The World Bank's Role in Reviving Kosovo and Southeast Europe

The Kosovo¹ crisis necessitated a coordinated economic and financial response from the international community on two fronts: providing immediate aid to relieve the suffering of a large number of refugees who were displaced as well as those who returned to Kosovo; and ensuring that neighboring countries of the Federal Republic of Yugoslavia have access to adequate external financing to help them deal with the adverse macroeconomic consequences of the crisis.

The neighboring countries most affected have been Albania and the Former Yugoslav Republic of Macedonia. However, Bosnia and Herzegovina, Bulgaria, Croatia, and Romania have also experienced the consequences of the crisis—albeit in different ways and to different extents. Albania, Bosnia and Herzegovina, Bulgaria, Croatia, former Yugoslav Republic of Macedonia, and Romania are members of the Bretton Woods Institutions, and the Bank has active lending programs in these six countries.

As a result of the crisis, some of these countries face considerable budgetary and balance of payments deficits at least through end-1999. Findings on the effects of the crisis include:

• The large number of refugees put a huge strain on the social and economic infrastructure, particularly in Albania and the former Yugoslav Republic of Macedonia. These countries incurred significant costs by providing assistance to refugees.
• Disruptions in trade and transport have—and will continue to—hurt, in particular, the economies of Bosnia and Herzegovina and the former Yugoslav Republic of Macedonia, for which of Yugoslavia is a major export market. Bulgaria and Romania are forced to find alternative-and more costly-transit routes around Yugoslavia.
• The crisis adversely affected the confidence of foreign investors-particularly in areas bordering Kosovo. In addition, some countries are experiencing a reduced flow of tourists and may also have to pay higher country risk premium on capital markets borrowings.
• Finally, the crisis could result in the postponement of structural reforms which in surrounding countries will affect their longer term development goals.

As a result of lost export earnings, trade diversions, and potentially higher debt service costs, balance of payments gaps in most countries have widened. Budgetary deficits have also been the result of lost fiscal revenues as a result of lower incomes, and in some cases, from disruption of customs collection and expenditures related to refugees. Fiscal strains may lead to cuts in key social sector expenditures.

World Bank Response to the Affected Neighboring Countries

Consequently, the World Bank, together with the IMF, the European Commission, the US, and other partners, will continue to assess the macroeconomic impact of the crisis on the countries neighboring Kosovo and FRY. Although, the Bank is not a humanitarian or relief agency and will not provide humanitarian assistance, nonetheless, it is working closely with humanitarian aid organizations to ensure that its support complements the activities of those other agencies.

Together with the European Commission and in close cooperation with the IMF, US, and other donors, the Bank will continue to lead the coordination effort among all bilateral and multilateral aid agencies involved in mitigating the economic consequences of the Kosovo crisis for the countries of the region, and will provide other economic development support.

The World Bank acknowledges that the crisis has had a serious impact on the health and social sectors, the environment, and physical infrastructure in the region. In addition, the falling economic growth could potentially slow or reverse progress on poverty reduction. Damage to infrastructure and increased demand on alternative transport infrastructure will also increase the need for investment in transport in some affected countries.

The World Bank has launched efforts on an emergency basis in preparing quick assistance packages for the neighboring countries most affected by the crisis:

Albania: Albania came under enormous pressure, with the influx of tens of thousands of Kosovar refugees as a result of the Kosovo crisis. The government requested urgent balance of payments and budget support from the World Bank. To accommodate the crisis needs of the country and to safeguard the functioning of the state and macroeconomic stabilization, the Bank took several initiatives:

• Post Conflict Fund - Two grants under the Post-Conflict Fund, totaling US$2 million, have been approved by the World Bank for Albania. The first grant (US$1million) is being implemented through an Italian non-governmental organization (NGO)—Communita di Sant'Egidio—to expand schools, supply health centers, improve water supply and sanitation, finance transport, provide food for children, and collect waste in Durres, Lexha, Kukes, and Shkodra. The second grant of US$1 million, approved on April 6, 1999 will undertake more intensive refugee support activities and assist the development of NGO structures, which can administer this and other inflows of aid funds. Other NGO partners will also be identified.
• Public Sector Support Program - A fast-disbursement operation of US$30 million was approved by the Bank's Board on May 6, 1999 to finance extraordinary budgetary needs and to compensate for revenue shortfalls caused by the crisis. The program is expected to assure sufficient budgetary allocations for Albania to perform essential public sector functions, especially in social services, civil administration, public infrastructure, and domestic security. The program will assure that fiscal discipline continues to be maintained, fiscal monitoring processes be implemented, and special transparency measures related to relief expenditures be established.
• The Bank will continue with the preparation and implementation of several new operations, including developmental assistance which is also urgently needed at this time. For example, a US$12 million equivalent Microcredit Project was approved by the Bank's board on June 22, 1999 which will support private sector development and poverty alleviation by increasing the availability of financial services to rural farmers and entrepreneurs and to urban micro-entrepreneurs and self-employed workers. It will also help Albania sustain economic growth by building legitimate and sound financial intermediaries. Substantial disbursements are expected to take place immediately after project approval, particularly under the US$45 million equivalent Structural Adjustment Credit (SAC)—approved on June 3, 1999—which will provide budgetary support for reforms in the judiciary and civil service, privatization of public banks and strategic public enterprises, and other key actions to modernize the economy.
• Several ongoing projects were restructured to assist the refugees. Funds were reallocated for the rehabilitation of public buildings to serve as shelters, purchase of surgical and medical equipment, and improvements to water systems. For example, the Second Irrigation and Drainage Rehabilitation Credit (US$24 million equivalent) was approved on June 3, 1999. It is helping the country make sustainable and equitable use of irrigation and water for agriculture production and will reduce the risk of floods through rehabilitation and improvements to irrigation, flood control, and drainage facilities.
• Emergency Consultative Group Meeting - The World Bank and the European Commission co-chaired an emergency donor conference for Albania, which took place on May 26, 1999 in Brussels. The 24 countries and 15 organizations participating in the Emergency Joint G24/Consultative Group meeting pledged US$200 million/EURO 188.6 million to cover external financing requirements in 1999. This includes financing requirements of $160 million for costs incurred as a result of the Kosovo crisis.

Former Yugoslav Republic of Macedonia: The Former Yugoslav Republic of Macedonia also faced an extraordinary situation with the influx of tens of thousands of Kosovar refugees as a result of the Kosovo crisis. The government requested emergency support from the World Bank to help ease the unexpected budgetary costs associated with this huge influx of refugees and the impact on the country of the loss of its major trade and export routes. The Bank included the following in its approach to help ease the effect of the Kosovo crisis on the Macedonian economy as follows:

• Emergency Recovery Credit - A quick disbursing credit of US$50 million equivalent was approved on May 13, 1999 to assist the government in maintaining macroeconomic stability and support economic growth amid the severe trade disruptions and large inflows of refugees caused by the Kosovo conflict, through financing of imports and government budget support. The credit is providing immediate support to finance imports needed for the recovery effort while supporting macroeconomic objectives in the wake of the Kosovo conflict.
• Emergency Consultative Group Meeting - The World Bank, together with the European Commission, also took the lead in organizing an emergency donor conference for the former Yugoslav Republic of Macedonia which took place on May 5, 1999 in Paris. The purpose of this emergency donor Consultative Group meeting was to organize additional balance of payments and budgetary support from bilateral countries and international institutions to assist the Macedonian Government in handling the economic impact of the Kosovo crisis. A second donor's conference is planned for the second half of 1999.
• Post-Conflict Fund - An application for US$1 million Post-Conflict Fund, financed by re-flows from the World Bank net income was approved by the Post Conflict Board in May 1999. These funds were used to undertake more intensive refugee support activities and to assist local NGOs with requisite institutional capacity to administer and direct other inflows of aid funds.
• The Emergency Social Support Project (US$10 million), designed to help with the rising unemployment in the country, was approved by the World Bank's Board on June 30. The project will help to mitigate the negative social and economic impact of divestiture of state owned enterprises and the economic disruption caused by the Kosovo conflict. It includes temporary income support through severance payments, labor redeployment, and social benefits and employment.
• The Bank will continue with the preparation and implementation of several new operations, including a Guarantee Fund (US$10 million) to help the private sector meet the risks resulting from the Kosovo crisis and help companies cope with the current economic situation. In addition, a special trust fund mechanism will be established where the World Bank will manage donor funds. In addition, the Bank will take the lead in monitoring and technical assistance to the Budget Control Unit, recently established in the Ministry of Finance through which fiscal control will be maintained. These operations are expected to be approved in the next 3-4 months.

Bosnia and Herzegovina: Bosnia and Herzegovina also came under enormous pressure due to the refugees that fled to Bosnia and Herzegovina from both Kosovo and the Sandjak region of Serbia as a result of the Kosovo crisis, in addition to hundreds of thousands of people who were internally displaced as a result of the conflict in Bosnia during the 1992-1995 period.

The country has also experienced significantly reduced trade flows, since FRY was a major trading partner.

The World Bank responded in two key areas to the government's request for emergency support:

• Budgetary support —On June 24, 1999, the Bank approved an increase in the amount of the Second Public Finance Structural Adjustment Credit (US$72 million), to respond, in part, to additional budgetary requirements brought on by the crisis.
• Donor Conference—The World Bank and European Commission successfully led efforts to mobilize the remaining funding for the US$5.1 billion reconstruction and recovery program for Bosnia. The 45 countries and 30 organizations participating in the Fifth Donor Conference for Bosnia and Herzegovina pledged US$1.05 billion/Euro 992 million on May 20, 1999 in support of the 1999 program of economic reform and reconstruction, including US$90 million to cover the impact of the Kosovo crisis on Bosnia and Herzegovina. This was the last pledging session for the reconstruction and recovery program.

Coordinating the International Response For Southeast Europe and Kosovo

Building on the existing collaborative work on a country-by-country basis in the region, the EC and the World Bank were given a special mandate for coordinating donors' economic assistance in the Balkans (endorsed by the April 1999 international meeting). Under this mandate, the two institutions are responsible for "coordination of matters related to the economic recovery, reform and reconstruction of the Southeast European Region," including mobilizing donor support, providing economic analysis, developing appropriate conditions and implementing projects. To implement this mandate, a joint European Commission-World Bank office in Brussels has been opened and a website providing information on the reconstruction in Southeast Europe was launched. The Stability Pact notes the European Commission-World Bank mandate for coordination of economic assistance to the region.

In addition, the "High Level Steering Group" was created as a result of the April international conference to oversee the economic recovery and reconstruction mandate, and an expert-level working group with which the Bank and the EC would be dealing on an ongoing basis. Membership in both groups has been kept small to ensure a light, efficient, and workable structure.

At the inaugural meeting of the High Level Steering Group Meeting on July 13, 1999 in Brussels, participants²of the High Level Steering Group, endorsed priorities for an action plan to rebuild Kosovo and repair the economies of neighboring countries, and set the course of action to be followed for reconstruction. The Group also confirmed the first Kosovo donors meeting that was held on July 28 in Brussels. At the conference, donors were given an interim damage assessment report on Kosovo in addition to a progress report on the establishment of UNMIK - the United Nations Mission in Kosovo.

The second High Level Steering Group meeting will take place in September 1999 in Washington during the IMF/World Bank Annual Meetings.

In addition to discussing its mandate and working methods, the Group focused not only on Kosovo but also the wider Southeast Europe region. The need for balance of payments support to these countries in 1999 was emphasized, in order to help alleviate the short-term impact of the crisis. The region will continue to suffer from the effects of disruptions in trade, transit and tourism for the foreseeable future.

In the context of this reconstruction effort, the World Bank is also focusing on how it might help Kosovo.

The aim of the Bank's proposed assistance strategy for Kosovo is to offer technical support and non-regular financial assistance to spur reconstruction and recovery efforts in the next 12-18 months. Its focus would be: assistance in designing the reconstruction and recovery program; policy advice in economic management, including building government institutions; and selective financial assistance for reconstruction and economic re-start activities, support of government budgets and institutions and initial transition and social reforms, provided special resources become available.

• Developing a Reconstruction and Recovery Program. There are three main tasks associated with this effort. First, preparing damage assessments, and developing a program for both physical and institutional rebuilding. Carried out jointly with the European Commission, this would identify priority investments and sound sectoral policies. Second, mobilizing donor support by planning, preparing and co-hosting donor conferences, jointly with the European Commission. Third, coordinating and monitoring the international aid effort from the joint World Bank-European Commission Office in Brussels. All of these activities are now underway.
• Building Economic Policies and Institutions. Given its comparative advantage in promoting economic development, the Bank will offer the countries of Southeast Europe extensive policy advice in this area. Together with the IMF, the Bank is developing a coordinated approach to this work to ensure complementarity of support.

  Developing of an overall economic assessment (e.g., institutions and policies for fiscal management, monetary and banking arrangements, structural issues, in particular, those related to privatization and private sector development, and social protection/poverty-alleviation) would be an important element of this support. Such work would also involve advising the UN on designing sound economic policies and institutions, including monetary and fiscal policy, banking, trade and other issues (this work is now underway); and, also working directly on building economic institutions and policies with Kosovo's future government authorities.

• Implementation Through Financial Support for Reconstruction and Policy Reform. We plan to limit our financial support to those priority areas where other donors will not be involved. We would also seek to make the best use of our resources by leveraging those of other donors through cofinancing. Devising a sound strategy will require better information on the extent of damage in order to assess the needs of reconstruction and recovery as well as of other donor programs. We will also build on the lessons learned in other post conflict situations.

With some of these lessons in mind, the Bank's believes that immediate priorities include restarting economic activity and stimulating employment, especially in the farming sector, and repair or rebuild infrastructure that may restrict economic activity.³ For example, one quick way to provide people with jobs and wages would be through funding local community projects through a social fund or other related mechanism. Another measure will be sector operations that could attract broad donor support – electric power, transport, agriculture, and/or lines of credit-- would be possible candidates. These projects would identify and ensure efficient and sustainable policies. The Bank will also consider operations that provide urgently-needed budgetary resources to support local institutions and fiscal management, as well as those transition reforms related to developing of a functioning private sector, and strengthening of social services.

After extensive consultation with international donors, the Bank and the European Commission have drawn up a phased timetable for future donor meetings – similar to that used for Bosnia and Herzegovina. The next donor meeting for Kosovo will be held in late October when the focus will be on urgent reconstruction needs.

High level officials from more than 100 donor countries and international organizations attended the first International Donors Conference on Kosovo on July 28, 1999 in Brussels which focused on funding urgent humanitarian needs, winterizing housing, as well as restarting the economy, and building up a local civil administration under the auspices of UNMIK-the UN interim administration for Kosovo.

For example, urgent financial measures to cover Kosovo's budgetary deficit were estimated by UNMIK before the conference at US$45 million; US$200 million to cover immediate basic needs identified by UN agencies; and Euro300 million as the immediate requirements for reconstruction estimated by the EC on the basis of the first damage assessment presented at the conference. Pledges made at the conference added up to a total of US$2.082 billion, including funding already disbursed during 1999. During the conference, participants shared information on recent developments in Kosovo and discussed the next steps in coordinating donors' efforts for Kosovo. A more comprehensive assessment of needs and priorities for assistance will be completed in the coming months.

In the meantime, task teams have been mobilized to: (i) prepare damage assessments and develop a reconstruction program; and (ii) develop economic assessments and an initial economic report. It is expected that both reports would be ready in time for the October donor meeting. Revised versions of both reports - on the basis of more extensive field visits - would be completed by the end of the year.

September 1999

For more information on Economic Reconstruction and Development in Southeast Europe, visit the joint World Bank/European Commission website at
http://www.seerecon.org/

³ Our assessment of the 1996-1998 reconstruction program in Bosnia and Herzegovina indicates that while early emphasis on network and other physical reconstruction led to early successes, more could have been done early on to regenerate economic activity and put in place the legal and policy framework for private activity needed to build and sustain real growth. (Bosnia and Herzegovina, Review of the Priority Reconstruction Program and Towards Sustainable Economic Development, May 1999, World Bank/EU.)

---