## 2014. Government revenue is collected mostly from VAT, excises, and trade taxes, which is ## Source details **Canonical URL:** [2014. Government revenue is collected mostly from VAT, excises, and trade taxes, which is](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13222.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13222.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13222.pdf.json) --- ### Background and setting - Since the 2011 Article IV consultations, Kosovo: - International Civilian Office ended operations in 2012. - EBRD offered membership to Kosovo in December 2012. - Kosovo and Serbia signed a normalization agreement in April 2013 including a mutual commitment not to block one another’s efforts to join the EU. - Around 100 states have recognized Kosovo, up from about 70 in 2011. - Domestic political environment: remained stable, albeit at times tense. - Demographics: median age 26.3 years; high economic growth reflects in part population growth. ### Recent economic and financial developments - Growth and labor market - Annual real GDP growth averaged 4½ percent between 2007 and 2012. - Unemployment around 35 percent. - Macroeconomic context and program - Policies conducted under a Staff-Monitored Program (2011) and a Stand-By Arrangement (from 2012); SBA treated as precautionary in 2013 and expires toward the end of the year. - Major advances: restored a sustainable fiscal stance, improved preparation and costing of spending initiatives, strengthened the financial safety net. - 2012–early 2013 dynamics - Real growth exceeded 5 percent of GDP in 2011; slowed in 2012 with FDI and private investment contracting. - Credit growth decelerated from almost 15 percent in 2011 to 4½ percent. - Estimated real growth about 2½ percent in 2012. - Current account deficit (excluding official transfers) narrowed from more than 20 percent in 2011 to 15 percent in 2012. - Trade deficit about 35 percent of GDP in 2012. - Core inflation around 2 percent. - Banking sector - Remained liquid, profitable, and well capitalized though financial strength differs across banks. - Non-performing loans increased from 5.7 percent at end-2011 to around 7½ percent in late 2012 and early 2013; increases concentrated in corporate sector and NPLs are almost fully provisioned. - Return on assets halved between end-2011 and early 2013 but remained solid compared to peers. - System-wide capital adequacy fluctuated around 18 percent for most of 2011 and 2012; dropped to around 15 percent in late 2012 after tighter capital rules under the new banking law. ### Outlook and risks - Baseline projections - Staff projects real GDP growth about 2½ percent in 2013. - Medium-term staff projects real growth about 4½ percent. - CPI inflation projected to decline gradually to below 2 percent. - Exports expected to recover modestly due to higher global demand for metals; exports remain a small contributor to growth. - Key risks - Short-term: deterioration in economic conditions in Diaspora host countries that would curtail remittances and FDI. - Bank lending: restrictive lending policies of subsidiaries of euro area parent banks could reduce lending; Turkish and Albanian banks may compensate in part. - Political risk: policies undermining macroeconomic stability and competitiveness (example: public sector wage increases of 30-50 percent after the 2010 campaign that forced Kosovo’s previous SBA irrecoverably off-track). ### Financial sector development and supervision - Structure and resilience - Banking sector grew rapidly over the last decade from a low base; saturation point appears reached. - Kosovar banking subsidiaries largely deposit-funded, limiting risk of parental funding withdrawal. - Euro area–based banks account for 71 percent of loans; other foreign banks 17 percent; domestic banks 12 percent (Share of Loans to Industry, 2012). - 2012 FSAP found the banking sector resilient to a wide range of shocks; commendable steps taken to strengthen the financial safety net. - Regulatory changes and priorities - New banking law prescribes related party exposures be deducted in full from capital. - FSAP recommended strengthening crisis management framework and funding future increases of the ELA facility through a bank premium. - Priorities: gradual move to comprehensive risk-based supervision, development of a macro-prudential policy framework, establishing a permanent funding mechanism for the SRF, and continued supervisory vigilance by a strong and independent central bank. ### Fiscal stance, fiscal rule, and financing - Structural adjustment and sustainability - Government implemented adjustment of about 2½ percent of GDP in 2011-13 through revenue measures and expenditure-saving structural reforms (notably in the energy sector). - Fiscal stance sustainable provided capital spending converges to around 10 percent of GDP. - Fiscal rule (from 2014) - Fiscal rule expected to be enacted in early July sets a ceiling for the general government deficit of 2 percent of GDP. - Ceiling consistent with keeping gross public debt at or below 30 percent of GDP. - Capital projects exempt from the ceiling provided (i) financed from privatization receipts and (ii) government bank balance exceeds minimum threshold of 4½ percent of GDP. - Financing - Medium-term financing expected primarily through issuance of securities. - Government T-bill market (set up in 2012) had net issuance of 1½ percent of GDP in 2012, maturities up to one year, and nominal yields between ½ and 3½ percent. - T-bills purchased mostly by domestic banks; market may take a few years to be deep enough to cover financing needs sustainably. ### Revenue structure, challenges, and policy recommendations - Current revenue composition - Government revenue heavily tilted toward indirect taxes: more than 80 percent of receipts stemming from VAT, excises, and customs duties. - Detailed shares of tax revenue (2006-2011): Property 1.4%, VAT 45.6%, Excises 25.4%, International trade 11.5%, Personal Income Tax 7.4%, Tax on Profits 6.5%. - Challenges identified - Replace customs duties as integration with the EU advances. - Gradually shift toward direct taxation as domestic production increases. - Short-term replacement of trade tax revenue could come from VAT, given Kosovo’s VAT rate is among the lowest in the region. - Strengthening direct taxation politically and administratively difficult; options include broadening the income tax base, reviewing relatively low direct tax rates, and strengthening local governments’ use of property taxes. - Authorities’ response - Emphasized phasing in tax losses from upcoming free trade agreements (notably with Turkey and the EU). - Pointed to lowering the VAT threshold as an alternative to rate hikes, citing increased administrative capacity. - Staff revenue policy recommendations - Preserve integrity of indirect taxes while broadening the income tax base, avoiding unnecessary tax expenditures or exemptions, reviewing very low rates for corporate and personal income taxes, and adopting a modern recurrent property tax to improve revenue productivity. - IMF TA recommendations from 2011 remain topical: increase environmental taxes and tobacco excises, broaden tax base and increase progressivity, and gradually raise income and property taxes from current low levels. ### Expenditure composition and budgetary planning - Expenditure features - Government spending modest compared to peers and heavily tilted toward public investment; almost 40 percent of the government budget is spent on capital expenditures, including highway construction. - Over time, spending envelope may become more similar to neighboring countries; staff emphasized managing this adjustment in an orderly manner. - Budgetary discipline - Under the SBA, spending initiatives proceed only after thorough costing (examples: health reform and increases in the basic pension). - Staff urged continued careful budgetary planning and costing to prevent unfunded spending initiatives and avoid poorly designed benefits that create burdens exceeding sovereign capacity. ### Government bank balance and reserve adequacy - Role and yardsticks - In unilateral euroization, government bank balance (BB) is main tool to safeguard reserves and insure against liquidity shocks. - SBA yardstick recommends BB about 7 percent of GDP. - Fiscal rule inscribes minimum government bank balance of 4½ percent of GDP; authorities regard this as more politically feasible. - Alternatives and measures - Staff saw room for lowering the SBA yardstick relative to the recommended level but encouraged exploring options to fund reserves from non-government sources to depoliticize cash buffers. - 2012 FSAP proposed funding increases in the ELA facility through a bank premium; authorities started preparatory work on an ELA bank premium. ### Staff appraisal and key policy recommendations - Growth and competitiveness - Kosovo resilient with annual real GDP growth never less than two percent since 2007; average growth among highest in the Western Balkans. - Resilience depends heavily on FDI and remittances from the Diaspora; development of a robust tradable sector needed for self-sustained growth. - Recommended: strengthen investor climate, public infrastructure, cautious wage policies, SME development, rules-based minimum wage setting, and strengthen education and training. - Fiscal sustainability and risks - Sustainable budgetary stance restored; future budgets should be guided by rules-based fiscal framework complemented by sound fiscal practices. - Careful costing and planning of social spending and investment projects (notably highway construction) necessary to avoid unfunded obligations. - Bank balance and reserves - Floor of 4½ percent of GDP in the fiscal rule is at lower range of adequate levels; government should aim to exceed this floor when anticipating large payment obligations. - Continue exploring options to fund portion of reserves from non-government sources, notably a premium on banks to fund future increases of the SRF for ELA. - Financial sector reforms - Strengthen institutions to deepen financial sector and lower credit spreads by improving contract enforcement. - Implement gradual transition to risk-based supervision, develop macro-prudential tools, and establish permanent funding for the SRF. ### FSAP stress tests, scenario, and key resilience findings - Stress test scenario (severe euro area deterioration) key assumptions (as of June 2012): - GDP would decline by 2 percent. - Yields on European sovereign bonds would increase on average by 130 bps. - Average increase in default probability of European banks to which Kosovo banks are exposed of 140 percent. - Tests based on banks’ exposures as of June 2012. - Macro stress test result: banking system generally resilient though pockets of vulnerability exist. - Sensitivity test highlights (additional capital/liquidity needs expressed in percent of GDP): - Default of three largest borrowers for each bank would cause banks’ CAR to fall below 12 percent (0.2 percent of GDP additional capital needed). - Default of a parent bank on liabilities to a subsidiary: one bank’s CAR falls below 12 percent (0.1 percent of GDP additional capital needed); coupled with adverse scenario, recapitalization need 0.7 percent of GDP. - Parallel shift of 200 basis points in interest rates would bring two banks (representing >25 percent of system) below 12 percent CAR (0.1 percent of GDP additional capital needed). - Simultaneous withdrawal of the three largest private deposits would cause one small foreign bank liquidity shortfall (liquidity assistance ~0.1 percent of GDP). - Severe liquidity event (30 percent outflow, 20 percent haircut on liquid assets) would cause 4 banks to have liquidity shortfalls; total liquidity assistance needed equivalent to 2.2 percent of GDP. - Up to 1 percent of GDP could be covered by the ELA fund; amount increases to 2 percent of GDP if CBK equity and reserves are included. - FSAP conclusion: two largest banks resilient; remaining locally incorporated banks more vulnerable with some capital ratios falling below 12 percent under stress. ### Key macroeconomic and fiscal projections (selected exact figures) - Real GDP growth (percent): 2013 Est. 3.2; 2014 2.3; 2015 2.6; 2016 4.2; 2017 4.5; 2018 5.0. - GDP per capita (euros): 2013 Est. 2,761; 2014 2,852; 2015 2,988; 2016 3,139; 2017 3,312; 2018 3,480. - Consumption (real growth, percent): 2013 Est. 1.1; 2014 2.5; 2015 3.0; 2016 3.3; 2017 3.3; 2018 2.9. - Investment (real growth, percent): 2013 Est. -3.2; 2014 5.2; 2015 3.4; 2016 5.2; 2017 7.9; 2018 7.5. - Exports (real growth, percent): 2013 Est. -0.5; 2014 4.8; 2015 12.1; 2016 11.8; 2017 11.7; 2018 9.7. - CPI, period average (percent): 2013 Est. 2.5; 2014 2.1; 2015 1.8; 2016 1.5; 2017 1.5; 2018 1.5. - GDP (millions of euros): 2013 Est. 5,012; 2014 5,256; 2015 5,588; 2016 5,959; 2017 6,383; 2018 6,806. - Total primary revenue and grants (percent of GDP): 2013 26.4; 2014 26.9; 2015 25.9; 2016 26.2; 2017 26.4; 2018 26.4. - Taxes (percent of GDP): 2013 22.5; 2014 22.6; 2015 22.8; 2016 23.0; 2017 23.0; 2018 23.0. - Primary expenditure (percent of GDP): 2013 28.7; 2014 30.0; 2015 28.7; 2016 27.9; 2017 28.0; 2018 28.0. - Capital expenditure and net lending (percent of GDP): 2013 11.0; 2014 11.3; 2015 10.2; 2016 9.4; 2017 9.4; 2018 9.4. - Overall balance (percent of GDP): 2013 -3.4; 2014 -3.0; 2015 -2.0; 2016 -2.0; 2017 -2.0; 2018 -2.0. - Bank balance of the general government (percent of GDP): 2013 3.4; 2014 3.4; 2015 7.9; 2016 6.1; 2017 6.7; 2018 6.8. - ELA (percent of GDP) in bank balance: 2013 0.9; 2014 0.9; 2015 0.8; 2016 0.8; 2017 0.7; 2018 0.7. ### External sector and debt indicators (selected exact figures) - Goods and services balance (millions of euros): 2013 -1,728; 2014 -1,745; 2015 -1,709; 2016 -1,711; 2017 -1,746; 2018 -1,789. - Exports (millions of euros): 2013 287; 2014 306; 2015 360; 2016 408; 2017 460; 2018 520. - Current account (percent of GDP), incl. official transfers: 2013 -7.6; 2014 -10.5; 2015 -8.7; 2016 -8.3; 2017 -8.6; 2018 -8.4. - Net foreign direct investment (millions): 2013 213; 2014 542; 2015 366; 2016 399; 2017 447; 2018 486. - Gross international reserves of the CBK (millions): 2013 899; 2014 943; 2015 968; 2016 958; 2017 881; 2018 893. ### Financial soundness and banking metrics (selected exact figures) - Regulatory capital/risk weighted assets (percent): 2013 Apr. 14.8; 2012 14.4; 2011 17.6; 2010 18.1; 2009 16.5. - Tier 1 capital/risk weighted assets (percent): 2013 Apr. 12.2; 2012 12.8; 2011 15.3; 2010 16.2. - NPL ratio (percent): 2013 Apr. 7.6; 2012 7.5; 2011 5.7; 2010 5.2; 2009 4.1. - Large exposures to capital: 2012 80.1; 2011 77.8; 2010 72.4; 2009 64.6; 2008 56.5; 2007 38.3. - Sectoral loan shares (percent of total loans, 2013): Trade 37.8; Households 30.9; Other services 11.7; Manufacturing 9.5; Construction 7.2; Agriculture 2.6. - Liquidity ratios (percent): Liquid assets/total assets 2013 32.3; 2012 34.1; 2011 32.6. - Deposits to loans (percent): 2013 120.7; 2012 123.7; 2011 119.4. - Profitability: Return on average assets (percent): 2013 1.0; 2012 0.8; 2011 1.6. Return on average equity (percent): 2013 10.2; 2012 8.7; 2011 16.8. ### Data, TA, and Fund engagement - Kosovo joined IMF June 29, 2009; Quota 59.00 SDR Million. - Stand-By Arrangements: April 27, 2012–Dec 26, 2013 (Amount Approved 90.97 SDR Million; Amount Drawn 78.22 SDR Million). - FSAP mission conducted September 19–October 2, 2012; FSSA included ROSC for compliance with Basle Core Principles. - Planned TA and reviews (selected): TA on CBK asset management May 22-June 4 2013; Fourth Review SBA May 28-June 10 2013; TA on revenue administration up to six short-term expert visits through end-April 2014; other TA on crisis management, macro-prudential framework, stress testing, bank resolution, and risk-based supervision scheduled through 2013–March 2014. *Republic of Kosovo: IMF staff report, discussions held in Pristina, May 28–June 10, 2013; Approved by Poul M. Thomsen and Dhaneshwar Ghura; June 28, 2013.* ### 2014. Government revenue is collected mostly from VAT, excises, and trade taxes, which is ### _cr13222 - 2014. Government revenue is collected mostly from VAT, excises, and trade taxes, which is ### Background and Setting - Since the 2011 Article IV consultations, Kosovo has taken important steps toward normalizing international relations: the International Civilian Office ended operations in 2012; in December 2012, the EBRD offered membership to Kosovo; in April 2013, Kosovo and Serbia signed a normalization agreement including a mutual commitment not to block one another’s efforts to join the EU. - Around 100 states have recognized Kosovo, up from about 70 in 2011. - The domestic political environment has remained stable, albeit at times tense. - Kosovo’s median age is 26.3 years; high economic growth reflects in part population growth. ### Recent Economic and Financial Developments - Growth performance - Annual real GDP growth averaged 4½ percent between 2007 and 2012. - At around 35 percent, unemployment remains very high, although much of it reflects arguably informal employment. - Resilience and external linkages - Limited export and financial linkages to crisis countries have contained the impact of the euro area crisis. - Two-thirds of the Diaspora reside in Germany and Switzerland; remittances and FDI from the Diaspora have held up well and have continued to support domestic demand. - 2011–2013 program context - Macroeconomic policies were conducted in the context of a Staff-Monitored Program (2011) and a Stand-By Arrangement (from 2012). - Major advances: restored a sustainable fiscal stance, improved preparation and costing of spending initiatives, strengthened the financial safety net (Box 4). - The Stand-By Arrangement is treated as precautionary in 2013 and expires toward the end of the year. - 2012–early 2013 dynamics - Real growth exceeded 5 percent of GDP in 2011; slowed in 2012 with FDI and private investment contracting. - Credit growth decelerated from almost 15 percent in 2011 to 4½ percent. - Estimated real growth remained about 2½ percent in 2012, the strongest in the region. - Current account deficit (excluding official transfers) narrowed from more than 20 percent in 2011 to 15 percent in 2012. - Trade deficit remained about 35 percent of GDP in 2012. - Core inflation remained contained at around 2 percent. - Banking sector - The banking sector has remained liquid, profitable, and well capitalized, though financial strength differs across banks. - Non-performing loans increased from 5.7 percent at end-2011 to around 7½ percent in late 2012 and early 2013; the increase concentrated in the corporate sector and NPLs are almost fully provisioned. - Return on assets halved between end-2011 and early 2013 but remained solid compared to peers. - System-wide capital adequacy fluctuated around 18 percent for most of 2011 and 2012; it dropped to around 15 percent in late 2012 after tighter capital rules under the new banking law took effect. ### Outlook and Risks - Baseline outlook - Staff projects real GDP growth of about 2½ percent in 2013. - Medium-term staff projects real growth of about 4½ percent, in line with Kosovo’s recent average. - CPI inflation is projected to decline gradually to below 2 percent. - Exports expected to recover modestly due to higher global demand for metals; exports remain a small contributor to growth. - Key risks - Short-term: deterioration in economic conditions in Diaspora host countries that would curtail remittances and FDI, dampening domestic demand, reducing border tax receipts, and affecting financial stability. - Bank lending: restrictive lending policies of subsidiaries of euro area parent banks (three largest banks headquartered in the euro area) could reduce lending; Turkish and Albanian banks may compensate in part. - Political risk: policies that undermine macroeconomic stability and competitiveness (example: public sector wage increases of 30-50 percent after the 2010 campaign that forced Kosovo’s previous SBA irrecoverably off-track). ### Financial Sector Development - Banking sector trajectory - The banking sector has grown rapidly over the last decade from a low base; a saturation point appears to have been reached. - Further progress will require strengthening the legal and institutional environment. - Despite fast growth, banks have avoided funding imbalances typical for many banking sectors in Central and Eastern Europe. - FSAP and resilience - The 2012 Financial Sector Assessment Program (FSAP) found the banking sector resilient to a wide range of shocks, including turbulence in the euro area. - Commendable steps have been taken to strengthen the financial safety net. - Structural features and risks - Kosovar banking subsidiaries are largely deposit-funded, limiting risk of parental funding withdrawal. - The new banking law prescribes that related party exposures—including placements with the group—be deducted in full from capital. - Euro area–based banks account for 71 percent of loans; other foreign banks 17 percent; domestic banks 12 percent (Share of Loans to Industry, 2012). ### Previous Staff Advice and Policy Implementation - In the past two years, recommendations from the 2011 Article IV consultation were incorporated into program design. - Achievements - Restored a sustainable fiscal stance. - Progress in preparation and costing of spending initiatives. - Strengthened the financial safety net. - Government on-track to restore cash buffers, provided the sale of PTK proceeds as planned. - Authorities initiated measures to strengthen competitiveness and enhance public infrastructure. - Fragility - Progress is fragile and could be undone by adverse political developments. - The discussions on the 4th review under Kosovo’s Stand-By Arrangement are documented in a separate report. ### Policy Discussions — Kosovo’s Growth Model and Competitiveness - Diagnosis - Kosovo is excessively dependent on Diaspora inflows that finance mostly consumption and investments in non-tradables; goods exports are less than 10 percent of GDP and concentrated in low-value added sectors, notably metals. - Data limitations complicate assessment, but available indicators paint an unfavorable picture for external competitiveness. - CPI-based REER has changed little since the 2011 Article IV consultation; its evolution reflects mostly import prices and is of limited relevance for competitiveness. - Wages are modest in nominal terms but elevated when scaled by productivity, suggesting REER overvaluation. - Structural impediments: deficient public infrastructure, weak governance, difficult business environment, unsettled relations with Serbia, and incomplete international recognition. - Strategy pillars - Investments in infrastructure and education. - Reforms to strengthen the business climate. - Initiatives to support the development of small- and medium-sized enterprises (SMEs). - Wage restraint and maintenance of flexible labor markets, given unilateral euroization. - Existing initiatives that can be built upon - Almost 40 percent of the government budget is spent on capital expenditures, including highway construction. - Government working with the World Bank on upgrading energy supply. - Initiatives to streamline business registration and protect investors helped Kosovo gain about 30 ranks in the World Bank’s 2013 ‘Doing Business’ survey. - A development strategy for SMEs aimed at improving access to finance and competitiveness has been initiated in cooperation with donors. - Improvements in the regional political climate and closer integration with the EU; authorities expect to enter negotiations for an association and stability agreement with the EU in the second half of 2013 or early 2014. - Caution - Staff noted that success of these initiatives could be undermined by inconsistent, countervailing measures, such as outsized public sector wage increases. *Republic of Kosovo: IMF staff report, discussions held in Pristina, May 28–June 10, 2013; Approved by Poul M. Thomsen and Dhaneshwar Ghura; June 28, 2013.* ### 12. In the past two years, Kosovo has restored a sustainable fiscal stance (Table 6). ### _cr13222 - 12. In the past two years, Kosovo has restored a sustainable fiscal stance (Table 6). ### Fiscal stance, fiscal rule, and financing - Structural adjustment - The government implemented adjustment of about 2½ percent of GDP in 2011-13 through a mix of revenue measures and expenditure-saving structural reforms, notably in the energy sector. - The resulting fiscal stance is sustainable, provided capital spending converges to around 10 percent of GDP. - Fiscal rule (from 2014) - A fiscal rule expected to be enacted in early July sets a ceiling for the general government deficit of 2 percent of GDP. - The ceiling is consistent with keeping gross public debt at or below 30 percent of GDP. - Capital projects are exempt from the ceiling provided (i) they are financed from privatization receipts and (ii) the government bank balance exceeds a minimum threshold of 4½ percent of GDP. - Financing - In the medium-term, the fiscal deficit is expected to be financed primarily through the issuance of securities. - The government T-bill market (set up in 2012) had net issuance of 1½ percent of GDP in 2012, maturities of up to one year, and nominal yields between ½ and 3½ percent. - T-bills have been purchased mostly by domestic banks; it may take a few years for the market to be sufficiently deep to cover financing needs sustainably. ### Revenue structure and reform challenges - Current structure - Government revenue is heavily tilted toward indirect taxes, with more than 80 percent of receipts stemming from VAT, excises, and customs duties. - Detailed shares of tax revenue (2006-2011): Property (1.4%), VAT (45.6%), Excises (25.4%), International trade (11.5%), Personal Income Tax (7.4%), Tax on Profits (6.5%). - Challenges identified by staff - Replace customs duties as integration with the EU advances. - Gradually shift toward direct taxation as domestic production increases. - Short-term replacement of trade tax revenue could come from VAT, given Kosovo’s VAT rate is among the lowest in the region. - Strengthening direct taxation is politically and administratively more difficult; options include broadening the income tax base, reviewing relatively low direct tax rates, and strengthening local governments’ use of property taxes. - Authorities’ response - Emphasized the importance of phasing in tax losses from upcoming free trade agreements (notably with Turkey and the EU). - Pointed to lowering the VAT threshold as an alternative to rate hikes, arguing administrative capacity has increased to make this feasible. ### Expenditure composition and budgetary planning - Expenditure structure and implications - Government spending is modest compared to peers and heavily tilted toward public investment, supportive of economic development. - Over time, the spending envelope may become more similar to neighboring countries; staff emphasized managing this adjustment in an orderly manner. - Budgetary discipline - Staff urged continued careful budgetary planning and costing to prevent unfunded spending initiatives. - Under the SBA, spending initiatives proceed only after thorough costing—examples include health reform and increases in the basic pension—but proposals with unknown budgetary impacts have recurred. - Poorly designed benefits in other countries have created budgetary burdens exceeding sovereign capacity; Kosovo should avoid similar outcomes. ### Government bank balance and reserve adequacy - Role and yardsticks - In Kosovo’s unilaterally euroized economy, the government bank balance is the main tool to safeguard reserves and insure against liquidity shocks. - The SBA yardstick recommends a balance of about 7 percent of GDP (derived from a rule-of-thumb for reserves in fixed exchange rate countries). - The fiscal rule inscribes a minimum government bank balance of 4½ percent of GDP; authorities regard this minimum as more politically feasible. - Alternatives and measures - Staff saw room for lowering the SBA yardstick relative to the recommended level but encouraged exploring options to fund a higher portion of reserves from non-government sources to “depoliticize” cash buffers. - The 2012 FSAP proposed funding increases in the emergency liquidity assistance (ELA) facility through a bank premium; the authorities have started preparatory work on an ELA bank premium. ### Financial sector development and supervision - Banking sector evolution and challenges - Kosovo’s banking sector grew rapidly in the 2000s but growth has slowed, suggesting a saturation point. - Other financial segments (insurance and securities markets) remain underdeveloped. - Progress on efficiency—as measured by the loan-deposit interest rate spread—has been slow. - Weak contract enforcement contributes to intermediation spreads and inhibits longer-term mortgage lending and product development. - FSAP follow-up (2012) - FSAP results suggest resilience of the banking system to a wide range of shocks; pockets of vulnerability remain from loan and deposit concentrations, maturity-mismatches, and external asset exposures. - Commended central bank supervision professionalism but noted a relatively narrow focus on credit risk; staff and authorities agreed a gradual move to comprehensive risk-based supervision is desirable. - FSAP recommended strengthening the crisis management framework, including funding future increases of the ELA facility through a bank premium; most recommendations have been taken up under the SBA. - Technical assistance is required for risk-based supervision, a macro-prudential policy framework, and the ELA bank premium; TA is expected to be delivered in the next 12 months. - Supervisory priorities - Persistent supervisory vigilance by a strong and independent central bank is critical. - Banks display generally adequate capital buffers and profitability, a modest level of non-performing loans, and high liquid reserves. - Priorities include a gradual move to comprehensive risk-based supervision, development of a macro-prudential policy framework, and establishing a permanent funding mechanism for the SRF. ### Staff appraisal and policy recommendations - Growth and competitiveness - Kosovo’s economy has been resilient, with annual real GDP growth never less than two percent since 2007; average growth has been among the highest in the Western Balkans. - Resilience depends heavily on FDI and remittances from the Diaspora; development of a robust tradable sector is needed to support self-sustained growth. - Continued efforts to strengthen the investor climate, public infrastructure, cautious wage policies, SME development, and rules-based minimum wage setting are positive; competitiveness strategy should be reinforced by strengthening education and training. - Fiscal sustainability and risks - A sustainable budgetary stance has been restored through revenue measures and expenditure-saving reforms; future budgets should be guided by the rules-based fiscal framework complemented by sound fiscal practices. - Careful costing and planning of social spending and investment projects (notably the government’s highway construction program) are necessary to avoid unfunded obligations. - Revenue policy - Upcoming challenges require careful preparation: reliance on indirect taxation is appropriate now but customs duties will need replacement as integration proceeds; IMF TA recommendations from 2011 remain topical (increase environmental taxes and tobacco excises, broaden the tax base and increase progressivity, and gradually raise income and property taxes from current low levels). - Bank balance and reserves - The floor of 4½ percent of GDP in the fiscal rule is at the lower range of adequate levels; the government should aim to exceed this floor when anticipating large payment obligations. - Continue exploring options to fund a portion of reserves from non-government sources, notably a premium on banks to fund future increases of the SRF for ELA. - Financial sector - Strengthen institutions to deepen the financial sector and lower credit spreads by improving contract enforcement. - Implement gradual transition to risk-based supervision, develop macro-prudential tools, and establish permanent funding for the SRF. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 2012. These flows have remained fairly resilient both in ### _cr13222 - 2012. These flows have remained fairly resilient both in ### Spillovers from host-country activity (Germany and euro area) - Vector-autoregressions confirm Kosovo’s dependence on—and vulnerability to—developments in host countries. - A shock to quarterly growth in Germany affects Kosovo’s imports by a factor or about three (imports used as proxy for domestic demand). - The VAR model shows significant impacts on credit and deposit growth. - VAR estimation details: - Quarterly nominal growth indicators: imports (log), bank credit to private sector, deposits in the banking system. - Host-country proxy: Germany’s GDP. - Sample period: 2002Q4–2012Q4. - Illustration: Impulse-response function traces the accumulated impact (in percent) of a one percent shock to the GDP growth rate of Germany on Kosovo’s imports (in logs); responses shown over Q1–Q10 with +/- 2 standard errors. ### Determinants of remittances (Box 3) - Remittances play a key role supporting economic activity in Kosovo. - Estimation approach: - Panel data for 6 Balkan countries for 1999-2011. - Dependent variable: Remittances per Capita (log). - Regressors include home and host country GDP per capita (logs); host-country GDP proxied with euro area (EA) GDP per capita, alternative proxy: Germany’s GDP per capita. - Regressions include constants, robust standard errors, and country fixed effects; in equations with home GDP on RHS, lagged values used. - Key estimated elasticities and results (Determinants of Migrants' Remittance Transfers in the Balkans, 1999-2011): - Home Country GDP per capita (t-1): -0.49* (in column (1)) - Host Country GDP per capita: 2.67** (in column (2)) - Host-Home GDP per Capita diff (t-1): 1.75** - Observations: 6868 - R-squared: 0.22 (column (1)), 0.29 (column (2)) - Country FE: YES - Significance notation: * significant at 10 percent level; ** significant at 5 percent level; *** significant at 1 percent level. - Interpretation: - Host country per capita income is the main driver of remittances. - Evidence for altruistic motive: positive coefficient on income gap variable and negative coefficient on home country GDP per capita—emigrants’ remittances stronger when home incomes are lower. - Results preserved when using Germany’s GDP per capita as host proxy. - Decomposition (2011) by source country (percent): remittances to Albania, BiH, Croatia, Kosovo, Macedonia, Serbia broken down by source countries including Germany, Switzerland, Italy, Greece, France, Austria, Slovenia, Croatia, Other, etc. (chart present in source). ### Status of 2011 Article IV recommendations (Box 4) - Most recommendations incorporated into Kosovo’s SMP (2011) and SBA (2012/13). Actions taken include: - Fiscal Policy: - Sustainable fiscal stance restored to stabilize public debt at about 30 percent of GDP under a 3-year consolidation program. - Structural reforms to reduce current spending (notably subsidies to the energy sector) and revenue measures based on recommendations of a 2011 FAD TA mission. - Rules-based fiscal framework submitted to the assembly in March 2013 and expected to be enacted in early July. - New spending initiatives preceded by fiscal impact assessments covering at least 5 years (examples: possible war veteran benefits and highway R6 to Macedonia). - Government on-track to restore cash buffers, conditional on sale of PTK to a German-American conglomerate advancing as planned. - Government debt market established in 2012; Pension Fund Law amended in April 2012 to limit exposure of pillar II pension fund to public debt. - Financial Sector Policies: - New banking law passed in April 2012 strengthening prudential rules and central bank resolution powers. - Emergency liquidity assistance (ELA) facility for banks set up and funded; Law on Public Financial Management and Accountability amended in June 2012 to grant CBK exclusive control over ELA. - Amendments to deposit insurance law passed in December 2012 enhancing target size of deposit insurance fund (DIF) and allowing use of DIF-resources for P&A transactions. - Competitiveness and Private Sector Developments: - Assembly passed package of twelve laws to streamline business registration and protect investors. - Kosovo’s Doing Business rank improved from #126 in 2012 to #98 in 2013. - Privatizations of PTK (telecommunications) and KEDS (energy distribution) aimed at enhancing infrastructure; construction of highway R7 to Albania scheduled to be completed in 2013 and R6 to Macedonia scheduled to start in late 2013. - Secondary legislation in preparation to introduce rules-based setting of minimum wage levels. - Items marked (*) are covered by conditionality under the SMP or SBA, respectively. ### Risk Assessment Matrix (Box 5) - The RAM lists events that could materially alter the baseline path and staff views on source of risks and level of concern. - Principal risks and staff-assessed impact if realized: 1. Domestic policies that would undermine macroeconomic stability and/or external competitiveness — Medium-High. - Risk of policies reacting to short-term political pressures, especially during electoral campaigns; impact more on medium-term growth than short-term outlook. 2. Protracted period of slower European growth — Medium. - Slower growth in host countries of Kosovo’s Diaspora—including Germany—would depress remittances and other inflows, dampening domestic demand. 3. Restrictive lending policies by banking subsidiaries with parents located in the euro area — Medium-Low. - Impact may be mitigated by Turkish and Albanian banks seeking to gain market share. 4. Financial stress in the euro area re-emerges due to stalled or incomplete delivery of policy commitments — Low. - Kosovo has almost no financial or export links to crisis countries. ### External competitiveness (Box 6) - Standard indicators limited for assessing external competitiveness: - CPI-based REER depreciated by some 4.5 percent in 2004-2012 but influenced heavily by import prices (notably food). - Exports of goods increased on average by 25 percent per year in 2004-2012; export share increases reflect mostly price increases for metals, Kosovo’s main export commodity. - Unit labor cost REER measure does not exist. - Wages and productivity: - Nominal wages remain relatively low, but labor costs (average wages relative to GDP per capita) appear elevated relative to peers. - Kosovo’s GDP per capita is the lowest in the Balkans. - Educational attainment (2009): less than 10 percent of working age population had tertiary education and less than 40 had secondary education (percent sign omitted in source). - Business environment and infrastructure: - World Bank Doing Business rank: #98 out of 185 in 2013, improved by some 30 spots compared to 2012. - Improvements largest in investor protection, construction permits, and starting a business. - Challenges remain with contract enforcement and electricity shortages; public infrastructure still lacking, notably in energy and transport. - Data visuals in source: metal exports share and metals price index; REER (2005=100) and exports of goods (Mil. Euros). ### Tax structure and trade liberalization (Box 7 and Table 1) - Tax-to-GDP and composition (2006-2011 averages): - Kosovo: Tax Revenue 21.7; Direct Taxes 3.8; Indirect Tax 15.4; Trade Taxes 2.5; VAT c-efficiency 0.56 (all figures in percent of GDP or as specified in table). - Regional unweighted average (excluding Kosovo): 21.3; Direct Taxes 6.8; Indirect Tax 12.8; Trade Taxes 0.6; VAT c-efficiency 0.52. - Key points: - Kosovo’s average tax revenue for 2006–2011 was about 22 percent of GDP. - More than 80 percent of tax revenue came from indirect taxes—share only exceeded by Bosnia and Herzegovina. - Contribution of direct taxes was about half the regional average. - Large portion of indirect taxes collected at the border: all excises and three-quarters of VAT; VAT productivity above average for region and sample of small open economies. - Kosovo’s share of trade taxes is the largest in the region: import duties account for about 2.5 percent of GDP and 11.5 percent of tax revenue—these revenues would be at risk from trade liberalization. - Econometric evidence suggests countries have struggled to make up for revenue losses from trade taxes. - Policy recommendation: - Gradual reform of Kosovo’s taxation system: preserve integrity of indirect taxes while broadening the income tax base, avoiding unnecessary tax expenditures or exemptions, reviewing very low rates for corporate and personal income taxes, and adopting a modern recurrent property tax to improve revenue productivity. ### Euroization, FX liquidity needs, and precautionary cash buffers (Box 8) - Kosovo has unilaterally adopted the euro; one of three IMF members to do so. - Implications: - Every liquidity need is in foreign exchange (FX); no domestic liquidity generation or access to ECB facilities. - Self-insurance against liquidity shocks requires holding FX reserves. - Central bank reserves identification: - FX reserves defined as central bank assets denominated in FX that are freely available. - In Kosovo, reserves limited to: (i) central bank’s capital, (ii) Kosovo’s SDR allocation from 2009 quota increase, and (iii) government’s deposits with the central bank (BB). - As (i) and (ii) are fixed short-term, government’s BB is main instrument to ensure reserves adequacy. - Under the SBA, BB adequacy is computed by a formula (presented in source); the formula yields a recommended BB of about 7 percent of GDP—a purposely ambitious threshold. - Options and considerations: - A lower BB requirement could be defended: more than two-thirds of bank deposits are held with subsidiaries of euro area based banks; in liquidity strains, subsidiaries would likely turn to parents with ECB access. Reducing liquidity buffer for non-euro-area based banks would reduce minimum BB to 4½-5 percent of GDP. - Depoliticize reserves by financing larger portion from other depositors than the government—banks could pay a commitment fee for ELA access, as recommended by the FSAP. - Footnotes and comparisons: - The other two unilateral euro adopters are Montenegro and San Marino. - Eight IMF members unilaterally adopted the U.S. dollar; two adopted the Australian Dollar. - 4½ percent of GDP is also the minimum BB requirement inscribed into the rules-based fiscal framework. ### Financial sector development (Box 9) - Banking sector growth and structure: - From six banks to nine (mostly foreign) banks over the last decade. - Private credit as a share of GDP increased more than six fold. - Non-bank financial institutions and securities markets remain small. - Public securities market established in 2012 is nascent. - Benchmarks and depth: - Kosovo’s banking depth now appears to be above its structural fundamentals compared to benchmark proxies. - In 2003 Kosovo was below proxy benchmark for private sector credit and deposit depth; by 2011 banking depth was higher than income per capita and population characteristics would indicate. - Reach and efficiency: - Reach (number of bank accounts) roughly in line with benchmark; number of bank borrowers seems low (reflected in large exposures). - Banking efficiency (interest rate spread) is below benchmark (spread higher than expected), reflecting weak contract enforcement and structural characteristics such as bank concentration. - Comparative data (selected indicators, 2003 and 2010 or latest available): - Deposit money bank assets to GDP (%): Kosovo 2003 = 5.3; 2010 = 32.3. - Non-bank financial institutions’ assets to GDP (%): Kosovo 2003 = 1.5; 2010 = 1.2. - Mutual fund assets to GDP (%): Kosovo 2003 = 0.0; 2010 = 0.0. - Insurance company assets to GDP (%): Kosovo 2003 = 1.4; 2010 = 0.1. - Stock market capitalization to GDP (%): Kosovo 2003 = 0.0; 2010 = 0.0. - Outstanding domestic private debt securities to GDP (%): Kosovo 2003 = 0.0; 2010 = 0.0. - Outstanding domestic public debt securities to GDP (%): Kosovo 2003 = 0.0; 2010 = 0.0. - Comparative groups: - SEE5 comprise Albania, Bosnia and Herzegovina, Macedonia, Montenegro, and Serbia. - ECA comprise middle-income countries in Europe and Central Asia. - Notes: - Kosovo not benchmarked in FinStats; Albania used as proxy for benchmarking given similar GDP per capita and population size/structure, with adjustments for Kosovo’s denser and younger population potentially indicating lower benchmarks. *International Monetary Fund — Republic of Kosovo mission documents excerpt (pages and boxes as provided in source content).* ### Box 10. Financial Sector Assessment Program (FSAP) Stress Tests ### Box 10. Financial Sector Assessment Program (FSAP) Stress Tests ### Stress test scenario - Scenario: severe euro area deterioration impacting Kosovo’s banks through: - decline in remittances and FDI, - lower values of banks’ holdings of European sovereign debt, - higher counterparty risk from exposures to euro area banks, - reduction in credit due to deleveraging by foreign-owned banks. ### Key assumptions (as of June 2012) - GDP would decline by 2 percent. - Yields on European sovereign bonds would increase on average by 130 bps. - There would be an average increase in the default probability of European banks to which Kosovo banks are exposed of 140 percent. - All stress tests were based on banks’ risk exposures as of June 2012. ### Results — macro stress tests - The macro stress tests found the banking system to be generally resilient, although there are pockets of vulnerability. ### Findings on bank resilience - The two largest banks are resilient. - The impact of higher losses on capital adequacy was partially mitigated by a projected reduction in risk-weighted assets. - The remaining four locally incorporated banks are more vulnerable. - Some banks’ capital ratios would fall below the 12 percent minimum, although the additional capital need would be only *Box 10. Financial Sector Assessment Program (FSAP) Stress Tests* ### 0.2 of GDP. ### _cr13222 - 0.2 of GDP. ### Banking sector stress tests and resilience - Sensitivity tests covered credit concentration, interest rate, foreign exchange, and liquidity risks and showed a high degree of resilience. - Credit concentration: - A default of the three largest borrowers for each bank would cause the banks’ CAR to fall below 12 percent (0.2 percent of GDP additional capital needed). - Related-party/default risk: - The default of a parent bank on its liabilities to the subsidiary has one bank’s CAR fall below 12 percent (0.1 percent of GDP in additional capital needed). Coupled with the adverse scenario, the recapitalization need is 0.7 percent of GDP. - Interest rate risk: - A parallel shift of 200 basis points in interest rates would bring two banks—representing more than 25 percent of the system—below the 12 percent CAR minimum (0.1 percent of GDP additional capital needed). - Foreign exchange risk: - Exchange rate risk is negligible. - Liquidity risk: - The simultaneous withdrawal of the three largest private deposits would cause one small foreign bank to have a liquidity shortfall (requiring liquidity assistance of around 0.1 percent of GDP). - A severe liquidity event (30 percent outflow, combined with a 20 percent haircut on liquid assets) would cause 4 banks—3 of which are foreign—to have liquidity shortfalls. Total liquidity assistance needed would be equivalent to 2.2 percent of GDP. - Up to 1 percent of GDP could be covered by the ELA fund; the amount would increase to 2 percent of GDP if CBK equity and reserves are included. - This result does not account for the possibility that some foreign-owned banks may be able to borrow from their parents. ### Key macroeconomic projections and real sector indicators (selected figures) - Real GDP growth (percent): 2013 Est. 3.2; 2014 2.3; 2015 2.6; 2016 4.2; 2017 4.5; 2018 5.0. - GDP per capita (euros): 2013 Est. 2,761; 2014 2,852; 2015 2,988; 2016 3,139; 2017 3,312; 2018 3,480. - Consumption (real growth, percent): 2013 Est. 1.1; 2014 2.5; 2015 3.0; 2016 3.3; 2017 3.3; 2018 2.9. - Investment (real growth, percent): 2013 Est. -3.2; 2014 5.2; 2015 3.4; 2016 5.2; 2017 7.9; 2018 7.5. - Exports (real growth, percent): 2013 Est. -0.5; 2014 4.8; 2015 12.1; 2016 11.8; 2017 11.7; 2018 9.7. - Imports (real growth, percent): 2013 Est. -4.1; 2014 4.6; 2015 4.4; 2016 5.5; 2017 6.3; 2018 5.7. - CPI, period average (percent): 2013 Est. 2.5; 2014 2.1; 2015 1.8; 2016 1.5; 2017 1.5; 2018 1.5. - GDP (millions of euros): 2013 Est. 5,012; 2014 5,256; 2015 5,588; 2016 5,959; 2017 6,383; 2018 6,806. ### Fiscal position (selected consolidated government budget indicators, percent of GDP) - Total primary revenue and grants: 2013 26.4; 2014 26.9; 2015 25.9; 2016 26.2; 2017 26.4; 2018 26.4. - Taxes (percent of GDP): 2013 22.5; 2014 22.6; 2015 22.8; 2016 23.0; 2017 23.0; 2018 23.0. - Primary expenditure (percent of GDP): 2013 28.7; 2014 30.0; 2015 28.7; 2016 27.9; 2017 28.0; 2018 28.0. - Capital expenditure and net lending (percent of GDP): 2013 11.0; 2014 11.3; 2015 10.2; 2016 9.4; 2017 9.4; 2018 9.4. - Overall balance (percent of GDP): 2013 -3.4; 2014 -3.0; 2015 -2.0; 2016 -2.0; 2017 -2.0; 2018 -2.0. - Bank balance of the general government (percent of GDP): 2013 3.4; 2014 3.4; 2015 7.9; 2016 6.1; 2017 6.7; 2018 6.8. - ELA (percent of GDP) in bank balance: 2013 0.9; 2014 0.9; 2015 0.8; 2016 0.8; 2017 0.7; 2018 0.7. - Nominal GDP (millions of euros): 2013 5,012; 2014 5,256; 2015 5,588; 2016 5,959; 2017 6,383; 2018 6,806. ### External sector and balance of payments (selected figures, millions of euros) - Goods and services balance: 2013 -1,728; 2014 -1,745; 2015 -1,709; 2016 -1,711; 2017 -1,746; 2018 -1,789. - Exports: 2013 287; 2014 306; 2015 360; 2016 408; 2017 460; 2018 520. - Imports: 2013 -2,360; 2014 -2,431; 2015 -2,518; 2016 -2,658; 2017 -2,847; 2018 -3,036. - Services receipts: 2013 637; 2014 672; 2015 746; 2016 844; 2017 957; 2018 1,053. - Current account balance (millions): 2013 -380; 2014 -553; 2015 -487; 2016 -494; 2017 -549; 2018 -574. - Current account (percent of GDP), incl. official transfers: 2013 -7.6; 2014 -10.5; 2015 -8.7; 2016 -8.3; 2017 -8.6; 2018 -8.4. - Net foreign direct investment (millions): 2013 213; 2014 542; 2015 366; 2016 399; 2017 447; 2018 486. - Gross international reserves of the CBK (millions): 2013 899; 2014 943; 2015 968; 2016 958; 2017 881; 2018 893. ### Financial soundness indicators and banking sector metrics (selected) - Regulatory capital/risk weighted assets (percent): 2013 Apr. 14.8; 2012 14.4; 2011 17.6; 2010 18.1; 2009 16.5. - Tier 1 capital/risk weighted assets (percent): 2013 Apr. 12.2; 2012 12.8; 2011 15.3; 2010 16.2. - NPL ratio (loans classified as doubtful or loss, percent): 2013 Apr. 7.6; 2012 7.5; 2011 5.7; 2010 5.2; 2009 4.1. - Large exposures to capital: 2013 Apr. N.A.; 2012 80.1; 2011 77.8; 2010 72.4; 2009 64.6; 2008 56.5; 2007 38.3. - Sectoral loan shares (percent of total loans): Trade 2013 37.8; Households 2013 30.9; Other services 2013 11.7; Manufacturing 2013 9.5; Construction 2013 7.2; Agriculture 2013 2.6. - Liquidity ratios (percent): Liquid assets/total assets 2013 32.3; 2012 34.1; 2011 32.6; 2010 37.5; 2009 37.0. - Deposits to loans (percent): 2013 120.7; 2012 123.7; 2011 119.4; 2010 126.1; 2009 129.7. - Liquid assets to short-term liabilities (percent): 2013 38.8; 2012 40.8; 2011 39.6; 2010 46.2; 2009 47.0. - Profitability measures (profits before taxes and extraordinary items): - Return on average assets (percent): 2013 1.0; 2012 0.8; 2011 1.6; 2010 1.6; 2009 3.2. - Return on average equity (percent): 2013 10.2; 2012 8.7; 2011 16.8; 2010 15.5; 2009 32.3. ### Debt sustainability and external debt framework (baseline projections and indicators) - External debt (nominal, percent of GDP): 2009 17.2; 2010 16.3; 2011 14.6; 2012 15.6; 2013 14.7; 2014 13.4; 2015 12.2; 2016 10.4; 2017 8.9; 2018 average 12.5; 2022 9.7; 2032 13.0. - PV of external debt (percent of GDP): 2013 14.8; 2014 14.2; 2015 13.7; 2016 12.8; 2017 11.8; 2018 10.4; 2022 9.1; 2032 8.7; 2018-32 Average 10.8. - Current account, non-interest deficit (percent of GDP): 2009 9.2; 2010 11.8; 2011 13.6; 2012 9.8; 2013 3.1; 2014 7.4; 2015 10.3; 2016 8.5; 2017 8.1; 2018 8.4; 2022 8.3; 2032 8.5. - Net FDI (negative = inflow, percent of GDP): 2009 -6.4; 2010 -6.9; 2011 -6.9; 2012 -4.8; 2013 3.2; 2014 -3.7; 2015 -9.8; 2016 -6.1; 2017 -6.3; 2018 -6.6; 2022 -6.8; 2032 -6.8. - PV of PPG external debt (percent of GDP): 2013 14.8; 2014 14.2; 2015 13.7; 2016 12.8; 2017 11.8; 2018 10.4; 2022 9.1; 2032 8.7. - Debt service-to-exports ratio (percent): 2009 2.2; 2010 2.3; 2011 2.2; 2012 9.6; 2013 17.8; 2014 15.6; 2015 12.0; 2016 13.0; 2017 11.8; 2018 13.0; 2022 109.7 (memorandum/highlighted in table). - Total gross financing need (billions of euros): 2009 0.1; 2010 0.2; 2011 0.3; 2012 0.3; 2013 0.2; 2014 0.3; 2015 0.3; 2016 0.3; 2017 0.3; 2018 0.7; 2022 5.6. - Key macro assumptions used in DSA: - Real GDP growth (percent): historical and projected values including 2013 4.7 (listed among various cells) and long-run averages (2018-32) 4.6. - GDP deflator in euro terms (change, percent): values including 2013 3.6; projections commonly 2.0. - Effective interest rate (percent): historical and projected values e.g., 2013 0.6; projection ranges include 1.4 to 4.7 in various years. ### IMF engagement, technical assistance, and safeguards - Membership: Joined June 29, 2009. - Quota: 59.00 SDR Million, 100.00 percent quota. - Fund holdings of currency: 141.82 (240.37 percent quota). - Stand-By Arrangements (outstanding purchases and loans): 96.98 SDR Million (164.37 percent quota). - Stand-By April 27, 2012–Dec 26, 2013: Amount Approved 90.97 SDR Million; Amount Drawn 78.22 SDR Million. - Stand-By July 21, 2010–Jan 20, 2012: Amount Approved 92.66 SDR Million; Amount Drawn 18.76 SDR Million. - Projected payments to Fund (SDR Million, forthcoming totals by year): 2013 Principal 2.35; Charges/Interest 0.52; Total 2.86. 2014 Principal 2.38; Charges/Interest 0.97; Total 10.35 (table shows multi-year totals). - Safeguards assessment of the Central Bank of the Republic of Kosovo (CBK) completed June 25, 2012: noted majority of recommendations implemented; internal audit department progress and recommendation for external quality review. - Exchange arrangements: Kosovo uses the euro as legal means of payment; is not part of the euro area; CBK is not part of the European System of Central Banks; Kosovo is an Article XIV member and has not accepted Article VIII obligations. - FSAP mission conducted September 19–October 2, 2012; FSSA included ROSC for compliance with Basle Core Principles. - Technical assistance provided since 1999 and through EBD/08/95 areas include: - Real sector: National Accounts Statistics (August 2011, September 2012, Feb-March 2013); CPI Statistics (Feb-March 2013). - Fiscal sector: IT systems and Taxpayer Compliance; Tax Policy and Administration; Fiscal Federalism; Public Financial Management; Fiscal rule and monitoring; Resource regime for mining; Rules-based fiscal framework (various dates listed). - Monetary and financial sectors: FSAP (Sep.-Oct. 2012); Central Bank asset management; Central Bank Law; Bank supervision and regulations; Financial stability analysis, including stress testing; Monetary and forex operations; Payments and settlements (dates listed). - External sector: Balance of Payments Statistics (Mar. 2012). - Resident Representative: Mr. Sulemane (post taken October 2010). *Source: IMF staff report and informational annex for the Republic of Kosovo (June 28, 2013).* ### 1. Fund work program ### 1. Fund work program ### Planned technical assistance and reviews - TA on CBK asset management — May 22-June 4 2013 - Fourth Review SBA — May 28-June 10 2013 - Staff visit on the 2014 Budget — September 2013 - Fifth review SBA — November 2013 - TA on Revenue administration — Up to six short-term expert visits through end-April 2014 - TA on crisis management — July 2013 - TA on macro prudential framework (macro modeling) — August 2013 - TA on stress testing — August 2013 - TA on Bank Resolution — October 2013 - TA on risk-based banking supervision — November 2013 - TA to the CBK on External sector — Planned for March 2014 - TA on national accounts — Four missions by the regional national accounts advisor planned for June, September, 2013 and January and April 2014 ### Scheduling highlights - May 22-June 4 2013: TA on CBK asset management - May 28-June 10 2013: Fourth Review SBA - September 2013: Staff visit on the 2014 Budget - November 2013: Fifth review SBA - Up to six short-term expert visits through end-April 2014: TA on Revenue administration - July 2013: TA on crisis management - August 2013: TA on macro prudential framework (macro modeling); TA on stress testing - October 2013: TA on Bank Resolution - November 2013: TA on risk-based banking supervision - Planned for March 2014: TA to the CBK on External sector - Four missions by the regional national accounts advisor planned for June, September, 2013 and January and April 2014: TA on national accounts *Source: _cr13222 - 1. Fund work program* ### 2. Bank work program Public Sector ### 2. Bank work program Public Sector ### Macroeconomic performance and outlook - Kosovo’s annual real GDP growth has never been less than two percent since 2007 and averaged 4½ percent between 2007 and 2012. - Growth projections: - GDP real growth: 3.2 (2010), 5.2 (2011), 2.3 (2012), 2.6 (2013), 4.2 (2014) - GDP per capita real growth: 1.7 (2010), 3.8 (2011), 1.4 (2012), 1.1 (2013), 2.7 (2014) - Consumption: 1.9 (2010), 2.6 (2011), 1.1 (2012), 2.5 (2013), 3.0 (2014) - Investment: 12.3 (2010), 11.3 (2011), -3.2 (2012), 5.2 (2013), 3.4 (2014) - Exports: 13.0 (2010), 10.1 (2011), -0.5 (2012), 4.8 (2013), 12.1 (2014) - Imports: 8.5 (2010), 5.3 (2011), -4.1 (2012), 4.6 (2013), 4.4 (2014) - Price developments: - CPI, period average: 3.5 (2010), 7.3 (2011), 2.5 (2012), 2.1 (2013), 1.8 (2014) - CPI, end of period: 6.6 (2010), 3.6 (2011), 3.7 (2012), 1.5 (2013), 1.7 (2014) - GDP deflator: 3.7 (2010), 5.8 (2011), 2.5 (2012), 2.2 (2013), 2.0 (2014) - External and savings balances: - Domestic savings: -3.8 (2010), -4.9 (2011), -3.6 (2012), -3.7 (2013), -2.4 (2014) - Transfers excluding general government (net): 15.4 (2010), 14.6 (2011), 15.8 (2012), 15.7 (2013), 13.2 (2014) - Net factor income: 1.6 (2010), 2.4 (2011), 3.1 (2012), 3.1 (2013), 3.1 (2014) - National savings: 13.2 (2010), 12.1 (2011), 15.3 (2012), 15.1 (2013), 16.0 (2014) - Investment: 32.7 (2010), 32.7 (2011), 30.9 (2012), 29.5 (2013), 28.2 (2014) - Current account, excl. official transfers: -19.5 (2010), -20.6 (2011), -15.6 (2012), -14.4 (2013), -12.2 (2014) - Current account balance, incl. official transfers: -12.0 (2010), -13.8 (2011), -7.6 (2012), -10.5 (2013), -8.7 (2014) - Official transfers: 7.4 (2010), 6.7 (2011), 8.0 (2012), 3.9 (2013), 3.5 (2014) - Net foreign direct investment: 7.7 (2010), 7.9 (2011), 4.3 (2012), 10.3 (2013), 6.5 (2014) - Portfolio investment, net: -1.1 (2010), -1.2 (2011), -3.7 (2012), -3.4 (2013), -1.7 (2014) - Macroeconomic outlook summary: - Economy expected to gradually accelerate throughout 2013 and continue along the path to 4.5 percent growth over the next few years. - Drivers include favorable demographics, a strong banking sector, remittances, and foreign direct investment (Diaspora from Germany and Switzerland cited). ### Fiscal policy and public finances - General government operations (percent of GDP): - Revenues, incl. interest income 1/: 27.1 (2010), 27.3 (2011), 26.4 (2012), 26.9 (2013), 26.0 (2014) - Primary expenditures: 29.5 (2010), 28.9 (2011), 28.7 (2012), 30.0 (2013), 28.7 (2014) - Wages and salaries: 7.3 (2010), 8.1 (2011), 8.1 (2012), 8.4 (2013), 8.3 (2014) - Subsidies and transfers: 6.3 (2010), 5.7 (2011), 5.8 (2012), 5.9 (2013), 5.9 (2014) - Capital and net lending, incl. highways: 11.7 (2010), 11.5 (2011), 11.0 (2012), 11.3 (2013), 10.2 (2014) - Capital expenditures on highways: 2.9 (2010), 5.4 (2011), 5.6 (2012), 5.2 (2013), 4.8 (2014) - Overall balance: -2.6 (2010), -1.8 (2011), -2.6 (2012), -3.4 (2013), -3.0 (2014) - Debt financing, net: 0.3 (2010), -0.1 (2011), 3.1 (2012), 1.4 (2013), 1.7 (2014) - Privatization: 0.0 (2010), 0.0 (2011), 0.9 (2012), 5.8 (2013), 0.0 (2014) - Stock of government bank balances: 5.7 (2010), 3.3 (2011), 4.3 (2012), 7.9 (2013), 6.1 (2014) - Fiscal framework and policy recommendations: - From 2014, fiscal policy to be anchored by a rules-based fiscal framework, expected to be enacted in July of this year. - Authorities emphasize maintaining sustainable fiscal stance while addressing social and capital spending needs. - Capital projects exempt from the ceiling under the fiscal rule depending on privatization receipts and government bank balance. - Target for adequate level of government bank balance cited as 4.5 percent of GDP, with recognition of need for higher levels for multi-year investment projects or debt servicing obligations. - Careful budgetary planning, costing of spending initiatives, and resistance to ad hoc spending pressures highlighted as critical. ### Financial sector: performance and policy actions - Banking sector indicators: - Bank credit to the private sector (percentage change): 12.6 (2010), 14.7 (2011), 4.5 (2012), 5.3 (2013), 9.9 (2014) - Deposits of the private sector (percentage change): 23.1 (2010), 11.4 (2011), 10.9 (2012), 11.4 (2013), 10.2 (2014) - Non-performing loans (percent of total loans): 5.2 (2010), 5.7 (2011), 7.5 (2012), 7.6 (2013), 4/ ... - GDP (millions of euros): 4,291 (2010), 4,776 (2011), 5,012 (2012), 5,256 (2013), 5,588 (2014) - GDP per capita (euros): 2,418 (2010), 2,655 (2011), 2,761 (2012), 2,852 (2013), 2,988 (2014) - Performance and risks: - Banking sector described as liquid, profitable, and well capitalized; capital adequacy ratio around 15 percent (effect of tighter capital rules under the new banking law). - NPLs increased but are comparably low and almost fully provisioned; return on assets among the highest in the region. - Banking subsidiaries of euro area banks largely deposit-funded with limited risk of deleveraging. - Policy recommendations and reform actions: - Strengthen legal and institutional environment, notably to expedite contract enforcement by the judicial system. - Move gradually to comprehensive risk-based supervision. - Develop a macro-prudential policy framework. - Create a permanent funding mechanism for the special reserve fund for emergency liquidity assistance. - Improve crisis management framework and institutional capacity; establish the National Council on Financial Stability and Crisis Management. - Study on an emergency liquidity assistance facility through a bank premium underway. - Continue work to improve property registry and NPL resolution, court processes for contract enforcement, and establishment of a mortgage market. ### Structural reforms and competitiveness - Key priorities: - Strengthen competitiveness through improved business climate, public infrastructure, and education. - Increase regional integration (negotiations for a Stabilization and Association Agreement with the EU have begun). - Improve access to finance for SMEs; development strategy for small and medium enterprises initiated. - Infrastructure focus: - High level of capital spending prioritized to improve public infrastructure, notably energy and transport. - Preparation of planned highway R6 to Macedonia committed to, with emphasis on limiting risks to public finances and safeguarding economic viability. - Labor market and wage policy: - Maintain wage restraint and flexible labor markets. - Authorities will issue an administrative instruction in coordination with Fund and World Bank staff to limit risks stemming from wages. - Importance of cautious public sector wage policies given past large wage increases (2010 election campaign). ### Data, statistics, and surveillance - Assessment of data adequacy: - Data provision adequate for surveillance and program monitoring; performance criteria can be tested with accuracy. - Statistical system suffers from considerable shortages of financial and human resources. - National accounts and prices: - Improvements made to national accounts; nominal and real GDP data (expenditure approach) improved and published in excel format on the Kosovo Statistical Agency website. - GDP production-approach data available but with long publication lags; recommendation to start publishing quarterly GDP and a monthly industrial production index. - CPI produced monthly since 2002; published with a lag of 13 days; uses COICOP-compatible item classification with 352 elementary aggregates; current weights introduced in January 2012 based on HBS and NA data for 2010 and used through December 2013. - Labor market data: - Limited and unreliable data on labor force and wages due to large informal economy; household survey underway with preliminary first-half 2012 data published in May 2013. - Government finance statistics: - Monthly cash-basis budget execution reports provided five weeks after month-end. - Budget classification not consistent with GFSM 2001: data on cash basis not accrual; lending for policy purposes included after calculating primary balance; capital transfers should be included in current expenditure; MOUs need proper classification; annual budget documents should specify current and capital spending related to individual projects. - Monitoring of domestic arrears needs strengthening. - Financial sector data and external statistics: - Depository corporations statistics published monthly (lag 25 days) from Dec. 2000; other financial corporations statistics published quarterly (lag 35 days) from June 2004; broadly consistent with MFSM (2000). - CBK ceased compiling monetary aggregates in 2006 due to difficulties estimating Euro currency in circulation. - Financial soundness indicators compiled per Compilation Guide on Financial Soundness Indicators (FSI), 2007; available through STA FSI starting July 2010 data. - CBK provides quarterly balance of payments data; revisions improved measurement of exports of services, remittances, and currency in circulation. - Trade data publishing transferred to Statistical Office of Kosovo (SOK); monthly availability. - Kosovo started reporting quarterly IIP data to STA in October 2012. - Data standards: - Participant in the General Data Dissemination (GDDS) since April 2011. - Kosovo has not had a Data ROSC. *IMF Staff Report content (Article IV consultation and related program material, July 2013).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13222.pdf_