Kosovo

Kosovo Macroeconomic Outlook

1. Overview:
The unfavorable global economic environment has had limited impact on Kosovo’s economy, due to its narrow exports base and limited exposure of local banks to international financial products. The crisis is projected, though, to slow down FDI and remittances inflow (which account for 15-20% of Kosovo’s GDP) in 2009 and 2010.

2. Growth performance:
GDP growth reached 5.5% in 2008.The main drivers of growth are currently the international donor activity, remittances of Kosovo’s diaspora and the significant increase of public investment. 20% of GDP currently depends on aid. The ongoing slowdown in remittances, imports, private sector credit and FDI indicate that domestic demand will decrease in 2009. IMF projects a deceleration of real growth to 3.5% in 2009.

3. Balance of payments:
Strong domestic demand and deterioration in the terms of trade balance widened the C/A deficit to an estimated 22% of GDP in 2008, compared to 17% of GDP in 2007(IMF); C/A deficit is forecast at 27.7% of GDP in 2009.

4. Inflation-Monetary Policy:
Average annual inflation stood at 9.4% in 2008, after 4.4% in 2007 and 0.6% in 2006(EC). IMF forecasts inflation at -2.1% for 2009. While the adoption of euro has provided stability to Kosovo’s economy, euroization leaves fiscal policy as the only instrument in ensuring macro-economic stability.

5. Fiscal Position:
The 2008 budget resulted in a deficit of 0.9% of GDP, substantially below the planned surplus of 7.4% of GDP. The fiscal deficit is projected to widen considerably due to the rapid growth of public expenditures. IMF forecasts that if all expenditures are executed in full, the fiscal deficit will reach 11% of GDP in 2009.

6. Key Issues:
Kosovo’s economy suffers from severe structural problems: according to the report of Transparency International, Kosovo ranks as world’s fourth most corrupt economy. Additionally, the poor infrastructure and heavy electricity disruptions discourage foreign investments. With an unemployment rate of 43%, 45% of the population is below the poverty line (WB). The complex political status of Kosovo should be also noted; as Serbia's breakaway region, Kosovo unilaterally declared independence in Feb 2008, recognized so far by 53 countries, including the U.S. and 22 EU member states. As the financial crisis hit SEE, the participation of Kosovo in IMF became an imperative, in order for the country to take advantage of IMF financing. IMF’s weighted-majority decision making allowed Kosovo to join, despite objections from Serbia, Russia and other countries that do not recognize Kosovo’s independent status. In June 2009, Kosovo became a member of the IMF. It is expected that this development will unlock hundreds of millions of Euros in economic aid.