Bosnia and Herzegovina

Bosnia and Herzegovina

Bosnia and Herzegovina: Market Profile

Graph: Bosnia and Herzegovina factsheet
Graph: Bosnia and Herzegovina factsheet

1. Overview

Bosnia and Herzegovina (BiH) is an upper middle-income country, which has made good progress in terms of its development since the end of the Bosnian War in the mid-1990s. Its complex political system reflects the constitutional provisions made by the Dayton Agreement (to end the ethnic conflict), as well as the subsequent amendments introduced under the auspices of the international community through the Office of the High Representative. Today, BiH is an European Union (EU) potential candidate country that is embarking on a new growth model.

Source: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

March 2015
EU foreign ministers and Bosnia signed the Stabilisation and Association Agreement that has been on hold since 2008, increased the likelihood of Bosnia joining the EU if it carries out key political and economic reforms.

February 2016
Bosnia submitted formal application to join EU.

October 2018
Bosnia and Herzegovina held both presidential and parliamentary elections on October 7.

Source: BBC Country Profile – Timeline, Fitch Solutions

3. Major Economic Indicators

Graph: Bosnia and Herzegovina real GDP and inflation
Graph: Bosnia and Herzegovina real GDP and inflation
Graph: Bosnia and Herzegovina GDP by sector (2017)
Graph: Bosnia and Herzegovina GDP by sector (2017)
Graph: Bosnia and Herzegovina unemployment rate
Graph: Bosnia and Herzegovina unemployment rate
Graph: Bosnia and Herzegovina current account balance
Graph: Bosnia and Herzegovina current account balance

e = estimate, f = forecast
Source: International Monetary Fund, World Bank, Fitch Solutions
Date last reviewed: August 21, 2018

4. External Trade

4.1 Merchandise Trade

Graph: Bosnia and Herzegovina merchandise trade
Graph: Bosnia and Herzegovina merchandise trade

e = estimate
Source: WTO
Date last reviewed: August 21, 2018

Graph: Bosnia and Herzegovina major export commodities (2017)
Graph: Bosnia and Herzegovina major export commodities (2017)
Graph: Bosnia and Herzegovina major export markets (2017)
Graph: Bosnia and Herzegovina major export markets (2017)
Graph: Bosnia and Herzegovina major import commodities (2017)
Graph: Bosnia and Herzegovina major import commodities (2017)
Graph: Bosnia and Herzegovina major import markets (2017)
Graph: Bosnia and Herzegovina major import markets (2017)

Source: Trade Map, Fitch Solutions
Date last reviewed: September 19, 2018

4.2 Trade in Services

Graph: Bosnia and Herzegovina trade in services
Graph: Bosnia and Herzegovina trade in services

Source: WTO
Date last reviewed: August 21, 2018

5. Trade Policies

  • BiH is not yet a member of the WTO. The Working Party was established on July 15, 1999, when the country started its accession negotiations for the WTO. In February 2018, the 13th meeting of the Working Party on the Accession of BiH was held, where WTO members supported the prompt conclusion of negotiations and welcomed the commitment by Sarajevo to finalise its accession process over the course of 2018.
  • The standard VAT rate is 17%, and the VAT regime applies equally throughout the country of Bosnia and Herzegovina. There is no reduced VAT rate in Bosnia and Herzegovina. The export of goods is zero-rated.
  • The customs policy law and the rates of customs tariffs to be applied exist and are largely based on EU standards. BiH has signed the Stabilisation and Association Agreement (SAA) and the Central European Free Trade Agreement (CEFTA).
  • An excise tax is also paid on certain imported and domestic goods which include coffee, oil derivatives, tobacco, beverages and alcoholic drinks.
  • In 2009, BiH introduced a law for the protection of domestic products against imports from Croatia and Serbia. The law stipulates that safeguard measures were necessary due to the influx of imports and dumping of particular agricultural products from Croatia and Serbia, as well as a conceivable decrease in exports from BiH to Serbia.
  • As a result of BiH not having EU member status, even though the majority of its trading partners are EU member states, export and import supply chains will face more onerous border and documentary times and costs when compared to those of EU states. The most salient risk is the high cost associated with the import border compliance process, which is higher than that of countries such as the Former Yugoslav Republic of Macedonia, and contributes towards BiH's status as regional under-performer in relation to customs burdens.

Source: WTO - Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

An agreement which will allow the export of honey, milk and dairy products from BiH to China is expected to be signed in July 2018, at the next summit of the 16+1 grouping. However, before gaining access to the Chinese market, Bosnian exporters will have to meet certain criteria, such as having adequate health and sanitary standards.

6.2 Multinational Trade Agreements

Active

  1. BiH and European Free Trade Association (EFTA), consisting of Switzerland, Norway, Iceland and Liechtenstein: The main focus of the EFTA-BiH Free Trade Agreement (FTA), which came into force in January 2015, is on the liberalisation of trade in goods. EFTA and BiH abolished all customs duties on industrial products as of the entry into force of the Agreement. Additional agricultural agreements between the individual EFTA States and BiH form an integral part of the instruments establishing the free trade area.

  2. The CEFTA, consisting of Albania, BiH, Serbia, Moldova, Montenegro, Former Yugoslav Republic of Macedonia (FYROM) and UNMIK/Kosovo: CEFTA came into force in May 2007 and helps increase trade between regional counterparts and fosters non-EU bilateral relations.

  3. EU and BiH: The SAA between the EU and BiH entered into force on June 1, 2015 and has caused a shift in the latter's export and import partners and goods. The SAA establishes a close partnership between the EU and BiH and deepens the political, economic and trade ties between the two parties. It is from now on the main framework for the relations between the EU and BiH, further preparing the latter for future EU membership. The entry into force of the SAA has also increased the confidence of domestic and international investors in BiH. It allows both Bosnian and EU companies to access their respective markets. This is conducive to enhanced business opportunities for both the EU and Bosnian based companies, and would stimulate economic growth and employment. SAA will also contribute to the progressive alignment of Bosnian norms and legislation with the EU legislation, thus benefiting Bosnian citizens through better quality, healthier and safer goods.

  4. Turkey-BiH: An FTA with Turkey, which came into force in July 2003, provides additional free access to a consumer market of 80 million people.

Under Negotiation

Malaysia-BiH: The agreement, which is expected to materialize by 2020, will help businesses exploit opportunities in manufacturing and the import and export of Halal products due to the large population of Muslim consumers in both markets. This will also boost service exports in terms of tourism in both countries.

Source: WTO Regional Trade Agreements database

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Bosnia and Herzegovina FDI stock
Graph: Bosnia and Herzegovina FDI stock
Graph: Bosnia and Herzegovina FDI flow
Graph: Bosnia and Herzegovina FDI flow

Source: UNCTAD
Date last reviewed: August 21, 2018

7.2 Foreign Direct Investment Policy

  1. The Foreign Investment Promotion Agency (FIPA) of BiH works to attract Foreign Direct Investment (FDI), and encourage existing investors to expand their businesses in BiH. FIPA has identified sectors, such as manufacturing, energy and wood processing as key industries that are likely to see high investment growth in the coming years. Overall, there are no restrictions on foreign investment or ownership, with the exception of the defence and media sectors, where foreign control is capped at 49%.

  2. A bonus to foreign investors is the Law on the Policy of FDI, which accords foreign investors the same rights as domestic investors, including during the bidding process for privatisation tenders. Existing investors are also granted protection from amendments to the Law on Foreign Investment. If the Bosnian government were to make changes to this law, the individual investor may select the most favourable version of regulations to apply.

  3. Despite the various investment incentives of the Bosnian market, some short-term risks as well as longer term barriers to FDI still exist. State-owned enterprises (SOEs), which affect sectors such as defence, media and telecommunications, are mostly owned by the sub-national governments and are thus controlled by various political parties, which leaves them open to corruption and inefficient management. By law, private enterprises can compete under the same conditions as public ones, but in practice SOEs have the upper hand as some of them hold a near-monopoly and make large profits due to their dominant market position.

  4. Although Bosnian law states that foreign investors shall have the same ownership rights of real estate as domestic persons, the Law on Agricultural Land prohibits foreigners from acquiring ownership of agricultural land unless international agreements state otherwise. The rights of foreigners to acquire respective ownership over real estate in BiH may also be subject to reciprocity. This may present risks to investors, or simply dissuade them from investing or seeking ownership of property in the country.

  5. BiH exhibits the fifth-worst state of cluster development in the region (out of 12 South East European states), behind Romania. This indicates that there are few business parks with close groupings of ventures from multiple different sectors, suggesting a poor state of business relationships and economic management in the country.

Sources: WTO - Trade Policy Review, The International Trade Administration (ITA), US Department of Commerce, Fitch Solutions

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
BiH operates a number of Free Trade Zones (FTZs) which offer a range of incentives for investment.

There are six FTZs which are located at Vogošća, Sarajevo, Holc, Lukavac, Mostar and Visoko.
Investors in these zones do not pay taxes or contributions, and are free to invest and re-transfer capital, as well as transfer their profits, among others:

- Exempted from Value Added Tax, contributions and import duties
- Investment and transfer of profit and investments are free of charge
- Reduced Municipal fees for facilities construction, allowing for payment in instalments
- Faster administration for acquisition of construction permits
- Reduced costs for certificates of occupancy for usable areas

Source: US Department of Commerce, Fitch Solutions

8. Taxation – 2018

  • Value Added Tax: 17%
  • Corporate Income Tax: 10%

Source: PwC Tax Summaries 2018

8.1 Important Updates to Taxation Information

  • No substantial corporate tax developments occurred in Bosnia and Herzegovina over the last fiscal year. The anticipated new Personal Income Tax Law in the Federation of BiH and the adjustments to the Law on VAT are still subject to parliamentary proceedings. The new Law on Contributions in the Federation of BiH that should follow the anticipated changes in taxation of individuals, is still being negotiated by stakeholders.

  • Corporate income tax laws are rather complicated owing to the fragmentation of BiH into two territorial entities. The Federation of Bosnia and Herzegovina (FBiH) distinguishes between:

    • Resident business entities (whereby actual management or supervision is in the FBiH), which have to pay corporate income tax on their worldwide income; and

    • Non-resident businesses (whereby actual management and supervision is based outside the FBiH), which pay taxes on income realised in the FBiH only.
  • Simultaneously, in the Republika Srpska and the District of Brčko, the corporate income tax law does not distinguish according to residency definitions, but whether a business is incorporated in the area or merely a branch in the entity, thus paying only taxes on income realised in the territory. However, generally taxes in Bosnia and Herzegovina are rather low, with a 10% statutory tax rate on operating profits. Dividends paid to non-resident companies are taxed at 5% in the FBiH and 10% in the Republika Srpska and District of Brčko, while dividends received can generally not be taxed in any entity. Interest as well as patent royalties and copyright royalties paid to non-resident companies in all entities is taxed at 10%.

8.2 Business Taxes

Type of TaxTax Rate And Base in Federation of Bosnia and HerzegovinaTax Rate And Base in Republika SrpskaTax Rate And Base in District of Brcko
Corporate Income Tax (standard)10% on operating profits10% on operating profits10% on operating profits
Capital Gains TaxTaxable as part of operating profits at 10%Taxable as part of operating profits at 10%Taxable as part of operating profits at 10%
VAT
17% on value of the products in all regions17% on value of the products in all regions17% on value of the products in all regions
Dividends5% withholding tax10% withholding tax10% withholding tax
Property TaxNot applicable for corporate entities0.05% to 0.5% of property value0.05% to 1.0% of property value
Social security contributionsTotal rate 41.5% applicable to gross salary; out of that, 31% is employee contribution and 10.5% is paid by employerTotal rate 33.0% applicable to gross salary - all payable by employee; no employer contributionTotal rate 31.5% applicable to gross salary - all payable by employee; 6% employer contribution

Source: PwC Tax Summaries 2018, Fitch Solutions
Date last reviewed: September 19, 2018

9. Foreign Worker Requirements

9.1 Localisation Requirements

Since unemployment in BiH is high, requirements for businesses to hire foreign workers are rigorous. Quotas on the number of work permits which may be issued to foreign workers for each sector of the economy are decided on an annual basis by the Council of Ministers. Only the highest level educational degrees are accepted as legitimate reason to hire a foreigner instead of a local.

9.2 Foreign Worker Permits

The permit application process is lengthy, with 45-50 days required for a work permit and 30 days for a residence permit. Work permits are valid for a period up to one year, and are only valid for the specific job and specific employer for which they are originally issued. The risks associated with such rigorous demands and lengthy visa processes will deter businesses requiring highly skilled workers from locating to BiH, as the low skill level of the domestic labour force means that foreign labour will often be required.

9.3 Visa/Travel Restrictions

30 days are required for a visa application and citizens of all African, some Latin American and most Asian and Middle Eastern states require a visa before arrival. Due to various visa arrangements, foreign nationals from 79 jurisdictions that include Europe (except Belarus), North America, Australia, New Zealand and some parts of Latin America enjoy access into BiH without a visa for up to 90 days.

Source: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
B3 (Stable)
16/02/2018
Standard & Poor'sB (Stable)
30/11/2011
Fitch Ratings
Not Rated
Not Rated

Source: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
79/189
81/190
86/190
Ease of Paying Taxes Index
154/189
133/190137/190
Logistics Performance Index
97/160
N/A72/160
Corruption Perception Index
83/176
91/180N/A
IMD World CompetitivenessN/A
N/AN/A

Source: World Bank, Transparency International

10.3 Fitch Solutions Risk Indices


World ranking
201620172018
Economic Risk Index Rank133/202
Short-Term Economic Risk Score34.8
35.0
35.6
Long-Term Economic Risk Score40.5
44.8
46.3
Political Risk Index Rank134/202
Short-Term Political Risk Score42.1
40.6
41.0
Long-Term Political Risk Score51.8
55.8
55.8
Operational Risk Index Rank117/201
Operational Risk Score46.4
45.1
45.5

Source: Fitch Solutions
Date last reviewed: August 21, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
Economic activity continues to show resilience in the face of elevated political risks, and GDP growth is expected to remain on its current trajectory over the coming years amid falling unemployment, rising investment in infrastructure projects, and robust export growth. At the same time, the country's growth potential remains capped by its unstable political climate, institutional weakness, and shortages of skilled workers.

OPERATIONAL RISK
BiH offers an operating environment with significant operational risks, mainly relating to weak transport infrastructure, the limited size of the labour force, a fractured political environment and weak cross border relationships. Even though the country has a relatively open investment climate, with no restrictions on foreign direct investment and a low rate of corporate income tax, its small market size, complicated regulatory barriers and weak rule of law weigh down investor confidence.

Source: Fitch Solutions
Date last reviewed: September 21, 2018

Graph: Bosnia and Herzegovina short term political risk index
Graph: Bosnia and Herzegovina short term political risk index
Graph: Bosnia and Herzegovina long term political risk index
Graph: Bosnia and Herzegovina long term political risk index
Graph: Bosnia and Herzegovina short term economic risk index
Graph: Bosnia and Herzegovina short term economic risk index
Graph: Bosnia and Herzegovina long term economic risk index
Graph: Bosnia and Herzegovina long term economic risk index

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: August 21, 2018

10.5 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Bosnia and Herzegorvina Score45.545.544.346.145.9
Southeast Europe Average57.1
52.857.958.359.4
Southeast Europe Position (out of 12)12
121212
10
Emerging Europe Average56.754.158.457.456.8
Emerging Europe Position (out of 31)25
292927
22
Global Average49.7
49.850.049.349.9
Global Position (out of 201)117
126129
109
108

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Bosnia and Herzegovina vs global and regional averages
Graph: Bosnia and Herzegovina vs global and regional averages
Country
Operational Risk Index
Labour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Secruity Risk Index
Slovenia
67.254.0
60.970.683.4
Croatia63.151.9
55.468.476.7
Romania62.157.162.160.768.5
Cyprus61.055.161.758.368.8
Bulgaria
60.255.563.660.661.1
Macedonia57.547.268.357.257.3
Montenegro
56.952.858.856.559.3
Serbia56.158.559.453.952.5
Turkey
52.952.055.861.942.0
Kosovo52.355.257.655.640.7
Albania50.849.047.649.856.8
Bosnia and Herzegovina45.545.544.346.145.9
Regional Averages57.152.857.958.359.4
Emerging Markets Averages46.848.047.545.846.0
Global Markets Averages49.749.850.049.349.9

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: August 21, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Bosnia and Herzegovina

Graph: Major export commodities to Bosnia and Herzegovina (2017)
Graph: Major export commodities to Bosnia and Herzegovina (2017)
Graph: Major import commodities from Bosnia and Herzegovina (2017)
Graph: Major import commodities from Bosnia and Herzegovina (2017)
Graph: Merchandise exports to Bosnia and Herzegovina
Graph: Merchandise exports to Bosnia and Herzegovina
Graph: Merchandise imports from Bosnia and Herzegovina
Graph: Merchandise imports from Bosnia and Herzegovina

Exchange Rate HK$/US$, average
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Source: Hong Kong Census and Statistics Department, Fitch Solutions


2017
Growth rate (%)
Number of Bosnian residents visiting Hong Kong775
0.4

Source: Hong Kong Tourism Board


2017
Growth rate (%)
Number of European residents visiting Hong Kong1,929,824
-0.2

Source: Hong Kong Tourism Board, Fitch Solutions
Date last reviewed: September 19, 2018

11.2 Commercial Presence in Hong Kong


2017
Growth rate (%)
Number of Bosnian companies in Hong Kong N/A   N/A
- Regional headquarters
- Regional offices
- Local offices


11.3 Treaties and Agreements between Hong Kong and Bosnia and Herzegovina

  • The Agreement between the People's Republic of China (PRC) and BiH on the Promotion and Protection of Investments entered into force in January 2005. The duration of the initial treaty term is 10 years, with its purpose being to extend and intensify the economic cooperation between the two countries.

  • The Agreement on the abolition of visa requirements for holders of ordinary passports between BiH and PRC was signed by the two countries in November 2017. The agreement stipulates that citizens of BiH and the PRC, who are holders of valid passports, will have no obligation to obtain visas for entry, exit, stay or transit through the territory of the other contracting party up to 90 days within 180 days.

  • The Agreement on agricultural cooperation between BiH and PRC was signed in November 2017. The signing of this agreement is opening the process of intensive communication between institutions and business communities in the field of agriculture and rural development in both countries, as well as providing further promotion of economic, scientific and technological cooperation in the aforementioned sectors.

  • BiH has a Double Taxation Agreement (DTA) with PRC, which entered into force in December 1989.

Source: Government Sources, Fitch Solutions

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

There is no Bosnian Consulate in Hong Kong.

11.5 Visa Requirements for Hong Kong Residents

A tourist visa is not required for citizens of Hong Kong for a stay up to 90 days. All travelers will need a passport valid for at least 90 days from the date of first entry into the territory of BiH.

Source: Hong Kong Immigration Department
Date last reviewed: September 19, 2018