Guidance

Overseas business risk: Bosnia and Herzegovina

Updated 22 January 2024

1. Political

The Dayton Peace Agreement, which ended the war in Bosnia and Herzegovina in 1995, established a complex governance and power-sharing structure.

The 2 entities that make up Bosnia and Herzegovina (the Federation of Bosnia and Herzegovina and the Republika Srpska) have substantial autonomy, and their administrative and regulatory institutions diverge in a number of ways. The Federation is further divided into 10 cantons. Additionally there is the Brčko District, a unit of local self-governance.

Many of the challenges common to other Western Balkans’ countries, such as underdeveloped institutions, low capacity of the civil service, and a weak judiciary are present in Bosnia and Herzegovina. These factors act as impediments to trade and investment, although local businesses have learnt over the years how to overcome many of the barriers to trade. Corruption and the lack of transparency and consistency, means that doing business in Bosnia and Herzegovina is particularly complex and can present risks.

General elections were held in October 2022. The state-level government was formed in January 2023 based on a policy agreement between political parties focused on reform and EU integration. Nevertheless, the political relationships remain fragile and a number of political leaders continue to threaten to block the wider work of parliaments and assemblies for party political objectives. As part of their secessionist agenda, senior politicians in the Republika Srpska have adopted policy goals aimed at withdrawing legislative and oversight competence from key institutions, further reducing legal certainty for businesses.

2. Economics

Bosnia and Herzegovina is a relatively small and open transitional economy with strong import needs, officially classified as ‘upper-middle income’ by the World Bank.

In 2022, the country’s nominal Gross Domestic Product (GDP) amounted to EUR 23.3 billion, with an estimated real annual GDP growth set to slow down to around 2% in 2024 (International Monetary Fund (IMF) estimates) with diminishing real disposable household incomes and economy beset by negative food price shocks, the economic slowdown in Europe and ongoing domestic political tensions.

Bosnia and Herzegovina’s economy  is growing at a pace typically below the more successful countries in Southeast Europe, mostly as a consequence of political dysfunction, widespread patronage and political capture, institutional weaknesses, poor infrastructure and low levels of investment.

The inflation rate was the highest among Western Balkans countries throughout 2022, driven by the larger than expected increase in food prices (22.3%) and in energy prices (16.5%). The overall rate peaked at all-time high of 17.4% in October 2022. Inflationary pressures have severely dented household budgets and their purchasing power, but also fuelled increased budget revenues at all levels of government. The inflationary pressures faltered over the course of 2023, but remained elevated, averaging at an high rate of 6.6% on an annual level. They are projected to further decline to around 3% in 2024.

There is an extensive informal economy. Real unemployment in the formal sector remains high at approximately 17%, posing a constraint on consumption. In 2023, the average net monthly salary amounted to around £552. Due to the complex political and institutional setup, government spending is large, at approximately 42% of GDP, but largely ineffective, as it fails to translate into high-quality public services or investments.

Bosnia and Herzegovina was granted EU candidacy status in December 2022. The current EU focus on Bosnia and Herzegovina is set out in the 2019 European Commission Opinion prioritising democracy, political functionality, the rule of law, human rights and public administrative reform. The EU has offered a new Growth Plan, with some conditionality between countries in the Western Balkans.

Socio-economic reforms were conditions for a potential Extended Fund Facility Arrangement with the IMF in 2021. However, due to the lack of the political will to undertake reforms in the area of energy, digitalisation and transparency, the negotiations with the IMF failed and the arrangement was not agreed. A new IMF package remains a possibility.

The Stabilization and Association Agreement (SAA) between the EU and Bosnia and Herzegovina from 2015 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 economic and trade relations between the EU and Bosnia and Herzegovina. In 2022 the EU accounted for 57% of imports and 74% of exports. 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.

Bosnia and Herzegovina is an important partner for the UK, and we are working with Bosnia and Herzegovina counterparts to sign a trade cooperation agreement to reproduce the effects of the SAA, with the aim to take if forward as soon as the agreements with other countries are further advanced.

3. Investment

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 foreign direct investments between 1994 and 2022 came from 1. Austria, 2. Croatia, 3. Serbia, 4. Slovenia and 5. UK. In August 2023, Standard & Poor’s (S&P) increased Bosnia and Herzegovina’s sovereign credit rating from ‘B’ to ‘B+’, whilst keeping the country’s stable outlook. As stated by S&P, the upgrade and stable outlook reflect the views of Bosnia and Herzegovina’s resilient economic performance, despite prevailing external headwinds, as well as its favourable fiscal position that is expected to endure over 2024-2026. It also illustrates S&P view that the recent domestic political escalation will ease, although future bouts of confrontation remain a risk given Bosnia and Herzegovina’s complex domestic institutional arrangements.

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.

In terms of external financing, the IMF allocated around EUR 300 million to Bosnia and Herzegovina on the basis of its general allocation of Special Drawing Rights in 2021. In addition to this, the European Commission transferred EUR 124 million-worth first tranche of macro-financial assistance funds (EUR 250 million), on the basis of the signed Agreement on Credit Line between the EU and Bosnia and Herzegovina. In 2023, the EU allocated EUR 70 million-worth grants to Bosnia and Herzegovina, aimed at mitigating the consequences of the energy crisis for the most vulnerable households and small and medium enterprises.

The UK government can provide finance or credit insurance specifically to support UK exports through UK Export Finance (UKEF) – the UK’s export credit agency. As part of the Government’s ambition to boost trade, in November 2020 UKEF increased its country limit for Bosnia and Herzegovina from £250 million to £2 billion. For up-to-date country specific information on the support available see UKEF’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, political corruption and lengthy and complex administrative procedures. Investors should be aware of potential legal uncertainty around ‘state / immovable property’ which is currently disputed by the political leadership of the Republika Srpska entity, and subject to an enforceable ban on property disposal imposed by the High Representative. In some circumstances, this can extend to so-called ‘public goods’ such as forestry and agricultural land. We recommend that all potential investors or others doing business in in Bosnia and Herzegovina seek authoritative legal advice on any risks arising from this uncertainty.

In addition to high unemployment there is also a high level of emigration, which combined with a rapidly aging population and a declining birth rate, pose significant threats to economic growth and social stability. Brain-drain, particularly among young people, remains one of the most significant challenges for the country, as Bosnia and Heryegovina’s emigration rate is now one of the highest in the world. A 2018 World Economic Forum report found only Haiti and Venezuela had higher rates of lost talent. A 2021 United Nations Population Fund (UNFPA) survey showed that 47% of young people are looking to leave the country.

Additional information is available from:

• Central Bank of Bosnia and Herzegovina
• International Monetary Fund
• Statistics Agency of Bosnia and Herzegovina
• Foreign Investment Promotion Agency
• FCDO Travel Advice Bosnia and Herzegovina

4. Business and human rights

A legal and institutional human rights framework 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, laws provides for the right of workers in both entities to form and join independent unions. In both entities and in Brčko District, the law provides for the right to strike. In 2016, labour laws were adopted in both the Federation and the 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, in which disability is 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.

5. Bribery and corruption

Bribery is illegal in Bosnia and Herzegovina and in the UK. 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 UK 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 European 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 vulnerable to 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 2022 Corruption Perception Index, ranked Bosnia and Herzegovina joint 110th out of 180 (along with Albania, Mongolia, Malawi and Thailand), down from 89th in 2018. Its score of 34 is 8 lower than 2013.

Visit the Business anti-corruption page which provides advice and guidance about corruption in Bosnia and Herzegovina.

Read the information provided on our Bribery and corruption page.

6. Terrorism threat

Terrorist attacks in Bosnia and Herzegovina cannot be ruled out. Previous attacks have included firearms attacks on government, law enforcement interests and the public. Attacks could be indiscriminate, including in places visited by foreigners. Read the latest FCDO Travel advice Bosnia and Herzegovina from the Foreign, Commonwealth and Development Office.

7. Protective security advice

Read the information provided on our protective security advice page.

8. 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.

For additional information visit Institute for Intellectual Property of Bosnia and Herzegovina.

Read the information provided on our Intellectual property page.

9. Organised crime

Bosnia and Herzegovina faces challenges from organised crime including drug trafficking, trafficking in human beings, illegal firearms and counterfeiting.

The 2021 EU Report on Bosnia and Herzegovina’s EU membership application 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.

A European Commission review in 2022 found no progress was made in addressing the Opinion priorities on the fight against organised crime. In 4 cases, plea bargain agreements were concluded with 27 individuals. 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. BiH needs to take additional steps to avoid facing the possibility of being again ‘grey listed’. Bosnia and Herzegovina will be re-evaluated in 2024.

10. Contact details

Contact the Department for Business and Trade (DBT) team in Bosnia and Herzegovina for further information.