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. Kosovo, a potential candidate for European Union (EU) membership, signed a Stabilization Association Agreement with the EU that has been in force since April 2016. The last parliamentary elections were held on February 14, 2021, and the current government was elected on March 22, 2021.

Kosovo has experienced steady economic progress since declaring independence, with a nearly 50% increase in per-capita income and a 35% reduction in the poverty rate. The country has successfully transitioned away from a growth model based on high dependence on foreign aid inflows, outperforming peer countries of similar per-capita income thanks to a steady expansion in consumption and investment, with a strong impetus from diaspora inflows, public investment in infrastructure, and financial deepening, amid a stable fiscal stance and an environment of low inflation.

Although largely inclusive, Kosovo’s growth has not been sufficient to provide enough formal jobs, particularly for women and youth. 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. Further actions are also needed to promote environmental sustainability, including the fulfillment of the EU’s environmental acquis. 

Last Updated: Apr 19, 2024

Strategy

The Country Partnership Framework (CPF) for Kosovo for FY2023-2027 aims to support the country in accelerating its competitiveness for higher job creation and living standards. This framework outlines priorities for World Bank Group engagement in the country over the next five years, which will contribute to greater public service efficiency and quality, more formal private sector jobs, and increased environmental resilience. The CPF aims at delivering a comprehensive World Bank Group program of lending operations and advisory services and analytics.

The International Development Association (IDA) lending projects in the pipeline will support investments in early childhood development, health sector strengthening, along with fiscal policy, competitiveness, and green growth reforms. The indicative resource envelope during the first three years of the CPF period amounts to $127 million in IDA20 financing and is provided on concessional terms, with very low interest charges and long repayment periods. The active IDA and Trust Fund-financed projects total around $370 million:

9 Active Lending Projects ($ 370.64 million):

• Kosovo Strengthening Digital Governance for Service Delivery Project ($20 million)
• Kosovo Emergency COVID-19 Project ($68.2 million)
• Fostering and Leveraging Opportunities for Water Security Program ($27.4 million)
• Kosovo Digital Economy Project ($25 million)
• Energy Efficiency and Renewable Energy Project ($31 million)
• Water Security and Canal Protection Project ($16.99 million)
• Real Estate and Geospatial Infrastructure Project ($16.5 million)
• Kosovo Social Assistance System Reform Project ($55.93 million)
• Kosovo Development Policy Operation ($100 million)

Last Updated: Apr 19, 2024

Recent Economic Developments

GDP growth reached 3% for the first three quarters of 2023. Growth was driven by resilient consumption (2.7% YoY), service exports (8.5% YoY), and investment activity (3.5% YoY); merchandise exports contracted by 6.7% YoY. On the supply-side, services continue to be a key contributor to growth. In 2023, consumer inflation continued its downward path, averaging 5%. Labor market formalization continued, as reflected in a 2.9% YoY increase in formal employment by November 2023. In 2023, the current account deficit narrowed, reaching 7.7% of GDP. Remittance inflows remained strong in 2023, growing 10% YoY. Net FDI inflows increased by 12% YoY, on account of quadrupling reinvested earnings; equity and debt investments dropped by 8% YoY.

By year-end, the fiscal deficit reached 0.2% of GDP. Budget expenditures increased by 13.2%, driven by increases in capital expenditures (32.4%). In 2023, public and publicly guaranteed debt fell to 17.2% of GDP, down from 20% in 2022. The financial sector remains robust. By December 2023, credit increased by 13% YoY, with nonperforming loans remaining stable at 2%. Poverty is estimated to have decreased in 2023 to 21.7%, driven by growth and higher employment.

Economic Outlook

GDP growth is expected to accelerate to 3.7% in 2024, picking up towards Kosovo’s potential of around 4%, driven by resilient diaspora inflows and a gradual pickup in investment. Continued stabilization of international prices helped by the unwinding of the energy shock, is expected to boost consumer and investor confidence. Higher public and private investments in energy generation associated with the implementation of the energy strategy, and related reforms, are expected to boost investment. Exports are expected to remain resilient on the back of strong diaspora-driven service exports, and a pickup in goods exports, driven by a recovery in foreign demand, continued diversification into non-commodity goods and regulatory reforms. Growth acceleration and improvements in labor market outcomes are expected to foster poverty reduction.

The current account deficit is expected to narrow, driven by strong service exports and a continued decline in commodity prices. Driven by increases in capital spending, the fiscal deficit is expected to widen to around 1%. Persisting uncertainties associated with both geopolitical tensions and domestic politics, and a further slowdown in the EU entail significant risks. Accelerating the economic convergence with the EU requires prioritizing reforms in the fiscal, governance, education, and energy sectors.

Last Updated: Apr 19, 2024