Bosnia: Oil Deal Bolsters Economy

A New Year harmonisation of oil prices across Bosnia-Herzegovina could prove to be a major step towards building prosperity from the ravages of a war which left the country one of the poorest in Europe.

Under international pressure, Bosnian authorities signed an agreement on November 7 to set uniform fuel taxes. The two entities, Republika Srpska, RS, and the Federation, implemented the plan by the end of December, and Brcko, a separate administrative district in the north of the country, followed suit on January 1.

Analysts believe the harmonisation will bring great economic benefits to a country plagued by feuding warlords and corrupt politicians and businessmen.

"Lack of a unified market in Bosnia-Herzegovina played a major part in hampering economic development," said Renzo Davidi, the leading EC legal and economic expert in the country

While living standards in Bosnia-Herzegovina improved after the war, the entities reluctance to cooperate on a whole host of issues, from trade and population movement, have impeded the transition to a market economy.

Although Bosnia has no oil of its own, the petroluem industry played a large part in its economic and social development. About 15 per cent of total budget revenue comes from various taxes on fuel.

Huge amounts of revenue are lost each year through oil-related corruption, fraud and smuggling. Legally or illegally, the petroleum business brings aprroximately one hundred million konvertible marks to state-owned and private importers.

Before the war, oil was imported and refined at the Bosanski Brod refinery from where it was distributed all over the country. At that time, the greatest share of the fuel market was held by the Sarajevo-based Energopetrol company. The two second largest companies were INA, Croatia, and Yugopetrol, Serbia.

The war almost completely destroyed the Bosanski Brod refinery. Afterwards, the fuel market divided along ethnic lines. The Energopetrol company split in two with one branch controlling the market in Bosniak- (Bosnian Muslim) dominated territory and the other dominating Bosnian Serb areas. INA BiH held sway in Bosnian Croat territory.

Post-war legislation enabled the three companies to retain dominant positions. Top management in each was appointed by ruling nationalist parties who used the businesses to achieve personal profits and political goals.

Under international and local pressure, the entities started slowly liberalising import rules for oil derivatives. Small private oil companies began to grow. However, this also increased smuggling and tax-avoidance. As a result, a monopoly was replaced by confusion and chaos. The situation was further complicated by the Brcko district setting up its own tax and customs levels.

The rivalry brought a series of small oil wars. The latest one, at the end of October, blew up when the RS government reduced the road maintenance tax that used to be contained in the final retail fuel price. The aim was to divert trade away from Brcko which until then had the lowest oil prices.

This move brought a new inflow of customers and budget revenue into the RS. But the Federation and Brcko responded by cutting their own taxes even more. The result was that customers paid much less for their fuel but budgetary income plunged by tens of millions of marks.

The price war significantly jeopardised Bosnia-Herzegovina's stand-by credit arrangement with the International Monetary Fund, which required proper budgetary discipline, and prompted the international community to intervene.

Haris Abaspahic works for the Sarajevo Economic Regional Development Agency.