2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012

Openness to Foreign Investment

After several years and multiple attempts at reform, Bosnia and Herzegovina (BiH) still struggles with opening its economy to foreign investment. The global economic crisis coupled with the sixteen month delay in formation of the state-level government stalled many key economic reforms over the past year. Earlier successful reforms included a liberal state-level foreign investment policy, a value-added tax, and a uniform trade and customs policy. Foreign investors, however, continue to face a number of serious obstacles, including a complex legal and regulatory framework, non-transparent business procedures, corruption, poor infrastructure, insufficient protection of property rights, and weak judicial structures. The government has been unable to make considerable improvements to the business environment, placing BiH lowest in the region in terms of ease of doing business. This, in turn, inhibits robust foreign investment. BiH has taken few concrete actions in recent years to encourage the privatization of state-owned enterprises, and has stalled a number of initiatives to improve the business climate, which has frustrated potential investors. Although some government authorities have begun to address these obstacles as part of the transition to a market economy, much more needs to be done. Foreign investment in the first nine months of 2011 totaled $316 million, far from its height of $2.1 billion in 2007. Foreign investment -- particularly greenfield investment -- has shown only limited gains. The banking sector is the exception, with Austrian banks taking a dominant position in the local market. A high unemployment rate, slowdown of foreign direct investment and increased public sector spending remain central problems of the BiH economy.

The lack of political stability gives pause to many investors, preventing the country's economic development, and has resulted in BiH’s recent credit rating downgrades. Political deadlock resulted in the country’s failure to service external debt payments from January 16 through early February 2012, even though funds were readily available in the central bank. The state has remained under temporary financing (similar to a continuing resolution in the US) for more than a year preventing it from making necessary capital investments to advance BiH towards EU and NATO membership. This stalemate also affects the private sector which benefits from public procurements and service needs.

Following are BiH's third-party rankings on widely accepted measures of the business and investment environment:

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

2012 Index/ Ranking

2011 Index/ Ranking

2010 Index/ Ranking

2009 Index/ Ranking

Transparency International Corruption Perception (CPI) Index

N/A

91 (out of 178)

91 (out of 178)

99 (out of 180)

The Heritage Foundation Index of Economic Freedom

104 (out of 179)

104 (out of 179)

110 (out of 179)

134 (out of 179)

World Bank Ease of Doing Business Ranking

125 (out of 183)

110 (out of 183)

116 (out of 183)

119 (out of 181)

The World Economic Forum Global Competitiveness Index

100 (out of 142)

100 (out of 142)

102 (out of 142)

102 (out of 142)

BiH will need to address four fundamental issues in the near term to further economic reform:

--Lack of Collective Political Will: BiH has a complex governmental structure. Under the BiH constitution established through the Dayton Accords, Bosnia and Herzegovina is divided into two “entities,” the Federation of BiH (the Federation) and the RepublikaSrpska (RS). A third, smaller area, the Brčko District, operates under a separate administration. Each entity has municipalities. The Federation is further divided into ten cantons, each with its own government and responsibilities. This complex system of government lends itself to deadlock and prevents reforms. As a result, serious reforms take great effort, time, and political commitment. Unfortunately, well-known problems continue to persist year after year.

-- Complex legal and regulatory framework: The establishment of governmental structures at the state and entity levels created a multi-tiered legal and regulatory framework that is often duplicative and contradictory. For example, current employer contributions on net wages total 69 percent and 52 percent in the Federation and the RS, respectively. While the situation is far from ideal, progress has been made in recent years. For example, corporate income taxes in the two entities and Brčko District have been harmonized at ten percent. Nonetheless, the lack of a single economic space has a chilling effect on job creation in the formal economy and creates difficulties for companies trying to do business across the entire country. Entity business registration requirements are not harmonized. The Federation’s ten cantons each have different business regulations and administrative procedures affecting companies. Simplifying and streamlining this framework is essential to improving the investment climate. The RS has its own registration requirements which apply to the entire entity.

-- Business regulations and administrative procedures: With multiple layers of administration, opportunities for corruption abound, increasing the cost of doing business. In particular, public procurement tenders are not always transparent and investors complain about political interference and corruption. Even though European Union-compliant public procurement legislation has been adopted, it is not adequately enforced. According to the World Bank and the International Finance Corporation (IFC) Doing Business 2012 report, BiH’s business environment did not improve significantly over the last year. The country ranked 125th among 183 countries, the lowest in the region, in terms of overall ease of doing business. BiH lags behind Macedonia (22nd), Montenegro (56th), Croatia (80th), Albania (82nd), and Serbia (92nd) and Kosovo (117). BiH's position improved in three categories - dealing with construction permits, registering property, and trading across borders. BiH’s worst performance was in the following categories - starting a business, paying taxes and enforcing contracts. Starting a business requires approximately 40 days and 12 separate procedures, which is well above the average for the region. BiH’s ranking for ten aspects of doing business can be found at: http://www.doingbusiness.org/ExploreEconomies/?economyid=26

-- Weak judicial structures: BiH’s legal/judicial system does not normally provide quick resolution of commercial disputes. Commercial courts do not exist and non-judicial dispute resolution mechanisms are few. Investors complain that legal judgments are at times not transparent and of questionable objectivity. Reform has been slow. The Competition Council, established in 2004, is an independent public institution mandated to enforce anti-trust laws, prevent monopolies, and enhance private sector competition. The Council reviews and approves foreign investments in cases of mergers and acquisitions of local companies by foreign companies.

Investment Law: The state-level Law on the Policy of Foreign Direct Investment provides a generic framework for foreign investment. The law accords foreign investors with the same rights as domestic investors, including bidding on privatization tenders. With the exception of the defense industry and the media sector, where foreign control is limited to 49 percent of a single company, there are no restrictions on investment. Investors are also protected from changes in the Law on Foreign Investment. Should the government amend the legislation, the investor may choose the most favorable regulations to apply. The law prohibits expropriation and nationalization of assets, except under special circumstances and with due compensation. Neither entity government nor the state government has expropriated any foreign investments to date.

Complex Foreign Direct Investment: BiH’s commercial laws are unable to provide the level of security desired by some foreign investors. Some investors may seek to register their company outside of BiH. However, it can also lead to additional and time-consuming administrative and legal hurdles when registering these often complex companies in BiH.

BiH's Foreign Investment Promotion Agency provides some assistance to foreign investors, but has limited staff and budgetary resources. (www.fipa.gov.ba)

Public-private partnerships (PPPs) are gradually gaining wider acceptance with BiH officials. The RS currently has PPPs in the health-care and transportation sectors. The Federation expects to adopt legislation that would allow PPPs in the near future.

Conversion and Transfer Policies

The Law on Foreign Direct Investment guarantees the immediate right to transfer and repatriate profits and remittances. Local and foreign companies may also 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 that the local currency, the convertible mark or KM, is fully convertible to the euro with a fixed exchange rate of KM 1.95583 : €1.00.

Expropriation and Compensation

The state investment law forbids expropriation of investments, except in the public interest. According to Article 16, “Foreign investment shall not be subject to any act of nationalization, expropriation, requisition or measures that have similar effects, except where the public interest may require otherwise.” In such cases of public interest, expropriation of investments would only be executed in accordance with applicable laws and regulations, would be free from discrimination, and would include payment of appropriate compensation. Neither entity government nor the state government has expropriated any foreign investments to date.

Dispute Settlement

BiH has implemented reforms to court operations and staffing, designed to streamline commercial disputes and other proceedings. However, it often takes several years for a case to be brought to trial. The U.S. Government implements a number of court reform programs to expedite case processing and further develop judicial capacity. The U.S. Government has provided training to judges, trustees, attorneys, and other stakeholders at both state and entity levels to assist in the development of new bankruptcy and intellectual property rights laws. Those laws are now in effect at both the entity and state levels.

Bosnia and Herzegovina has been a member of the International Center for the Settlement of Investment Disputes since 1997. It accepts international arbitration to settle private investment disputes if the parties outline this option in a contract.

Over the last decade, there has been only one case of a legal dispute involving a U.S. investor and the local government. Although this dispute remains unresolved, the claimant is currently pursuing negotiations with the local government and has not opted for international mediation. While efforts are being made to improve BiH’s commercial court system, its current capacity and practical inefficiencies limit timely resolution of commercial disputes.

Performance Requirements and Incentives

There are several incentives for foreign direct investment, including exemptions from payment of customs duties and customs fees. Bosnia and Herzegovina is divided into three jurisdictions for direct tax purposes: the Federation, the RS and the Brčko District. The corporate income tax in the Federation allows tax relief to foreign investors who invest KM 20 million (roughly USD 14 million in December 2011) over a five-year period. The Federation exempts domestic and foreign companies from annual corporate profit tax if 30% of turnover at year end is from exports. In the Federation, RS, and Brčko District, the corporate income tax allows offsetting of profits against losses over a five-year period. In the Brčko District, if an investor invests in fixed assets and pays taxes, this investment is subject to tax relief. There are no special investment incentives in the RS. Foreign investors can open bank accounts in all jurisdictions and transfer abroad their profits, without any restrictions. The rights and benefits of foreign investors granted and obligations imposed by the Law on the Policy of Foreign Direct Investment cannot be terminated or overruled by subsequent laws and regulations. Should a subsequent law or regulation be more favorable to foreign investors, the investor has the right to choose the most beneficial regulations.

Right to Private Ownership and Establishment

Under the state-level investment law, a foreign enterprise has the same rights as a BiH enterprise or citizen, and foreign entities can establish and own a business with the same rights as domestic entities. However, the Federation Companies Law, unlike laws in the RS and the Brčko District, does not provide an option for foreign legal entities to establish a branch office. Foreign investors may own real estate in BiH and enjoy the same property rights as BiH citizens and legal entities, except in the defense industry and media, where foreign control is limited to 49 percent of a single company. Foreign interests must follow the same regulatory procedures when establishing their enterprises.

Protection of Intellectual Property Rights

The BiH Government is strengthening its intellectual property rights laws in preparation for eventual membership in the European Union and the World Trade Organization. Bosnia’s new IPR framework consists of seven laws, adopted and put into force by the Parliament in 2010. This new legislation is TRIPS and EU-compliant and includes laws on copyrights, patents, trademarks, geographical indications, and the topography of integrated circuits. The country also continues to increase its international obligations. It belongs to over 20 international treaties related to IPR and in 2009 ratified the 1996 WIPO Copyright Treaty and the WIPO Performance and Phonograms Treaty. Although existing legislation provides a basic level of protection, BiH’s civil and criminal enforcement remains weak and some government offices are offenders. Some officials lack a basic understanding of the importance of IPR to economic growth.

The U.S. Government, in conjunction with local partners, has made IPR awareness within the enforcement community a priority through training programs, partnerships in campaigns run by the American Chamber of Commerce’s IPR committee, and a recent IPR program to build the capacity of BiH’s IPR Institute by improving efficiencies in the IPR application process and by assisting with drafting of regulations. Jurisdiction over IPR investigations is split between customs officials, entity inspectorates, and state and entity law enforcement agencies, and no institution has specialized IPR investigation teams. IPR crimes are prosecuted primarily at the state level. Those cases indicted often involve fairly low-level violators. The more significant cases have sometimes languished for years with little action from prosecutors or judges. However, there are signs of progress. In August 2011, the BiH State Court issued a verdict in a significant software piracy case. In that case, the accused was found guilty of unauthorized use of copyrighted material, based on having provided unlicensed products to a government agency. He was sentenced to one year in prison and ordered to pay approximately 195,000 Euros in damages. Undoubtedly, this will have an impact on discouraging similar instances of software piracy.

In BiH’s private sector, awareness of IPR, particularly the importance of copyright protection, remains low. Curbing business software piracy could significantly improve the local economy through the creation of new jobs and the generation of significant tax revenue. Failure to recognize the importance of reducing copyright infringement makes software producers and official distributors less competitive and the establishment of a legitimate market more difficult. Businesses lose an estimated USD 15 million from the sale of counterfeit software, CDs, and DVDs. According to the Business Software Alliance (BSA), the rate of illegal software installed on personal computers in Bosnia and Herzegovina currently remains at 66 percent, which is the regional average.

In addition to the software piracy judgments, there are other indicators that BiH is strengthening its IPR enforcement regime. The entity governments have been using licensed software for a number of years and the state-level government came into compliance in 2009, a significant step forward in the government’s commitment to IPR protection. However some officials still lack understanding of the importance of IPR. Illegal DVDs and CDs are still available for sale in small public markets. BiH's enforcement record still leaves much room for improvement. At this time, there is no mechanism to combat digital piracy.

Transparency of the Regulatory System

Establishing a business in BiH can be an extremely burdensome and time-consuming process for investors. Registration is a 12-step procedure that takes, on average, 40 days to complete. Retaining a local lawyer may expedite the process. The administrative costs are approximately USD 450 and attorney’s fees range from USD 200 to USD 1,000. Notary services are necessary when establishing a company, for real estate proceedings and for changes to the court registry. Once a company is registered in one of the entities, branch offices can be established in the other entity without a separate company registration procedure. This significantly reduces the time and administrative hurdles to expand operations. Other administrative procedures can be more time-consuming. For example, obtaining a construction permit can take six months to one year. Investors often complain about lack of transparency and potential corruption in this process.

The multitude of state, entity, cantonal (in the Federation only), and municipal administrations – each with the power to establish laws and regulations affecting business – creates a heavily bureaucratic, non-transparent system. It is difficult to know all of the laws or rules that might apply to certain business activities, given overlapping jurisdictions and the lack of any central source of information. Foreign investors often, therefore, obtain local assistance and advice.

Businesses are subject to inspections from a number of entity and cantonal/municipal agencies including the financial police, labor inspectorate, market inspectorate, sanitary inspectorate, health inspectorate, fire-fighting inspectorate, environmental inspectorate, institution for the protection of cultural monuments, tourism, and food inspectorate, construction inspectorate, communal inspectorate, and veterinary inspectorate. Some investors have complained about non-transparent fees levied during inspections, changing rules and regulations, and an ineffective appeals process to protest these fines.

Efficient Capital Markets and Portfolio Investment

Capital markets remain underdeveloped in BiH. Both entities have created their own modern stock market infrastructure with separate bourses in Sarajevo (SASE) and Banja Luka (BLSE), both of which started trading in 2002. The small size of the markets, lack of privatization, and public mistrust of previous voucher privatization programs have impeded the development of a market. Nonetheless, both stock exchanges experienced a significant boom in the first half of 2007, supported by strong performances in neighboring stock markets in Belgrade, Zagreb, and Ljubljana. However, during 2008 and the global economic crisis, foreign investment dwindled and investors saw previous gains dissipate on both exchanges. This downward trend continued in 2011, shaped not only by the global financial crisis but also by BiH's lack of political stability and slowdown of reforms. Both the RS and FBiH 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. These securities are also available for secondary market trading on the stock exchanges.

Standard & Poor’s (S&P) issued its first sovereign credit rating for Bosnia and Herzegovina in December 2008. On November 30, 2011, S&P cut BiH’s long-term credit rating by one notch from B+ to B citing political deadlock over central-level government formation. S&P stated that it could act again if political wrangling continues to undermine management of the country's public finances. On May 16, 2011, Moody’s Investors Service changed the outlook on the B2 government ratings of Bosnia and Herzegovina from stable to negative, citing the ongoing political stalemate and related delays in economic and constitutional reform. Additionally, Moody's has placed a negative outlook on Bosnia and Herzegovina's Ba3 ceiling for foreign-currency debt and its B3 ceiling for foreign-currency bank deposits.

Bosnia and Herzegovina’s banking and financial system has been stable with the most significant investment coming from Austria. BiH has not yet emerged from the global economic crisis, but there are recognizable signs of slow recovery. Foreign exchange reserves increased to EUR 3.05 billion (USD 4.5 billion), and inflation is relatively low and stable at approximately 3%. During the second quarter of 2011, 30 commercial banks operated in BIH; 20 with headquarters in the Federation and 10 in the RepublikaSrpska. Total assets of commercial banks operating in Bosnia and Herzegovina reached USD 14 billion at the end of October 2011. 25 commercial banks are members of the deposit insurance scheme which provides for deposit insurance in the amount of KM 35,000 since April 2010.

In 2004 BiH passed a state-level framework law mandating the use of international accounting standards, and in 2005 both entities passed legislation eliminating the previous differences in standards that existed between the entities and Brčko District. All governments have implemented accounting practices that are fully in line with international norms. However, these standards have not yet been fully implemented throughout the country due to weak accounting capacity and failure of the government to translate international standards into local language so that firms can implement the standards. Legislative officials have been criticized for attempts to change these standards in an effort to protect local accounting firms. Foreign investors should therefore carefully scrutinize Bosnian corporate financial statements.

Competition from State-Owned Enterprises (SOEs)

Generally, private companies compete with public enterprises under the same terms and conditions with respect to access to markets, credit and other business operations. However, in the sectors such as telecommunications and electricity, state-owned enterprises hold a near-monopoly, making hefty profits as a direct result of their dominant market position. There have also been allegations that the Government-owned Postal Service has an unfair advantage when competing with private firms in the field of expedited mail delivery.

Corporate Social Responsibility (CSR)

Foreign and local companies exercise some corporate social responsibility activities and awareness. 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. The American Chamber of Commerce (AmCham) hosts annual philanthropic campaigns – most recently to support UNICEF’s early childhood development center projects. USAID also manages a project to foster greater corporate social responsibility in BiH.

Corruption

Corruption remains prevalent in many political and economic institutions in Bosnia and Herzegovina and raises the costs and risks of doing business. BiH’s overly-complex business registration and licensing process is particularly vulnerable to corruption. The multitude of state, entity, cantonal and municipal administrations, each with the power to establish laws and regulations affecting business, creates a system that lacks transparency and opens opportunities for corruption. With the large number of levels involved, there are multiple opportunities to demand "service fees.” Paying bribes to obtain necessary business licenses and construction permits, or simply to expedite the approval process, occurs regularly.

Transparency International’s (TI) 2011 Corruption Perception Index ranked BiH 91st out of 178 countries, among the lowest ranks in the region. According to TI, which maintains offices in BiH, relevant institutions lack the will to become actively involved in fighting corruption. Law enforcement agencies and the judiciary are not effective in the prosecution of corruption cases and are visibly exposed to political pressures. Prosecutors complain that citizens generally do not report instances of corruption and do not want to testify in these cases. The BiH Parliament established a state level agency to prevent and coordinate efforts to combat corruption.

Corruption has a corrosive impact on both market opportunities overseas for U.S. companies and the broader business climate. It deters foreign investment, stifles economic growth and development, distorts prices, and undermines the rule of law. U.S. companies must carefully assess the business climate and develop an effective compliance program and measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms should take the time to become familiar with the relevant anticorruption laws of both BiH and the United States in order to properly comply, and where appropriate, seek the advice of legal counsel.

The U.S. Government seeks to level the global playing field for U.S. businesses by encouraging other countries to take steps to criminalize their own companies’ acts of corruption, including bribery of foreign public officials, and uphold obligations under relevant international conventions. A U.S. firm that believes a competitor is seeking to use bribery of a foreign public official to secure a contract should bring this to the attention of appropriate U.S. agencies, as noted below.

U.S. Foreign Corrupt Practices Act: The Foreign Corrupt Practices Act of 1977 was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Since 1977, the anti-bribery provisions of the FCPA have applied to all U.S. persons and certain foreign issuers of securities. With the enactment of certain amendments in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States.

For more detailed information, see:

http://www.justice.gov/criminal/fraud/fcpa/

Local Laws: U.S. firms should become familiar with local anticorruption laws, and, where appropriate, seek legal counsel. While the U.S. Department of Commerce cannot provide legal advice on local laws, the Department’s U.S. and Foreign Commercial Service can provide assistance with navigating the host country’s legal system and obtaining a list of local legal counsel.

Assistance for U.S. Businesses: The U.S. Department of Commerce offers several services to aid U.S. businesses. For example, the U.S. and Foreign Commercial Service can provide services that may assist U.S. companies in conducting due diligence when choosing business partners or agents overseas and provide support for qualified U.S. companies bidding on foreign government contracts. For a list of U.S. Foreign and Commercial Service offices: www.trade.gov/cs

Alleged corruption by foreign governments or competitors can be brought to the attention of appropriate U.S. government officials, including local embassy personnel or through the Department of Commerce Trade Compliance Center “Report a Trade Barrier” Website at tcc.export.gov/Report_a_Barrier/index.asp

Anti-Corruption Resources

Useful resources regarding combating corruption in global markets include the following:

· Information about the U.S. Foreign Corrupt Practices Act (FCPA), including a “Lay-Person’s Guide to the FCPA” is available at the U.S. Department of Justice’s Website at: http://www.justice.gov/criminal/fraud/fcpa.

· Transparency International (TI) publishes an annual Corruption Perceptions Index (CPI). The CPI measures the perceived level of public-sector corruption in 180 countries and territories around the world. The CPI is available at: http://www.transparency.org/policy_research/surveys_indices/cpi/2011. TI also publishes an annual Global Corruption Report which provides a systematic evaluation of the state of corruption around the world. See http://www.transparency.org/publications/gcr.

· Information about the OECD Antibribery Convention including links to national implementing legislation and country monitoring reports is available at: http://www.oecd.org/department/0,3355,en_2649_34859_1_1_1_1_1,00.html See also new Antibribery Recommendation and Good Practice Guidance Annex for companies: http://www.oecd.org/dataoecd/11/40/44176910.pdf.

· General information about anticorruption initiatives, such as the OECD Convention and the FCPA, including translations of the statute into several languages, is available at the Department of Commerce Office of the Chief Counsel for International Commerce Website: http://www.ogc.doc.gov/trans_anti_bribery.html.

· The World Bank Worldwide Governance Indicators (WGI) assess six areas of governance including Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption. See http://info.worldbank.org/governance/wgi/sc_country.asp. The World Bank Business Environment and Enterprise Performance Surveys may also be of interest and are available at: http://go.worldbank.org/RQQXYJ6210.

· The World Economic Forum’s Global Enabling Trade Report ranks the Enabling Trade Index, and assesses the transparency of border administration (focused on bribe payments and corruption). See: http://www.weforum.org/en/initiatives/gcp/GlobalEnablingTradeReport/index.htm.

· Additional country information related to corruption can be found in the U.S. State Department’s annual Human Rights Report available at http://www.state.gov/g/drl/rls/hrrpt/.

· Global Integrity, a nonprofit organization, publishes its annual Global Integrity Report, which provides indicators for 92 countries regarding governance and anti-corruption at: http://report.globalintegrity.org/.

Bilateral Investment Protection Agreements

BiH has signed/ratified 42 agreements to promote and protect investments with the following countries: Albania, Austria, Belgium, Belarus, China, Croatia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Netherlands, Hungary, India, Iran, Italy, Jordan, Kuwait, Lithuania, Luxembourg, Macedonia, Malaysia, Moldova, Montenegro, Netherlands, Pakistan, Portugal, Qatar, Romania, Serbia, Libya, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, UAE, Ukraine, and the United Kingdom.

BiH does not have a bilateral investment treaty with the United States.

OPIC and Other Investment Insurance Programs

OPIC's activities in BiH include: insurance for investors against political risk, coverage of losses due to expropriation of assets, political violence, and currency inconvertibility; and insurance coverage for contracting, exporting, licensing and leasing transactions.

Political risk insurance is also available from the EU Investment Guarantee Trust for BiH, administered by the Multilateral Investment Guarantee Agency, a World Bank affiliate.

Labor

BiH has a workforce with relatively 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. Tax rates on labor are high, discouraging employment of new workers and increasing incentives for unregistered employment. In addition, a rigid wage determination system stands in the way of job creation and worker mobility. This is a result of a collective bargaining system that retains most of its socialist era characteristics. Employees and employers share the costs of health care, pension, and unemployment insurance in the Federation, while in the RepublikaSrpska employers cover all of these costs, as well as child care contributions. Many employers underreport their labor force to avoid paying taxes and benefits. While official unemployment is approximately 43 percent, "unofficial" estimates of unemployment that include the large gray economy are approximately 27 percent.

Foreign Trade Zones/Free Ports

The BiH Law on Free Trade Zones allows the establishment of free trade zones (FTZs) as part of the customs territory of BiH. Currently there are four free trade zones in BiH: Vogosca, Visoko, Hercegovina-Mostar, and HolcLukavac. One or more domestic or foreign legal entities registered in BiH may create a FTZ. The users of FTZs do not pay taxes and contributions, with the exception of those related to salaries and wages. Investors are free to invest capital in the FTZ, transfer their profit and retransfer capital. Customs and tariffs are not paid on imports into FTZs. The import of equipment for manufacturing within FTZs may be discontinued, however, if the value of goods produced and exported abroad is less than 75 percent of the total value of goods produced in that zone.

Foreign Direct Investment (FDI) Statistics

According to BiH Central Bank data, the total value of foreign investments in BiH for the first nine months of 2011 amounted to 470.1 million KM (USD $313 million), which was almost 50 percent more than during the same period in 2010. Most investments during the first nine months of 2011 came from Russia, (USD 211 million), followed by Serbia (USD 159 million) and Austria (USD 105 million). The sectors that attracted the most investment were real estate, wholesale and retail trade and financial services. In the past fifteen years, Austria has been the largest investor (20 percent), followed by Serbia (18 percent), Croatia (14 percent), Slovenia (11 percent), Russia (9 percent) and Germany (6 percent). The manufacturing sector had the highest percentage of FDI, followed by the banking and trade sectors.

(Source: FIPA-Foreign Investment Promotion Agency of Bosnia and Herzegovina.)

In December 2006, BiH signed free trade agreements with Albania, Croatia, Macedonia, Moldova, Montenegro, Serbia and Kosovo. It has preferential export regimes with the United States, New Zealand, Switzerland, Norway and Japan. In 2008, Bosnia and Herzegovina signed the Stabilization and Association Agreement (SAA) with the European Union, a step towards EU membership, but it has not yet entered into force. The SAA establishes a free trade zone between Bosnia and Herzegovina and the European Union, implying the mutual abolishment of all custom tariffs and quantity limitations on goods. The Interim Agreement on Trade and Trade-related matters (IA) between EU and Bosnia and Herzegovina will be in force until the ratification process of Stabilization and Association Agreement is finalized by the all the EU member states. According to the Interim Agreement, the preferential export regime with the European Union is in force, which provides that all goods of BiH origin that fulfill EU technical-technological standards and conditions, can be imported to all EU countries without any quantitative restrictions and without paying customs or other similar duties. Once in force, the SAA should encourage further development of competitiveness among the country’s exporters and increase investments and employment. Since 2009, import tariffs have been eliminated for 11,000 products that BiH imports from the EU. Immediately upon signing, tariffs were cut by 50 per cent for products such as cosmetics, tractors, motorcycles, furniture, major appliances, electronic equipment, computers and tools, and they were completely eliminated as of January 1, 2010.

[This is a mobile copy of Bosnia and Herzegovina]