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.
On May 20, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Kosovo.
Growth in Kosovo has proven relatively resilient and stronger than in its Western Balkan neighbors, averaging slightly more than 3 percent over the last five years. Steady remittances from the Diaspora living in Advanced Europe continue to be a key driver of growth, supporting as they have private consumption and investment. Nonetheless, medium-term growth prospects of some 3½ percent per year, while reasonable, are not strong enough to steadily lift incomes towards regional standards, or to create enough jobs in a country with very high unemployment.
Kosovo continues to enjoy a low public debt, and last year’s deficit complied with the fiscal rule’s limit. However, promises made in the run up to the general elections could push this year’s deficit above the limit. Moreover, the composition of the budget has worsened considerably, with unproductive current spending crowding out spending on infrastructure, education, and health.
Kosovo’s banks remain liquid, well capitalized, and profitable. NPL ratios are slightly elevated at 8.4 percent, but are stable and fully provisioned. The central bank has made commendable progress in strengthening bank supervision as well as the framework for emergency liquidity assistance. However, there are obstacles to the provision of credit, despite high levels of liquidity in the banks. In particular, inefficient court proceedings on bank cases contribute to high interest margins and high collateral requirements. High levels of informality also deter credit provision via the concomitant lack of reliable financial statements.
Kosovo’s productive and export capacity is low at present owing to the country’s significant wage and non-wage competitiveness gap. The former is related to unsustainable wage pressures in the public sector, which make it difficult for the private sector to attract talent. The latter involves a looming energy deficit, limited access to and quality of education and vocational training, and remaining issues in the business environment, including perceptions of corruption.
Executive Board Assessment2
Executive Directors welcomed the resilient performance of Kosovo’s economy, driven by private consumption and investment on the back of strong remittances. Meanwhile, low energy prices and developments in the euro area have kept inflation low. Directors noted, however, that the growing fiscal deficit and competitiveness gap weigh on medium-term prospects for growth, employment, and income convergence with neighboring countries. They stressed that strong policy action, including fiscal adjustment and broad based structural reforms, is critical to address these challenges in the period ahead.
Directors called on the authorities to preserve fiscal credibility and gradually strengthen buffers. Following last year’s large wage and benefit increases, they welcomed the initial steps taken this year to contain fiscal overruns. Directors agreed that additional measures would be needed to bring the 2015 deficit closer to the ceiling under the fiscal rule. They saw scope for further mobilizing revenues, particularly the value added tax. Directors also recommended improving the composition of the budget by containing increases in unproductive current spending, so as to create space for spending in priority areas such as infrastructure, education, and health care. They welcomed the authorities’ plan to develop a rules based mechanism for public wage setting consistent with productivity gains, and pointed to the benefits of a broader reform of the civil service. Directors also saw merit in revisiting the investment clause in the fiscal rule to allow for externally financed development projects, while preserving Kosovo’s good debt position.
Directors noted that Kosovo’s banking sector is generally healthy and well capitalized. They commended the authorities for the progress in strengthening the supervisory and regulatory framework, especially the adoption of risk based supervision. Continued efforts are necessary to further enhance the frameworks for emergency liquidity assistance, macroprudential policies, and crisis management. Directors also saw a need to improve access to credit and facilitate financial intermediation, supported by a more efficient judicial system.
Directors underscored that raising potential growth and improving labor participation and productivity remain key priorities for the country. They called on the authorities to expedite structural reforms in several areas to boost competitiveness and help spur private sector development and job creation. Specifically, Directors encouraged further steps to modernize energy infrastructure, address high labor costs, and improve education. Enhanced efforts are also needed to strengthen governance and the business environment more broadly. Directors welcomed the authorities’ intention to remain closely engaged with the Fund, including through a possible new arrangement to help anchor their ambitious policy and reform agenda.
Kosovo: Main Indicators, 2010–20
(Percent, unless otherwise indicated)
Data for H1 2013, as published in Kosovo Labor Force Survey, July 2014.
Projected balance does not conform with the fiscal rule.
Total foreign assistance excluding capital transfers.
Includes former Yugoslav debt, not recognized by Kosovo.
Series updated according to Kosovo Agency of Statistics (2013), Pristina, Kosovo.
Kosovo: Main Indicators, 2010–20
(Percent, unless otherwise indicated)
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | ||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Est. | Projections | |||||||||||||
| Real growth rates | ||||||||||||||
| GDP | 3.3 | 4.4 | 2.8 | 3.4 | 2.7 | 3.3 | 3.5 | 3.5 | 3.5 | 3.5 | 3.5 | |||
| Consumption | 3.7 | 3.7 | 2.6 | 2.2 | 3.9 | 3.2 | 3.3 | 3.4 | 3.4 | 3.4 | 3.4 | |||
| Investment | 10.9 | 7.9 | −12.9 | −0.3 | 0.9 | 5.1 | 3.4 | 3.4 | 3.5 | 3.5 | 3.5 | |||
| Exports | 12.5 | 3.3 | 0.5 | 2.5 | 1.9 | 3.6 | 1.5 | 1.9 | 2.3 | 2.7 | 3.1 | |||
| Imports | 9.1 | 3.5 | −7.7 | −1.5 | 3.9 | 4.2 | 3.5 | 3.0 | 3.5 | 3.9 | 4.4 | |||
| Official unemployment (percent of workforce) | … | … | 30.9 | 30.0 1/ | … | … | … | … | … | … | … | |||
| Price changes | ||||||||||||||
| CPI, period average | 3.5 | 7.3 | 2.5 | 1.8 | 0.4 | 0.3 | 1.4 | 1.6 | 1.8 | 1.9 | 1.8 | |||
| CPI, end of period | 6.6 | 3.6 | 3.7 | 0.5 | −0.4 | 1.5 | 1.5 | 1.8 | 1.9 | 2.0 | 2.2 | |||
| Import prices | 5.9 | 8.2 | 4.9 | 0.0 | −0.4 | −1.0 | 0.7 | 1.0 | 1.0 | 1.1 | 0.9 | |||
| GDP deflator | 4.7 | 4.8 | 2.2 | 1.8 | 0.6 | 0.4 | 1.6 | 1.7 | 2.0 | 2.1 | 2.2 | |||
| Real effective exch. rate (average; -=depreciation) | −0.8 | 3.4 | −0.7 | 0.0 | 1.6 | … | … | … | … | … | … | |||
| Real effective exch. rate (end of period; -=depreciation) | 0.8 | 0.8 | 0.6 | −1.1 | 7.2 | … | … | … | … | … | ||||
| General government budget (percent of GDP) | ||||||||||||||
| Revenues, incl. interest income | 26.4 | 27.1 | 26.1 | 24.6 | 24.2 | 25.8 | 25.7 | 25.4 | 25.4 | 25.4 | 25.4 | |||
| Primary expenditures | 28.7 | 28.7 | 28.5 | 27.6 | 26.6 | 29.3 | 29.3 | 29.3 | 29.3 | 29.3 | 29.3 | |||
| Of which: Wages and salaries | 7.1 | 8.0 | 8.1 | 7.8 | 8.8 | 9.6 | 9.6 | 9.6 | 9.6 | 9.6 | 9.6 | |||
| Subsidies and transfers | 6.1 | 5.6 | 5.7 | 6.0 | 6.7 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | |||
| Capital and net lending | 11.4 | 11.4 | 10.9 | 9.7 | 7.3 | 8.0 | 8.0 | 8.0 | 8.0 | 8.0 | 8.0 | |||
| Overall balance excluding PAK 2/ | … | … | −2.4 | −3.0 | −2.5 | −3.6 | −3.7 | −4.2 | −4.3 | −4.4 | −4.5 | |||
| Debt financing, net | 0.4 | 0.0 | 3.1 | 1.3 | 1.6 | 1.9 | 1.3 | 1.6 | 2.2 | 2.2 | 2.2 | |||
| Privatization | 0.0 | 0.0 | 0.9 | 0.5 | 0.0 | 0.9 | 0.8 | 0.8 | 0.4 | 0.4 | 0.4 | |||
| Stock of government bank balances | 5.5 | 3.3 | 4.3 | 3.0 | 1.8 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | |||
| Balance of Payments (percent of GDP) | ||||||||||||||
| Current account balance, incl. official transfers | −11.7 | −13.7 | −7.5 | −6.4 | −7.1 | −7.3 | −8.0 | −8.0 | −7.9 | −7.5 | −7.2 | |||
| Of which: official transfers 3/ | 7.3 | 6.7 | 7.9 | 6.4 | 5.1 | 4.8 | 3.9 | 3.6 | 3.3 | 3.2 | 3.2 | |||
| Capital and financial account | 6.8 | 8.7 | 2.8 | 3.1 | 5.3 | 5.7 | 6.7 | 6.9 | 6.9 | 6.7 | 6.5 | |||
| Of which: Net foreign direct investment | 7.5 | 7.9 | 4.2 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | |||
| Portfolio investment, net | −1.1 | −1.2 | −3.7 | −2.5 | −2.8 | −2.0 | −0.8 | −0.7 | −0.6 | −0.5 | −1.1 | |||
| Errors and Omissions | 4.9 | 5.0 | 4.7 | 3.2 | 1.8 | 1.6 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7 | |||
| Savings-investment balances (percent of GDP) | ||||||||||||||
| Domestic savings | −1.2 | −2.7 | −5.0 | −4.1 | −5.1 | −4.9 | −5.2 | −5.4 | −5.7 | −6.1 | −6.6 | |||
| National savings | 15.4 | 14.1 | 13.7 | 14.7 | 14.5 | 15.2 | 15.2 | 15.3 | 15.5 | 15.8 | 15.9 | |||
| Investment | 34.3 | 34.5 | 29.2 | 27.5 | 26.8 | 27.3 | 27.1 | 26.9 | 26.7 | 26.5 | 26.2 | |||
| Current account, excl. official transfers | −19.0 | −20.4 | −15.4 | −12.8 | −12.3 | −12.1 | −11.9 | −11.6 | −11.2 | −10.7 | −10.3 | |||
| Non-performing loans (percent of total loans) | 5.2 | 5.7 | 7.5 | 8.7 | 8.5 | … | … | … | … | … | … | |||
| Bank credit to the private sector | 12.6 | 14.7 | 4.5 | 2.7 | 3.9 | 4.0 | 5.3 | 5.5 | 5.9 | 6.1 | 6.2 | |||
| Deposits of the private sector | 23.1 | 11.4 | 10.9 | 8.0 | 7.2 | 6.2 | 7.2 | 7.4 | 7.7 | 7.8 | 8.0 | |||
| Regulatory capital/risk weighted assets | 18.8 | 17.6 | 14.4 | 16.8 | 17.8 | … | … | … | … | … | … | |||
| Memorandum items | ||||||||||||||
| Total public debt (percent of GDP) 4/ | 16.1 | 14.6 | 17.1 | 17.6 | 18.5 | 20.3 | 22.2 | 24.6 | 27.1 | 29.6 | 32.1 | |||
| GDP (millions of euros) | 4402 | 4815 | 5059 | 5327 | 5506 | 5712 | 6004 | 6322 | 6671 | 7048 | 7459 | |||
| GDP per capita (euros) | 2480 | 2672 | 2799 | 2935 | 2989 | 3055 | 3164 | 3282 | 3412 | 3552 | 3703 | |||
| GNDI per capita (euros) | 2891 | 3123 | 3323 | 3488 | 3575 | 3670 | 3811 | 3962 | 4126 | 4302 | 4489 | |||
| Population (thousands) 5/ | 1775 | 1802 | 1807 | 1815 | 1842 | 1870 | 1898 | 1926 | 1955 | 1984 | 2014 | |||
Data for H1 2013, as published in Kosovo Labor Force Survey, July 2014.
Projected balance does not conform with the fiscal rule.
Total foreign assistance excluding capital transfers.
Includes former Yugoslav debt, not recognized by Kosovo.
Series updated according to Kosovo Agency of Statistics (2013), Pristina, Kosovo.
Kosovo: Main Indicators, 2010–20
(Percent, unless otherwise indicated)
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | ||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Est. | Projections | |||||||||||||
| Real growth rates | ||||||||||||||
| GDP | 3.3 | 4.4 | 2.8 | 3.4 | 2.7 | 3.3 | 3.5 | 3.5 | 3.5 | 3.5 | 3.5 | |||
| Consumption | 3.7 | 3.7 | 2.6 | 2.2 | 3.9 | 3.2 | 3.3 | 3.4 | 3.4 | 3.4 | 3.4 | |||
| Investment | 10.9 | 7.9 | −12.9 | −0.3 | 0.9 | 5.1 | 3.4 | 3.4 | 3.5 | 3.5 | 3.5 | |||
| Exports | 12.5 | 3.3 | 0.5 | 2.5 | 1.9 | 3.6 | 1.5 | 1.9 | 2.3 | 2.7 | 3.1 | |||
| Imports | 9.1 | 3.5 | −7.7 | −1.5 | 3.9 | 4.2 | 3.5 | 3.0 | 3.5 | 3.9 | 4.4 | |||
| Official unemployment (percent of workforce) | … | … | 30.9 | 30.0 1/ | … | … | … | … | … | … | … | |||
| Price changes | ||||||||||||||
| CPI, period average | 3.5 | 7.3 | 2.5 | 1.8 | 0.4 | 0.3 | 1.4 | 1.6 | 1.8 | 1.9 | 1.8 | |||
| CPI, end of period | 6.6 | 3.6 | 3.7 | 0.5 | −0.4 | 1.5 | 1.5 | 1.8 | 1.9 | 2.0 | 2.2 | |||
| Import prices | 5.9 | 8.2 | 4.9 | 0.0 | −0.4 | −1.0 | 0.7 | 1.0 | 1.0 | 1.1 | 0.9 | |||
| GDP deflator | 4.7 | 4.8 | 2.2 | 1.8 | 0.6 | 0.4 | 1.6 | 1.7 | 2.0 | 2.1 | 2.2 | |||
| Real effective exch. rate (average; -=depreciation) | −0.8 | 3.4 | −0.7 | 0.0 | 1.6 | … | … | … | … | … | … | |||
| Real effective exch. rate (end of period; -=depreciation) | 0.8 | 0.8 | 0.6 | −1.1 | 7.2 | … | … | … | … | … | ||||
| General government budget (percent of GDP) | ||||||||||||||
| Revenues, incl. interest income | 26.4 | 27.1 | 26.1 | 24.6 | 24.2 | 25.8 | 25.7 | 25.4 | 25.4 | 25.4 | 25.4 | |||
| Primary expenditures | 28.7 | 28.7 | 28.5 | 27.6 | 26.6 | 29.3 | 29.3 | 29.3 | 29.3 | 29.3 | 29.3 | |||
| Of which: Wages and salaries | 7.1 | 8.0 | 8.1 | 7.8 | 8.8 | 9.6 | 9.6 | 9.6 | 9.6 | 9.6 | 9.6 | |||
| Subsidies and transfers | 6.1 | 5.6 | 5.7 | 6.0 | 6.7 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | |||
| Capital and net lending | 11.4 | 11.4 | 10.9 | 9.7 | 7.3 | 8.0 | 8.0 | 8.0 | 8.0 | 8.0 | 8.0 | |||
| Overall balance excluding PAK 2/ | … | … | −2.4 | −3.0 | −2.5 | −3.6 | −3.7 | −4.2 | −4.3 | −4.4 | −4.5 | |||
| Debt financing, net | 0.4 | 0.0 | 3.1 | 1.3 | 1.6 | 1.9 | 1.3 | 1.6 | 2.2 | 2.2 | 2.2 | |||
| Privatization | 0.0 | 0.0 | 0.9 | 0.5 | 0.0 | 0.9 | 0.8 | 0.8 | 0.4 | 0.4 | 0.4 | |||
| Stock of government bank balances | 5.5 | 3.3 | 4.3 | 3.0 | 1.8 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | |||
| Balance of Payments (percent of GDP) | ||||||||||||||
| Current account balance, incl. official transfers | −11.7 | −13.7 | −7.5 | −6.4 | −7.1 | −7.3 | −8.0 | −8.0 | −7.9 | −7.5 | −7.2 | |||
| Of which: official transfers 3/ | 7.3 | 6.7 | 7.9 | 6.4 | 5.1 | 4.8 | 3.9 | 3.6 | 3.3 | 3.2 | 3.2 | |||
| Capital and financial account | 6.8 | 8.7 | 2.8 | 3.1 | 5.3 | 5.7 | 6.7 | 6.9 | 6.9 | 6.7 | 6.5 | |||
| Of which: Net foreign direct investment | 7.5 | 7.9 | 4.2 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | |||
| Portfolio investment, net | −1.1 | −1.2 | −3.7 | −2.5 | −2.8 | −2.0 | −0.8 | −0.7 | −0.6 | −0.5 | −1.1 | |||
| Errors and Omissions | 4.9 | 5.0 | 4.7 | 3.2 | 1.8 | 1.6 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7 | |||
| Savings-investment balances (percent of GDP) | ||||||||||||||
| Domestic savings | −1.2 | −2.7 | −5.0 | −4.1 | −5.1 | −4.9 | −5.2 | −5.4 | −5.7 | −6.1 | −6.6 | |||
| National savings | 15.4 | 14.1 | 13.7 | 14.7 | 14.5 | 15.2 | 15.2 | 15.3 | 15.5 | 15.8 | 15.9 | |||
| Investment | 34.3 | 34.5 | 29.2 | 27.5 | 26.8 | 27.3 | 27.1 | 26.9 | 26.7 | 26.5 | 26.2 | |||
| Current account, excl. official transfers | −19.0 | −20.4 | −15.4 | −12.8 | −12.3 | −12.1 | −11.9 | −11.6 | −11.2 | −10.7 | −10.3 | |||
| Non-performing loans (percent of total loans) | 5.2 | 5.7 | 7.5 | 8.7 | 8.5 | … | … | … | … | … | … | |||
| Bank credit to the private sector | 12.6 | 14.7 | 4.5 | 2.7 | 3.9 | 4.0 | 5.3 | 5.5 | 5.9 | 6.1 | 6.2 | |||
| Deposits of the private sector | 23.1 | 11.4 | 10.9 | 8.0 | 7.2 | 6.2 | 7.2 | 7.4 | 7.7 | 7.8 | 8.0 | |||
| Regulatory capital/risk weighted assets | 18.8 | 17.6 | 14.4 | 16.8 | 17.8 | … | … | … | … | … | … | |||
| Memorandum items | ||||||||||||||
| Total public debt (percent of GDP) 4/ | 16.1 | 14.6 | 17.1 | 17.6 | 18.5 | 20.3 | 22.2 | 24.6 | 27.1 | 29.6 | 32.1 | |||
| GDP (millions of euros) | 4402 | 4815 | 5059 | 5327 | 5506 | 5712 | 6004 | 6322 | 6671 | 7048 | 7459 | |||
| GDP per capita (euros) | 2480 | 2672 | 2799 | 2935 | 2989 | 3055 | 3164 | 3282 | 3412 | 3552 | 3703 | |||
| GNDI per capita (euros) | 2891 | 3123 | 3323 | 3488 | 3575 | 3670 | 3811 | 3962 | 4126 | 4302 | 4489 | |||
| Population (thousands) 5/ | 1775 | 1802 | 1807 | 1815 | 1842 | 1870 | 1898 | 1926 | 1955 | 1984 | 2014 | |||
Data for H1 2013, as published in Kosovo Labor Force Survey, July 2014.
Projected balance does not conform with the fiscal rule.
Total foreign assistance excluding capital transfers.
Includes former Yugoslav debt, not recognized by Kosovo.
Series updated according to Kosovo Agency of Statistics (2013), Pristina, Kosovo.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.