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Economic Consequences of the Kosovo Crisis The first authoritative report on the economic effects of the war in Kosovo, issued by the World Bank and the International Monetary Fund (IMF) in April, contends that the crisis is having a catastrophic effect on the economies of the Balkans. The war and refugee crisis are wiping out growth, destroying commerce, and placing enormous strain on the budgets of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, and Romania. In all of these countries, except possibly Romania, more than 5 percent of GDP will be wiped out this year, plunging the region’s economies deep into recession and raising unemployment at a time when hundreds of thousands of refugees must be absorbed. Albania put the 1999 extra costs of the crisis at $820 million, including the care for the 360,000 newly arrived refugees in the country. The FYR Macedonia claims that its economy has already lost some $1.6 billion this year. Region Under Pressure As a result of the Kosovo tragedy, the six countries closest to FR Yugoslavia will suffer huge budgetary and balance of payments gaps. The impact will come from various sources: · The influx of large numbers of refugees puts strains on the social and economic infrastructure. Albania and FYR Macedonia, both poor countries, will be most severely affected. · Trade is disrupted. While the military conflict continues, and perhaps even for some time thereafter, trade with Yugoslavia will remain suspended. FYR Macedonia and Bosnia and Herzegovina, Yugoslavia’s main export markets, will be particularly hard hit. A significant portion of transit trade will have to be rerouted. Bulgaria and Romania will need to find alternative and more costly transit routes. · Investor confidence is falling. Uncertainty reduces the confidence of both local and foreign investors and of consumers, reducing spending and putting strain on the external current and capital accounts. All six countries, especially those bordering Kosovo, can be expected to experience a decline in foreign direct investment. Some countries (especially Croatia) may be hurt by a loss of tourism receipts. Croatia, Bulgaria, Romania, and other countries in the region may also pay a higher country risk premium on borrowing from international capital markets, and private financing may become more difficult to obtain. · Structural reform may be postponed, adversely affecting development. Privatizations may be postponed because of a lack of foreign investor interest or lower sale prices.As a result of these factors in the six countries, balance of payments gaps will appear in 1999 and probably persist through at least 2000. Moreover, even if the international community provides for all of the basic needs of the refugees, budgetary gaps will arise. Revenues will fall as incomes and customs collections decline, while expenditures will rise as spending on refugees, defense, and maintenance of public order increases. In the absence of external financing, adjustment could require additional compression of domestic demand and imports as well as cuts in essential social expenditures. In particular, in Albania, where the GNP per capita is only $760, economic growth is likely to fall 5 to 6 percent this year, from 8 to 10 percent in 1998. In FYR Macedonia, where the 40 percent unemployment rate is already the highest in Europe, about four out of five enterprises have stopped working. Broken trade ties with Yugoslavia, severed transport links with EU trading partners (90 percent of exports and imports with the EU used to go through Serbia) make the situation in this country especially difficult. How Much Financing? The World Bank and International Monetary Fund report, "Economic Consequences of the Kosovo Crisis: A Preliminary Assessment of External Financing Needs and the Role of the Fund and the World Bank in the International Response," estimates the 1999 external financing needs of these countries—depending on the duration of the crisis—between 0.8 and 1.8 billion dollars. (Paying for economic reconstruction in the region after the fighting ends could cost as much as $30 billion. That was estimated, at the end of April, by European experts.) The response to the tragedy, according to the report, must consist of providing immediate aid to relieve the suffering of the refugees and ensuring that the six countries have access to adequate external financing to help them deal with the crisis. The IMF and the World Bank will be able to coordinate the international community’s response, with the IMF playing a direct role through policy advice and financial resources and the Bank providing emergency financing assistance to help close the balance of payments and budgetary gaps. Just how much assistance will be necessary? The report examines two scenarios (see table next page). Under the first scenario, the military campaign is prolonged and the refugee crisis lasts throughout 1999. All official trade with FR Yugoslavia is suspended, although limited transit trade to third countries resumes in the second half of 1999 (at 25 percent of the precrisis level and at a higher cost). Required humanitarian assistance for covering the basic needs of the refugees reaches more than $300 million in 1999. The combined balance of payments gap of the six countries reaches $1.5 billion, with the worst hit countries in the region—FYR Macedonia and Bosnia and Herzegovina—experiencing increases in their balance of payments deficit of 7-8 percent of GDP. The aggregate budgetary gap for the region reaches $652 million. Under the second scenario, the crisis is resolved quickly. Official trade with FR Yugoslavia returns to 75 percent of its precrisis level in the second half of 1999, and transit trade through FR Yugoslavia reaches 50 percent of its precrisis level. About three-quarters of the refugees return to Kosovo during the third quarter of 1999, and all return by the end of the year. The Washington Consensus The international community’s response to the Kosovo crisis was discussed during a high-level meeting of governments and international agencies held in Washington April 27, 1999. The meeting was cochaired by World Bank President James Wolfensohn and IMF Managing Director Michel Camdessus. Representatives of 7 international agencies and 33 countries, including the six Balkan countries immediately affected by the crisis, participated in the conference. Conference participants agreed that donors should act swiftly; that quick disbursing assistance over and above earlier planned aid programs will be needed to cover affected countries’ external and budgetary gaps for 1999; that financing on concessional terms is critical; that strong donor coordination will be essential, as most aid will continue to be channeled on a country-by-country basis; and that affected countries should maintain the momentum of adjustment and structural reform and ensure good governance. The medium-term development of the region will be discussed during a meeting in Bonn at the end of May. In the coming weeks donor meetings, cochaired by the World Bank and the European Union, will seek pledges to close the funding gaps for individual countries. World Bank Support to the Region The Bank has taken a number of steps to assist countries in the region. · Albania—through speedy delivery— received emergency budget support of $30 million. The credit will finance extraordinary budgetary needs (social services, civil administration, public infrastructure, and domestic security) and compensate for revenue shortfalls caused by the crisis. Two $1 million postconflict grants will provide Albania with institutional support to assist refugees arriving at the border area from Kosovo. Several new credits, worth $40 million, are also expected to be approved soon. The new projects will fund microcredit programs, irrigation and flood prevention efforts, support reform of the judiciary and civil service, and privatization of banks and strategic state-owned enterprises. · For FYR Macedonia the Bank has provided a $50 million emergency IDA credit to finance critical imports. A $1 million postconflict grant is being prepared to support refugees and help local nongovernmental organizations administer and direct inflows of other aid funds. The World Bank played a major role to organize a donors meeting in Paris on May 5, that pledged $252 million financial assistance to FYR Macedonia. The meeting of 46 countries and multinational organizations, chaired by the Bank and the European Commission, promised additional financial assistance. Donors agreed to meet again in the second half of 1999. |
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