Economy resilient and steady growth says IMF


The International Monetary Fund (IMF) has concluded an Article IV consultation with Kosovo in which it found that growth since 2007 has averaged 4.5% and the economy has shown great resilience, but Directors noted that “Kosovo’s exposure to Diaspora host economies could turn into a risk”.

The full press release as published on the IMF website is as follows:

IMF Executive Board Concludes 2013 Article IV Consultation with the Republic of Kosovo

Press Release No. 13/272

July 23, 2013

On July 15, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kosovo.1

Kosovo’s economy has displayed resilience in the face of headwinds from the global financial crisis and euro area turbulence. Since the onset of the financial crisis in 2007, annual real GDP growth has never been less than two percent, and has averaged 4½ percent between 2007 and 2012, one of the highest growth rates in the region. The resilience owes primarily to the near-absence of financial or export linkages to crisis countries, and Kosovo’s exposure instead to Germany and Switzerland, countries in which two-thirds of the Diaspora reside. Remittances and FDI from the Diaspora have held up well, and have therefore continued to support domestic demand and finance a wide trade deficit. Unemployment remains very high at around 35 percent, although much of it reflects arguably informal employment.

Consumer price inflation has moved in line with import prices, notably for food, but core inflation has remained contained at around 2 percent, consistent with Kosovo’s unilateral adoption of the euro. The banking sector has remained liquid, profitable, and well capitalized, although financial strength differs across banks.

In the past two years, macroeconomic policies have been conducted in the context of a Staff-Monitored Program (in 2011) and a Stand-By Arrangement (from 2012). In this period, the authorities have restored a sustainable fiscal stance, improved the preparation and costing of spending initiatives, and strengthened the financial safety net. From 2014, fiscal policy would be anchored by a rules-based fiscal framework, expected to be enacted in July of this year. Further, the government is on-track to restore its cash buffers, provided the sale of the telecommunications company PTK proceeds as planned later this year. The authorities have also taken initiatives to strengthen competitiveness and enhance public infrastructure. The Stand-By Arrangement—that the authorities are treating as precautionary in 2013—expires toward the end of the year.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They noted that Kosovo’s economy had displayed resilience in spite of headwinds from the global financial crisis and euro area turbulence, owing in part to robust remittances and FDI inflows from the Diaspora. They emphasized that Kosovo’s exposure to Diaspora host economies could turn into a risk, however, should prospects for these economies deteriorate. Insuring against such risks would require the development of a tradable sector that could support self-sustained growth.

Directors praised initiatives to enhance competitiveness taken since the last Article IV consultation, such as strengthening the investor climate, investments in public infrastructure, and steps to normalize cross-country relations in the region. They emphasized that building a competitive economy and fostering the development of a tradable sector was a long-term process, however, that required stamina and patience from stakeholders. Directors also warned that inconsistent policies—such as outsized

Directors commended the authorities for restoring a sustainable fiscal stance in the past two years. They also welcomed the development of a rules-based fiscal framework that would anchor fiscal policy from 2014. Directors underscored, however, that the framework needed to be complemented by sound fiscal practices, especially the careful preparation and costing of spending initiatives.

Directors noted that Kosovo’s heavy reliance on indirect taxes was appropriate in view of the economy’s transfer-dependent structure. They emphasized, however, that the revenue structure would need to adjust as Kosovo integrates more closely with its neighbours—triggering the loss of customs receipts—and as the growth model shifts from dependence on transfers to domestic production. Directors underscored that the government’s bank balance with the central bank was a critical prudential buffer to insure the economy against fiscal and financial shocks that needed to be guarded carefully.

Directors noted that the banking system had grown rapidly in the past decade, but that further progress would require the strengthening of institutions. They urged in particular faster contract enforcement by the judicial system. At the same time, Directors noted that the banking system had remained stable, with adequate capital buffers, a modest level of non-performing loans, and high liquid reserves. They emphasized that risks could be reduced further by a gradual move to comprehensive risk-based supervision, the development of a macro-prudential policy framework, and by creating a permanent funding mechanism for the special reserve fund for emergency liquidity assistance.

As regards Kosovo’s Stand-By Arrangement, Directors noted that macroeconomic and financial policies had remained broadly on-track. They emphasized that the end-year parameters inscribed into the 2013 budget remained appropriate, provided an effort was made to achieve revenue targets. Directors underscored that the main risk to the program continued to stem from the fragile political environment.”

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