Economic growth has been weak but some progress has been made on policies. Only minimal growth has been recorded over the past year. Following the finalisation of the state and entity budgets, progress was made towards re-engaging with the IMF, culminating in the signing of a new programme. " Private sector involvement in the road sector is advancing. A tender for a public-private partnership (PPP) in the transport sector based on best international practice has been announced for a concession of a section of a key international transport corridor in Republika Srpska. " Non-performing loans (NPLs) are rising in the banking sector, but liquidity remains sound. The level of NPLs still remains below that of some regional peers and the direct impact of the international financial crisis on the local banking sector has been limited so far. 
KEY PRIORITIES FOR 2013 ? Further progress is needed on EU approximation. Bosnia and Herzegovina is the only SEE country that has not yet submitted an application for EU membership. Key priorities include political reforms, boosting competitiveness, reforming the social benefits system and improving the countrys infrastructure. " Some basic investment climate reforms should be introduced. The countrys persistently low scores on many cross-country indicators suggest there is a lack of consensus on the need for deep economic reforms, as well as plenty of scope for improvements in areas such as licences and permits, and enforcement of contracts. " Major reforms are needed in the energy sector. Bosnia and Herzegovina has significant potential in renewables, but the legal and institutional framework for sustainable energy remains weak. 
MACROECONOMIC PERFORMANCE Weak domestic demand, an unfavourable external environment and political stalemate have held back economic recovery. Following a year of anaemic growth in 2010, the economy showed some signs of revival in early 2011. However, weaker growth in the eurozone has negatively affected Bosnia and Herzegovinas exporting activity and capital inflows in the second half of the year and the beginning of 2012. Exports fell by 8.6 per cent between Q2 and Q4 of 2011. At the same time, domestic consumption has remained subdued, largely owing to the austerity measures implemented by the authorities in the past two years as well as the weakened contribution from remittances, which are significantly below pre-crisis levels. As a result, overall growth in 2011 was a modest 1.3 per cent. Inflation remains low. The disinflationary pressures that dominated much of the post-crisis period were reversed for a brief interval in early 2012, but inflation has been on a generally downward path since, and it stood at 1.8 per cent in August 2012. A new Stand-By Arrangement (SBA) with the IMF was approved in September 2012. The 24-month US$ 520.6 million SBA will provide a buffer against external shocks from the ongoing eurozone crisis as well as an anchor for important structural reforms envisioned in the country's 2012-14 economic programme. The new arrangement follows the expiration of a 36-month SBA, which was put on hold in 2011 due to the political stalemate that left the country without a central government for over 15 months after the October 2010 elections. The authorities are planning a budget deficit of 3 per cent of projected GDP in 2012. The economic programme envisages continued fiscal consolidation accompanied by structural fiscal reforms to safeguard medium-term fiscal sustainability. The economic outlook for 2012 and 2013 remains bleak. The weak external and domestic environment will constrain growth in Bosnia and Herzegovina this year and beyond. GDP growth is forecast at close to zero per cent in 2012 and only slightly higher in 2013. The economy remains vulnerable on many fronts, not only because the whole region is struggling but also because the internal complexity of the countrys political structure and the poor investment climate are major deterrents to investment. 
Source: bne