Kosovo: Staff Concluding Statement of the 2020 Article IV Mission
IMF News, October 8, 2020
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- Published: October 8, 2020
Pandemic impact and macro outlook
- Real GDP is projected to fall by 7.5 percent in 2020, and to rebound by 6 percent in 2021.
- Plummeting growth in countries where the diaspora resides (-6 percent in 2020) and international travel restrictions will cost Kosovo 6 percentage points of GDP in diaspora flows in 2020.
- Staff expects the contraction in 2020 to be in the 6 – 7.5 percent range, while the rebound in 2021 will be in the 4.5 – 6 percent range.[1]
- After surging strongly during July-August, new COVID-19 cases have recently subsided; the health system responded well but its capacity was stretched at the height of the spread last August.
- The uncertainty surrounding the baseline projection is large and the risk of worse than projected outcomes remains sizable.
Fiscal policy recommendations and measures
- Overall deficits are expected at around 6 and 5.5 percent of GDP in 2020 and 2021 respectively.
- The suspension of the fiscal rule over 2020–21 is warranted, but it needs to be combined with a clearly communicated commitment for its gradual reinstatement as the economic recovery takes hold.
- The extraordinary situation may warrant refocusing part of the Privatization Agency of Kosovo’s (PAK) deposits from financing investment to mitigation and recovery measures; these should be well-designed, transparent, and targeted to those most in need.
- PAK-financed mitigation and recovery measures not fully defined in the mid-year revision of the 2020 budget should be redeployed to the budget of 2021 once their full design, targeting, and costing have been completed.
- Bonus payments for health and security sectors (0.6 percent of GDP planned for 2020) recognize essential workers’ efforts; given uncertainty, the 2021 budget should include a general contingency allocation for mitigation efforts deployable in the first half of 2021 if needed.
- Planned transfers of Euro 60 million (1 percent of GDP) to private firms should:
- Ensure jobs are protected in firms expected to remain viable after the pandemic subsides.
- Have clear eligibility criteria.
- Have the list of beneficiaries publicly available (in line with legislation).
- Large subsidies to agriculture (of about 1 percent of GDP in 2020, including planned recovery measures) need strengthened design to increase transparency and effectiveness.
- A credible consolidation path is needed as the recovery takes hold; communication should highlight the temporary nature of current bonuses and transfers.
- Reforms should refocus social spending to protect the most vulnerable; creating additional pension benefits without an actuarial sustainability analysis of existing benefits should be avoided.
- The proposed 10 percent withdrawal of pension savings from the Kosovo Pension Saving Trust (KPST) undermines Pillar 2, reduces future pensions, and limits the size of the domestic capital market, which has been an essential source for budgetary financing.
Financial sector policies and stability
- The CBK decisions to postpone loan repayments and then to allow for up to 1-year loan reprogramming mitigated the impact on borrowers and banks.
- The March postponement resulted in a 3-month loan payment moratorium that reached more than 50 percent of total bank loans.
- By the June window for up to 1-year loan extensions and restructuring, and at the closing of the window in September, about 15 percent of the banks’ loan book had been reprogrammed.
- The lifting of regulatory forbearance should be gradual; the CBK needs to be prepared to adapt its plans if 2021 growth disappoints.
- To avoid limiting credit availability, regulatory forbearance should be lifted gradually, bringing any deficiency in provisions to zero over the next 12 months.
- The CBK should provide guidance along these lines as soon as possible and strengthen supervision efforts, focusing on large borrowers.
- If growth in 2021 disappoints, further loan reprogramming could be considered for viable borrowers.
- Avoiding any weakening of capital or provisioning standards remains essential.
- Vacancies at the CBK Board should be filled urgently — the CBK Board has not functioned since June due to lack of quorum.
- Once the CBK Board resumes operations, institutional arrangements should be strengthened to ensure financial stability and macroprudential functions are adequately represented at the CBK’s Executive Board.
Structural reform priorities
- The pandemic exacerbated pre-existing structural constraints that have prevented faster income convergence.
- The impact of public investment remains low.
- The quality of health and education spending is below regional standards.
- Priority near-term focus: preserve people’s health and combat the recession.
- Medium-term priorities: strengthen budget effectiveness, reduce human capital and infrastructure gaps, improve governance, and further enhance international integration to create a more enabling growth environment.
Kosovo: Staff Concluding Statement of the 2020 Article IV Mission, October 8, 2020.
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- Kosovë: Deklaratë përmbyllëse e Misionit të Artikullit IV për vitin 2020