IMF Offers Emergency Support to the Balkans

IMF News, May 12, 2020

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The emerging economies of South-Eastern Europe that are not part of the EU have lower incomes and less developed social safety nets, making them particularly vulnerable to the economic and social impact of COVID-19.
The share of the population infected by COVID-19 in Balkan countries has been limited by strong containment measures and has been lower than in many more advanced economies.
Lockdowns have led to:
- people being unable to work or spend their money;
- declines in remittances as overseas jobs are lost;
- difficulties mobilizing funding from abroad for governments;
- severe losses in sectors dependent on international activity such as tourism.
Country-specific impacts:
- Moldova: remittances amounted to nearly 16 percent of GDP last year; a third of Moldovans working abroad are temporary migrants; return of some overseas workers complicated containment.
- Albania: COVID-19 follows a severe earthquake at the end of 2019; both shocks are expected to depress tourism; strong ties with Italy aggravate the crisis.
- North Macedonia: reduced domestic demand and disruption in the European automobile value chain.
- Bosnia and Herzegovina: crisis response complicated by a complex political economy; prior prudent fiscal policy created some room for a strong fiscal response.
- Kosovo: diaspora flows (tourism receipts and remittances), exports of goods, and foreign direct investment are all expected to plummet.

In early April, the IMF doubled the annual access limits for its rapidly-disbursing loans to address urgent financing needs.
Rapid Financing Instrument (RFI) approvals:
- April 10: support approved for Albania, North Macedonia, and Kosovo.
- April 17: support approved for Moldova.
- April 20: support approved for Bosnia and Herzegovina.
Characteristics and uses of the financial support:
- Provides critical resources to shore up the health care sector, and shield jobs and businesses.
- Limits the decline in international reserves.
- Unlike the IMF’s standard financial packages, there are no programs attached to these emergency loans.

The IMF foresees sizable contractions in economic activity in 2020 for all countries in the region, followed by a gradual and incomplete recovery over the next few years.
The full impact of the crisis remains highly uncertain.
Growth projections made for the RFIs assumed that the spread of COVID-19 would be contained in the second half of 2020, but it looks increasingly likely that the adverse growth impact may be more severe than was assumed in the RFI requests.

Near-term policy response:
- Rapid, targeted measures to mitigate economic and social impacts and support recovery.
- Ramp up spending on urgent healthcare needs.
- Introduce support for affected households and businesses.
- Central bank action: in Albania, Moldova, and North Macedonia the central bank cut its interest rate to support the economy.
Design principles for fiscal support:
- Fiscal support should be targeted, temporary, and transparent.
- Prudence in reopening the economy to avoid a new surge of the virus is important given limited fiscal buffers.
Medium-term priorities:
- Countries that see rises in public debt to relatively high levels, including Albania, Kosovo, and North Macedonia, will need to return to steadfast fiscal consolidation to rebuild room for fiscal policy maneuver.
- The IMF stands ready to help manage both near-term challenges and the medium-term recovery.

IMF News — May 12, 2020