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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
Achieved results in referred period:
Year
1998
1999
2000
2001
2002
2003
2004
2005
7,2
8,9
10,0
10,9
11,6
12,3
13,4
14,7*
Retail price
growth (%)
13.8
3.7
4.8
3.1
0.4
0.6
0.4
3.6
Foreign reserves in
KM millions
283
866
1021
2696
2464
2781
3457
4195
Foreign reserves in
months of goods
0.5
1.4
1.5
3.6
3.2
3.4
4.0
4.2
-5,482 -6,052
-5,868
-6,470 -6,892
-7,255
-7,193
-7,833
Nominal GDP
in KM billions
Trade deficit in
KM millions
Estimate CBBH*
Current account deficit
Product groups participation in trade deficit for the first twelve months
Tobacco and manufactured tobacco substitutes
Paper & paperboard
Miscellaneous edible preparations
Cereals
Beverages, spirits and vinegar
Pharmaceutical products
Plastics and articles thereof
Electric machinery
Vehicles (not railway, tramway, rolling stock)
Machinery and mechanical appliances
Mineral fuels, mineral oils
0%
2%
4% 6% 8% 10% 12% 14% 16%
2005 2004 2003
Current account deficit
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
Current account deficit financing (in GDP %)
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
13%
6%
3%
2000
2001
2002
2003
2004
2005
-21%
-22%
-8%
-15%
-21%
Current Account
FDI
-23%
Other investment
NEO
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
1200
1000
800
600
400
200
0
2002
2003
2004
Direct investment
2005
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.