IMF Staff Concludes Visit to Kosovo

IMF News, May 26, 2022

Source details

Mission led by Mr. Gabriel Di Bella.
Staff visit dates: May 10 – 13 and May 20.
Purpose: discuss recent economic developments, the outlook, and policies.
Statement reflects views of IMF staff and does not necessarily represent the views of the IMF’s Executive Board.
This mission will not result in a Board discussion.

Key finding: "The war in Ukraine represents a severe shock for Kosovo."
Trade and financial direct exposure: described as negligible.
Estimated impact on imports: could be "as high as 5.5 percent of GDP".
Outlook: momentum from last year’s recovery remains strong, but the shock will "inevitably affect demand and economic activity in 2022."
Policy implication: maintaining sound macroeconomic policies and financial stability, and advancing reforms, are essential to attract foreign direct investment.

Inflation projection: "expected to reach more than 10 percent in 2022" driven by increased import prices.
Recommended approach: targeted and temporary support to help vulnerable households.
Authorities’ measures noted as appropriate:
- subsidies for agricultural inputs;
- wage bonuses;
- temporary increases in pension benefits and social transfers;
- increase in electricity tariffs in February to reflect larger electricity import bill;
- implementation of electricity subsidies for "about 20 percent of households."
Cautionary finding: reverting the electricity tariff increase would "lead to a larger current account deficit and represent a serious burden for the budget."
Recommendation: the planned budgetary review for 2022 should:
- describe how support programs are reaching the most vulnerable; and
- describe how "the appropriate functioning of the electricity value chain is being preserved in the face of the current electricity subsidies."

Minimum wage: staff "concurred with the proposal to raise it by about 50 percent."
Fiscal design: agreed on the need to decouple the increase in budgetary transfers from the minimum wage.
Strong caution: IMF staff "cautioned strongly against additional withdrawals from the private pension fund (KPST)."
- Rationale: withdrawals would "represent a heavy blow to the viability of the pension system and strongly reduce the real value of future pensions."
- Additional effects: would "translate into a large compression of domestic capital markets, seriously compromising budgetary financing and debt sustainability."

Assessment: "The banking sector has so far weathered the recent shocks well, helped by a good regulatory framework."
Observations:
- Strong credit growth has been supporting economic activity.
- Domestic deposit and lending rates have remained broadly stable.
Risks: tighter financial conditions in Europe could translate into higher domestic interest rates, creating vulnerabilities for sectors that have expanded strongly, including construction.
Recommendation: banking supervision should "continue to vigilantly monitor banks’ asset quality and liquidity, ensuring that banks preserve sufficient capital buffers."

Importance: "An independent, accountable, and fully functional central bank is critical for the stability of the financial system."
Positive step: appointment of two new Board members last December restored the quorum of the supervisory board after "1½ years."
Outstanding issue: "the vacant deputy governor position should be filled urgently to prevent any adverse impact on the CBK’s capacity to act or make executive decisions during these trying times."

IMF staff thanked authorities and counterparts for "excellent and very cordial discussions and engagement, including during the presentation of the IMF’s Regional Economic Outlook for Europe in Pristina."
Next engagement: "We look forward to continue the dialogue during the upcoming 2022 Article IV consultations in October."

IMF Staff Concludes Visit to Kosovo — Press Release No. 22/172 (May 26, 2022).

Stafi i FMN-së përmbyll vizitën në Kosovë
- Stafi i FMN-së përmbyll vizitën në Kosovë (Markdown version)
- Stafi i FMN-së përmbyll vizitën në Kosovë (PDF)