IMF Staff Completes 2021 Article IV Mission to Kosovo
IMF News, November 5, 2021
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- Published: November 5, 2021
Mission summary and context
- Mission led by Mr. Gabriel Di Bella; virtual visit during October 20-Novermber 4 in the context of the 2021 Article IV consultations.
- End-of-Mission press release conveys preliminary findings of IMF staff; views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
- Recovered mobility, policy actions and support from the diaspora identified as the keys behind the strong economic recovery in 2021.
- Expectation that growth will normalize in 2022 amid still-high pandemic-related risks.
Growth, drivers, and labor mobility
- Kosovo real GDP contracted by 5.3 percent in 2020 and is projected to rebound by 7 - 8 percent in 2021.
- Key drivers of the 2021 rebound:
- Renewed domestic mobility following a successful vaccination program.
- Extraordinary support from the diaspora: remittances in the first 8 months of 2021 increased by about 40 percent compared to pre-pandemic levels.
- Exports of services (including tourism by the diaspora) grew by 15 percent.
- Kosovo featured the highest vaccination rate of the Western Balkans at end-October: 47 percent.
- Continuation of the vaccination program in 2022 financed by a budgetary allocation for additional vaccines for booster shots and to expand coverage is commended.
Fiscal developments and role in recovery
- Fiscal policy was less supportive in 2021 than in 2020 but provided lifelines to vulnerable households and firms and supported economic formalization.
- Fiscal position:
- 2020 deficit: close to 8 percent of GDP.
- 2021: almost balanced fiscal position expected due to a cyclical rebound in revenues, fiscal restraint, and low implementation of the investment budget (partly due to absence of a functioning board at the Procurement Review Body, PRB).
- Policy actions highlighted: lifelines to households and firms, support for formalization.
- Recommendation: fiscal revenue windfall from the diaspora should be used to close social and economic infrastructure gaps and diversify growth engines.
- Recommendation: fiscal policy should revert to the fiscal rule beginning in 2022, while including an allocation for emergency expenditures should the virus strike back.
- Opportunity: fully replenished fiscal buffers present a chance to initiate the process to obtain a rating for Kosovo’s public debt securities.
Inflation and prices
- Inflation projected to increase to about 5 percent (y/y) by end-2021 on higher energy and food prices.
- Drivers in 2021:
- Rebound in oil prices explained about ½ of the increase in 2021:H1.
- Food price acceleration contributed to inflation in the summer.
- Households largely insulated from steep increase in electricity prices in Europe, but a few firms affected via exposure to the regional electricity market.
- Core inflation has begun to creep up; inflation pressures expected to remain persistent through mid-2022 and gradually ease thereafter.
Financial sector resilience and vulnerabilities
- Banking sector overall remains resilient: capital and liquidity buffers are strong and NPLs are low.
- Improvement in many financial soundness indicators is partly linked to the policy response to the pandemic.
- Pockets of vulnerabilities: fast increase in lending to the construction sector by smaller banks.
- Credit developments: extension of the window to restructure loans early in 2021 combined with improved expectations led to increased credit growth; projected to expand by more than 10 percent (y/y) in 2021.
- Recommendation: strengthen credit risk monitoring as pandemic-related support measures were phased out in 2021 to ensure provisioning reflects underlying solvency risks and capital buffers are sufficient.
Outlook and risks (2022 baseline and scenarios)
- Baseline: Absent negative pandemic-related surprises, real GDP expected to grow by 3 - 4 percent in 2022, partly driven by 2021 momentum.
- Supporting factors for 2022 activity:
- Continued domestic credit expansion.
- Fiscal policy easing (size dependent on capacity to increase absorption of externally-financed investment projects and appointment by Parliament of directors to the PRB’s Board).
- Downside risks:
- New virus mutations remain the main downside risk after a rapid surge of cases in August.
- Still-low spare capacity of hospitals could necessitate renewed mobility restrictions if cases rise.
- Upside potential:
- Implementation of an ambitious government program.
- Continuation of extraordinary diaspora support, though projected to subside somewhat in the baseline.
Fiscal policy priorities and recommended spending composition
- Make the budget more pro-growth by improving composition, effectiveness, and efficiency of spending.
- Specific priorities and recommendations:
- Wage bill must remain within its legal ceiling; the new draft law regulating public wages should strengthen transparency and compensation fairness and be based on wage coefficients that do not unsustainably increase the total wage bill.
- New social transfer programs should be well designed, targeted, and transparent.
- Budget for 2022 could clarify design and target beneficiaries of envisaged programs to expand child benefits and transfers to unemployed mothers of 0.6 percent of GDP.
- Clarify intended use of a blanket allocation for subsidies and transfers of 1.6 percent of GDP.
- Finalize certification of war veterans and insulate the budgetary envelope for war veteran benefits from the expected increase in minimum wages.
- Augment health system capacity, expand access to computers for schools and households, and assign allocation to increase the number of commercial courts as called by the draft law under discussion.
- Given security, defense, and road infrastructure comprise a large portion of the investment budget, devote targeted resources to increase share of households and schools with access to computers and to expand hospital infrastructure.
- Sustain and consolidate gains in formalization through faster and more effective commercial courts, improved tax policy and administration, and increased electronic payments.
- Reduce pollution and emissions by cleaner electricity generation; installation of filters in Kosovo B, in collaboration with the EU, remains a priority.
Financial policy priorities: Central Bank independence and liquidity tools
- Urgent need to fill existing vacancies at the Central Bank (CBK) Board.
- Essential for the CBK to adopt its budget, oversee its policies, and implement needed reforms, including adequate representation of financial stability and macroprudential policy functions at the CBK’s Executive Board.
- Use of new SDR allocation:
- Given comfortable fiscal buffers, the new SDR allocation can be used to strengthen the CBK’s window for Emergency Lending Assistance (ELA).
- Current size of ELA is considered too low compared with potential financial sector liquidity risks.
- The SDR allocation should remain available for pandemic-related support should downside risks materialize.
- Strengthen CBK capacity to analyze banks’ risks in the context of the transition to IFRS9.
Mission closing
- The mission thanks the authorities and other stakeholders for the frank, open and constructive dialogue.
IMF Staff Completes 2021 Article IV Mission to Kosovo — November 5, 2021
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- Stafi i FMN-së përfundoi Misionin e Nenit IV për vitin 2021 në Kosovë