Republic of Kosovo: Staff Report for The 2017 Article IV Consultation
Author: International Monetary Fund. European Dept.
Publication Date:
04 Feb 2018
eISBN:
9781484340431
Language:
English
Keywords:
ISCR; CR; government bank balances; staff; governance practice; authority; private sector; minimum wage; IMF staff estimate; IMF staff calculation; government budget
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2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Kosovo

Abstract

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Kosovo

Context

1. Since the last Article IV in 2015, Kosovo has taken important steps under the Stand-by Arrangement that expired in August 2017 to foster fiscal sustainability, further strengthen financial stability, and advance some structural reforms (Annex I). These have contributed to strengthening the recovery and improving confidence. Despite this progress, however, structural challenges remain significant. Kosovo is a small, unilaterally euroized economy characterized by high unemployment, extensive informality, and a narrow production and export base resulting in a large trade deficit—mainly financed by large and growing remittance flows. While the relatively high economic growth is helping to improve living standards, Kosovo remains one of the poorest European countries.

2. A new government was appointed recently, pledging to support investment, fight corruption, and improve relations with neighboring countries. Following early general election in June 2017 a new multi-party coalition government took office in September. However, its thin majority in parliament may affect the pace of reform implementation. Also, the impending issuance of indictments by a special war crimes tribunal expected to start in 2018 and the ratification of the border demarcation agreement with Montenegro—a key precondition for EU visa liberalization—may test the strength of the government coalition. Notwithstanding these risks, Kosovo has made some further progress in normalizing international relations, and is now recognized by almost two-thirds of UN member states.

Recent Developments, Outlook and Risks

3. Growth continues at a healthy pace, led by investment and, more recently, growth in exports. Real GDP growth has averaged about 4 percent per year since 2015, a relatively strong performance compared to Kosovo’s Western Balkan peers. Staff project growth to continue at 4.1 percent in 2017, led by continued strong investment, export growth, and higher remittance inflows. While declining recently, unemployment remains the highest in Europe at just above 30 percent, particularly among the youth (50 percent).

4. The policy framework has improved considerably. The fiscal deficit has been kept well below the 2 percent of GDP fiscal rule ceiling, despite spending pressures, and government bank balances are above the minimum level of 4.5 percent of GDP. Banks remain healthy and credit growth has increased (Table 1, Figure 1). Inflation remains subdued and although headline is expected to pick up to 1.5 percent (largely driven by higher food and energy prices), core inflation has turned negative due to falling input prices for some non-tradable and consolidation in the retail sector resulting in lower prices.

Table 1.

Kosovo: Select Economic Indicators, 2014-22

(Percent, unless otherwise indicated)

article image
Sources: Kosovo authorities; and IMF staff estimates and projections.

As of Q2 2017.

For fiscal rule purposes, only projects post-July 2015 apply.

Kosovo neither recognizes nor services nor tracks this debt.

Total foreign assistance excluding capital transfers.

2017 as of November 2017.

Figure 1.
Figure 1.

Kosovo: Recent Economic Developments

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

Sources: Kosovo Agency of Statistics; Central Bank of Kosovo; KPST; and IMF staff estimates.

5. Medium-term growth prospects remain positive, although more is needed to accelerate income convergence with regional peers and the EU. Under the assumption of a gradual pace of reform efforts, medium-term growth is projected at 4 percent, driven mainly by private consumption and investment, with exports (mainly minerals) making an increasing but still relatively minor contribution to growth. Reaching the authorities’ objective of sustained growth above 5 percent and accelerating income-convergence with the EU—GDP per capita in PPP terms was just 20 percent of the EU average in 2016—will require faster reforms to address major bottlenecks in Kosovo’s business climate, and to close physical and human capital gaps. With the economy growing at its current potential, inflation is projected to remain slightly above the euro area average of 1.8 percent throughout the projection period, reflecting productivity gains. The trade deficit is expected to remain large, though on a declining path, while largely funded by non-debt creating inflows, namely remittances and FDI. Even assuming a scaling up of donor-financed public investment to reduce the infrastructure gap, debt-to-GDP is projected to increase moderately over the next years, but will remain below the 30 percent threshold (Annex II).

A01ufig1

GDP per Capita in PPP Relative to EU Average

(Index, EU = 100)

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

Sources: IMF, World Economic Outlook; and IMF staff calculations.

Selected Macroeconomic Indicators

article image
Source: IMF staff estimates; KAS.

6. Risks to the outlook are balanced (see Risk Assessment Matrix—Annex III).

  • Weaker reform momentum, including on the back of political risks, could lower growth and keep unemployment and migration high. Tax compliance gains may fall short of target, and significant social spending pressures and low progress in mobilizing IFI and privatization financing could reduce productive spending.

  • Weaker-than-expected growth in the EU and lower remittance inflows could result in lower consumption and investment (largely housing), and therefore slower growth. Also, high current account deficits and heavy reliance on remittances make Kosovo vulnerable to external shocks.

  • At the same time, moving ahead with the new power plant and accelerated reform implementation that could help attract more FDI and possibly unlock large IFI financing for key capital projects are upside risks to the outlook.

Authorities’ Views

7. The authorities were more optimistic about the outlook and viewed staff’s baseline scenario as too conservative. In their view, growth could accelerate to 5.3 percent by 2020, and despite risks of further delays, moving ahead with the construction of a new power plant would provide a substantive boost to growth. They considered that the current coalition would be able to move ahead with important reforms to address structural challenges.

External Stability Assessment

8. The external position is weaker than implied by the fundamentals and desirable policy settings, but there has been some progress in strengthening competitiveness since the last Article IV. Standard methodologies indicate that the real effective exchange rate remains stronger than justified by fundamentals and desired policies in the range of 12-14 percent (compared to 15-18 percent at the last Article IV). This modest improvement has been largely achieved by controlling public sector wages, consolidating the budget, and some progress with structural reforms (Annex IV).

9. Notwithstanding, the trade deficit remains substantial, but is largely financed by non-debt creating capital inflows. While the trade deficit has continued to remain at 28-30 percent of GDP at elevated levels, exports have been increasing steadily over the last three years, albeit from a very low base. However, the deficit is largely financed by FDI (5 percent of GDP), remittances (15 percent) and other non-recorded capital inflows. Despite a projected increase in IFI-financing, external debt is expected to remain low at around 25 percent of GDP.

10. International reserve coverage remains broadly adequate. Gross international reserves reached 12 percent of GDP in 2016 and are expected to increase to 13.5 percent in 2017. This covers more than 110 percent of a composite metric of reserve adequacy (ARA metric), important for a unilaterally euroized economy, like Kosovo, which needs liquidity buffers to mitigate the impact of external shocks on domestic absorption and pressures stemming from financial obligations and bank liquidity.

11. Progress has been made in improving qualitative competitiveness indicators. While recognizing measurement uncertainty, various indicators point to an improvement in Kosovo’s standing in various rankings since 2014. Kosovo’s improvement is more noteworthy in the areas of starting a business, registering property and trading across borders. This improvement however largely reflects the progress of adopting new legislation in line with EU directives, which has not been translated yet into de-facto improvement on the ground to support higher productivity and competitiveness.

Authorities’ Views

12. The authorities broadly concurred with the external sector assessment, but had a more sanguine view of reform implementation gaps. The authorities stressed that substantial progress has been made in improving the business environment, as for instance reflected in Kosovo being ranked among the top 10 reformers globally in the World Bank’s 2018 Doing Business Report, but noted that reform implementation is hampered by capacity constraints (in human capital, in particular). They welcomed the reduction in the overvaluation of the real exchange rate, but noted that the magnitude of this is unclear due to model uncertainty.

Policy Discussions

Discussions focused on measures to address the three key challenges facing Kosovo: (i) accelerating structural reforms to improve productivity and reduce high unemployment; (ii) improving the composition of the budget within the limits of the fiscal rule and the efficiency of spending; and (iii) safeguarding financial sector stability and financial deepening. All three areas are critical to improving competitiveness, achieving stronger and more equitable growth and supporting income convergence with regional peers and the EU.

A. Structural Reforms: Improving Investment Climate, Governance and Competitiveness

13. Several structural issues are impeding growth and are also contributing to inequality.1 These include the perception of a weak “rule of law”2 and a large informal sector that create an uneven playing field amongst businesses, deter investment, and support small-scale low value added production (instead of more competitive companies). Public enterprises remain relatively inefficient, with low productivity. High informality hampers access to bank financing and is associated with weak labor and working standards. These contribute to inequality, which is further exacerbated by the poor public health and education systems, as well as poorly targeted social benefits.

14. The authorities are making some efforts to improve governance, but further decisive steps are needed. The use of the e-procurement platform has been delayed and remains limited, although picking up in recent months. Therefore, efforts are needed to strengthen the system by expanding capacity and enforcing the mandatory use of e-procurement, while at the same time increasing the list of goods and services subject to centralized procurement. Also, the investigative capacity of the anti-corruption agency and the effectiveness of the asset declaration regime should be strengthened. Enhanced capacity of the anti-corruption agency would make its investigation capacity more effective in supporting law enforcement agencies to meet their obligations. Asset declaration requirements should be as comprehensive as possible and cover all assets owned both domestically and abroad. Large public investment projects should be subject to ex-post audit.

15. Plans to reduce the large inefficiency in public enterprises will improve governance, and should be fully carried out to put those companies into more productive use. Reform priorities include improving governance by strengthening the independence of supervisory boards, timely publication of financial statements, external audits, and significantly reducing operating costs by rightsizing employment and reducing the excessively high wages. This should also pave the way for private sector involvement (e.g., PPPs, privatization) in the medium term, and developing a clear divestment strategy would be a first step. The Privatization Agency’s institutional and governance structure should also be strengthened significantly to accelerate the slowed-down privatization/liquidation process.3

16. Higher quality and better targeted education is needed to improve labor market outcomes. The 2015 Program for International Student Assessment (PISA) score (Kosovo’s first participation) ranks Kosovo low among participating countries. Decisive measures are needed to improve access and quality of education, including enhanced curricula for vocational programs. This would help to address the large skill mismatch, particularly among the most disadvantaged groups. The timely implementation, with the support of the EU, of the new Action Plans for increasing youth employment and for enhancing active labor market policies and job placement will also play a key role to increase labor participation and employment, including for women.

A01ufig2

Government Secondary Education Spending and PISA Outcome, Latest Value Available

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

17. In addition, any increases to minimum wages should be in line with the current rules-based minimum wage setting mechanism. This rule links adjustments to developments in prices, private sector wages and competitiveness. While some increase in the minimum wage could reduce wage inequality, care should be given to avoid unwarranted increases beyond productivity gains. Against the backdrop of high unemployment, a large competitiveness gap, and widespread informality, large discretionary increases could disadvantage low-skilled workers and increase youth unemployment, leading to greater migration or increase in informal employment. In addition, it could generate fiscal pressures by e.g. raising expectations for higher social benefit amounts, thus crowding out higher priority spending in the budget.

18. Addressing energy supply constraints and shortages is key to support investments in the tradable sector. After several attempts over the last decade to replace one (Kosovo A) of the two aging lignite power plants, little progress has been achieved. The recent conclusion of the commercial agreement with a private firm is a first step to replace Kosovo’s existing plant with a more reliable and higher capacity plant that is projected to be completed in 2023, assuming no further delays.

Authorities’ Views

19. The authorities agreed with the need to accelerate structural reforms and felt that their reform priorities are well-aligned with staff recommendations. Strengthening the rule of law (including by new hiring in the judiciary), supporting private sector development, and closing skills and energy gaps are among their reform priorities. While agreeing that there is scope to further strengthen governance, including in public procurement and public enterprises, they felt that progress made in the 10 years since independence is not sufficiently recognized or captured in perception-based governance indicators.

20. There was also broad agreement amongst various stakeholders, including employer representatives and trade unions, that inequality should be addressed. It was agreed that improving public education and health, fighting informality, enforcing labor standards and better targeting social assistance are key priorities. Trade unions stressed that informal employees not only tend to get paid less but also risk being left without any other old age insurance except the basic pension benefits, and employers noted that the same standards and the rule of law should be applied to every company.

21. The authorities were not convinced that an increase in the minimum wage beyond those implied by the current rule could undermine competitiveness and efforts to improve labor market outcomes. Internal discussions on raising the minimum wage and changing the minimum wage setting mechanism are still ongoing. The authorities generally considered that the impact of higher minimum wages on the economy will be limited, and by reducing the underreporting of wages in the private sector it will increase revenue.

B. Fiscal Policy: Supporting Economic Growth Through Macro-stability, and Structural Revenue and Expenditure Policies

22. The existing “fiscal rule”4 provides an appropriate anchor for fiscal policy (see Figure 2, Table 2). The 2017 fiscal deficit is expected to be about 1 percent of GDP, and the 2018 budget targets a deficit (fiscal rule definition) of 1.8 percent of GDP, all below the fiscal rule’s deficit ceiling. The budget also keeps the wage bill constant as a share of GDP, in line with the wage bill rule. Assuming the authorities will be able to execute IFI and privatization-financed investment (exempted from the fiscal rule’s deficit ceiling) of about 1 percent of GDP to address the large infrastructure gap, this would bring the overall 2018 fiscal deficit to about 3 percent of GDP, from 1 percent in 2017. While this would result in a pro-cyclical stance, the high import-content of investment and the still high unemployment rate should keep domestic demand pressures broadly in check.

Figure 2.
Figure 2.

Kosovo: Fiscal Developments

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

Source: Country authorities; and IMF staff calculations.1/ Overall balance excluding PAK spending.
Table 2.

Kosovo: Consolidated Government Budget, 2014-22 1/

(Excluding donor designated grants; millions of euro)

article image
Sources: Kosovo authorities; and IMF staff estimates and projections.

Does not yet reflect the GFSM 2001 methodology.

For fiscal rule purposes, only IFI projects post-July 2015 apply.

Kosovo neither recognizes nor services nor tracks this debt.

Assumes tax compliance gains of 0.7 percent of GDP, a timely and full implementation of the war veteran pension law, and tight administration for all other budgeted social schemes.

See footnote 4. Also, assumes a lower exectution of IFI and PAK financed investments, taking into account implementation capacity.

23. Over the medium term, the authorities aim to maintain budget deficits below the fiscal rule’s ceiling, and—when including IFI and privatization-financed capital spending—at around 3 percent of GDP, on average. This would provide an appropriate balance between fiscal discipline and developmental needs, given the still low public debt of 22 percent of GDP (2017). It would also maintain bank balances at a prudent level of 4.5 percent of GDP. While the government debt is projected to increase in the medium term, the debt sustainability analysis shows that it is expected to remain within sustainable levels (Annex II).

24. However, the 2018 budget is subject to risks and efforts would be needed to reach the deficit target. The budget assumes about ¾ percent of GDP in gains from revenue administration reforms, which may not be realized. On the expenditure side, social spending could exceed the budget allocation by about ¾ percent of GDP, unless there is timely reclassification and verification of war veteran pension beneficiaries, and a tight administration of other social benefits. At the same time, there are pressures to move ahead with several new unbudgeted social spending initiatives, and while there might be scope to delay some investment, spending on Route 6 of some 2½ percent of GDP is expected to be needed in 2018.

25. Also, the composition of the budget and the efficiency of its spending could be improved to ensure better outcomes and make space for scaling up of investment in education, health, and infrastructure—critical to improve productivity and growth.

Possible Revenue Measures

26. There is considerable scope for improving revenue collection. While total revenue has increased to 26 percent of GDP, it is still some 10 percentage points below the EM Europe average (or 6 percentage points if contributions to the second pillar pension system are included) and collected from a narrow base. Low tax revenue mobilization is due to low tax rates and high informality combined with weak collection efficiency. The tax gaps for VAT and PIT are estimated at one-third and two-third respectively of potential taxes collected and the CIT gap close to 20 percent.5 Over three-quarters of Kosovo’s revenue comes from indirect tax (led by VAT and excise), making fiscal revenue highly vulnerable to consumption and imports.

A01ufig3

Total Revenue, Kosovo and Comparator Average

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

Sources: IMF, World Economic Outlook; and IMF staff calculations.
A01ufig4

Tax Structure Compared to Regional Average

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

Sources: IMF, Government Finance Statistics; and IMF staff calculations.

27. The focus should be on fighting informality by strengthening the tax administration. The 2018 budget ambitiously targets some ¾ percent of GDP in tax compliance gains. To achieve this objective, collections should be reinforced by setting publicly available quantitative and strategic performance targets for the tax administration, allocating resources to activities that generate the highest yields (e.g. risk-based audits), improving the efficiency and productivity of audits, significantly scaling up tax debt collection, and requiring filing a tax return by every registered taxpayer, even if no tax is due.

28. Tax policy, on the other hand, should seek to minimize exemptions and increase yields. As individual tax rates are broadly in line with peer countries in the region, the focus should be on broadening the tax base.6 The new property tax legislation paves the way towards higher yields—which is achievable if exclusions of taxable objects or other tax relief is kept to a minimum. As to indirect taxes, the VAT standard rate is regionally competitive. However, no new exemptions/reduced rate categories should be introduced as these tend to lower revenue (including by evasion), not reach the intended beneficiaries, and not increase growth. Continuing to increase excises on products, such as tobacco, in line with the current schedule are sound tax policies, especially since Kosovo has among the lowest tobacco excise rates in the region.

Possible Spending Measures

29. Pressures to increase current spending remain high. Current spending has increased from 17½ percent in 2011 to an estimated 20 percent in 2017, due to continued spending increases on social schemes and a higher wage bill, largely due to a wage hike in 2014. While as a share of GDP current spending remains below European EMEs, Kosovo spends relatively more on untargeted and work dis-incentivizing social benefits and public wages, which are key factors worsening competitiveness and inequality.7 Also, in terms of outcomes Kosovo ranks low in the poverty and inequality-reduction impact of benefit spending (Box 1).

30. The wage bill should make space for hiring in priority sectors within the limits of the rule. Staff recommends that across the board wage increases be restrained, given the already high public sector wage level. This would create space for priority hiring in the judiciary, health and education sectors, and to finance the health insurance scheme when it is eventually introduced. It would also reduce pressure from public sector wages on private sector wages, important for gaining price competitiveness and job creation, and reduce inequality between public-private sector employees.

31. Social benefit programs should be reformed to more effectively address inequality, poverty and unemployment within the existing spending envelope.8 This includes strengthening mechanisms to ensure no double dipping, better means-testing, removing disincentives to remain employed, tightly administering and enforcing eligibility of schemes, and making the system more equitable by e.g. aligning the disability threshold and payments for war veterans to those of the civilian disability scheme. Further, a credible re-classification and verification of war veterans, in line with the law should be completed in early 2018, which is necessary for current spending to stay within the budget envelope.9 Staff urges not to introduce any non-contributory early retirement schemes for special groups as this would further weaken the fairness and financial soundness of the unfunded pension system.

32. Efficacy of health and education spending should be improved. Healthcare and education spending levels and outcomes are poor. While the 2018 budget allocation has increased, efficiency improving reforms in the health care system must also move forward to keep spending in check once the new insurance system is rolled out. Also, the contribution base must be broadened to secure sufficient revenue. Comprehensive education reforms should move ahead in earnest to upgrade skills and address mismatches, often quoted as one of the key impediments to growth.

33. While capital spending is already high, there is scope for scaling up by improving the absorption of donor financing and strengthening its efficiency. The authorities have ratcheted up spending including through large resources allocated to motorways (Routes 6 and 7). The implementation of other priority projects, however, has generally been limited by capacity constraints and low absorption of available IFI-financing. Scaling up public investment and improving its quality will raise potential GDP growth and accelerate income convergence toward EU levels (with an estimated growth dividend of up to 0.8 percent yearly).10 This includes introducing a requirement for cost-benefit analysis of major capital projects, strengthening project appraisal, selection, preparation, and execution, adopting multi-year budgeting for investment projects, and ensuring ex-post independent audit and assessment of large-scale projects.11

Income Inequality and Social Benefit Performance

While income inequality is relatively low, spatial disparities remain, exacerbated by a weak labor market and high poverty. There is some regional variation in inequality, which is higher in urban areas. As of 2015, 18 percent of the population was below the national poverty line of €1.82 a day, and poverty is considerably worse than the EME Europe average. Poverty and distributional gains are constrained by high unemployment (31 percent in 2017) and low participation (57 percent inactive); both indicators are worse among youth and women.

A01ufig6

Gini coefficient by region

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

A rapid expansion of social assistance in recent years, now high by regional standards, has skewed towards categorical benefits. Pension and social assistance as a share of current expenditure increased from 21½ percent in 2010 to 36½ percent in 2016, and social assistance spending is now above the Western Balkans average. However, the composition of benefits over time has shifted away from poverty and inequality-focused benefits towards war-related benefits.

A01ufig7

Social assistance spending, percent of GDP

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

As such, high social benefit spending has not translated into above-average distributional outcomes. The impact of social benefits is constrained by a number of factors: (i) only around half of all households receive any benefit; (ii) adequacy is low, particularly for non-pension social benefits; and (iii) benefit and beneficiary incidence indicate a need to improve targeting.

A01ufig8

Social benefit allocation in 2010 and 2017

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

Source: IMF staff calculations based on data from authorities.
A01ufig9

Social benefit performance

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

A01ufig10

Social benefit spending (percent of GDP) and Gini reduction (percent)

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

Source: IMF staff calculations based on HBS 2015 and World Bank ASPIRE database.
Notes: For social benefit performance, the Gini and poverty reductions are simulations are based on the current year. Coverage is the percent of the households receiving social benefits, while adequacy is the share of welfare that social benefits represent.

Financing

34. Financing so far has been readily available, but the investor base should be diversified to minimize roll-over risks and support market development. Financing of the fiscal deficit has been easily absorbed largely by banks operating in Kosovo and to a lesser extent by other institutional entities, despite the 100 percent risk-weightings on government paper for banks with EU-based parents (in the absence of a sovereign credit rating).12 The authorities are gradually extending the maturity of all outstanding public debt (2-year average maturity), with recent 7-year issuances, which should reduce roll-over risks. However, a normalization of the euro area monetary policy may make it more difficult to sell bonds in the domestic market. Therefore, the investor base should be expanded and diversified so that costs and roll-over risks will be reduced.

Authorities’ Views

35. The authorities broadly concurred with staff’s assessment. They agreed that the fiscal stance is appropriate given cyclical conditions, and that the fiscal rule continues to provide an important anchor to fiscal policy. In terms of risks to budget execution, they are confident that the revenue targets will be met, while any overspending related to social spending pressures could be offset by cutting capital spending to keep the deficit within the limits of the fiscal rule.

36. They agreed with the need to strengthen the tax administration and reduce informality, but felt that staff’s revenue projections underestimate related gains. They also see room for improvement in the budget composition, but pointed out that it does not compare poorly to peers when adjusting for initial conditions, nothing that the high social benefit spending largely reflects legacies from the 1998-99 conflict. Nonetheless, they see scope to make the social benefit system more equitable, i.e. by improving the funding and eligibility for the social assistance and basic pension schemes. Laws are under preparation that would strengthen the administration, tighten eligibility, and improve the targeting and equity of social benefit schemes. Regarding the wage bill, they see limited space for additional priority hiring within the limits of the wage bill rule given the need to attract and retain skilled labor in the civil service by offering competitive salaries.

C. Financial Sector: Supporting Economic Growth Through Stability and Financial Deepening

37. Kosovo’s largely foreign-owned banking system is broadly sound (see Figure 3, Table 6). The banking sector remains well-capitalized and liquid, despite credit growth and a shift toward shorter deposit tenors with falling interest rates. It also remains profitable as lower interest income has been offset by higher fee income and lower operational costs. However, the implementation of IFRS9 will require more provisioning with little space to increase fees further. Aggregate asset quality is strong by international comparison – the system’s NPL ratio has halved in the past two years to below 3½ percent as banks have proactively collected on bad loans and the CBK has implemented stricter write-off standards.

Figure 3.
Figure 3.

Kosovo: Banking Sector Overview

Citation: IMF Staff Country Reports 2018, 030; 10.5089/9781484340431.002.A001

Sources: Central Bank of Kosovo; and IMF staff estimates.
Table 3.

Kosovo: Consolidated Government Budget, 2014-22 1/

(Excluding donor designated grants; percent of GDP)

article image
Sources: Kosovo authorities; and IMF staff estimates and projections.

Does not yet reflect the GFSM 2001 methodology.

For fiscal rule purposes, only projects post-July 2015 apply.

Kosovo neither recognizes nor services nor tracks this debt.

Assumes tax compliance gains of 0.7 percent of GDP, a timely and full implementation of the war veteran pension law, and tight administration for all other budgeted social schemes.

See footnote 4. Also, assumes a lower exectution of IFI and PAK financed investments, taking into account implementation capacity.

Table 4.

Kosovo: Balance of Payments, 2014-22

(Millions of euros, unless otherwise indicated)

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Sources: Kosovo authorities; and IMF staff estimates and projections.

Including trading companies, insurance companies, and pension funds.

Includes only program financing under the 2015-17 SBA.

Includes SDR allocations and IMF account at historical value.

Errors and omissions are thought to be mostly comprised of unidentified private remittances and unidentified FDI.

Kosovo neither recognizes nor services nor tracks this debt.

When calculating reserves, the CBK excludes claims on the government related to IMF financing.