknesses in the country’s education system, structural unemployment is worryingly high, in particular among young people and vulnerable groups.

Furthermore, the informal economy remains significant, creating unfair competition and leading to a higher tax burden than otherwise necessary. This situation has led to high levels of emigration. A 2018 World Economic Forum report found only Haiti and Venezuela had higher rates of lost talent.

2. Human rights

A legal and institutional framework for the observance of human rights is in place and the main elements of international human rights laws have been incorporated into the legal system. With regard to labour and trade union rights, the law provides for the right of workers in both entities to form and join independent unions. In both entities and Brcko District, the law provides for the right to strike. New labour laws were adopted in both the Federation and Republika Srpska, with the aim of introducing “Flexi-Security” into the system.

Fragmentation of the legal framework across the country remains an issue, notably regarding economic and social rights.

Violations of worker rights continue to be a lower priority for labour inspectors, who focus instead on unregistered employees and employers not paying taxes. While no legal or technical barriers prevent an employee from bringing a complaint against an employer, high unemployment coupled with fear of losing one’s job, backlogs in the court system, and the lack of legal protection for the large section of the labour force working in the informal economy remain disincentives to filing complaints.

People with disabilities face particular problems. There is a law banning discrimination where disability would be covered but implementation is weak and there is no specific state law regarding disability. Legislation does not ensure this category of the equal opportunity to work. Individuals with disabilities, particularly those with more severe impairments, are not generally in a position to find employment on the open labour market. There are few companies focusing on the employment of people with disabilities and those that do are active only in major urban centres.

Legal provisions guaranteeing women’s rights and gender equality are in place. Although few women hold positions of substantial economic or political power, they are represented in most professions. However, surveys have shown that women have no larger share in employment than men in any formal economic sector. There are improvements in legislation related to protection of equal opportunities for LGBT people but conservative values are prevalent and Pride marches proved impossible before 2019.

3.Bribery and corruption

Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world. In addition, a commercial organization carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national nor resident in the UK nor a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.

The 2010 Bribery Act, became law on 1 July 2011, signalling a concerted effort by the UK to be among the leading nations in international anti-corruption efforts. The Ministry of Justice published Guidance for business on 30 March 2011, to help companies to familiarise themselves with the Act before it becomes law.

The Commission Opinion on Bosnia and Herzegovina’s application for membership of the European Union indicates that the fight against corruption and organised crime is hampered by a lack of harmonisation of legislation across the country and by weak institutional cooperation and coordination. Corruption is widespread and all levels of government show signs of political capture directly affecting the daily lives of citizens, notably in health, education, employment and public procurement matters.

The policy, institutional and legal framework to prevent corruption is fragmented and has significant gaps. Law-enforcement agencies are fragmented and vulnerable to undue political interference. Prosecutors are not sufficiently proactive. Financial investigations and asset seizures are largely ineffective. The fight against money laundering needs to be stepped up.

Transparency International operates a branch office in Bosnia and Herzegovina. Transparency International’s 2020 Corruption Perception Index, ranked Bosnia and Herzegovina 111th out of 180, down from 89th in 2018. Its score of 35 is 7 lower than 2012..

4. Terrorism threat

There is a general threat from terrorism. Attacks could be indiscriminate, including in places visited by foreigners.

5. Protective security advice

Read the information provided on our protective security advice page.

6. Intellectual property

Bosnia and Herzegovina continues to make progress, particularly in the area of intellectual, industrial and commercial property rights. Further efforts are required to improve enforcement and coordination. In general, there is a low level of awareness of copyright issues in the country’s private sector.

7. Organised crime

Bosnia and Herzegovina faces challenges from organised crime including drug trafficking, trafficking in human beings, illegal migration, illegal firearms and counterfeiting. Bosnia and Herzegovina is both a transit route and a destination for organised crime activity.

The 2019 EU Analytical Report on Bosnia and Herzegovina’s EU membership application notes that Bosnia and Herzegovina has strategies in place for combatting organised crime and trafficking in human beings. However, it notes shortcomings in operational cooperation between law enforcement agencies, limited exchange of intelligence, police vulnerability to political interference and ineffective use of financial investigations and asset seizures. All these are exploited by criminal organisations.

The 2019 report notes a decrease of numbers compared to 2018. There were 55 investigations into organised crime with 417 suspects, 25 indictments with 134 accused and 26 sentences with 91 convicted (cf 146 convictions in 2018). A European Commission review in 2020 found no progress was made in addressing the Opinion priorities on the fight against organised crime. In February 2018, Bosnia and Herzegovina was removed from the Financial Action Task Force (FATF) list of high-risk third countries with deficiencies in anti-money-laundering/counter terrorism financing, and from the EU list of high-risk countries in May 2020.

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