BAKU, Azerbaijan, July 7. A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’). Missions are undertaken as part of regular consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources, or as part of other staff monitoring of economic developments, Trend reports.
The authorities have given the green light for this statement to be put out. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Growth has shown its mettle, buoyed by expansionary fiscal policies, but inflation is starting to rear its head, and the risks are running high due to external shocks and domestic political squabbles. While the road to EU accession may light a fire under confidence, there are still plenty of political hurdles to jump over.
Fiscal policy should focus on restoring buffers and improving spending quality. The authorities should refrain from further discretionary measures that widen the deficit and strengthen contingency planning. Both entities face large financing needs that are expected to be met through external borrowing, with a Eurobond issuance in FBiH and bilateral loans in the RS, along with some domestic issuances. The authorities should prepare contingency plans in case of financing shortfalls. Reforms, including a review of public employment, wages, and social benefits are needed to achieve a debt-stabilizing primary balance.
To safeguard monetary stability, it is essential to maintain the currency board and uphold the independence of the central bank. The authorities should continue to closely monitor financial sector risks and enhance crisis preparedness. The establishment of a country-wide financial stability fund, which would facilitate bank restructuring and provide liquidity on an exceptional basis, would substantially strengthen the financial safety net. To accelerate growth, the authorities need to speed up reforms to improve fiscal governance, protect financial integrity, fight corruption, and step up digitalization. Transitioning from coal to green energy along with preparing for the introduction of EU carbon taxes are major challenges ahead. Placing BiH on a higher growth path and providing its people with more opportunities will speed up income convergence with the EU and reduce emigration.
Recent developments and outlook
In the face of a tumultuous landscape, the economic framework has demonstrated remarkable fortitude. Economic expansion surged to 2.5 percent in 2024, up from 2 percent in 2023, driven by robust domestic consumption that eclipsed a downturn in net export activity. Domestic expenditure was bolstered by robust expansion in credit facilities and remittance inflows; private sector investment exhibited a marked acceleration. The labor market experienced a contraction in the unemployment metric, registering at 11.7 percent in the fourth quarter of 2024, while nominal wage growth accelerated at an annualized rate of 8 percent. The current account imbalance expanded to 4.0 percent of GDP in 2024, up from 2¼ percent in 2023, driven by a drought-induced contraction in electricity exports, diminished export demand, and elevated import levels linked to robust domestic consumption. The inflationary rate experienced a contraction to 1.7 percent in the fiscal year 2024, a notable decrease from the previous year's figure of 6¼ percent, primarily attributable to a deceleration in the price indices of fuel and utility sectors. Nonetheless, as we approached the conclusion of 2024, we observed a resurgence in inflationary pressures, escalating to 3.7 percent (year-over-year) in May, predominantly propelled by an uptick in food price indices.
The economic outlook remains uncertain amid elevated downside risks. Real GDP is projected to grow by 2.4 percent in 2025 supported by an improvement in net exports, a stronger fiscal impulse, and private consumption. However, the outlook is vulnerable to both domestic and external shocks. A worsening in geopolitical tensions and a resulting slowdown in Europe, or increased commodity price volatility could raise food and energy prices, lower BiH exports and remittances, and dampen domestic demand. An escalation of political tensions could further increase economic fragmentation and weigh on investor confidence and growth. In the absence of faster reform progress, medium-term growth is expected to remain around 3 percent—insufficient for rapid income convergence with the EU. Inflation is expected to remain elevated during 2025, and as food inflation eases, gradually decline from 2026, approaching the ECB target of 2 percent.
Fiscal policy and reforms
Fiscal performance in 2024 was stronger than expected. The general government deficit turned out to be 1¾ percent of GDP, the same as in 2023, but better than anticipated at the time of the 2024 AIV Consultation. The authorities leveraged a large increase in tax revenues to boost spending on wages, goods and services, social benefits, and public investments.
With fiscal policy expected to ease in 2025, the authorities should avoid further discretionary measures and strengthen contingency planning. Entity budgets and subsequently-adopted measures envisage increases in public wages and pensions, reflecting both legally-mandated indexation and discretionary changes. The widening deficit, which could reach 2.6 percent of GDP, is expected to be mainly financed mostly through foreign borrowing, as well as domestic banks. The authorities should avoid policies that further expand the deficit as this would likely put upward pressure on rising prices and widen external imbalances. Moreover, given mounting downside risks, the authorities should aim to build cash buffers and develop contingency plans. Depending on the severity of a potential shock the authorities should use the available buffers and activate contingency plans.
Over the medium term, the authorities are advised to place fiscal deficits on a firmly declining path starting from 2026, build fiscal buffers, and enhance the economy’s growth potential. Persistently high deficits risk placing public debt on an upward trajectory and may worsen financing terms. Fiscal consolidation should begin in 2026, with the goal of reducing the primary deficit to its debt-stabilizing level, while improving the quality of spending and rebuilding treasury balances. Priority should be given to spending measures that enhance efficiency—particularly by rationalizing the public wage bill through functional reviews and improving the targeting of social assistance programs.
These strategies ought to be augmented by fiscal enhancement initiatives, encompassing the expansion of the tax base via the minimization of exemptions and the innovation of novel revenue streams, including the imposition of taxes on dividends. Any economically burdensome policies should be meticulously circumvented or counterbalanced. In light of substantial infrastructural deficiencies, enhancing both the magnitude and caliber of public capital allocation ought to be a primary strategic aim.
Fiscal consolidation efforts should be accompanied by institutional and structural fiscal reforms. Strengthening fiscal discipline will require a review of existing fiscal rules to assess whether they are appropriately designed to meet macroeconomic management and developmental needs and whether there are sufficient institutional arrangements in place to ensure that they are met. The recent materialization of contingent liabilities related to international arbitration cases underscores the urgency of enhancing fiscal risk management. This includes timely identification of all sources of fiscal risks, assessment of risk magnitude and likelihood, development of mitigation strategies, and reinforcement of the institutional framework. In this context, improving the oversight and governance of state-owned enterprises (SOEs) is crucial. Reducing inefficiencies in public investment management remains a priority. This involves better project selection, rigorous appraisal processes, efficient and transparency procurement, and stronger portfolio management and oversight. Finally, implementing robust beneficiary registries would improve the targeting of social assistance programs by reducing inclusion and exclusion errors, improving efficiency, and enhancing transparency and accountability.
Currency board arrangement and financial sector policies and reforms
For three decades, the currency board arrangement (CBA) has been a cornerstone of macroeconomic stability and must be preserved. The CBA has ensured the stability of the domestic currency, while reinforcing policy credibility and fiscal discipline. Benefiting from strong institutional independence, the Central Bank (CBBH), has consistently maintained net foreign exchange reserves well above the level of its monetary liabilities. Safeguarding the CBBH’s independence is critical to preserving the credibility and effectiveness of the CBA.
The CBBH should further strengthen the reserve requirement framework. In line with IMF advice, the CBBH applies differentiated remuneration rates on reserve requirements for foreign and domestic currency liabilities. Falling euro area interest rates offer an opportunity to reduce the gap with CBBH remuneration rates on required reserves and the opportunity costs for holding reserves. A further comprehensive review of the reserve requirement framework, with technical assistance from the IMF, and implementation of previous recommendations would further strengthen the CBBH’s capacity to achieve its policy objectives.
Sustained strong credit growth calls for close monitoring of systemic risks and continued efforts to safeguard banking sector resilience. Credit expansion has been driven by rising wages, declining lending rates, and a booming real estate market. Despite this rapid growth, banks remain well capitalized, liquid, and profitable, while the share of non-performing loans continues to decline. Nonetheless, vigilance is warranted. The authorities should closely monitor financial sector developments and be prepared to deploy macroprudential tools to address risks from credit growth and rising real estate prices. Following introduction of additional capital buffers for systemic risk (SyRB) and domestic systemically important banks (D-SIBs), the macroprudential toolkit should be expanded to include a countercyclical capital buffer (CCyB) and borrower-based measures such as limits on loan-to-value (LTV) ratios and debt-service to income (DSTI) ratios. To preserve resilience, reducing the regulatory capital requirement from 12 to 10 percent as planned from end-2026 should be avoided. The authorities are also advised to avoid further extensions of temporary regulatory measures that aim to contain lending rate increases and to remove limits on bank exposures to foreign governments and central banks.
Continued momentum on the alignment of financial sector
dynamics, spearheaded by the CBBH, must be preserved. Routine
financial sector synergy assemblies enhance inter-agency
collaboration and facilitate seamless data interchange.
Furthermore, it is imperative for regulatory bodies to initiate the
formation of a nationwide Financial Stability Fund aimed at
facilitating systematic bank resolution. Collaborative efforts
across state-level institutions are essential, alongside a joint
appeal for a new IMF Financial Sector Assessment Program (FSAP)—a
request already submitted by the CBBH. This program should provide
a thorough evaluation of systemic resilience and delineate a
strategic framework for subsequent reforms, particularly in
relation to EU accession processes.
We extend our accolades to the CBBH and the pertinent regulatory
bodies for their robust initiatives aimed at facilitating the
integration of BiH into the Single Euro Payments Area (SEPA). SEPA
integration will facilitate expedited and streamlined euro
transactions across borders within the SEPA jurisdiction, reduce
transactional overhead, and promote enhanced trade and economic
synergies within the European landscape. It is imperative that the
pertinent legislative modifications are enacted expeditiously to
facilitate the initiation of the application process for SEPA
membership. Moreover, the advancement of the TIPS Clone—an
initiative executed by the CBBH in collaboration with the Bank of
Italy—will establish a framework for real-time payment
processing.
Structural reforms
Advancing toward EU membership will require a stronger, more coordinated, and results-driven approach. Persistent political fragmentation, lack of consensus among governing bodies, and limited administrative capacity continue to obstruct the adoption and execution of key reforms. In this context, timely adoption and implementation of the EU Growth Plan offers a valuable opportunity. Reforms under the growth plan will align BiH more closely with the EU single market, advance EU accession, and unlock €1 billion in additional financing over 2025–27 period.
The authorities should accelerate energy sector reforms to reduce fiscal risks and prepare for implementation of the EU Carbon Border Adjustment Mechanism (CBAM). Key reforms include phasing out electricity subsidies over the medium term—while protecting vulnerable households—and advancing efficiency improvements in energy SOEs. CBAM charges are set to take effect from 2026, with the largest anticipated impact on the BiH electricity sector. To mitigate this, it is essential to establish a domestic power exchange system and an agreed roadmap and legislative framework for introduction of carbon pricing at the state level. These steps would enable BiH to unlock new investment in renewable electricity generation, reducing the overall burden of CBAM. Implementation of carbon pricing will allow BiH to retain carbon-related revenues domestically and potentially secure a CBAM exemption for electricity exports to the EU.
Reforms that hit the nail on the head regarding the labor market, governance, and digitalization are also of utmost importance. The powers that be ought to take the bull by the horns and adopt a well-thought-out strategy for minimum wage hikes, steering clear of knee-jerk reactions and erratic changes that could throw a wrench in the works. Complementary reforms are needed to address low labor market participation (particularly among women) and high youth unemployment. The authorities should urgently implement MONEYVAL priority actions to avoid being grey listed by the Financial Action Task Force (FATF) in early 2026. Grey listing could impose significant economic costs through reduced investment, delays in international payments, and increased transaction costs. Finally, developing digital identity and trust services, and providing government e-services, would strengthen the business environment.
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