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Western Balkans Regular Economic Report: Spring 2021

Latest Issue: 
  • 19

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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). The report analyzes the economic performance and outlook for the Western Balkans and specific factors that affect the region’s development. This edition looks at the economic and social impacts of COVID-19 on the region and the prospects for sustained recovery amid uncertainty.

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Subdued Recovery

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Press Release | BiH | Kosovo | MontenegroNorth 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.


 

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Country Notes

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


COVID-19’s Impacts in the Western Balkans

Poverty and Household Welfare COVID-19 and containment measures will halt poverty reduction and welfare improvements in the Western Balkans, with the crisis likely to affect household welfare, mainly through fewer jobs and loss of labor income in the most affected sectors, as well as lower international remittances. Many of those who could become impoverished because of the COVID-19 crisis will not receive social protection unless programs are expanded and informal workers without access to unemployment insurance and other support to the formal economy are particularly at risk. - English
- Albanian
- Bosnian
- Macedonian
- Serbian
Education The COVID-19 pandemic shocks to education systems in the Western Balkans will have negative short and long term impacts. Economic gains might falter, human capital growth will likely decline or come to a standstill, and current gaps in learning equity will widen. All countries in the region have responded to the disruption in education delivery by introducing various remote teaching modalities. Yet despite prompt action, learning loss will be unavoidable and considerable, disproportionately affecting the disadvantaged, with a larger share of students falling back into functional illiteracy and potentially dropping out of school altogether - English
- Albanian
- Bosnian
- Macedonian
- Serbian
Health Prior to the outbreak of COVID-19, health systems in the Western Balkans faced critical financing and service delivery challenges. Going forward, governments in the region will need to invest in critical pandemic preparedness gaps and identify opportunities to improve the quality of care and the efficiency and effectiveness of service delivery. - English
- Albanian
- Bosnian
- Macedonian
- Serbian
Labor Markets The total employment impact of the COVID-19 pandemic is expected to be unprecedented and broad-based in the Western Balkans, with 40 percent of the 2019 unemployment reduction gains lost by April 2020. All countries in the region have moved to support enterprises to retain jobs and protect unemployed and as the recovery phase starts, authorities there should not lose sight of addressing longer-term challenges. - English
- Albanian
- Bosnian
- Macedonian
- Serbian
Air Pollution Challenges Emerging evidence suggests that Ambient Air Pollution plays a role in the spread and impact of the COVID-19 pandemic and countries in the Western Balkan are particularly vulnerable - as many suffer from air pollution, especially during the winter months. Countries with high air pollution should enforce regulations and introduce measures to improve air quality, reducing the exposure of people in the upcoming winter. - English
- Albanian
- Bosnian
- Macedonian
- Serbian
Social Protection The COVID-19 pandemic is affecting labor markets and people’s employment opportunities across the Western Balkans and countries are stepping up their support to affected households. There are clear financing tradeoffs between programs and across time, and spending will need to be prioritized. It will be important to improve the targeting while guaranteeing the long-term funding of social protection, and limit the duration of wage subsidy programs - which are expensive. - English
- Albanian
- Bosnian
- Macedonian
- Serbian
Financial Sector The financial sector can help mitigate the impacts of COVID-19 on the real economy by providing bridge financing and loan restructuring for viable firms to help them alleviate the impacts of the crisis. Financial sector vulnerabilities have more impact on emerging markets like the Western Balkans - whose financial systems are less prepared to weather shocks. While national financial sectors in the region are generally stable, it is necessary to monitor credit and liquidity trends because COVID-19 poses the most serious threat since 2008. - English
- Albanian
- Bosnian
- Macedonian
- Serbian
Fiscal Policy After the immediate crisis containment period, fiscal policy needs to strike a balance between supporting economic recovery and ensuring fiscal sustainability. Some Western Balkan countries have improved their fiscal stance in recent years by creating fiscal buffers which allowed them to finance larger support programs. Still, all countries entered the COVID-19 crisis with more debt than before the 2009 global financial crisis and while all Western Balkan countries introduced measures to mitigate the immediate impact of the crisis, their effectiveness depends on how well they are adapted to the specific context in each country. - English
- Albanian
- Bosnian
- Macedonian
- Serbian
Trade Trade in the region will be affected by the combination of a supply side shock, largely through global value chains, and a demand side shock, due to recessions in major trading partners. Trade policies, such as tariff reductions and other measures to facilitate border crossings, will be key to alleviate the immediate disruptions caused by the pandemic, and to facilitate economic recovery. - English
- Albanian
- Bosnian
- Macedonian
- Serbian
Private Sector The economic impact reported by firms surveyed has been substantial. In each country, at least 50 percent of firms in the most affected sectors had been forced to close to some extent and those that remained open saw activity plunge. Surveys conducted at the onset of the crisis show that the total reported layoffs are concernedly large and access to raw materials and imports has been less of a constraint than liquidity, declining demand, and uncertainty. - English
- Albanian
- Bosnian
- Macedonian
- Serbian




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