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FDI in Bosnia’s Republika Srpska is increasing, but there’s plenty of room for more

banja luka republika srpska

Republika Srpska is becoming more attractive to foreign investors, but there’s still some way to go before Bosnia’s Serb entity reaches its full potential, according to the region’s foreign investment promotion agency (FIPA) and a number of senior economic analysts.

The good news is that there is room for optimism both in Republika Srpska and Bosnia and Herzegovina as a whole. Since 2017, the amount of foreign direct investment (FDI) has increased steadily, after falling between 2015 and 2016.

According to data from Bosnia’s Central Bank there was 316 million euro of FDI in 2016, 399 million euro in 2017, and 401 million euro in 2018. Preliminary figures for 2019 also show a rise, to around 459 million euros.

However, even with these increases Bosnia and Herzegovina still finds itself in the lower tier of Western Balkan countries by volume of investments, outstripped significantly by Albania and Serbia, although a positive trend can be seen in the number of greenfield investments, where Bosnia and Herzegovina is performing better than Albania and North Macedonia.

“Foreign direct investment in Bosnia and Herzegovina is negligible in the overall economy. Considering the pronounced political, legal, economic, and other systemic risks, this country has one of the worst performances in the region on this issue,” says Admir Čavalić, an economic analyst based in Bosnia.

Of the total FDI going into Bosnia and Herzegovina, the proportion heading for Republika Srpska was around 40 per cent in 2018, up from just 13 per cent in 2016.

According to Mr Čavalić, most of the investment comes from Serbia, a country that Republika Srpska maintains very close ties with.

In recent years, Republika Srpska has taken steps to attract more investment and become a more desirable location to do business in. According to its FIPA, the strengths this entity can offer are natural resources, favourable tax regulations, and a qualified workforce.

“Many local communities have realised the importance [of investments] and have invested in previous years into bettering their infrastructure and establishing functional business zones,” the FIPA tells Emerging Europe.

The FIPA also points out that Republika Srpska has been at the forefront of fulfilling regulatory standards imposed by a Stabilisation and Association Agreement with the EU that took effect in July 2015. In a bid to make the business climate more favourable it has also lowered the capital needed to register a company to just one Bosnia-Herzegovina convertible mark (around 0.5 euros) and shortened the legal deadline for company registration, which is now three working days.

But of all these efforts, it seems that easing tax regulations is what might be attracting most foreign companies to come to Republika Srpska. In Bosnia and Herzegovina corporate profits are taxed at 10 per cent, compared to 15 per cent in Serbia and 20 per cent in Slovenia. Furthermore, in Republika Srpska, dividends are not taxed at all.

This has made it somewhat attractive as an offshore destination, especially for Slovenian companies looking to lower their corporate income tax. According to a recent investigation by Capita.ba, a regional economics portal, around 200 companies have been opened in Republika Srpska by Slovenian nationals. The report reveals most of these don’t have any other presence within Republika Srpska except a registered address in the capital Banja Luka.

According to Mr Čavalić, offshore attractiveness won’t have a positive effect on the economy in the long run. But as the phenomenon is relatively new, the exact effects will become clear only later.

“We want to believe that Republika Srpska is not an attractive destination for offshore companies. The goal of every state is to establish an efficient economic system in which there will be production growth. The main interest of Republika Srpska should be employing the domestic workforce and creating strong working capital in domestic companies that represents a base for their development and with them the development of our economy and society,” the Republika Srpska Chamber of Commerce told Emerging Europe.

“The main problem of Republika Srpska is that its GDP is based on public spending, without the existence of an industrial base. Unlike the Federation of Bosnia and Herzegovina, it is traditionally agriculturally oriented. This hinders the development of a real sector that will invest and be export-oriented,” Mr Čavalić says.

The entity’s high centralisation, with wealth being concentrated in the capital Banja Luka, is also not doing it any favours.

“The result of all the above is exceptional indebtedness compared to the Federation of Bosnia and Herzegovina,” he explains.

developmentaid

According to data from last year, Republika Srpska’s total debt stood at 5.3 billion Bosnia-Herzegovina convertible marks (around 2.7 billion euros), which represents 48,09 per cent of its GDP.

“There is still much to be done to improve the business climate and to make Republika Srpska more suitable for greenfield rather than offshore investments,” Mr Čavalić explains. “This primarily refers to socio-economic reforms (removal of barriers to business, reduction of taxes, but also better sustainability of large social systems such as pension system), as well as reducing the degree of political risk (democratisation of relations within Republika Srpska, reducing conflict rhetoric, turning to the EU, possibly NATO integration.”

The FIPA takes a similar view when it comes to investment obstacles in the country. It says that the biggest hurdles are a slow and complex bureaucracy and political instability.

The Bosnian Serb member of the Presidency of Bosnia and Herzegovina, Milorad Dodik, was recently embroiled in a scandal after publicly admitting that he wiretaps opposition leaders. Mr Dodik later claimed he was only joking.

An additional problem, according to the FIPA is brain drain, an issue that’s been a bugbear for all Western Balkans countries. Foreign investors can be faced with a problem of not being able to find enough qualified workers in certain occupations that, according to the FIPA, affects their business plans.

Like most of the region, Bosnia and Herzegovina has not been spared the economic consequences of the coronavirus pandemic. And FDI is especially sensitive now.

According to preliminary data from the country’s Central bank, the first quarter of 2020 already saw a 3.4 per cent decrease in FDI. And yet according to a poll conducted by the FIPA, there is reason for optimism. Around half of existing foreign inventors said that they will still continue with investment plans made before the outbreak of the pandemic, while around 40 per cent say they will have to delay them.

Overall, while Republika Srpska and Bosnia and Herzegovina in general are taking steps to become more attractive to investments and create a better business climate, there is a lot that still needs to be done.

“Attracting foreign investment is a complex and long process and with an earnest commitment it requires coordination and a greater collaboration of all government levels in Bosnia and Herzegovina,” the FIPA concludes.

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