## KOSOVO'S ELECTRICITY SECTOR: CHALLENGES AND OPPORTUNITIES

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### A. Context and recent shock
- Energy price and market shock:
  - Energy prices increased sharply and became more volatile since the start of the war in Ukraine; Russia’s energy exports to Europe were 85 percent below their level in 2021 through October 2022.
  - A continuation of Russian exports to the EU at current level would result in a supply loss of about 100 billion cubic meters/year (25 percent of 2022 EU’s demand) that would need to be replaced by more expensive LNG imports.
- Kosovo-specific impacts:
  - Kosovo’s net energy imports are projected to have reached 12.5 percent of GDP in 2022, up 3.5 percentage points (pp) with respect to 2021, despite a 35 percent decrease in electricity imports and 5 percent decrease in fuel imports.
  - Lignite is used to generate more than 90 percent of Kosovo’s electricity; natural gas use is virtually inexistenceally; there is no domestic oil refining.

### B. Electricity supply chain and load features
- Institutional/market structure:
  - Kosovo Energy Corporation (KEK): publicly owned enterprise owning Kosova A and B coal plants and lignite mines.
  - Ibër-Lepenc JSC: reservoir-based hydro (POE).
  - KOSTT: Transmission System and Market Operator (TSO), member of ENTSO-E.
  - KEDS: privately-owned distribution; KESCO: retail supply, metering, and collection (owned by same firm as KEDS).
- Load composition and losses:
  - Household consumption constitutes around 60 percent of demand; commercial consumption 38 percent; public lighting 2 percent.
  - Demand in the regulated market accounts for about 90 percent of the load; deregulated market about 5 percent; unregulated (north) about 5 percent.
  - Around 11–12 pp of the regulated market are technical and non-technical losses; another 5 pp are commercial losses.
  - Electricity demand is highly seasonal: winter hourly loads about twice summer hourly loads.
- Northern municipalities:
  - Four northern municipalities (about 5 percent of demand) are largely unpaid and represent a fiscal burden.

### C. Financial flows, tariff framework, and recent stress
- Tariff setting and parameters:
  - Tariffs set once per year by the Energy Regulatory Office (ERO) considering domestic generation prices, expected load and generation, import volumes and prices, projected losses, and a value added of distribution.
  - Tariffs were last adjusted in February 2022 (up by about 10 percent for households consuming more than 800 KWh/month, while keeping other tariffs for households and firms constant).
  - Stated tariff levels and generation/import price parameters:
    - Tariff: 7€cts/KWh (6.1€cts/KWh for households and 8.4€cts/KWh for non-households).
    - Coal-based generation price: 2.95 €cts/KWh.
    - Renewable generation price: 9€cts/KWh.
    - Electricity imports price: 18.6€cts/KWh.
    - Lignite price for domestic generation: 3€/Ton.
  - Vulnerable household subsidy in the budget: €4.5 million.
- Recent liquidity stress:
  - Higher European electricity prices since 2021 created liquidity choke points in KEDS, leading to load-shedding in winter 2021–22 and late summer 2022.
  - Before 2021, lower European prices allowed the system to operate without significant fiscal costs; technical/non-technical/commercial losses were covered by tariffs and northern consumption was paid through a budget transfer to KOSTT.
  - KEK electricity exports in the summer increased to record levels: €150 million, about 1.5 percent of GDP.
  - Government subsidies to the sector were about 2 percent of GDP in 2022.

### D. Short-term outlook and scenario-driven fiscal stress estimates
- Macroeconomic outlook drivers:
  - The war in Ukraine keeps uncertainty high; a full Russian gas shutoff would likely lead to higher natural gas and electricity prices; Europe likely faces higher energy prices than before the war in the medium term.
  - The EU agreed on a natural gas price cap in mid-December 2022, though its impact on gas supply remains uncertain.
- Baseline assumptions for 2023 fiscal costing:
  - Foreign electricity prices in 2023 remain, on average, at the same level of 2022; KEK’s electricity supply remains unchanged; electricity demand remains at 2022 levels.
- Baseline fiscal cost estimates of keeping tariffs constant and avoiding winter load shedding:
  - about 1 percent of GDP (0.5 percent of GDP for subsidies to the regulated electricity sector, and the other 0.5 percent of GDP to finance the electricity consumption of the northern municipalities), and about 1.5 percent of GDP for 2023.
- Scenario definitions:
  - Scenario 1: assumes a 50 percent increase in the external price of electricity in 2023.
  - Scenario 2: assumes in addition a 10 percent decrease in KEK electricity production.
  - Scenario 3: considers that 20 percent of the increase in the external price of electricity assumed in Scenario 1 is passed through to domestic tariffs.
  - Scenario 4: illustrative case with 150 MW of wind-based electricity in place (assumes an effective capacity for wind of 28 percent) under the higher international prices and lower supply assumed in Scenario 2.
- Scenario outcomes and risks:
  - If downside risks materialize, costs would be significant: in Scenario 2 the fiscal cost over the winter would reach more than 2 percent of GDP and around 4.5 percent of GDP for 2023.
  - In that case it is unlikely higher import costs would be covered completely by additional subsidies; the adjustment would likely be a combination of subsidies and demand compression, with renewed liquidity choke points and potential load shedding.

### E. Medium-term challenges and environmental considerations
- Emissions and environmental exposure:
  - Coal-based electricity generation is the largest source of greenhouse gas (GHG) emissions in Kosovo.
  - Kosovo’s carbon intensity (CO2 emissions per unit of output) is the highest in the western Balkans and about four times the average of the EU.
  - Ambient concentrations of PM2.5 in Kosovo exceed the World Health Organization air quality guideline value of 10 μg/m3 and the EU limit value of 25 μg/m3.
  - CBAM (EU carbon border adjustment mechanism) will require EU importers, as of 2026, to purchase carbon certificates equivalent to the weekly EU carbon price; CBAM initially applies to cement, iron and steel, aluminum, fertilizers, and electricity — Kosovo’s current generation profile may hamper EU FDI attraction and summer electricity exports.
- System vulnerabilities:
  - Frequent unplanned outages of Kosova A and B hinder long-term supply contracts and increase dependence on volatile day-ahead and intraday markets.
  - High non-technical and commercial losses increase fiscal costs and vulnerability.
  - Northern municipalities’ unpaid consumption remains a fiscal exposure pending a Brussels’ agreement solution.

### F. Policy options — stylized suggestions
- Short-term measures (reduce demand and liquidity stress in 2023):
  - Partial pass-through of external prices to tariffs, including differential increases for peak-hour consumption for non-vulnerable clients, to improve efficiency and reduce fiscal subsidy costs.
  - Protect vulnerable households preferably via direct transfers rather than across-the-board tariffs.
  - Increase frequency of tariff adjustments (from once to at least twice per year) and ensure timely payment of subsidies to reduce liquidity choke points.
  - If load shedding is unavoidable, allocate it smartly to preserve economic activity.
- Medium-term measures (greening and resilience):
  - Boost energy efficiency and diversify away from lignite; explore creating a fund for renewal and expansion of domestic generation capacity in green technologies.
  - Consider earmarking KEK’s extraordinary export revenues for green investment.
  - Further regional integration (especially with Albania) to allow more efficient balancing of generation and loads.
  - Proper maintenance of existing transmission and generation capacity to increase reliability and reduce pollution; install filters in Kosova B and enforce emissions regulation.
  - Residential sector policies: feebate mechanisms to reward heating efficiency and adoption of clean efficient stoves; deploy green investment funds to expand district heating.
  - Reduce non-technical losses through stronger penalization of theft; continue seeking implementation of Brussels’ agreement energy protocols to lower fiscal exposures.
  - ERO should work with KESCO–KEDS to ensure planned distribution improvements lead to target decreases in electricity theft.
  - Begin exploring carbon pricing to strengthen price signals, reduce carbon intensity, and improve demand efficiency.

*Source: IMF staff note "KOSOVO'S ELECTRICITY SECTOR: CHALLENGES AND OPPORTUNITIES" (excerpt contained in the supplied PDF content).*

### References ____________________________________________________________________________ 10

### KOSOVO'S ELECTRICITY SECTOR: CHALLENGES AND OPPORTUNITIES

### A. Context and recent shock
- Energy prices increased sharply and became more volatile since the start of the war in Ukraine; Russia’s energy exports to Europe were 85 percent below their level in 2021 through October 2022.
- Natural gas market developments will spill over into both electricity and coal markets; a continuation of Russian exports to the EU at current level would result in a supply loss of about 100 billion cubic meters/year (25 percent of 2022 EU’s demand) that would need to be replaced by more expensive LNG imports.
- Kosovo’s net energy imports are projected to have reached 12.5 percent of GDP in 2022, up 3.5 percentage points (pp) with respect to 2021, despite a 35 percent decrease in electricity imports and 5 percent decrease in fuel imports.
- Lignite is used to generate more than 90 percent of Kosovo’s electricity; natural gas use is virtually inexistenceally; there is no domestic oil refining.

### B. Electricity supply chain and load features
- Institutional/market structure:
  - Kosovo Energy Corporation (KEK): publicly owned enterprise owning Kosova A and B coal plants and lignite mines.
  - Ibër-Lepenc JSC: reservoir-based hydro (POE).
  - KOSTT: Transmission System and Market Operator (TSO), member of ENTSO-E.
  - KEDS: privately-owned distribution; KESCO: retail supply, metering, and collection (owned by same firm as KEDS).
- Load composition and losses:
  - Household consumption constitutes around 60 percent of demand; commercial consumption 38 percent; public lighting 2 percent.
  - Demand in the regulated market accounts for about 90 percent of the load; deregulated market about 5 percent; unregulated (north) about 5 percent.
  - Around 11–12 pp of the regulated market are technical and non-technical losses; another 5 pp are commercial losses.
  - Electricity demand is highly seasonal: winter hourly loads about twice summer hourly loads.
- Treatment of consumption in the north: four northern municipalities (about 5 percent of demand) are largely unpaid and represent a fiscal burden.

### C. Financial flows, tariff framework, and recent stress
- Tariff setting:
  - Tariffs set once per year by the Energy Regulatory Office (ERO) considering domestic generation prices, expected load and generation, import volumes and prices, projected losses, and a value added of distribution.
  - Tariffs were last adjusted in February 2022 (up by about 10 percent for households consuming more than 800 KWh/month, while keeping other tariffs for households and firms constant).
  - Stated tariff levels and generation/import price parameters:
    - Tariff: 7€cts/KWh (6.1€cts/KWh for households and 8.4€cts/KWh for non-households).
    - Coal-based generation price: 2.95 €cts/KWh.
    - Renewable generation price: 9€cts/KWh.
    - Electricity imports price: 18.6€cts/KWh.
    - Lignite price for domestic generation: 3€/Ton.
  - Vulnerable household subsidy in the budget: €4.5 million.
- Recent stress and liquidity choke points:
  - Higher European electricity prices since 2021 created liquidity choke points in KEDS, leading to load-shedding in winter 2021–22 and late summer 2022.
  - Before 2021, lower European prices allowed the system to operate without significant fiscal costs; technical/non-technical/commercial losses were covered by tariffs and northern consumption was paid through a budget transfer to KOSTT.
  - KEK electricity exports in the summer increased to record levels: €150 million, about 1.5 percent of GDP.
  - Government subsidies to the sector were about 2 percent of GDP in 2022 (as noted in discussion of ERO decision not to authorize further tariff increases).

### D. Short-term outlook and scenario-driven fiscal stress estimates
- Outlook:
  - The war in Ukraine keeps uncertainty high; a full Russian gas shutoff would likely lead to higher natural gas and electricity prices; Europe likely faces higher energy prices than before the war in the medium term.
  - The EU agreed on a natural gas price cap in mid-December 2022, though its impact on gas supply remains uncertain.
- Fiscal cost estimates (baseline and scenarios for 2023):
  - Baseline scenario assumptions: foreign electricity prices in 2023 remain, on average, at the same level of 2022; KEK’s electricity supply remains unchanged; electricity demand remains at 2022 levels.
  - Baseline fiscal cost of keeping tariffs constant and avoiding load shedding in the winter:
    - about 1 percent of GDP (0.5 percent of GDP for subsidies to the regulated electricity sector, and the other 0.5 percent of GDP to finance the electricity consumption of the northern municipalities), and about 1.5 percent of GDP for 2023.
  - Scenario definitions:
    - Scenario 1: assumes a 50 percent increase in the external price of electricity in 2023.
    - Scenario 2: assumes in addition a 10 percent decrease in KEK electricity production.
    - Scenario 3: considers that 20 percent of the increase in the external price of electricity assumed in Scenario 1 is passed through to domestic tariffs.
    - Scenario 4: illustrative case with 150 MW of wind-based electricity in place (assumes an effective capacity for wind of 28 percent) under the higher international prices and lower supply assumed in Scenario 2.
  - Scenario outcomes and risks:
    - If downside risks materialize, costs would be significant: in Scenario 2 the fiscal cost over the winter would reach more than 2 percent of GDP and around 4.5 percent of GDP for 2023.
    - In that case it is unlikely higher import costs would be covered completely by additional subsidies; the adjustment would likely be a combination of subsidies and demand compression, with renewed liquidity choke points and potential load shedding.

### E. Medium-term challenges and environmental considerations
- Coal dominance and emissions:
  - Coal-based electricity generation is the largest source of greenhouse gas (GHG) emissions in Kosovo.
  - Kosovo’s carbon intensity (CO2 emissions per unit of output) is the highest in the western Balkans and about four times the average of the EU.
  - Ambient concentrations of PM2.5 in Kosovo exceed the World Health Organization air quality guideline value of 10 μg/m3 and the EU limit value of 25 μg/m3.
  - CBAM (EU carbon border adjustment mechanism) will require EU importers, as of 2026, to purchase carbon certificates equivalent to the weekly EU carbon price; CBAM initially applies to cement, iron and steel, aluminum, fertilizers, and electricity — Kosovo’s current generation profile may hamper EU FDI attraction and summer electricity exports.
- System vulnerabilities:
  - Frequent unplanned outages of Kosova A and B hinder long-term supply contracts and increase dependence on volatile day-ahead and intraday markets.
  - High non-technical and commercial losses increase fiscal costs and vulnerability.
  - Northern municipalities’ unpaid consumption remains a fiscal exposure pending a Brussels’ agreement solution.

### F. Policy options — stylized suggestions
- Short-term measures (reduce demand and liquidity stress in 2023):
  - Partial pass-through of external prices to tariffs, including differential increases for peak-hour consumption for non-vulnerable clients, to improve efficiency and reduce fiscal subsidy costs.
  - Protect vulnerable households preferably via direct transfers rather than across-the-board tariffs.
  - Increase frequency of tariff adjustments (from once to at least twice per year) and ensure timely payment of subsidies to reduce liquidity choke points.
  - If load shedding is unavoidable, allocate it smartly to preserve economic activity.
- Medium-term measures (greening and resilience):
  - Boost energy efficiency and diversify away from lignite; explore creating a fund for renewal and expansion of domestic generation capacity in green technologies.
  - Consider earmarking KEK’s extraordinary export revenues for green investment.
  - Further regional integration (especially with Albania) to allow more efficient balancing of generation and loads.
  - Proper maintenance of existing transmission and generation capacity to increase reliability and reduce pollution; install filters in Kosova B and enforce emissions regulation.
  - Residential sector policies: feebate mechanisms to reward heating efficiency and adoption of clean efficient stoves; deploy green investment funds to expand district heating.
  - Reduce non-technical losses through stronger penalization of theft; continue seeking implementation of Brussels’ agreement energy protocols to lower fiscal exposures.
  - ERO should work with KESCO–KEDS to ensure planned distribution improvements lead to target decreases in electricity theft.
  - Begin exploring carbon pricing to strengthen price signals, reduce carbon intensity, and improve demand efficiency.

*Source: IMF staff note "KOSOVO'S ELECTRICITY SECTOR: CHALLENGES AND OPPORTUNITIES" (excerpt contained in the supplied PDF content).*

### References

### References

### A. Introduction
- Kosovo’s tax revenue over 2021–22 has surpassed tax base growth; the note examines the extent to which tax revenue increases may reflect gains in formalization of workers and businesses.
- Kosovo’s tax system is based on consumption and income taxes, which together make up around 25 percent of GDP.
- Consumption taxes (VAT, excise, and customs) have historically been the major source of revenue; income taxes (CIT and PIT) have played a more limited role.
- Policy responses to informality at the tax administration level include more frequent, risk-based audits and inspections; budgetary incentives to formalize workers have also been used.

### B. Recent Developments in Tax Revenues
- Tax revenues overshot pre-pandemic levels already in 2021 driven by rebound in diaspora inflows, mobility normalization, and supportive policies.
- Consumption taxes (VAT and excises) in percent of 2021 GDP overshot their pre-pandemic levels; income taxes as a share of GDP also expanded due to corporate performance and increases in employment and salaries.
- In 2022:
  - Economic activity slowed given the terms-of-trade shock and inflation.
  - VAT and income taxes kept rising as a share of GDP.
  - Excises declined as taxes per unit were kept largely unchanged.
  - Customs duties continued to decline reflecting implementation of free trade agreements with the European Union and Türkiye.

### C. Disentangling the Sources of Tax Revenue Increase: The Role of Formalization
- Framework: Tax revenues defined by equation (I) and re-expressed in logarithmic approximation (III): φ_t^R ≈ π_t + γ_t + Δλ_t^R + Δg_t + Δτ_t(E,R). Key terms:
  - π_t: inflation
  - γ_t: change in real tax base
  - Δλ_t^R: change in tax gap (collection improvements, including formalization)
  - Δg_t: buoyancy (output gap yield change)
  - Δτ_t(E,R): change in effective tax rate
- Notes on parameterization:
  - Inflation reflects taxable goods deflator change for VAT, wage inflation for PIT, and profit inflation for CIT.
  - Real demand measures: domestic demand for VAT; actual number of employees (assuming an informal employment rate of 20 percent and a share of labor in GDP at factor cost of 0.5) for PIT; number of CIT paying businesses for CIT.
  - Elasticity of tax revenues to the output gap assumed: 0.85 for VAT, 0.5 for PIT, and 0.7 for CIT.

Findings by tax category (tables summarized):

- Value-Added Taxes (VAT) — Change in total VAT revenues (Millions of euro):
  - 2019: 46.6
  - 2020: -75.6
  - 2021: 268.2
  - 2022: 190.1
  - Cumulative 2020-2022: 382.7
  - Contribution factors (Percent, cumulative 2020-2022 shares):
    - Inflation: 287.0 (75%)
    - Change in real demand: -18.5 (-5%)
    - Buoyancy: -13.2 (-3%)
    - Change in effective tax rate: 8.6 (2%)
    - Collection improvement, including formalization: 118.7 (31%)
  - Year-on-year contribution examples:
    - Collection improvement, including formalization contributed about 35 percent of VAT revenue increases in 2021 and around 22 percent of VAT increases in 2022 (year-on-year basis).

- Personal Income Taxes (PIT) — Change in total PIT revenues (Millions of euro):
  - 2019: 9.1
  - 2020: -1.8
  - 2021: 24.8
  - 2022: 24.5
  - Cumulative 2020-2022: 47.5
  - Contribution factors (Percent, cumulative 2020-2022 shares):
    - Inflation: 25.4 (54%)
    - Change in real demand: 11.8 (25%)
    - Buoyancy: -1.1 (-2%)
    - Change in effective tax rate: 0.9 (2%)
    - Collection improvement, including formalization: 10.5 (22%)
  - Observations:
    - Government subsidies for registered employees in 2020–21 helped shift employees from informal to formal sector.
    - Increased labor demand during the rebound contributed around 60 percent of PIT revenue growth in 2021.
    - Female employment rose from around 30 percent of total employment in 2012 to around 40 percent in 2022, contributing to PIT base expansion in sectors with high informality (e.g., accommodation and food service, construction).

- Corporate Income Taxes (CIT) — Change in total CIT revenues (Millions of euro):
  - 2019: 7.8
  - 2020: -9.3
  - 2021: 28.7
  - 2022: 47.6
  - Cumulative 2020-2022: 66.9
  - Contribution factors (Percent, cumulative 2020-2022 shares):
    - Inflation: 9.4 (14%)
    - Change in real demand: 15.6 (23%)
    - Buoyancy: -1.3 (-2%)
    - Change in effective tax rate: 1.2 (1%)
    - Collection improvement, including formalization: 42.0 (63%)
  - Observations:
    - Improved tax collection could explain about two thirds of CIT revenue increases over 2020–22.
    - Contribution of newly registered firms to CIT revenues rose from around 4 percent of annual CIT in 2019 to 6 percent in 2021.

- Total Tax Revenues (CIT, PIT, and VAT) — Change in total tax revenues (Millions of euro):
  - 2019: 63.5
  - 2020: -86.7
  - 2021: 321.7
  - 2022: 262.1
  - Cumulative 2020-2022: 497.1
  - Contribution factors (Millions of euro, cumulative 2020-2022):
    - Inflation: 321.8 (65%)
    - Change in real demand: 8.9 (2%)
    - Buoyancy: -15.5 (-3%)
    - Change in effective tax rate: 10.7 (2%)
    - Collection improvement, including formalization: 171.2 (34%)
  - Overall estimate: increased formalization contributed around 35 percent of the cumulative change in tax revenues in 2020–22; inflation contributed around 65 percent.

### D. Conclusions and Stylized Policy Implications
- Continued gains in formalization require a multi-pronged approach:
  - Sustain and deepen tax administration efforts by TAK and Customs (audits, inspections, penalties, and other measures).
  - Complement tax administration with broader reforms addressing multidimensional nature of informality:
    - Simplify tax procedures.
    - Enhance public governance and transparency to raise awareness and trust in public institutions.
    - Strengthen the education system.
    - Improve financial inclusion.
    - Increase electronic payments.
    - Improve the judicial system.

### Central Banks: Surviving Low Interest Rates (selected points)
- Financial strength supports central bank de facto independence; financially weak central banks can be less effective in carrying out functions and more prone to fiscal influence.
- Lower global interest rates reduced central bank revenues, especially in emerging market economies that invest foreign exchange assets in reserve currencies.
- Unilaterally euroized economies or countries with currency boards (Kosovo, Montenegro, Bosnia and Herzegovina) were especially affected because their central banks cannot use seigniorage to finance operations.
- The assets of the central banks of Bosnia and Herzegovina (CBBH), Kosovo (CBK) and Montenegro (CBCG) mainly comprise foreign reserves, mostly denominated in euros; CBK and CBCG also hold euro-denominated domestic government securities (not considered foreign reserves).
- The post-GFC decline in global interest rates led to a significant decrease in income for all three central banks; net interest income turned negative for all three central banks in 2021.
- Selected central bank balance sheet figures (Percent of GDP; 2007 and 2021 where shown):
  - Assets (2007 / 2021): Bosnia and Herzegovina 32.8 / 51.0; Kosovo 31.2 / 21.0; Montenegro 19.1 / 38.6.
  - Foreign assets (2007 / 2021): Bosnia and Herzegovina 32.5 / 49.8; Kosovo 31.1 / 14.1; Montenegro 17.2 / 31.8.
  - Equity and Reserves (2007 / 2021): Bosnia and Herzegovina 1.9 / 2.7; Kosovo 1.0 / 0.8; Montenegro 1.6 / 1.6.
- Operating income and expense charts (selected central banks) indicate declines in net interest income over time alongside operating expenses and other income composition changes.

*International Monetary Fund, Republic of Kosovo materials included in the provided content.*

### 6.      A large part of the decline in net interest income was compensated by increases   in

### 6.      A large part of the decline in net interest income was compensated by increases in fees, commissions, and regulatory income.

### Revenue composition and recent drivers
- In 2021, the sum of net fees, commissions and other regulatory income represented:
  - more than 100 percent of operating expenses at the CBK and CBCG,
  - about 60 percent at the CBBH.
- Increases in fees, commissions and regulatory income reflected both increases in unit rates and financial deepening.
- Negative remuneration on excess reserves generated additional central bank income when euro-area short-term rates were negative between 2014 and mid-2022. From a central bank perspective:
  - income from negative remuneration could only offset the negative return on foreign reserves funded by excess reserves;
  - negative returns on foreign reserves funded by mandatory reserves and government deposits still had to be borne by the central bank.
- Both the CBK and CBCG accrued interest income from domestic government securities. During 2018–22:
  - interest spreads of these securities over German government bonds averaged 280 bps (Kosovo) and 420 bps (Montenegro).
  - The CBK started to hold Kosovo government securities in 2015.
  - As of end-2021, government securities represented 13 percent of total assets but generated 2/3 of the CBK’s gross interest income.

### Expenditure and personnel costs
- Personnel cost-to-GDP ratios over 2014–19 were:
  - broadly flat at the CBK,
  - declined at the CBBH and CBCG.
- The number of employees increased in all three central banks, but compensation per employee grew slower than GDP per capita.
- Assessing appropriateness of personnel costs is not straightforward because mandates differ across central banks (examples: financial supervision, currency operation, banknote printing, payment system operation).
- Studies document a negative correlation between population size and the scale of the public sector (normalized by population), implying that smaller countries may have higher central bank personnel cost-to-GDP ratios.
- Comparisons indicate:
  - personnel costs of the CBK and CBBH are similar to peers with comparable exchange rate regimes or population sizes,
  - personnel costs of the CBCG are higher than such peers.

### Cross-country contrasts within the Western Balkans
- In Albania, North Macedonia, and Serbia (less constraining exchange rate regimes), declines in interest income from foreign reserves were not compensated by substantial increases in fees, commissions, and other regulatory income.
  - Banknotes in circulation can act as an “equity” buffer in these economies, reducing pressure to raise other revenues.
  - Specific mitigants:
    - Albania: interest income from domestic assets mitigated equity decline.
    - North Macedonia: lower interest income cushioned by valuation gains on gold reserves.
    - Serbia: currency depreciation during 2008–16 led to valuation gains on international reserves.

### Rising interest rates in 2022 — projections and effects
- Rising global interest rates in 2022 increase central bank interest income from foreign reserve assets as euro-area rates rise.
- For the CBK:
  - charter requires transfer of 50 percent of distributable earnings to the Ministry of Finance when equity exceeds 5 percent of monetary liabilities.
  - staff baseline assumption: net effective return on the CBK’s assets will be 150–200 bps higher by 2024 relative to that observed in 2021.
  - under that assumption, staff projects the rise in net income will bring equity above the 5 percent threshold in late 2023 or early 2024 (up from 4.2 percent in 2021).
  - assessed profits are projected at around €15 million per year (0.2 percent of GDP of 2022).

### Policy implications and recommendations
- Principle: central banks should not set positive profits as a policy target, but practical implementation raises challenges.
- Post-GFC declines in net interest income from foreign reserves were substantial and prolonged in CBK, CBBH, and CBCG; financing operations required raising income from other sources.
- Reliance on budgetary support:
  - most central banks in the region have legislation allowing or requiring recapitalization by the budget when equity buffers fall below thresholds — a positive element;
  - central banks should avoid dependence on budgetary support to finance operations to prevent political constraints and policy expectations that conflict with central bank goals;
  - some central banks are required to make transfers to the budget even when they have losses.
- Investing in domestic government securities:
  - helped mitigate declines in interest income for Kosovo and Montenegro due to higher interest spreads, but domestic securities have lower liquidity profiles than euro-area securities;
  - tradeoff for central banks: higher interest income versus liquidity risk;
  - liquidity risk can be minimized if governments maintain prudent fiscal policy and central bank holdings remain a relatively low share of total assets.
- Fees, commissions, and regulatory income:
  - Montenegro and Kosovo have the highest fees, commissions, and other regulatory income as share of GDP among emerging European economies;
  - charges on financial intermediation can be interpreted as taxes on capital income, which may distort saving and investment (classical view favors low capital income taxes) but lower charges could raise concerns on inequality and financial sector externalities;
  - whether it is desirable for central banks to rely on these revenue sources to finance operations remains an open question.
- Treatment of 2022 windfall profits:
  - windfall profits from higher interest income should be preserved;
  - for Kosovo, saving windfall profits now will reduce financial pressures in the next low-interest-rate cycle;
  - because Kosovo is unilaterally euroized, a strong equity position is important as a buffer for policy interventions (e.g., lending through the emergency liquidity assistance window, ELA).
  - suggestion: save profits into a designated account managed by the CBK on behalf of the Minister of Finance (including the ELA window), to be used to cover possible fiscal and quasi-fiscal costs from interventions to assist banks in times of crisis.

*Source: IMF country note excerpt (sections 6–16) as provided in the supplied content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1uvkea2023002.pdf_