IMF Staff Concludes Visit to Kosovo with Agreement on Second and Third Review of the SBA Program

IMF News, November 18, 2016

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IMF mission led by Jacques Miniane visited Pristina during November 9-18, 2016.
Staff-level agreement reached on policies needed to complete the second and third reviews under Kosovo’s Stand-By Arrangement (SBA).
Agreement is subject to completion of policy actions on key fiscal and structural measures, and approval by IMF Management and Executive Board.
Consideration by the Executive Board is tentatively scheduled for early 2017.
Completion of the review would make available SDR 79.2 million (around €100 million), bringing the total funds disbursed to SDR 135.4 million (around €170 million).

Growth of 4.1 percent last year, with similar momentum to this year and next.
Key growth contributors:
- Strong remittances.
- Accelerating bank credit now growing at more than 9%.
- Ongoing large infrastructure projects.
Structural challenges remain, including a persistently high trade deficit.
Policy priority: develop a more dynamic and export-oriented private sector to reduce high unemployment.

Fiscal discipline broadly maintained, but pressures mounting from current spending.
Tax revenues increasing in line with targets, supported by robust growth.
Government is highly likely to meet the €98 million deficit target in the budget and in the IMF program.
Budget submitted to parliament for 2017:
- Strikes a balance between fiscal prudence and attending to the country’s needs.
- Expected deficit ex PAK and ex donor-financed capital projects of about €100 million.
Policy recommendation: continue efforts to keep current spending contained to create space for necessary expansion of the capital budget.

Growing recognition that certain social and pension support schemes need reform.
Risk: Without reform, the larger than expected number of certified war veterans, together with the newly certified war disabled, could raise spending on war-related schemes to more than €100 million per year.
Fiscal and labor-market concerns:
- Such spending is significantly more than Kosovo can afford without foregoing other priority spending.
- These pension schemes discourage people from staying in their jobs, looking for a job, or truthfully declaring income.
Government plans for reform:
- Reclassify already certified war veterans according to differing contributions during the war.
- Adjust benefits accordingly.
- Reclassification should be based on clear and transparent criteria set in the law and led by a qualified and impartial commission.
Objectives of reform: budgetary savings, better labor market incentives, and governance improvements.

Banks remain liquid, profitable, and well capitalized.
Asset quality improving: NPL ratio at 5.1 percent in September.
Central Bank approved its first macro-prudential framework to identify and, if needed, handle systemic risks.
Progress in contract enforcement is encouraging bank lending at lower rates with less collateral.
- Recommendation: approval of the amended Law on Enforcement Procedures to make it harder for debtors to easily challenge enforcement orders.
Insurance sector concerns:
- Insurance is small, unprofitable, and thinly capitalized, not contributing to financial deepening.
- Introduction of new prudential rules on January 1st will be the first step towards stabilizing the sector.

Welcome progress in public procurement to make it more transparent and efficient.
- Plans to move towards full e-procurement and expand the list of centrally procured goods and services.
Wages and infrastructure:
- Efforts over the last two years to slowly realign wages with productivity trends and slow upgrade of infrastructure will slowly contribute to a more dynamic and diversified economy.
Remaining priorities to raise living standards and create jobs:
- Strengthen the rule of law.
- Find ways to channel large Diaspora flows into more productive uses.
- Address energy security.

IMF mission held frank and open discussions with Kosovar authorities.
Views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
The mission thanks interlocutors for their hospitality and discussions.

IMF Staff Concludes Visit to Kosovo with Agreement on Second and Third Review of the SBA Program — November 18, 2016.