The World Bank In Kosovo

COUNTRY CONTEXT

Kosovo is a parliamentary republic. It declared independence on February 17, 2008 and is recognized as an independent country by more than 100 United Nations members and by 22 out of 27 members of the European Union (EU). Kosovo is a potential candidate for EU membership and signed a Stabilization Association Agreement with the EU in October 2015 that has been in force since April 2016. Last parliamentary elections were held on February 14, 2021, and the current government was elected on March 22, 2021. 

Although Kosovo’s economic growth in the past decade has outperformed its neighbors and has largely been inclusive, it has not been sufficient to provide enough formal jobs, particularly for women and youth, or to significantly reduce the high rates of unemployment. 

Kosovo’s growth model relies heavily on remittances to fuel domestic consumption but has recently shifted to more investment- and export-driven growth. To continue to grow, Kosovo needs to unleash productivity gains and create more quality jobs. This will require addressing infrastructure bottlenecks, prioritizing human capital investment, and creating an environment more conducive to private sector development. Governance and the rule of law also must be strengthened.

Kosovo’s young population needs to be equipped with the skills demanded by a modern economy, and the most vulnerable of its citizens protected by well-targeted and effective social programs. Gender gaps in access to economic opportunities are another key challenge. Further actions are also needed to promote environmental sustainability, including the fulfillment of the EU’s environmental acquis. Kosovo’s economy experienced a strong recovery in 2021, however global inflationary pressures interrupted Kosovo’s boisterous recovery path. Real GDP growth moderated to 3.5 percent in 2022, supported by private consumption and export growth.

Last Updated: Apr 13, 2023

Strategy

Since 1999, the World Bank has provided and/or managed over US$500 million for Kosovo through more than 40 operations, including trust funds.

All Bank-supported projects prior to Kosovo’s joining the World Bank Group (WBG) in 2009 were financed through grants from a variety of sources, principally the Bank’s net income, the Trust Fund for Kosovo, the Post-Conflict Fund, and the International Development Association (IDA).

Kosovo is still eligible for IDA credit financing (on blend terms) due to its post-conflict fragility. In October 2022, the active IDA lending portfolio amounted to US$379.55 million across 11 projects in the areas of energy, agriculture, water, health, competitiveness, finance, information and communications technology (ICT), social assistance, and cadaster reform. 

The main strategic objective of the WBG Country Partnership Framework (CPF) 2017–22 was assisting Kosovo in moving on a path toward more sustainable, export-oriented, and inclusive growth to provide its citizens with more opportunities for a better life. 

Key Engagement

Most recently the World Bank approved the Kosovo Strengthening Digital Governance for Service Delivery Project, which aims to improve the quality of and user access to selected public administrative services.

11 Active Projects (US$ 357.69 Million):

• E-Government Services (20)

• Kosovo Emergency COVID-19 Project (68.2) 

• Fostering and Leveraging Opportunities for Water Security Program (27.4) 

• Kosovo Digital Economy Project (25) 

• Energy Efficiency and Renewable Energy Project (31) 

• Water Security and Canal Protection Project (16.99) 

• Competitiveness and Export Readiness Project (15.27) 

• Real Estate and Geospatial Infrastructure Project (16.5) 

• Financial Sector Strengthening Project (25) 

• Kosovo Social Assistance System Reform Project (55.93) 

• Kosovo Public Finances and Sustainable Growth Development Policy Operation (56.4) 

Last Updated: Apr 13, 2023

Economic Developments

Growth reached 3.5 percent in 2022, driven by exports and private consumption. Consumption was supported by an increase in remittances (6 percent), government transfers (26.3 percent), and lending. On the production side, the construction sector contracted in real terms, contributing to softer growth. Based on Kosovo’s Statistical Agency data, consumer inflation peaked at 14.2 percent (y-o-y) in July, and remained above 11 percent until December, bringing annual average inflation to 11.6 percent. Key inflation drivers in 2022 remained transport (16.9 percent), food (16.3 percent), and energy (12.7 percent). Labor market formalization continued. Pension contribution data show that formal employment increased by 4.9 percent compared to 2021. At the same time, 80.7 thousand jobseekers were registered by December 2022, a reduction of 1.5 percent from December 2021.

The current account deficit (CAD) deteriorated to 10.1 percent of GDP (from 8.1 percent in 2021), driven by higher import prices, against a large trade deficit of 32.1 percent of GDP. Nominal export growth reached 29.7 percent (y-o-y), supported by services exports associated to the resilient diaspora-driven demand for travel services, but also a 23.6 percent increase in merchandise exports. In parallel, the value of imports grew by 22 percent, on the back of higher prices for mineral products and food and beverages. By the end of 2022, the fiscal deficit reached 0.5 percent of GDP, reflecting continued positive revenue growth (13.7 percent) supported by inflation effects as well as formalization gains. The combination of positive tax revenue growth and capital underspending outpaced increases in current transfers (26.3 percent y-o-y), associated to the implementation of crisis mitigation measures (4 percent of GDP). The financial sector remains robust. In December 2022, the annual change in loans reached 16.1 percent. Bank capital buffers and asset quality remain adequate, with non-performing loans remaining stable at 1.8 percent. 

Economic Outlook

GDP growth is expected to pick up modestly, reaching 3.7 percent in 2023. The sizable impulse on private consumption and service exports from diaspora flows over 2021 and 2022 is expected to fade against an expected slowdown in EU growth. The contribution of government transfers to private consumption will also be more limited. However, a hike in public wage spending following the implementation of the new Law on Public Wages will add to consumption growth. After recording a real contraction in 2022, investment is expected to provide a positive contribution to growth in 2023. A gradual stabilization in international prices is expected to boost investment confidence.

The medium-term outlook remains positive, with growth expected to accelerate towards potential. However, continued uncertainties related to the war in Ukraine entail significant downside risks. Poverty is projected to continue its decline, reaching 24.3 percent in 2023, measured using the upper-middle-income poverty line (US$6.85/person/day in 2017 PPP) but the materialization of downside risks could lead to a stagnation of poverty rates. Inflation is expected to decelerate in line with international price dynamics; yet price levels could remain elevated throughout 2023. Despite an expected slowdown in service exports and remittances growth, easing import price pressures are expected to lead to a minor CAD improvement in 2023. The fiscal deficit is expected to increase to 1.1 percent of GDP in 2023, fueled by increases in public compensation and capital investment. Further spending needs for energy subsidies could, however, increase the deficit. Over the medium-term, public debt is projected to remain below 25 percent of GDP. Over the medium-term, there is a pressing need to preserve fiscal buffers by containing spending on untargeted transfers to respond to the changing macroeconomic environment, and accelerate implementation of structural reforms in energy, education, social protection, and healthcare.

Last Updated: Apr 13, 2023