2023 Investment Climate Statements: Bosnia and Herzegovina

Policies Towards Foreign Direct Investment 

Bosnia and Herzegovina (BiH) struggles to attract foreign investment.  Complex labor and pension laws, the lack of a single economic space, and inadequate judicial and regulatory protections, among other challenges, deter investment.  Under the BiH constitution, established through the Dayton Peace Agreement that ended the 1990s war, Bosnia and Herzegovina (henceforth “the state”) is comprised of two “entities,” the Federation of BiH (the Federation) and the Republika Srpska (RS).  A third, smaller area, the Brčko District, operates under a special status.  The Federation includes ten cantons, each with its own government and responsibilities.  There are also 143 municipalities in BiH: 63 in the RS and 80 in the Federation.  As a result, BiH has a multi-tiered legal and regulatory framework that can be duplicative and contradictory and is not conducive to attracting foreign investors.

Employers bear a heavy burden toward governments.  On top of employee wages, employers must contribute 69 percent of each employee’s net wages in the Federation, and 52 percent in the RS, to the health, unemployment, and pension systems.  The labor and pension laws are also deterrents to investment, and major reform has stalled.  While corporate income taxes in the two entities and Brčko District are now harmonized at 10 percent, business registration requirements are not harmonized.  The RS has its own registration requirements, which apply to the entire entity.  Each of the Federation’s ten cantons has different business regulations and administrative procedures affecting companies. Simplifying and streamlining this framework is essential to achieving a competitive investment climate.  EU reforms target changes that should improve the investment climate by clarifying and simplifying regulation and procedures while decreasing fees faced by businesses at the entity, canton, and municipal levels, but lack of political will has stalled even the most basic of reforms.

Generally, BiH’s legal framework does not discriminate against foreign investors.  Given the high level of corruption, however, foreign investors can be at a significant disadvantage in relation to entrenched local companies and some foreign investors, such as the PRC, with formal or informal backing by BiH’s various levels of government.

The Foreign Investment Promotion Agency (FIPA) is a state-level organization mandated by the Council of Ministers to facilitate and support FDI ( www.fipa.gov.ba ).  FIPA provides data, analysis, and advice on the business and investment climate to foreign investors and maintains a database of some 400 available projects being marketed to foreign investors.  All FIPA services are free of charge.

BiH does not maintain an ongoing, formal dialogue with foreign investors, and after-care is generally ad-hoc.  Sporadically, high-ranking government officials give media statements inviting foreign investments in the energy, transportation, and agriculture industries; however, the announcements are rarely supported by tangible, commercially viable investment opportunities.

Generally, BiH does not screen investments on national security grounds unless there is a “reasonable doubt” that some of those investments might pose a threat to the national security.

Limits on Foreign Control and Right to Private Ownership and Establishment 

According to the Law on the Policy of FDI, foreign investors are entitled to invest in any sector of the economy in the same form and under the same conditions as those defined for residents.  Exceptions include the defense industry and some areas of publishing and media, specifically public television and radio services, where foreign ownership is restricted to 49 percent; and electric power transmission, which is closed to foreign investment. The law provides for foreign investors to seek exceptions to some of these foreign ownership restrictions, which must be approved by the relevant entity-level government and minister. In practice, additional sectors are dominated by government-owned monopolies (such as airport operation) or oligopolies (such as telecommunications and electricity generation), making it difficult for foreign investors to engage.  There have been no significant privatizations of government-owned enterprises in the past few years.

 Other Investment Policy Reviews 

In the past three years, the BiH government has not conducted an investment policy review through the Organization for Economic Cooperation and Development (OECD); the World Trade Organization (WTO); or the United Nations Conference on Trade and Development (UNCTAD).  The Foreign Investors Council (FIC), a business association representing the interests of foreign investors present in BiH, has published six editions of the White Book (most recent 2015/16), a document that addresses key issues and obstacles that investors face in BiH and details recommendations for improving the investment climate to create better business conditions for foreign and domestic investors. The White Book is available at https://fic.ba/en/white-book/ .

Business Facilitation 

Establishing a business in BiH can be an extremely burdensome and time-consuming process for investors.  Registration in BiH can sometimes be expedited if companies retain a local lawyer to follow up at each step of the process.  The RS established a one-stop shop for business registration in the entity.  On paper, this dramatically reduced the time required to register a business in the RS, bringing the government-reported time to register a company down to an average of 7 to 14 days.  Some businesses, however, report that in practice it can take significantly longer. There is no one-stop shop in the Federation.

The entity, cantonal, and municipal levels of government each establish their own laws and regulations on business operations, creating redundant and inconsistent procedures that deter foreign investors and facilitate corruption.  It is often difficult to understand all the laws and rules that might apply to certain business activities, given overlapping jurisdictions and the lack of a central information source.  It is therefore critical that foreign investors obtain local assistance and advice.  Investors in the Federation may register their business as a branch in the RS and vice versa.

The most common U.S. business presence found in BiH are representative offices.  A representative office is not considered to be a legal entity and its activities are limited to market research, contract or investment preparations, technical cooperation, and similar business facilitation activities.  The BiH Law on Foreign Trade Policy governs the establishment of a representative office.  To open a representative office, a company must register with the Registry of Representative Offices, maintained by the BiH Ministry of Foreign Trade and Economic Affairs (MoFTER), and the appropriate entity’s ministry of trade.

Additional English-language information on the business registration process can be found at:

BiH Ministry of Foreign Trade & Economic Relations (MoFTER):
Ph: +387-33-220-093
www.mvteo.gov.ba 

BiH Foreign Investment Promotion Agency (FIPA):
Ph: + 387 33 278 080
www.fipa.gov.ba 

Republika Srpska Company Registration Website:
http://www.investsrpska.net 

Outward Investment 

The government does not restrict domestic investors from investing abroad.  There are no programs to promote or incentivize outward investment.

Transparency of the Regulatory System 

The government has adequate laws to foster competition; however, due to corruption, political influence, and preferential treatment of government-owned companies, laws are often not implemented transparently or efficiently.  Additionally, political dysfunction results in lengthy delays in adapting and/or updating regulations necessary to implement legislation.  Accounting, legal, and regulatory procedures are often not transparent, though publicly listed companies adhere to International Financial Reporting Standards (IFRS). The multitude of state, entity, cantonal (in the Federation only), and municipal administrations – each with the power to establish laws and/or regulations affecting business – creates a heavily bureaucratic, non-transparent system.

The government in BiH does not actively promote or require environmental, social, and governance (ESG) disclosures to facilitate transparency. The audit offices on the state and entity level conduct annual audits to assess whether government institutions are compliant with all applicable regulations and processes.

BIH’s fiscal transparency of budget operations, including debt issuance, is generally satisfactory. The Ministries of Finance at the state and entity levels maintain an acceptable level of transparency of budget revenues and expenditures.

Ministries and/or regulatory agencies are obligated to publish the text of proposed regulations for public comment before they are enacted, but this process does not always occur in practice.  Some local and international companies have expressed frustration with generally limited opportunities to provide input and influence/improve draft legislation that impacts the business community.  The EU helped create a website, www.ekonsultacije.ba, where key regulatory actions may be published with the goal of enhancing citizen oversight. All officially approved laws and regulations are published in the Official Gazette at the state, entity, or cantonal level (as appropriate).

Foreign investors have criticized the public procurement system for a lack of openness and transparency, and for allowing lengthy (and often unfounded) appeals.

Regulations are enforced by inspectors from a number of entity and cantonal/municipal agencies including the financial police, labor inspectorate, market inspectorate, sanitary inspectorate, health inspectorate, fire-fighting inspectorate, environmental inspectorate, institution for the protection of cultural monuments, tourism and food inspectorate, construction inspectorate, communal inspectorate, and veterinary inspectorate.  Some investors and businesses have complained about non-transparent fees levied during inspections, changing rules and regulations, and an ineffective appeal process to protest these fines.

International Regulatory Considerations 

BiH became an EU candidate in 2022 and is in the process of aligning its legislation and regulations with the EU in anticipation of beginning the accession process. BiH is undergoing an accession process to join the WTO, but the Working Party has not met since 2018..

Legal System and Judicial Independence 

The BiH legal system is based on civil law. There is a complicated court structure that mirrors the legal and regulatory structure of the country and includes courts at the state, entity, cantonal (in the Federation), and municipal levels. There is some overlap in jurisdictions. The RS has a designated commercial court system, including district commercial courts and a High Commercial Court. In the Federation, commercial cases are decided by cantonal courts. Regulations or enforcement actions can be appealed, and appeals are adjudicated in the national court system.

BiH has an overloaded court system. It often takes many years for a case to be brought to trial, after which multiple appeals are possible. Corruption is endemic in the judicial system. Political parties and organized crime figures have sometimes influenced the judiciary at both the state and entity levels in politically sensitive cases, especially those related to corruption. Authorities at times failed to enforce court decisions. As a result, contract enforcement and dispute resolution through the national legal system remains difficult.

Moreover, commercial cases with subject matter that judges do not have experience adjudicating, such as intellectual property rights, are often left unresolved for lengthy periods of time.  Most judges have little to no in-depth knowledge of adjudicating international commercial disputes and require training on applicable international treaties and laws. The U.S. government has provided training to judges, trustees, attorneys, and other stakeholders at the state and entity levels to increase predictability in the legal system on commercial matters.

Laws and Regulations on Foreign Direct Investment 

The state-level Law on the Policy of Foreign Direct Investment accords foreign investors the same rights as domestic investors and guarantees foreign investors national treatment, protection against nationalization/expropriation, and the right to dispose of profits and transfer funds.  In addition, both entities have their own laws on foreign direct investment. In practice, most business sectors in BiH are fully open to foreign equity ownership, with some exceptions in the defense, electric power transmission, and media sectors.

The Foreign Investment Promotion Agency maintains a list of laws, rules, procedures, and reporting requirements relevant to investors on its website:
http://www.fipa.gov.ba/publikacije_materijali/zakoni/default.aspx?id=317&langTag=en-US 

The complex legal and regulatory environment in BiH underscores the utility of local legal representation for foreign investors.   Companies’ in-house legal counsel should be prepared to oversee their in-country counsel.  The U.S. Embassy maintains a list of local lawyers willing to represent U.S. citizens and companies in BiH.  The list can be accessed at https://ba.usembassy.gov/u-s-citizen-services/attorneys/.

Competition and Antitrust Laws 

BiH has a Competition Council, designed to be an independent public institution to enforce anti-trust laws, prevent monopolies, and enhance private sector competition.  The Council reviews and approves foreign investments in cases of mergers and acquisitions of local companies by foreign companies.  The Competition Council consists of six members appointed for six-year terms of office with the possibility of one reappointment.  The BiH Council of Ministers appoints three Competition Council members; the Federation government appoints two members; and the RS government appoints one member.  By law, decisions of the Competition Council are subject to an ethnic veto, meaning that at least one representative of each constituent people (Croat, Serb, and Bosniak) must vote for each decision, which significantly impedes the institution’s functioning. From the six-member Competition Council, the BiH Council of Ministers affirms a president of the Council for a one-year term without the possibility of reappointment. While the original intent and mandate of the Competition Council was essential to encouraging fair competition and foreign investor interest in key sectors, the Competition Council has become another tool for existing political patronage networks in BiH and often fails to adhere to fair and transparent norms and procedures. Competition Council decisions may be appealed through administrative court proceedings.

In 2021, the Competition Council took 34 decisions, including 5 on abuse of dominant position, and imposed 7 fines for a total amount of 260,000 euros. A BiH Competition Council ruling in 2022 against a foreign bank, which included a fine for abuse of dominant position, undermined the authority of banks to refuse to service certain customers, including on the basis of U.S. sanctions or anti-money laundering (AML) concerns.

Expropriation and Compensation 

BiH investment law forbids expropriation of investments, except in the public interest.  According to Article 16, “Foreign investment shall not be subject to any act of nationalization, expropriation, requisition, or measures that have similar effects, except where the public interest may require otherwise.”  In such cases of public interest, expropriation of investments, including real estate, would be executed in accordance with applicable laws and regulations, be free from discrimination, and include monetary compensation or payment in the form of comparable real estate.  Neither the entity governments nor the state government have expropriated any foreign investments to date.

Dispute Settlement 

ICSID Convention and New York Convention 

Bosnia and Herzegovina is a signatory of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) (the “Washington Convention”).

Investor-State Dispute Settlement 

Over the last decade, there have been two cases of legal disputes involving U.S. investors and the local government, both of which were adjudicated in favor of the U.S. investor  Foreign arbitral awards are recognized and enforced in BiH only if recognized by a court in Bosnia and Herzegovina. For the judgment of a foreign court to be enforced in BiH, it is necessary for the local courts to recognize it in a special non-litigation court procedure. After recognition, a foreign court arbitral award has the force of a local court decision and is enforceable.

International Commercial Arbitration and Foreign Courts 

BiH has been a member of the International Center for the Settlement of Investment Disputes since 1997.  BiH does not have a bilateral investment treaty (BIT) or free trade agreement (FTA) with the United States.  It accepts arbitration to settle private investment disputes if the parties outline this option in a contract. By law, parties may opt for a) foreign-seated arbitration, or b) domestic arbitration. BiH is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and local courts will recognize and enforce awards that are rendered in other states that are also party to the New York Convention.

Domestic knowledge about and use of arbitration is low. There are two arbitration courts in BiH – the Arbitration Court of the Foreign Trade Chamber of Commerce of BiH and the Foreign Trade Court of Arbitration of the Republika Srpska Chamber of Commerce and Industry. These courts adjudicate very few cases annually, mostly for local parties, and would benefit from updated and modernized laws and regulations to comply with international norms and standards, and licensed and trained arbitrators.

There is no state-level law on arbitration. Instead, laws governing arbitration in BiH can be found in three separate civil procedure codes under “special procedures” (Federation Civil Procedure Act, Republika Srpska Civil Procedure Act, and District Civil Procedure Act). The provisions in these laws are similar and follow the United Nations Commission on International Trade Law (UNICITRAL) Model Law on International Commercial Arbitration. Practitioners assess that, while these provisions govern the basics of arbitral proceedings, due to legal gaps they do not provide sufficient legal protections for the parties.

 Bankruptcy Regulations 

Both the Federation and Republika Srpska entities have laws on bankruptcy.  However, bankruptcy proceedings are not resolved in a timely manner, and there is insufficient emphasis placed on companies’ rehabilitation and/or reorganization.  The entities’ laws define the rights of creditors, equity shareholders, and holders of other financial contracts.  Foreign contract holders enjoy the same rights as local contract holders.  Bankruptcy is not criminalized.  The U.S. government has provided training to judges on international bankruptcy principles.

Investment Incentives 

There are some state-level incentives for foreign direct investment, including exemptions from payment of customs duties and customs fees.  There are also various investment incentives available to investors at the entity, canton, municipal, or city level.

Bosnia and Herzegovina is divided into three jurisdictions for direct tax purposes: the Federation, the RS, and the Brčko District. In the Federation, RS, and Brčko District, the corporate income tax allows offsetting of losses against profits over a five-year period.  The corporate tax rate is 10 percent across the country.  Foreign investors can open bank accounts in all jurisdictions and transfer their profits abroad without any restrictions.  The rights and benefits of foreign investors granted, and obligations, imposed by the Law on the Policy of Foreign Direct Investment cannot be terminated or overruled by subsequent laws and regulations.  Should a subsequent law or regulation be more favorable to foreign investors, the investor has the right to choose the most beneficial regulations.  BiH’s state-level renewable energy incentives use a feed-in tariff model, under which the producer must obtain the status of privileged producer of electricity and meet other prescribed requirements. These incentives have been inadequate to facilitate significant green energy investments.

In addition to the BiH-wide incentives listed above, the two entities and the Brčko District have specific incentives as detailed below.

In the Federation

A taxpayer who invests KM 20 million (approx. $12 million) over a period of five years is exempted from paying corporate income tax for the period of five years beginning from the first investment year. A taxpayer who does not make the prescribed investment in the period of five years loses the right of tax exemption.  In that case, unpaid corporate income tax is determined in accordance with the provisions of the Law on Corporate Income Tax augmented with a penalty and interest for late payment of public revenues. Qualifying investments include fixed assets such as real estate, plants, and equipment for carrying out production activity.  A taxpayer loses the right to tax exemption if the corporation makes a dividend payment during first three years of investment.

A taxpayer whose workforce is more than 50 percent disabled persons and persons with special needs in any given year is exempted from paying corporate income tax.  The exemption applies to the applicable year in which disabled persons and persons with special needs met the required threshold.  Employees must have been with the company for longer than one year to be considered.

In the Republika Srpska

In its Amendments to the Law on Profit Tax, the RS reduced taxes on investments in equipment intended for company production and investment in plants and immovable property used for manufacturing and processing.

For employers with at least 30 workers during a calendar year, there is a tax base reduction in personal income tax and mandatory employer contributions.  Employees must be officially listed with the RS Employment Office.

The 2012 RS Decree on Conditions and Implementation of the Investment and Employment Support Program (Official Gazette of RS No. 70/12) also established incentives meant to encourage and support direct investments, employment growth, and transfer of new knowledge and technologies, which are still in force.  To qualify for the incentives, participants must have existing investment projects in the RS manufacturing sector, a minimum investment value of KM 2 million ($1.2 million), and new employment for at least 20 workers.  The total funding awarded is proportional to the investment value, the number of newly employed, and the development level of the investment location.

In 2015, the RS government passed the Law on Property Tax, which imposes a flat rate for property taxes in all municipalities; the Law on Income Tax, which exempts dividends and profit shares from taxation; the Law on Corporate Income Tax, which broadens the scope of deductible expenses and harmonizes taxes for foreign investors; and the Law on Contributions, which decreases tax contributions employers pay on salaries by 1.4 percent.

In the Brčko District

In the Brčko District, investments in fixed assets are subject to tax relief. The Law on Incentives to Economic Development of Brčko District provides for an exemption from utility fees; compensation of expenses of connection to power, water and sewage network; compensation of paid fees necessary for obtaining the location permit, building permits, and approvals for the use of the facility; compensation of expenses in the amount of the difference in the price of electricity and water paid by the company and the price paid by households; and a refund of paid fees (taxes) and connection services for the right to connect to the power grid in the maximum amount of up to $7,000 per calendar year.

Foreign Trade Zones/Free Ports/Trade Facilitation 

The BiH Law on Free Trade Zones allows the establishment of free trade zones (FTZs) as part of the customs territory of BiH.  One or more domestic or foreign legal entities registered in BiH may create an FTZ.  Currently there are four free trade zones in BiH: Vogošća, Visoko, Herzegovina-Mostar, and Holc Lukavac. All four trade zones are located in the Federation.  The RS (Trebinje) and Brčko District are in the process of establishing their first FTZs.

FTZ users do not pay taxes and contributions, with the exception of those related to salaries and wages.  Investors are free to invest capital in the FTZ, transfer their profits, and retransfer capital.  Customs and tariffs are not paid on imports into FTZs.  An FTZ is considered economically justified if the submitted feasibility study and other evidence can prove that the value of goods exported from a free zone will exceed at least 50 percent of the total value of goods imported to the free zone within the period of 12 months. Foreign-owned firms have the same investment opportunities as local entities in FTZs.

Performance and Data Localization Requirements 

The BiH government does not have a “forced localization” policy in which foreign investors must use domestic content or sourcing in goods, human capital, or technology.  There are no requirements for foreign IT providers to turn over source code and/or provide access to surveillance.  There are no rules requiring local data storage or restricting the transfer of customer or other business-related data outside the country.

Real Property 

BiH generally has an adequate set of laws for the protection of real estate property rights, regardless of gender, but determining ownership can be difficult and enforcement is weak. Investors are cautioned to investigate real property titles on land intended for investment projects. A significant portion of land and real estate property does not have a clear title due to restitution or state property issues.

The BiH Constitutional Court has ruled that only state – not entity – authorities can regulate state property. Attempts by authorities in the RS to re-register or otherwise unilaterally claim state assets, such as the law on immoveable property passed by the RS National Assembly in 2022, are illegal. Only the BiH Parliament can authorize any direct or indirect transfer of state property. Investors should be certain, especially in the RS, to conduct adequate due diligence and clarify land ownership rights to avoid becoming entangled in a potential illegal and/or unconstitutional arrangement.

Registration of real property titles is generally acknowledged as a significant barrier to the real property and mortgage market development.  In the Federation, the geodetic administration is responsible for the real property cadasters, which describes and certifies the legal object, e.g. land, house.  Separately, the land registry establishes legal ownership and rights for the specific object and is maintained by the municipal courts.  In the RS, the land register and cadaster are unified in the RS Geodetic Authority. Neither the Federation land registry nor the RS Geodetic Authority has the constitutional authority to transfer ownership of state property to any other entity.

Real estate property rights and ownership are enforced through local courts. Mortgages and liens are registered in property titles administered through local municipal courts, which maintain property records. If legally purchased property is unoccupied, property ownership cannot be reverted to other owners or squatters.   Foreigners must register a local company to purchase property; the company then makes the purchase and is recorded as the landowner.  The exception to this rule is if the foreigners’ country of citizenship allows BiH citizens to purchase property.  In that case, the foreigner may directly own land.

Intellectual Property Rights 

Bosnia and Herzegovina is not included in the U.S. Trade Representative’s (USTR’s) Special 301 Report or the Notorious Markets List.

According to local law, intellectual property rights (IPR) in BiH must be registered and enforced.  BiH’s IPR framework consists of seven laws adopted and put into force by the BiH Parliament in 2010.  At the time of adoption, this legislation was compliant with the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and EU legislation. At present, the EU assesses further harmonization is necessary, especially with regard to patents, trademarks, and trade secrets.  BiH is not a member of the European Patent Convention. BiH is a member of the World Intellectual Property Organization (WIPO) and party to a number of its treaties including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performance and Phonograms Treaty.  Registration of patents and trademarks is on a first-in-time, first-in-right basis, so businesses should consider applying for trademark and patent protection prior to introducing their products or services in the BiH market.  Companies may wish to seek advice from local attorneys who are experts in IPR law.  Although existing legislation provides a basic level of protection, BiH’s civil and criminal enforcement remains weak. BiH has not implemented its strategy on IPR enforcement.

Jurisdiction over IPR investigations is split between customs officials, entity inspectorates, and state and entity law enforcement agencies, none of which has specialized IPR investigation teams.  The Indirect Taxation Authority publishes statistics on customs measures and the temporary detention and seizure of goods.  In 2021, the Indirect Taxation Authority received 113 requests for customs measures based on protected trademarks and issued 114 decisions on temporary detention and seizure of goods (compared to 69 requests and 57 decisions in 2020). IPR crimes are prosecuted primarily at the state level. The State Investigation and Protection Agency investigated 38 cases in 2021, of which 13 were closed.  Prosecutors and judges often lack specific expertise in IPR legislation. Cases in which companies are indicted often involve low-level violations.  More significant cases have sometimes languished for years with little action from prosecutors or judges. Companies have no recourse in the legal system if the IPR violator re-registers its company under a different name.

In BiH’s academic institutions and private sector, awareness of IPR, particularly the importance of copyright protection, remains low, though the emergence of a local software development industry is helping to raise awareness.  Curbing business software piracy could significantly improve the local economy by creating new jobs and generating tax revenue.  The failure to recognize the importance of preventing copyright infringement makes software producers and official distributors less competitive and the establishment of a legitimate market more difficult.  According to the latest Business Software Alliance (BSA) report, the rate of illegal software installed on personal computers in BiH currently remains at 66 percent, which is the regional average.   Some BiH government entities, cantonal governments, and government-owned enterprises continue to use unlicensed software.

Collective copyright protection and enforcement also remains a challenge in BiH.  Six organizations in the country are authorized to collectively manage copyright and related rights. There is no established local representative to collect and distribute royalties for visual artists, filmmakers, and literary authors.  The Association of Composers and Musical Authors is the only licensed collective management organization for music authors in BiH, and it faces enforcement challenges since both musical artists and consumers remain skeptical and unfamiliar with collective management protection.

The U.S. government, in conjunction with local partners, has made IPR awareness within the BiH enforcement community a priority through judicial engagement and public awareness programs.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment 

Capital markets remain underdeveloped in BiH.  Both entities have created their own modern stock market infrastructure with separate stock exchanges in Sarajevo (SASE) and Banja Luka (BLSE), both of which started trading in 2002.  The small size of the markets, lack of privatization, weak shareholder protection, and public mistrust of previous privatization programs has impeded the development of the capital market.  The capital markets in BiH represent a small part of the financial system. While many companies are listed on the twoentity-level stock exchanges, very few companies or institutions use the securities markets to raise capital to finance growth and expansion.  Except for a few large companies, there is very little or no trading in most shares that are listed on both stock exchanges. The continuing political uncertainty has also played a role in limiting investor interest in the country’s stock markets.

The legal regulatory framework for capital markets operates mainly at the entity level. Both the Federation and the RS have their own laws governing the securities markets. In the Federation, the securities market is regulated by the Securities Commission of the Federation of Bosnia andHerzegovina, while in the RS the securities market is regulated by the Republika Srpska Securities Commission. The two entity-level Securities Market Acts provide the respective securities commissions with broad authority to regulate all core aspects of the capital market. The overall quality of the laws and regulations in both entities is fairly sound and has been gradually improving, partly as a result of the EU integration process.
Foreign portfolio investors represent another potential component of the investor base, but they are unlikely to play a major role unless the macro-economic situation changes. Foreign individual investors are reasonably active on the stock markets and in the investment funds segment. Non-resident and institutional investors appear to be actively participating in the capital markets, but extensive data on this is not readily available. Foreign institutional investors are present in BiH’s government securities market at low levels.The local governments and the Central Bank of BiH respect IMF Article VIII and do not impose restrictions on the making of payments and transfers for international transactions.
The government securities market in BiH is still relatively small but it is gradually beginning to grow.  Both the RS and the Federation issued government securities for the first time in 2011, as part of their plans to raise capital in support of their budget deficits during this period of economic stress.  Both entity governments continue to issue government securities in order to fill budget gaps.  These securities are also available for secondary market trading on the stock exchanges.

The investment fund sector in both the Federation and the RS is fairly significant and currently includes both closed and open-ended investment funds.

Money and Banking System 

The banking and financial system in BiH is considered adequately capitalized, stable, and liquid.  The banking sector is divided between the two entities, with entity-level banking agencies responsible for banking supervision and licensing.  In March 2022, the announcement of sanctions against the Russian financial sector triggered bank runs on the two Sberbank subsidiaries, which together represented some 8 percent of total assets of the banking sector. The two banking agencies reacted swiftly to initiate the bank resolution mechanism, resulting in the sale of both banks and the preservation of stability. As of March 2023, there are 22 commercial banks operating in BiH, some of which are separate branches of the same bank in the two entities: 14 banks have headquarters in the Federation and 8 in the RS.  The majority of banks in BiH are foreign owned (over 80 percent). The competition is strong, and banks offer an extended range of financial products and services. Competition for a small population and an even smaller pool of good borrowers has led some banks to lend at below-market and/or fixed interest rates.  The ratio of non-performing loans in 2022 was 5.2 percent. Total deposits reported in February 2023 stood at $16.1 billion. A deposit insurance program provides for up to KM 70,000 ($39,000). The BiH banking sector lags behind regional peers on digitalization. BiH does not have an e-signature law, which would facilitate financial services both domestically and internationally. Non-residents and foreigners can open bank accounts in foreign and local currency and can transfer funds abroad without restrictions. In commercial banks, there are no restrictions for individuals or businesses (domestic or foreign) on opening accounts in domestic or any foreign currency, on exchanging KM for any foreign currency, or in payments to foreign partners. The Central Bank of BiH (CBBH) maintains monetary stability through its currency board arrangement, through which the currency is pegged to the Euro at a fixed exchange rate, which has remained stable for the past 25 years. The currency board arrangement precludes the CBBH from acting as a lender of last resort. BiH has few mechanisms in place to address temporary liquidity pressures. The CBBH also supports and maintains payment and settlement systems and coordinates the activities of the entity banking agencies.

BiH passed a state-level framework law in 2010 mandating the use of international accounting standards, and both entities passed legislation that eliminated differences in standards between the entities and Brčko District.  All governments have implemented accounting practices that are fully in line with international norms.

Foreign Exchange and Remittances 

Foreign Exchange

The Law on Foreign Direct Investment guarantees the immediate right to transfer and repatriate profits and remittances.  Local and foreign companies may hold accounts in one or more banks authorized to initiate or receive payments in foreign currency.  The implementing laws in both entities include transfer and repatriation rights.  Based on the two entities’ Laws on Foreign Currency Exchange, all payments in the country must be in national currency.  The Central Bank’s adoption of a currency board in 1997 guarantees the local currency, the convertible mark or KM (aka BAM), is fully convertible to the euro with a fixed exchange rate of KM 1.95583 = €1.00.

Remittance Policies

BiH has no remittance policy, although remittances are generally high due to a large diaspora.  Remittances are estimated to range up to 15 percent of total GDP.

Sovereign Wealth Funds 

BiH does not have a government-affiliated Sovereign Wealth Fund.

Privatization Program 

There have been no significant privatizations in the past few years.  Privatization offerings are scarce and often require unfavorable terms.  Some formerly successful government-owned enterprises have accrued significant debts from unpaid health and pension contributions, and potential investors are expected to assume these debts and maintain the existing workforce.  Under the state-level FDI Law, foreign investors may bid on privatization tenders.

Historically, the privatization process in BiH has resulted in economic loss due to corruption.  Since 1999 more than 1,000 companies have been fully privatized, while around 100 have been partially privatized.  Some privatizations led to the loss of value of state property and many of the privatized companies were weakened or ruined in the privatization process.  The history of corrupt privatizations has raised concerns that further privatization would only lead to additional unemployment and the enrichment of a few politically connected individuals.  Successful privatizations and restructurings that improve service delivery, business productivity, and employment would be very beneficial for the BiH economy, could help the image of privatization, and would build support for a long overdue shift away from a government-led economy.

Privatization activities in the Federation are led by the Federation Agency for Privatization, which released its latest work plan in March 2021. The Agency is not currently functional; its bank accounts are blocked and the workers are on a general strike because salaries have not been paid since March 2022.

The privatization process in the RS is carried out by the RS Investment Development Bank (IRBRS).  Many prospective companies have already been privatized, and out of 163 not yet privatized companies, many are being liquidated or undergoing bankruptcy.  In 2016, the RS government announced plans to sell its capital in 22 companies via the sale of government shares on the Banja Luka stock exchange, and in December 2022 the government again announced plans to sell its capital in 59 companies, but neither plan has been implemented.  Although the RS National Assembly passed a decision that the entity has no plans to privatize the energy sector, the RS government maintains the possibility of joint ventures in the energy sector.

Climate Issues  

Bosnia and Herzegovina (BiH) adopted an Environmental Approximation Strategy in 2017, laying out a broad framework for the country’s transposition of EU environmental legislation into domestic law, but implementation is lagging.  A countrywide Environmental Protection Strategy remains pending.  In February 2023, BiH adopted an updated Strategy for Adaptation to Climate Change and Low-Emission Development for 2020-2030.  The strategy’s goal is to increase BiH’s resilience to climate variability and climate change, prevent environmental degradation, and gradually reduce greenhouse gas emissions, while ensuring economic growth.

As a signatory of the Paris Agreement, BiH submitted its revised Nationally Determined Contribution (NDC) for 2020-2030 to the UNFCCC in April 2021. According to the revised NDC, BiH plans to reduce GHG emissions by slightly over a third by 2030, and almost two thirds by 2050 (compared to 1990 levels).  By signing on to the Sofia Declaration on the Green Agenda for the Western Balkans in November 2020, BiH committed to develop and implement an integrated National Energy and Climate Plan outlining clear measures designed to reduce greenhouse gas (GHG) emissions by integrating climate action into all relevant sectoral policies.  BiH joined the Global Methane Pledge to voluntarily reduce methane emissions by 2030 but has not passed an action plan to implement the agreement. BiH committed to develop and implement a Western Balkans 2030 Biodiversity Strategic Plan together with Western Balkan counterparts.  BiH continues to lack a legal framework at the state level that would facilitate meeting and monitoring implementation of its climate obligations, however. The role of BiH’s private sector in meeting relevant targets also remains largely undefined.

BiH is currently committed to aligning with the EU’s Emissions Trading Scheme.  Following the EU’s announcement of a new Carbon Border Adjustment Mechanism (CBAM), some discussions have begun about introducing a similar mechanism in BiH that may secure BiH’s opt-out from the CBAM.  No legislative activities have been launched in that respect, however. BiH’s public procurement policies do not specifically stipulate any environmental or green growth considerations.  BiH has recently made certain progress in declaring protected areas at the level of the two entities, and BiH joined the Glasgow Leaders’ Declaration on Forests and Land Use at the COP26 summit.  BiH, with international assistance, is currently developing an Environmental Strategy and Action Plan that will include policies that target deforestation, in addition to other climate and environment objectives. The country’s Green Growth Index is among the lowest in Europe per Global Green Growth Institute indicators (Green Growth Index 2022), but the country ranks 37th of 104 on Climatescope’s list of most attractive markets for energy transition projects investment.