Role and position of micro-businesses in BiH in the light of COVID-19 pandemic

Wednesday, September 30, 2020

COVID-19 crisis has had a tremendous economic impact in Bosnia and Herzegovina (BH). It is estimated that the country will enter a recession of 5%, which implies a number of negative economic indicators – decrease in exports, rise of unemployment and possible rise of interest rates, budget instability and the like. Of particular concern is the rise of unemployment and decrease in BH diaspora support, which is very important for the BH economy. COVID-19 has mainly endangered the service sector, i.e. all businesses that depend on the so-called "moment of truth" – the direct contact with customers. There are many micro-enterprises and crafts operating within the service sector, while freelancers are mainly exposed to the crisis due to the decrease in global demand for their services (exports).

So far, the main support for the BH economy was coming from the BH entities in the form of the so-called “corona” laws. In the Federation of BiH (FBH), it was a comprehensive law, passed relatively late in May 2020, while in the Republika Srpska entity (RS) there were series of regulations that were dealing with individual problems caused by COVID-19. The greatest importance of these laws refers to the stabilization of the economy, through financing of a certain amount of contributions on salaries and net salary (from the cantonal level in FBH) for business enterprises that were blocked or that experienced an exceptional decline in revenues.

In addition, special guarantee funds were established, which yet have to be utilized by the businesses. A special type of measures refer to the support of the financial sector, in the form of a moratorium on loans. The moratorium was not mandatory, but a great number of banking and microcredit services clients were given the opportunity to use it. This partially alleviated the liquidity problem, especially of micro-businesses (individuals were the dominant beneficiaries of these measures). Freelancers and other representatives of the informal economy have not been the subject of direct support from various levels of governments in BH. Although individuals engaged in self-employment and crafts are covered by the existing measures, freelancers and other representatives of the informal economy are not.

In underdeveloped “transition” economies such as the BH economy, which is characterized with an unfavorable business environment, inadequately defined legislative framework and modest business financing opportunities, micro-enterprises face a number of specific obstacles, largely caused by poor economic policies that hinder their development since they overlook their optimal potential. As the external sources of funding are generally less available to micro-enterprises, their representatives generally have less access to policy makers and decision-makers, or have less public, social or political influence, which makes them even more vulnerable in times of economic crisis.

The dramatic general decline in economic activity around the world that marked the 2020 has been the main argument for this research with an aim to determine the importance of micro-enterprises and self-employed people for the BH economy and to assess their capacity to cope with short- and medium-term economic consequences of the COVID-19 pandemic. The decline in economic activity caused by the pandemic was most severely experienced by the companies in tourism and service sectors, where micro-enterprises and the self-employed are the dominant actors. Finally, having in mind the previously mentioned share of micro-enterprises in the total economic activity of a national economy, the loss of jobs and businesses in this sector will inevitably affect the wider socio-economic situation in BH.

In the light of the current challenges induced by the economic crisis caused by the COVID-19 pandemic, and in order to strengthen the long-term position and status of micro-enterprises and self-employed people in BH, this study examines several key aspects of problems faced by entrepreneurs and employees based on:

  • assessment of their participation in the economy,
  • estimation of the number of formally and informally employed people,
  • analyzes of the legal status of formally operating entities, and
  • circumstances that obstruct their development and discourage persons in the informal sector from initiating formal businesses.

Executive summary is available HERE.

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