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Bosnia and Herzegovina

Executive Summary

Bosnia and Herzegovina (BiH) is open to foreign investment, but to succeed, investors must overcome endemic corruption, complex legal/regulatory frameworks and government structures, non-transparent business procedures, insufficient protection of property rights, and a weak judicial system.  Economic reforms to complete the transition from a socialist past to a market-oriented future have proceeded slowly and the country has a  low level of foreign direct investment (FDI).  According to the BiH Central Bank preliminary data, 2020 FDI in BiH was USD 299 million, a 34% decrease from 2019.  According to the World Bank’s 2020 Ease of Doing Business Report, BiH is among the least attractive business environments in Southeast Europe, with a ranking of 90 out of 190 global economies.  The World Bank report ranks BiH particularly low for its lengthy and arduous processes to start a new business and obtain construction permits.  Before the COVID-19 pandemic, BiH’s economic growth was expected to reach 4 percent in 2021, backed mainly by consumption and to some extent public investment.  BiH’s economy grew by an estimated 3.0 percent in 2019, with domestic consumption remaining the dominant growth driver. BiH is tied  closely to global value chains as it primarily exports goods rather than services. Preliminary estimates of the 2020 economic downturn for BiH vary.  For instance, the IMF predicts an economic contraction of 5% in 2020 and growth of 3.5% in 2021. The EBRD predicts a contraction of 4.5% in 2020 and a recovery of 5% in 2021.

U.S. investment in BiH is low due to the small market size, relatively low income levels, distance from the United States, challenging business climate, and the lack of investment opportunities.  Most U.S. companies in BiH are represented by small sales offices that are concentrated on selling U.S. goods and services, with minimal longer-term investments. U.S. companies with offices in BiH include major multinational companies and market leaders in their respective sectors, such as Coca-Cola, Microsoft, Cisco, Oracle, Pfizer, McDonalds, Marriott, Caterpillar, Johnson & Johnson, FedEx, UPS, Philip Morris, KPMG, PwC and others.  Nonetheless, BiH offers business opportunities to well-prepared and persistent exporters and investors.  Companies that overcome the challenges of establishing a presence in BiH often make a return on their investment over time.  A major U.S. investment fund was able to enter the market with a regional investment in 2014 and exit its majority position in 2019 with a good return.  There is an active international community and many reform efforts to improve the business climate as BiH pursues eventual European Union membership.  The country is open to foreign investment and offers a liberal trade regime and its simplified tax structure is one of the lowest in the region (17 percent VAT and 10 percent flat income tax).

BiH is actively pursuing World Trade Organization membership and hopes to join in the near future.  It is also richly endowed with natural resources, providing potential opportunities in energy (hydro, wind, solar, along with traditional thermal), agriculture, timber, and tourism.  The best business opportunities for U.S. exporters to BiH include energy generation and transmission equipment, telecommunication and IT equipment and services, transport infrastructure and equipment, engineering and construction services, medical equipment, and raw materials and chemicals for industrial processing.  In 2020, U.S. exports to BiH totaled USD 235 million, a 40 percent decrease from 2019, and held a 2.3 percent share of total BiH imports.  BiH exports to the United States in 2019 totaled $39.7 million. U.S. exports to BiH are primarily in the areas of raw materials for industrial processing, food and agricultural products, machinery and transport equipment, and mineral fuels.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website
TI Corruption Perceptions Index 2020 111 of 180 www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2020 90 of 190 www.doingbusiness.org/rankings 
Global Innovation Index 2020 74 of 131 https://www.globalinnovationindex.org/home
U.S. FDI in partner country 2019  $9 million https://apps.bea.gov/international/factsheet/factsheet.cfm
World Bank GNI per capita 2019      $6,170 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Bosnia and Herzegovina struggles to attract foreign investment.  Complex labor and pension laws, the lack of a single economic space, and inadequate judicial and regulatory protections deter investment.  Under the BiH constitution, established through the Dayton Accords that ended the 1990s war, Bosnia and Herzegovina (henceforth “the state”) is divided into two “entities,” the Federation of BiH (the Federation) and the Republika Srpska (RS).  A third, smaller area, the Brčko District, operates under a separate administration.  The Federation is further divided into ten cantons, each with its own government and responsibilities.  There are also 143 municipalities in BiH: 63 in the RS and 80 in the Federation.  As a result, BiH has a multi-tiered legal and regulatory framework that can be duplicative and contradictory, and is not conducive to attracting foreign investors.

Employers bear a heavy burden toward governments.  They must contribute 69 percent on top of wages in the Federation and 52 percent in the RS to the health and pension systems.  The labor and pension laws are also deterrents to investment, though both are being reformed to decrease burdens on employers.  While corporate income taxes in the two entities and Brčko District are now harmonized at 10 percent, entity business registration requirements are not harmonized.  The RS has its own registration requirements, which apply to the entire entity.  Each of the Federation’s ten cantons has different business regulations and administrative procedures affecting companies.  Simplifying and streamlining this framework is essential to improving the investment climate.  The EU Reform Agenda targets changes that should improve the investment climate by clarifying and simplifying regulation and procedures while decreasing fees faced by businesses at the entity, canton, and municipal levels.

Generally, BiH’s legal framework does not discriminate against foreign investors.  However, given the high level of corruption, foreign investors can be at a significant disadvantage in relation to entrenched local companies, especially those with formal or informal backing by BiH’s various levels of government.

The Foreign Investment Promotion Agency (FIPA) is a state-level organization mandated by the Council of Ministers to facilitate and support FDI (www.fipa.gov.ba).  FIPA provides data, analysis, and advice on the business and investment climate to foreign investors.  All FIPA services are free of charge.

BiH does not maintain an ongoing, formal dialogue with foreign investors.  Sporadically, high-ranking government officials give media statements inviting foreign investments in the energy, transportation, and agriculture industries; however, the announcements are rarely supported by tangible, commercially-viable investment opportunities.

Limits on Foreign Control and Right to Private Ownership and Establishment

According to the Law on the Policy of FDI, foreign investors are entitled to invest in any sector of the economy in the same form and under the same conditions as those defined for local residents.  Exceptions include the defense industry and some areas of publishing and media where foreign ownership is restricted to 49 percent; and electric power transmission, which is closed to foreign investment.  In practice, additional sectors are dominated by government monopolies (such as airport operation), or characterized by oligopolistic market structures (such as telecommunications and electricity generation), making it difficult for foreign investors to engage.  There have been no significant privatizations of government-owned enterprises in the past few years.

Other Investment Policy Reviews

In the past three years, the BiH government has not conducted an investment policy review through the Organization for Economic Cooperation and Development (OECD); the World Trade Organization (WTO); or the United Nations Conference on Trade and Development (UNCTAD).

Business Facilitation

Establishing a business in BiH can be an extremely burdensome and time-consuming process for investors.  The World Bank estimates there are an average of 13 procedures (actual number depends on the type of business), taking a total of 81 days, to register a new business in the capital city of Sarajevo.  Registration in BiH can sometimes be expedited if companies retain a local lawyer to follow up at each step of the process.  The RS established a one-stop shop for business registration in the entity.  On paper, this dramatically reduced the time required to register a business in the RS, bringing the government-reported time to register a company down to an average of 7 to 14 days.  Some businesses, however, report that in practice it can take significantly longer.

The entity, cantonal, and municipal levels of government each establish their own laws and regulations on business operations, creating redundant and inconsistent procedures that enable corruption.  It is often difficult to understand all the laws and rules that might apply to certain business activities, given overlapping jurisdictions and the lack of a central information source.  It is therefore critical that foreign investors obtain local assistance and advice.  Investors in the Federation may register their business as a branch in the RS and vice versa.

The most common U.S. business presence found in BiH are representative offices.  A representative office is not considered to be a legal entity and its activities are limited to market research, contract or investment preparations, technical cooperation, and similar business facilitation activities.  The BiH Law on Foreign Trade Policy governs the establishment of a representative office.  To open a representative office, a company must register with the Registry of Representative Offices, maintained by the BiH Ministry of Foreign Trade and Economic Affairs (MoFTER) and the appropriate entity’s ministry of trade.

Additional English-language information on the business registration process can be found at:

BiH Ministry of Foreign Trade & Economic Relations (MoFTER):
Ph: +387-33-220-093
www.mvteo.gov.ba

BiH Foreign Investment Promotion Agency (FIPA):
Ph: + 387 33 278 080
www.fipa.gov.ba

Republika Srpska Company Registration Website: http://www.investsrpska.net

Outward Investment

The government does not restrict domestic investors from investing abroad.  There are no programs to promote or incentivize outward investment.

6. Financial Sector

Capital Markets and Portfolio Investment

Capital markets remain underdeveloped in BiH.  Both entities have created their own modern stock market infrastructure with separate stock exchanges in Sarajevo (SASE) and Banja Luka (BLSE), both of which started trading in 2002.  The small size of the markets, lack of privatization, weak shareholder protection, and public mistrust of previous privatization programs has impeded the development of the capital market.

Both the RS and Federation issued government securities for the first time during 2011, as part of their plans to raise capital in support of their budget deficits during this period of economic stress.  Both entity governments continue to issue government securities in order to fill budget gaps.  These securities are also available for secondary market trading on the stock exchanges.

In August 2020,  the international rating agency Standard and Poor’s (S&P) affirmed the credit rating of Bosnia and Herzegovina as “B” with a stable outlook.  The agency stated that the stable outlook reflects the anticipation that the risks coming from the economic impact of the coronavirus pandemic will be balanced over the next 12 months by the potential implementation of structural reforms and S&P’s expectations for stronger economic growth beyond 2020.Prior to the COVID-19 pandemic, the Agency forecasts real GDP growth of 2.7 percent over the next four years. The ratings on BiH continue to be supported by the favorable structure of state debt. Even taking into account the impact of the pandemic, net general government debt should remain about 30% of GDP over the next four years. Almost all external debt (which accounts for more than 70% of gross general government debt) is due to official bilateral or multilateral lenders, and is characterized by long maturities and favorable interest rates. The quality of banking regulations was also positively evaluated.  Positive reforms, according to analysts’ expectations, could include reducing the labor cost burden on business and enhancing governance of the country’s state-owned enterprise sector.

Money and Banking System

The banking and financial system has been stable with the most significant investments coming from Austria.  As of March 2020, there are 23 commercial banks operating in BiH: 15 with headquarters in the Federation and eight in the Republika Srpska.  Twenty-two commercial banks are members of a deposit insurance program, which provides for deposit insurance of KM 50,000 (USD 28,000).  The banking sector is divided between the two entities, with entity banking agencies responsible for banking supervision.  The BiH Central Bank maintains monetary stability through its currency board arrangement, and supports and maintains payment and settlement systems.  It also coordinates the activities of the entity Banking Agencies, which are in charge of bank licensing and supervision. Reforms of the banking sector, mandated by the IMF and performed in conjunction with the IMF and World Bank, are in progress.

BiH passed a state-level framework law in 2010 mandating the use of international accounting standards, and both entities passed legislation that eliminated differences in standards between the entities and Brčko District.  All governments have implemented accounting practices that are fully in line with international norms.

Foreign Exchange and Remittances

Foreign Exchange

The Law on Foreign Direct Investment guarantees the immediate right to transfer and repatriate profits and remittances.  Local and foreign companies may hold accounts in one or more banks authorized to initiate or receive payments in foreign currency.  The implementing laws in both entities include transfer and repatriation rights.  The Central Bank’s adoption of a currency board in 1997 guarantees the local currency, the convertible mark or KM (aka BAM), is fully convertible to the euro with a fixed exchange rate of KM 1.95583 = €1.00.

Remittance Policies

BiH has no remittance policy, although remittances are generally high due to a large diaspora.  Remittances are estimated to range up to 15 percent of total GDP.  Based on the two entities’ Laws on Foreign Currency Exchange, all payments in the country must be in national currency.

Sovereign Wealth Funds

BiH does not have a government-affiliated Sovereign Wealth Fund.

7. State-Owned Enterprises

In BiH, subnational governments own the vast majority of government-owned companies: the two entities and ten cantons.  Private enterprises can compete with state-owned enterprises (SOEs) under the same terms and conditions with respect to market share, products/services, and incentives.  In practice, however, SOEs have the advantage over private enterprises, especially in sectors such as telecommunications and electricity, where government-owned enterprises have traditionally held near-monopolies and are able to influence regulators and courts in their favor.  Generally, government-owned companies are controlled by political parties, increasing the possibilities for corruption and inefficient company management.  With the exception of SOEs in the telecom, electricity, and defense sectors, many of the remaining public companies are bankrupt or on the verge of insolvency, and represent a growing liability to the government.

The country is not party to the Government Procurement Agreement within the framework of the WTO.

Privatization Program

There have been no significant privatizations in the past few years.  Privatization offerings are scarce and often require unfavorable terms.  Some formerly successful state-owned enterprises have accrued significant debts from unpaid health and pension contributions, and potential investors are required to assume these debts and maintain the existing workforce.  Under the state-level FDI Law, foreign investors may bid on privatization tenders.  International financial organizations, such as the European Bank for Reconstruction and Development (EBRD) are seeking to be engaged on privatization and restructuring efforts across the remaining portfolio of state owned enterprises.  Historically, the privatization process in BiH has resulted in economic loss due to corruption.  From 1999 to 2015, more than 1,000 companies were fully privatized, while around 100 were partially privatized.  Some privatizations led to the loss of value of state property and many of the privatized companies were weakened or ruined in the privatization process.  The history of corrupt privatizations has raised concerns that further privatization would only lead to additional unemployment and the enrichment of a few politically-connected individuals.  Successful privatizations and restructurings that improve service delivery, business productivity, and employment would be very beneficial for the BiH economy, could help the image of privatization, and would build support for a long overdue shift away from a government-led economy.

The Federation government is focused on privatizing or restructuring some SOEs based on the Federation Agency for Privatization’s 2019 privatization plan.  The privatization plan includes the fuel retailer Energopetrol dd. Sarajevo, the engineering company Energoinvest, and the insurer Sarajevo-Osiguranje.  The remaining companies listed in the privatization plan have posted losses and suffered significant declines in their value, while others have only a small amount of government ownership.  The Federation government rejected media speculation that it plans to privatize the two majority government-owned telecom companies, BH Telecom (90 percent stake) and HT Mostar (50.1 percent stake).  At the same time, it has completed due diligence on the two telecom companies as part of its arrangement with the IMF.

The privatization process in the RS is carried out by the RS Investment Development Bank (IRBRS).  Many prospective companies have been already privatized, and out of 163 not yet privatized companies, many are being liquidated or undergoing bankruptcy.  In 2016, the RS government announced plans to sell its capital in 22 companies but the plan has not been implemented yet.  The plan envisions the privatizations to take place via the sale of government shares on the stock exchange.  Although the RS National Assembly passed a decision that the entity has no plans to privatize the energy sector, the RS government maintains the possibility of joint ventures in the energy sector.

8. Responsible Business Conduct

Foreign and local companies conduct some corporate social responsibility activities and there is a general awareness of standards for responsible business conduct.  More could be done in this area to respond to BiH’s various social and economic needs.  In general, consumers tend to view favorably companies that initiate and carry out charitable activities in the local market.  Corporate governance is not part of the broader economic mindset, and shareholder protection is not a priority.  The financial system is not yet developed enough to understand and apply principles of corporate governance and shareholder protection.  The BiH Consumer Ombudsman leads efforts to ensure that consumers are aware of their rights and takes action against organizations that have been accused of violating consumer rights.  The local American Chamber of Commerce (AmCham) has an Ethics and Compliance Committee to raise awareness about responsible business conduct and make it a more routine part of doing business in BiH.

Additional Resources

Department of State

Department of Labor

11. Labor Policies and Practices

BiH has a workforce with low labor costs by Western standards, and university enrollments have been increasing for a number of years.  However, several sectors such as construction, information technology, and health care have experienced a significant loss of skills over the past decade due to a lack of education and job training opportunities, as well as emigration.  Mandatory contributions on labor are high, discouraging employment of new workers and increasing incentives for unregistered employment.

Each entity has its own pension and health care systems, and the systems are not harmonized.  Companies working in both entities have two sets of rules to follow related to employment, wages, and contributions.  Employees and employers share the costs of health care, pension, and unemployment insurance in the Federation while in the Republika Srpska employers cover all of these costs, as well as child care and unemployment contributions.  Many employers underreport their labor force to avoid paying taxes and benefits, creating a significant gray market.  In December 2020 the number of registered unemployed in BiH amounted to 413,627. The official rate of registered unemployment according to the BiH Statistical Agency was approximately 34.4 percent in January 2021, while the BiH Statistics Agency’s Labor Force Survey suggests the total unemployment rate was 17.5 percent in 2020.  However, unemployment based on the International Labor Organization (ILO) definition, which factors in unregistered workers in the “gray economy,” was approximately 20.5 percent, and estimates the share of informal employment in total employment was 30 percent in 2019.  The youth unemployment rate stands at  57.5 percent, placing Bosnia an Herzegovina’s youth unemployment rate among the highest in the world, driven by widespread corruption, nepotism and economic stagnation.  The majority of unemployed persons are skilled workers.

Both entities passed updated labor laws in 2016. The new labor laws are critical to modernizing the BiH labor code, a system inherited from former Yugoslavia that is rigid, outdated, and unfriendly to businesses.  Concrete implementation has yet to be seen, but should reduce the cost of employment and ease of hiring and firing for private companies and the public sector.  The laws should also decrease or eliminate costly benefits that are out of line with European standards and streamline hiring and firing. Reforming the labor laws in BiH has been a long and challenging process that the governments avoided for years.  The passage of the new labor laws represents an important first step toward economic reform that will modernize the BiH labor market and bring it closer to EU standards.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) (USD) 2019 $20.2 billion* 2019 $20.2 billion www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI ($M USD, stock positions)     2020 $250 million (Post estimate) N/A N/A N/A
FDI in the United States ($M USD, stock positions)         N/A N/A N/A N/A N/A
Total inbound stock of FDI as %  GDP ($M USD, stock positions)       N/A N/A N/A N/A N/A

*Source: BiH Statistics Agency

Table 3: Sources of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $8,594 100% Total Outward 524 100%
Austria $1,558 18.1% Croatia 130 24.8%
Croatia $1,393 16.2% Germany 97 18.5%
Serbia $1,143 13.3% Montenegro 87 16.6%
Slovenia $620 7.2% Serbia 74 14.1%
Netherlands $469 5.4% Romania 37 7.0%
“0” reflects amounts rounded to +/- USD 500,000.

According to the BiH Central Bank preliminary data for 2020, FDI inflow in Bosnia and Herzegovina decreased by 34% comparing to the same period of 2019 and amounted to USD 299 million. The all-time high for FDI was USD 2.1 billion in 2007.  Most investments in 2014-2020 came from Croatia, Austria, Russia, Serbia, The Netherlands, UAE, and the United Kingdom.

Table 4: Sources of Portfolio Investment
Data not available.

Investment Climate Statements
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