- Outlook: Growth is slowing and inflation rising, with higher energy import costs and weaker EU demand weighing on activity. Over the medium term, growth is expected to recover gradually but remain insufficient to support meaningful convergence with the EU absent stronger structural reforms. Risks are tilted to the downside; faster progress on EU-related reforms could provide upside.
- Fiscal policy: Fiscal policy remains expansionary, contributing to rising deficits and debt, inflationary pressures, and declining fiscal buffers. The authorities should refrain from discretionary measures that would further increase the fiscal deficit in 2026 and use unspent resources or revenue overperformance to rebuild buffers. Credible and sustained fiscal consolidation, supported by structural fiscal reforms, is needed to ensure sustainability, rebuild buffers, and create space for priority spending.
- Financial sector policy: Safeguarding the currency board arrangement and the central bank’s institutional independence is essential for macroeconomic stability. The banking sector is well capitalized and liquid, but vigilance is needed to monitor risks from rapid credit growth and evolving financial conditions. Strengthening crisis preparedness, advancing macroprudential tools, phasing out distortionary measures in favor of market‑based instruments, enhancing payment systems, and addressing AML/CFT deficiencies are key priorities.
- Structural policies: Structural reforms are needed to strengthen competitiveness and raise growth potential. Advancing EU-related reforms, improving governance, accelerating energy sector transformation, and addressing constraints to investment will be critical to support stronger, more sustainable growth and convergence.
Economic outlook and risks
The energy price shock is weighing on Bosnia and Herzegovina’s already modest growth and adding to inflationary pressures. Growth slowed to 2.1 percent in 2025 from 3.2 percent in 2024 and is projected to ease further to 2 percent in 2026, as spillovers from the war in the Middle East—higher energy import costs and weaker external demand—offset expansionary fiscal policy and strong consumption. Over the medium term, growth is expected to recover gradually toward 3 percent, but without decisive structural reforms, it will remain insufficient to support meaningful income convergence with the EU. Headline inflation rose to 4 percent in 2025 from 1.7 percent in 2024, driven by higher imported food prices and minimum wage increases. Inflation is expected to reach 5.4 percent in 2026 due to the energy price shock before moderating thereafter.
The outlook is subject to elevated uncertainty and downside risks. Weaker growth in key trading partners, persistently high energy prices from the ongoing conflict in the Middle East, tighter global financial conditions and renewed domestic political tensions could dampen trade, investment, and remittances, leading to slower growth and wider external imbalances. Continued increases in unit labor costs risk eroding competitiveness, while climate-related shocks and the impact on exports from the EU’s Carbon Border Adjustment Mechanism (CBAM) pose additional headwinds. On the upside, faster progress on EU-related reforms could strengthen confidence and support higher investment. Effective implementation could raise GDP growth between 0.5-1.0 percentage point over the longer term.
Elevated energy prices and heightened uncertainty call for well-calibrated policy responses and contingency planning. While higher fuel prices are eroding household purchasing power, broad-based support measures—such as universal fuel price discounts introduced in Republika Srpska (RS)—should be avoided, as they are fiscally costly, distort price signals, and disproportionately benefit higher-income households. Support should be temporary, targeted, and delivered through existing social assistance mechanisms, with scope to expand coverage to vulnerable households if conditions worsen. More broadly, enhanced contingency planning, including stronger cross-agency coordination, will be important to mitigate risks to the economy and financial sector.
Fiscal policy and reforms
Fiscal policy remains expansionary in 2026 and should be contained. The consolidated general government deficit has risen steadily since 2022 and is projected to reach 4.0 percent of GDP in 2026, driven by discretionary increases in pensions, other social benefits, and wages. This shift toward less growth-enhancing spending is adding to inflationary pressures, widening external imbalances, and eroding fiscal space to respond to shocks. Elevated deficits are being financed through record external market borrowing—€750 million in total in RS (7.3 percent of GDP) and €800 million in the Federation of Bosnia and Herzegovina (3.9 percent of FBiH GDP)—increasing refinancing and market risks amid heightened global uncertainty. Current fiscal plans are inconsistent with entity-level deficit rules, pointing to policy slippages. Against this backdrop, refraining from further discretionary measures that add to already high deficits and preserving revenue overperformance and expenditure under-execution would help ease inflationary pressures and rebuild fiscal buffers.
A decisive and credible fiscal consolidation is needed to place public finances on a sustainable footing. Under current policies, macro-fiscal sustainability is at risk, as deficits will remain elevated and public debt will rise rapidly. A well-designed consolidation strategy, starting no later than in 2027, would help reduce financing needs, rebuild buffers, and create space for priority spending, including productive public investment, while supporting macroeconomic stability. On expenditures, efforts should focus on containing the public wage bill, rationalizing subsidies and transfers, and improving the targeting and efficiency of social benefits, while strengthening the efficiency of capital spending. On revenues, priorities include broadening tax bases by reducing exemptions in income tax and social security contributions, enhancing progressivity, modernizing property taxation, and further strengthening revenue administration. These measures would support fiscal sustainability while minimizing adverse effects on growth.
Structural fiscal reforms should accompany consolidation efforts. Strengthening fiscal frameworks is critical, particularly by restoring compliance with well-designed fiscal rules over the medium term, clarifying their application across all levels of government, and enhancing reporting and oversight. Further reforms are needed to strengthen fiscal risk management and disclosure, as well as to improve public investment management. Enhancing government finance statistics and fiscal transparency—by improving the timeliness and consistency of fiscal reporting, particularly on budget execution and public debt—would support policy credibility and effectiveness.
Currency board arrangement (CBA) and financial sector policies and reforms
The CBA is a cornerstone of macroeconomic stability and must be preserved. Elevated risks underscore the importance of preserving strong reserve buffers and safeguarding the institutional independence of the Central Bank of Bosnia and Herzegovina (CBBH). The recent IMF Central Bank Transparency Code review highlights the CBBH’s strong track record and high degree of transparency. Comprehensive reporting, timely dissemination of high-quality data, and clear communications support policy credibility and public trust. Building on these strengths, targeted enhancements in governance, communication of risks, and institutional clarity—balancing transparency and confidentiality—would further reinforce public understanding and credibility.
Within the CBA, further strengthening the reserve requirements framework would enhance its role as the monetary policy instrument. The framework can play a key role in liquidity management and safeguarding financial stability. While the gap between reserve remuneration rates and the opportunity cost of holding reserves—the euro area interest rates—has narrowed, it remains sizable and should be reduced. Additional refinements, including better alignment of reserve requirements with the currency composition of liabilities and introduction of a tiered rate structure based on residual maturity of local currency liabilities, would further strengthen effectiveness.
Progress in modernizing payment systems is advancing, with the CBBH playing a central coordinating role. Adoption of payment systems laws, albeit with a delay, will advance financial sector development, support the SEPA application and, together with the planned launch of the TIPS-based instant payment system, help move toward faster, cheaper, and more integrated payments with tangible benefits for households and businesses. Continued strong coordination by the CBBH will be essential to ensure broad adoption, supported by effective communication and adequate preparedness across all participants, including further strengthening risk management frameworks, business continuity arrangements, and oversight capacity to safeguard financial stability and reinforce confidence in the new payment systems.
The banking sector is sound, but sustained vigilance on strong credit growth and faster progress on reforms are needed. Banks are well capitalized, liquid, and profitable, with strong asset quality. However, rapid credit expansion warrants close monitoring of emerging risks, particularly those related to uncollateralized consumer lending and interest rate exposure. The authorities should avoid extending temporary prudential measures, such as limits on exposures to foreign sovereigns and to allow fully market-based lending rates, as the related risks are better addressed through a comprehensive and harmonized macroprudential framework across the two entities. In addition, limited progress in addressing AML/CFT deficiencies outside the banking sector has increased the risk of FATF greylisting, which could raise transaction costs and dampen the benefits of ongoing payment system reforms. Nevertheless, the banking sector’s strong fundamentals suggest that it is well positioned to absorb potential spillovers. Continued efforts to implement MONEYVAL and FATF recommendations will be important to mitigate risks.
Further strengthening crisis preparedness and the macroprudential framework remains a priority. Recent steps, including introduction of the systemic risk buffer and higher capital requirements for systemically important banks, are welcome. Plans to operationalize a countercyclical capital buffer (CCyB) and introduce borrower-based measures would further enhance the policy toolkit to address risks from rapid credit growth and rising real estate prices. Following the announced reduction of regulatory capital requirements in RS, close coordination with FBiH—possibly combining a similar reduction with a positive neutral CCyB rate—would help avoid regulatory arbitrage while maintaining broadly unchanged overall capital requirements. In the absence of a lender of last resort, establishing a country-wide Financial Stability Fund is key for effective crisis management. Finally, a joint request by all relevant authorities for a new IMF Financial Sector Assessment Program (FSAP) would provide an updated comprehensive assessment of systemic risks, strengthen the macroprudential framework, and support further alignment with international best practices.
Structural reforms
Structural reforms are needed to strengthen competitiveness and raise the economy’s growth potential to support faster income convergence. Recent developments—including declining industrial production, reduced export shares, and rising unit labor costs—suggest growing competitiveness pressures. Addressing these challenges will require sustained implementation of productivity-enhancing reforms. In this context, the EU Growth Plan provides a critical opportunity to advance economic restructuring, deepen integration with the EU, and mobilize external financing to support budgets and priority investment.
Reforms towards decarbonization are critical to strengthen BiH’s competitiveness and unlock export potential. The introduction of the EU CBAM from 2026 is affecting 11 percent of exports, reflecting BiH’s significant sales of aluminum, cement, electricity, and iron and steel to the EU. As an immediate priority, establishing robust systems to monitor, report, and verify emissions in line with EU standards could help demonstrate lower actual emissions intensity and associated CBAM costs and mitigate adverse impacts on competitiveness. Over the medium term, advancing industrial decarbonization and accelerating investment in renewable energy will be key. While adopting an EU-aligned emissions trading system remains an important objective, a carbon tax could serve as an interim solution, with revenues used to support households and firms in the energy transition.
Governance reforms are crucial to strengthen institutions and raise growth potential. Progress in addressing key governance weaknesses—widely perceived as among the most pronounced in Europe—has been limited, and recent reform efforts have had only modest impact, with governance gaps continuing to weigh on the business environment and investment. Addressing shortcomings in the anti-corruption framework, judicial integrity, and public procurement will be essential to improve the functioning of institutions, strengthen investor confidence, and support stronger and more sustainable growth.
READ MORE: https://www.imf.org/en/news/articles/2026/06/16/mcs-06162026-bosnia-and-herzegovina-staff-concluding-statement-of-the-2026-article-iv-mission
