IMF Survey: Kosovo Receives €48 Million Installment Under IMF Loan
IMF News, July 17, 2012
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- Authors: Arrangement. The
- Published: July 17, 2012
Program disbursement and background
- The IMF’s Executive Board approved the second tranche for Kosovo under the country’s €106.6 million Stand-By Arrangement.
- The €48 million tranche follows a first disbursement of €5 million received when the 20-month program was approved in April 2012.
- Kosovo became a member of the IMF in 2009. Before membership the IMF provided extensive technical assistance while Kosovo was under administration of the United Nations (1999–2008).
- The new Stand-By Arrangement was approved by the IMF’s Executive Board in April 2012.
Economic outlook and recent performance
- The IMF projects the economy to grow by 3.8 percent in 2012, modestly down from 5 percent in 2011.
- Kosovo has remained largely shielded from the euro crisis for several reasons:
- Kosovo’s exports are small.
- Financial linkages are limited: largest banks are foreign-owned but funded with domestic retail deposits and do not depend on financing from their parents.
- Kosovo’s debt is not traded in cross-border financial markets.
- Economic growth depends importantly on remittances and foreign direct investment from the Kosovar diaspora that lives primarily in Germany and Switzerland.
- Solid remittance inflows and robust lending activity by a well-capitalized and liquid banking system have supported growth.
Program objectives and policy measures
- First objective: restore a sustainable fiscal position that would keep public debt below 30 percent of GDP in the long-term.
- During the 2011 Article IV consultations, the IMF assessed that relative to this yardstick, Kosovo’s fiscal stance was too expansionary by about 3 percent of GDP.
- Significant adjustment has already been achieved in the context of the SMP and the 2012 budget.
- A fully sustainable position is targeted for 2014.
- Second objective: restore an adequate level of cash buffers.
- In a unilaterally euroized economy like Kosovo’s, cash buffers insure against possible fiscal and financial risks and have a similar function as international reserves in a country with an own currency.
- Third objective: provide orientation for fiscal policy in the long-run.
- With no independent monetary policy, fiscal policy is the main tool to stabilize and anchor the economy.
- A technical assistance mission from the IMF’s Fiscal Affairs Department discussed options for a fiscal rule that could be introduced next year.
- Fourth objective: reinforce the resilience of the financial system.
- As Kosovo is euroized, the central bank cannot generate liquidity on its own.
- After the installment tied to this review becomes available, the authorities intend to fund a central bank facility designated for emergency liquidity assistance.
- In April Kosovo’s assembly passed a revised banking and microfinance law that strengthens the central bank’s capacity to resolve troubled institutions.
IMF engagement history and program implementation
- Earlier engagement:
- In July 2010, the Executive Board approved a first Stand-By Arrangement (SBA), which went off-track partly due to outsized public sector wage increases in the context of the 2011 budget.
- Kosovo requested a staff-monitored program (SMP) through end-2011; implementation of the SMP was broadly satisfactory with significant overperformance especially relative to fiscal targets, paving the way for the new SBA.
- IMF mission chief for Kosovo: Johannes Wiegand.
Medium-term challenges and policy priorities
- A key medium-term challenge: build a competitive economy and develop a tradable sector to reduce dependence on transfers and create conditions for durable, robust growth.
- Critical actions to address this challenge:
- Strengthen the institutional framework and business climate.
- Invest in infrastructure and education.
- Carefully prioritize, cost, and sequence spending initiatives to avoid risking macroeconomic stability.
- Secure broad political support for reforms.
- Kosovo is a young country with large capital and social spending needs; policymakers face significant pressure to address these needs rapidly.
IMF Survey online, July 17, 2012 — IMF