20220111-IMF-Republic_of_Kosovo_2021_Article_IV_Consultation-Press_Release_and_Staff_Report_91页_12mb

Summary of 2021 Article IV Consultation with the Republic of Kosovo

Core Content

The 2021 Article IV Consultation with the Republic of Kosovo, conducted by the IMF, assessed the country's economic recovery from a severe pandemic-induced recession in 2020. The economy rebounded strongly in 2021, with real GDP growth projected at 7.5 percent, driven by improved vaccination rates, renewed mobility, and significant support from the diaspora. The consultation concluded that the economy is returning to a degree of normality, although uncertainties and risks persist, particularly from the ongoing pandemic and its potential resurgence.

Main Views and Key Information

Economic Recovery and Outlook

• GDP Growth:

  • Real GDP contracted by 5.3% in 2020 but rebounded by 7.5% in 2021.
  • Growth is expected to normalize at 3.8% in 2022, but the pandemic remains a key downside risk.
  • The output loss compared to the pre-crisis trend is projected at 3.3% in 2025, half of what was expected in the 2020 consultation.

• Inflation:

  • Inflation reached over 5% in 2021 due to energy and food price increases.
  • It is expected to decelerate to 2.5% by the end of 2022 as base effects fade.

• Fiscal Policy:

  • The fiscal stance tightened in 2021, moving from a deficit of 7.9% of GDP in 2020 to a small deficit of 0.4% of GDP.
  • The fiscal rule (capping deficit at 2% of GDP) will be followed in 2022, with a fiscal impulse of around 2 percentage points (pp) of GDP.
  • Public investment is seen as a key tool to support recovery and economic resilience.

• Diaspora Inflows:

  • Diaspora inflows were a critical factor in the recovery, with remittances and tourism contributing significantly.
  • The 2021 fiscal revenues increased by 4.2% of GDP, partly due to the diaspora travel overshoot.

• Public Expenditure:

  • The 2021 Economic Revival Program (ERP-21) extended previous measures but also included new ones.
  • The composition and targeting of social transfers need improvement to ensure efficiency and avoid unnecessary spending.

• Financial Sector:

  • The banking sector remained resilient with strong capital and liquidity buffers and low non-performing loans (NPLs).
  • Credit risk monitoring and provisioning should be strengthened as the CBK unwinds pandemic-related support measures.
  • The CBK's international reserves are adequate, supported by the new SDR allocation.

• Structural Reforms:

  • Diversifying growth engines, reducing informality, and improving governance are critical for long-term resilience.
  • Investment in green projects and carbon pricing are recommended to support sustainable growth.
  • Improving the efficiency of the justice system and tackling corruption will enhance economic performance.

• External Sector:

  • The current account deficit (CAD) remained at around 7% of GDP in 2021, financed by diaspora inflows and FDI.
  • The external position is projected to be moderately weaker than fundamentals in 2021, but is expected to improve in the medium term.

• Challenges and Risks:

  • High informality negatively affects competition and firm size.
  • Uncertainty remains high due to potential new virus variants and ongoing fiscal risks.
  • The new law on public salaries and the indexation of war veteran benefits may breach the legal ceiling for public spending.

Key Recommendations

• Fiscal Policy:

  • Maintain a fiscal impulse of around 2 pp of GDP in 2022 to cushion the softening of diaspora inflows.
  • Focus on public investment to improve economic resilience.
  • Ensure the new law on public salaries keeps the wage bill within legal limits.
  • Continue efforts to expand the tax base and strengthen fiscal transparency.

• Financial Policy:

  • Strengthen credit risk monitoring and ensure bank provisioning reflects asset quality.
  • Improve the CBK's governance and its capacity to implement financial sector reforms and safeguard assessments.

• Structural Reforms:

  • Enhance public investment management and performance of public-owned enterprises (POEs).
  • Improve the efficiency of the justice system and reduce corruption.
  • Invest in green projects and infrastructure to support sustainable growth.

• Diaspora and Investment:

  • Leverage diaspora inflows to support economic recovery and development.
  • Diversify growth engines by improving infrastructure, skills, and investment composition.
  • Encourage FDI and expand the market for government securities.

• Climate and Environment:

  • Develop a credible climate strategy centered on carbon pricing.
  • Allocate proceeds from carbon pricing to green projects and support vulnerable households affected by energy price increases.
  • Prioritize the installation of filters in the largest lignite-based energy plant in collaboration with the EU.

Conclusion

The IMF Executive Board endorsed the staff's appraisal and emphasized the importance of maintaining fiscal discipline, strengthening the financial sector, and implementing structural reforms to ensure long-term economic resilience and growth. The next Article IV consultation is expected to follow the standard 12-month cycle.