A return to growth saw significant job creation, helping to reverse some of adverse impact of the pandemic. Rapid growth in 2021 saw the creation of 227,300 new jobs in the Western Balkans. Strong domestic and external demand, coupled with a resumption in tourism and construction, helped drive the employment rate to a historical high of 45.8 percent of the working-age population.
Employment demand helped reduce poverty across all six Western Balkan economies. The poverty rate is estimated to have fallen by 2.9 percent in 2021, reversing the 1.4 percentage increase in poverty of 2020. This is equivalent to 408,000 people being lifted out of poverty in 2021, meaning that net poverty has now fallen below pre-pandemic levels.
Strong revenue performance helped reduce fiscal deficits across the region. For most economies in the Western Balkans in 2021, the buoyant recovery in economic activity together with higher inflation fueled nominal growth in revenues that outpaced expenditures. The average deficit for the region dropped by 4 percentage points of GDP compared to 2020, and public debt declined to 56.5 percent of GDP in 2021.
Inflation is on the rise due to a combination of factors. Stronger global growth since mid-2020 has placed upward pressure on commodity prices and on shipping costs, feeding through into higher imported inflation across the Western Balkans.
Financial stability remains sound due to support measures, but vigilance will be needed given exceptional uncertainty. The financial systems of the Western Balkan economies have remained resilient through the pandemic, with adequate capital and liquidity buffers and the maintenance of asset quality. Policy support, including borrower relief measures, coupled with a growth recovery has helped reduce banking sector risks and even increase commercial bank profitability.
2021 saw especially strong growth in trade as the region benefited from a recovery in global demand, but the conflict between Russia and Ukraine is expected to disrupt this trend. Exports surged by 39.2 percent and imports by 29.0 percent in 2021, as the economies of the Western Balkans profited from a strong and broad-based recovery in demand for the region’s goods and services.
There are several channels of impact from the war in Ukraine on the economies of the Western Balkans. Among these, it is certain that inflation will be even higher, because of additional increases in food and energy prices, and that lower exports, disruptions in supply chains, and lower tourism revenues would also likely lead to a slowdown in growth.
The economies of the Western Balkans now face an unusually uncertain outlook. The baseline projection for GDP growth in 2022 in the Western Balkans is now 3.1 percent, a downward revision by almost one percentage point.
Policy needs to focus on building resilience and on undertaking structural reforms to support growth and steer through the crises. With limited fiscal space, countries will need to carefully weigh the costs and benefits of new spending commitments in response to higher energy and food prices, prioritizing vulnerable households. Structural measures to reduce business regulatory costs, increase market competition, support labor market participation, and strengthen the independence of public institutions would all be supportive of growth in an uncertain environment.