Western Balkans Regular Economic Report: Spring 2021

Subdued Recovery

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Press Release | BiH | Kosovo | Montenegro | North Macedonia |

The COVID-19 pandemic has plunged the Western Balkan economies into a deep recession, like in the rest of the world. In 2020, economic activity contracted by an estimated 3.4 percent—the worst downturn on record. The primary causes were the drop in domestic and foreign demand and disruptions in supply chains, especially early in the year. The region’s economy began to reactivate in Q3 2020, supported by partial easing of stringent lockdowns and the revival of global demand. But with renewed restrictions in late 2020 in response to a resurgence of infections, the recovery has been subdued. 

The crisis has led to significant job losses but the labor market is rebounding. The pandemic halted a decade of the region’s progress in boosting incomes and reducing poverty. Job support schemes and other government measures helped prevent steeper spikes in poverty. By end-2020, the labor market had recovered half of its pandemic losses, still leaving large numbers of people unemployed. Workers with less education, women, youth, and those informally employed have suffered disproportionately.

The recovery is expected to strengthen in the second half of the year as vaccinations continue and confidence, consumption, and trade gradually improve. The economy is projected to expand by 4.4 percent in 2021. In 2022 and 2023, growth will likely moderate to 3.7 percent, weighed down by lingering damage from COVID-19.

A number of risks could derail the economy. Economic recovery hinges on the vaccine rollout and the durable containment of the pandemic. Even if the pandemic is brought under control, damage to the economy could persist for longer than expected. The uncertain near-term outlook underscores the importance of the right policy choices.

Policy efforts in the region need to stay focused on fighting the pandemic, limiting social damage, and nurturing recovery. All countries should ensure that their health care systems are adequately resourced - for vaccination, testing, therapies, and investment in health care facilities. Public health efforts should continue to be reinforced with well-designed economic policies to support the recovery as needed. Investments in education, digitalization and other infrastructure projects, as well as green initiatives should all be prioritized since they can boost productivity and accelerate growth and the necessary transition to lower carbon dependence as countries emerge from the pandemic.

The government responses to the pandemic have caused major fiscal pressures, hence rebuilding fiscal sustainability will be a high priority for the region. Falling revenues and rising spending needs together have strained fiscal balances. In 2020, large economic packages in all Western Balkan countries have deteriorated deficits. As the economic recovery firms up in the region, adjustments to the fiscal policy stance and vigilant debt management are central to securing a sustainable recovery.

The COVID-19 pandemic and the ensuing economic crisis have exposed how informal firms and workers are more vulnerable to shocks, and the difficulty of providing support to businesses operating in the shadow (informal) economy. All six Western Balkan economies have large informal sectors, which account for an estimated 25–35 percent of both the GDP and the number of people employed — much higher than in the EU member states. For the Western Balkan economies, high informality has held back growth, created unfair competition, and delayed convergence with the rest of Europe. Like in the Western Balkans, many emerging economies have large informal sectors. As countries transition to higher income status, they embark on an effort to improve productivity and incentivize the formalization of the economy, since the costs of formalization decline and the benefits increase. This edition puts a spotlight on informal businesses and explores interventions that are likely to promote formalization.

Country Notes

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Country-specific chapters: Albania | BiH | Kosovo ALB SRB | North Macedonia | Montenegro | Serbia