Coal remains a major energy source in Bosnia and Herzegovina. To make progress in reducing Bosnia and Herzegovina’s greenhouse gas emissions, significant efforts are needed in the energy sector. The objective of this study was to better understand development financing, by analyzing financial flows from 2008 to 2020 in five Western Balkan countries: Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia.
Key takeaways
Status quo financing structures will not allow these countries to decarbonize their societies. The study found that financial flows for energy development were minimal compared to average annual gross domestic product (GDP), varying from 0.15% to 0.62% across countries. This funding is insufficient for a green and just transition. In its nationally determined contribution, Bosnia and Herzegovina said it would need 14 times more funding – around $9.3 billion – by 2030, compared to the $680 million spent by 2008 to 2020.
Bosnia and Herzegovina received the largest proportion of funding for non-renewable sources. This is a trend that has persisted even after the adoption of the Paris Agreement. For Bosnia and Herzegovina, this represented 33% of total funding flows. The main financiers of non-renewable energy were Japan, Germany and European institutions. Even if the study does not analyze the motivations for these investments, they are linked to the interests of donors and the priorities of countries. However, compared to Bosnia and Herzegovina’s average annual GDP of less than 0.3%, these results are less significant.
Much of the investment has been directed towards obsolete energy supply infrastructure. Around 24% of all financial flows, or $798 million, were allocated to energy distribution and transmission infrastructure in the countries studied. Modernizing grid systems is essential to meet growing energy demand.
Additional debt will only hinder economic development. The study analyzed three financial mechanisms: official development assistance (ODA) loans, ODA grants and other official flows (OOF). ODA loans were the second most common financial instrument, while OOFs were the most widespread. Bosnia and Herzegovina had the highest ODA debt per capita, totaling $457 million, followed by OOF with $140 million and ODA grants with $79 million. Going forward, the complexity of increased dependence on loans will need to be carefully considered as it may hamper development processes.
Globally, some countries are turning to private or blended financing to facilitate their energy transition. However, the study highlights the fragility of such strategies and the importance of taking into account the interests and priorities of donors. In the case of the Western Balkans, there are signs of the EU’s willingness to help these countries in their efforts to join the Union; Germany, the European Bank for Reconstruction and Development (EBRD) and EU institutions, excluding the European Investment Bank, have been the main contributors to financing energy development.
Planning for sustainable funding streams requires more attention
For Western Balkan countries to move towards a decarbonized society, strategic planning by donors and country governments must align with the long-term goals of decarbonizing the energy sector and achieving net zero emissions by 2050, the study indicates. Financing flows must also be coordinated with private sector actors, civil society and other organizations at local and regional levels to effectively finance the energy transition. The study also recommends that future research may be needed to better understand the effectiveness and accountability of development finance.
