KEY ISSUES Context: Following a six-month political stalemate, the largest two parties reached an agreement in December to form a grand coalition, which enjoys a comfortable majority in parliament. The remittances-fueled growth is set to continue in the near term, but deep challenges remain in view of Kosovo’s narrow export and productive base, low employment ratios, and incomes that are among the lowest in Europe. Fiscal Policy: Following very generous pre-electoral promises, gradual fiscal adjustment is required to preserve the credibility of the fiscal rule and safeguard low public debt levels. Measures should focus on arresting the rapid growth in unproductive current spending, so as to reduce the deficit while creating space for priority areas such as infrastructure, education, and health. Financial Sector: The banking sector has remained well-capitalized, liquid, and profitable. Good progress has been made in enhancing banking supervision as well as the Emergency Liquidity Assistance (ELA) framework. Given low credit penetration, the main challenge is to harness available liquidity so that banks can further support investment and growth: this will require improvements in the weak judiciary, as well as tackling the sizable informal economy. Structural Issues: The key structural challenge is to address the large wage and non- wage competitiveness gap. Gradually deflating high public sector wages will help with the former. As for the latter, the focus should be on tackling the large skills gap by enhancing educational quality—particularly vocational training—and complementing de jure improvements in the business environment with de facto progress. Upgrading energy infrastructure, including a new power plant, is important to avert a future energy crisis. Previous IMF advice: Implementation of Fund advice remained strong throughout the Stand-By Arrangement, which expired in December 2013. However, measures contrary to the spirit of the arrangement were taken immediately after the program’s expiry. This is the first Article IV consultation since July 2013.

Abstract

KEY ISSUES Context: Following a six-month political stalemate, the largest two parties reached an agreement in December to form a grand coalition, which enjoys a comfortable majority in parliament. The remittances-fueled growth is set to continue in the near term, but deep challenges remain in view of Kosovo’s narrow export and productive base, low employment ratios, and incomes that are among the lowest in Europe. Fiscal Policy: Following very generous pre-electoral promises, gradual fiscal adjustment is required to preserve the credibility of the fiscal rule and safeguard low public debt levels. Measures should focus on arresting the rapid growth in unproductive current spending, so as to reduce the deficit while creating space for priority areas such as infrastructure, education, and health. Financial Sector: The banking sector has remained well-capitalized, liquid, and profitable. Good progress has been made in enhancing banking supervision as well as the Emergency Liquidity Assistance (ELA) framework. Given low credit penetration, the main challenge is to harness available liquidity so that banks can further support investment and growth: this will require improvements in the weak judiciary, as well as tackling the sizable informal economy. Structural Issues: The key structural challenge is to address the large wage and non- wage competitiveness gap. Gradually deflating high public sector wages will help with the former. As for the latter, the focus should be on tackling the large skills gap by enhancing educational quality—particularly vocational training—and complementing de jure improvements in the business environment with de facto progress. Upgrading energy infrastructure, including a new power plant, is important to avert a future energy crisis. Previous IMF advice: Implementation of Fund advice remained strong throughout the Stand-By Arrangement, which expired in December 2013. However, measures contrary to the spirit of the arrangement were taken immediately after the program’s expiry. This is the first Article IV consultation since July 2013.

Fund Relations

(As of March 31, 2015)

Membership Status:

Joined: June 29, 2009

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans:

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Latest Financial Arrangements:

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Projected Payments to Fund 1

(SDR Million; based on existing use of resources and present holdings of SDRs):

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Implementation of HIPC Initiative: Not Applicable

Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable

Safeguards Assessments

The latest safeguards assessment of the Central Bank of the Republic of Kosovo (CBK) was completed in June 2012. It concluded that the majority of previous safeguards recommendations had been implemented. In particular, Audit Committee oversight has been strengthened and the Internal Audit Department has taken important steps towards full compliance with international standards.

Exchange Arrangements

Kosovo does not issue a currency of its own, but uses the euro as legal means of payment. Kosovo is not part of the euro area and the CBK is not part of the European System of Central Banks. There are no restrictions on payments and transfers for current international transactions, or measures that would give rise to multiple currency practices. Kosovo is an Article XIV member. The authorities are considering whether to accept the obligations under Article VIII, but have yet to reach a decision.

Previous Article IV Consultation

Kosovo was on a 24-month cycle during the previous Stand-By Arrangement. The last Article IV consultation was concluded on July 23, 2013. Going forward, it is expected that Kosovo will be on a 12-month cycle.

FSAP and ROSC Participation

An FSAP mission was conducted during September 19–October 2, 2012. The FSSA included the ROSC for compliance with Basel Core Principles. Kosovo has not had a data or a fiscal transparency ROSC.

Technical Assistance

Since 1999, the Fund has provided technical assistance and policy advice to UNMIK and, since September 2008, to Kosovo. Technical assistance has centered on the Fund’s core competencies, notably in the areas of fiscal policy, the banking and payments systems, and macroeconomic statistics. Assistance has also contributed to developing key aspects of the legal and institutional framework needed for a market economy. More recently, TA has been provided on the following issues:

Real Sector

  • National Accounts Statistics (June, August–September, December 2013; April, September 2014; March 2015)

  • Price Statistics (December 2013)

Fiscal Sector

  • Tax Administration (February, April, October, December 2014; January 2015)

  • Tax Compliance (March 2014)

  • Government Finance Statistics (December 2014)

Monetary and Financial Sectors

  • Contingency Planning for Crisis Preparedness and Management (September 2013)

  • Risk-Based Supervision (January, March, April–May, July 2014; January 2015)

  • Bank Intervention and Resolution (February–March 2014)

Resident Representative

Mr. Lakwijk took up his post on September 1, 2014.

Joint IMF-World Bank Management Action Plan

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Statistical Issues

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Kosovo—Table of Common Indicators Required for Surveillance

(As of April 13, 2015)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I), and not available (NA).

Services data available on annual basis.

GNDI data not available.

1

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.