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Western Balkans Regular Economic Report: Fall 2020

Latest Issue: 
  • 18

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Artwork: Coins, by Faton Dermaku

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 impact of COVID-19 on the region and the prospects for recovery amid uncertainty.

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An Uncertain Recovery

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Press Release | BiHKosovo | MontenegroNorth Macedonia | 

 

As elsewhere in the world, the COVID-19 pandemic has plunged countries in the Western Balkans into a deep recession. While the outlook remains uncertain, economic activity in the region is projected to contract by 4.8 percent in 2020.

The primary causes are the drop in both domestic and foreign demand, and disruptions in supply chains due to imposed containment measures, such as lockdowns. A second wave of the pandemic in the Western Balkans since mid-June and political uncertainty about elections in some countries have further impeded economic recovery.

The recession has worsened labor market conditions and interrupted welfare improvements, although government response measures cushioned the blow. Prior to the pandemic outbreak, most of the countries in the Western Balkans had made progress in reducing poverty and boosting household incomes. The crisis interrupted, and in some cases reversed, this process. By June, the unemployment rate in the region rose by 0.5 pp, and 139,000 jobs were lost. Government measures contained the labor market fallout and helped prevent larger spikes in poverty. In Albania, Kosovo, Montenegro, and Serbia, the COVID-19 crisis is estimated to have pushed over 300,000 people into poverty—a significant number, but less than half of what it would have been without the response measures.



Policy efforts in the region need to remain focused on fighting the pandemic, limiting the economic damage, and facilitating recovery. Going forward, all countries should ensure that their health care systems are adequately resourced. Where infections surge and lockdowns are required, economic policy should continue to cushion household income losses with well targeted measures, as well as provide support to firms suffering the consequences of mandated restrictions on activity.

Rebuilding fiscal sustainability will be a high priority throughout the region as the recovery takes hold. Falling revenues and rising spending needs together have put heavy stress on fiscal balances. Western Balkan countries have already put forward massive economic packages in 2020—deficits will increase from 4 to 10 percent of GDP for most countries.

Across the Western Balkans, resilient recovery will depend on strengthening the fundamentals. By 2022, the total output loss due to the crisis is projected to be fully recovered. But the crisis also offers the opportunity to make growth more resilient in the future by implementing key structural reforms. These include more effective public spending and better management of public investments; rebuilding fiscal space by heightening tax compliance, greater efficiency in spending, and new fiscal instruments, such as green taxes and digital taxation; building strong,  independent, and accountable institutions; and committed adherence to the rule of law.

The extent of the recovery is far from risk-free. In the short term, the speed of the recovery will depend on how the pandemic evolves, while a delayed recovery in the region’s main trading partner—the EU, could slow economic normalization by diminishing trade and remittance flows.


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Recovery of Western Balkan Firms: Crowding In Private Investment and Expanding Access to Advisory Support

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The COVID-19 crisis has caused businesses in the Western Balkans region to suffer substantial revenue losses. Based on data collected during the crisis, at least 50 percent of firms surveyed in each country have been forced to close at least partly, and business was minimal for those that remained open. Micro and small firms suffered more than medium and large firms. Across the region, disappearing market demand was reported and firms faced liquidity constraints.

Firms in the region must now adapt their business models to the new post-COVID-19 normal, while also overcoming structural barriers to competitiveness and innovation. Firms should prioritize restructuring their operations and logistics chains to make them more resilient to future shocks; accelerating digitalization throughout value generation chains; increasing the efficiency of investment and operational costs; and speeding up development of new products and services to respond to the rapid changes in demand from their clients.

But regulatory obstacles in the region make it difficult to set up investment mechanisms in support of firms, such as private equity and debt instruments, venture capital, crowdfunding platforms, or business angel groups. There is little support for firms seeking much-needed soft investments – in areas such as improving investment readiness, upgrading processes, managerial innovation, export readiness, acquiring licenses, and adopting digital solutions, all of which are critical for firms to adapt to post-COVID realities and to compete domestically and internationally.

To support firms, Western Balkan governments need to crowd in private financing (debt or equity) to facilitate hard investments by firms; and shift the focus of scarce government resources more towards facilitating soft investments. 

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Country Notes

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Country-specific chapters: Albania | BiH | Kosovo | North 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