What is the World Bank’s assessment on the economic trends in Kosovo?
In comparison to its neighbors (and other countries in Europe), Kosovo has weathered the global financial and euro crises fairly well, protecting the strong macro-fiscal and financial foundation of its economy. Unlike Greece or Italy, for instance, where over-indebtedness has been the root cause of the current crisis, or Iceland, Ireland, Spain, or Cyprus, where overexposed banking sectors have brought previously healthy economies to the edge of sovereign default, Kosovo has maintained low deficits and debts and a stable, liquid, and generally profitable banking sector. It has been particularly impressive that, for years, about 40 percent of public expenditures were earmarked for investments, even if the majority of related funds went to one single project. As a result, key elements necessary to pursue pro-growth policies are in place, policies that would place further improvements to the business climate and a tangible reduction in the very high rates of unemployment and poverty center stage. Kosovo’s current economic situation, characterized by too few high-quality, well-paying jobs, reflects productivity levels unsufficient to produce goods and provide services that are competitive in domestic and foreign markets. Not being able to sell the goods and services at prices needed to remain profitable, this leads to high external deficits in the trade of goods and services. As a result, export revenues and multiplier effects of domestic spending remain very low. The second point, referring to the high import content of domestic consumption and investment, implies that, for any euro spent in Kosovo’s economy, too large a percentage represents income of foreign rather than domestic companies. For this reason, the continued focus on reforms to improve the business climate—reflecting the quality of laws, public institutions, and public infrastructure—remains critical to be able to attract direct investments of the scale and scope to increase know-how, the use of state-of-the-art technology, and overall productivity. Since summer 2011, considerable progress has been made, but it is now essential that the discipline of macro-fiscal and financial policies and the overarching business climate-related reform momentum are maintained even in the context of a more fragile politico-economic environment and in anticipation of general elections within the foreseeable future.
There have been different reports on the GDP figures in Kosovo. What is the GDP rate for 2012?
There are no final figures on 2012 GDP yet, and we expect the Statistical Agency to publish those in late summer or early autumn. On the basis of the information available to us, the World Bank currenty estimates 2012 growth to have been a little less than 3 percent and, as such, higher than in neighboring countries, the economies of which seem to have stagnated or shrunk last year.
What is the World Bank projection of economic growth this year?
With a GDP of about five billion euro, Kosovo’s economy is relatively small, meaning that single events—such as the success or failure of a large investment or privatization—or changes in the external environment can have a considerable impact on overall growth. Information available to us seems to indicate a modest deceleration of economic activities in the first quarter of 2013, traditionally the weakest quarter in any year, with the potential of some acceleration towards the summer and year’s end. Taking into consideration developments in Kosovo, the region, and the eurozone, any result either below 3 percent or significantly above 4 percent in 2013 would surprise me.
Despite the macro-economic indicators, the unemployement and poverty remain at alarming levels. Why these figures are not declining?
Families can get out of poverty only through regular income streams and a level of wages high enough to support a household. However, a sufficient number of well-paying jobs cannot be decreed by a single stroke of the pen—in that case, there would not be poverty in the world or the need to listen to the analyses and the advise of economists—but are the result of sustained efforts to provide an attractive environment and a long-term planning horizon for companies, small and large, domestic and foreign, to engage activities that will generate profits. Firms in Kosovo, as those operating elsewhere, need a clear legal framework, its uniform application, professional public institutions, high-quality public services, not least those in education, and a supportive public infrastructure. Any such element represents one link in a chain that is needed to pull Kosovo’s society out of the current unemployment and poverty situation. This means, it does not suffice that some of the links are strong (as they are), all of them will have to be. Improvements in the social situation of families and households, as described by key indicators of unemployment and poverty, thus only follow reforms in other areas and the decision by private companies to expand their economic activities in Kosovo. And this reflects the principal problem of socio-economic development: it is difficult (if not impossible) to be patient when poor, opening the door for populist pre-election promises made at the expense of the ability to implement development policies successfully.
Kosovo has marked a positive enhancement in the WB Doing Business Report, yet there are obstacles. Why can’t Kosovo attract foreign investors still?
The premise is not a hundred percent accurate, but it is true that Kosovo finds itself in a most critical phase that is likely to shape the perception of investors in months and years to come. A number of important investment decisions by foreign companies have been made in recent months, especially the ones in electricity distribution, banking, and telecommunications, with the investors’ decision to come to Kosovo reflecting the improvements in the business climate, including those measured in the Doing Business index. However, foreign investors have not been welcomed with open arms to Kosovo—partly reflecting principal objections to privatization, suspicions over the bidding price offered, or perceived changes to the domestic environment on key assumptions underpinning investors’ economic viability and profitability calculations. Every political actor, whether in government or opposition, thus bears an important responsibility in helping Kosovo to benefit from foreign investors’ interest, technology, and know-how. However, to do this, political parties, civil society, and the public would need to debat—and ultimately agree on—a national core consensus on a most appropriate economic model for Kosovo and the public and private sectors’ roles in it.
The Kosovo Assembly Speaker recently declared that the investors are requested a share before coming to invest in Kosovo. Is corrupton scaring the investors away?
Whether it did, I do not know—whether it would, certainly. It is not only a criminal offense to accept “rewards”, it is equally criminal to pay them, and this would be persecuted in the investors’ home countries.
How do you assess the sale of PTK, is €277 million the realistic value of 75% of shares?
Calculations of the value of a company—or the discounted stream of future net profits derived from its activities—are very complex and prone to a considerable degree of uncertainty. You have seen this in two very different evaluations by the two remaining bidders. From the (very imperfect and incomplete) information that I have, the winning bid appears to come from an investor seriously interested in the company’s development, its long-term operation and profitability, which would lead to the creation of high-quality, well-paying expert jobs and a stream of dividends (on the remaining 25 percent of shares) and tax revenues for the government.
Does the World Bank support the privatization from Axos and Najafi?
The World Bank is not involved in this privatization, neither financially nor technically. International experience has shown, however, that the private management of companies, especially in the highly innovative telecommunication sector, tends to result in increased productivity, efficiency, and profitability, as reflected in higher-quality services to the customers and a downward pressure on the prices being charged for them. Even though the publicly-owned PTK has been very profitable, the government has no particular advantage over the private sector in managing such a company. I am quite convinced that, in a few year’s time, Kosovars will be satisfied in having privatized this company.
What do you expect do happen next with PTK?
I cannot speak for the new owners and I have not seen their detailed plans for PTK. But it is clear that the basis for their very serious bid has to be a medium- to long-term business plan for this company. And for this to work, especially in a sector as competitive, fast changing, and technologically innovative as the telecommunciations sector, it will have to bring PTK to the cutting edge of technology, allowing Kosovo to “import” new ideas, new technologies, and the know-how and, in so doing, increase productivity in this sector.
What are the benefits of privatizations in the public sector?
The domestic debate in Kosovo has focused a lot on the price being offered in the privatization of the electricity distribution and telecommunication companies. Clearly, this is an important revenue for the state budget, allowing for public investments in other sectors otherwise not affordable. But the real benefits lie somewhere else: privatizations to high-quality investors with the technology, know-how, ambition, and perspective to operate in Kosovo, invest in the company’s future, and make it competitive and profitable are among the most effective ways to close the productivity and income gap between Kosovo and the countries in the European Union. There is no modern economy with modern companies employing current technology.
KEDS has been privatized for only €26 million. How do you assess this process?
It would have been easy for the government to get a higher price for KEDs. To do that, it would “simply” have had to agree to higher tariffs for the consumers, to accept commercial risks, and/or not to insist on job guarantees for current employees and investment obligations for the new owners. As such, the government was willing to pay a high “political price” for the success of this transaction. You just have seen in Albania, such a privatization—if not done correctly—can fail, and I was encouraged to see that the government was willing to draw the right lessons from this episode and “sacrifice” quick wins over longer-term sustainability.
Now we have a tender for Kosova e Re project. World Bank is involved in this process. How do you see the delays in this important project?
The Kosova e Re power project, a replacement investment for the highly polluting and inefficient Kosovo A power station, is the largest private-sector investment in Kosovo’s history. It is a technially and financially immensely complex project that—because it involves coal technology—has been picked by international and local civil society organizations as battle ground over global energy strategies. Against this backdrop, Kosovo has needed an open debate on an energy strategy and required investments that is to achieve three objectives at the same time, namely (i) to guarantee the supply of sufficient energy at any time; (ii) to ensure that households and firms operating in Kosovo can afford the energy; and (iii) minimize socio-environmental costs from the ultimately chosen energy mix, while respecting—as committed to as signatory to the Energy Community Treaty—the European Union’s environmental acquis communautaire. It has proven an ultimately productive debate, and Kosovo has found a minimal core consensus to use as much alternative energy as possible and rely on as much fossil-based energy as absolutely necessary.
There is an ongoing debate by the CSOs on coal-based or alternative energy. What is the stance of World Bank on this issue?
The World Bank is welcoming this debate on an issue of strategic importance for Kosovo. Its expert teams are actively engaging in it and have taken every argument brought forward very seriously. To be as constructive as possible, we have similated and analysed various options of an energy mix for Kosovo, engaged an independent panel of external experts to peer review the underlying assumptions, the methodology, and results, undertaken efforts to estimate the (economic costs of) various forms of pollution, and are preparing an in-depth environmental and social impact assessment of the planned KRPP investment. We have been organizing consultations with all civil society organizations and made sure that all related documentation is publicly available. We have projects ongoing in dealing with legacy issues of coal-based energy generation, especially the ash dumps and highly toxical and hazardous chemicals, are preparing projects in energy efficiency, renewable energy, and water security in central Kosovo. The public scrutiny and global attention paid to this project should help to ensure that, at the end of this process, Kosovo will indeed benefit from the most modern power station using best available technology—setting standards for other countries in similar situations—and advance the utilization of alternative sources of energy as quickly and comprehensively as possible and economically viable.
Recently there have been continous protests against the increase of electricity price. Is it likely there will be an increase of energy price in future, and if yes, what would the increase be like, according to the WB?
A considerable number of elements fed into the debate over, and the protests against, electricity bills, including (i) the structure of the currently used block tariffs; (ii) the independence of the energy regulator; (iii) the implications of replacing analog with digital meters; (iv) the methods applied to reading the meters; (v) the handling of consumer protests; (vi) the implications of private-sector involvement in the energy sector; and (vii) the potential friction between the implementation of a cost-reflective energy strategy and social policies. A crisis like the one over the January electricity bills can help to link all elements of relevant challenges and result in a more comprehensive and holistic approach to all related issues. Any action taken, whether in line with the current energy strategy or not, will have costs that need to be identified, quantified, and appropriately distributed, with electricity tariffs—as decided by the energy regulator—ensuring that Kosovo will have energy available. To address unwanted social consequences is a political challenge and will have to be addressed through more pro-active and closely targeted social policies.
The government is for some time without a minister of finance. Is this a handicap in the relations between the World Bank and the Government?
The Acting Minister of Finance and his team are doing their best to avoid any negative implications of the political situation. But I am not denying the fact that the current situation is not ideal.
The former Minister of Finance, Bedri Hamza, has been decreed as Governor of Central Bank, and this encountered criticism by opposition. Do you consider CBK has been politicized?
The appointment process of the new central bank governor was consistent with laws and regulations, and his recent government experience per se does not imply politicization. The current governor of Germany’s central bank, the Bundesbank, for instance, had previously been Chancellor Angela Merkel’s economic advisor. But with the decisions taken since his appointment, pronouncements made, and analyses presented by the Bundesbank, there has not been any criticism of politicization—as every action taken was in line with the bank’s mandate and role. The leadership in the CBK will find itself in similar positions, in which the CBK mandate and government objectives might not necessarily be congruent; and at that point will Kosovo be able to see whether the central bank’s de iure independence has been protected or de facto compromised. For as long as the CBK focuses on its mandate, presents data, the assessment of economic developments and related challenges objectively, and remains Kosovo’s voice of economic reason, concerns of the central bank’s lack of independence will remain unwarranted.
Let’s talk about the global crisis. How did it affect Kosovo?
Again, areas where neighboring countries show vulnerabilities and weaknesss, especially with respect to unsustainable fiscal policies and/or banking sector stability, are those of relative strengths of Kosovo’s economy. Main channels through which Kosovo’s economy is affected are (i) the labor markets in the country’s of destination of the diaspora; (ii) general insecurity paired with tight credit conditions in the domestic and international markets, constraining investstors’ interests; and (iii) reduced purchasing power among main trading partners, stifling efforts made by companies to open export markets. However, with continued fiscal discipline, prudent macro-financial management, and the implementation of the business climate-focused reform agenda, Kosovo will be able to place its economy in a post-crisis pole position among countries in the region and revert back to average growth rates seen during the pre-crisis years.
On which sector is the WB more focused through its projects?
In line with the policy priorities discussed earlier, the World Bank’s Country Partnership Strategy focuses on supporting Kosovo’s reform efforts in (i) reinforcing the overall business climate; and (ii) improving the management of natural resources. We are thus preparing new projects (beyond those already being implemented) in addressing environmental legacy issues, the energy sector, including in energy efficiency and renewable energy, water supply, and education, joint with complementary analytical support in areas as broad as supporting efforts to increase consumers’ financial literacy, improving poverty data, auditing and accounting procedures, and the assessment of regional econmic and financial developments in the region.
Did the financial crisis result in less funds from the WB to Kosovo?
Do we expect any now loan for Kosovo from the WB this year?
Yes, assuming the Parliament agrees with it and ratifies the credits. Soon we will present to the World Bank’s Board of Executive Directors the Additional Finance package for the Clean-Up and Land Reclamation project to finalize work on the ash dumps, hazardous chemicals, as well as to start work on the environmental and social impact assessment for the proposed power project.
Government is planning the highway to Skopje. Does the privatization of PTK enable this project?
The Stand-By Arrangement with the IMF had effectively linked the motorway project with the successful privatization of PTK. In that sense, the answer to your question is “yes”.
Kosovo currently has huge funds abroad – privatization fund, pensions fund, and budgetary funds. Is it due time for these funds to be returned at the service of Kosovo’s economy?
Some funds, like the pension fund, have clearly defined roles and are designed solely for one purpose. Others, like the privatiation fund, have a broader purpose and, in line with rules and constraints defining them and with the broadest possible consensus among all domestic stakeholders, are aimed at benefiting Kosovo’s economy.