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.
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