Washington, October 22, 2020 – The COVID-19 pandemic has plunged the Western Balkans region into a deep recession, with drops in both domestic and foreign demand, coupled with disruptions in supply chains, forcing all six countries in the region into negative growth territory for 2020. According to the World Bank’s latest Regular Economic Report (RER), economic growth is forecast to contract by 4.8 percent in 2020, 1.7 percentage points lower than forecast in April. A second, stronger wave of the pandemic since mid-June is delaying economic recovery in the region. Travel restrictions and social distancing measures have also depressed growth in those countries more reliant on tourism.
The pandemic is further challenging labor markets in the region and threatening to undermine the progress that countries have made on improving the population’s welfare. By June, unemployment in the region had risen by a half of a percentage point, erasing 139,000 jobs. An additional 300,000 people are estimated to have fallen into poverty in Albania, Kosovo, Montenegro, and Serbia – a significant number, but less than half of the total that would have fallen into poverty had response measures not been put in place, notes the report.
“Like in much of the rest of the world, the COVID-19 pandemic is continuing to hit people hard in the Western Balkans, threatening the health and economic well-being of people in all six countries,” says Linda Van Gelder, World Bank Country Director for the Western Balkans.
In Kosovo, the pandemic is exerting unprecedented pressure on economic activity and the livelihoods of people. Despite the easing of containment measures in June 2020, the economy continues to decline, as the shock of the pandemic continues to stifle diaspora-driven service exports, investment, and private consumption. Kosovo’s economy is expected to contract by 8.8 percent in 2020. However, the increase in diaspora remittances and base metal exports, a relaxation of international travel restrictions, and the government’s countercyclical fiscal policy response, is expected to prevent a deeper contraction.
“The COVID-19 shock confirmed the fragility of Kosovo’s consumption-based growth model, but also showed the significant role remittances play during these trying times,” says Massimiliano Paolucci, World Bank Country Manager for Kosovo and North Macedonia.
“Kosovo is the only country in the region where remittances are growing - a buffer many other countries don’t have. This could be an opportunity to lay the foundations for a resilient recovery that tackles long-standing structural impediments by improving the regulatory environment for private sector development, prioritizing social transfers to the most vulnerable, and investing in human capital to create a more inclusive and sustainable growth model in the country.”
As bad as this situation is, it would have been much worse had governments not taken swift measures from the outset of the crisis. According to the report, all six countries in the region were quick to introduce policies to protect lives and livelihoods. To cushion the impact of the pandemic, the Government of Kosovo has countercyclically expanded current spending by mobilizing significant concessional financing from donors and International Financial Institutions, raising domestic debt, and using government deposits accumulated before the crisis.
“Apart from improved health systems and robust social protection mechanisms, policymakers in the region will need to take measures to enhance human capital, build stronger institutions and strengthen the rule of law. The unfortunate situation of needing to spend more in a time of declining revenues puts additional pressure on governments in the region to prioritize fiscal sustainability, including through improving public spending and strengthening tax compliance,” says Linda Van Gelder.
The report acknowledges that the speed of recovery, in the short term, will depend on how the pandemic evolves, the availability of a vaccine that allows for the normalization of economic activity, and a sustained recovery for the region’s main trading partner – the European Union.