Bosnia and Herzegovina is a complex state and its constitutional organisation largely dominates economic developments. A state with two entities, Federation of BiH and Republika Srpska, as well as Brcko District, is not a common model, resulting in circumstances in which the area of investments is regulated differently than in centralised states.
While potential investors are sometimes confused about BiH’s fiscal architecture, implicit competition between the subnational levels of governance of the two entities and Brcko District has kept both personal and corporate income tax rates at a nominal rate of 10%.
The indirect taxation system, with the single VAT rate of 17%, remained unchanged even during the great financial crisis, and serves as a major and reliable source of revenues.
On the positive side, with the ratio of net general government debt to GDP below 35%, average effective interest rate below 1.5% and average time to maturity above seven years, public finance stability appears secured.
On the negative side, in the post-war period, pension and health care system funds required huge social sector contributions which resulted in the high labour burden and high tax wedge.
Furthermore, like in other Balkan countries, negative demographic trends force policymakers to act fast in securing the sustainability of the social system. Social policy and social contributions fall under the scope of the BiH entities so the lover levels of governance and major reforms are necessary in order to ensure the best possible utilisation of funds for most vulnerable categories.
State-owned enterprises pose another source of risk for public finance, but also an opportunity in case of successful restructuring, which will only be on the agenda of the levels of governance in the future period.
Protecting the tax base
Like most complex systems, internal debate concentrates on revenue allocation among the levels of governance. However, we also closely follow international developments and fully recognise the need for BiH to be a part of the global system for protection of the tax base, especially in the digital era where companies in the digital IT sector may benefit from different rules across different jurisdictions.
Despite recent bumps in global trade, globalisation and free movement of goods and capital, sooner or later, resulted in fewer obstacles for the free movement of labour. Practically, BiH has to fight not only to maintain its human resources but also to attract skilled labour from abroad. Failure to do so will result in the fact that BiH will continue to export goods of a very low level of sophistication with minimal value added. It is with this perspective in mind that we approach the EU integration process. The EU integration process requires improvements on the level of institutions in order for the country to grasp the benefits of the bigger and technologically more demanding market.
Reforms
With or without the EU accession process, we are simplifying the administrative burden imposed on entrepreneurship and business. Both Republika Srpska and Brcko District have embarked upon reforms to limit parafiscal fees and this process is about to start in the Federation of Bosnia and Herzegovina. Municipalities implement different policies to attract business, including establishment of one-stop shops which will enable speeding up of the procedure of business registration and creation of business zones.
Projected real economic growth rates for the next three years exceed 3.5%, which is 1 percentage point above the rates projected for the EU, but still insufficient to decrease the development gap with developed countries in foreseeable future.
However, we are aware that competition in the 21st century is global and that the economic development depends on the ability to adjust and implement digital technologies. We see increasing numbers of millenials working for foreign companies using their IT skills. This may signal what the governments should do in the future — invest in those self-developing sectors and support them, rather than creating big complicated reindustrialisation strategies.