Recent Economic Developments
Albeit from a low base, the Kosovar economy has had a consistently higher growth rate in the post-global financial crisis period than the Western Balkan country average. Kosovo’s GDP per capita grew from US$1,088 in 2000 to US$3,641 in 2016. Despite this tripling of income per capita, however, Kosovo remains the third-poorest country in Europe.
During 2008–16, real GDP grew on average by 3.4%. Growth was driven primarily by household and government consumption, which contributed 2.8 percentage points to growth, buoyed by sizable remittances and foreign aid flows. Growth in 2016 is estimated at 3.6%—the top growth rate in the Western Balkans —due to consumption and an investment-driven recovery in domestic demand, which also fueled imports.
The non-tradable sectors dominate output and employment in Kosovo. Services represented the largest sector in the economy, with a share of value added at 54% of GDP during 2008–15. Industry is relatively small by regional standards at 16% of GDP, of which manufacturing is about 10%. Agriculture remains relatively large at 11% of GDP.
The current account deficit (CAD) widened from 10.4% of GDP in 2015 to11.5% in 2016. The deterioration of the external balance was due to an increase in the trade deficit by 3.2% year-on-year (y-o-y), although it remained flat as a share of GDP. Driven by domestic demand, imports grew by 6.7% y-o-y. On the other hand, exports of goods fell by 4.6% y-o-y as a result of the lower prices of base metals.
Macroeconomic stability in Kosovo is based on full euroization, a fiscal policy that follows a fiscal rule, and on a healthy banking sector. The fiscal deficit declined further in 2016 to 1.3% of GDP, thanks to healthier revenues and the slow execution of the capital budget.
The stock of public debt is low, though it has been rapidly increasing in recent years. Public and publicly guaranteed debt is estimated at 14.6% of GDP for 2016, the lowest debt level in the Western Balkans, offering room to borrow on concessional terms for productive investments with a high rate of return. Half of the public debt is external, mainly from international financial institutions (IFIs).
The financial sector in Kosovo is healthy and sound. The banking sector dominates the financial sector and is well capitalized and profitable, with high capital adequacy ratios and low levels of (and declining) nonperforming loans (NPLs) at 4.9% in December 2016. Both credit and deposits continued to grow at an accelerated rate in recent years, reaching a y-o-y growth of 10.4% and 8.4%, respectively, in 2016.
Kosovo’s medium-term growth outlook has an upside potential, but this is conditioned on the country’s ability to establish a stable political environment and a better business climate that together enable productive investments.
Near-term growth is expected to continue to be driven by investment and consumption including investment in the energy sector to build new generation capacity and new donor-financed projects under the investment clause of the fiscal rule. A better absorption capacity of the public investment projects could lead to slightly higher growth, especially in 2017, but to lower growth in 2018 due to a higher base.
Last Updated: Oct 13, 2017