Kosovo’s economy has grown faster than its neighbors over the past decade, and that growth has been broadly shared. However, it has not been enough to considerably reduce the country’s high unemployment rates or create enough formal jobs, especially for women and youngsters. Kosovo’s growth model used to be primarily reliant on remittances to fuel domestic consumption, but this has changed in recent years to be driven more by investment and exports.
Kosovo must unlock productivity gains and generate more high-quality employment opportunities if it is to sustain its economic expansion. To achieve this goal, infrastructural bottlenecks must be eliminated, the human capital investment must be given top priority, and an atmosphere must be created that encourages private sector growth. It is also important to improve governance and the rule of law.
Kosovo’s youth must be given the tools to succeed in a contemporary economy, and the country’s most vulnerable residents must be safeguarded through efficient and effective social services.
One of the major problems is the inequality between men and women in terms of economic opportunity. The promotion of environmental sustainability necessitates further activities, such as the completion of the EU’s environmental acquis.
Kosovo’s economy bounced back strongly in 2021, but it was quickly derailed by rising global inflationary pressures. Investment and consumer spending slowdowns should bring real GDP growth down to 3.1% in 2022.
Kosovo Economy In Europe 2023 [Facts & History]
In 2021, GDP growth hit a record 10.5%; in the first half of 2022, however, growth slowed to 3.2% due to a combination of lower investment and higher exports. The service sector was the primary driver of output growth, fueled by diaspora spending, expanding credit, and increased government spending.
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An increase in the cost of imported goods led to a spike in inflation of 13 percent year over year in August 2022. By August of 2022, inflation in the cost of food and transportation had topped 20%, disproportionately affecting the most vulnerable populations.
Average pension contributors for the first half of 2022 indicate an 8% (year-over-year) rise in the labor force. For the same time period, the number of people registering at employment centers to look for work fell by 32%. (y-o-y).
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July saw a 29.4 percent year-on-year growth in exports, mainly of manufactured goods. Exports of services, fueled by the diaspora, grew by 46% by May, and early indications from the tourism industry suggest that this upward trend has persisted throughout the summer.
Kosovo’s structurally high trade imbalance is expected to worsen as merchandise imports, which accounted for 53.4% of GDP in 2021, rise nominally by 26.0% through July 2022. After a yearly drop of 0.3% between January and June, remittance inflows have leveled out.
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Total tax receipts climbed by 15.4 percent (year-over-year) through the end of August 2022, supported by inflation and formalization. Spending now exceeds 4.5 percent of GDP as a result of government inflation mitigation and energy-subsidy policies, contributing to a 17.6 percent increase over the same time period.
The execution rate for capital expenditures was 17% as of the end of August, which was over 30% lower than at the same time last year. Stability in the banking industry continued in July, with the annual percentage change in loans coming in at 18%. The proportion of non-performing loans to total loans held by banks has remained unchanged at 2.1 percent, and capital and asset quality at these institutions are still satisfactory.
Kosovo Economic Prospects
In 2022, GDP growth is predicted to moderate to 3.1%. Private consumption growth is anticipated to decelerate as inflationary pressures dampen purchasing power. Economic expansion is anticipated to be fueled by net exports. Contrarily, investment should weigh on expansion due to the impact it has on both public capital spending and the construction industry.
Increased demand from the diaspora, expanding credit, and government spending should all help the service sector surge ahead in the coming years.
Poverty is predicted to reduce modestly in 2022 after a big drop in 2021, but it could remain stagnant if inflationary pressures persist.
The forecast is still optimistic over the next few years. There are, however, risks to the negative due to rising interest rates and the costs of food and energy. Inflation among consumers is predicted to peak in 2022 at an annual rate of 12.1%, before progressively subsiding in the coming years.
It is anticipated that the current account would continue to deteriorate until 2023 as a result of high import inflation leading to a nominal increase in the level of trade imbalances and slower remittances.
The current account will rely mostly on foreign direct investments (FDIs) and external lending (EL) that do not increase the country’s debt load in the medium run. To the tune of 0.8% of GDP in 2022, the budget gap is projected to widen.
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It’s possible, though, that more money spent on energy subsidies could worsen the deficit. Spending is projected to rise and the budget deficit is forecasted to exceed 2% of GDP over the medium term as a result of employee compensation, transfers, and a modest improvement in capital investment execution.
As the macroeconomic environment shifts, there is an urgent need to preserve fiscal buffers by limiting spending on untargeted transfers and speed up the rollout of structural reforms in energy, education, social protection, and healthcare to promote equitable and sustainable growth.
Global Financial Institutions’ Plan of Action
Through more than 40 separate projects and trust funds, the World Bank has supplied and/or administered in excess of US$500 million for Kosovo since 1999.
Prior to Kosovo’s membership in the World Bank Group in 2009, the Bank’s net income, the Trust Fund for Kosovo, the Post-Conflict Fund, and the International Development Association all provided grants to fund Bank-supported initiatives in Kosovo (IDA).
As a fragile state in the wake of war, Kosovo can still access IDA loan finance (under mixed terms).
There were eleven projects totaling US$379.55 million in the active IDA credit portfolio as of October 2022. These projects focused on energy, agriculture, water, health, competitiveness, finance, ICT, social assistance, and cadaster reform.
Assisting Kosovo in making strides toward more sustainable, export-oriented, and inclusive growth to improve living conditions for all Kosovars is a top priority for the World Bank Group in its Country Partnership Framework (CPF) for 2017-22.