Situation and Cooperation

Although the war in Bosnia and Herzegovina ended back in 1995, the situation in the country is still difficult. Tensions between the three ethnic groups, Bosniaks, Croats, and Serbs, continue to pervade everyday life. The country is still dependent on the support of EUFOR (European Military Force, troops of the European Union) for implementing the Dayton Peace Agreement. The greatest societal challenge is to offer the population prospects of peaceful coexistence irrespective of their ethnicity and religion.

The war left one-third of all housing severely damaged or totally destroyed. The overriding priority in recent years has been to rebuild the country. Bosnia and Herzegovina is undergoing a radical reform process – the economy, education system, legislation, and administration are all being restructured. The international community is supporting the country in this work.

There is still a great shortage of capital because many investors are hesitant to make financial commitments in a country that is classified as high risk. Because of the country's high risk status, its domestic banks have little access to international capital markets. The donor community is improving the situation with refinancing loans.

Bosnia and Herzegovina is undergoing a transition from a planned economy to a market economy. During the war, many industrial plants were destroyed. The country's economy was brought to its knees. Inflation rose and unemployment rocketed to almost 50 percent in some areas. A number of large-scale enterprises have not re-opened since the war, or are operating at a loss; for the most part these are state-owned enterprises set up during the socialist period. The economy is still operating at only 50 percent of its pre-war capacity. The economy has a high proportion of state-owned enterprises, and the national debt amounts to almost a quarter of gross domestic product. Up to now it has not been possible to create a unified economic zone that encompasses all parts of the country.

Complex structure hinders development

The political structure of Bosnia and Herzegovina is extremely complex. The state is made up of two 'entities' – the Bosniak/Croat Federation of Bosnia and Herzegovina and the Republika Srpska – together with Brčko District. It is headed by a three-member presidency which rotates every eight months between the representatives of the three ethnic groups. The government consists of nine ministers, 19 deputies and a prime minister. The High Representative of the international community and Special Representative of the EU in Bosnia and Herzegovina and his office (OHR) have wide-ranging executive and legislative powers. This complex structure hinders joint decision-making, since the two entities have far-reaching decision-making authority and often hamper one another. The situation is further compounded by a lack of legal security and by corruption at all levels and in all sectors.

In the recent past, however, a certain amount of progress has been made. This includes the reform of the defence system, the re-structuring of the police force and a marked improvement in the functioning of the judiciary. One major success for the country was the signing of the Stabilisation and Association Agreement with the European Union in summer 2008.

Although Bosnia and Herzegovina is not one of the heavily indebted poor countries (HIPC), it drew up a PRSP in 2004 in order to be able to continue to receive concessional loans from the World Bank in the future. With this wide-ranging, multi-year development programme the government set itself the goal of reducing poverty in the country by one-third by 2007. This was not accomplished, however: According to the PRSP, in 2004 19.5 percent of the population was living below the poverty line and another 30 percent only slightly above it. In 2007 the figures were virtually unchanged. In order to tackle poverty effectively, more intensive work will be done to improve conditions for local and foreign investors, and thus to strengthen the private sector in particular.

Potential

In spite of many problems, Bosnia and Herzegovina has development potential: the tying of the Bosnian currency to the euro has brought price stability and a low inflation rate. Commerce and some other service sectors have developed well in recent years. Thanks to its central location, Bosnia and Herzegovina is an attractive location for businesses planning to expand into the neighbouring markets of south-eastern Europe. Particular opportunities exist in the energy industry, which has major export potential. The country is currently the region's only net exporter of electricity. Opportunities for growth are also evident in the timber, construction, textiles, leather and food industries as well as in the energy, tourism and information technology sectors. Mineral resources are an additional factor: the country is rich in lead, copper, iron ore, zinc, bauxite and coal.

Priority areas of German cooperation with Bosnia and Herzegovina

After the signing of the Dayton Peace Agreement in 1995, German cooperation with Bosnia and Herzegovina concentrated initially on emergency aid measures, especially assistance for returning refugees. Thereafter, the focus of cooperation shifted to rebuilding the country and securing peace and democracy. Germany currently supports Bosnia and Herzegovina in three principal areas:

• Economic reform, promotion of small and medium-sized enterprises (SMEs)

• Municipal water supply and sanitation, renewable energies and energy efficiency

• Stabilisation of democracy, civil society, and public administration.

To this end, Germany pledged Bosnia and Herzegovina 64 million euros for 2008. Of this sum, 60 million euros are allocated to Financial Cooperation and 4 million euros to Technical Cooperation. The majority of the money (46 million euros) is being made available at particularly favourable conditions as a development loan and is to be used for the expansion of wind power.

In addition to bilateral projects, Germany supports social and economic development in the western Balkans by means of a regional fund. In order to apply for this funding the countries of the region have to submit their own project proposals.

Support for economic reform

In spite of international support, economic development in Bosnia and Herzegovina has been slow to take off in the wake of the war. Uncoordinated, non-transparent legal and fiscal systems, which are not adequately geared to the needs of the market economy, are an obstacle to the emergence of small and medium-sized enterprises in the private sector and deter potential investors and entrepreneurs. Many uneconomic state-owned enterprises still have to be privatised or simply liquidated, which in turn presupposes a reform of the social security systems. In this respect there are considerable differences between the two entities: whereas most small and medium-sized enterprises have been privatised successfully in both areas of the country, only the Republika Srpska has also privatised strategic companies in the telecommunications and electricity sectors. In contrast, the Federation of Bosnia and Herzegovina has made little progress with the transfer of state-owned enterprises to the private sector, and the governmental and administrative institutions responsible for that process tend to block one another. For Bosnia and Herzegovina to become a single market on the domestic and international front, all norms and standards of both entities must be aligned.

The Federal Republic of Germany is supporting the requisite reforms. The aim is to make the country attractive for domestic and foreign investors, so that the economy is no longer dependent on international assistance. Successes already achieved include the establishment of a common central bank and a common currency, the Bosnian marka, which is tied to the euro.

A programme for supporting small and medium-sized enterprises through PPP measures is contributing to the development of the private sector and the banking system. The programme targets both entities and has achieved some early success: small and medium-sized enterprises are more efficient and their approach is more attuned to a market economy. Around 4,000 new jobs have arisen as a result. The requirement for businesses to be registered has already had a marked effect in slowing the growth of the shadow economy. The first VAT system was introduced on 1 January 2006, having been many years in preparation; it covers the entire country and imposes a uniform tax rate of 17 percent. There has been a notable improvement in tax revenues since that date.

Municipal water supply and sanitation, renewable energies and energy efficiency

An operational water and energy supply system is an important precondition for the economic development of Bosnia and Herzegovina. The situation faced by many municipal water suppliers, however, is difficult. On average, about half of the water produced in the country is lost through leaks, theft or inadequate metering of consumption. In addition, the country's municipal water supply utilities have been unable in the past to build up reserves. Their charges were just high enough to cover their operating costs. The operators now face the problem of having to finance investments and adjust their charges accordingly. The water sector as a whole must also be restructured.

Germany is supporting selected municipalities in the implementation of necessary investments, the development and implementation of a cost-covering, socially acceptable system of user charges, and the improvement of the corporate structure. Development cooperation measures also include training and upgrading. In view of the poor standard of education and high unemployment affecting one-third of the population, these are an urgent necessity. At the same time, the involvement of the private sector is being promoted.

Germany is particularly active in promoting the use of renewable energies and greater energy efficiency in Bosnia and Herzegovina. The largest Bosnian-German development project is the construction of a wind farm in southern Herzegovina – the first of its kind in the western Balkans. In the context of government negotiations held in 2008, the German government pledged its partner country a subsidised loan of 46 million euros for this purpose. 25 million euros had already been approved for the wind farm the previous year.

Stabilisation of democracy, civil society, and public administration

For political stability, economic growth and peace in the Balkan region, it is important to develop structures based on the rule of law and a strong civil society. Well-functioning institutions based on the rule of law must be supported by a performance-oriented civil service and be placed on a firm financial footing. Germany is assisting Bosnia and Herzegovina in reforming the country's public administration with this objective in mind. This includes, among other things, setting up a system of land registry. Land rights are often unclear, entries in the land registry outdated or nonexistent. Establishing legal security in this area serves to promote the flow of foreign direct investment.

Considerable deficiencies continue to exist in the education system. Although the donor community is demanding that everyone should at last be taught together without ideological bias, the segregation of Croatian and Bosniak pupils is actually on the increase. Both groups of pupils have different curricula and teachers, and often even separate school entrances. Another important area of activity for German development cooperation with Bosnia and Herzegovina is therefore crisis prevention and reconciliation among ethnic groups, for ethnic divisions and discrimination are not unique to the education system, but persist in many areas of society.

As a policy issue, the theme of youth is still not given the attention it deserves in Bosnia and Herzegovina. One relevant measure aimed at establishing and promoting structures in the youth work sector has achieved a great deal. Today the resulting youth organisations are well organised and able to articulate their own needs. Support is being provided to help all age groups – including young people in particular – to come to terms with the atrocities of the war. This process is regarded as a model for reconciliation among the country's people.

last changed: March 2009