Before the war, Bosnia and Herzegovina ranked next to Macedonia as the poorest republic of the former Yugoslav SFR. Although industry accounted for over 50% of GDP, Bosnia and Herzegovina was primarily agricultural. Farms were small and inefficient, thus necessitating food imports. Industry was greatly overstaffed, with Bosnia and Herzegovina accounting for much of the former Yugoslav SFR's metallic ore and coal production. Timber production and textiles also were important.
The destructive impact of the war on the economy led to a 75% drop in GDP. Since the Dayton Accords of 1995, trade increased in Croat areas, and significant growth began in Muslim areas. Reconstruction programs initiated by the international community financed the construction of infrastructure and provided loans to the manufacturing sector. External aid amounted to $5 billion between 1995–99. This aid caused growth rates to increase to 30%, but as of 2003, that rate had stabilized to around 6%. Actual GDP growth by that year had reached half its pre-war level.
Privatization has been slow and Western financial organizations are increasing calls for reform in this area, especially in telecommunications and energy. (The private sector accounts for only 35% of the economy.) Foreign direct investment remains low, due in part to corruption and many layers of bureaucracy. Tax reform is needed, as is reform of the banking industry and the financial services sector. In 2002, the government adopted a poverty reduction strategy designed to create more jobs and increase exports. As foreign aid declines in coming years, Bosnia and Herzegovina will need to increase exports to generate hard currency revenues. Some progress was made in this area in 2001 with exports of clothing, furniture, and leather goods.