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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Even if pouched in complex, quantitative studies, “risk” remains a complex, multi-dimensional, and highly subjective concept that reflects an analyst’s lack of confidence and sense of uncertainty. In ... Show More +this, financial markets are not different from other sectors in the economy. Decision-making processes—especially if they relate to large-scale investments to be realised over a medium- to long-term horizon—are facilitated by an environment, in which the underlying “risk components” can be objectivised, quantified, and tracked over time. This is where functioning markets play such an important role, aggregating individual risk assessments, perceptions, and resultant actions and “translating” them into (accurate) price signals, which will help to increase the effectiveness of economic decisions made in the economy as a whole. In the financial sector, this price signal is the interest rate. Even though reported figures tend to be averages spanning over a wide range of individually relevant prices (typically reported without accompanying standard deviations), they condense important information from market participants in the private and financial sectors.To take an example, consumer loans in Kosovo, over a one-year period, dropped by about 100 basis points to 11 per cent at the end of the second quarter in 2014. As such, consumer loans cost about 1½ percentage points more than they do in Montenegro, the only other country in the Western Balkans having adopted the euro as sole legal tender, and 6 percentage points more than in Germany, the eurozone’s benchmark economy. Similar differentials apply to the cost of credits for enterprises. 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. In the Kosovo-specific context, it comprises essentially three types of perceived extra risks, viz., (i) business climate (difficulties faced with collaterals, contract enforcement, and/or property rights); (ii) business conduct (the high degree of informality, and the lack of financial transparency and/or viable business plans); and (iii) the particular challenge faced by foreign-owned banks in Kosovo that their respective headquarters would group them together with troubled banks elsewhere in Eastern Europe and integrate them in corporate deleveraging strategies out of (perceived) high-risk markets. Faced with this particular set of constraints, the banking sector in Kosovo has, in principle, adapted astonishingly well to the environment, in which it operates—focusing its activities on remaining healthy, liquid, profitable, deposit-based, with portfolios that contain only manageable risks.Against this backdrop, it is apparent why banks in Kosovo have been conservative in their lending decisions; and this prudence has 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 more to the country’s socio-economic development. For any given financial institution to be open to fostering growth and employment generation, there has to be a business case. Within this tension between “micro-economic” and “macro-economic” objectives, there is an underlying question on banks’ optimal degree of risk-taking.The inherent costs of a banking sector being too willing to take risks are well-understood and—having just witnessed the aftermath of the Global Financial Crisis—well documented. However, the opposite case, when banks are too risk-averse, has similarly clear macro-economic consequences, posing the risk of asphyxiating an economy’s innovation and growth potential. A corresponding “vicious cycle” would start with weak businesses (without proper financial reporting) and unknown start-ups, which leads to considerable hesitation among banks to lend. As a result, banks require high collaterals and high interest rates for credits with short maturities, which leave the private sector with heightened cash-flow management problems and reduced rates of returns on its investments. Such a situation cements firms’ financial vulnerability, leaving them still weak and unattractive to the banking sector and exposed to the risk of exiting the market altogether.The overarching consideration is thus the following: if a bank is convinced of the economic potential inherent in a client’s business plan, it will benefit from efforts to align repayment/amortisation obligations with the expected turnover and profit profiles. Evidently, a failed business is in nobody’s interest, but it is an outcome that becomes more likely if the combination of high interest rates and short maturities intersects with an ex ante unexpected deceleration of economic growth (for instance, as a result of a protracted political crisis and the ensuing deterioration in overall business confidence). Banks might not see any space (yet) to lower interest rates beyond current levels. However, extending loan maturities alone might be an important step to reducing default risks for a considerable number of corporate clients.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 macro-economic costs would be far too high and detrimental to the development objective motivating said requests. But reflections along these lines invite the question of whether it would not also be in the financial sector’s own economic interest to move towards the edge of, or go slightly beyond, its current comfort zone. Market leaders will see it first: unrealised opportunities are costly not only to the country and its citizens’ socio-economic welfare but also to the bank’s own bottom line. Show Less -
While many structural challenges like these continue to represent hurdles to sustained growth in the region, another, less predictable challenge also emerged during 2014 - significantly hampering grow... Show More +th in these countries and across the region as a whole: weather.Extreme weather events, including devastating floods in May, plagued much of the region throughout 2014 and negatively impacted nearly every economic sector in the region - from agriculture, to energy, to tourism.Unprecedented rainfall in May resulted in the worst floods the region has seen in more than 100 years. In Bosnia and Herzegovina, these floods killed more than 20 people and displaced a further 90,000 and resulted in billions of dollars in damages across the region. The floods are estimated to have cost the country some 15% of overall GDP in lost output and damages. In Serbia, the overall damage from these floods is estimated at around 4.7%. Nearly every segment of the economy was negatively impacted by these floods.The impacts of this flood were amplified by earlier weather events in the region, further exacerbating the negative effect they had on growth in 2014. A drought in the summer of 2012 and a severe winter that same year stymied the agriculture sector, reduced energy generation, hindered tourism, and slowed construction more than usual around the region. The severe impact these extreme events are having on economies in the region highlights the overall economic vulnerability of these countries. With climate, policymakers in these countries continue to explore options to help avoid or, at the very least, how to mitigate well these shocks.In addition to adaptation and mitigation efforts - such as flood defenses and weather-resistant infrastructure - the latest SEE RER also highlights the importance of expanding insurance markets in countries throughout the region to better protect homeowners and businesses against natural disasters - especially in the agriculture sector. As poorer households are more likely to work in agriculture and live in rural areas, the need for mechanisms to buffet them against the shocks brought on by floods, droughts, and heat waves is even more pressing. Although as many as 40% of people in Albania and 20% in both Bosnia and Herzegovina and Serbia work in agriculture, insurance rates for plan that protect against weather and other natural disasters among these people is drastically low. In FYR Macedonia, just 4% of registered farmers insure their crops against weather related perils. In Kosovo, insurance companies represent just 3% of the total assets of the financial system, while in Bosnia and Herzegovina they represent just 5% of the total.With economic growth forecasted at or above 3% in Albania, Kosovo, FYR Macedonia, and Montenegro, in 2015, this new year could see the South East region slowly emerge from stagnation. In addition to addressing the ongoing problems of high unemployment, stunted job creation, and boosting productivity of domestic firms, however, policymakers must also turn their attention to unexpected threats - such as floods, droughts and other natural disasters. Supplementing mitigation and adaptation initiative in these six countries with mechanisms such as insurance coverage - especially among the more vulnerable in the region - can go a long way in preventing the next disaster. These mechanisms can also drastically help recovery efforts on the ground if and when the next weather shock occurs. Show Less -
PRISHTINA, January 15, 2015 – The Minister of Finance of the Republic of Kosovo, Avdullah Hoti, and the World Bank’s Country Director and Regional Coordinator for Southeastern Europe, Ellen Goldstein,... Show More + today signed two new World Bank-financed projects, the Kosovo Energy Efficiency and Renewable Energy Project (US$31 million) and Kosovo Health Project (US$25.5 million).Minister of Finance, Avdullah Hoti, while thanking the World Bank for the willingness to support the Government of Kosovo through these two projects, emphasized, "I am here with the two ministers, Minister of Economic Development Blerand Stavileci and Minister of Health Imet Rrahmani, to sign two important agreements with the World Bank – the agreement on energy efficiency and the agreement on health reform. The agreements are under very favorable terms, particularly given the limited budgetary capacities of the country, and they address two areas that are among the five priorities of the Kosovo Government.""We have approved yesterday the Government Annual Plan, and energy and health are two areas that are a priority for the Government, not only in declarative terms, but are real priorities, which we aim at supporting though concrete measures. These two projects actually contribute to Government’s efforts to develop the two sectors, which are very crucial for the social aspect of the citizens of the Republic of Kosovo, but also for the long-term economic development, through finally resolving the issue of power supply," added Minister Hoti.He also said that "We are moving ahead with the ‘Kosova e Re’ project and Energy Efficiency supports this project through energy saving measures."“A modern energy sector generating reliable, affordable and cleanest possible electricity is indeed Kosovo’s most urgent priority,” concurred the World Bank Country Director Ellen Goldstein. “Using available energy more efficiently and encouraging the development of renewable sources represent two central pillars of Kosovo’s comprehensive energy strategy.”The Kosovo Energy Efficiency and Renewable Energy Project (KEEREP) aims at reducing energy consumption and fossil fuel use in public buildings and demonstrating the economic viability of corresponding investments. Through this project, the Bank will be supporting Kosovo in implementing its comprehensive energy strategy and enhancing the policy and regulatory environment for renewable energy and energy efficiency.The Government is expected to benefit from this project through reduced energy expenditures, a renovated building stock, with a particular focus on universities and hospitals, and improved indoor comfort and functionality. In parallel, the Ministry of Economic Development, the Ministry of Environment and Spatial Planning, the Kosovo Energy Efficiency Agency, and the Energy Regulatory Office will develop their capacity to foster sustainable energy investments across the country. The private sector will benefit from an improved regulatory environment, which is expected to facilitate faster licensing and easier market entry for companies developing renewable sources of energy, which, in turn, will stimulate demand for goods and services from suppliers and service providers in these sectors.“Faced with still one of the poorest health outcomes in Europe and the citizens’ risk to be exposed to severe financial burdens from unaffordable out-of-pocket payments,” added Jan-Peter Olters, World Bank Country Manager for Kosovo, “the Government is taking a pro-active stance towards improving the quality of the health care system, not least through the introduction of a mandatory health insurance that will offer increased access to, and better quality of, health services in Kosovo.”The Kosovo Health Project (KHP) seeks to improve the financial protection from health spending for the poor and quality of care for priority maternal and child health and non-communicable disease services in Kosovo. It will support the Ministry of Health and future Health Insurance Fund in introducing and implementing health insurance and other reforms to improve the quality of primary health care services. In order to improve quality of care, the project will finance investments in priority maternal and child health equipment for primary care facilities and hospitals. In addition, information systems will be modernized to allow health sector data to be the basis for informed decision-making and oversight in Kosovo.The poorest households will be exempted from health insurance contributions, cost-sharing for health care, and/or drugs covered under the new legislation. Municipalities, health facilities, and providers at these facilities will benefit from capacity-building and other support provided under the project. The Health Project will be implemented over a period of five years. Show Less -