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Business Insight: Bosnian Leadership Vows to Focus on Economy

26 10 2007  Bosnian leaders have adopted a “Platform for Action” in an attempt to revive the economy and eliminate an array of legal barriers to business.

By Saida Mustajbegovic in Sarajevo

The prime ministers of Bosnia and Herzegovina and its two autonomous entities signed a “Platform for Action” on October 16 committing themselves to making economic issues and reforms the top priority in their work.

The Platform is intended to help remove the huge range of legal barriers to business, created by Bosnia’s complex administrative structures. But the move is seen as perhaps only one of the first steps along what is expected to be a lengthy path.

At a time when Bosnia’s integration with the EU is being held up by its politicians’ failure to agree on police reforms, the much-needed agreement on improving the business climate has received a welcome at home and abroad.

Bosnia’s Prime Minister Nikola Spiric was joined by the two entity premiers and the mayor of self-governing Brcko District at the signing ceremony. If the Platform is followed by action, it may help sweep away many of the obstacles that the existence of around 3,500 conflicting laws and regulations has put in the way of conducting business.

The complexity of the administration is at times mind-boggling. Bosnia and Herzegovina has a central government with nine ministries; the country is divided into two entities, the Republika Srpska and the Federation of Bosnia and Herzegovina, and Brcko District. The Federation is sub-divided into ten cantons. This means that there are, for example, thirteen finance ministries.

For each level of public administration – municipality, canton, entity and state – there are separate laws. When a law is passed at the state level, corresponding laws that apply at the lower levels of government are often not taken into account.

In some cases obsolete laws from the time when Bosnia-Herzegovina was a federal unit of the former Socialist Federal Republic of Yugoslavia are still in use, with fines for specific violations denominated in Dinars, a currency which has not been used in Bosnia and Herzegovina, BiH, for 15 years.

In the World Bank’s report on “Doing Business in 2008” focusing on Europe and Central Asia, the Republic of Croatia was named as the country that has improved the most over the past year. By contrast, Bosnia and Herzegovina and Albania have slipped back even further towards the bottom of the list.

Last year the Republika Srpska carried out a successful “Guillotine Project” aimed at eliminating obsolete commercial legislation and making it easier for companies to set up shop. The Federation government decided late last year to begin adjusting laws and regulations individually rather than copying the guillotine approach.

Until now, the entity governments have not worked together to create a positive business environment that could help raise living standards, despite a constitutional provision encouraging them to do so.

For this reason the importance of the Platform for Action should not be understated. Its signing was the result of a conference organised by the top international official and EU Special Representative in Bosnia, Miroslav Lajcak, with the express purpose of putting economic issues back at the centre of the political debate. Policymakers, businesspeople, union representatives and other economic stakeholders attended the conference.

Lajcak told reporters that the Platform for Action identifies problems hindering the country’s economic development, some of which could be solved in months rather than years.

He said that much of the preparatory work had already been done on legislation and other initiatives that would establish a proper system for allocating tax revenue, and would modernize the commercial code, regulate the pharmaceutical market, improve the security of small bank depositors and encourage the banks to lend more to business start-ups, establish an effective BiH Social and Economic Council, and help upgrade the country’s infrastructure.

“In many cases the relevant legislation is ready to be debated and enacted,” Lajcak told conference participants.


“There hasn’t been political opposition to these measures. There has been political inattention, and that is what we want to change. If we can focus the attention of the media and the general public on these issues, if we can get economic stakeholders and policymakers to focus on them, then it is realistic to believe that our efforts in 2007 could start to deliver material benefits to citizens as early as 2008.”


Tomislav Grizelj, chair of the country’s Employers’ Association said the multiplicity of overlapping and often contradictory laws was a major disincentive to economic growth.


One of the most commonly cited examples is the State Excise Act (regulating taxes levied on alcohol, coffee, cigarettes and oil), in effect since 2005 and at odds in places with the Federation Tobacco Act of 2002. The State law, for example, treats alcohol used by pharmaceutical companies as a luxury, while the entity legislation treats it as a raw material.


The State Indirect Taxation Authority calculates that the national budget loses somewhere in the region of three million KM (about one and a half million Euros) annually due to discrepancies among various laws regulating tobacco, pharmaceuticals and chemical products.

Cigarette production is another area of contention. The Federation’s Tobacco Act classifies tobacco into three categories, but the State Excise Act places imported and domestic cigarettes in the same category.


Around 4,500 tons of tobacco is produced annually in Bosnia-Herzegovina, but at a price and of a quality that is not competitive regionally. Imported cigarettes are pushing domestic cigarettes out of the market.

“Thanks to the equal excise rate applied to domestic and imported cigarettes, Bosnia and Herzegovina’s budget loses between 350 and 400 million KM every year,” according to Edin Mulahasanovic, marketing director at Sarajevo Tobacco manufacturer FDS, the biggest cigarette maker in the country.


Another example of legislation which negatively affects the business environment is the mandatory requirement that two percent of the value of new construction projects has to be paid to the local authorities so that they can make suitable provision for nuclear shelters.


When this requirement was abolished at the Federation level, as part of an initiative to promote private investment, it was immediately re-introduced at the Cantonal level.

It means that, for example the Slovenian investor Droga Kolinska, which built a plant in Sarajevo Canton worth 20 million Euros, had to pay two percent of that figure to the local authorities for a nuclear shelter that is very unlikely ever to be built. It is worth noting that the Droga Kolinska plant has created 80 new jobs.


The most common criticism of the business environment in Bosnia and Herzegovina is that it is split down the middle. Companies routinely have to duplicate time-consuming paperwork when they try to do business in both entities.

Local companies also complain that as Bosnia and Herzegovina embraces free trade with its neighbours they are unable ton compete.

Banja Luka Brewery General Manager Nicholas Penny points out that his company has to pay customs duties on raw material it imports to make beer, whereas breweries in neighbouring countries selling their products in Bosnia and Herzegovina are exempt from such tariffs in their own countries. Hence, breweries from neighbouring countries are more competitive on the Bosnian market than local breweries.


Senior executives at Bimala, headquartered in Brcko District, the biggest producer of edible oils and a large Bosnian exporter, say there is less confusion now, “following the adoption of an increasing number of state laws that apply to the whole of Bosnia and Herzegovina.”


Companies resort to a variety of legal and sometimes illegal strategies and mechanisms in their efforts to cope with confusing and conflicting laws.

“Big international corporations in Bosnia and Herzegovina, as a rule, would rather pay the fines because it’s cheaper than hiring huge legal teams whose only task would be to disentangle the cobweb of cantonal, entity and state laws,” says economic expert Davorin Pavelic, who has researched and analysed this phenomenon and interviewed many local and foreign companies’ management teams.

Constitutional law expert Omer Ibrahimagic points out that article 3, paragraph 5, of Bosnia and Herzegovina’s Constitution stipulates that the entities are supposed to have started working on joint economic projects, among other things, within six months of the signing of the 1995 Dayton Peace Accord.


Nothing in the Constitution specifically impedes economic development, said Sarajevo University School of Economics Professor Meho Basic, adding that “all the problems occur during implementation.”


Clearly the Platform for Action which the political leaders signed last week amid considerable media fanfare will not change the situation overnight.

However, if the initiative succeeds in focusing at least a measure of political activity on economic issues then a start could be made on clearing away the thicket of obsolete and conflicting laws that have done so much harm to the Bosnian business environment.

Saida Mustajbegovic is a Balkan Insight contributor. Balkan Insight is BIRN`s online publication.
This article has been produced as part of BIRN’s Bosnia Constitutional Reforms project which is financed by the Swiss Embassy in Sarajevo and the University of Sarajevo's Human Rights Center.