The World Bank In Kosovo

COUNTRY CONTEXT

Kosovo’s economic growth in the past decade has outperformed its neighbors and has largely been inclusive. However, it has not been sufficient to provide enough formal jobs, particularly for women and youth, or to significantly reduce the country’s 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 growth, 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, but global inflationary pressures interrupted Kosovo’s boisterous recovery path. Real GDP growth is expected to decelerate to 3.1 percent in 2022, following a slowdown in investment and private consumption.

Last Updated: Oct 12, 2022

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 joining the World Bank Group 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 World Bank Group Country Partnership Framework (CPF) for 2017–22 is 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.

Last Updated: Oct 12, 2022

Economic Developments

After reaching a record of 10.5 percent GDP growth in 2021, it moderated to 3.2 percent in the first-half of 2022, driven by domestic demand and exports. On the production side, the service sector – driven by remittances, credit growth, and higher public transfers – was the main contributor to economic growth. Inflation soared, reaching 13 percent (y-o-y) in August 2022, triggered by an increase in import prices. Food and transport price increases surpassed 20 percent by August 2022, disproportionally impacting the most vulnerable people. 

The average number of pension contributors for the first half of 2022 suggests an increase of 8 percent (y-o-y) in formal employment. For the same period, the number of registered job-seekers at employment centers dropped by 32 percent (y-o-y). Exports – particularly for manufactured goods – increased by 29.4 percent (y-o-y) in July. Diaspora-driven service exports also increased by 46 percent by May; and travel data suggest a positive momentum continued during the summer season.

Against a significant increase in prices, merchandise imports – which represented 53.4 percent of GDP in 2021 – increased nominally by 26 percent until July 2022, further exacerbating Kosovo’s structurally high trade deficit. After declining by 0.3 percent (y-o-y) between January and June, remittance inflows have plateaued.

Supported by inflation and formalization, total tax revenues increased by 15.4 percent (y-o-y) until end-August 2022. Current spending increased by 17.6 percent for the same period and is expected to continue increasing as the government implements over 4.5 percent of GDP in inflation-mitigation and energy subsidy measures. Capital spending remained exceptionally low with an execution rate of 17 percent by end-August, and almost 30 percent lower than a year before. The banking sector remained stable, with the annual change in loans at 18 percent in July. Bank capital buffers and asset quality remain adequate, with non-performing loans remaining stable at 2.1 percent.  

Economic Outlook

GDP growth in 2022 is expected to slow to 3.1 percent. Inflationary pressures are expected to subdue purchasing power, slowing private consumption growth. Net exports are expected to drive growth. On the other hand, investment - driven by a plunge in public capital spending and a slowdown in construction - should subtract from growth. On the production side, services – supported by higher diaspora demand, credit growth, and public transfers – are expected to be the main driver of growth.

After a significant reduction in 2021, poverty is expected to marginally decline in 2022, but the continuation of inflationary pressures could lead to a stagnation of poverty rates. The medium-term outlook remains positive. However, it is also mired by downside risks related to food and energy price increases and upward pressures on interest rates. Consumer inflation is expected to average 12.1 percent in 2022, before moderating gradually over the medium-term. With high import inflation leading to a nominal increase in the level of trade imbalances, and with slowing remittances, the current account is expected to deteriorate until 2023.

In the medium-term, non-debt creating FDIs and external lending will be the key source of financing for the current account. The fiscal deficit is expected to reach 0.8 percent of GDP in 2022. Further spending on energy subsidies could, however, increase the deficit. Over the medium-term, compensation of employees, transfers, and a gradual improvement in capital investment execution, are expected to drive spending and push the fiscal deficit above 2 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 to enhance inclusive and sustainable growth.

Last Updated: Oct 12, 2022