WASHINGTON, October 21, 2021 – Kosovo and the rest of the Western Balkans region are rebounding from the COVID-19-induced recession of 2020, thanks to a faster-than-expected recovery in 2021, says the latest edition of the Western Balkans Regular Economic Update, Greening the Recovery, released today. Output in 2021 in Kosovo is expected to exceed 2019 levels by year-end, but risks to the outlook remain high as the country continues to grapple with the pandemic.
Economic activity in 2021 is expected to expand by 7.1 percent on the back of a stronger-than expected rebound in diaspora visits, restored consumer confidence, and higher consumer lending. Exports of merchandise continued their expansion and gradual diversification from 2020.
However, significant inflationary pressures, primarily from higher import prices, may undermine a stronger recovery in private investment. Public revenue is experiencing an unprecedented rebound due to higher economic activity, but also due to higher inflation and tax compliance measures. As a result, and against public investment under-execution against sluggish public investment, the fiscal deficit is expected to decrease in 2021.
Management of the pandemic, including through accelerating vaccinations, remains a priority in the near term. New pandemic flare-ups and new variants can weigh on the growth prospects if domestic or international movement restrictions are re-instated.
“A momentum should be built for greater economic opportunities, with policies and investments focusing on longer term reforms to fundamentally transform Kosovo’s growth model into a job-creating model driven by higher productivity,” said Massimiliano Paolucci, World Bank Country Manager for Kosovo and North Macedonia. “This same call applies to the entire region.”
The outlook for the region has improved significantly, with GDP growth now projected to reach 5.9 percent in 2021, after a 3.1 percent contraction in 2020. Growth in the region is projected at 4.1 percent in 2022 and 3.8 percent in 2023. The poverty rate for the region is projected to resume its pre-pandemic downward trend and fall by around 1 percentage point to 20.3 percent, close to its 2019 level.
The regionwide recovery is due to strength in both domestic and external demand. A sharp rebound in domestic consumption and in travel across Europe helped boost remittances as well as tourism inflows during the 2021 peak summer season. A strong recovery in advanced economies also provided a boost to demand for the region’s exports.
However, the recovery remains fragile. Early warning signals from the labor market call for close policy attention. Job losses from the recession and its aftermath have disproportionately affected women and youth, which may set back efforts to raise the region’s perennially low rates of labor force participation. Youth unemployment rose to 37.7 percent in 2021, up 5.4 percentage points from June 2020, further worsening youth employment prospects.
“As the Western Balkans countries look to a post-pandemic future, their policy approach will need to focus on addressing key impediments to job creation and economic transformation, including green transition,” said Linda Van Gelder, World Bank Country Director for the Western Balkans. “All six countries would benefit from reforms in the business environment, governance, and digitalization, which would contribute to growth and close the gap with EU countries.”
The report also looks at the macro-fiscal challenges and drivers of greening the region’s growth. The Western Balkans now find themselves at a key decision point regarding the impending green transition.
Global strides toward climate action are causing fundamental changes in society. Consumer and investor preferences are shifting, green technologies and new business models are disrupting more markets, and green policies are reshaping economic landscapes. As such, greening a country’s economy is becoming a decisive factor in international competitiveness and the ability to attract international finance and investments.
The Western Balkans are no exception. Still characterized by a development model tilted toward familiar brown industries, moving toward a green growth pathway is far from easy, especially in the short term. Yet, the green transition offers significant opportunities for the Western Balkans – including closer integration into Euro-centric global value chains and access to significant EU resources to help fund a green transition.
Effectively managing this green transition, including the many policy tradeoffs, will need to be a core focus of policy attention for the Western Balkans in the years ahead.
Download the report:
For more information and previous editions of the Western Balkans Regular Economic Report: https://www.worldbank.org/en/region/eca/publication/western-balkans-regular-economic-report