Bosnia and Herzegovina (BiH) is open to foreign investment, but to succeed, investors must overcome significant challenges including endemic corruption, complex legal/regulatory frameworks and government structures, non-transparent business procedures, insufficient protection of property rights, and a weak judicial system under the undue influence of ethnonationalist parties and their patronage networks. The country offers a liberal trade regime, and its simplified tax structure is one of the lowest in the region (17 percent VAT and 10 percent flat income tax), but employers bear a heavy burden to the government for social contributions. Significant out-migration of the workforce has created challenges in hiring. More than 500 government-owned enterprises and a bloated public sector crowd out the private sector.
The complex institutional, political, and territorial structures of BiH complicate the economic landscape of the country and deter foreign investors. Following the October 2022 general elections, the state-level and Republika Srpska (RS) entity level governments were formed in record time. The Federation of BiH entity, where the government has been in a technical mandate since the 2018 elections, still faces significant challenges in forming a functioning government. Ethnic tensions are high as the ethnonationalist parties battle to secure or maintain control over certain institutions. Against this backdrop, state-level institutions have made little progress to enact necessary reforms to strengthen the business environment. BiH became an EU candidate country in 2022 in a move that was widely acknowledged as a political decision rather than a reflection of significant progress on necessary reforms. BiH is not a member of the World Trade Organization (WTO).
Moves by the RS entity to unconstitutionally seize control of state property and threats by RS President Milorad Dodik to separate the RS from BiH have also increased tensions. These actions, combined with RS efforts to form parallel entity-level institutions such as the RS Medicine and Medical Equipment Agency, threaten to create legal ambiguities that further complicate the business environment, disrupt the economy, and hinder investment. Investors should conduct adequate due diligence. This includes avoiding exposure to individuals and entities under U.S. sanctions, and clarifying land ownership rights and the status of sub-national institutions to avoid becoming entangled in a potential illegal and/or unconstitutional arrangement. Potential investors are urged to read the legal reviews and statements of the High Representative for BiH.
The BiH economy has fully recovered from the COVID-19 pandemic, but still records low levels of economic growth compared to its peers in the region. According to World Bank estimates, real GDP is expected to grow by 2.5 percent in 2023 and 3 percent in 2024. The BiH economy has not experienced significant direct effects from Russia’s war of aggression against Ukraine, but its economic recovery outlook has been hampered by the worsening external environment, elevated inflation, and tighter commercial financing conditions. The average inflation rate in BiH in 2022 was 16.3 percent and was especially high in basic consumer goods and energy. An anticipated economic slowdown in 2023 in Eurozone export markets also poses serious risks, as BiH is tied closely to European value chains and primarily exports goods rather than services.
BiH also has comparatively low levels of foreign direct investment (FDI). BiH’s fractured government has neither the capacity nor the political will to commit to providing adequate incentives or a sound enabling environment for investors. Between 1994 and 2021, roughly $8.95 billion of FDI flowed into BiH. The top five historic investors in BiH are Austria, Croatia, Serbia, Slovenia, and Germany. Collectively, these countries represent 61 percent of total FDI stocks in BiH. The main historic sectors for FDI in BiH are manufacturing, banking, trade, and telecommunications. Annual FDI tends to remain steady year on year at approximately $400 million. According to preliminary data from the Central Bank of BiH (CBBH), FDI in the first nine months of 2022 focused on renewable energy, tourism, real estate, and the metal-processing industry with an emphasis on the automotive sector. BiH is richly endowed with natural resources, providing potential opportunities in energy (hydro, wind, solar, along with traditional thermal), agriculture, timber, and tourism. U.S. investment in BiH is low, and most U.S. companies in BiH are represented by small sales offices that are concentrated on selling U.S. goods and services, with minimal longer-term investments.
|TI Corruption Perceptions Index||2022||110 of 180|
|Global Innovation Index||2022||70 of 131|
|U.S. FDI in partner country||2022||$9 million|
|World Bank GNI per capita||2021||$6,810|