Kosovo is a lower-middle-income country which has experienced solid economic growth over the last decade. Kosovo is one of only four countries in Europe to experience growth in every year since the onset of the global financial crisis in 2008.
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Kosova Sot: What happens if the budget does not get approved this year?Jan-Peter Olters: There are emergency provisions in Kosovo's legislation that give the authorities a little extra time to finance... Show More + current -- but not capital -- expenditures, in function of the previous year's budget. But even this contains a number of important implications and risks. First, by having to delay public investments until a new budget will have been approved by a Parliament that was able to constitute itself will reduce overall growth rates in the economy -- beyond the amounts not spent by Government. The uncertainty alone will have the private sector delay its own decisions on large expenditures as well. Second, without the mid-year budget review for the current budget, the ability to accommodate the salary increases within existing line-item constraints risks the Government's ability to pay (all) public sector salaries by year's end and rectify any arrears situation early in 2015. If the January emergency budget only allows one-twelfth of the previous year's budget for the wage bill, the Government will face immense difficulty in paying all January salaries and repaying any outstanding December wages. This would lead to an accumulation of payment arrears with a considerable risk of, ultimately, asphyxiating private sector activities. Even healthy and profitable companies would see their ability to honor payment obligations affected, resulting in arrears spreading throughout the economy. And third, if the politico-constitutional crisis goes beyond the emergency period specified in the laws, the ultimate risk consists of the Government's inability to authorize any spending, with incalculable risks to the economy and the country's socio-economic development potential. KS: Can it happen that the 2015 budget brings the country to bankruptcy?Olters: Parliament's inability to vote on and approve a 2015 budget could provoke a very serious crisis, given the time limits that Kosovo's laws define on a budgetary emergency period. Beyond that initial phase, as said before, it is unclear on what basis the Government could authorize any payments, which, of course, contains the risk of a fiscal crisis of difficult-to-contain proportions.KS: Any possible alternative to get out of the budgetary crisis?Olters: Sure. Parliament will have to find some way to adopt, in time, a budget for 2015. No political grouping with any hope of being able to form Kosovo's next Government could afford to have the country fall off the fiscal cliff. Beyond the resolution of the overarching politico-constitutional crisis, which represents a separate challenge, Members of Parliament will have to devise -- in parallel, if the formation of institutions extends well into 2015 -- an agreed-upon procedure that would allow for agreement on, and the adoption of, a "consensus" budget. Show Less -
* The World Bank Group comprises five institutions, including the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA), which together make up t... Show More +he World Bank; International Finance Corporation (IFC); and the Multilateral Investment Guarantee Agency (MIGA). Show Less -
Signs of recoverySome signs of hope show through in the region. Central and East European (CEE) countries are expected to see growth accelerate to 2.5 percent in 2014 and to 2.8 percent in 2015 – a si... Show More +gnificant improvement from the previous two years when growth was very modest (0.8 percent in 2012 and 1.3 percent in 2013). But recovery in the new EU member states remains mixed and growth in Western Europe is disappointing.Unemployment rates in several countries have peaked and are now showing signs of improvement. While they remain above 10 percent in several CEE countries, they are declining the most in countries such as Estonia, Latvia, and Lithuania, where structural reforms and prudent policies were implemented swiftly. Given past trends, these positive developments are expected to be reflected in higher income growth for the bottom 40 percent of the population.In the Western Balkans, economic growth is expected to drop from 2.4 percent in 2013 to only 0.6 percent in 2014, due to its debt overhang that is reducing financing for business and lack of reform momentum, and then recover modestly to a projected 1.9 percent in 2015. Ukraine crisisMeanwhile, in Ukraine, geo-political tensions have developed into a deep crisis for the country. Recent trends point to a sharper decline in Ukraine’s real GDP in 2014 and continued retrenchment in 2015 compared to earlier projections. Ukraine’s GDP is expected to contract 8 percent in 2014 and 1 percent in 2015.The conflict in the east has disrupted economic activity, made collection of taxes difficult, adversely affected exports, and hurt investor confidence. Meanwhile, weak revenue performance, rising spending pressures, and a growing Naftogaz deficit make fiscal adjustment more challenging. The current account deficit has adjusted because of the sharp depreciation, but balance of payments pressures remain high due to large external debt refinancing needs, low FDI, and limited access to external financing. A prolonged confrontation in the east, constrained credit supply due to risks in the banking sector, constrained domestic consumption, and investment demand all pose risks and affect prospects for recovery.Russian stagnationIn Russia, the World Bank warned earlier this year of an unfinished transition, including ongoing problems in the business environment and heavy reliance on oil revenues. Currently, the Russian economy is slowing as its past growth drivers have weakened. GDP growth in Russia was just 0.8 percent in the first half of 2014, compared to 0.9 percent in the first half of 2013.Economic activity was already hamstrung in 2013 by lingering structural problems and a wait-and-see attitude on the part of both businesses and consumers. An additional negative impact on the economy – besides slow structural reforms – came from increased geopolitical tensions and an uncertain policy environment. It is policy uncertainty about the economic course the country will take that is casting the longest shadow on Russia’s medium-term prospects. There is a greater need for reforms to enhance the business climate to build avenues for growth and less reliance on the energy sector.The Commonwealth of Independent States (CIS) economies have faced headwinds due to the crisis in Ukraine and ongoing stagnation in Russia, however broad spill-overs to other countries have been limited so far. Immense reliance of the CIS economies on energy exports persists, and progress on structural reforms has slowed. Growth for these countries is expected to be a meager 1 percent in 2014 and to rise only slightly to 1.3 percent in 2015.In Turkey, growth has also slowed from over 4 percent in 2013, but is projected to stabilize at about 3.5 percent in 2014 and 2015.Going forward“The forecast for the Emerging Europe and Central Asia region remains tepid because of deferred structural reforms, as well as ongoing weak growth in Western Europe and stagnation in Russia,” noted Hans Timmer, Chief Economist in the World Bank’s Emerging Europe and Central Asia region. “Economic growth in the region remains lower than in most other regions of the world. Going forward, the emphasis should be on improving governance and the investment climate, strengthening competitiveness, ensuring the stability of the financial sector, and maintaining a sound macroeconomic framework.”“To be sustainable in the longer term, economic growth and shared prosperity need to be fiscally affordable, environmentally responsible, and conducive to social inclusion,” said Timmer.The World Bank, working jointly with other World Bank Group institutions, is helping its client countries in Emerging Europe and Central Asia address these and other challenges to reduce poverty and boost shared prosperity through policy dialogue, analytical work, project funding, and reimbursable advisory services.-----------------------------------------------------------------------------------Watch the video: Press Briefing - Regional Economic Update Show Less -
This interest rate differential vis-à-vis any benchmark country—be it Germany or Montenegro—reflects the additional “risk premium” that banks perceive and charge on loans. It comprises essentially thr... Show More +ee types of perceived extra risk, viz., (i) the business climate (collaterals, contract enforcement, or property rights); (ii) business conduct (high degree of informality, lack of financial transparency, or the lack of viable business plans); and (iii) the Damocles’ sword faced by foreign-owned banks in Kosovo of being merged by their respective headquarters into the group of troubled banks elsewhere in Eastern Europe and confronted with corporate strategies to deleverage out of (perceived) high-risk markets. Faced with this particular set of constraints, the banking sector in Kosovo has, in fact, adapted well to the existent environment, focusing its activities on remaining healthy, liquid, profitable, deposit-based, and with portfolios that contain but manageable risks.It is apparent why banks in Kosovo have been conservative in their lending decisions; and these have served the sector and the economy well in recent years, especially if compared to the experiences made in neighbouring countries. At the same time, demands on the banking sector, by the public and polity alike, have been increasing to contribute (even) more to the country’s development. For financial institutions to be in a position to do support the “macroeconomic” development objective, the “microeconomic” aspects (of an underlying business case) have to be in place as well—thereby begging the overarching question as to whether, for banks, there is an optimal degree of risk-taking.The inherent costs of a banking sector that is too willing to take risks are well-understood and, given the recent financial history, well documented. The opposite case, when banks are too risk-averse, has similarly clear macroeconomic consequences, posing the risk of asphyxiating an economy’s innovation and growth potential. The corresponding “vicious cycle” starting with (i) weak businesses and unknown start-ups; (ii) leading to considerable hesitation among banks to lend; (iii) as manifested in banks’ requiring for loans with (overly?) short-term maturity, if granted at all, high collaterals and high interest rates; (iv) which leaves the private sector with reduced rates of returns on its investments; (v) cementing their financial vulnerability; and (vi/i) leaving them still weak and unattractive to the banking sector. In this context, banks would need to ask themselves whether extending loan maturities would not effectively reduce default risks, as loan repayment profiles become more closely aligned with investments’ (expected) revenue and amortisation profiles.There are considerable options to assess the extent, to which banks’ risk exposures could be reduced further so as to allow for a tangible reduction in the real cost of credits. One could add a whole array of other potential changes to the banks’ conduct, all sound from a business perspective and desired from an economic policy-making point-of-view, but let me just mention one: the delayed modernisation of the insurance sector could be accelerated by linking it explicitly to mortgage lending, offering to insure borrowers against incapacitation, unemployment, and death. This would not only protect the interests of both contracting parties but also open doors for the diversification of insurance products.Evidently, demands to the banking sector for lower interest rates and more favourable conditions to the private sector must not come at the expense of increased vulnerability and fragility to the financial sector—the macroeconomic costs alone would be far too high and detrimental to the development objective motivating said requests. But a debate of this nature, in the context of the Finance Fair, does warrant the question of whether it would not also be in the financial sector’s interest to move towards the edge of, or go beyond, the current comfort zone. It is true for all market participants in the financial and private sectors: unrealised opportunities (if viable) are very costly to the country and its citizens’ socio-economic welfare. Show Less -