Testing Resilience
Press Release | BiH | Kosovo | Montenegro | North Macedonia
The economies of the Western Balkans have seen their resilience tested over the last three years. After the economic activity bounced back in 2021, economic performance has been challenged by the external environment stemming from the fallout of Russia’s invasion of Ukraine, higher energy and food prices, unfavorable weather conditions, tightening financial conditions, and significant uncertainty.
Although risks remain significant, and while growth continues to slow and prices continue to rise, the Western Balkan economies have shown resilience. The region now faces the challenges of rebuilding buffers in readiness for the next shock while undertaking supply-side reforms to lay the foundations for more sustainable and greener growth.
Growth in the Western Balkan economies started strong in early 2022, before moderating toward year-end, but the impact of major shocks, such as electricity and heating outages, has been less severe than expected. Inflation surged to a two-decade high in 2022 in almost all economies, but now shows signs of easing due to slowing global growth. However, price pressures remain elevated in early 2023.
Higher food and energy prices have affected low-income households more severely, resulting in a slower pace of poverty reduction in 2022 despite government support. Due to lower economic growth and higher inflation, poverty is estimated to have decreased by just 1 percent in 2022. This is a much lower pace of poverty reduction than in the pre-pandemic period, equivalent to only 160,000 people moving out of poverty in 2022. Poor households spend a higher proportion of their income on food and energy, the two items in the consumption basket with the highest price increases. To design effective policies to protect the less well-off, it is important to consider the variability of inflation rates across different households.
Despite seeing a positive rate of employment growth, job creation slowed down across the Western Balkans in the second half of 2022. By year-end, employment in the region contracted by just over 1 percent, equivalent to 72,000 fewer jobs, but was still above the pre-crisis levels. While the unemployment rate declined across all countries to 13.2 percent by end-2022, regional disparities persist.
Fiscal deficits have narrowed in most Western Balkan countries despite social spending pressures against record inflation. However, in Montenegro and Bosnia and Herzegovina fiscal balances deteriorated. As a result, the regional deficit remained at 3 percent of GDP and above the pre-pandemic levels. At the same time current account deficit deteriorated. In 2022, the regional current account deficit was highest in the last decade, with the exception of the pandemic year, rising to 6.9 percent of GDP in 2022 from 4.8 percent the year before.
The outlook for the Western Balkans remains subdued and uncertainty remains high. In the short term, growth outcomes are expected to be driven by economic performance in the EU, the course of energy and food prices, and the fight against inflation. In the medium term, the Western Balkans continues to have a positive outlook, but reforms are needed to rebuild buffers, accelerate the green transition, and to address key structural challenges.
The ongoing energy crisis has highlighted the need to accelerate the green transition. A key starting point is to accelerate the move toward carbon pricing and to increase the use of environmental fiscal measures that incentivize households and firms to shift toward lower carbon intensity with respect to economic activity. Securing alternative energy resources, including through investment in renewables, also needs to be a priority ahead of the next winter.
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Country-specific chapters: Albania | BiH | Kosovo ALB SRB | North Macedonia ALB MKD | Montenegro | Serbia
