Bosnia and Herzegovina’s Struggle for Convergence, beyond Stability

Bosnia and Herzegovina’s economic challenge is no longer simply how to preserve stability. It is how to turn that stability into convergence. The country has demonstrated resilience in a difficult global environment, but resilience has not translated into growth strong enough to close the income gap with the European Union. With growth slowing, fiscal pressures building, and structural weaknesses persisting, the window for relying on short-term policy support is narrowing.

The IMF’s latest Article IV assessment for 2026 underscores a clear message: preserving stability will require deeper and more sustained reforms than those undertaken so far. The country will need to tighten fiscal policy credibly and improve the efficiency of public spending. At the same time, it must strengthen competitiveness and accelerate structural transformation if growth is to become both stronger and more durable.

Recent economic trends highlight a gradual loss of momentum. After expanding by 3.2% in 2024, real GDP growth eased to 2.1% in 2025 and is expected to slow further to around 2% in 2026. This moderation reflects a combination of weaker external demand, elevated energy costs, and geopolitical disruptions, including tensions in the Middle East, which have weighed on trade flows. While domestic consumption and government support have helped cushion the slowdown, they have not been sufficient to offset external pressures. Over the medium term, growth is projected to recover toward 3%, but this remains below what is typically required for meaningful convergence with EU income levels.

Slower growth is not Bosnia and Herzegovina’s only concern. Inflationary pressures are returning at precisely the moment when fiscal space is becoming more constrained. Price growth is expected to accelerate to 5.4% in 2026, up from 4% in 2025, largely driven by higher fuel costs and expansionary fiscal measures. At the same time, external imbalances are widening, with the current account deficit projected to increase from 3.2% of GDP in 2025 to 4.9% in 2026. This deterioration reflects both rising energy import costs and persistently weak export performance. Together, these developments underline the economy’s exposure to external shocks and its limited progress in strengthening export competitiveness.

These pressures are converging most visibly in fiscal policy. Since 2022, public spending has expanded significantly, particularly through increases in wages and broadly distributed social transfers that are not always well targeted. While these measures have supported short-term demand, they have also weakened the overall quality of fiscal policy. As a result, the fiscal deficit is projected to reach 4 percent of GDP in 2026, while public debt is projected to rise from 29.4 percent in 2025 to 32 percent in 2026, with further increases expected over the medium term. Without corrective action, fiscal space risks becoming increasingly constrained, limiting the government’s ability to support productive investment.

Against this backdrop, the IMF stresses the importance of beginning fiscal consolidation no later than 2027. However, the emphasis is not simply on reducing spending, but on improving its structure and effectiveness. This would involve better targeting of social benefits, rationalising the public wage bill, and strengthening revenue collection through a broader tax base and more efficient administration. Fiscal transparency will also be critical. Together, these measures would help reduce budgetary pressures while creating room for higher-quality public investment that supports long-term growth.

Fiscal pressures are not the only risks building beneath the surface. The financial system remains resilient, but rapid credit expansion and rising property prices are creating new vulnerabilities. Banks remain well capitalised, liquid, and profitable, which provides an important buffer against shocks. However, rapid expansion in consumer credit—particularly unsecured lending—and rising property prices are beginning to raise concerns. In response, the IMF encourages a shift away from ad hoc policy responses toward a more structured macroprudential framework. This includes stronger stress testing, improved crisis preparedness, and better coordination among financial regulators to ensure risks are identified and managed early.

Financial integrity is another area requiring sustained attention. Strengthening the anti-money laundering and counter-terrorist financing framework is particularly important as Bosnia and Herzegovina works toward exiting the Financial Action Task Force grey list. Full implementation of the agreed action plan, combined with improved coordination between institutions, would not only reinforce financial stability but also enhance investor confidence and improve the country’s overall financial reputation.

Energy policy represents one of the most significant long-term structural challenges. For Bosnia and Herzegovina, the energy transition is therefore not simply an environmental imperative; it is an economic competitiveness issue. As European markets tighten their carbon rules, dependence on carbon-intensive production could increasingly translate into higher costs, weaker export competitiveness, and reduced access to European markets.

In the context of Europe’s evolving regulatory and environmental framework. The IMF highlights the need for urgent reforms to improve the financial sustainability of the energy sector, protect vulnerable households, and accelerate the transition toward cleaner energy sources. These reforms are also increasingly important in light of the European Union’s Carbon Border Adjustment Mechanism, which will have implications for trade competitiveness.

The policy response should focus on four areas: reforming electricity tariffs, introducing carbon pricing mechanisms, reducing dependence on coal, and improving integration with regional energy markets. Such changes would not only support environmental objectives but also improve market efficiency, strengthen price signals, and enhance cross-border energy trade.

Beyond macroeconomic and sectoral policies, Bosnia and Herzegovina continues to face deep-rooted structural constraints. Labour market participation remains relatively low, informal employment is widespread, and mismatches between skills and labour market needs continue to limit productivity. At the same time, rising labour costs risk undermining competitiveness unless they are matched by corresponding gains in productivity.

Addressing these issues will require reforms that go beyond traditional economic policy tools. Strengthening institutions, improving judicial efficiency, reducing corruption, reforming public procurement systems, and investing in education and skills development are all essential components of a more competitive and dynamic economy. These reforms are particularly important for supporting a shift from consumption-driven growth toward productivity-led expansion.

Key Policy Directions for Bosnia and Herzegovina: The current economic situation offers several broader lessons for policymakers:

• Strengthening fiscal credibility: Sustainable fiscal policy requires not only controlling deficits but also improving how public resources are allocated and used. More efficient spending and stronger revenue systems are essential for long-term stability.
• Modernising the energy sector: Dependence on fossil fuels exposes the economy to both price volatility and regulatory risks. Diversification and integration into regional energy markets will be central to maintaining competitiveness.
• Enhancing financial oversight: While the banking system remains stable, emerging risks in credit markets and real estate require more proactive supervision and stronger macroprudential tools.
• Boosting productivity: Long-term growth will depend on improving skills, reducing informality, and strengthening institutions that support private sector development.
• Advancing EU integration: The reform process linked to EU accession remains one of the most powerful drivers of structural improvement. If implemented effectively, it could significantly raise growth potential and investor confidence over time.

Bosnia and Herzegovina’s challenge is not simply to grow faster but to grow differently. The country enters this next phase with important advantages: a stable financial system, close economic ties with the European Union, external buffers, and a reform agenda anchored in the accession process. But these strengths cannot compensate indefinitely for weak productivity, constrained fiscal space, institutional fragmentation, and an energy model under increasing pressure.

The choice is therefore becoming clearer. Bosnia and Herzegovina can continue using short-term measures to preserve stability, or it can use its current window of relative resilience to undertake the reforms needed to make growth more productive, competitive and sustainable. Stability has provided the foundation. The next task is to turn that foundation into convergence.