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
