Overview

A potential candidate for EU membership, the Republic of Kosovo is a lower-middle-income country with a solid economic growth performance since the end of the war in 1999. It is one of only four countries in Europe that recorded positive growth rates in every year during the crisis period 2008–12, averaging 3.7 percent. The resilience of Kosovo’s economy reflects (i) limited international integration into the global economy; (ii) the success of its diaspora in the labor markets of, especially, the German-speaking countries of Central Europe, resulting in a steady reflux of remittances; (iii) a generally pro-growth composition of the budget, allowing for about 40 percent of public expenditures to be spent on public investments; and (iv) a steady influx of donor support.

The outlook over the medium term remains moderately buoyant. Growth reached 3.6 percent in 2015 and is estimated to remain at the same level in 2016. The productive base has remained narrow and exports have not reached a transformative level. A gradual rebalancing to make growth much more reliant on higher productivity at home and greater competitiveness abroad is needed for job creation – particularly for young people - and improvement of income levels. Efforts aimed at strengthening domestic productivity—particularly critical in a euroized country—will need to remain the pivotal policy anchor, as Kosovo continues to struggle with high rates of unemployment and poverty. Joblessness in particular - estimated at about 35 percent - remains a central economic-policy challenge. With the difficult labor market conditions affecting youth and women disproportionately, these conditions risk undermining the country’s social fabric. Largely reflecting historical legacies, Kosovo remains one of the poorest countries in Europe, with a per-capita gross domestic product (GDP) of about €3196 (US$ 3551) and about 30 percent of the population living below the national poverty line - and roughly one-eighth in extreme poverty.

Kosovo declared independence in February 2008. By early 2016, 109 of a total 193 UN member states have recognized Kosovo’s independence, including 23 EU member states. The unresolved status issue remains a key obstacle to attaining the country’s overarching objectives of political integration and socio-economic development. In mid-2009, Kosovo joined the International Monetary Fund (IMF) and the World Bank Group and, 3.5 years later it joined as a full member the European Bank for Reconstruction and Development (EBRD). Kosovo’s candidacy for EU membership was given a perspective, following the European Commission’s Feasibility Study in October 2012, according to which there were no legal obstacles that would prevent the EU from opening negotiations for a Stabilization and Association Agreement with the EU. Kosovo eventually, on October 27, 2015, signed the Stabilization and Association Agreement with the EU. The World Bank Group’s Country Partnership Strategy (CPS) supports Kosovo’s EU aspirations.

The World Bank Group has been working with Kosovo since 1999 and has provided and/or managed around US$400 million through more than 30 operations, including trust funds. Kosovo receives credits from the International Development Agency (IDA), with commitments of about US$76 million during the fiscal years 2012–15.

The World Bank Group is now engaged in helping Kosovo forge an economic growth path that sustainably creates more opportunities and high-quality jobs for the country’s growing, youthful population.

On May 29, 2012, the World Bank Group endorsed the first Country Partnership Strategy (CPS) for Kosovo, calling for a highly-selective lending program during fiscal years 2012–15. The CPS was extended for one year, ending in fiscal year 2016. It focuses on two strategic areas:

(i) accelerating broad-based economic growth and employment generation; and

(ii) improving environmental management.

With technical and financial support provided under these two pillars, the World Bank Group—along with support for EU integration—is focusing its support on accelerating broad-based growth and employment generation as well as improving environmental management. The World Bank Group has now begun preparations for a new Country Strategy Framework for Kosovo for the period covering fiscal years 2017 to 2021.

As of March 15, 2016, the active lending portfolio of the World Bank in Kosovo amounts to US$131 million across eight projects in the areas of energy, education, public sector reform, cadaster, agriculture, health, and financial sector.

For more than ten years, Kosovo has engaged with the World Bank Group and has succeeded in overcoming considerable challenges en route from the postwar reconstruction to a functioning and competitive market economy that provides its citizens and the enterprises operating therein an economic perspective.

Kosovo increased significantly its ranking in the Doing Business survey from 126th place in 2012 to 66th place in 2016. This is the result of work undertaken by successive governments of Kosovo. A legislative package of related reforms was approved in the Assembly in June 2011, embedded by World Bank-financed projects and programs, in particular the Business Environment Technical Assistance (BETA) project and the Sustainable Employment Development Policy Program (SEDPP). Both operations closed in mid-2012. BETA has supported the streamlining of regulations, while encouraging business development, including through the establishment of 26 municipal business centers where citizens can obtain permits and business registrations, pay taxes and customs fees—as well as receive advice. SEDPP has supported the country in maintaining a stable macro-fiscal framework and improving the conditions for sustainable employment. Through the various SEDPP-inspired reforms, the government has increased the transparency, accountability, and management of public expenditures, while laying necessary institutional and legislative foundations that Kosovo needs to generate sustainable employment and growth. The first SEDPP operation, in the amount of US$34 million, was disbursed in December 2011, while the second SEDPP tranche, a US$49-million grant, was paid out in June 2012.

Critical reforms, many of which supported by the World Bank, are ongoing.

Public Administration: Despite considerable progress achieved in the past few years, Kosovo still needs to improve public financial management and further utilize information technology to make efficient use of scare public resources. The capacity of the civil service to attract, motivate, and retain qualified staff is also a pressing constraint to the effectiveness of government institutions. As part of its engagement in the sphere of public administration, the World Bank is working with the Government of Kosovo to implement the Public Sector Modernization Project, which aims at (i) strengthening the performance of key budget organizations in budget formulation, budget execution, and public procurement; (ii) establishing the foundations for fiscally sustainable payroll management and effective human resource management in the core civil service; and (iii) creating conditions for the further automation of Government work processes and for the development of e-government applications

Agriculture: Kosovo is a country endowed with good quality agriculture land and has been largely food self-sufficient in the past. The agriculture sector currently contributes about 12 percent to the country’s GDP and accounts for approximately 35 percent of total employment in Kosovo. The country has competitive potential in the production of fruits and vegetables and in the livestock sub-sector, with domestic demand for horticulture and livestock products expected to grow as purchasing power increases in the country. This sector faces many challenges—including outdated technology and management practices, unfavorable farm structures, weak rural infrastructure, suboptimal use of inputs, and limited access to credit and investment capital. Agriculture is a priority sector for development and the Government of Kosovo has developed an Agriculture and Rural Development Plan (ARDP) to address this sector. As part of these efforts, The World Bank Group is implementing the Agriculture and Rural Development Project, aimed at helping the Government of Kosovo promote competitiveness and growth in the livestock and horticulture subsectors over the next decade.

Education: Although the net primary enrollment rate in Kosovo reaches 96 percent, the country’s higher education enrollment lags behind other countries in the region. The education infrastructure in the country is insufficient, with more than half of the schools operating on double shifts, and about five percent on triple shifts. The education system remains poorly regulated, resulting in low quality of services and weak linkages with labor demand. As a result, the Government is placing high priority on strengthening the education system and has prepared a multi-year strategy for developing both general and higher education in Kosovo. The Government in Kosovo worked with the World Bank to implement the Institutional Development for Education Project, which helped to (i) develop the organization and financing of the education system in Kosovo; (ii) build institutions and management capacities to promote quality improvements in primary and secondary education; (iii) create conditions to introduce efficient and appropriate designs and reduce multiple shifts in Kosovo’s schools; and (iv) strengthen the management capacity at the system and institutional levels for higher education. It is now working on the implementation of a new World Bank supported project, the Education System Improvement Project which aims to strengthen selected systems that contribute to quality, accountability, and efficiency improvements in education in the Republic of Kosovo.

Energy: A major obstacle to Kosovo's economic growth and development is inadequate and unreliable electricity, with frequent power outages disrupting manufacturing, education, and health services. Kosovo's electricity supply options are constrained by limited availability of renewable resources, ageing and unreliable power generation plants, supply shortages in the Balkans that limit Kosovo's ability to import electricity, and an absence of any natural gas resources or pipeline to import gas. Support to alleviate Kosovo's energy constraints is one element of the World Bank's broader strategy to support economic development, as well as improve competitiveness and environmental management. The support from the World Bank is aimed at addressing Kosovo’s energy crisis in a comprehensive way. This involves seeking to balance energy security and energy affordability with efforts to minimize socio-environmental externalities, so as to mitigate the adverse environmental, public health, and economic impacts on affected citizens. The active portfolio includes the Energy Sector Clean-Up Project, which addresses the environmental legacy issues related to the open dumping of ashes from Kosovo’s oldest power plants, for which Additional Financing has been approved. It also includes an Energy Efficiency and Renewable Energy Project, which aims to reduce energy consumption and fossil fuel use in public buildings and support Kosovo in enhancing the policy and regulatory environment for renewable energy and energy efficiency.

Finance and Competiveness: The financial system in Kosovo is dominated by foreign-owned banks and is primarily funded from large—relatively stable—flows of remittances. Although Kosovo has proven to be relatively resilient to the global financial crisis, it suffers from structural financial sector vulnerabilities that need to be addressed. Kosovo is working with The World Bank Group, in the context of the Financial Sector Strengthening and Market Infrastructure Project, to create a strong regulatory and supervisory framework, strengthen financial system supervision, and improve access to affordable financial services, especially outside of the capital city and for small enterprises.

 


LENDING

Kosovo: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments