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 23 out of 28 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. Early 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 was particularly vulnerable to the COVID-19 shock because of the predominance of service activities in production and its reliance on diaspora-driven service exports for income generation. 

Last Updated: Apr 08, 2021

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 April 2021, the active IDA lending portfolio amounted to US$281.6 million across 11 projects in the areas of energy, education, agriculture, health, competitiveness, finance, water, the information and communications technology (ICT) sector, and cadaster reform. 

The main strategic objective of the WBG Country Partnership Framework (CPF) 2017–21 is to assist 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. The CPF has three focus areas: (i) enhancing the conditions for accelerated private sector–led growth and employment, (ii) strengthening public service delivery and macro-fiscal management, and (iii) promoting reliable energy and stewardship of the environment.

Key Engagement

To help Kosovo with its immediate COVID-19 response, the World Bank swiftly mobilized fast-track emergency financing to address urgent health sector priorities and protect household income. In addition, several active projects were restructured to allow for additional funds to support small and medium-sized enterprises impacted by the crisis. The Bank is now finalizing an additional financing operation to assist with the deployment of the COVID-19 vaccine and preparing a development policy loan operation to support economic recovery and help finance the budget.

World Bank–financed projects have been designed to strengthen the business climate and improve competitiveness. 

Active Projects (US$, Million)

• Kosovo Emergency COVID-19 Project (50)
• Fostering and Leveraging Opportunities for Water Security Program (27.4)
• Kosovo Digital Economy Project (25)
• Agriculture and Rural Development Project (42.2)
• Energy Efficiency and Renewable Energy Project (31.0)
• Kosovo Health Project (17.3)
• Education System Improvement Project (7.52)
• Water Security and Canal Protection Project (24.5)
• Competitiveness and Export Readiness Project (15.3)
• Real Estate and Geospatial Infrastructure Project (16.5)
• Financial Sector Strengthening Project (25)

Last Updated: Apr 08, 2021

Economic Developments

Kosovo entered 2021 under continued pressure from the COVID-19 pandemic and in expectation of a change in government after early elections in February 2021. Given the health care capacity constraints, stringent containment measures were imposed in the second quarter of 2020 but were relaxed in the third quarter. 

In 2020, economic activity is estimated to have contracted by 6.9 percent, driven by a plunge in exports—principally because of a 51 percent drop in diaspora travel services—and investment. Consumption contributed modestly, with higher government consumption offsetting lower private consumption. The fiscal stimulus, combined with increased remittances and goods exports, cushioned the contraction. Consumer price inflation decelerated in 2020 to 0.2 percent because of weak domestic demand and declining import prices. Formal employment weathered the impact of the downturn, but compensation and working hours were reduced. Registered unemployment increased, most likely from informal job losses. Overall, unemployment remained high at 25 percent of the labor force (46.9 percent of youth) in the third quarter of 2020.

Growth averaged 3.6 percent over 2009–2019 and before the pandemic was expected to exceed 4 percent in the medium term. Private investment added to growth in those years but was concentrated mainly in trade and construction industries, with limited productivity spillovers. Likewise, robust growth did not translate into more jobs as the employment rate remained almost constant between 2017 and 2019. In 2019, 21 percent of the population still lived with under US$5.5 per person per day (in 2011 purchasing power parity), and this share is expected to have increased in 2020 by 4–5 percentage points. As a largely service- and consumption-based economy, Kosovo was particularly vulnerable to the COVID-19 shock. 

Kosovo is a euroized economy, and headline macro-fiscal policies, anchored on a legally binding rules-based fiscal framework, were stable before the pandemic. However, the pandemic-induced downturn took a significant toll on public revenue in 2020 and mandated the temporary suspension of the budget deficit rule. The budget deficit more than doubled in 2020, closing the year at 7.6 percent of GDP, driven by lower public revenues and increased current spending on policy measures, estimated at 4.4 percent of GDP. The stock of public debt continues to be the lowest in the Western Balkans but rapidly increased in 2020. Public and publicly guaranteed debt increased by 5.2 percentage points of GDP, reaching 22.8 percent of GDP. 

Kosovo’s financial sector has weathered the pandemic well, but the full impact on the quality of the loan portfolio has yet to be assessed. Bank deposits increased by 11.5 percent, while bank credit went up by 7.1 percent. Capital adequacy continues to be above regulatory requirements. The nonperforming loan rate increased by 0.7 percentage point by December 2020 compared to a year earlier.  

Economic Outlook

Economic growth is projected to reach 4 percent in 2021 and remain over 4 percent in the medium term, but downside risks to the outlook are high. The projected outlook rests on the assumption of relaxed international mobility between Europe and Kosovo, the end of strict local containment measures, and a recovery in euro area growth. There is also a potential for higher growth, including through faster implementation of public investment financed through international financial institutions. 

The fiscal deficit will remain elevated in 2021, projected at 5.1 percent of GDP, driven by fiscal stimulus measures and the disruption in the growth trajectory induced by the pandemic. Revenues are expected to recover as growth picks up. A fiscal stimulus, aimed at supporting businesses and livelihoods, should be fully executed in 2021 at about 3.2 percent of GDP.

The current account deficit (CAD) should remain at 5.7 percent of GDP in 2021 and gradually improve over the medium term. Goods exports should increase gradually, while imports are also expected to increase on the back of higher aggregate demand. The size of the CAD will be determined by the pace of the growth  in remittances and the recovery in diaspora-related tourism exports. 

The pandemic has intensified the developmental gaps. Thus, progress on structural reforms, including improvements in the design and targeting of social protection spending and the regulatory environment for businesses, is vital to reversing the adverse economic and social impact of the pandemic and building resilience against future negative shocks.

Last Updated: Apr 08, 2021