The World Bank In Kosovo

COUNTRY CONTEXT

Kosovo is a parliamentary republic and upper-middle-income country. It declared independence on February 17, 2008, and is recognized as an independent country by more than 100 United Nations members. Kosovo is a potential candidate for European Union (EU) membership and signed a Stabilization Association Agreement with the EU that has been in force since April 2016. The last parliamentary elections in the country were held on February 14, 2021, and the current government was elected on March 22, 2021.  

Kosovo has experienced steady economic progress over the past decade, with a nearly 50% increase in per-capita income and a 35% reduction in the poverty rate. It 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 Kosovo’s growth has largely been inclusive, it 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: Oct 10, 2023

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. It 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, greening and cleaning contaminated sites 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 IDA financing and is provided on concessional terms, with zero or very low interest charges and long repayment periods. The active IDA and trust fund-financed projects total to around $365 million. Most recently the World Bank approved the Kosovo Strengthening Digital Governance for Service Delivery Project, which aims to improve the quality of and user access to selected public administrative services.

11 Active Projects ($ 357.69 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)

• Competitiveness and Export Readiness Project ($15.27 million) 

• Real Estate and Geospatial Infrastructure Project ($16.5 million)

• Financial Sector Strengthening Project ($25 million) 

• Kosovo Social Assistance System Reform Project ($55.93 million)

• Kosovo Public Finances and Sustainable Growth Development Policy Operation ($56.4 million) 

Last Updated: Oct 10, 2023

Recent Economic Developments

Kosovo’s GDP growth reached 2.9% in the first half of 2023, driven primarily by a robust export performance (9.8% YoY). After reaching its 2023 peak in January, consumer inflation was on a downward trend until July 2023 (2.4% YoY) and experienced a slight uptick in August 2023 (3.2% YoY). During this period, significant contributors to inflation were furnishing, household items and maintenance (7.2% YoY), alcoholic beverages and tobacco (6.3% YoY), and food and non-alcoholic beverages (5.5% YoY), while transport (-3.8% YoY) subtracted from the inflation rate. Labor market formalization is steadily growing, evident in the 2.3% increase in formal employment between July 2022 and July 2023. Additionally, the number of registered jobseekers decreased by 53% between July 2022 and 2023.

The current account deficit showed signs of improvement by June 2023 (13.4%), driven by the lower value of imports coupled with a positive performance in service exports and balance of secondary income. By June 2023, the trade deficit decreased slightly (-4.6% YoY). During January-August 2023, tax revenues grew by 12% while overall revenues increased by 15%. Public and publicly guaranteed debt (PPG) decreased to 17.3% in June 2023, from close to 20% in 2022. The financial sector remains robust. Bank capital buffers and asset quality also remain adequate, with non-performing loans remaining stable at 2%.

Economic Outlook

GDP growth is expected to reach 3.2% in 2023, driven by positive export performance and private consumption. The medium-term outlook remains positive, with growth expected to accelerate towards 4%, bringing the level of economic activity closer to Kosovo’s potential. The contribution of investment to growth is expected to pick up in 2024-2025, supported by the implementation of the Energy Strategy. Continued uncertainties related to Russia’s invasion of Ukraine, the slowdown in Europe, and the domestic political context entail significant risks. Poverty is projected to continue its decline, falling to 23.5% in 2023, measured using the upper-middle-income poverty line ($6.85/person/day in 2017 PPP). Still, the materialization of downside risks could lead to a stagnation of poverty reduction. Inflation is expected to decelerate, yet price levels will remain elevated throughout 2023. The current account deficit is projected to narrow, with the expected decline in commodity prices and continued positive service exports. The fiscal deficit is expected to remain below 1% of GDP in 2023, driven by positive tax revenue performance and lower-than-budgeted capital expenditures. Over the medium term, public debt is projected to remain below 20% of GDP.

Last Updated: Oct 10, 2023