IMF Executive Board Concludes 2018 Article IV Consultation with Kosovo
IMF News, December 18, 2018
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- Published: December 18, 2018
Executive Board assessment and macroeconomic outlook
- Following three years of robust economic growth, the economy is expected to continue to grow at 4.0 percent in 2018, led by investment, consumption, and services exports.
- Inflation is projected to remain subdued at 0.9 percent.
- The budget deficit under the fiscal rule definition is expected to be around 1½ percent of GDP, well within the fiscal rule ceiling of 2 percent.
- Adding investment exempted from the deficit rule, the overall deficit is expected to reach 3 percent of GDP.
- The current account deficit is widening to 7 percent of GDP.
- The banking system remains sound and financial deepening continues.
- For 2019:
- Growth is expected to increase to 4.2 percent supported by a temporary increase in public investment.
- Over the medium term growth is expected to remain at its potential of 4 percent.
- Risks and trade-offs:
- Spending pressures and tax revenue shortfalls could crowd out productive spending or increase the fiscal deficit and undermine confidence.
- The proposed new power plant would alleviate energy bottlenecks and provide an impulse to growth, but would widen the current account deficit during construction and—depending on financial arrangements—could significantly increase public debt.
Policy priorities and fiscal stance
- The fiscal rule remains an appropriate anchor for fiscal policy and underpins the 2019 budget, though execution risks are significant.
- The fiscal rule accommodates large pension increases and space for other wage and social benefit initiatives, relying on large and uncertain gains from reforms in tax administration and war veteran benefits.
- Recommendations to strengthen fiscal credibility and protect pro-growth spending:
- Limit specific non-priority spending until targeted revenue gains are realized.
- Diversify financing to reduce roll-over risks and avoid crowding out credit to the private sector.
- Gradually reduce the central bank’s holdings of government securities.
- Revenue administration reforms:
- Accelerate overhaul of tax and customs administration to reduce informality and large tax gaps and tax debts.
- Protect tax revenues by including strong safeguards if changes to import VAT collection are made.
- Avoid granting new tax expenditures and review existing ones.
- Consider room to increase tax rates in the medium term, given low rates by regional standards.
- Containing fiscal risks:
- Move ahead with war veteran reforms and resist introducing new benefits schemes (teachers, police, other benefits).
- Any pension increase should be limited to the basic pension only.
- Redesign public administration and health care reforms to fit within the wage bill rule.
- Advance plans to restructure public enterprises and ensure any government support for the new power plant through guarantees or financing is consistent with the fiscal rule and public debt sustainability.
- Ensure planned pension reforms protect the second pillar and avoid creating sizeable unfunded liabilities.
Structural reforms to boost growth, jobs, and competitiveness
- Structural challenges identified:
- Underdeveloped private and export sector, widespread informality, reliance on remittances.
- High unemployment and inactivity rates, and a large trade deficit.
- Policy pivot recommended:
- Shift from spending initiatives to removing structural constraints to growth and job creation.
- Restrain wage and social benefit growth.
- Promote female labor force participation.
- Upgrade skills and reduce mismatches through better access and quality of education and vocational training.
- Reduce infrastructure bottlenecks.
- Strengthen rule of law and reduce red tape.
- Avoid or redesign fiscally costly measures: the public salary law, excessively generous maternity/parental benefits, and a large minimum wage hike.
- Spending efficiency and governance:
- Strengthen fiscal institutions: tax administration, public procurement, public investment, and public enterprise management.
- Social benefit reform to create space for investment in education, health, judiciary, active labor market policies, and infrastructure.
- Enhance transparency and accountability and reduce corruption vulnerabilities.
Financial sector and access to finance
- The financial sector remains sound.
- With double-digit credit growth, authorities should remain vigilant for possible pockets of risk and distinguish healthy financial deepening from potentially excessive credit growth.
- Credit depth remains low in regional comparison.
- Recommended measures to improve access to lending:
- Fully implement the law on enforcement procedures.
- Accelerate resolution of commercial cases.
- Strengthen property rights.
Recommendation on consultation cycle
- It is recommended that the next Article IV consultation takes place on the standard 12-month cycle.
Key statistics and selected indicators (2016–19)
- Population: 1.8 million
- GDP per capita: € 3,566
- Gini index: 0.265
- Poverty rate: 20.8 percent
- Quota (current): SDR 82.6 million
- Main products and exports: Minerals, base metals, agricultural products
- Output
- Real GDP growth (percent): 2016 Act. 4.1; 2017 4.2; 2018 Proj. 4.0; 2019 Proj. 1/
- Employment
- Unemployment rate 2/: 2016 27.5; 2017 30.5; 2018 29.4; 2019 …
- Labor force participation rate 2/: 2016 41.3; 2017 42.9; 2018 40.4
- Prices
- Consumer prices (period average): 2016 0.3; 2017 1.5; 2018 0.9; 2019 1.4
- Terms of Trade (percent): 2016 100; 2017 98
- Public finance (percent of GDP)
- Revenue and grants: 2016 26.3; 2017 26.2; 2018 26.1; 2019 26.9
- Expenditure: 2016 27.6; 2017 29.0; 2018 32.0
- Overall balance, excluding IFI- and privatization-financed capital projects (Fiscal rule definition): 2016 -1.2; 2017 -1.5; 2018 -1.9
- Overall balance: 2016 -1.3; 2017 -2.8; 2018 -5.0
- Total public debt 3/: 2016 14.3; 2017 16.3; 2018 17.0; 2019 19.6
- Stock of government bank balance: 2016 3.5; 2017 4.5
- Financial sector
- Non-performing loans (percent of total loans) 4/: 2016 4.9; 2017 3.1; 2018 2.6
- Credit to the private sector (eop, percent change): 2016 10.3; 2017 11.5; 2018 9.5
- Effective bank lending rate (eop) 4/: 2016 7.2; 2017 6.8; 2018 7.0
- Balance of payments (percent of GDP)
- Current account balance: 2016 -7.9; 2017 -6.4; 2018 -6.9; 2019 -8.3
- Foreign direct investment: 2016 2.9; 2017 3.9; 2018 2.1
- Reserves in months of imports: 2017 3.8
- External debt: 2016 18.9; 2017 21.2; 2018 20.8; 2019 21.6
Press Release No. 18/481 — IMF Communications Department, December 18, 2018
