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