BiH’s ERP lacks pro-growth orientation, says EC

BiH’s Economic Reform Program (ERP) that forecasts a moderate acceleration of GDP growth from 3.5 % in 2019 to 3.8 % in 2021 reflects the lack of government policies to lift the country’s growth potential through stronger public and private investment, the European Commission (EC) said in an assessment of the document. Local authorities assume that economic growth will speed up on the back of strong private consumption, a build-up of inventory, and a slight improvement in investment. The EC said that the key downside risks to growth projection are a sharper-than-expected deterioration in the external environment, and a continuation in delays to implement reform measures. Upside risks could materialize if the new government embarks on a more growth-supportive policy path, driven also by reforms related to the EU-accession process, the Commission added. It assessed that the program’s baseline macroeconomic scenario is plausible, with key assumptions strongly depending on the swift implementation of structural reforms.

The EC estimated that fiscal policy does not pay enough attention to improving the quality of public spending, which remains heavily biased towards public sector employment and redistribution through cash transfers, clearly neglecting medium-term needs in the areas of education and infrastructure. It pointed that the quality of short and medium-term fiscal planning still suffers from a weak statistical underpinning and a short-term orientation of policy making. The Commission noted that the country’s competitiveness continues to be hampered by a multi-layered public administration and a fragmented economic space. Another issue are the oversized, non-transparent and inefficient state-owned enterprises that have accumulated considerable arrears in payments. The Commission also highlighted as a challenge the very low labor force participation and high levels of unemployment.

It deplored the fact that similarly to previous years, the program lacks consistent and sufficiently detailed country-wide data on BiH’s actual fiscal performance in 2018 and on the 2019 budgets. The document presents a medium-term fiscal projection for 2019-2021. The Commission said that the ERP does not provide sufficient plans to improve the spending structure, and the fiscal program lacks a pro-growth orientation. It warned that the main risk to the fiscal surplus targets for 2020 and 2021 is a possible slippage in planned spending constraints since the intended reduction in spending as a share of GDP appears quite ambitious.

The EC has identified several key structural challenged for BiH in terms of boosting competitiveness and long-term and inclusive growth — improving labor market transition; enhancing the business environment through creation of a single economic space; facilitation of starting a business and making the public sector more efficient.

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