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IMF Country Report No. 24/147

REPUBLIC OF KOSOVO

SECOND REVIEWS UNDER THE STAND-BY ARRANGEMENT AND THE ARRANGEMENT UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY AND REQUEST FOR MODIFICATION OF REFORM MEASURE—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR REPUBLIC OF KOSOVO

June 2024

In the context of the Second Reviews Under the Stand-by Arrangement and the Arrangement Under the Resilience and Sustainability Facility and Request for Modification of Reform Measure, the following documents have been released and are included in this package:

• A Press Release including a statement by the Chair of the Executive Board.

• The Staff Report prepared by a staff team of the IMF for the Executive Board's consideration on May 31, 2024, following discussions that ended on April 3, 2024, with the officials of Republic of Kosovo on economic developments and policies underpinning the IMF arrangements under the Stand-By Arrangement and the Resilience and Sustainability Facility. Based on information available at the time of these discussions, the staff report was completed on May 14, 2024.

• An Informational Annex prepared by the IMF staff.

• A Statement by the Executive Director for 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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International Monetary Fund

Washington, D.C.

© 2024 International Monetary Fund

Press Release

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PR 24/198

IMF Executive Board Completes Kosovo’s Second Reviews Under the Stand-By Arrangement and the Arrangement Under the Resilience and Sustainability Facility and Request for Modification of Reform Measure

FOR IMMEDIATE RELEASE

• The IMF Executive Board completed on May 31,2024, the second reviews of Kosovo’s Stand-By Arrangement (SBA) and Resilience and Sustainability Facility (RSF) Arrangement, making available SDR 13.354 million (about €16.5 million) and SDR 7.744 million (about €9.5 million), of budget support under each facility, respectively.

• Kosovo’s economic activity continues to expand at a robust pace, despite a challenging external environment, and inflation has declined markedly.

• Program implementation remains strong. The SBA continues to anchor prudent macroeconomic policies and to support structural reforms to strengthen fiscal and financial sector governance. The RSF has proved instrumental in supporting the authorities’ ambitious green agenda and catalyzing additional climate financing.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed today the second reviews of Kosovo’s Stand-By Arrangement (SBA) and Resilience and Sustainability Facility (RSF) Arrangement. Completion of the reviews makes available SDR 13.354 million (about €16.5 million) under the SBA and SDR 7.744 million (about €9.5 million) under the RSF arrangement. The Kosovo authorities continue to treat the SBA as precautionary.

Kosovo’s economy continues to perform well, despite a challenging environment. Real GDP growth moderated to 3.3 percent in 2023 amid subdued external demand and is projected to accelerate to 3.8 percent in 2024, driven by domestic demand. Inflation has decelerated sharply, reaching 2 percent year-over-year in the first quarter of 2024. Fiscal policies have remained prudent, with an overall fiscal deficit of 0.2 percent of GDP in 2023, reflecting strong tax collections. The overall deficit is projected to widen to about 1% percent of GDP in 2024, with higher investment spending and lower grants. The banking system remains liquid, well capitalized, and profitable, with a low level of non-performing loans and ample coverage of provisions.

Following the Executive Board’s discussion, Mr. Li, Deputy Managing Director and Acting Chair of the Board, issued the following statement:

The Kosovo authorities continue to advance their economic program and structural reform and climate agenda, supported by the Stand-By Arrangement (SBA) and the Arrangement Under the Resilience and Sustainability Facility (RSF). Program performance under both arrangements remains strong. All quantitative targets have been met, and all structural benchmarks and reform measures for the second reviews have been implemented.

Fiscal outturns have exceeded expectations, reflecting the authorities’ commitment to prudent fiscal policies. The SBA has continued to support the authorities’ rules-based fiscal framework while fostering implementation of reforms to strengthen fiscal and financial sector governance. Rebuilding government liquidity buffers will be important to safeguard an adequate level of international reserves. Progress has been made in enhancing tax compliance and managing fiscal risks. Further strengthening public investment management remains key.

The Central Bank of Kosovo (CBK) is committed to advance an ambitious institutional and governance reform agenda. The adoption of a new Law on Banks should provide a modern regulatory framework for the financial sector. Measures to support digitalization, promote financial inclusion, strengthen the AML/CFT framework, and introduce greener considerations into the supervisory toolkit will help strengthen CBK capacities and operations. Kosovo’s first ever sovereign credit rating is a positive development that could help attract new foreign investors.

The authorities are advancing an ambitious green agenda. The RSF has supported efforts to strengthen the regulatory framework and increase policy space to attract private investment into green energy. The successful completion of a pilot competitive auction for solar electricity generation and a first auction for wind electricity generation are important steps in the authorities’ plan to expand renewable energy capacity. The authorities are also taking steps to strengthen regional integration and promote competition in electricity markets, while preparing for implementation of carbon pricing. Reducing emissions and improving air quality, increasing energy efficiency, improving targeting of energy subsidies, and enhancing energy security are important goals of Kosovo’s green agenda. Timely implementation of C-PIMA recommendations will help support the green transition.

Kosovo: Selected Economic Indicators, 2019-24

(Percent, unless otherwise indicated)

Sources: Kosovo authorities; and IMF staff estimates and projections. 1/ The "fiscal rule" caps the overall fiscal deficit at 2 percent of GDP, excluding investment financed with privatization receipts and donor financing contracted after 2015, as well as PAK-related current expenditure; the IMF calculates expenditures from carried-forward own-source revenue (OSR) as the difference in the municipal OSR stock. 2/ It does not include contingent debt of former Yugoslavia. Beginning in 2020, it includes Euro 120 million of debt with KPST. 3/ Total foreign assistance excluding capital transfers.

Kosovo: Selected Economic Indicators, 2019-24

(Percent, unless otherwise indicated)

	2019	2020	2021	2022	2023 Prel.	2024 Proj.
Real GDP growth	4.8	-5.3	10.7	4.3	3.3	3.8
Contribution to growth (percentage points of GDP)
Consumption	5.8	2.3	7.7	4.0	4.0	4.4
Private	4.6	2.0	6.5	3.9	3.7	3.5
Public	1.2	0.3	1.2	0.0	0.3	0.9
Investment	-0.1	-2.3	3.6	-2.6	0.9	1.1
Net Exports	-0.3	-5.3	-0.2	2.9	-1.6	-1.6
Exports	2.2	-8.6	17.0	6.7	2.5	2.0
Imports	-2.5	3.3	-17.2	-3.7	-4.1	-3.6
Real growth rate (percent)
Consumption	6.2	2.4	7.6	3.0	4.1	4.4
Private	5.6	2.5	7.3	4.6	4.3	4.0
Public	10.1	2.1	9.0	0.2	2.3	7.0
Investment	2.9	-7.6	13.0	-3.2	3.1	3.9
Exports	7.6	-29.1	76.8	18.9	6.3	4.8
Imports	4.5	-6.0	31.4	5.4	6.2	5.4
Official unemployment (percent of workforce)	25.7	26.0	21.3
Price changes
CPI, period average	2.7	0.2	3.3	11.6	4.9	2.9
GDP deflator	1.0	1.4	6.1	7.2	5.0	2.8
General government budget (percent of GDP)
Revenues and grants	27.0	25.6	27.8	28.1	29.6	28.8
Expenditures	29.9	33.5	29.0	28.8	29.9	30.4
Of which: Wages and salaries	8.7	9.8	8.4	7.3	7.9	8.1
Subsidies and transfers	8.9	12.8	10.6	12.0	11.2	11.0
Capital expenditure	7.6	5.6	5.3	4.8	5.8	6.0
Overall Balance (Fiscal rule) 1/	-0.8	-6.5	-0.9	-0.5	-0.1	-1.2
Overall balance	-2.9	-7.8	-1.2	-0.7	-0.2	-1.6
Stock of freely available government bank balances	5.1	3.4	3.8	3.9	2.8	3.1
Total public debt 2/	17.7	22.5	21.6	20.1	17.5	18.8
Balance of Payments (percent of GDP)
Current account balance, incl. official transfers	-5.7	-7.0	-8.7	-10.3	-7.7	-7.6
Of which: Official transfers 3/	3.4	4.1	2.9	3.3	3.2	3.1
Of which: Remittance inflows	12.1	14.5	14.4	13.7	13.9	13.5
Financial account	-2.3	-8.3	-4.6	-7.4	-4.4	-5.1
Of which: Direct investment, net	-2.7	-4.2	-4.0	-6.8	-6.5	-5.4
Portfolio investment, net	0.8	-1.2	3.5	1.5	4.6	0.9
Other investment, net	-1.8	-3.5	-6.2	-2.9	-2.1	-2.0
Reserve change	1.3	0.7	2.1	0.8	-0.5	1.4
Errors and Omissions	3.5	-1.6	3.4	2.4	2.6	1.8
Savings-investment balances (percent of GDP)
National savings	28.9	26.4	27.2	24.9	26.5	25.6
Public savings	4.4	-2.8	3.9	3.8	4.7	4.3
Private savings	24.5	29.3	23.3	21.1	21.8	21.3
Investment	34.6	33.4	36.0	35.2	34.2	33.2
Public investment	7.6	5.6	5.3	4.8	5.8	6.0
Private investment	27.0	27.8	30.6	30.5	28.4	27.2
Current account, including. official transfers	-5.7	-7.0	-8.7	-10.3	-7.7	-7.6
Financial Sector
Non-performing loans (percent of total loans)	1.9	2.5	2.1	1.9 ... ...
Bank credit to the private sector (percent change)	10.0	7.1	15.6	16.0	12.8	8.0
Deposits of the private sector (percent change)	15.5	10.9	12.4	12.7	11.3	7.6
Regulatory capital to risk weighted assets	15.9	16.5	16.1	15.5
Memorandum items:
Foreign Reserves (millions of euros, IMF Definition)	1,141	1,149	1,293	1,370	1,449	1,567
Foreign Reserves (% of ARA metric)	126	120	107	96	92	92
GDP (millions of euros)	7,056	6,772	7,958	8,896	9,653	10,301
GDP (millions of euros; projections in 2023 budget)	7,056	6,772	7,958	8,956	9,843	10,605
GDP per capita (euros)	3,959	3,766	4,499	5,026	5,451	5,814
Real GDP growth per capita	5.6	-6.2	12.6	4.2	3.3	3.7
Output gap (% of GDP)	1.2	-6.2	-0.5	-0.5	-0.7	-0.5
Population (million)	1.8	1.8	1.8	1.8	1.8	1.8

Sources: Kosovo authorities; and IMF staff estimates and projections. 1/ The "fiscal rule" caps the overall fiscal deficit at 2 percent of GDP, excluding investment financed with privatization receipts and donor financing contracted after 2015, as well as PAK-related current expenditure; the IMF calculates expenditures from carried-forward own-source revenue (OSR) as the difference in the municipal OSR stock. 2/ It does not include contingent debt of former Yugoslavia. Beginning in 2020, it includes Euro 120 million of debt with KPST. 3/ Total foreign assistance excluding capital transfers.

View Table

Kosovo: Selected Economic Indicators, 2019-24

(Percent, unless otherwise indicated)

	2019	2020	2021	2022	2023 Prel.	2024 Proj.
Real GDP growth	4.8	-5.3	10.7	4.3	3.3	3.8
Contribution to growth (percentage points of GDP)
Consumption	5.8	2.3	7.7	4.0	4.0	4.4
Private	4.6	2.0	6.5	3.9	3.7	3.5
Public	1.2	0.3	1.2	0.0	0.3	0.9
Investment	-0.1	-2.3	3.6	-2.6	0.9	1.1
Net Exports	-0.3	-5.3	-0.2	2.9	-1.6	-1.6
Exports	2.2	-8.6	17.0	6.7	2.5	2.0
Imports	-2.5	3.3	-17.2	-3.7	-4.1	-3.6
Real growth rate (percent)
Consumption	6.2	2.4	7.6	3.0	4.1	4.4
Private	5.6	2.5	7.3	4.6	4.3	4.0
Public	10.1	2.1	9.0	0.2	2.3	7.0
Investment	2.9	-7.6	13.0	-3.2	3.1	3.9
Exports	7.6	-29.1	76.8	18.9	6.3	4.8
Imports	4.5	-6.0	31.4	5.4	6.2	5.4
Official unemployment (percent of workforce)	25.7	26.0	21.3
Price changes
CPI, period average	2.7	0.2	3.3	11.6	4.9	2.9
GDP deflator	1.0	1.4	6.1	7.2	5.0	2.8
General government budget (percent of GDP)
Revenues and grants	27.0	25.6	27.8	28.1	29.6	28.8
Expenditures	29.9	33.5	29.0	28.8	29.9	30.4
Of which: Wages and salaries	8.7	9.8	8.4	7.3	7.9	8.1
Subsidies and transfers	8.9	12.8	10.6	12.0	11.2	11.0
Capital expenditure	7.6	5.6	5.3	4.8	5.8	6.0
Overall Balance (Fiscal rule) 1/	-0.8	-6.5	-0.9	-0.5	-0.1	-1.2
Overall balance	-2.9	-7.8	-1.2	-0.7	-0.2	-1.6
Stock of freely available government bank balances	5.1	3.4	3.8	3.9	2.8	3.1
Total public debt 2/	17.7	22.5	21.6	20.1	17.5	18.8
Balance of Payments (percent of GDP)
Current account balance, incl. official transfers	-5.7	-7.0	-8.7	-10.3	-7.7	-7.6
Of which: Official transfers 3/	3.4	4.1	2.9	3.3	3.2	3.1
Of which: Remittance inflows	12.1	14.5	14.4	13.7	13.9	13.5
Financial account	-2.3	-8.3	-4.6	-7.4	-4.4	-5.1
Of which: Direct investment, net	-2.7	-4.2	-4.0	-6.8	-6.5	-5.4
Portfolio investment, net	0.8	-1.2	3.5	1.5	4.6	0.9
Other investment, net	-1.8	-3.5	-6.2	-2.9	-2.1	-2.0
Reserve change	1.3	0.7	2.1	0.8	-0.5	1.4
Errors and Omissions	3.5	-1.6	3.4	2.4	2.6	1.8
Savings-investment balances (percent of GDP)
National savings	28.9	26.4	27.2	24.9	26.5	25.6
Public savings	4.4	-2.8	3.9	3.8	4.7	4.3
Private savings	24.5	29.3	23.3	21.1	21.8	21.3
Investment	34.6	33.4	36.0	35.2	34.2	33.2
Public investment	7.6	5.6	5.3	4.8	5.8	6.0
Private investment	27.0	27.8	30.6	30.5	28.4	27.2
Current account, including. official transfers	-5.7	-7.0	-8.7	-10.3	-7.7	-7.6
Financial Sector
Non-performing loans (percent of total loans)	1.9	2.5	2.1	1.9 ... ...
Bank credit to the private sector (percent change)	10.0	7.1	15.6	16.0	12.8	8.0
Deposits of the private sector (percent change)	15.5	10.9	12.4	12.7	11.3	7.6
Regulatory capital to risk weighted assets	15.9	16.5	16.1	15.5
Memorandum items:
Foreign Reserves (millions of euros, IMF Definition)	1,141	1,149	1,293	1,370	1,449	1,567
Foreign Reserves (% of ARA metric)	126	120	107	96	92	92
GDP (millions of euros)	7,056	6,772	7,958	8,896	9,653	10,301
GDP (millions of euros; projections in 2023 budget)	7,056	6,772	7,958	8,956	9,843	10,605
GDP per capita (euros)	3,959	3,766	4,499	5,026	5,451	5,814
Real GDP growth per capita	5.6	-6.2	12.6	4.2	3.3	3.7
Output gap (% of GDP)	1.2	-6.2	-0.5	-0.5	-0.7	-0.5
Population (million)	1.8	1.8	1.8	1.8	1.8	1.8

Sources: Kosovo authorities; and IMF staff estimates and projections. 1/ The "fiscal rule" caps the overall fiscal deficit at 2 percent of GDP, excluding investment financed with privatization receipts and donor financing contracted after 2015, as well as PAK-related current expenditure; the IMF calculates expenditures from carried-forward own-source revenue (OSR) as the difference in the municipal OSR stock. 2/ It does not include contingent debt of former Yugoslavia. Beginning in 2020, it includes Euro 120 million of debt with KPST. 3/ Total foreign assistance excluding capital transfers.

Title Page

REPUBLIC OF KOSOVO

SECOND REVIEWS UNDER THE STAND-BY ARRANGEMENT AND THE ARRANGEMENT UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY AND REQUEST FOR MODIFICATION OF REFORM MEASURE

May 14, 2024

EXECUTIVE SUMMARY

Recent developments, outlook, and risks. Kosovo's economy has continued to perform well, despite a challenging external environment. Real GDP growth moderated to 3% percent in 2023 amid subdued external demand. Inflation has decelerated sharply, reaching 2 percent y/y in the first quarter of 2024. Growth is projected to accelerate to 3% percent in 2024, driven by domestic demand. Key risks to the outlook include commodity price spikes due to geopolitical tensions, weaker activity in advanced European economies, and an escalation of tensions in northern Kosovo.

Performance under the Stand-by (SBA) and Resilience and Sustainability Facility (RSF) arrangements. Program implementation remains strong. All quantitative performance criteria and indicative targets have been met, and all structural benchmarks and reform measures for the second reviews have been implemented. Actions required for subsequent reviews are progressing well.

• SBA. The SBA remains on track. Fiscal performance has exceeded expectations. Treasury deposits at the CBK declined in 2023 due to delayed external budget financing but remained above the program's adjusted floor. The fiscal deficit is projected to increase to about 1/ percent of GDP this year, due to higher investment and lower grants. The CBK continues to advance an ambitious institutional reform agenda. The SBA will continue to be precautionary.

• RSF. The green agenda supported by the RSF continues to be advanced. The Law on Climate Change—establishing a framework for the promotion, planning, and monitoring of climate change policies—and the Law on Renewable Energy— creating a framework to attract private capital into renewable energy—were recently approved by Parliament. Green electricity generation capacity is being expanded. A pilot competitive auction for 100 MW of solar electricity generation was completed successfully, and an auction for 150 MW of wind-based electricity generation (the first in Kosovo) is under preparation. Day-ahead auctions in marketcoupling mode for Albania and Kosovo, which started in January, should help strengthen regional integration and promote competition in electricity markets.

Approved By Mark Horton (EUR) and Anna Ivanova (SPR)

Contents

• CONTEXT

• RECENT DEVELOPMENTS, OUTLOOK, AND RISKS

• A. Recent Developments

• B. Outlook and Risks

• PROGRAM PERFORMANCE AND POLICY DISCUSSIONS

• A. Stand-By Arrangement

• B. Resilience and Sustainability Facility

• PROGRAM ISSUES

• STATISTICS

• STAFF APPRAISAL

• BOX

• 1. An Illustrative Adverse Scenario

• FIGURES

• 1. Real Sector Developments

• 2. Fiscal Developments

• 3. External Sector Developments

• 4. Financial Sector Developments

• TABLES

• 1. Selected Economic Indicators, 2019-29

• 2. Consolidated Government Budget, 2019-29 (Euro million)

• 3. Consolidated Government Budget, 2019-29 (Percent of GDP)

• 4. Central Government Cashflow Table 2019-29

• 5a. Program Monitoring—External Financing Requirements and Sources 2019-29

• 5b. Balance of Payments 2019-29

• 6. Central Bank and Commercial Bank Survey, 2019-29

• 7. Selected Financial Soundness Indicators, 2019-23

• 8. Indicators of Fund Credit, 2022-48

• 9. SBA Quantitative Performance Criteria, 2023-25

• 10. Prior Actions and Structural Benchmarks Under the SBA

• 11. Reform Measures Under the RSF

• 12. Schedule of Reviews and Purchases/Disbursements Under the SBA and RSF

• ANNEXES

• I. External Sector Assessment

• II. Application of the Sovereign Risk and Debt Sustainability Framework

• III. Risk Assessment Matrix

• APPENDIX

• I. Letter of Intent

  • I. Memorandum of Economic and Financial Policies

  • II. Technical Memorandum of Understanding