SARAJEVO – The six countries of the Western Balkans region are facing a new range of economic challenges, despite a better-than-expected rebound from the recession caused by the COVID-19 pandemic, says the latest Western Balkans Regular Economic Report (#21 in the series).
The economy of Bosnia and Herzegovina bounced back strongly in 2021 from the pandemic-induced economic crisis, with growth estimated at 7.1 percent. Real GDP growth was driven by a surge in exports, and robust growth in private consumption. However, output growth in 2022 is expected to slow to 2.7 percent, as the war in Ukraine disrupts trade and exacerbates energy and food price increases.
“The uncertainty and the impacts of the war in Ukraine are amplifying the need for the authorities in Bosnia and Herzegovina to accelerate structural reforms and fiscal prudence in order to mitigate the increasing risks while striving to create economic opportunities for its people and achieving a resilient post-COVID recovery,” says Christopher Sheldon, World Bank Country Manager for Bosnia and Herzegovina and Montenegro.
GDP growth in the region reached 7.4 percent in 2021, after a contraction of 3.2 percent in 2020. This return to growth saw significant job creation, with employment demand helping to reduce poverty across all six Western Balkan economies. In 2021, the Western Balkan employment rate increased to a historical high of 45.8 percent, led primarily by employment recovery in Serbia and Kosovo.
Growth was driven by an exceptionally strong rebound in consumption, helped by both fiscal stimuli, pent-up demand, as well as a relaxation in movement and travel restrictions.
However, the post-pandemic recovery has been cut short, as the war in Ukraine sends shockwaves across the region. Growth for the Western Balkans is now forecast at 3.1 percent in 2022.
“Despite a strong rebound from the pandemic, the Western Balkans now face a new set of challenges, compounded by the war in Ukraine, including rising energy and food prices, high inflation, and slowing trade and investment,” said Linda Van Gelder, World Bank Country Director for the Western Balkans. “Careful policy support will be needed to navigate the Western Balkans through these crises and protect the important gains made in 2021, including poverty reduction.”
The downside risks to the region’s economic outlook are daunting. An expanded conflict or prolonged war in Ukraine could trigger further disruptions to global trade and to energy and food prices. Refinancing risks could arise if external financial market conditions continue to tighten. Debt sustainability may become a concern if limited fiscal space is eroded by policy responses to higher energy and food prices amidst rising refinancing costs.
“In such an environment, government policy needs to focus on building resilience and on undertaking structural reforms to support growth and steer through the crises,” said Sanja Madzarevic-Sujster, World Bank Senior Economist and one of the report’s lead authors. “With limited fiscal space, countries will need to carefully weigh the costs and benefits of new spending commitments in response to higher energy and food prices, prioritizing the most vulnerable households.”
In the context of the energy crisis in Europe, the report also provides an assessment of the vulnerability of the Western Balkan countries to energy price shocks, measures adopted by the governments to mitigate the impacts, and how the crisis can affect the green energy transition going forward.
The report argues that sustained growth cannot happen without structural reforms to boost productivity, increase competition, invest in human capital, and strengthen governance. Measures to reduce business regulatory costs, increase market competition, support labor market participation, and strengthen the independence of public institutions would all be supportive of growth in an uncertain environment.