Opinion: The RS/BiH economy will pay the price of the pandemic

Opinion: The RS/BiH economy will pay the price of the pandemic

By Zoran Pavlović*

The economy of BiH is export-oriented and mostly import-dependent on raw materials and materials for finishing and production, so many products are imported for the needs of citizens even those that own economy can produce. Imports of goods mainly depend on the needs of buyers in the domestic market, which has little purchasing power. The results achieved by the BiH economy are based on geographical location, local workforce and available types of materials and raw materials. Low wages with a high tax burden imposed by the ruling coalitions of about 64% are also present and represent a burden on economic development and the competitiveness of domestic products.

The coronavirus pandemic began in mid-March in BiH and the RS, as well as in many Western Balkan countries. Crisis Staffs in both entities then took the stage and, in cooperation with the entity governments, immediately implemented the measures they saw in China, South Korea and other countries that were the first to face a pandemic – close and/or interrupt almost all living, collective and economic activities that put people in a situation to have mutual contact in work or use of services.

The tertiary sector, and then production, administrative activities, schools, kindergartens and almost everything else, was stopped in all aspects of its activities by the decisions of the Crisis Staffs. Some manufacturing companies, however, continued working, mainly in finishing works, civil engineering and housing construction.

Economic life was set aside, without the intention of the government (s) to reconsider the real economic situation and thus the fiscal consequences of the new situation on the collection of direct and indirect taxes. Monitoring of the reduction of economic indicators in the same period was not done either, because “the lives of citizens should be saved” so that they would not become infected because “the health care system is not prepared for a pandemic”.

Exports registered a decline of 30% in March and April, and almost the same percentage was registered in imports to BiH. Difficult transport, reduction and/or cessation of production in the surrounding countries and the EU, and the reduction of orders from BiH have significantly contributed to this.

The period of ceased economic activity from March 15 to mid-May significantly affected the decline in all fiscal revenues in BiH, starting with the decline in inflows from indirect taxes, which were registered in the Indirect Taxation Authority, that the decline in revenues was 23% in April 2020 or 156 million BAM less than in the same month in 2019. The decline in VAT revenues was not so drastic because we had apocalyptic purchasing of food and household consumption, which partially reduced the decline. The decline in revenues continued in May, so with the reduction of the pandemic, serious consideration is being given to reducing strict labour bans and restrictions imposed on the economy to reduce coronavirus infections.

Regarding direct taxes, the Tax Administration of Republika Srpska collected 49.1 million KM based on direct taxes in March, which is 29.4 million BAM less than in the same period last year, so that the decline in payments is almost 37.5%. This gives us a realistic picture of the problems that the economy of Republika Srpska has had since the beginning of the pandemic. This trend continues in May.

Since the beginning of the pandemic, most attention has been paid to the health sector, where public procurement was conducted without tender procedures and/or a transparent negotiation process by the Crisis Staff, so it was noted that during the corona period there were large procurements, often at terms and prices disproportionately larger than usual. In that way, there was an outflow of enormous amounts from the budget, which was not planned.

Due to all that, BiH has started new borrowing, initially for the needs of payment of regular obligations from the entity budgets, and then for the needs of supporting the revitalization of the economy, as it was announced. The first creditor was, of course, the IMF, which, very fast, approved a favourable loan of 330 million euros for BiH, which was paid to the Central Bank. Unfortunately, due to the complexity of the legal and political structure in BiH, that money is blocked because it is not clear how the cantons in the Federation of BiH will issue promissory note for 50% of the money they should receive within this credit support to the Federation of BiH, while it is quite clear in Republika Srpska. In any case, the money is still blocked in the Central Bank, and so much is now needed immediately for all possible support to micro, small and medium-sized companies in RS and BiH.

To provide the missing funds in the budget, the Government of the Republika Srpska offered 300 million BAM of bonds with a maturity of five years through the Banja Luka Stock Exchange but managed to place only about 50%. It is obvious that the fear of investors was present due to the coronavirus in the segment of investments in bonds on the domestic market, and all this led to a reduced inflow into the budget of Republika Srpska.

According to the EU credit assistance program to the countries of the Western Balkans, BiH’s support of EUR 250 million has been defined with favourable credit conditions to support the economy to reduce job losses and re-start-ups. This amount is not yet available.

Now, if we look at the current situation, the entire burden of starting economic activities has been placed on the economy and companies, which have been operating hard before, without sufficient working capital and with a lack of quality labour. The much-needed “re-start” after the Covid-19 period will not be easy at all if the funds for help to the economy are not distributed in the short term. Besides, the purchasing power of consumers has been reduced, because there are no payments even of those salaries earned before the pandemic, and also, everyone in the economy today is additionally afraid of the announcements of health experts that the second wave of the pandemic will (or might) happen in September.

Due to that, employers postponed investments and even planned capital investments, as well as the purchase of durable consumer goods that citizens need, and all that further complicates and harden the start of economic activities.

The general impression is additionally burdened by all media that still put the state of the pandemic in the foreground, and not the state of the economy. Optimism and a positive approach of the Government and the media are additionally missing, along with the presentation of active recovery measures, to stimulate the economy to plan its activities to reactivate production and fight for old and new buyers of its goods and services.

In the end, the perspective and dynamics of the recovery of the Republika Srpska economy, which was in crisis before the Covid-19 pandemic and neglected by the Government, will now depend especially directly on the active measures of the Government and focusing on solving key problems that businessmen have. We will see to what extent unions, businessmen, economic experts and everyone else who can help create active measures for economic recovery will be involved in this activity – but according to the activities that are lukewarm and unfocused so far, it is difficult to expect better days for the economy of the BiH and Republic of Srpska.

*Zoran Pavlović is independent economy analyst from Banja Luka./ibna