IMF Executive Board Concludes 2022 Article IV Consultation with Kosovo


IMF Executive Board Concludes 2022 Article IV Consultation with Kosovo







January 27, 2023















Washington, DC:
On January 25, the Executive Board of the International Monetary Fund (IMF)
concluded the Article IV consultation

[1]

with Kosovo.

The increase in energy and food prices after Russia’s war in Ukraine is
weighing on private demand, activity, and inflation. Real GDP growth is
estimated to have decelerated to 2.5–3 percent in 2022, after recovering by
10.7 percent in 2021. Average inflation reached more than 11 percent in
2022.

Fiscal consolidation that began in 2021 continued in 2022. The primary
fiscal position is estimated to be balanced in 2022, compared with a
deficit of about 1 percent of GDP in 2021. The tighter fiscal stance
reflected solid fiscal revenue growth and low implementation of the public
investment program (PIP) that offset the increase in transfers to lessen
the impact of higher food and energy prices. In particular, the improvement
in domestic tax collection reflected progress in strengthening tax
administration and tackling informality. While credit to the private sector
is estimated to have expanded by about 15 percent in nominal terms in 2022,
real credit growth decelerated compared to 2021. Reflecting the tighter
euro area financial conditions, domestic government bond yields and lending
rates have begun to increase. With strong capital and liquidity buffers and
low NPLs, the banking sector has remained resilient overall.

Economic activity is forecasted to grow at 3.5 percent in 2023, around
Kosovo’s potential of 3.5–4 percent. This forecast crucially depends on the
assumption that international commodity prices will ease in 2023.
Uncertainty around the outlook remains high; higher energy prices represent
the main downside risk. Although sound fiscal and financial policies will
help mitigate the impact of downside risks, structural reforms addressing
infrastructure and governance gaps are essential to diversify Kosovo’s
growth engines and create the conditions for greener economic growth.

Executive Board Assessment

[2]

Executive Directors noted that following an economic rebound, spillovers
from Russia’s war in Ukraine, including high food and energy prices and
tightening financial conditions, are weighing on growth, and the outlook
remains uncertain with risks tilted to the downside. Directors commended
the authorities’ swift policy response, which helped cushion the impact of
the terms of trade shock on households and firms. Looking ahead, they
encouraged continued commitment to prudent policies combined with a
revitalized structural reform agenda to unlock growth. Continued close Fund
engagement can help Kosovo advance its reform efforts and rebuild policy
buffers.

Directors welcomed the authorities’ efforts to replenish fiscal buffers.
They agreed that a return to the fiscal rule deficit ceiling in 2023 could
support a soft landing without exacerbating inflationary pressures.
Directors emphasized that measures to mitigate the impact of higher energy
prices should be temporary, well targeted, and encourage efficient energy
use. While welcoming an increase in public investment, Directors urged the
authorities to improve its absorption and address public investment
management shortcomings. Directors commended the progress toward reducing
informality and encouraged exploring additional revenue measures.

Directors recommended that public spending be better balanced between
social transfers and promoting economic transformation and resilience. They
agreed that the phased implementation of the law regulating public wages
would ensure talent retention while keeping the wage bill within its legal
ceiling. Directors emphasized that early withdrawals from Kosovo’s Pension
Savings Trust should be avoided.

Directors welcomed the resilience of the banking system, which has remained
liquid and well-capitalized. Noting the uncertain outlook, they urged
continued close monitoring of bank asset quality and liquidity and
emphasized the importance of enhancing surveillance of the housing market.
Directors welcomed the authorities’ commitment to implement the
recommendations from the 2019 Financial Sector Stability Review and 2021
Safeguards Assessment. They underscored the key role of an independent and
accountable central bank in maintaining financial stability.

Directors urged the authorities to address infrastructure and governance
gaps, further enhance transparency, and reduce corruption, which remain
essential to improve Kosovo’s business environment and increase potential
growth. They called for addressing weaknesses in the AML/CFT framework.
Directors also underscored the importance of boosting green energy
generation capacity to increase energy security and decrease emissions.

It is expected that the next Article IV consultation with the Republic of
Kosovo will be held on the standard 12-month cycle.



Kosovo: Selected Economic Indicators, 2019–27

2019

2020

2021

2022

2023

2024

2025

2026

2027

Est.

Proj.

Real GDP growth

4.8

-5.3

10.7

2.7

3.5

3.9

3.9

3.6

3.5

Contribution to growth (percentage
points of GDP)

Consumption

5.8

2.3

7.7

1.1

3.9

2.9

2.6

2.6

2.6

Private

4.6

2.0

6.5

2.3

2.2

2.1

2.1

2.1

2.1

Public

1.2

0.3

1.2

-1.3

1.7

0.8

0.5

0.5

0.4

Investment

-0.1

-2.3

3.6

-0.5

0.4

1.6

1.5

1.2

1.1

Net Exports

-0.3

-5.3

-0.2

1.4

-0.8

-0.6

-0.2

-0.2

-0.1

Exports

2.2

-8.6

17.0

3.8

0.8

1.3

1.5

1.4

1.4

Imports

-2.5

3.3

-17.2

-2.4

-1.6

-1.9

-1.7

-1.6

-1.5

Real growth rate (percent)

Consumption

6.2

2.4

7.5

1.1

4.0

2.9

2.7

2.7

2.7

Private

5.6

2.5

7.3

2.7

2.6

2.5

2.5

2.5

2.6

Public

10.1

2.1

9.0

-9.3

14.0

5.7

4.0

3.6

3.3

Investment

-0.2

-7.4

11.7

-1.5

1.2

5.4

5.1

4.1

3.5

Exports

7.6

-29.2

76.8

10.7

2.2

3.5

3.9

3.8

3.7

Imports

4.5

-6.0

31.5

3.7

2.4

2.9

2.7

2.5

2.4

Official unemployment (percent of
workforce)

25.7

26.0

21.3

Price changes

CPI, period average

2.7

0.2

3.3

11.6

4.9

2.5

2.1

1.9

2.0

GDP deflator

1.0

1.4

6.1

9.3

6.2

3.4

2.5

2.1

1.8


General government budget
(percent of GDP)

Revenues and grants

27.0

25.6

27.8

27.8

28.6

27.3

27.2

27.2

27.0

Expenditures

29.9

33.5

29.0

28.0

30.8

29.5

29.2

29.3

29.3

Of which:
Wages and salaries

8.7

9.8

8.4

7.4

7.6

8.1

8.1

8.1

8.1

Subsidies and transfers

8.9

12.8

10.6

12.0

11.2

10.2

10.0

10.0

10.0

Capital expenditure

7.6

5.7

5.3

4.6

6.8

6.3

6.3

6.3

6.3

Overall Balance (Fiscal rule) 1/

-0.8

-6.6

-1.0

0.1

-1.1

-1.3

-1.2

-1.3

-1.5

Overall balance

-2.9

-7.9

-1.3

-0.3

-2.2

-2.1

-2.0

-2.1

-2.3

Stock of government bank balances

5.1

3.4

3.8

3.3

4.0

3.5

3.0

2.4

1.5

Total public debt 2/

17.7

22.5

21.6

19.2

20.6

21.0

21.4

21.9

22.3


Balance of Payments (percent of
GDP)

Current account balance, incl.
official transfers

-5.7

-7.0

-8.7

-10.4

-8.0

-7.5

-7.1

-6.5

-6.3

Of which:
Official transfers 3/

3.4

4.1

2.9

3.0

3.8

3.1

3.0

3.0

3.0

Of which:
Remittance inflows

12.1

14.5

14.5

14.1

13.6

13.3

12.6

12.4

12.1

Financial account

-2.3

-8.3

-4.6

-6.9

-5.0

-5.1

-4.8

-4.2

-4.2

Of which:
Direct investment, net

-2.7

-4.2

-4.0

-4.9

-4.2

-4.2

-4.0

-3.7

-3.5

Portfolio investment, net

0.8

-1.2

3.5

1.0

1.0

1.1

1.3

1.6

1.6

Other investment, net

-1.8

-3.5

-6.1

-3.2

-3.0

-2.2

-2.2

-2.1

-1.8

Reserve change

1.3

0.7

2.1

0.2

1.2

0.1

0.0

0.1

-0.5

Errors and Omissions

3.5

-1.6

3.4

3.3

2.7

2.1

2.0

2.0

1.9


Savings-investment balances
(percent of GDP)

National savings

28.9

26.4

27.2

25.7

26.5

27.0

27.5

28.2

28.4

Public savings

4.4

-2.8

3.8

4.1

3.5

4.2

4.3

4.2

4.0

Private savings

24.5

29.3

23.4

21.7

23.0

22.8

23.2

24.0

24.4

Investment

34.6

33.4

36.0

36.2

34.5

34.5

34.6

34.6

34.7

Public investment

7.6

5.7

5.3

4.6

6.8

6.3

6.3

6.3

6.3

Private investment

27.0

27.7

30.6

31.6

27.6

28.2

28.3

28.4

28.4

Current account, including.
official transfers

-5.7

-7.0

-8.7

-10.4

-8.0

-7.5

-7.1

-6.5

-6.3

Financial Sector

Non-performing loans (percent of
total loans)

1.9

2.5

2.1

2.0

Bank credit to the private sector
(percent change)

10.0

7.0

15.6

15.1

10.3

9.0

7.9

6.8

6.6

Deposits of the private sector
(percent change)

15.6

10.9

12.4

8.6

7.5

7.7

7.3

6.6

6.4

Regulatory capital to risk weighted
assets

15.9

16.5

16.1

15.8

Memorandum items:

Foreign Reserves (millions of
euros, IMF Definition)

1,142

1,149

1,293

1,310

1,420

1,426

1,427

1,430

1,367

Foreign Reserves (% of ARA metric)

126

119

106

94

94

88

82

76

69

GDP (millions of euros)

7,056

6,772

7,958

8,932

9,817

10,547

11,233

11,879

12,522

GDP (millions of euros;
authorities’ projections)

7,056

6,772

7,958

8,956

9,843

GDP per capita (euros)

3,959

3,766

4,499

5,055

5,561

5,980

6,376

6,749

7,121

Real GDP growth per capita

5.6

-6.2

12.6

2.8

3.6

4.0

4.0

3.7

3.6

Output gap (% of GDP)

1.2

-6.2

-0.5

-0.5

-0.5

-0.3

-0.1

0.0

0.0

Population (million)

1.8

1.8

1.8

1.8

1.8

1.8

1.8

1.8

1.8

Sources: Kosovo authorities; and
IMF staff estimates and
projections.

1/ The “fiscal rule” caps the
overall fiscal deficit at 2 percent
of GDP, excluding investment
financed with privatization
receipts and donor financing
contracted after 2015, as well as
PAK-related current expenditure;
the IMF calculates expenditures
from carried-forward own-source
revenue (OSR) as the difference in
the municipal OSR stock.

2/ It does not include contingent
debt of former Yugoslavia.
Beginning in 2020, it includes Euro
120 million of debt with KPST.

3/ Total foreign assistance
excluding capital transfers.



[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.

[2]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summing up can be found here:

http://www.IMF.org/external/np/sec/misc/qualifiers.htm.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER:

Phone: +1 202 623-7100Email: [email protected]

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