Country Risk Rating

A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high. - Source: Coface

Business Climate Rating

The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.


  • Significant transfers from expatriate workers
  • Stabilisation and Association Agreement with the EU with pre-accession funds
  • Tourism (11.7% of employment and 10.2% of GDP, directly and indirectly) and hydroelectric potential (already 35% of electricity produced)
  • Member of a Regional Common Market of 6 Balkan countries since November 2020


  • Institutional, regulatory, economic, and community fragmentation (50% Muslim Bosniaks, 33% Orthodox Serbs, and 15% Catholic Croats)
  • Lack of public investment (local transport, education, health) with only 2% of public expenditure
  • Low diversity and low added value of exports
  • Corruption, cronyism, administrative delays
  • High emigration estimated at 50,000 people per year
  • Large informal sector, low labor force participation (42%), high youth unemployment (34%)

Current Trends

The need to support domestic demand

The economy contracted sharply in 2020 because of the COVID-19 crisis. The government declared a state of emergency in March 2020, but health measures are dependent on each of the two entities (Federation of Bosnia and Herzegovina and Republika Srpska) and have been strict (curfews, closures of schools, public places, borders, movement restrictions). These measures were lifted after the first wave (March-April 2020) but were partially reintroduced in October 2020 due to fears of a second wave. The economic recovery is therefore constrained by the virus. The tourism sector (about 10% of GDP) has been affected by the closure of borders, implying a sharp drop in the number of domestic and foreign tourists (-30% and -84% over the January-October period year-on-year, respectively). The return to pre-crisis tourism activity in 2021 remains very uncertain despite the reopening of borders in July 2020 because the majority of tourists are foreign (75%) and therefore more constrained (negative PCR tests, mandatory quarantine and possible vaccination in the future). Private consumption (75% of GDP) has been impacted by the drop in the flow of remittances from expatriate workers (-10% in the first half of 2020) and an increase in unemployment. The country's complex federal structure has delayed the implementation of household budget support. However, consumers could benefit from a rise in real wages in 2021 and a recovery of expatriate workers. The monetary policy is based on an agreement that pegs the marka to the euro at a fixed rate, supporting its currency. The year 2020 has been marked by the fall in energy prices, which was reflected in the level of inflation. Inflation is expected to rise slightly in 2021 in line with the recovery of domestic demand. Businesses are benefiting from a guarantee programme that facilitates access to credit and increases their level of liquidity. The investment will remain predominantly public, thanks in particular to financing received from the EBRD (EUR 700 million over 2018/2020, in partnership with the private sector) and the European Union (EUR 315 million over 2018/2020).

Twin deficits are increasing

The public accounts of the country's three constituent entities (Central State, Federation of Bosnia and Herzegovina and Republika Srpska) have worsened because of the crisis and are expected to improve in line with the economic recovery and the increase in VAT revenues (40% of the country's tax revenues). Public debt is increasing and will mainly be financed by the public, multilateral or bilateral actors, as the government does not have access to markets. The fragmented management carried out between the central government and the other two entities, the future cost of the pension and health systems, and the poor governance of the 500 or so public enterprises (indebted to the tune of 10% of GDP), half of which survive on public aid, call for caution.

Regarding the external accounts, the current account deficit is expected to widen in 2021, under the influence of the chronic trade deficit (24% of GDP in 2020). The resumption of services activities (7% surplus) related to tourism, transport, and re-exports, as well as remittances from expatriate workers (8% of GDP) will partially offset the trade deficit. FDI (3% of GDP) and predominantly public international financing will help limit the deterioration of the balance of payments while maintaining foreign exchange reserves at a level equivalent to 8 months of imports.

The political environment seems to be simplifying

Following the Dayton Accords (1995), Bosnia and Herzegovina is divided into two autonomous entities: the Federation of Bosnia and Herzegovina (FBiH) with Bosniak and Croat dominance, and the Republika Srpska, to which is added the district of BrĨko managed by the central state. The central state is headed by a collegial Presidency that represents the three "constituent peoples" and rotates every eight months. The constitution gives the central state very few powers: foreign and monetary policy, customs duties, VAT, transport, and defense. Even these powers are difficult to manage because each component has a blocking power in the central parliament. The Bosniak component is trying to strengthen the central government, the Croat component is seeking autonomy and the Serb component is contesting the existence of the country. The presidential and parliamentary elections of October 2018 put the nationalist parties in the lead. Parliament validated the new government after 14 months of deadlock, appointing Zoran Tegeltija, former finance minister of Bosnia’s Republika Srpska, as the new prime minister. Municipal elections in November 2020, the first since 2008, gave weight to opposition parties (especially in Sarajevo and other major cities) rather than the ruling nationalist parties. This is expected to make room for new actors on the political scene. Following the municipal elections, the government entered negotiations with the IMF to obtain a loan of USD 892 million (4% of GDP) for 3 years. Republika Srpska and the Federation of Bosnia and Herzegovina agreed, in November 2019, on a four-year reform program as a condition for EU candidate status and an IMF loan.


Coface (02/2022)
Bosnia and Herzegovina