Abstract

The United Nations has been in charge of administering Kosovo since the end of the conflict that took place in March-June 1999. The UN’s mandate comes from Security Council Resolution 1244 (SC1244), which gives the provisional authorities (the UN Mission in Kosovo, or UNMIK) powers to pass regulations that override Yugoslav law. Although local Kosovars are consulted closely in the decision-making process, there is no recognized indigenous government. However, municipal elections in October provided a democratic foundation for local administrative structures.

The United Nations has been in charge of administering Kosovo since the end of the conflict that took place in March-June 1999. The UN’s mandate comes from Security Council Resolution 1244 (SC1244), which gives the provisional authorities (the UN Mission in Kosovo, or UNMIK) powers to pass regulations that override Yugoslav law. Although local Kosovars are consulted closely in the decision-making process, there is no recognized indigenous government. However, municipal elections in October provided a democratic foundation for local administrative structures.

Policy decisions are guided by the assumption that Kosovo will continue to enjoy considerable autonomy in the future. Nonetheless, lack of clarity about Kosovo’s political future complicates the establishment of property rights and narrows policy and institutional options. Economic development is adversely affected by this uncertainty.

Although prewar statistics on the economy are incomplete and unreliable, they paint a picture of an economy that was already in serious decline. Per capita GDP was estimated to be low even by the standards of southeast Europe, and unemployment was very high, particularly among the disenfranchised ethnic Albanian majority. Low-productivity agriculture accounted for about 30 percent of output and the dominant means of employment. Mining and metals processing were other important activities, but they were starved of investment, and production techniques were outdated. More generally, Kosovo’s infrastructure was showing the signs of serious neglect and underinvestment.

The economy had also yet to embark on transition to a market economy. Although agricultural land was for the most part privately owned, industry was state or socially owned (the Yugoslav form of worker ownership). Banks tended to direct lending according to political considerations, as opposed to profit motives, and were essentially insolvent. Jobs in the public sector, including key jobs in the industrial sector, were typically reserved for the ethnic Serbian minority, which made up only about one-tenth of the population of roughly 2 million. The majority ethnic Albanians, meanwhile, engaged in extensive gray economy activities and operated separate health, education, and social benefit systems funded through parallel taxes and remittances from the diaspora.

The war provided a further setback to output and the quality and capacity of the infrastructure. Damage to the housing stock was particularly extensive, but the main utilities (power, telecommunications) also suffered considerable damage, as did some of the already dubiously viable industrial concerns. Massive, but for the most part temporary, population flight during the conflict led to the missing of planting seasons in 1999 and the disruption of commerce. The subsequent departure of a large proportion of the ethnic Serbian population left the province with a severe shortage of qualified or experienced workers.

Recovery is well under way, led by a donor-financed reconstruction boom. Shortly after the end of the conflict, donor funds were mobilized to help reactivate the agricultural sector, begin the repair of housing and the utilities, and support incomes through humanitarian assistance. These efforts went hand-in-hand with assistance to set up a rudimentary payments system (Box 1) and to establish budgetary functions and controls. A n early decision to legalize the use of the deutsche mark, which quickly became the currency of choice, helped to ensure price stability. So far, disbursements for reconstruction are estimated to have amounted to about US$0.5 billion, and there is at least the same amount in the pipeline established at a donor conference in November 1999.

How far the economy has recovered is difficult to gauge at this stage. By the second half of 2000, agricultural production was estimated to have reached about three-fourths of its preconflict level, construction activity was at a very high level, and some trade-related private services (hotels, restaurants, and retail) were blossoming on the back of aid flows and private remittances from abroad. Industry, however, remained depressed.

Preliminary IMF staff estimates put the level of per capita GDP in 2000 in the range $650-$850 (see Appendix I). The structure of expenditure is highly distorted, with consumption (public plus private) estimated at about 145 percent of GDP and imports over 80 percent of GDP (Table 1). Total investment is also sizable—about 40 percent of GDP—reflecting mainly donor-financed reconstruction. Exports are, to a first approximation, zero. The estimated per capita GDP is below the level in other regional postconflict countries: in Albania, per capita GDP is about $1,000, and in Bosnia and Herzegovina it is about $1,100. Kosovo per capita GDP would be only about half the level in Bulgaria, the former Yugoslav Republic of Macedonia, and Romania and well below levels in the more advanced transition economies of central and eastern Europe. The level of national income in Kosovo would greatly exceed GDP because of the sizable humanitarian aid and private remittances. These transfers bridge the wide trade deficit.

Banking and Payments System

After the conflict, commercial banking operations in Kosovo effectively ceased, and transactions through the local payment bureau system dwindled to a negligible level. To facilitate the modernization and development of payment services and a commercial banking system, two regulations were passed in November 1999, establishing the Banking and Payments Authority of Kosovo (BPK) and legislation for bank licensing, regulation, and supervision. The BPK was assigned responsibility for fostering an efficient and safe system for domestic payments; and the liquidity, solvency, and efficient functioning of a stable market-based banking system.

In keeping with this, the BPK licenses and supervises all banks and nonbank financial institutions operating in Kosovo; maintains a stock of deutsche mark and Yugoslav dinar banknotes and coins; and provides depository and payment services in deutsche mark until sufficient capacity has been developed within the commercial banking system. The overall plan calls for commercial banks in Kosovo to eventually provide payment services cleared through a local clearinghouse and settled on the books of the BPK (deutsche mark transactions) and the National Bank of Yugoslavia (Yugoslav dinar transactions). As soon as sufficient capacity exists within the banking system, teller operations currently performed by the BPK for the authorities in Kosovo will be shifted to commercial banks, and BPK branches and subbranches will be closed.

For now, as the government’s bank, the BPK accepts deposits from UNMIK and other official agencies and makes payments on instructions from the Central Fiscal Authority (CFA) and other depositors. All deposits in the BPK have been in the form of cash. Other than holding some cash for safekeeping, the BPK has not at this stage been offering deposit and payments services to enterprises, in order to prevent the BPK from competing with or undercutting the development of the nascent banking sector.

Licensing procedures cover three types of commercial banks: banks with a minimum capital of DM 1 million are allowed to take in deposits in a single currency and provide collection and payments services; banks wishing to make commercial or consumer loans are required to have minimum capital of DM 3 million; banks engaged in underwriting, dealing in debt or equity securities, or providing portfolio management services are required to have at least DM 5 million in capital.

The banking system nevertheless remains extremely thin. At end-2000, the commercial banking system consisted of only one institution (Micro Enterprise Bank), which is partially capitalized by the European Bank for Reconstruction and Development (EBRD). It operates five branches and has taken in about DM 170 million in deposits. So far, most of these deposits have been invested abroad, with lending in Kosovo amounting to about DM 5 million. License applications have been received from seven other would-be banks. However, most of these institutions have encountered major problems in raising the necessary capital, and in some cases the owners do not satisfy background requirements laid out under the licensing regulation.

Table 1.

GDP, National Income, and Balance of Payments, 2000

article image
source: Central Fiscal Authority (CFA); UNMIK Departments; Food and Agriculture Organization (FAO); and IMF staff estimates.

Includes budgetary assistance, off-budget financing, support for electricity imports, and change in cash balances of CFA.

Macroeconomic policy instruments and options are extremely limited. As a result of the decision to legitimize the use of the deutsche mark and other foreign currencies, there is no independent monetary or exchange rate policy. The dinar remains legal tender and is accepted for paying taxes, customs duties, utility charges, and other compulsory payments. But in practice it has all but vanished as a medium for transactions. A prohibition on public borrowing ensures that the budget has to be balanced.

Macroeconomic Issues and Fiscal Sustainability