Coal remains a major source of energy in Bosnia and Herzegovina. To advance a reduction in Bosnia and Herzegovina’s greenhouse gas emissions, significant efforts in the energy sector are necessary. This study’s purpose was to understand development finance better, analysing financial flows from 2008-2020 in five Western Balkan countries: Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia.

Key takeaways

Business-as-usual funding structures will not enable these countries to decarbonize their societies. The study found financial flows for energy development were minimal compared to the average annual Gross Domestic Product (GDP), varying from 0.15% to 0.62% across the countries. This funding is insufficient for a green and just transition. In its Nationally Determined Contribution, Bosnia and Herzegovina indicated a need for 14 times more funding – approximately USD 9.3 billion – by 2030 compared to the USD 680 million spent from 2008 to 2020.

Bosnia and Herzegovina received the highest proportion of finance for non-renewable sources. This was a trend that persisted even after the adoption of the Paris Agreement. For Bosnia and Herzegovina, this constituted 33% of total funding flows. The primary funders of non-renewables were Japan, Germany and EU institutions. Although the study does not analyse the motivations behind these investments, they relate to the funders’ interests and the countries’ priorities. However, compared to Bosnia and Herzegovina’s average annual GDP, less than 0.3%, these findings are less significant.

A large chunk of investment has been directed towards outdated energy supply infrastructure. Around 24% of all finance flows, equalling USD 798 million, were allocated to the energy distribution and transmission infrastructure across the studied countries. Upgrading the grid systems is essential to cope with the increasing energy demand.

Further indebtedness will only hinder economic development. The study analysed 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 most prevalent. Bosnia and Herzegovina had the highest per capita ODA loan debt, totalling USD 457 million, followed by OOFs at USD 140 million and ODA grants at USD 79 million. Moving forward, the complexity of increased loan dependency should be carefully considered as it can hinder development processes.

Globally, some countries are turning to private or blended finance to aid their energy transitions. However, the study highlights the fragility of such strategies and the importance of being mindful of funders’ vested interest and priorities. In the case of the Western Balkans, there are signs of the EU’s commitment to assist these countries in their endeavours to join the Union; Germany, the European Bank for Reconstruction and Development (EBRD) and EU institutions, excluding the European Investment Bank, were the most significant contributors to energy development finance.

Planning for sustainable funding streams requires more attention

For the Western Balkans countries to move towards a decarbonized society, strategic planning by funders and country governments must align with the long-term goals of decarbonizing the energy sector and achieving net zero emissions by 2050, the study states. Funding streams should also be coordinated with private sector actors, civil society and other organizations at local and regional levels to finance the energy transition effectively. The study also recommends that future research may be necessary to gain a better understanding of the effectiveness and accountability of development finance.