Bosnia and Herzegovina’s economic challenge is no longer simply how to preserve stability. It is how to turn that stability into convergence. The country has demonstrated resilience in a difficult global environment, but resilience has not translated into growth strong enough to close the income gap with the European Union. With growth slowing, fiscal pressures building, and structural weaknesses persisting, the window for relying on short-term policy support is narrowing.
The IMF’s latest Article IV assessment for 2026 underscores a clear message: preserving stability will require deeper and more sustained reforms than those undertaken so far. The country will need to tighten fiscal policy credibly and improve the efficiency of public spending. At the same time, it must strengthen competitiveness and accelerate structural transformation if growth is to become both stronger and more durable.
Recent economic trends highlight a gradual loss of momentum. After expanding by 3.2% in 2024, real GDP growth eased to 2.1% in 2025 and is expected to slow further to around 2% in 2026. This moderation reflects a combination of weaker external demand, elevated energy costs, and geopolitical disruptions, including tensions in the Middle East, which have weighed on trade flows. While domestic consumption and government support have helped cushion the slowdown, they have not been sufficient to offset external pressures. Over the medium term, growth is projected to recover toward 3%, but this remains below what is typically required for meaningful convergence with EU income levels.
Slower growth is not Bosnia and Herzegovina’s only concern. Inflationary pressures are returning at precisely the moment when fiscal space is becoming more constrained. Price growth is expected to accelerate to 5.4% in 2026, up from 4% in 2025, largely driven by higher fuel costs and expansionary fiscal measures. At the same time, external imbalances are widening, with the current account deficit projected to increase from 3.2% of GDP in 2025 to 4.9% in 2026. This deterioration reflects both rising energy import costs and persistently weak export performance. Together, these developments underline the economy’s exposure to external shocks and its limited progress in strengthening export competitiveness.
These pressures are converging most visibly in fiscal policy. Since 2022, public spending has expanded significantly, particularly through increases in wages and broadly distributed social transfers that are not always well targeted. While these measures have supported short-term demand, they have also weakened the overall quality of fiscal policy. As a result, the fiscal deficit is projected to reach 4 percent of GDP in 2026, while public debt is projected to rise from 29.4 percent in 2025 to 32 percent in 2026, with further increases expected over the medium term. Without corrective action, fiscal space risks becoming increasingly constrained, limiting the government’s ability to support productive investment.
Against this backdrop, the IMF stresses the importance of beginning fiscal consolidation no later than 2027. However, the emphasis is not simply on reducing spending, but on improving its structure and effectiveness. This would involve better targeting of social benefits, rationalising the public wage bill, and strengthening revenue collection through a broader tax base and more efficient administration. Fiscal transparency will also be critical. Together, these measures would help reduce budgetary pressures while creating room for higher-quality public investment that supports long-term growth.
Fiscal pressures are not the only risks building beneath the surface. The financial system remains resilient, but rapid credit expansion and rising property prices are creating new vulnerabilities. Banks remain well capitalised, liquid, and profitable, which provides an important buffer against shocks. However, rapid expansion in consumer credit—particularly unsecured lending—and rising property prices are beginning to raise concerns. In response, the IMF encourages a shift away from ad hoc policy responses toward a more structured macroprudential framework. This includes stronger stress testing, improved crisis preparedness, and better coordination among financial regulators to ensure risks are identified and managed early.
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