## _cr11374 - 1. Main Indicators, 2008–13

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### I. SMP design, implementation status, and near-term fiscal outlook
- SMP initiated on June 20, 2011; informal arrangement with IMF staff (no IMF Executive Board endorsement; no IMF financial assistance).
- SMP duration: runs until end-2011 with test dates of end-September and end-December.
- Objectives: decisive steps towards fiscal sustainability and stronger budget management and execution; maintenance of adequate government cash buffers in a fully euroized economy.
- Performance to date:
  - All end-September quantitative benchmarks but one were met.
  - Exception: ceiling on central government’s domestic payment arrears—“minuscule amount” accumulated, primarily in the Ministry of Justice, due to insufficient invoice recording capacity.
  - End-September structural benchmark on formulation of a tax compliance strategy was met.
  - End-December quantitative benchmarks, as defined in the Letter of Intent (LOI), appear well within reach on current trends.
- Privatization and contingency actions:
  - Cancellation of PTK auction removed expected proceeds of at least €300 million (6½ percent of GDP) the government had expected to raise before end-year.
  - Contingent spending cuts of €60 million enacted under the SMP to prevent near depletion of government bank balances.
  - Contingent spending cuts enacted by category: non-highway capital spending €30 million; lending to KEK €15 million; subsidies and transfers €8 million; goods and services €7 million.
- 2012 budget:
  - Submitted end-October and in line with SMP commitments.
  - Contains structural fiscal adjustment of €38 million (¾ of a percent of GDP) through wage restraint, energy sector reforms, and revenue measures.
  - Draft budget targets a primary deficit of €159 million (3¼ percent of GDP).
  - Passage by the Assembly in a form consistent with the LOI is a structural benchmark for end-December.
  - If PTK privatization progress is not made early in 2012, additional measures may be needed to ensure a minimum government bank balance of at least €150 million by end-2012.

### II. Recent macroeconomic and financial developments
- External/domestic environment:
  - Kosovo largely unaffected by euro-area financial turbulence owing to limited global financial integration.
  - Robust domestic demand evidenced by substantial import growth, tax revenue increases, and credit to the private sector: credit to the private sector grew 15.4 percent y-o-y in October (text also cites about 15½ percent in 12 months to October).
  - Inflation: spike to double-digit earlier in the year due to imported food prices; rapid disinflation thereafter.
- Banking sector indicators:
  - Banks remain well capitalized, liquid, and profitable.
  - Overall capital adequacy ratio: 17.2 percent at end-October.
  - Non-performing loans: 5.7 percent (up from 5.2 percent at end-2010); increase attributed to more prudent loan classifications.
  - In all systemically important banks, NPLs are fully provisioned.
- Cooperation with World Bank:
  - World Bank provides technical expertise on energy sector reforms, highway projects, social legislation, health sector reforms.
  - World Bank preparing disbursement of a budget grant of €20 million for late December 2011/early January 2012.

### III. Economic outlook, projections, and risks
- Growth projections and revisions:
  - Real GDP growth forecast for 2011 reduced by 0.3 percentage point to 5 percent (compared to 2011 Article IV report).
  - Real GDP growth for 2012 marked down to 4 percent from 5 percent due to weaker expected growth in Germany and Switzerland affecting remittances and FDI.
  - Table excerpts (selected): Real growth rates: 2008: 6.9; 2009: 2.9; 2010: 3.9; 2011 SMP: 5.3; Proj. 2012: 5.0; 2013: 4.0; (other table rows also report 2011 SMP: 5.0 in Table 2).
- Inflation:
  - CPI inflation expected to drop to 1.6 percent in 2012 (annual average; from 7.8 percent in 2011) in one passage; other passages: CPI, period average entries show 2011 SMP: 8.3; Proj. 2012: 7.8; Proj. 2013: 1.6 — preserve both source statements as presented in the document.
  - Core inflation expected to remain around 2 percent.
- External balances:
  - Current account deficit expected to narrow to 21 percent of GDP in 2012 from 24 percent in 2011.
  - Current account (incl. official transfers) table entries: 2011: -25.0 percent of GDP; 2012: -23.8 percent; 2013: -20.9 percent.
  - FDI and other non-debt generating flows projected to continue financing the deficit; net FDI entries (millions of euros): 2011: 408; 2012: 663; 2013: 390.
- Downside risks:
  - Main risks: transfers from the Kosovar diaspora (remittances) and the financial system.
  - A deeper downturn in Germany and Switzerland could depress remittances and FDI, decelerating domestic demand and reducing border-tax receipts (border taxes account for almost 80 percent of tax revenue).
  - Potential banking system impact via deposit drains and impaired credit quality; low probability risk that parent institutions might withdraw liquidity from Kosovar subsidiaries—CBK has taken precautionary measures.

### IV. Fiscal policy measures, medium-term plan, and structural reforms
- Medium-term fiscal plan:
  - Four-year plan (2011–14) to restore sustainable fiscal stance through cumulative fiscal adjustment of 3 percentage points of GDP, with ¾ of a percent of GDP in adjustment executed each year.
  - Public debt path: very gradual increase from current low levels, stabilizing at about 30 percent of GDP in the long term.
- 2011 budget execution through Q3:
  - Cumulative primary balance through end-September exceeded the corresponding quantitative benchmark by €42 million (close to 1 percent of GDP).
  - End-September total revenue and grants exceeded program projections by €33 million, including an unexpected €15 million dividend payment by PTK.
  - Primary expenditures remained €9 million below the end-September benchmark.
- 2012 structural adjustment package (Box 1 & detailed sections):
  - Total: €38 million (¾ of a percent of GDP).
  - Restraint on public sector wages: €10 million (0.2 percent of GDP); zero wage increases in 2012 though wage bill may rise due to full-year effect of 2011 hikes and new hires.
  - Electricity sector measures: €15 million (0.3 percent of GDP): reduced subsidies to KEK by €10 million and reduced lending to KEK by €5 million; means-tested electricity subsidies to the most vulnerable maintained.
  - Tax measures: €13 million (0.25 percent of GDP): increase in excise on tobacco by €2 per 1000 units (yielding about €7 million); increase in minimum property tax rate to 0.15 percent (€3 million); increase in the presumptive tax to 9 percent (€3 million).
- Government paper issuance and pension fund involvement:
  - First-time issuance of government paper planned in 2012.
  - About €75 million (1½ percent of GDP) expected to be sold to domestic financial institutions, including Pillar II pension fund (KPST).
  - Proposed KPST exposure limits: overall exposure to the government limited to 30 percent of KPST’s assets; annual purchases of government paper limited to at most 50 percent of new inflows into KPST in the preceding year.
  - Submission of revised KPST law to the Assembly is a structural benchmark for end-December.
- Contingency planning:
  - 2012 draft budget keeps €60 million spending unallocated as a clause for potential cuts to ensure minimum bank balances.
  - Authorities and staff agreed to revisit the situation early in 2012; additional fiscal measures may be needed if PTK privatization is further delayed.
- Public financial management:
  - Upgrading software to monitor accounts payable and overdue bills; software to be tested end-2011; full operational status expected in second half of 2012 after training budget officers.
  - Monitoring of domestic payment arrears: definition and monthly reporting requirements spelled out in TMU; end-September arrears ceiling missed due to recording shortcomings.

### V. Tax policy and revenue strategy
- IMF FAD Tax Policy mission (visited September 30—October 13, 2011) recommendations (Box 2 highlights):
  - Kosovo relies heavily on indirect taxes collected at the border; only about 14 percent of tax revenues stem from direct taxes.
  - Strategic guidance: maintain indirect taxes in near term, transition toward greater reliance on direct taxes over time.
  - Key recommendations:
    1. Preserve tax system integrity: maintain Corporate Income Tax rate at 10 percent; refrain from tax holidays and reduced VAT rates or exemptions for intermediary inputs.
    2. Increase fiscal disincentives for harmful activities: phase in tobacco excise increases over 3 years; introduce environmental taxes.
    3. Increase revenue from direct taxes annually by 0.5 percent of GDP (personal and corporate income tax, property taxes, circulation taxes).
    4. Broaden tax base and increase progressivity: include thin capitalization rule; introduce a 10 percent withholding tax on all capital incomes; adjust PIT threshold upward and introduce a more progressive PIT structure; property taxes: introduce minimum rate band ranging from 0.25 to 1 percent with annual increases of 0.05 percentage points until about 0.8 percent reached; unify and raise presumptive tax and require professional service providers to file under standard income tax regime.
  - 2012 revenue measures are broadly consistent with TA recommendations.

### VI. Monetary, financial sector reforms, and crisis preparedness
- Legislative and institutional reforms:
  - Banking and Microfinance Law (BML) drafted for Assembly consideration in December: improves governance, limits exposure to related parties and large borrowers, expands CBK toolkit for resolution and oversight of microfinance.
  - Deposit Insurance Law (DIL) to be revised after BML adoption to allow purchase and assumption transactions; contributions to deposit insurance fund progressing.
- Emergency Liquidity Assistance (ELA):
  - ELA close to fully operational; CBK given legal responsibility by new Central Bank law (2010).
  - Memorandum of understanding signed among Ministry of Finance, CBK, and Assembly Committee for Budget and Finance in early November 2011; CBK approved ELA regulations in late November.
  - 2012 budget law to be amended to contain provision to deposit €46 million in account earmarked for ELA, contingent on sufficient freely available government bank balances ensured through financing in context of a possible IMF-supported program; CBK to provide another €46 million from its resources.
- Prudential measures and supervisory stance:
  - CBK measures include prudent loan-to-deposit ratios (~80 percent), conservative asset qualification rules for reserve requirements, limits on banks’ exposure to foreign controlling institutions (20 percent of Tier 1 capital) and planned reduction of single-borrower exposure from 20 percent to 15 percent of Tier 1 capital under BML.
  - Prudent rules on assets eligible for minimum reserve requirements: Kosovar government paper non-eligible while market remains thin; banks allowed zero risk weight on government paper for capital adequacy purposes.
  - Staff urged vigilant monitoring and welcomed CBK readiness to take measures such as suspending dividend payments if needed.
- Microfinance institution resolution:
  - CBK completed resolution of Kosovo’s largest microfinance institution; new management appointed in November; process delayed by absence of regulatory framework.

### VII. Debt dynamics, public debt sustainability, and external vulnerability (selected indicators)
- External debt (nominal) o/w public and PPG (selected): 2008: 21.4; 2009: 17.6; 2010: 16.6; 2011: 15.4; 2012: 16.4; 2013: 16.8; 2014: 15.9; 2015: 14.8; 2016: 14.2; 2021: 18.5; 2031: 23.2.
- PV of external debt (selected): 2011: 14.7; 2012: 13.8; 2013: 15.0; 2014: 15.5; 2015: 14.9; 2016: 14.0; 2021: 15.7; 2031: 18.9.
- Debt service-to-exports ratio (selected): 2008: 28.6; 2009: 38.7; 2010: 31.6; 2011: 25.3; 2012: 20.9; 2013: 17.7.
- Public sector debt (percent of GDP, selected): 2007: 25.3; 2008: 21.4; 2009: 17.6; 2010: 16.6; 2011: 15.4; 2012: 17.9; 2013: 18.8; 2014: 18.6; 2016: 19.4; 2021: 30.1; 2031: value shown with o/w foreign-currency denominated: 0.0.
- Gross financing need (selected, percent of GDP): 2011: 3.3; 2012: 3.7; 2013: 4.2; 2014: 2.1; 2015: 3.3; 2016: 4.0; 2021: 7.1.
- Key macro assumptions (selected):
  - Real GDP growth (selected): 2008: 6.9; 2009: 2.9; 2010: 3.9; 2011: 3.8; 2012: 2.3; 2013: 5.0; 2014: 4.0; 2016: 3.2; 2021: 5.0; 2031: 4.4.
  - Effective interest rate (percent, selected): 2008: 1.0; 2009: 2.1; 2010: 2.8; 2011: 1.4; 2012: 1.2; 2013: 2.6; 2021: 4.7; 2031: 7.6.
  - Growth of exports of G&S (percent, selected): 2008: 11.1; 2009: 6.4; 2010: 28.8; 2011: 15.7; 2012: 36.7; 2013: 18.8.
  - Growth of imports of G&S (percent, selected): 2008: 18.4; 2009: 0.1; 2010: 15.4; 2011: 8.0; 2012: 9.4; 2013: 20.3.

### VIII. Program modalities, TMU provisions, and monitoring
- TMU defines quantitative benchmarks and indicative targets coverage, definitions, adjustments, and reporting requirements.
- Bank balances of general government:
  - Definition clarifies eligible forms and exclusions (e.g., excludes unspent Own Source Revenues carried forward and Donor Designated Funds).
  - Bank balances at December 31, 2010, were € 244.112 million.
  - Floor adjustments: floor raised by excess budget grants/loans, repayment of loans to public enterprises, and spending cuts of €60 million if PTK proceeds not received; floor lowered by €300 million if PTK proceeds not received before end-2011.
  - Reporting: Treasury to transmit bank balances table within five weeks after month; CBK to submit twice-monthly Report of Positions of Treasury Accounts with 1 day delay; independent audit reconciliation within 45 days after each test date.
- Primary expenditures and primary fiscal balance:
  - Definitions and adjustments (including €60 million spending cuts adjustors tied to PTK privatization shortfall).
  - Monthly reporting of execution and detailed revenue/expenditure components required within five weeks after month.
- Nonconcessional debt:
  - Defined as grant element < 35 percent; PV calculations use OECD CIRRs with specified margins.
  - Exclusions and reporting obligations set out; government to consult Fund staff where classification uncertain.
- Domestic and external payment arrears:
  - Domestic arrears defined as unpaid certified obligations outstanding more than 60 days; monthly reporting required.
  - Ministry of Finance to inform IMF immediately of external arrears and provide quarterly data within five weeks.

### IX. Key program monitoring items and structural benchmarks (selected)
- Structural benchmarks and prior actions:
  - Passage of 2012 budget containing at least ¾ of a percent of GDP in fiscal tightening: structural benchmark, End-December 2011 (budget submitted end-October).
  - Completion of PTK privatization: structural benchmark, End-December 2011 (auction cancelled; privatization to be finalized in 2012).
  - Submission of revised KPST law limiting exposures: structural benchmark, End-December 2011.
  - Setting up working groups for fiscal impact assessment methodology for war veterans’ pensions and possible benefits for former political prisoners: structural benchmark, End-December 2011 (modified from original requirement to complete fiscal impact assessments).
  - Inclusion of paragraph allowing cutting benefits in new benefit-creating laws: continuous structural benchmark (met).
  - Monthly Program Monitoring Committee meetings and transmission of minutes to IMF: continuous structural benchmark (met).
- Quantitative benchmark statuses (selected):
  - Floor on bank balance of the general government: Met.
  - Floor on primary fiscal balance: Met.
  - Ceiling on primary expenditures: Met.
  - Ceiling on contracting/guaranteeing nonconcessional debt: Met.
  - Ceiling on accumulation of domestic payment arrears of the central government: Missed.
  - Ceiling on accumulation of external payment arrears: Met.

*Source: IMF Staff Report excerpts and Technical Memorandum of Understanding in _cr11374 - 1. Main Indicators, 2008–13.*

### 1. Main Indicators, 2008–13 ............................................................................................

### _cr11374 - 1. Main Indicators, 2008–13

### I. Introduction and summary
- Kosovo’s Staff-Monitored Program (SMP) was initiated on June 20, 2011.
- SMP scope and features:
  - Informal arrangement with IMF staff; does not entail endorsement by the IMF Executive Board and does not involve financial assistance by the IMF.
  - Runs until end-2011 with test dates of end-September and end-December.
  - Targets decisive steps towards fiscal sustainability and stronger budget management and execution.
- Performance to date:
  - All end-September benchmarks but one were met.
  - Exception: ceiling on the central government’s domestic payment arrears—minuscule amount accumulated, primarily in the Ministry of Justice, reflecting insufficient capacity to monitor overdue bills.
  - End-September structural benchmark on formulation of a tax compliance strategy was met.
  - On current trends, end-December quantitative benchmarks as defined in the Letter of Intent (LOI) appear well within reach.
- Fiscal constraint: cancellation of the auction of PTK removed expected proceeds of at least €300 million (6½ percent of GDP) that the government had expected to raise before end-year (structural benchmark); contingent spending cuts of €60 million enacted under the SMP to prevent near depletion of government bank balances.
- Budget for 2012:
  - Submitted end-October and in line with SMP commitments.
  - Contains ¾ of a percent of GDP in structural fiscal adjustment through wage restraint, energy sector reforms, and revenue measures.
  - Passage is a structural benchmark for end-December.
  - If PTK privatization progress is not made early in 2012, additional measures may be needed to ensure adequate cash buffers.

### II. Recent developments
- External and domestic environment:
  - Kosovo’s economy largely unaffected by euro-area financial turbulence due to low integration into global goods and financial markets.
  - Substantial growth in imports, tax revenues, and credit to the private sector (15.4 percent y-o-y in October) point to robust domestic demand.
  - Inflation declined rapidly after a spike to double-digit figures earlier in the year caused by imported food price increases.
- Financial sector indicators:
  - Banks remained well capitalized, liquid, and profitable.
  - Overall capital adequacy ratio: 17.2 percent at end-October.
  - Non-performing loans: 5.7 percent (up from 5.2 percent at end-2010); increase reflects more prudent loan classifications rather than deteriorating credit quality.
  - In all systemically important banks, non-performing loans are fully provisioned.
- Cooperation with World Bank:
  - World Bank provides technical expertise in areas with fiscal implications (energy sector reforms, highway projects, social legislation, health sector reforms).
  - World Bank preparing disbursement of a budget grant of €20 million for late December 2011/early January 2012.

### III. Economic outlook and risks
- Growth forecasts:
  - Real GDP growth forecast for 2011 reduced by 0.3 percentage point to 5 percent (compared to the 2011 Article IV report), primarily reflecting government spending cuts after PTK privatization failure.
  - Real GDP growth for 2012 marked down to 4 percent from 5 percent due to weaker expected growth in Germany and Switzerland likely reducing remittances and FDI.
- Inflation:
  - Disinflation expected to continue; CPI inflation expected to drop to 1.6 percent in 2012 (annual average; from 7.8 percent in 2011).
  - Core inflation expected to remain around 2 percent.
- Balance of payments:
  - Current account deficit expected to narrow to 21 percent of GDP in 2012 from 24 percent in 2011.
  - FDI and other non-debt generating flows projected to continue financing the deficit.
- Downside risks:
  - Main risks relate to transfers from the Kosovar diaspora and the financial system.
  - A deeper downturn in Germany and Switzerland could depress remittances and FDI, decelerating domestic demand and reducing border-tax receipts (border taxes account for almost 80 percent of tax revenue).
  - Potential negative impact on banking system via deposit drains and impaired credit quality.
  - Low probability risk: headquarter institutions might attempt to withdraw excessive liquidity from Kosovar subsidiaries; CBK has taken precautionary measures.

### IV. Policy discussions
#### A. Fiscal policy in 2011 and 2012
- SMP fiscal anchors and medium-term plan:
  - Part of a four-year plan (2011–14) to restore sustainable fiscal stance through cumulative fiscal adjustment of 3 percentage points of GDP, with ¾ of a percent of GDP in adjustment executed each year.
  - Resulting public debt path: very gradual increase from current low levels, stabilizing at about 30 percent of GDP in the long term.
  - Second anchor: maintenance of adequate government cash buffers; minimum buffers needed in a fully euroized economy with limited access to capital markets.
- Budget execution through Q3 2011:
  - Cumulative primary balance through end-September exceeded the corresponding quantitative benchmark by €42 million (close to 1 percent of GDP).
  - End-September total revenue and grants exceeded program projections by €33 million, including an unexpected €15 million dividend payment by PTK.
  - Primary expenditures remained €9 million below the end-September benchmark, reflecting lower energy-related transfers.
- Contingent spending cuts enacted to prevent depletion of bank balances due to PTK delay:
  - Reductions in non-highway capital spending: €30 million.
  - Lending to the electricity company KEK: €15 million.
  - Subsidies and transfers: €8 million.
  - Goods and services: €7 million.
  - Potential additional end-year boost if World Bank budgetary support grant of €20 million is disbursed in December.
- 2012 draft budget specifics:
  - Built on (i) cautious revenue projections; (ii) restraint on current and non-highway capital spending; (iii) resources for expropriations to safeguard completion of highway R7 to Albania in 2013.
  - Contains structural adjustment measures of €38 million (¾ of a percent of GDP).
  - Targets a primary deficit of €159 million (3¼ percent of GDP).
  - Passage by the Assembly in a form consistent with the LOI is a structural benchmark for end-December.
- Government paper issuance in 2012:
  - For the first time, issuance of government paper planned.
  - CBK has set up an electronic bond trading platform; U.S. Treasury providing technical assistance to prepare a debt strategy to be published by end-December.
  - About €75 million (1½ percent of GDP) in government paper expected to be sold to domestic financial institutions in 2012, including Pillar II pension fund (KPST).
  - Proposed change: ceiling on KPST’s exposure to the government could be raised to 30 percent of KPST’s assets, with law limiting KPST’s annual purchases of government paper to at most 50 percent of new inflows into KPST in the preceding year.
  - Submission of revised law to the Assembly is a structural benchmark for end-December.
  - Draft budget contains a financing gap of €92 million that could be financed with the domestic counterpart of purchases under an IMF arrangement.
- Contingency and safeguards:
  - Additional fiscal measures may be needed if PTK privatization delay stretches beyond 2012 to safeguard a minimum government bank balance of at least €150 million by end-2012.
  - 2012 draft budget keeps €60 million spending unallocated as a clause for potential cuts; cuts could be complemented or replaced by revenue measures.
  - Authorities and staff agreed to revisit the situation early in 2012.
- Medium-term projects and social policy preparation:
  - Tight financing constraints and insufficient preparation prevent inclusion of ambitious medium-term projects (second highway R6 to Macedonia, health care overhaul) in 2012 budget; 2012 to be used for technical and financial preparations with World Bank.
  - Careful preparation needed for social policy initiatives (war related benefits); draft law submitted July was amended inconsistently with SMP commitments but amendments inconsistent with the LOI were removed prior to the law’s second reading. Law was passed on December 8, ensuring compliance with a prior action.
  - Setting up working groups to prepare methodology for costing assessments of war veterans’ pensions and possible benefits for former political prisoners, in consultation with the World Bank, with terms of reference is a structural benchmark for end-December.

#### B. Structural fiscal reforms
- Tax policy and revenue measures:
  - Authorities welcomed recommendations of recent IMF TA mission on tax policy.
  - TA recommendations focus on broadening the tax base, increasing tax progressivity, raising excises on harmful activities, and increasing the revenue share from direct taxes, including property taxes.
  - Revenue measures in the 2012 budget broadly consistent with TA recommendations.
- Fiscal decentralization:
  - System requires reforms to enhance effectiveness.
  - Current grant system provides municipalities with adequate funds but gives few incentives to raise own-source revenues and restricts allocation flexibility.
  - An IMF TA mission is analyzing these issues in cooperation with authorities and donors.

### V. Box 1 — Structural adjustment measures in the 2012 budget (summarized measures and amounts)
- Restraint on public sector wages: €10 million (0.2 percent of GDP); zero wage increases in 2012, though wage bill expected to increase somewhat due to full-year effect of 2011 hikes and new hires.
- Electricity sector measures: €15 million (0.3 percent of GDP); reduced subsidies to KEK by €10 million and reduced lending to KEK by €5 million; means-tested electricity subsidies to the most vulnerable maintained.
- Tax measures: €13 million (0.25 percent of GDP) including:
  - Increase in excise on tobacco by €2 per 1000 units (yielding about €7 million).
  - Increase in minimum property tax rate to 0.15 percent (€3 million).
  - Increase in the presumptive tax to 9 percent (€3 million).

*Source: IMF Staff Report excerpts in _cr11374 - 1. Main Indicators, 2008–13.*

### 20.      There was agreement that improvements are needed regarding the authorities’

### _cr11374 - 20.      There was agreement that improvements are needed regarding the authorities’

### Monitoring of payment arrears and invoice recording
- Domestic payment arrears accumulated in the context of the SMP are described as "minuscule in size, not indicative of funding constraints, and of no macroeconomic relevance."
- Emergence of arrears is attributed to shortcomings in the recording of invoices by budgetary organizations.
- Steps to improve invoice recording are in preparation, notably "an upgrade of the software that monitors accounts payable."
- While such measures are "vital for properly monitoring the government’s payment obligations and, more broadly, fiscal governance," it is noted that "it will likely take time until they bear fruit."
- The end-September quantitative benchmark exception was the ceiling on central government’s domestic payment arrears, where a "minuscule amount has been accumulated, reflecting insufficient capacity to monitor overdue bills."
- Corrective measures, notably the aforementioned software upgrade, "are in preparation, but will take time to yield results."

### Box 2 — Key Recommendations of the October 2011 Tax Policy Mission
- Mission timing: "An FAD Tax Policy mission visited Kosovo September 30—October 13, 2011."
- Context: Kosovo relies heavily on indirect taxes collected at the border, with "only about 14 percent of tax revenues stemming from direct taxes."
- Strategic guidance: indirect taxes will continue to provide revenue for fiscal consolidation during the transition toward greater reliance on direct taxes.

Key recommendations:
1. Preserve the integrity of the tax system.
   - Given the low Corporate Income Tax rate of "10 percent," tax holidays would have negligible incentive effects and "cannot be afforded."
   - Authorities should refrain from introducing reduced VAT rates and/or exemptions for intermediary inputs from VAT.
   - The VAT system is characterized as "well-designed and efficient owing to the relatively low single rate, a high threshold and few exemptions."
2. Increase fiscal disincentives for harmful activities.
   - Excises: "phase in increases in tobacco excises over 3 years."
   - Introduce environmental taxes.
3. Increase revenue from direct taxes annually by "0.5 percent of GDP," without reducing the overall tax-to-GDP ratio; emphasize personal and corporate income tax, property taxes, and circulation taxes for motor vehicles.
4. Broaden the tax base and increase progressivity. Options include:
   - Corporate income tax: "include a thin capitalization rule in the tax law (i.e., limit deductibility of interest expenditures)."
   - Capital incomes: "introduce a 10 percent withholding tax on all capital incomes for both individuals and corporations."
   - Personal income tax: "adjust the tax threshold upwards and introduce a more progressive PIT rate structure."
   - Property taxes: "introduce a minimum rate band to which all local governments must adhere" beginning with a rate band "ranging from 0.25 to 1 percent," with the commitment that the minimum rate is increased annually by "0.05 percentage points until a minimum rate of about 0.8 percent has been reached."
   - Presumptive tax: "unify tax rate and increase minimum payment to provide incentives for formalization." Require professional service providers to file tax returns under the standard income tax regime.

### Monetary and financial sector developments and policy measures
- Resolution of microfinance institution:
  - The Central Bank of Kosovo (CBK) "has completed the resolution of Kosovo’s largest microfinance institution."
  - Institution had been under CBK administration since early 2011; new management appointed in November and CBK’s administrator removed after transition.
  - Process was delayed by "the absence of a proper regulatory framework for the resolution of financial institutions" and required several rounds of negotiations with the institution’s owners.
- Legislative framework improvements (LOI ¶21):
  - Banking and Microfinance Law (BML): Draft law scheduled for Assembly consideration in December improves governance rules, limits banks’ exposure to related parties and large borrowers, expands CBK toolkit for rehabilitating, restructuring, or liquidating problem institutions, and establishes legal framework for oversight of microfinance institutions. An upcoming IMF technical assistance mission will help revise norms and regulations for consistency.
  - Deposit Insurance Law (DIL): Authorities committed to revise DIL once BML adopted to ensure consistency; revised DIL will include provisions to allow purchase and assumption transactions. Deposit insurance fund has "made good progress in collecting contributions from banks, the government, and donors."
- Emergency Liquidity Assistance (ELA):
  - ELA "is close to being fully operational (LOI ¶21)."
  - New Central Bank law (2010) gave CBK legal responsibility for ELA.
  - In early November 2011, Ministry of Finance, CBK, and Assembly Committee for Budget and Finance signed a memorandum of understanding defining roles and responsibilities in the provision of ELA; CBK approved corresponding regulations in late November.
  - The 2012 budget law will be amended to contain a provision to deposit "€46 million in an account earmarked for ELA," contingent on the existence of sufficient freely available government bank balances ensured through financing received in the context of a possible IMF supported program.
- Crisis preparedness:
  - CBK measures include safeguarding prudent loan-to-deposit ratios, prescribing conservative asset qualification rules for reserve requirements to ensure ample liquidity buffers, and limiting exposure of banks to their controlling institutions to a small fraction of the banks’ capital.
  - Staff urged vigilant monitoring of regional developments and welcomed CBK willingness to take additional measures as needed, such as "suspending banks’ dividend payments to shareholders to increase capital buffers."

### Program modalities and benchmarks
- Letter of Intent (LOI) sets quantitative and structural benchmarks through December 2011 (LOI ¶4, LOI Tables 2–3, and TMU ¶¶4, 6, 9):
  - An adjustor is introduced to the quantitative benchmark on the bank balance of the general government to account for the shortfall in privatization receipts due to the delay in PTK privatization (TMU ¶4).
  - Adjustors are introduced to quantitative benchmarks on the bank balance of the general government, the primary fiscal balance of the general government, and primary expenditures of the general government to adjust for spending cuts in reaction to the delay in PTK privatization (TMU ¶¶4, 6, 9).
  - Structural benchmark on fiscal impact assessments for planned war veterans’ pensions and possible benefits for former political prisoners is modified: from completing the fiscal impact assessments to "setting up working groups that prepare the impact assessments’ methodology, and defining the groups’ term of reference" (LOI ¶4).
  - A structural benchmark is introduced on submission to the Assembly of a revised law on the Kosovo pension fund to limit KPST exposure: KPST’s overall exposure to the general government limited to "30 percent of KPST’s assets" and KPST’s annual purchases of government paper limited to "50 percent of new inflows into the KPST in the preceding year" (LOI ¶12).
  - A prior action is introduced on ensuring that the law regulating the benefits for war-related categories is either approved by the Assembly in a form consistent with the LOI from June 20, 2011, or withdrawn from the Assembly (LOI ¶14).

### Staff appraisal — implementation, risks, and fiscal outlook
- SMP implementation: "largely satisfactory to date." All quantitative benchmarks for end-September but one have been met; exception noted above on domestic payment arrears.
- Contingent measures and fiscal management:
  - "Contingent spending cuts of €60 million have been enacted to limit the impact of the delay in PTK privatization on the government’s bank balances, as agreed under the SMP."
  - "Any additional outperformance on revenues or expenditures should be saved."
- Macro outlook and risks:
  - Kosovo "has remained largely unaffected by financial turbulence, owing to limited integration into global financial markets," but a sustained euro area downturn could harm growth by lowering remittances and FDI.
  - "Inflation is expected to continue to decelerate rapidly, in line with developments in global food markets."
  - The current account deficit is expected to "narrow somewhat in 2012, reflecting in particular slower growth in imports."
  - The banking system "has remained liquid, well capitalized, and profitable."
- 2012 budget and fiscal adjustment:
  - Draft 2012 budget submitted to the Assembly at end-October includes "¾ percent of GDP in structural fiscal adjustment" through wage restraint, energy sector reforms, and tax reforms.
  - Budget contains "cautious revenue forecasts" given downside growth risks.
  - Financing foresees the issuance of government paper, "a first in Kosovo’s history"; pension fund law reforms are needed to allow KPST to purchase government bonds while safeguarding prudent investment policies.
  - Additional fiscal measures would be required if the delay in PTK privatization stretches beyond 2012; need for such measures "should be reassessed in the early months of 2012."
  - Going forward, structural fiscal adjustment is "likely to rely to a substantial part on revenue measures." The IMF technical assistance mission recommendations on tax policy are noted as a useful yardstick.
- Medium-term priorities and preparation needs:
  - More preparatory work needed for projects including a new highway R6 to Macedonia, an overhaul of the health care system, and social initiatives; "2012 should be used to advance technical and financial preparations, in close cooperation with World Bank."
  - Budgetary risks from highway R7 to Albania need careful management as project nears completion in 2012/13.
  - Design of social benefits for war veterans and former political prisoners requires careful preparation, including "thorough fiscal impact assessments that need to include an evaluation of eligible beneficiaries."
  - Emphasis on "careful design and costing of capital and social spending initiatives" to safeguard sound public finances.
- Financial sector reform progress:
  - "Good progress has been made in the area of financial sector reforms."
  - ELA close to fully operational; revised banking law grants CBK better instruments to safeguard governance, limit exposure to related parties and large borrowers, and strengthens bank resolution framework.
  - CBK has taken important measures to contain liquidity risk but "should stand ready to take additional measures as needed."

*Source: _cr11374 - 20.      There was agreement that improvements are needed regarding the authorities’*

### 32.      Steadfast implementation of the policies under the Staff-Monitored Program

### 32.      Steadfast implementation of the policies under the Staff-Monitored Program

### Importance of implementation
- "Steadfast implementation of the policies under the Staff-Monitored Program remains essential to restoring fiscal sustainability and fostering macro-financial stability, and is vital for paving the way for an IMF supported program in 2012."

### Recent economic developments (highlights from Figure 1 and narrative)
- Monthly Imports (Millions of euros): charted Dec-08 to Jun-11 showing imports of goods, seasonally adjusted; commentary: "Strong imports point to solid domestic demand..."
- Price Indices (end of period; Annual percentage change): Headline, Food, Core; commentary: "Headline inflation is driven by volatile food prices while core inflation remains anchored."
- Credit to the Private Sector (Annual percentage change): Businesses, Households, Total; commentary: "... as does robust credit growth."

### Selected banking sector indicators (Figure 2 highlights)
- Credit and Deposit Growth (Year-on-year percent change): Loans and Deposits series Jan-07 to Jul-11; commentary: "Credit and deposit growth are robust."
- Liquid assets over Total Assets (Percent): Dec-06 to Dec-10 values shown (range approximately 25–43 percent); commentary: "... while liquidity buffers are ample..."
- Monthly Bank Profits (In million of euros): positive series; commentary: "...and banks' profits robust."
- Financial Soundness (Percent): Tier 1 capital/risk weighted assets and NPL ratio (right scale) show "Capitalization remains high and NPLs modest..."

### Recent fiscal developments (Figure 3 highlights and narrative)
- Highway (R7) Spending (Millions of euros, cumulative for year): Jan–Dec series for 2010 and 2011 and "Projected"; commentary: "... while spending on highway (R7) has progressed..."
- Total Revenues (Millions of euros, cumulative for year): series for 2009, 2010, 2011 and "Projected"; commentary: "...owing in part to better revenue collection..."
- Primary Balance 1/ (Millions of euros, cum. total for year): 2009–2011 and projected; note: "Primary balance excluding highway (R7) expenditures and dividends"; commentary: "The primary balance excluding highway spending has improved..."
- Stock of Bank Balances (Millions of euros): series indicates reduction: "...triggering a drop in bank balances in the absence of privatization receipts."

### Main macroeconomic and external indicators (Table 1: Kosovo: Main Indicators, 2008–13 — selected figures)
- Real growth rates (GDP): 2008: 6.9; 2009: 2.9; 2010: 3.9; 2011 SMP: 5.3; Proj. 2012: 5.0; 2013: 4.0; 2014: 4.1
- GDP per capita growth: 2008: 5.6; 2009: 1.4; 2010: 2.4; 2011 SMP: 3.7; Proj. 2012: 3.4; 2013: 2.5; 2014: 2.6
- Investment (percent): 2008: 18.1; 2009: 11.7; 2010: 8.8; 2011 SMP: 13.3; Proj. 2012: 9.6; 2013: 6.1; 2014: 8.0
- Official unemployment (percent of workforce): 2008: 47.5; 2009: 45.4; 2010: 45.4; 2011: 45.1
- CPI, period average: 2008: 9.4; 2009: -2.4; 2010: 3.5; 2011 SMP: 8.3; Proj. 2012: 7.8; 2013: 1.6; 2014: 1.0
- CPI, end of period: 2008: 0.5; 2009: 0.1; 2010: 6.6; 2011 SMP: 6.2; Proj. 2012: 5.0; 2013: 1.4; 2014: 0.7
- General government revenues, incl. interest income (percent of GDP): 2008: 24.5; 2009: 29.3; 2010: 27.6; 2011: 27.1; 2012: 27.9; 2013: 27.6; 2014: 27.9
- Primary expenditures (percent of GDP): 2008: 24.7; 2009: 29.9; 2010: 30.0; 2011: 31.8; 2012: 30.7; 2013: 30.6; 2014: 30.7
- Capital and net lending, incl. the highway (percent of GDP): 2008: 7.6; 2009: 11.6; 2010: 11.9; 2011: 13.0; 2012: 12.1; 2013: 12.3; 2014: 12.2
- Overall balance (percent of GDP): 2008: -0.2; 2009: -0.7; 2010: -2.6; 2011: -5.0; 2012: -2.9; 2013: -3.3; 2014: -3.1
- Stock of government bank balances (millions of euros): 2008: 10.8; 2009: 8.7; 2010: 5.8; 2011: 6.5; 2012: 2.3; 2013: 8.1; 2014: 5.9
- Current account, excl. official transfers (percent of GDP): 2008: -22.8; 2009: -25.7; 2010: -25.9; 2011: -30.4; 2012: -29.7; 2013: -26.2; 2014: -23.3
- Current account balance, incl. official transfers (percent of GDP): 2008: -15.3; 2009: -15.4; 2010: -17.4; 2011: -25.0; 2012: -23.8; 2013: -20.9; 2014: -18.4
- GDP (millions of euros): 2008: 3,851; 2009: 3,912; 2010: 4,216; 2011: 4,672; 2012: 4,649; 2013: 4,966; 2014: 5,275
- GDP per capita (euros): 2008: 2,323; 2009: 2,325; 2010: 2,468; 2011: 2,070; 2012: 2,682; 2013: 2,822; 2014: 2,953
- Population (thousands): Series updated with the 2011 census: 2008: 1,658; 2009: 1,683; 2010: 1,708; 2011: 2,256; 2012: 1,734; 2013: 1,760; 2014: 1,786

### Real growth and sectoral composition (Table 2 selected figures)
- GDP (real growth, percent): 2007: 6.3; 2008: 6.9; 2009: 2.9; 2010: 3.9; 2011 SMP: 5.0; 2012: 4.0; 2013: 4.1
- Consumption: 2007: 5.3; 2008: 4.3; 2009: 1.0; 2010: 2.9; 2011 SMP: 2.7; 2012: 2.6; 2013: 2.0; 2014: 2.6
- Investment: 2007: 15.2; 2008: 18.1; 2009: 11.7; 2010: 8.8; 2011 SMP: 9.6; 2012: 6.1; 2013: 8.0

### Balance of payments (Table 3 selected figures; Millions of euros)
- Trade balance (goods and services balance): 2009: -1,673; 2010: -1,776; 2011: -2,136; 2012: -2,147; 2013: -2,212
- Exports: 2009: 177; 2010: 305; 2011: 344; 2012: 392; 2013: 439
- Imports: 2009: -1,851; 2010: -2,081; 2011: -2,479; 2012: -2,539; 2013: -2,651
- Current account (including official transfers): 2009: -604; 2010: -732; 2011: -1,109; 2012: -1,036; 2013: -973
- Current account (in percent of GDP, incl. official transfers): 2009: -15.4; 2010: -17.4; 2011: -23.8; 2012: -20.9; 2013: -18.4
- Foreign direct investment, net: 2009: 277; 2010: 358; 2011: 408; 2012: 663; 2013: 390
- Gross international reserves of the CBK: 2009: 625; 2010: 686; 2011: 563; 2012: 885; 2013: 815

### Central Bank and commercial bank survey (Table 4 selected figures)
- Net foreign assets (millions of euros): 2008: 1,111; 2009: 1,088; 2010: 1,108; 2011: 1,002; 2012 (proj.): 1,324
- Credit to private sector (millions of euros): 2008: 1,183; 2009: 1,289; 2010: 1,451; 2011: 1,669; 2012: 1,825
- Deposits to private sector (percent of GDP, memorandum): 2008: 25.8; 2009: 22.2; 2010: 23.1; 2011: 16.0; 2012: 16.1; 2013: 9.6

### Financial soundness indicators (Table 5 selected figures)
- Regulatory capital/risk weighted assets (percent): series around 16.8–19.2 across observations.
- Tier 1 capital/risk weighted assets (percent): series around 14.7–16.4 across observations.
- NPL ratio 2/: 2006–2011 series includes 3.3, 4.3, 5.2, 5.7 (note: 5/ = March 2011)
- Liquid assets/total assets (percent): series include 41.7, 33.2, 30.0, 37.3, 33.2, 36.8, 31.1
- Return on assets (not annualized): series include 2.3, 2.9, 2.6, 1.4, 1.9, 1.8, 1.6

### Consolidated government budget (Tables 6–7 selected fiscal numbers)
- Total primary revenue and grants (millions of euros): 2011 SMP (May 2011) unadjusted: 903; Program proj. 2011 Year: 936; Program proj. 2012 Year: 1,261; 2013 Year: 1,281; 2014 Year: 1,295; 2015 Year: 1,348; 2016 Year: 1,361; 2017 Year: 1,459
- Total primary revenue (millions of euros): 2011 unadjusted: 896; 2012: 932; 2013: 1,253; 2014: 1,253; 2015: 1,270; 2016: 1,314; 2017: 1,327; 2018: 1,406
- Taxes 1/ (millions of euros): 741; 765; 1,057; 1,057; 1,048; 1,108; 1,121; 1,225
- Capital expenditure and net lending (millions of euros): 342; 343; 608; 562; 562; 615; 610; 645
- Highway project (millions of euros): 180; 190; 248; 248; 248; 296; 296; 293
- Primary balance (millions of euros): 143; -226; -146; -131; -197; -159; -159
- Overall balance (millions of euros): -737; -233; -151; -136; -201; -163; -161
- Overall balance (excluding highway expenditures) (millions of euros): 173; 226; 159; 71; 1295; 133; 132
- Change in bank balance (program definition; – = increase) (millions of euros): 23; -2; -6; 115; 1137; -260; -29891
- Financing gap (millions of euros): 0; 0; 0; 0; 0; 9; 29; 240

- Fiscal ratios (percent of GDP, Table 7):
  - Total primary revenue and grants: 19.3; 20.1; 27.0; 27.5; 27.9; 27.1; 27.4; 27.7
  - Primary expenditure: 19.3; 19.2; 31.8; 30.7; 30.7; 31.1; 30.6; 30.7
  - Capital expenditure and net lending: 7.3; 7.4; 13.0; 12.1; 12.1; 12.4; 12.3; 12.2
  - Primary balance (percent of GDP): 0.0; 0.9; -4.8; -3.1; -2.8; -4.0; -3.2; -3.0
  - Overall balance (percent of GDP): -0.1; 0.8; -5.0; -3.2; -2.9; -4.1; -3.3; -3.1
  - Financing gap (percent of GDP): 0.0; 0.0; 0.0; 0.0; 0.0; 1.8; 1.8; 0.8
  - Bank balance of the general government (percent of GDP): 4.7; 5.3; 6.5; 2.0; 2.3; 7.4; 8.1; 5.9
  - Nominal GDP (millions of euros): 4,672; 4,649; 4,672; 4,649; 4,649; 4,966; 4,966; 5,275

- Footnote on structural adjustment: "Structural adjustment in 2012 of ¾ of a percent of GDP (€ 38 million) is composed of € 13 million in revenue measures, €10 million in wage restraint, and € 15 million in reduction of support to the electricity sector (of which € 10 in subsidies and € 5 million in net lending)."

*Source: _cr11374 - 32.      Steadfast implementation of the policies under the Staff-Monitored Program*

### 0.3 percent of GDP in reduction of support to the electricity sector (of which 0.2 percent of GDP in subsidies and 0.1 p

### _cr11374 - 0.3 percent of GDP in reduction of support to the electricity sector (of which 0.2 percent of GDP in subsidies and 0.1 p

### Debt Sustainability: External Debt (Baseline Scenario, 2008-2031)
- External debt (nominal) o/w public and publicly guaranteed (PPG):
  - 2008: 21.4
  - 2009: 17.6
  - 2010: 16.6
  - 2011: 15.4
  - 2012: 16.4
  - 2013: 16.8
  - 2014: 15.9
  - 2015: 14.8
  - 2016: 14.2
  - 2011-2016 Average: 15.6
  - 2021: 18.5
  - 2031: 23.2
  - 2017-31 Average: 19.9
- Change in external debt (selected years):
  - 2008: -3.9
  - 2009: -3.7
  - 2010: -1.0
  - 2011: -1.2
  - 2012: 1.0
  - 2013: 0.4
  - 2014: -0.9
  - 2015: -1.1
  - 2016: -0.6
  - 2011-2016 Average: 0.7
  - 2021: 0.4
- Identified net debt-creating flows (selected values):
  - 2008: 5.8
  - 2009: 8.5
  - 2010: 8.4
  - 2011: 15.4
  - 2012: 7.9
  - 2013: 11.4
  - 2014: 7.2
  - 2015: 7.3
  - 2016: 6.4
  - 2011-2016 Average: 5.0
  - 2021: 8.1
- Non-interest current account deficit (selected values):
  - 2008: 15.1
  - 2009: 15.0
  - 2010: 16.9
  - 2011: 9.7
  - 2012: 4.2
  - 2013: 23.5
  - 2014: 20.4
  - 2015: 18.0
  - 2016: 14.2
  - 2011-2016 Average: 14.6
  - 2021: 13.8
  - 2031: 17.4
- Exports and imports (selected):
  - Exports (series ending 2016 and averages): 14.8, 15.5, 18.5, 19.9, 20.6, 21.3, 22.1, 22.9, 23.9; 2011-16 Average: 20.6; 2021: 20.0
  - Imports (series ending 2016 and averages): 56.0, 55.2, 59.1, 64.5, 61.0, 59.3, 56.5, 56.4, 55.8; 2011-16 Average: 48.4; 2021: 47.0
- Net current transfers (negative = inflow):
  - 2008: -21.5
  - 2009: -22.1
  - 2010: -21.1
  - 2011: -22.5
  - 2012: 1.5
  - 2013: -18.0
  - 2014: -17.0
  - 2015: -16.7
  - 2016: -16.9
  - 2011-16 Average: -15.6
  - 2021: -15.0
  - 2031: -16.5
  - o/w official: 2008: -7.5; 2009: -10.3; 2010: -8.6; 2011: -5.8; 2012: -5.3; 2013: -4.9; 2014: -4.7; 2015: -3.6; 2016: -3.3; 2011-16 Average: -1.9; 2021: -0.7
- Net FDI (negative = inflow):
  - 2008: -6.6
  - 2009: -6.6
  - 2010: -7.7
  - 2011: -4.3
  - 2012: 3.4
  - 2013: -7.7
  - 2014: -12.4
  - 2015: -6.4
  - 2016: -6.9
  - 2011-16 Average: -7.0
  - 2021: -7.1
  - 2031: -7.9

### Debt Sustainability: Endogenous Dynamics and PV Indicators
- Endogenous debt dynamics (selected years):
  - 2008: -2.8
  - 2009: 0.1
  - 2010: -0.8
  - 2011: -0.4
  - 2012: -0.1
  - 2013: -0.2
  - 2014: 0.0
  - 2015: -0.3
  - 2016: -0.3
  - 2011-16 Average: -0.2
  - 2021: 0.0
  - 2031: 0.6
  - 2017-31 Average: 0.2
- Contribution from nominal interest rate (selected):
  - 2008: 0.2
  - 2009: 0.4
  - 2010: 0.5
  - 2011: 0.4
  - 2012: 0.4
  - 2013: 0.5
  - 2014: 0.5
  - 2015: 0.4
  - 2016: 0.4
  - 2011-16 Average: 0.8
  - 2021: 1.6
- Contribution from real GDP growth (example):
  - 2008: -1.5
  - 2009: -0.6
  - 2010: -0.6
  - 2011: -0.7
  - 2012: -0.6
  - 2013: -0.6
  - 2014: -0.5
  - 2015: -0.7
  - 2016: -0.7
  - 2011-16 Average: -0.7
- Residual, including assets, errors, and ommissions (3-4) 3/ (selected):
  - 2008: -9.7
  - 2009: -12.2
  - 2010: -9.4
  - 2011: -16.6
  - 2012: -6.9
  - 2013: -11.0
  - 2014: -8.2
  - 2015: -8.4
  - 2016: -7.0
  - 2011-16 Average: -4.3
  - 2021: -7.7
- PV of external debt (selected years):
  - 2011: 14.7
  - 2012: 13.8
  - 2013: 15.0
  - 2014: 15.5
  - 2015: 14.9
  - 2016: 14.0
  - 2011-16 Average: 13.6
  - 2021: 15.7
  - 2031: 18.9
  - In percent of exports (selected): 2011: 79.4; 2012: 69.3; 2013: 72.9; 2014: 73.0; 2015: 67.6; 2016: 61.3; 2011-16 Average: 56.9; 2021: 76.1; 2031: 94.4
- Debt service-to-exports ratio (in percent) (selected):
  - 2008: 28.6
  - 2009: 38.7
  - 2010: 31.6
  - 2011: 25.3
  - 2012: 20.9
  - 2013: 17.7
  - 2014: 16.3
  - 2015: 15.5
  - 2016: 15.9
  - 2011-16 Average: 29.0
  - 2021: 114.5
- Total gross financing need (Billions of euros) (selected):
  - 2008: 0.5
  - 2009: 0.6
  - 2010: 0.6
  - 2011: 1.0
  - 2012: 0.6
  - 2013: 0.8
  - 2014: 0.6
  - 2015: 0.7
  - 2016: 0.7
  - 2011-16 Average: 0.9
  - 2021: 5.0

### Key Macroeconomic Assumptions (selected)
- Real GDP growth (in percent) (history and projections):
  - 2008: 6.9
  - 2009: 2.9
  - 2010: 3.9
  - 2011: 3.8
  - 2012: 2.3
  - 2013: 5.0
  - 2014: 4.0
  - 2015: 4.1
  - 2016: 3.2
  - 2011-16 Average: 5.0
  - 2021: 5.0
  - 2031: 4.4
  - 2017-31 Average: 4.4
- GDP deflator in euro terms (change in percent) (selected):
  - 2008: 6.2
  - 2009: -1.3
  - 2010: 3.7
  - 2011: 0.7
  - 2012: 3.2
  - 2013: 5.1
  - 2014: 2.7
  - 2015: 2.0
  - 2016: 1.8
  - 2011-16 Average: 1.9
  - 2021: 1.8
  - 2031: 2.5
- Effective interest rate (percent) 5/ (selected):
  - 2008: 1.0
  - 2009: 2.1
  - 2010: 2.8
  - 2011: 1.4
  - 2012: 1.2
  - 2013: 2.6
  - 2014: 3.0
  - 2015: 3.1
  - 2016: 2.9
  - 2011-16 Average: 2.9
  - 2021: 4.7
  - 2031: 7.6
  - 2017-31 Average: 5.5
- Growth of exports of G&S (euro terms, in percent) (selected):
  - 2008: 11.1
  - 2009: 6.4
  - 2010: 28.8
  - 2011: 15.7
  - 2012: 36.7
  - 2013: 18.8
  - 2014: 10.2
  - 2015: 9.9
  - 2016: 8.9
  - 2011-16 Average: 11.2
  - 2021: 11.3
  - 2031: 11.7
- Growth of imports of G&S (euro terms, in percent) (selected):
  - 2008: 18.4
  - 2009: 0.1
  - 2010: 15.4
  - 2011: 8.0
  - 2012: 9.4
  - 2013: 20.3
  - 2014: 1.2
  - 2015: 3.2
  - 2016: 0.2
  - 2011-16 Average: 6.7
  - 2021: 5.9
  - 2031: 6.2
- Government revenues (excluding grants, in percent of GDP) (selected):
  - 2008: 23.8
  - 2009: 29.3
  - 2010: 26.4
  - 2011: 27.3
  - 2012: 26.7
  - 2013: 26.7
  - 2014: 27.1
  - 2015: 27.5
  - 2016: 28.0
  - 2011-16 Average: 28.1
  - 2021: 28.1

### Public Sector Debt Sustainability (Table A2, Baseline Scenario, 2008-2031)
- Public sector debt (in percent of GDP) (selected):
  - 2007: 25.3
  - 2008: 21.4
  - 2009: 17.6
  - 2010: 16.6
  - 2011: 15.4
  - 2012: 17.9
  - 2013: 18.8
  - 2014: 18.6
  - 2015: 18.9
  - 2016: 19.4
  - 2011-16 Average: 24.5
  - 2021: 30.1
  - 2031: o/w foreign-currency denominated: 0.0
- Change in public sector debt (selected):
  - 2008: -3.4
  - 2009: -3.9
  - 2010: -3.7
  - 2011: -1.0
  - 2012: -1.2
  - 2013: 2.5
  - 2014: 0.8
  - 2015: -0.1
  - 2016: 0.3
  - 2011-16 Average: 0.5
  - 2021: 0.8
  - 2031: 0.4
- Identified debt-creating flows and primary balance (selected):
  - Primary deficit (multiple entries, selected): -7.2; 0.2; 0.7; 2.7; -0.6; 3.6; 2.8; 3.2; 3.0; 0.5
  - Revenue and grants (selected): 26.5; 24.5; 29.3; 27.3; 27.9; 27.4; 27.7; 28.0; 27.5; 28.0; 27.7; 28.1
  - Primary (noninterest) expenditure (selected): 19.3; 24.7; 29.9; 30.0; 30.7; 30.6; 30.7; 28.5; 28.5; 28.9; 29.6; 29.0
- Automatic debt dynamics (selected):
  - 2008: -2.3
  - 2009: -3.0
  - 2010: -0.2
  - 2011: -1.1
  - 2012: -1.4
  - 2013: -0.7
  - 2014: -0.6
  - 2015: -0.5
  - 2016: -0.8
  - 2011-16 Average: -0.7
  - 2021: -0.8
- Other identified debt-creating flows (privatization receipts negative):
  - 2008: -11.7
  - 2009: -10.8
  - 2013 onwards show 0.0 for privatization receipts
- Residual, including asset changes 2/ (selected):
  - 2007: 17.8
  - 2008: 9.6
  - 2009: -4.2
  - 2010: -2.6
  - 2011: -2.6
  - 2012: 6.1
  - 2013: -1.3
  - 2014: 0.0
  - 2015: 0.3
  - 2016: 0.5
  - 2011-16 Average: 0.5
- PV of public sector debt (selected):
  - 2011: 14.7
  - 2012: 13.8
  - 2013: 16.5
  - 2014: 17.5
  - 2015: 17.6
  - 2016: 18.1
  - 2011-16 Average: 18.8
  - 2021: 21.7
  - 2031: 25.8
- Gross financing need 3/ (selected):
  - 2007: -7.2
  - 2008: 0.2
  - 2009: 1.0
  - 2010: 3.1
  - 2011: 3.3
  - 2012: 3.7
  - 2013: 4.2
  - 2014: 2.1
  - 2015: 3.3
  - 2016: 4.0
  - 2011-16 Average: 6.2
  - 2021: 7.1

### Letter of Intent — Macroeconomic Outlook and Fiscal Policy (Republic of Kosovo, December 15, 2011)
- Macroeconomic outlook:
  - Real GDP growth 2011 projection revised down by 0.3 percentage points to 5 percent.
  - Current account deficit expected to improve to about 21 percent of GDP in 2012, from 24 percent in 2011.
  - Consumer price inflation projected to fall to around 2 percent in 2012.
  - Electricity price increases (from new regulations on electricity tariffs and coal royalties) may exert upward pressure on inflation.
- SMP implementation and fiscal measures:
  - Quantitative benchmarks for end-September were met except accumulation of domestic arrears (minor amount accumulated).
  - Structural benchmark on publication of tax compliance strategy was met.
  - Continuous structural benchmarks met: monthly program monitoring committee meetings; inclusion of a clause into all laws creating/modifying benefits to permit adjustment to budget availability.
- 2012 budget and fiscal stance:
  - Draft 2012 budget submitted targets a primary deficit of €159 million (3.2 percent of GDP).
  - Strategy includes achieving ¾ of a percent of GDP in structural fiscal adjustment over a period of 4 years.
  - Measures underpinning the 2012 budget:
    - Cautious revenue projections to preserve 2011 tax collection gains while providing buffers.
    - Restraint on current and non-highway capital spending.
    - Acceleration of spending on highway R7 to complete in 2013.
- Adjustments in response to PTK privatization delay:
  - PTK privatization auction cancelled; expected privatization receipts of at least €300 million will not be realized in year.
  - Enacted contingent spending cuts of €60 million on goods and services, subsidies and transfers, net lending for the electricity sector, and non-highway spending to protect central bank balances.
  - Requests to IMF to introduce adjusters to quantitative benchmarks on bank balances (for privatization shortfall and spending cuts) and to quantitative benchmarks on primary expenditures and primary fiscal balance (for spending cuts).
- Modification request on structural benchmark:
  - End-December benchmark on fiscal impact assessments for war veteran pension and possible benefits for former political prisoners is infeasible.
  - Request to modify benchmark to: set up working groups to prepare methodology and define terms of reference in cooperation with the World Bank.
- Revenues and expenditures through September and end-year expectations:
  - Tax revenue collection through September was €24 million higher than SMP target, driven by indirect taxes (VAT and excises).
  - Expectation to exceed end-year revenue targets somewhat due to one-off PTK licensing fees and a World Bank budgetary grant originally expected for 2012.
  - End-year targets for primary expenditures are within reach due to disciplined budget execution.

*Sources: Country authorities; staff estimates and projections.*

### 10.      The 2012 will budget contain €38 million (¾ of a percent of GDP) in structural

### _cr11374 - 10.      The 2012 will budget contain €38 million (¾ of a percent of GDP) in structural

### 2012 fiscal consolidation package
- Total structural adjustment: €38 million (¾ of a percent of GDP).
- Composition:
  - Restraint on public sector wages: €10 million (0.2 percent of GDP).
    - Budget contains zero wage increases for public sector employees.
    - Wage bill expected to increase because of (i) full-year effect of 2011 wage hikes (took effect in March 2011) and (ii) hiring of new public sector employees (including creation of new municipalities in Kosovo’s North and transfers of responsibilities from the international community).
  - Electricity sector: €15 million (0.3 percent of GDP).
    - Cuts: subsidies by €10 million and gross lending to the sector by €5 million.
    - Of remaining subsidies of €20 million, maximum of €13 million budgeted for KEK; remainder placed in a budgetary reserve.
    - Lower KEK subsidies expected to affect electricity prices in line with the regulatory formula.
  - Revenue measures: €13 million (0.25 percent of GDP).
    - Increase excise on tobacco by €2 per 1000 units (yielding about €7 million).
    - Raise minimum property tax rate to 0.15 percent (€3 million).
    - Raise presumptive tax to 9 percent (€3 million).
    - Measures broadly in line with recommendations of a recent IMF TA mission on tax policy (¶15).

### Infrastructure priorities and risks (highways)
- Highway R7 to Albania:
  - 2012 budget increases allocation for R7-related expropriations to €56 million.
  - Objective: finalize expropriations in 2012 to set stage for timely completion of R7 in 2013 and avoid cost escalation clauses from 2014.
  - Budgetary risks as project nears completion; efforts to minimize variation costs and additions to original contract.
- Highway R6 to Macedonia:
  - 2012 budget contains no allocation for R6 due to tight financing, need to revisit technical specifications, and insufficient information about final costs from R7.
  - Use 2012 to advance technical and financial preparations for R6.
  - With current design, only northern section near Pristina is economically viable.
  - Plan to revise technical specifications and analyze design and financing options for the southern portion in collaboration with the World Bank.

### Debt issuance, sovereign paper, and pension fund participation
- Government will issue sovereign paper for the first time in Kosovo’s history to finance the 2012 deficit.
- Central Bank tested a new platform for electronic bond trading.
- Debt strategy paper, developed with U.S. Treasury technical support, expected by year-end.
- Anticipated domestic purchase capacity: at least €75 million by domestic banks and the Pillar II pension fund KPST.
- Proposed changes to pension fund law to allow KPST purchases:
  - Replace single-borrower 5 percent constraint with:
    - (i) KPST’s overall exposure to the government limited to 30 percent of KPST’s assets.
    - (ii) KPST’s annual purchases of government paper limited to at most 50 percent of new inflows into KPST in the preceding year.
- Consultation with World Bank and IMF staff on wording; submission of revised law to Assembly envisaged for end-December (structural benchmark).

### PTK privatization and fiscal back-up plan
- Commitment to finalize privatization of PTK in 2012, with a back-up plan if delays occur.
- Back-up plan target: ensure bank balances of at least €150 million by end-December 2012 even without PTK privatization.
  - Measures:
    - Leave €60 million in the 2012 budget unallocated.
    - By February 2012, specify expenditure categories affected by back-up plan unless clear evidence of PTK privatization in 2012.
    - Additional measures (mix of revenue and financing) to be identified no later than February 2012.

### Social benefits and legislative safeguards
- Law regulating benefits for war-related categories passed in form consistent with government commitments (paragraphs 13–15 of the LOI from June 20, 2011) (prior action).
- Principles for future benefit-creating laws:
  - (i) Grant only cash benefits, with no link to the minimum wage.
  - (ii) Precede such laws with a fiscal impact assessment over at least 5 years.
  - (iii) Include a paragraph explicitly allowing cutting benefits in case of insufficient budgetary funds.
- Inclusion of such a paragraph into all new benefit-creating laws and amendments is a continuous structural benchmark (met).

### Structural fiscal reform strategy and tax policy
- Commitment to achieve structural adjustment of 3 percent of GDP over 4 years; half remains to be implemented in 2013/14.
- Anticipation that significant part of adjustment will come from revenue policies.
- Strategic re-orientation of tax system to reduce dependence on border taxes over the longer term.
- Will protect integrity of current tax system and refrain from introducing tax holidays and/or exemptions for intermediary inputs from VAT.
- Merge macroeconomics and fiscal policy divisions within the Ministry of Finance by end-December to enhance capacity for tax policy analysis.

### Public financial management and municipal finance
- Upgrading public financial management software to monitor overdue bills and prevent domestic arrears.
  - Software to be tested at end-2011.
  - Full operational status expected once budget officers in all budget organizations are trained; expected in second half of 2012.
- Analysis of inter-governmental grants system with IMF technical assistance aimed at enhancing effectiveness.
  - If grants are reduced, plan to compensate by increasing municipalities’ own-source revenues (e.g., raising minimum property tax rates or municipal motor vehicle fees).
  - Intend to grant municipalities more flexibility in allocating resources.

### Tax compliance and related reforms
- Preliminary version of 2012 tax compliance strategy completed in September and published on Tax Administration website.
  - Reviewed by stakeholders and being upgraded with IMF technical assistance.

### Monetary and financial sector policies and prudential measures
- Financial system indicators:
  - Capital adequacy: 17.2 percent at end-October.
  - Non-performing loans: around 6 percent.
  - Credit to private sector: grew by about 15½ percent in the 12 months to October.
- Measures to strengthen resilience:
  - Central bank acquiring ability to provide emergency liquidity assistance (ELA) (¶21).
  - Deposit insurance scheme introduced.
  - Legal framework for bank resolution and prudential regulation strengthened with new central bank law; further strengthened with upcoming banking and microfinance law (¶21).
  - Central bank committed to prudent loan-to-deposit ratios of around 80 percent.
  - Regulations limiting banks’ exposure to foreign controlling institutions to 20 percent of Tier 1 capital.
  - Plan to reduce banks’ exposure limits to single borrowers from 20 percent of Tier 1 capital to 15 percent with new banking and microfinance law.
  - Prudent rules on assets eligible for minimum reserve requirements: Kosovar government paper will remain non-eligible as long as market remains thin and investor base insufficiently diversified. Banks allowed to apply zero risk weight to government paper for capital adequacy purposes.
  - Prepared to request temporary suspension of dividends to increase capital buffers if needed.
- Financial sector structural reforms in progress:
  - ELA arrangements:
    - MoF, CBK, and Committee for Budget and Finance signed a Memorandum of Understanding on ELA duties and responsibilities.
    - CBK Board approved ELA regulations in November.
    - Government to deposit €46 million in a CBK account earmarked for ELA; CBK to provide another €46 million from its resources.
  - Banking and Microfinance Law (BML) finalized and submitted to Assembly; enhances governance and tightens prudential regulations on portfolio concentration and lending to related parties.
  - Deposit Insurance Law (DIL) revision planned to authorize CBK use of the Deposit Insurance Fund for purchase and assumption transactions; revised DIL expected to be submitted in first half of 2012 after BML adoption.
    - CBK has collected about €5 million from banks and the government for the deposit insurance fund.
    - CBK expects to receive €4.5 million from KFW and another US$4 million from the government, facilitated by a World Bank loan.

### Energy sector and privatization timetable
- Energy sector reforms aim to enhance supply quality and reduce budget dependence.
  - Regulator to issue key financial variables of revised energy pricing formula before end-year to enable pre-qualified bidders for distribution privatization.
  - Privatization schedule delayed due to change of transaction advisor.
  - Current plan: winning bid for distribution privatization announced in early 2012, with subsequent transfer in ownership shares.
  - Preparations for privatization of mining and electricity generation: Request for Proposals to be issued in first quarter of 2012.
  - Report on staffing and a functional audit of the coal division of KEK to be completed by end-2011.

### Healthcare reform stance
- Preparing overhaul of healthcare system centered on a health insurance fund financed by premium payments.
- No budgetary allocation for the reform in the 2012 budget.
- Total transfers from the treasury to the insurance fund, including premia for poorest citizens, will be designed not to exceed existing budget allocations for healthcare; reform will have no direct budgetary impact in medium term.

### Business environment and labor market measures
- Package of twelve laws prepared to strengthen business environment and improve Doing Business ranking.
  - Some laws already passed on business management, property rights, internal trade, information reporting, and auditing.
- Annual report on implementation of the labor law to be conducted in early 2012, focusing on maternity leave provisions and in close cooperation with the World Bank.

### Quantitative benchmarks and program monitoring (selected)
- Statuses reported:
  - Floor on the bank balance of the general government: Met.
  - Floor on the primary fiscal balance of the general government: Met.
  - Ceiling on primary expenditures of the general government: Met.
  - Ceiling on contracting or guaranteeing nonconcessional debt by the general government: Met.
  - Ceiling on the accumulation of domestic payment arrears of the central government: Missed.
  - Ceiling on the accumulation of external payments arrears of the general government: Met.
- Prior actions (June 2011) listed as Met where applicable (e.g., passage of law regulating war-related benefits).
- Structural benchmarks (Table 3 highlights):
  - Passage of a budget for 2012 containing fiscal tightening of at least ¾ of a percent of GDP: Structural benchmark, End-December 2011.
  - Completion of the privatization of PTK: Structural benchmark, End-December 2011.
  - Submission to Assembly of revised KPST law limiting exposures: Structural benchmark, End-December 2011.
  - Setting up working groups for fiscal impact assessment methodology: Structural benchmark, End-December 2011.
  - Inclusion of paragraph allowing cutting benefits in new benefit-creating laws: Continuous structural benchmark.
  - Monthly meetings of Program Monitoring Committee and transmission of minutes to IMF: Continuous structural benchmark.

*Source: Kosovo authorities; IMF staff estimates and projections, as presented in the cited document.*

### 1.      This Technical Memorandum of Understanding (TMU) sets out the understandings

### This Technical Memorandum of Understanding (TMU) sets out the understandings between the Kosovo authorities and the IMF staff regarding the definition of quantitative benchmarks and indicative targets, and reporting requirements for the Staff-Monitored Program (“SMP”) requested in June 2011.

### I. QUANTITATIVE BENCHMARKS AND INDICATIVE TARGETS — Coverage and definitions
- General government composition:
  - Executive, the Legislative, and Judiciary branches of the Government, its Municipalities, and any other public authorities that receive direct budgetary appropriations.
  - Excludes publicly owned enterprises and socially owned enterprises.
- Quantitative benchmarks, indicative targets, and their respective test dates are set in Table 2 of the Letter of Intent (LOI).

### Bank balances of the general government — definition, levels, and reporting
- Definition:
  - Bank balances are funds usable and readily available (i.e., liquid or marketable, and free of any pledges or encumbrances), held and controlled by the general government for the purposes of making payments and transfers.
  - Include Undistributed Funds of the Government of Kosovo plus funds specifically reserved for policy purposes.
  - Exclude the balance of unspent Own Source Revenues (OSR) carried forward, funds encumbered or pledged as Donor Designated Funds, funds relative to on lending operations, and investments made and managed by an outside Investment Manager assigned by the Minister pursuant to Kosovo’s Law on Public Financial Management Article 7.1.(iii).
  - Eligible forms: gold, holdings of foreign exchange and traveler’s checks, demand and short-term deposits at foreign banks, domestic banks, and the Central Bank of the Republic of Kosovo (CBK), long-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities held directly by the general government.
- Level:
  - Bank balances at December 31, 2010, were € 244.112 million.
- Adjustments to the floor on the bank balance (as set in Table 2):
  - The floor on the bank balance set in Table 2 will be raised by

    40

    • the excess of budget grants and loans relative to program assumptions  
    • the repayment of loans extended to public enterprises.  
    • spending cuts of €60 million in the event that the proceeds from the privatization of the post and telecom company PTK are not received before end-2011.
  - The floor on bank balance set in Table 2 will be lowered by €300 million in the event that the proceeds from the privatization of the post and telecom company PTK are not received before end 2011.
- Reporting requirements:
  - A table on bank balances will be transmitted by the Treasury with a maximum delay of five weeks after the end of each month.
  - The CBK will submit twice a month, with a delay of 1 day, the Report of Positions of Treasury Accounts.
  - Within 45 days after each test date, the CBK will submit to the IMF the independent audit of the reconciliation of government accounts.

### Primary expenditures of the general government — definition, ceilings, and reporting
- Definition:
  - Measured on a cash basis cumulatively from the beginning of the calendar year.
  - Include current expenditures (wages and salaries, goods and services, subsidies and transfers, reserves), capital expenditures, and net lending.
  - Exclude interest payments or receipts and expenditures designated by donors financed with grants (“donor designated grants”).
  - Net lending comprises loans granted by the general government except that it does not include onlending such as funds borrowed from KfW, which is included as a domestic financing item (“below the line”).
  - All expenditures and net lending financed with loans to be serviced by the general government are in the program’s concept of expenditures and net lending, even if the cash did not transit through the Treasury.
- Adjustments to the ceiling on primary expenditures (as set in Table 2):
  - The ceiling on primary expenditures set in Table 2 will be raised by the excess of project grants and loans relative to program assumptions.
  - The ceiling on primary expenditures set in Table 2 will be lowered by:
    • the shortfall of project grants and loans relative to program assumptions.  
    • spending cuts of €60 million in the event that the proceeds from the privatization of the post and telecom company PTK are not received before end-2011.
- Privatization proceeds:
  - Proceeds of privatizations mean all monies received by the government from the sale of a publicly owned company, organization, or facility to a private company or companies, organization(s), or individual(s), as well as any proceeds generated from the sale of government nonfinancial assets and from the liquidation of the assets of the Privatization Agency of Kosovo (PAK).
  - Proceeds of privatizations are not part of revenues; they are recorded as a domestic financing (Net acquisition of financial assets).
- Reporting requirements (monthly, within five weeks after end of each month):
  - Monthly execution, budget appropriations, and budget allocations of revenues and expenditures including:
    (i) government domestic revenue detailing by components direct taxes, indirect taxes, and nontax revenues;  
    (ii) external budget support grants;  
    (iii) primary recurrent expenditure;  
    (iv) domestic and external interest payments and receipts;  
    (v) capital expenditure detailing all those related to the construction of Route 7 and including domestically and budget support financed capital expenditure and externally project financed capital expenditure;  
    (vi) the gross payment and gross accumulation of domestic payments arrears;  
    (vii) external loan receipts and principal payments;  
    (viii) external arrears payments and accumulation;  
    (ix) bank and nonbank financing;  
    (x) privatization and receipts of the sales of nonfinancial assets; and  
    (xi) any other revenue, expenditure, or financing not included above.

### Primary fiscal balance of the general government — definition and adjustments
- Definition:
  - Primary fiscal balance = revenues and grants minus primary expenditures cumulatively since the beginning of the calendar year.
  - Revenues do not include privatization receipts.
- Adjustments to the floor on the primary fiscal balance (as set in Table 2):
  - The floor on the primary fiscal balance set in Table 2 will be lowered by the excess in project loans relative to program assumptions.
  - The floor on the primary fiscal balance set in Table 2 will be raised by:
    • the shortfall in project loans relative to program assumptions  
    • the excess in budget grants relative to program assumptions.  
    • spending cuts of €60 million in the event that the proceeds from the privatization of the post and telecom company PTK are not received before end-2011.

### Contracting or guaranteeing nonconcessional debt by the general government — definitions, exclusions, and reporting
- Nonconcessional debt:
  - Defined as debt contracted or guaranteed by the general government with a grant element of less than 35 percent.
  - Grant element = difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt.
  - PV at contracting is calculated by discounting future debt service payments using currency-specific commercial interest reference rates (CIRRs) published by the Development Assistance Committee of the OECD.
  - For debt with maturity of at least 15 years, the ten-year-average CIRR will be used to calculate PV and grant element.
  - For debt with maturity of less than 15 years, the six-month average CIRR will be used.
  - To both the ten-year and six-month averages, the following margins for differing repayment periods (OECD margins) are added:
    • 0.75 percent for repayment periods of less than 15 years  
    • 1 percent for 15 to 19 years  
    • 1.15 percent for 20 to 29 years  
    • 1.25 percent for 30 years or more
- Exclusions from ceilings:
  - Ceilings exclude purchases from the IMF, the sale of the SDR holdings allocated to Kosovo, and the contracting of Partial Risk Guarantees with the World Bank for the privatization of the energy sector.
  - Debt rescheduling and debt reorganization of debts contracted before the approval of the SMP are excluded from the limits on nonconcessional debt.
  - The definition of short-term nonconcessional debt excludes normal short-term (less than one year) import-related financing.
- Scope:
  - Quantitative benchmark applies to debt as defined and to commitments contracted or guaranteed for which value has not been received.
  - Contracting or guaranteeing nonconcessional debt by the general government will be assessed at each test date.
- Consultation:
  - The government of Kosovo will consult with Fund staff before contracting or guaranteeing any new debts in circumstances where they are uncertain whether the instrument is covered under the quantitative benchmark.
- Definition of debt (per Executive Board Decision No. 12274-(00/85), as amended by Decision No. 14416-(09/91)):
  - “Debt” means a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time; these payments will discharge the principal and/or interest liabilities.
  - Primary forms: (i) loans (including deposits, bonds, debentures, commercial loans and buyers’ credits, repurchase agreements, official swap arrangements); (ii) suppliers’ credits; (iii) leases (debt equals the present value at inception of all lease payments expected during the agreement, excluding operation/repair/maintenance payments).
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
- Reporting requirements:
  - Details of all new debt taken or guaranteed, indicating terms of debt and creditors, will be provided on a quarterly basis within five weeks of the end of each quarter.
  - The government will consult Fund staff in uncertain cases prior to contracting or guaranteeing.

### Domestic payments arrears — definition, assessment, and reporting
- Definition:
  - A domestic payment obligation to suppliers or creditors is in arrears if:
    (a) goods and services have been received;  
    (b) they have been certified to conform to the order of the contract; and  
    (c) the obligation has remained unpaid for more than 60 days after the invoice was received.
  - A payment obligation is domestic if the creditor is resident in Kosovo.
- Assessment:
  - The stock of arrears will be assessed at end-June 2011 and the accumulation of new domestic arrears will be assessed continuously.
- Reporting requirements:
  - The Ministry of Finance will submit detailed tables of the stocks of domestic arrears and of domestic payment obligation to suppliers or creditors not in arrears as of end-September and end-December 2011.
  - Monthly table with the stock of domestic payments arrears, including the accumulation (if any), payment, rescheduling and write-off of domestic payments arrears during the month.
  - Monthly data to be provided within five weeks after the end of the month.

### External payments arrears — definition and reporting
- Definition:
  - External arrears are total external debt service obligations of the government that have not been paid by the time they are due (after the expiration of the relevant grace period).
  - External arrears exclude external debt service obligations subject to ongoing good faith negotiations of debt-rescheduling agreements.
  - A debt service obligation is external if the creditor is not resident in Kosovo.
- Reporting requirements:
  - The Ministry of Finance will inform Fund staff immediately of any accumulation of external arrears.
  - Data on (i) debt-service payments; and (ii) external arrears accumulation and payments will be transmitted on a quarterly basis by the Ministry of Finance within five weeks of the end of each quarter.

### II. OTHER DATA REQUIREMENTS — monetary, trade, BOP, financial soundness, and employment statistics
- Monetary statistics:
  - Monthly monetary statistics (including balance sheets and monetary surveys) of the CBK, the consolidated commercial banks and revisions to historical data (if any) will be transmitted on a monthly basis with a maximum delay of five weeks.
- Trade statistics:
  - Data on exports and imports, including volume and prices and compiled by the Statistical Office of Kosovo (SOK), will be transmitted on a quarterly basis within forty-five days after the end of each quarter.
- Balance of payments:
  - A preliminary quarterly balance of payments, compiled by the CBK, will be forwarded within three months after the end of each quarter.
- Financial soundness indicators and bank ratios:
  - The table of Financial Soundness Indicators and the regulatory capital and liquidity ratios of individual banks will be transmitted by the CBK to the IMF on a monthly basis within six weeks after the end of each month.
- Employment data:
  - A monthly report on the number of employees will be transmitted to the IMF by the Treasury Department of the Ministry of Finance within two weeks after the end of each month.

*Source: Technical Memorandum of Understanding between the Kosovo authorities and IMF staff (TMU) — content as provided.*

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