Kosovo - Staff Concluding Statement of the 2020 Article IV Mission
IMF News, October 8, 2020
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- Published: October 8, 2020
Mission summary and context
- An IMF mission, led by Mr. Gabriel Di Bella, conducted a virtual visit during September 23-October 7 in the context of the 2020 Article IV consultations and issued the mission concluding statement on October 8, 2020.
- The mission stresses near-term priorities: ensure the health system can cope with unusually high demand while continuing to support incomes; preserve banking stability while mitigating income shocks; and address pre-existing structural challenges exacerbated by the pandemic.
Pandemic impact and 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 is projected at -6 percent in 2020 and international travel restrictions will cost Kosovo 6 percentage points of GDP in diaspora flows in 2020.
- After surging strongly during July-August, new COVID-19 cases have recently subsided; health system capacity was stretched at the height of the spread last August.
- Staff revision note: contraction in 2020 expected in the 6 – 7.5 percent range, while the rebound in 2021 will be in the 4.5 – 6 percent range.
- The uncertainty surrounding the baseline projection is large; downside risks include weaker external growth, longer international travel restrictions, longer domestic lockdowns, and political division; upside risks include progress with vaccines and treatments.
Fiscal policy findings and recommendations
- The fiscal rule should be temporarily suspended over 2020–21 to implement mitigation and recovery measures; suspension is warranted but must be combined with a clearly communicated commitment for gradual reinstatement as recovery takes hold.
- Overall deficits are expected at around 6 and 5.5 percent of GDP in 2020 and 2021 respectively.
- Privatization Agency of Kosovo (PAK) deposits: refocusing part of PAK deposits from financing investment to mitigation and recovery measures may be warranted; PAK-financed measures should be fully designed, targeted, and costed and redeployed to the 2021 budget once complete.
- Bonus payments for health and security sectors of 0.6 percent of GDP planned for 2020 recognize essential workers’ efforts.
- Budget 2021 should include a general contingency allocation for mitigation efforts deployable in the first half of 2021 if needed.
- Planned transfers to private firms: Euro 60 million (1 percent of GDP) should ensure protection of jobs in firms expected to remain viable; eligibility criteria should be clear and 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.
- Communication and fiscal anchoring: the extraordinary fiscal effort in 2020–21 needs anchoring by a credible consolidation path as recovery takes hold; clear communication that bonuses and transfers are temporary is needed.
- Social spending reforms: refocus social spending to protect the most vulnerable; avoid creating additional pension benefits without actuarial sustainability analysis.
- Pension policy caution: 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 findings and recommendations
- CBK measures: postponement of loan repayments and subsequent allowance of up to 1-year loan reprogramming mitigated the shock to borrowers and banks.
- The March postponement resulted in a 3-month loan payment moratorium that reached more than 50 percent of total bank loans.
- As the moratorium window closed, the CBK in June allowed applications for up to 1-year loan extensions and restructuring on a case by case basis; at the closing of this window in September, about 15 percent of the banks’ loan book have been reprogrammed.
- Non-performing loans (NPLs) are expected to increase; regulatory forbearance should be lifted gradually, bringing any deficiency in provisions to zero over the next 12 months.
- The CBK should provide guidance on gradual lifting of forbearance and strengthen supervision efforts, focusing on large borrowers.
- The pace of scaling back forbearance should be kept under review given uncertainty; if 2021 growth disappoints, further loan reprogramming could be considered for viable borrowers.
- Avoid weakening capital or provisioning standards.
- Institutional recommendation: fill vacancies at the CBK Board urgently — the CBK Board has not functioned since June due to lack of quorum.
- Once the CBK Board resumes operations, strengthen institutional arrangements to ensure financial stability and macroprudential policy functions are adequately represented at the CBK’s Executive Board.
Structural challenges and reform priorities
- The pandemic exacerbated pre-existing structural constraints that have prevented faster income convergence.
- Key structural weaknesses: low impact of public investment; quality of health and education spending below regional standards; human capital and infrastructure gaps; governance weaknesses; limited international integration.
- Policy priorities: strengthen budget effectiveness; reduce human capital and infrastructure gaps; improve governance; further enhance international integration to create an enabling growth environment and accelerate income convergence.
Key statistics and figures (as presented)
- Real GDP: fall by 7.5 percent in 2020; rebound by 6 percent in 2021.
- Diaspora countries’ growth: -6 percent in 2020; cost to Kosovo of diaspora flows: 6 percentage points of GDP in 2020.
- Overall deficits: around 6 and 5.5 percent of GDP in 2020 and 2021 respectively.
- Bonus payments for health and security sectors: 0.6 percent of GDP planned for 2020.
- Planned transfers to private firms: Euro 60 million (1 percent of GDP).
- Agriculture subsidies: about 1 percent of GDP in 2020 (including planned recovery measures).
- Proposed withdrawal from KPST: 10 percent (policy concern highlighted).
- Loan moratorium: 3-month moratorium reached more than 50 percent of total bank loans.
- Loan reprograming: about 15 percent of the banks’ loan book reprogrammed as of September.
- Provisioning target: bring any deficiency in provisions to zero over the next 12 months.
- Staff revised projection ranges: 2020 contraction in the 6 – 7.5 percent range; 2021 rebound in the 4.5 – 6 percent range.
International Monetary Fund — Staff Concluding Statement of the 2020 Article IV Mission (October 8, 2020).