Western Balkans Regular Economic Report: Fall 2019

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  • 16

Artwork: Angel Profiles, by Eduart Karaj

A semi-annual report on recent economic developments and economic policies in the Western Balkans (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia), this edition looks at the economic performance and outlook for the Western Balkans region and specific factors that affect growth prospects.

Unemployment in the Western Balkans fell to historic lows in the first half of 2019, supported by strong economic growth in 2018.

By June 2019, 150,000 additional jobs had been created in the Western Balkans compared to a year earlier. Some 43,000 young people have found jobs, especially in Albania. Youth unemployment in the region has fallen supported by the growing business-process outsourcing sector. Economic activity in 2018 has attracted more women into the labor force.

Despite these positive developments, however, less than half of the working-age population in the Western Balkans has a job (44 percent). In Bosnia and Herzegovina and in Kosovo, only 34 percent and 30 percent of the working-age population has a job, respectively. Sustaining high and equitable economic growth is essential to creating more, and much-needed, job opportunities in the region.

Economic growth in the region is slowing after a short-lived revival of investment.

In 2019, economic growth in the Western Balkans is projected to reach 3.2 percent, down from 3.9 percent in 2018. With the exception of Kosovo and North Macedonia, growth is expected to be lower than in 2018 in other countries. Economic growth slows as the contribution of investment and exports to growth is fading.

Instead, consumption continues to be the main driver of economic activity in Western Balkan countries, fueled by higher public spending and near double-digit growth in household lending. This raises questions about sustainability of the consumption-driven growth in the region.

Internal and external imbalances are rising.

Growth is slowing despite a surge in public spending stimulated by cyclical revenues. The rise in revenues has not been enough to offset the rise in current spending dominated by public wages and social benefits. As a result, fiscal deficits are projected to go up in 2019 in all countries in the Western Balkans, except Kosovo and Montenegro.

External imbalances also started to rise as exports slowed, due to falling demand from EU trading partners amid rising trade tensions. Sizeable internal and external imbalances in several Western Balkan countries, along with elevated public debt, expose the region to adverse economic shocks. The higher public spending has compromised an opportunity to build the much-needed fiscal buffers to be able to cushion the impact of rising external uncertainties.

Positive outlook for 2020–21 masks underlying vulnerabilities, as downside risks intensify.

All countries are projected to grow faster, except Montenegro, where the phasing-out of an investment cycle is projected to moderate growth. However, this positive outlook is vulnerable to mounting risks. The region faces rising uncertainty as economic growth slows globally, including in the EU— the Western Balkans’ major trading partner and source of financial flows.

Rising trade tensions and oil price volatility further raise the external risks. At the same time, political polarization in several countries in the region, as well as weather-related shocks affecting agricultural and energy production, add to domestic uncertainties.

Rising uncertainties call for rapid improvement in public finances and competitiveness.

Improving the efficiency and equity of public spending and strengthening revenue mobilization remains a priority in all Western Balkan countries. Public sector wage bills and pensions constitute the largest share of public spending in the region. Tighter controls on wage bills, reducing tax expenditures, and better targeting of social benefits would open space for more public investment, improve equity, and enable the build-up of fiscal buffers to mitigate rising risks.

Together, these reforms would help unlock stronger and more sustainable growth, ensuring faster convergence with EU income levels.