Influence of foreign direct investment on macroeconomic stability Presenter: Governor CBBH: Kemal Kozarić

Content Introduction Current account deficit Foreign direct investment CBBH expectation Conclusion

Introduction There are many preconditions for the growth of one small open economy as it is economy of BH, but some of the main preconditions are: Good business environment Financial stability of the country Stabile exchange rate

Introduction Year Nominal GDP in KM billions 7,2 8,910,010,911,612,313,414,7* Retail price growth (%) Foreign reserves in KM millions Foreign reserves in months of goods Trade deficit in KM millions-5,482-6,052-5,868-6,470-6,892-7,255-7,193-7,833 Achieved results in referred period: Estimate CBBH*

Current account deficit

Important question that has to be raised in a country with high deficit is: How deficit is financed? Balance of payments is a “balance” so by definition, deficit of one component has to be financed by a surplus of some other components. Is deficit sustainable and will a country face an external sector crisis? Currency crisis Foreign debt crisis

Current account deficit Looking ahead: It is difficult to expect that BH economy can only rely on transferes! The item in balance of payments that has the most potential to change rapidly is foreign direct investment. But for BH to attract more foreign direct investment, BH has to build economic environment that will be interesting for domestic investors and by itself it will become interesting for the foreign direct investors too. Government should impose a set of measures that will faster privatization, as well as, impose measures that will enable higher productivity of the private sector, which can contribute to the faster results in increase of export capacities of BH.

Current account deficit In order to improve external trade situation in BH it would be recommended to conduct a detailed micro analyze of goods that have the highest influence on BH import increase by identifying all main trading partners in foreign trade exchange, as well as, their price, quantity and type of imported goods. Improve BH agriculture policy by promoting BH agriculture on international market and especially by solving internal limitations and obstacles for the exports. Special attention should be given to development of export capacities of the country and especially to the component of raw materials which should be protected. Encourage infrastructure development in the field of quality standard certification in accordance with EU rules.

Current account deficit 13% 6% 3% ( in GDP % )

Foreign direct investment By regular survey that CBBH conducts, data for the first nine month of 2005 are recorded. Estimated FDI inflow in 2005 is about KM 470 million.

Foreign direct investment Short analyze highlights the following: In the first nine months of 2005 FDI inflow was reduced by 36.9% Total inflow of foreign investment was reduced by 31.7% Highest value of FDI is in amount of KM 117 million which is investment capital from Austria. Investors which invested more in 2005 compared to 2004 are: Slovenia, Turky and USA. Regarding the sectorial structure the highest investment were recorded in banking sector 50% and manufacturing sector 42% out of total FDI. Highest outflow, out of total FDI, was recorded in tourism sector (-9%), trade sector (-9%) and nonbanking sector (-10%)

Foreign direct investment State of foreign investments : Is a separate statistical category and it does not represent a sum of all previous flows, but also other changes such as exchange rate differentials, accounting changes, etc. Foreign investments at the end of 2004 amounted to KM 5.9 billion. Foreign direct investment amount to KM 3.8 billion, and portfolio and other investments to KM 2.1 billion. Out of KM 3.8 billions foreign direct investments more than two thirds, that is 68%, is in the form of owner’s equity, and the rest is in inter-company loans and other forms of investment.

CBBH expectations Presented data are showing that there is a space for investment inflow in BH to come, but in order for investments to come promotion of investment and necessary conditions preparation requires more aggressive approach and the best way is through efficiency in reform scenario implementation. Political stability, economic progress, as well as, country’s image represents the key elements for FDI inflow in single economy. Economic growth can be achieved through intensive development of the real sector of the economy, through efficiency in reform implementation and especially through fiscal reforms and through setting up the conditions for strengthening of the business environment.

CBBH expectations The part that is related to fiscal reforms is mainly related to: Adequate allocation of public revenues Decrease public spending Improve transparency and responsibility in collection and spending of the public revenues Support development of entrepreneurship and encourage growth of the private sector and work on constant decrease of the political risk Establish business environment Strengthening of a single economic space in BH Improve efficiency of the legal system Establish legal and institutional framework for free competition and consumer protection Stimulate regional economic development Increase mobility of the labor force Remove all administrative barriers to domestic and foreign investments

Conclusion There is still a lot of work on which country as a whole needs to work more on its way toward stability. Macroeconomic frame is very important, economic activity has to be measured in details by sectors and the rate of growth, as well as, productivity, competitiveness, real effective exchange rate, transparency etc. Potential of the real sector of the economy has to be used for future development of BH economy. This should be recognized by all levels of the government, as well as, by appropriate institutions which should work together continuously on the implementation of reforms that will lead BH towards a road of a desired development.