- Davina Jacobs, and Johannes Herderschee
- Dimitri Demekas
- Published Date:
- April 2002
Estimates of GDP and the balance of payments use earlier IMF staff work for 2000, 8 as well as newly available information, and are extended into 2001. Given the scarcity of data, these GDP estimates are compiled using the expenditure approach, based on partial information and some educated guesswork. The main data sources and assumptions underlying the estimates are as follows:
• The estimate of private consumption in 2000 is based on a household survey conducted by the World Bank.9 The survey yields a private consumption estimate of DM 3 billion. As the study acknowledges, consumption is underestimated for two reasons: certain items are not included (particularly consumption of housing services); and survey data are systematically lower than consumption estimates for national accounts purposes. To take these factors into account, the World Bank estimate for 2000 is adjusted upward by 15 percent. For 2001, the consumption deflator was estimated to be 8 percent and real consumption growth was estimated to be 5 percent. This conservative assumption reflects the hypothesis that the main source of GDP growth in 2000 and especially in 2001 was investment, and it may well be an underestimate of private consumption.
Estimates of public consumption for 2000 and 2001 are based on data from the Kosovo consolidated budget and, as such, are relatively reliable.
Public investment includes all donor-financed projects managed by UNMIK’s Department of Reconstruction, as well as a small amount of capital spending (estimated at 5 percent of the total) from the Kosovo consolidated budget.
The significant construction efforts observed in Pristina and elsewhere in Kosovo suggest that there is substantial private investment. However, there are no reliable estimates of the value of total private investment. IMF staff estimates are based on the assumption that private investment was equivalent to about 40 percent of public investment. For 2000, this amount is augmented by DM 110 million and for 2001 by DM 120 million, which is approximately two-and-a-half times the amount of bank lending in Kosovo.
Merchandise exports consist of cross-border exports and sales to the expatriate nonresident community. Cross-border exports are estimated on the basis of discussions with the Customs Department and information on the activities of selected companies made available by the CFA. On this basis, cross-border exports are estimated at DM 9.5 million in 2000 and DM 25 million in 2001. Sales to the nonresident expatriate community are estimated at DM 300 per civilian and DM 100 per military staff in 2000 and DM 500 per civilian and DM 200 per military staff in 2001.
As regards services exports, it is assumed that the average expatriate civilian spent some DM 12,000 on housing, plus some DM 3,000 in 2000 and DM 8,000 in 2001 on other locally produced services. The average expatriate military staff is assumed to have purchased local services of some DM 200 in 2000 and DM 600 in 2001.
Merchandise import estimates are based on data for energy imports, humanitarian assistance, and the public investment program, as well as actual customs data for 2000 and January-June 2001. It is assumed that in 2000, 50 percent of public investments consisted of imports, a figure that declined to 45 percent in 2001. For 2001, the customs data are adjusted upwards by 22 percent. This adjustment reflects imports from Serbia across the administrative boundary line, which are not recorded in customs statistics, and is based on the share of Serbian imports to total sales tax receipts. In addition, import figures are increased by an arbitrary factor to capture the extent of smuggling, as well as the magnitude on imports by KFOR and nongovernmental organizations, which are not reported. This factor is assumed to be 60 percent in 2000 and 45 percent in 2001, the latter reflecting improvements in compliance. Finally, import projections for the second half of 2001 assume a nominal growth of some 45 percent compared to the first half of the year to take account of the rapid GDP growth and the expanded coverage of customs statistics. On the basis of these estimates, import growth in 2001 was 19 percent.
Services imports are assumed to be equivalent to 15 percent of private investment and 25 percent of public investment, as well as 1 percent of private consumption.
The estimates of factor income, private transfers, and direct investment from abroad are based on the assumption that in 2000 a total of some 200,000 Kosovars living abroad transferred an average of some DM 5,000 back to Kosovo. This assumption is based on anecdotal information provided by UNMIK staff and is slightly lower than World Bank estimates. Of this amount, it is assumed that three-quarters was private unrequited transfers and the rest remittances (DM 150 million) and foreign direct investment (DM 100 million). In 2001, private transfers were projected to increase by DM 100 million, factor income by DM 150 million, and foreign investment by DM 50 million.
On this basis, the current account shows a small surplus of some DM 5 million in 2000. BPK data provide some information on net foreign assets of the banking system, on the basis of which it is estimated that net bank reserves increased by DM 205 million, roughly half of which were financed by surpluses on the current and capital accounts. This leaves a residual DM 100 million of errors and omissions in 2000. For 2001, a similar calculation yields an increase in net bank reserves of DM 224 million and errors and omissions equivalent to DM 243 million. The large amount of errors and omissions largely reflect deutsche mark that were previously held in cash and are progressively being deposited in the banking system.
Corker, Rehm, and Kostiel, Macroeconomic Issues and Fiscal Sustainability.
World Bank, Poverty Assessment, Kosovo.
Current Tax System and Performance
Kosovo has made considerable progress in building a sound tax system and tax administration. The latter, in particular, had to be rebuilt from scratch because staff, records, and infrastructure had been dispersed, looted, or destroyed. Today, Kosovo has a basic functioning tax system that collects revenue mainly from imports and some domestic sources. The main sources of tax revenue are the following:
Imports are subject to a 10 percent uniform customs tariff, with the exception of agricultural and medical products and humanitarian goods.10
Since July 1, 2001, a value-added tax at 15 percent replaced the sales tax previously paid by importers. The VAT also applies to domestic taxpayers, but the high turnover threshold (DM 200,000 annually) and widespread tax evasion limit its efficacy.
Excise taxes were mostly levied on an ad valorem basis. The rates varied between 10 percent on soft drinks, 20-50 percent on alcoholic beverages, and 25 percent on tobacco. In October 2000, ad valorem rates on several categories of excisable goods (alcohol, tobacco, and fuel) were switched to specific rates. An increase in the excise tax rate for fuel of 5 pfennig each quarter was introduced on January 1, 2001.
A presumptive tax on businesses is levied at a rate of 3 percent of gross receipts in excess of DM 15,000 per quarter.
Custom duties, excise and sales taxes, and a large share of VAT are collected only at the borders. This reliance on border taxes makes revenue collection in Kosovo vulnerable to border disturbances, as illustrated by incidents involving the setting of a boundary line with Serbia and the temporary closure of the border with the former Yugoslav Republic of Macedonia in 2001.
In addition to these sources of tax revenue, the budget also collects vehicle registration fees and a few other small amounts in the form of charges and user fees.
Overall, revenue performance in Kosovo improved significantly in 2001, largely owing to rapid growth but also because of improved tax collection at the borders. The introduction of the VAT in July has proved successful, and the removal of certain exemptions on food has also contributed to higher performance. The quarterly increase of 5 pfennig per liter in petrol excise taxes boosted tax revenue even further.
Compliance with existing domestic taxes is currently very low. Recent estimates by the CFA have shown that the level of compliance is around 35-50 percent. There are also very strong indications that many products, notably fuel and cigarettes, are smuggled into Kosovo. After the full range of new taxes is implemented, it will be possible to shift resources from implementation to compliance.
Future Tax Policy and Administration Reforms
The following tax reforms are in the pipeline, subject to approval of the necessary regulations:
the wage withholding tax, to be implemented in 2002 at the following proposed monthly rates:
DM 1-100: zero
DM 101-500: 5 percent
DM 501 and higher: 10 percent
a profit tax at a rate of 20 percent on business profits, to be implemented at the start of 2002,
that will replace the current presumptive tax for the larger enterprises
an income tax, to be introduced in 2003, that would be levied on all sources of personal income, which includes income from labor, interest, rents, pensions, and social transfers
a lowering of the VAT threshold to DM 100,000 in July 2002 from DM 200,000
a reduction in the customs tariff in July 2002.
Proposals for several other taxes are under consideration, such as lottery or gambling taxes and a motor vehicle property tax.
Customs tariffs are not levied on goods originating in the Federal Republic of Yugoslavia, because it is not a foreign country. Also, imports from the former Yugoslav Republic of Macedonia, with which the Federal Republic of Yugoslavia has a free trade agreement, are subject only to the 1 percent administrative fee levied on all imports.