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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007
BANJA LUKA STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Politic and Economic Environment
The nationwide elections held on October 1st
have shifted the balance of power between
political parties in Bosnia and Herzegovina
(BiH), but have failed to break the pattern of
ethnically divisive politics, and may even
have reinforced it. The three traditionally
ethnic nationalist parties–the Serb
Democratic Party (SDS), the Croatian
Democratic Union of BiH (HDZ BiH) and the
mostly Bosnian Muslim Party for Democratic
Action (SDA)–have emerged weakened from
the elections. The main winners were the
nominally moderate parties: the SNSD in the
RS, and the SzBiH in the Federation.
However, both the SNSD and the SzBiH
prospered by running on an ethnic agenda
during an election campaign that was tense
and at times inflammatory.
EU representatives and the BiH authorities
agree that talks on an SAA between BiH and
the EU have proceeded smoothly from a
technical perspective. However, progress
has been slow in meeting many of the
criteria for an SAA, including those on police
reform, co-operation with the International
Criminal Tribunal for former Yugoslavia
(ICTY) in The Hague, reform of the public
administration, and passing laws on higher
education and broadcasting. The upcoming
report of the European Commission on BiH's
progress in meeting EU requirements is
therefore expected to be highly critical of the
local authorities, so that the agreement will
almost certainly not be signed until 2007. In
the light of current concerns within the EU
over the pace of future enlargement, BiH's
path towards membership is likely to be
significantly longer than those of the most
recent new EU entrants. Membership of
NATO's Partnership for Peace (PfP) program
continues to be delayed by inadequate cooperation
with the ICTY.
Negotiations with the IMF over a new standby
arrangement have been on hold for some
time. However, given the negative
consequences that would ensue from an IMF
withdrawal, and with the elections out of the
way, we expect the authorities to work with
Fund representatives to resolve their
differences over the fiscal position and
conclude a new agreement at some point.
Economic Performance
Recent rapid growth in imports of investment
goods will strengthen the country's export
base, and significant export-oriented
capacity has come on stream in the past
year. The recent expansion of consumer
borrowing should keep household spending
buoyant in 2006 and push real GDP growth
to an estimated 5.3%. Credit growth is likely
to slow in 2007-08, which, along with publicsector
wage restraint, is likely to weaken
domestic demand growth. However, strongly
rising investment is expected to keep annual
real GDP growing at around the same pace
as in 2006, although the potential for political
instability presents some risk to this forecast.
The introduction of VAT led to a sharp spike
in price growth in both entities in early 2006,
and inflation remained well above trend
levels in the first half of the year. A slowdown
in inflation is anticipated in both entities
towards the end of 2006 as the impact of
VAT dissipates and base-year effects take
hold, although annual average inflationis
expected in both entities to be several
percentage points higher than in 2005. In
2007-08 the absence of any further tax
increases, together with more modest wage
growth, will see inflation ease in both the
Federation and the RS.
The marka is pegged to the euro at a rate of
KM1.96:[euro]1. Low inflation in BiH has
tempered the pace of real effective
appreciation in previous years, although
rising inflation in 2006 and a weakening US
dollar in 2006-07 will see the real effective
exchange rate appreciate by about 4% in
2006 and by 2% next year. The marka
appears to be considerably overvalued,
although the likelihood of a change in
exchange-rate regime over the forecast
period is remote. The Central Bank of Bosnia
and Herzegovina (CBBH) maintains sufficient
reserves to cover the whole of its monetary
liabilities. Its free reserves–that is, those
above and beyond these liabilities–remain
relatively low, despite strong growth in recent
years. However, the chances of a speculative
attack on the marka are also low.*
* The Economic Intelligence Unit Ltd., October 2006
Key Information Contacts
Bosnia and Herzegovina Council of Ministers www.vijeceministara.gov.ba
Ministry of Foreign Affairs of Bosnia and Herzegovina www.mvp.gov.ba
Directorate of European Integration www.dei.gov.ba
Central Bank of Bosnia and Herzegovina www.cbbh.ba
Republic of Srpska Government www.vladars.net
Foreign Trade Chamber of Bosnia and Herzegovina www.komorabih.com
Republic of Srpska Securities Commission www.khov-rs.org
Central Registry of Securities www.crhovrs.org
2005-SHARE IN GROSS VALUE ADDED (%) (a)
2003-MAIN COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (b)
Services
Agriculture
Industry (c)
Private consumption General government consumption
Exports of goods & services Import of goods & services
65.7
24.5
9.8
100
90
80
70
60
50
40
30
20
10
0
91.7
22.3 25.1
59.1
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