1. Key Policies Improving Business and Investment Climate Presenter: Governor CBBH: Kemal Kozarić, MA

2. Content Introduction through macroeconmic framework Trade deficit Recommendations Foreign direct investment CBBH expectation Conclusion

3. Introduction There are many preconditions for the growth of one small open economy as it is economy of BH, but some of the main preconditions are: Good business environment Financial stability of the country Legal frame Stabile exchange rate

4. Introduction Year199819992000200120022003200420052006 Nominal GDP in KM billions 7,2 9,710,711,612,813,414,615,817,9* Retail price growth (%) 13.33.7 4.83.10.40.60.43.87.4** Foreign reserves in KM millions2838661021269624642781345741955400 Foreign reserves in months of imports0.51.41.53.63.23.43.93.94.25.45.4 Trade deficit in KM millions-5,482-6,053-5,868-6,470-6,892-7,180-7,193-7,834-6,655 Achieved results in referred period: *Estimate CBBH ** Inflation in Janury was 1.2%

5. Trade deficit GDP%

6. Current account deficit First important question that has to be raised in a country with high trade deficit is: How deficit is financed? Balance of payments is a “balance” so by definition, deficit of one component has to be financed by a surplus of some other components. Trade deficit is financed by: current transfers 44% (workers remittances 31%), services 14%, income 11% and the rest of trade deficit (31%) is CA deficit (amount of KM 2.0 billions) and it is financed by capital and financial account.

7. Current account deficit How CA deficit is financed and is it sustainable? If currency crisis and foreign debt crisis are not a threat for the country, CA deficit is sustainable. CA deficit is financed by: capital transfers to public sector 21%, FDI 27% and other investments 51%. In some economies deficit is financed by foreign reserves reduction. In BH CA deficit is not followed by foreign reserves reduction. In BH foreign reserves are growing and in 2006 foreign reserves increased by KM 1.2 billions.

8. Foreign reserves CBBH DATEFOREIGN ASSETSMONETARY LIABILITIESFREE RESERVES DEC. 1997.144,1160,3- 16,2 DEC. 1998.283,3253,929,4 DEC. 1999.865,7836,729,0 DEC. 2000.1021,4973,248,0 DEC. 2001.2696,52591,675,0 DEC. 2002.2464,42345,2118,1 DEC. 2003.2.780,62.626,3153,3 DEC. 2004.3.457,53.283,5173,0 DEC. 2005.4.195,94.007,8187,1 DEC. 2006.5.400,45.178,0221,4 End of period in millions of KM

9. Current account deficit Second important question that has to be raised in a country with high trade deficit is: What is a reason behind trade deficit increase? Undertake adequat steps.

10. Exports Analyze refers to the commodities that BH exports the most. About 4500 commodities were used. Only 22 commodities that contribute to export growth with more than KM 36 million per year were closely analyzed 22 commodities explain 49 % of total exports in 2006.

11. Imports Analyze refers to the commodities that BH imports the most. About 4500 commodities were used. Only 19 commodities that contribute to imports growth with more than KM 65 million per year were closely analyzed 19 commodities explain 36,8 % of deficit in 2006 and their total participation in imports during 2006 is 27%.

12. Recommendations In order to improve external trade situation in BH it would be recommended to conduct a detailed micro analyze of goods that have the highest influence on BH import increase by identifying all main trading partners in foreign trade exchange, as well as, their price, quantity and type of imported goods. Improve BH agriculture policy by promoting BH agriculture on international market and especially by solving internal limitations and obstacles for the exports. Special attention should be given to development of export capacities of the country and especially to the component of raw materials which should not be exploit. Focus for development should be on export of final goods and products. Encourage infrastructure development in the field of quality standard certification in accordance with EU rules.

13. Foreign direct investment During 2006 FDI inflow continued but with a weaker intensity compared to 2005. Estimated FDI inflow in 2006 is about KM 661* million. *Final data on FDI for 2006, based on CBBH survey will be available in August 2007

14. Foreign direct investment By survey that CBBH conducts on regular basis, FDI for the first nine months of 2006 reached amount of KM 428.7 millions. CBBH conducts regular quartarly (150 companies) and yearly (around 700 companies) survey on FDI and collects data on companies and banks with foreign investments in BH in accordance with interantional methodology. Based on survey highest investment capital in the first nine months of 2006 came from Austria 50.6%, then follows Slovenia 27.3%, Serbia and MN 5.3% and Croatia with 4.9%.

15. Foreign direct investment Regarding the sectorial structure the highest investment were recorded in banking sector 51%, manufacturing sector 21% and non-banking financial enterprises 15% out of total FDI. In tourism sector which presents one of the potentials for BH development, according to survey, no significant improvement has been done in regards to increase in investment inflow that would indicate a better perception of BH by potential foreign investors. Already announced higher future investments in energy sector and privatization of telecom operators are expected to have a significant influence in BH investment position in 2007.

16. Foreign direct investment State of foreign investments : Is a separate statistical category and it does not represent a sum of all previous flows, but also other changes such as exchange rate differentials, accounting changes, etc. Foreign investments at the end of 2005 amounted to KM 7.3 billion. Foreign direct investment amount to KM 4.4 billion, and portfolio and other investments to KM 2.9 billion. Total foreign investment in 2005 increased by 26% compared to 2004.

17. Foreign direct investments When compared to the region and thinking of a size of BH economy, it can be seen from the graph and estimated that BH is reciving a significant inflow of FDI*. Source: data from "Transition report 2006" and CBBH estimates for 2006 *Final data on FDI for 2006, based on CBBH survey will be available in August 2007

18. CBBH expectations Presented data are showing that there is a space for investment inflow in BH to come, but in order for investments to come promotion of investment and necessary conditions preparation requires more aggressive approach and the best way is through efficiency in reform scenario implementation. Political stability, economic progress, as well as, country’s image, represents the key elements for FDI inflow in single economy. Economic growth can be achieved through intensive development of the real sector of the economy, through efficiency in reform implementation and especially through fiscal reforms and through setting up the conditions for strengthening of the business environment.

19. CBBH expectations The part that is related to fiscal reforms is mainly related to: Adequate allocation of public revenues Decrease public spending Improve transparency and responsibility in collection and spending of the public revenues Support development of entrepreneurship and encourage growth of the private sector and work on constant decrease of the political risk Establish business environment Strengthening of a single economic space in BH Improve efficiency of the legal system Establish legal and institutional framework for free competition and consumer protection Stimulate regional economic development Increase mobility of the labor force Remove all administrative barriers to domestic and foreign investments

20. Conclusion There is still a lot of work on which country as a whole needs to work more on its way toward stability. Macroeconomic frame is very important, economic activity has to be measured in details by sectors and the rate of growth, as well as, productivity, competitiveness, real effective exchange rate, transparency etc. Potential of the real sector of the economy has to be used for future development of BH economy. This should be recognized by all levels of the government, as well as, by appropriate institutions which should work together continuously on the implementation of reforms that will lead BH towards a road of a desired development.