{
  "title": "Kosovo: Staff Concluding Statement of the 2022 Article IV Mission",
  "publication": "IMF News, November 4, 2022",
  "sourceUrl": "https://www.imf.org/en/news/articles/2022/11/04/kosovo",
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  "summary": "Kosovo: Staff Concluding Statement of the 2022 Article IV Mission",
  "publishDate": "2022-11-04",
  "sections": [
    {
      "heading": "Recent developments and outlook",
      "content": "- Mission visit: October 25–November 4, 2022; statement issued November 4, 2022.\n- External shock and transmission:\n  - Fallout from the war in Ukraine is affecting Europe’s economic activity and inflation; Kosovo affected via higher food and energy import prices.\n  - Higher input prices have slowed public investment program implementation.\n- Growth and inflation dynamics:\n  - 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.\n  - Inflation reached 14.4 percent in July 2022 (y/y), but has gradually declined thereafter.\n  - Food and energy prices have jointly contributed 80 percent of inflation so far in 2022.\n  - Core inflation projected to reach 4.4 percent in 2022 (up from 2.2 percent in 2021).\n- Fiscal and financial environment:\n  - Stronger fiscal revenues enabled temporary measures and replenished government deposits.\n  - 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).\n  - Projected overall fiscal deficit of at most 1 percent of GDP for 2022.\n  - 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.\n- Outlook and risks:\n  - Staff expect real GDP to grow by 3 – 4 percent in 2023.\n  - Staff baseline projects average inflation to decline to 4 – 5 percent in 2023.\n  - Forecasts depend crucially on international commodity prices, including energy.\n  - 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.\n  - Upside: faster public investment implementation and higher foreign direct investment from near shoring, though effects likely gradual."
    },
    {
      "heading": "Fiscal policy: managing the energy price shock while increasing capital spending absorption",
      "content": "- 2023 draft budget:\n  - Appropriately envisages a return to the fiscal rule deficit ceiling.\n  - Implied rise in the fiscal deficit will provide a moderate fiscal impulse of 1 – 2 percentage points of GDP.\n- Fiscal position and debt:\n  - Strong fiscal buffers; staff assesses public debt to be sustainable.\n  - Public debt-to-GDP ratio projected to remain below the legal ceiling of 30 percent of GDP throughout the forecast horizon.\n- Public wages and administration:\n  - Work on the law regulating public wages should be finalized for implementation in 2023.\n  - Objectives: increase compensation fairness, reduce arbitrariness and number of allowances, retain talent in health, information technology, and public service regulation.\n  - Wage coefficients should be set so the wage bill does not breach its legal ceiling and private sector competitiveness is not negatively affected.\n- Contingency allocations:\n  - Contingency allocations need to be accompanied by a description of intended use; large blanket allocations increase opacity and policy discretion.\n- Energy support measures:\n  - Programs to mitigate surging energy costs need to be temporary and targeted at vulnerable households and viable firms.\n  - 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).\n  - Recommend higher tariffs for peak-hour consumption for non-vulnerable clients to flatten intra-day electricity demand and reduce sector financial imbalance during winter.\n  - Power outages should be a last resort given high social and economic costs.\n  - 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.\n- Public investment absorption:\n  - Increase in public investment envelope is welcome; challenge remains to increase absorption.\n  - Staff urged increased allocations to health and education.\n  - Initiative to compensate contractors for higher project costs through mid-2023 (on an invoice-by-invoice basis) can help speed implementation.\n  - Consistent progress on the 2018 IMF’s Public Investment Management Assessment recommendations can address shortcomings."
    },
    {
      "heading": "Financial policies: preserving credit flow and containing risks",
      "content": "- Supervisory priorities:\n  - As growth decelerates and financial conditions tighten, the Central Bank (CBK) should further strengthen monitoring of banks’ credit and liquidity.\n  - 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.\n- Liquidity preparedness:\n  - To address possible liquidity shocks, systemic banks have contingent credit lines with foreign financial institutions.\n  - The CBK has renewed its repo line with the ECB through early 2023, and intends to negotiate its extension at that time.\n- Housing sector:\n  - Monitoring of the housing sector needs strengthening; housing sector statistics are poor, constraining monitoring capacity.\n- Financial sector reform implementation:\n  - Good pace of implementation of the 2019 Financial Sector Stability Review (FSSR) needs to be maintained.\n  - Priorities: approval of the draft banking law and clearer delineation of responsibilities of the executive and Central Bank boards.\n  - Commended the temporary filling of one deputy governor position through June 2023; remaining deputy governor vacancy needs to be filled as soon as possible."
    },
    {
      "heading": "Structural policies: addressing infrastructure and governance gaps",
      "content": "- Infrastructure constraints:\n  - Gaps in physical and social infrastructure vis-a-vis the EU15 are significant and limit attractiveness for foreign direct investment.\n  - Electricity sector vulnerabilities: high non-technical and commercial losses; unreliability in domestic supply exposes sector to external price fluctuations.\n  - 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.\n- Governance and institutional improvements:\n  - Staff commended improvements: full roll-over of e-procurement and new commercial courts.\n  - Adoption of beneficial ownership reporting recommended to tackle conflicts of interest in public procurement.\n  - Hiring additional commercial court judges will strengthen economic security and reduce informality rates.\n  - Staff urged against additional withdrawals from the pension fund (KPST) as this would harm pension system viability and domestic capital market development.\n  - Encouraged continued efforts to implement the EU-Kosovo Stability and Association Agreement."
    },
    {
      "heading": "Closing",
      "content": "- Mission expressed thanks to authorities and stakeholders for hospitality and open dialogue.\n\nKosovo: Staff Concluding Statement of the 2022 Article IV Mission (November 4, 2022) — IMF Communications Department\n\n---\n\n Content in this bundle\n\n- Kosovë: Deklaratë përmbyllëse e Misionit në kuadër të Nenit IV për vitin 2022\n  - Kosovë: Deklaratë përmbyllëse e Misionit në kuadër të Nenit IV për vitin 2022 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Kosovë: Deklaratë përmbyllëse e Misionit në kuadër të Nenit IV për vitin 2022 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- Republic of Kosovo and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2022/11/04/kosovo"
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    "Published: November 4, 2022",
    "Mission visit: October 25–November 4, 2022; statement issued November 4, 2022.",
    "External shock and transmission:",
    "Growth and inflation dynamics:",
    "Fiscal and financial environment:",
    "Outlook and risks:",
    "2023 draft budget:",
    "Fiscal position and debt:",
    "Public wages and administration:",
    "Contingency allocations:",
    "Energy support measures:",
    "Public investment absorption:",
    "Supervisory priorities:",
    "Liquidity preparedness:",
    "Housing sector:",
    "Financial sector reform implementation:",
    "Infrastructure constraints:",
    "Governance and institutional improvements:",
    "Mission expressed thanks to authorities and stakeholders for hospitality and open dialogue.",
    "**Kosovë: Deklaratë përmbyllëse e Misionit në kuadër të Nenit IV për vitin 2022**",
    "[Republic of Kosovo and the IMF](http://www.imf.org/external/country/UVK/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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