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IMF Country Report No. 21/41

REPUBLIC OF KOSOVO

2020 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR REPUBLIC OF KOSOVO

February 2021

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2020 Article IV consultation with the Republic of Kosovo, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its February 12, 2021 consideration of the staff report that concluded the Article IV consultation with the Republic of Kosovo.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on February 12, 2021 following discussions that ended on December 2, 2020, with the officials of the Republic of Kosovo on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on February 1, 2021.

  • An Informational Annex prepared by the IMF staff.

  • A Statement by the Executive Director for the Republic of Kosovo.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623–7430 • Fax: (202) 623–7201

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Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2021 International Monetary Fund

Title Page

REPUBLIC OF KOSOVO

STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION

February 1, 2021

Key Issues

COVID-19 impact. Strict containment measures and international travel restrictions limited the health impact of the first wave, but the second and third waves have stretched the capacity of the health system and led to a reinstatement of containment measures. Despite policy support, GDP is estimated to have contracted by about 6 percent in 2020. The fiscal deficit soared to 7.7 percent, and the current account deficit increased to 7.5 percent of GDP mainly on account of decreases in diaspora-related inflows. The banking sector has remained stable. Economic activity is projected to rebound by 4.5 percent in 2021, but downside risks related with the uncertain course of the pandemic and the complex political situation are prevalent.

Policy challenges. Fiscal policy needs to continue to cushion income losses for households and firms, but strengthening the design, targeting, and transparency of measures remains essential. While the suspension of the fiscal rule over 2020–21 is warranted, it needs to be combined with a clearly communicated commitment for its gradual reinstatement when the economic recovery is entrenched. Financial policies should continue mitigating the shock to incomes without endangering banking sector stability. Bank capital standards should not be weakened but the Central Bank should exercise flexibility to allow banks more time to reconstitute capital buffers.

Rekindling structural reforms post-COVID-19. While preserving people’s health and combating the recession are the near-term priorities, the pandemic exacerbated many pre-existing structural challenges. Addressing these remains essential to increase productivity and ensure that gains are evenly shared.

Approved By

Mahmood Pradhan (EUR) and Daria Zakharova (SPR)

The discussions took place remotely during September 23 – October 8, 2020, with further discussions during November 16 – December 2. The team consisted of Gabriel Di Bella (head), Oana Luca, Zhongxia Zhang, Xiao Liu, and Guillermo Tolosa (all EUR), and was assisted by Stephanie Eble, Selim Thaci and Amanda Edwards (Resident Representative Office). Merita Kernja, Agnesa Zalezakova and Rafaela Jarin assisted in the preparation of the report. The mission met with the Prime Minister, Mr. Hoti, the Minister of Finance, Ms. Bajrami, the Governor of the Central Bank, Mr. Mehmeti, and other senior officials and representatives of civil society. Mr. Mehmedi (OED) participated in most meetings.

Contents

  • CONTEXT: THE PANDEMIC’S HIGH SOCIO-ECONOMIC TOLL

  • OUTLOOK: GROWTH TO RESUME IN 2021 AMID HIGH UNCERTAINTY

  • POLICY DISCUSSIONS: MITIGATING THE EFFECTS OF THE PANDEMIC AND SUPPORTING ECONOMIC RECOVERY

  • A. Fiscal Policy: Combatting the Health Crisis and Cushioning Income Losses

  • B. Financial Policies: Mitigating the Shock without Endangering Banking Stability

  • REFORMS TO STRENGTHEN ECONOMIC GOVERNANCE AND FOSTER HIGHER GROWTH

  • STAFF APPRAISAL

  • BOXES

  • 1. The Pandemic’s Impact on Diaspora Flows

  • 2. Adverse Scenarios: Characterization and Policy Response

  • 3. Kosovo’s Efforts at International Integration

  • 4. European Union Accession Process

  • FIGURES

  • 1. Recent Economic Developments, 2012–2020

  • 2. Fiscal Developments, 2014–2021

  • 3. Labor Market, 2020

  • 4. Banking Sector Overview, 2014–2020

  • TABLES

  • 1. Select Economic Indicators, 2017–2025

  • 2. Consolidated Government Budget, 2017–2025 (Including donor designated grants and PAK operational expenditure, millions of euros)

  • 3. Consolidated Government Budget, 2017–2025 (Including donor designated grants and PAK operational expenditure, percent of GDP)

  • 4. General Government Cashflow, 2017–2025

  • 5. Balance of Payments, 2017–2025

  • 6. Central Bank and Commercial Bank Survey, 2017–2025

  • 7. Financial Soundness Indicators, 2017–2020

  • 8. Indicators of Capacity to Repay the Fund, 2017–2025

  • ANNEXES

  • I. Risk Assessment Matrix

  • II. Debt Sustainability Analysis

  • III. Kosovos’s External Sector Assessment

  • IV. 2019 FSSR Main Recommendations and Implementation Status

  • V. Implementation Status of the 2018 Article IV Recommendations

  • APPENDICES

  • I. COVID-19 in the Western Balkans: How Does Kosovo Compare?

  • II. Policy Response to the COVID-19 Pandemic

  • III. Pension System: Challenges and Areas for Reform

Front Matter Page

REPUBLIC OF KOSOVO

STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

February 1, 2021

Prepared By

The European Department

(in consultation with other departments)

Contents

  • FUND RELATIONS

  • RELATIONS TO OTHER INTERNATIONAL FINANCIAL INSTITUTIONS

  • STATISTICAL ISSUES