Bosnia and Herzegovina ranked next to Macedonia as the poorest republic in the old Yugoslav federation. Although agriculture is almost all in private hands, farms are small and inefficient, and the republic traditionally is a net importer of food. Industry remains greatly overstaffed, a holdover from the socialist economic structure of Yugoslavia. Yugoslav President Josip Broz Tito had pushed the development of military industries in the republic with the result that Bosnia was saddled with a host of industrial firms with little commercial potential. The interethnic warfare in Bosnia caused production to plummet by 80% from 1992 to 1995 and unemployment to soar. With an uneasy peace in place, output recovered in 1996-99 at high percentage rates from a low base; but output growth slowed in 2000-02. Part of the lag in output was made up in 2003-05. National-level statistics are limited and do not capture the large share of black market activity. The konvertibilna marka (convertible mark or BAM)- the national currency introduced in 1998 - is pegged to the euro, and confidence in the currency and the banking sector has increased. Implementation of privatization, however, has been slow, and local entities only reluctantly support national-level institutions. Banking reform accelerated in 2001 as all the Communist-era payments bureaus were shut down; foreign banks, primarily from Western Europe, now control most of the banking sector. A sizeable current account deficit and high unemployment rate remain the two most serious economic problems. The country receives substantial amounts of reconstruction assistance and humanitarian aid from the international community but will have to prepare for an era of declining assistance.
The centrally planned economy has resulted in some legacies in the economy. Industry is greatly overstaffed, reflecting the rigidity of the planned economy. Under Josip Broz Tito, military industries were pushed in the republic; Bosnia hosted a large share of Yugoslavia's defence plants for military reasons - Bosnia was in the center of former Yugoslavia.
Three years of War (1992-1995) destroyed the economy and infrastructure in Bosnia, causing unemployment to soar, as well as causing the death of about 100,000 people and displacing half of the population.
Bosnia has been facing a dual challenge: not only must the nation recover from the war, but it also has to finish the transition from socialism to capitalism.
With an uneasy peace in place, output recovered in 1996-98 at high percentage rates on a low base; but output growth slowed appreciably in 1999, and GDP remains far below the 1990 level.
Economic data are of limited use because, although both entities issue figures, national-level statistics are not available. Moreover, official data do not capture the large share of activity that occurs on the black market. The Grey market is a notable source of income for Bosnian traders.
A Central Bank of Bosnia and Herzegovina was established in late 1997, successful debt negotiations were held with the London Club in December 1997 and with the Paris Club in October 1998, and a new currency, the Bosnia and Herzegovina convertible mark, was introduced in mid-1998. In 1999, the Convertible Mark gained wider acceptance, and the Central Bank dramatically increased its reserve holdings.
Due to Bosnia's strict currency board regime, inflation has remained low in the entire country.
The country receives substantial amounts of reconstruction assistance and humanitarian aid from the international community. Support for Eastern European Democracy (SEED) assistance accounts for 20%-25% of economic growth in Bosnia.
However, growth has been uneven throughout the post-war period, with the Federation outpacing the RS. According to World Bank estimates, GDP growth was 62% in the Federation and 25% in the RS in 1996, 35% in the Federation and flat in the RS in 1997, and continued growth in the Federation in 1998.
Movement has been slow, but considerable progress has been made in economic reform since peace was re-established in the republic. Banking reform lagged, as did the implementation of privatization. Many companies (mainly factories) that were privatized faced massive problems, causing the owners to reduce salaries and deny the workers their salaries. Combined with persistent inter-ethnic problems in the country, for many workers this meant that they had a useless job, getting paid perhaps after two three or even six months late only for one month, but one which they clung on to. They don't want to leave the job because they think someone from another nationality will then get it. The privatized factories are now owned mostly by Germans and foreigners, who used webcams to monitor the workers. One example of all this is the Alloy factory in Jajce which produces wheels for cars, sold in Germany or other EU members.
The tourism sector has been recovering and helping the economy altogether in the process, with popular winter skiing destinations as well as summer countryside tourism. An estimated 500,000 tourists visit Bosnia and Herzegovina every year and contribute much of the foreign currency in the country. Of particular note is the diaspora population which often returns home during the summer months, bringing in an increase in retail sales and food service industry.
Political corruption is one of the more acute problems in Bosnia and Herzegovina, and the main one that accounts for low amount of tax money used for the population, due to government inefficiency and corruption, especially at the lowest levels.
Bosnia has been preparing for an era of declining international assistance. Bosnia's most immediate task remains economic revitalization to create jobs and income. In order to do this the workers need to form unions and demand their payment or similar. The owners need to pay the salaries all months the full salary agreed upon.
The Bosnian government plans to issue an international tender for the construction of the 350 km long Corridor 5c in Bosnia and Herzegovina which will passes along the route Budapest-Osijek-Sarajevo-Ploče. The highway along this corridor is the most significant roadway in B&H and the shortest communication route between Middle Europe and the Adriatic. The routing of the road passes through the central part of the country in the North-South direction from Donji Svilaj to the border of B&H, north from the Croatian port of Ploce, following the rivers Bosna and Neretva. More than 50% of the total population and the economic activity of Bosnia and Herzegovina lies within the zone of influence along this route.
Project documentation for that highway is ready, so in January 2006, the Bosnian government will issue an international tender for construction of the highway Corridor 5C using a DBFOT system (Design, Build, Finance, Operate, Transfer). Using this system, the concessionaire secures finance, bears all business risks and upon expiration of the concession period, transfers the highway to the state of Bosnia and Herzegovina. The estimated cost for the construction of the highway is 2.5 billion EUR.