Kosovo: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, November 4, 2022
Source details
- Canonical URL
- Kosovo: Staff Concluding Statement of the 2022 Article IV Mission
Other formats
Bibliographic details
- Published: November 4, 2022
Recent developments and outlook
- Mission visit: October 25–November 4, 2022; statement issued November 4, 2022.
- External shock and transmission:
- Fallout from the war in Ukraine is affecting Europe’s economic activity and inflation; Kosovo affected via higher food and energy import prices.
- Higher input prices have slowed public investment program implementation.
- Growth and inflation dynamics:
- Real GDP growth slowed to 4.5 percent in 2022:Q1 and further to 2.1 percent in 2022:Q2 (both y/y), down from the extraordinary growth of almost 11 percent last year.
- Inflation reached 14.4 percent in July 2022 (y/y), but has gradually declined thereafter.
- Food and energy prices have jointly contributed 80 percent of inflation so far in 2022.
- Core inflation projected to reach 4.4 percent in 2022 (up from 2.2 percent in 2021).
- Fiscal and financial environment:
- Stronger fiscal revenues enabled temporary measures and replenished government deposits.
- Government reallocated 2.6 percent of GDP in April and an additional 1.7 percent of GDP in September for temporary measures (pension and social assistance top ups, wage bonuses, energy subsidies).
- Projected overall fiscal deficit of at most 1 percent of GDP for 2022.
- Bank credit continued flowing; adequate liquidity and capital buffers; low non-performing loans (NPLs). Tightening Euro Area conditions have resulted in some increases in deposit and lending rates; credit growth in real terms decelerated compared to 2021.
- Outlook and risks:
- Staff expect real GDP to grow by 3 – 4 percent in 2023.
- Staff baseline projects average inflation to decline to 4 – 5 percent in 2023.
- Forecasts depend crucially on international commodity prices, including energy.
- Downside risks: higher energy prices leading to higher inflation, input costs, electricity rationing; lower activity and tighter financial conditions weighing on credit growth and NPLs.
- Upside: faster public investment implementation and higher foreign direct investment from near shoring, though effects likely gradual.
Fiscal policy: managing the energy price shock while increasing capital spending absorption
- 2023 draft budget:
- Appropriately envisages a return to the fiscal rule deficit ceiling.
- Implied rise in the fiscal deficit will provide a moderate fiscal impulse of 1 – 2 percentage points of GDP.
- Fiscal position and debt:
- Strong fiscal buffers; staff assesses public debt to be sustainable.
- Public debt-to-GDP ratio projected to remain below the legal ceiling of 30 percent of GDP throughout the forecast horizon.
- Public wages and administration:
- Work on the law regulating public wages should be finalized for implementation in 2023.
- Objectives: increase compensation fairness, reduce arbitrariness and number of allowances, retain talent in health, information technology, and public service regulation.
- Wage coefficients should be set so the wage bill does not breach its legal ceiling and private sector competitiveness is not negatively affected.
- Contingency allocations:
- Contingency allocations need to be accompanied by a description of intended use; large blanket allocations increase opacity and policy discretion.
- Energy support measures:
- Programs to mitigate surging energy costs need to be temporary and targeted at vulnerable households and viable firms.
- Given inelastic domestic electricity supply, staff recommends energy savings through more frequent pass-through rates to tariffs (from one to at least two per year).
- Recommend higher tariffs for peak-hour consumption for non-vulnerable clients to flatten intra-day electricity demand and reduce sector financial imbalance during winter.
- Power outages should be a last resort given high social and economic costs.
- Call for careful scenario analysis, planning, and strengthened dialogue among sector stakeholders given international energy prices expected to remain above pre-war levels for the foreseeable future.
- Public investment absorption:
- Increase in public investment envelope is welcome; challenge remains to increase absorption.
- Staff urged increased allocations to health and education.
- Initiative to compensate contractors for higher project costs through mid-2023 (on an invoice-by-invoice basis) can help speed implementation.
- Consistent progress on the 2018 IMF’s Public Investment Management Assessment recommendations can address shortcomings.
Financial policies: preserving credit flow and containing risks
- Supervisory priorities:
- As growth decelerates and financial conditions tighten, the Central Bank (CBK) should further strengthen monitoring of banks’ credit and liquidity.
- CBK should consider shifting macroeconomic environment in supervising banks’ working assumptions for credit, liquidity, and interest risks; be ready to take supervisory action when warranted.
- Liquidity preparedness:
- To address possible liquidity shocks, systemic banks have contingent credit lines with foreign financial institutions.
- The CBK has renewed its repo line with the ECB through early 2023, and intends to negotiate its extension at that time.
- Housing sector:
- Monitoring of the housing sector needs strengthening; housing sector statistics are poor, constraining monitoring capacity.
- Financial sector reform implementation:
- Good pace of implementation of the 2019 Financial Sector Stability Review (FSSR) needs to be maintained.
- Priorities: approval of the draft banking law and clearer delineation of responsibilities of the executive and Central Bank boards.
- Commended the temporary filling of one deputy governor position through June 2023; remaining deputy governor vacancy needs to be filled as soon as possible.
Structural policies: addressing infrastructure and governance gaps
- Infrastructure constraints:
- Gaps in physical and social infrastructure vis-a-vis the EU15 are significant and limit attractiveness for foreign direct investment.
- Electricity sector vulnerabilities: high non-technical and commercial losses; unreliability in domestic supply exposes sector to external price fluctuations.
- Recommended actions: expand green capacity, explore further regional market integration, increase effective penalties for electricity theft, and strengthen coordination among sector stakeholders at regulatory and management levels.
- Governance and institutional improvements:
- Staff commended improvements: full roll-over of e-procurement and new commercial courts.
- Adoption of beneficial ownership reporting recommended to tackle conflicts of interest in public procurement.
- Hiring additional commercial court judges will strengthen economic security and reduce informality rates.
- Staff urged against additional withdrawals from the pension fund (KPST) as this would harm pension system viability and domestic capital market development.
- Encouraged continued efforts to implement the EU-Kosovo Stability and Association Agreement.
Closing
- Mission expressed thanks to authorities and stakeholders for hospitality and open dialogue.
Kosovo: Staff Concluding Statement of the 2022 Article IV Mission (November 4, 2022) — IMF Communications Department
Content in this bundle
- Kosovë: Deklaratë përmbyllëse e Misionit në kuadër të Nenit IV për vitin 2022