Prof. dr. Anto Domazet

Influence of global economic crisis on Bosnia and

Herzegovina

PANEL LECTUREGlobal Economic Crisis: Implications and

the Way Out for Turkey, Bosnia and Herzegovina and the Western Balkans

Sarajevo 20 October 2009

For whom the Bell Tolls ?

"No man is an island, intire of itself. Every man is a piece of the Continent, a part of the main. If a clod (piece of dirt) be washed away by the sea, Europe is the lesser... Any man's death diminishes me, because I am involved in Mankind. And therefore, never send to know for whom the bell tolls; it tolls for thee.“ (Ernest Hamingway)

„Nijedan čovjek nije otok sam za sebe; svaki čovjek je dio kontinenta, dio okeana. Ako more odnese grudu zemlje, Evrope je manje...Smrt svakoga čovjeka smanjuje tebe jer si obuhvaćen u čovječanstvu. I zato nikada ne pitaj kome zvono zvoni; tebi zvoni!" (Ernest Hemingway)

Agenda

1. What where we before recession had started

2. What is impact of recession on our economy and our lifes

3. What governments and other actors of economic activity did in meantime

4. What has to be done to overcome recession

Crisis – unknown phenomen in Bosnia and Herzegovina

Lack of research and low level of knowledge about recession and crisis in BH

No relevant analysis and estimation of future develpment of recession and crisis

Everyone would like to hear or communicate good news, but no signs of positive economic development in BH

Recession or depression – how long it will last?

GDP growth rates 2005-2014.

3,9

-3

0,5

44,5

6,9 6,85,5 6 6 6 6 6 6

-4

-2

0

2

4

6

8

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Estimated by IMF Extrapolation

Source: IMF Country Report No. 09/226, www.imf.org

Cost of recession – about 1.354 mil. KM, cost of crisis 9,4 bill. KM

Hystorical, projected and estimated dynamic of GDP (mil. KM)

16.928

19.121

21.640

23.808 23.928

24.884

26.378

27.96029.219

25.890

27.314

28.816

30.401

32.073

33.837

24.54524.545 24.545

24.545 24.545 24.545 24.545

15.000

17.000

19.000

21.000

23.000

25.000

27.000

29.000

31.000

33.000

35.000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Estimated by IMF Projection at 5,5% growth Projection 2008 level

Real sector weakenning, service sector strenghtenning its share in GDP

Structure of Gross domestic product in BH 2002.- 2007. (%)

12,5

9,6

21,619,7

5,3 5,8

24,8 24,6

6,7

15,0

29,3

25,2

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

2002 2007. 2002. 2007. 2002. 2007. 2002. 2007. 2002. 2007. 2002. 2007.

AB -Agriculture

C,E Mining& industry

F-Construction

G,H,I -Trade,

transport,

J, K-financial,business and

real estate

L-P -Publicservices

Source: www.bhas.ba

Modest results in reindustrialization of the country

Industrial production in Federation of BH Industrial production in Republika Srpska Source: Bulletin CB BH 2/09

Big decline in construction works in 2009 in F BH (-20,4%) and growth in RS (6,5%)

Construction in F BiH and RS

Source: Bulletin CB BH 2/09

Serious decline in tourism in 2009. (-7,9% total arrivals, - 13,7% total nights)

Tourist arrivals in BH (thousands)

214 220 223 217243

277 289255

161 167194

217256

306 322 308

375 388418 434

499

584611

563

0

100

200

300

400

500

600

700

2002 2003 2004 2005 2006 2007 2008 2009 est.

Domestic Foreign Total

Tourist nights in BH (in thousands)

503 505 533 533 582642 678

600

400 409 466 485594

695 719 684

903 914999 1.018

1.176

1.337 1.3951.284

0

200

400

600

800

1.000

1.200

1.400

1.600

2002 2003 2004 2005 2006 2007 2008 2009 est.Domestic Foreign Total

Source: www.zsrs.ba, www.fzs.ba

Decreasing purchaising power lowers trade distribution activity in BH

Turnover in wholesale and retailing (in mil KM)

4.470,00

3.956,70

6.669,20

5.964,60

3.099,702.490,50

4.013,903.543,503.741,30

1.600,70 1.620,601.975,40 2.199,20 2.007,90

1.620,002.057,90

5.342,00 5.164,10

5.989,30

4.110,50

5.157,60

1.000,00

2.000,00

3.000,00

4.000,00

5.000,00

6.000,00

7.000,00

2007 IV Q 2008 IQ 2008 IIQ 2008 IIIQ 2008IV 2009IQ 2009 II Q

F BH RS Total

Source: www.zsrs.ba, www.fzs.ba

Export and imports – the most sensitive indicators of recession in BH (1)

Exports to main trade areas (Thous. KM)

1.925.709

2.858.025

510.516

1.700.2182.006.623 2.415.030

2.977.0373.400.860 3.703.290

487.084 529.412 593.370

5.936.8956.711.690

5.164.3395.294.250

0

1.000.000

2.000.000

3.000.000

4.000.000

5.000.000

6.000.000

7.000.000

8.000.000

2006. 2007 2008 2009

CEFTA EU OTHERS TOTALSource: www.bhas.ba

Export and imports – the most sensitive indicators of recession in BH (2)

Imports from main trade areas (Mil. KM)

5.898.900

12.028.920

5.653.430 3.929.255 4.702.625

3.205.830

5.360.4076.642.380

7.814.757

3.327.0742.924.1303.768.6742.893.097,35

13.906.934 13.898.70916.286.056

0

2.000.000

4.000.000

6.000.000

8.000.000

10.000.000

12.000.000

14.000.000

16.000.000

18.000.000

2006 2007 2008 2009

CEFTA EU OTHERS TOTALSource: www.bhas.ba

Estimated unemployment due the recession 25-35.000 persons

Source: Bulletin CB BH

BH - losing competitiveness capacity for mid-term growth

Position of BH in global competitiveness 2008 2009

4,15

3,99

4,42 4,69

4,52

3,93

3,89

3,42

3,44

3,95

4,083,58

3,48

3,82

3,703,16

2,83

3,302,74

2,80

3,33

3,90

3,75

3,874,22

4,11

3,56

3,55

0

1

2

3

4

5

Albania

BH

Montenegro

CroatiaMacedonia

Moldova

Serbia

Basic requirements

Efficiency enhancers

Innovation factors

Overall score

Source: Global Competitiveness Report 2009, www.weforum.com

Key macroeconomic indicators -projecting higher debt and lower CAB deficit

Average decrease of revenue of 10% - clear sign of recession in BH

State and entities revenue (2006-2009) in mil. KM

5248,4

4.766,804.409,50

2.794,50

349,20

4713,2

5.339,0 5.702,0

4348,3

4.902,55.273,2

4.676,0 4.924,3

4104,7

2448,82.868,6

3.119,5

919,2861,6 939,61.006,70

651,7557,8655,6

0

1000

2000

3000

4000

5000

6000

2006 2007 2008 2009*Current Revenues Taxes Indirect taxes

VAT Excises Customs duties

* * estimated, source VAT Directorate, www.oma.ba

Recovering money supply but still not favorable conditions of credits

Money supply VI 2008-VIII 2009 (mil. KM)

5.000,00

6.000,00

7.000,00

8.000,00

9.000,00

10.000,00

11.000,00

12.000,00

13.000,00

14.000,00

06. 07. 08. 09. 10. 11. 12. 01. 02. 03. 04. 05. 06. 07. 08.

2008. 2008. 2008. 2008. 2008. 2008. 2008. 2009. 2009. 2009. 2009. 2009. 2009. 2009. 2009.

M1 QM M2

13.37012.380 13.370

6.2425.528 5.704

6.9217.174

6.651

Lower claims becouse of higher credit risks and higher interest rates

Banks claims on non-government sector in BH (Mil. KM)

6.000,00

7.000,00

8.000,00

9.000,00

10.000,00

11.000,00

12.000,00

13.000,00

14.000,00

15.000,00

06. 07. 08. 09. 10. 11. 12. 01. 02. 03. 04. 05. 06. 07. 08.

2008. 2008. 2008. 2008. 2008. 2008. 2008. 2009. 2009. 2009. 2009. 2009. 2009. 2009. 2009.

Claims from private companies Claims from housholds TOTAL Claims

14.60814.164

13.734

6.237 6.7356.290

6.404 6.791 6.458

Monetization of BH economy – money supplay grows faster than real economy (GDP)

Source: Central Bank of BH

Monetary agregates as % of GDP

39,5 40,9

46,551,1

56,2 56,151,4 52,6

23,4 23,2 24,1 2628,2 28,3

24,2

18,618,115,6

27,2 28,8

19.1

28,225,122,1

0

10

20

30

40

50

60

2002 2003 2004 2005 2006 2007 2008 I-VII 2009

M2 M1 MQ

BH entered recession as neglected society and economy with old fashioned politics

BH economy was overheat in 2008, with consumption-lead growth, based on high credit and fiscal expansion

Low competitiveness and lack of political will to start structural reforms in social and economic field on the EU way, needed to activate potentail sources of development

The main consequences of recession are: a) drop in GDP, fiscal revenue, public, household and investments consumption and external sector activities (export, import, FDI, tourism, remittances), b) losses of working places, c) credit contraction and more expansive money, d) bankruptcies

More intensive social tensions – higher risk of poverty

Global recession and Made in BH attributes (magic triangle of BH reality)

Ekonomija

Socijalna sfera

Politička struktura

Global recession

EU Regional impactBH reality Economy

Social Political

sphere sphere

Main challenges of BH development

Political consensus about future of the country and its political organization

Growth of competitiveness based on efficiency driven stage of development

Improve the governance in global unstability and recession

Increase the level of investments and employment – to mobilize potential sources of development

To speed up economic, spocial and political reforms and integration in EU – to reach status of candidate for membership

Fighting corruption and organized crime Building up strong state and market institutions

The question of sustainability– there is need for new politics for better economy and fair social system

POLITICSBH as a functional state

EU and global integrationRules of low

Fighting corruption and organized crime

Private vs public sectorsMarket regulation Market institutions

SOCIAL SECTORSocial state and security

Equal chances for allImprove education and health

Reforming tax and social benefits systemReforming pension system

Fighting povertyImprove labor regulation

Social care for children and old people

ECONOMYMacroeconomic stability - SESImprove business environemnt

Attract domestic and foreign inv.R&D and Support competitiveness

Openning new working placesSupport SMEs and farmersPrivete public partnership

Export – lead growth

What have governments done – trying to save themselves or to help to the others

Intensity of govenment engagement to confront with crisis

1

3

2

6

5

4

4

5

73

11

7

2

01234567

Expenditure reduction

Tax increasing

IndebtednessSocial support

Support to business

Serbia

Croatia

BH

Fire faighting in line with systematic approach to structural and sectoral reforms

(Supply side vs demand side approach)

Supply side Demand side

Reforming economy

Reducing taxes

Supplying money under favorable conditions (RB)

Privatization to activate business/improve performances

Supporting education

Promoting entrepreneuership

Investing in business infrastructure (business parks

Deeper integration in EU

Better access to credits for households

Public investments

Subsidies for working places

Increasing public consump-tion by increasing taxes

Selecting VAT rates

Requisition of property gained by crime

Is recovery natural phenomen?(More realistic approach – to combine internal

efforts with global recovery)

2.

Good expectationsRisk of the growth

1.

WinnersRecovery and fast

growth

3.

LosersNo recovery – long-term

depression and crisis

4.

Bad expectationsRecovery in long-term

period

High

SUCCESSOF REFORMS

Weak Slow GLOBALNI RECOVERY Fast

Thank you for your attention.