Press Release No. 10/300

Press Release: IMF Executive Board Approves € 108.9 Million 18-Month Stand-By Arrangement for the Republic of Kosovo

July 21, 2010

The Executive Board of the International Monetary Fund (IMF) today approved an 18-month Stand-By Arrangement (SBA) for the Republic of Kosovo in a sum equivalent to SDR 92.656 million (about €108.9 million, or US$ 139.6 million), or 157 percent of its quota in the Fund. An initial disbursement equivalent to SDR 18.760 million (about € 22.1 million, or US$ 28.3 million) is available immediately, with subsequent disbursements subject to quarterly reviews.

Kosovo became the 186^th member of the IMF on June 29, 2009. Prior to that, Fund staff had provided technical assistance and policy advice to the United Nations Mission in Kosovo, and, since 2008, to the Republic of Kosovo.

Following the Executive Board’s discussion of Kosovo, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, made the following statement:

“Kosovo’s economic performance has strengthened in recent years, although large fiscal and external imbalances persist, which could be exacerbated by considerable capital spending, including for the country’s first major highway. Against this background, the authorities’ commitment to a comprehensive policy program that aims to lay the foundation for restoring fiscal sustainability and to safeguard financial sector stability is, therefore, most welcome.

“The program seeks to raise revenues and restrain current expenditures in order to limit the impact of large capital spending on the fiscal deficit and on the government’s bank balances. To this end, the Assembly recently revised the 2010 budget and raised excise rates.

“The authorities are committed to improving tax administration, refraining from unfunded spending initiatives, and ensuring the credibility of the budget process by revising future budgets exclusively in a deficit-neutral fashion. Disciplined implementation of these policies will help ensure sound public finances over the medium term.

“An important objective of the Fund-supported program is to shore up the government’s bank balances to a prudent level in order to provide an adequate fiscal reserve and funds for emergency liquidity assistance to the banking system, if this is needed. The timely privatization of PTK, the post and telecom operator, will help replenish bank balances and ensure that deficit financing will not rely on short-term commercial borrowing.

“To effectively address quasi-fiscal risks, the authorities intend to devise a strategy to improve energy sector finances in order to phase out the need for continued budget transfers. To further protect against contingent fiscal liabilities, the authorities recognize the importance of safeguarding the fiduciary responsibilities of the pension fund and of avoiding undue exposure by this fund to a single borrower.

“Kosovo’s financial system has weathered the global financial crisis relatively well, and will be further strengthened by improving crisis preparedness. In this context, the revised central bank law allows for the extension of emergency liquidity assistance, if needed, and the authorities intend to draw up regulations that will operationalize the provision of such assistance, while limiting moral hazard.”

ANNEX

Recent Economic Developments

A decade after the end of the conflict that led to Kosovo’s unilateral declaration of independence in February 2008, growth prospects continue to be hampered by profound structural impediments. These include poor public and private infrastructure, unreliable electricity supply, and inadequate regional connectivity of transportation routes.

The economy remains undiversified and dominated by the trade and services sectors that are boosted by the large foreign presence and remittances. The export base is narrow and dominated by low value-added products, and a sector that could drive sustainable growth has yet to emerge. Public expenditure has increased due in part to rising subsidies and net lending to the publicly-owned loss-making electricity company KEK, which remains under severe financial strain as a result of widespread difficulties with billings and collections, and a tariff structure that does not ensure cost recovery.

Nevertheless, economic activity appears to be strengthening and the recession in Europe in 2009 had only a modest impact on Kosovo’s economy. Following a contraction last year, exports have been rebounding so far in 2010 and remittances—an essential source of funding for private sector activity—have also been recovering.

However, private sector credit growth continues to decelerate. Public spending, especially for capital investments, has supported economic activity. Real growth therefore declined only moderately to 4 percent in 2009, from 5.4 in 2008. Public investment spending is expected to increase in 2010, mainly due to the beginning of the construction of the Route 7 corridor, Kosovo’s first highway.

Program Summary

The key objective of the authorities’ economic program is to lay the foundation for restoring fiscal sustainability and to safeguard financial stability by:

• Exercising restraint in current spending and raise revenues to contain the impact of their large capital investment program on the overall fiscal deficit;

• Securing substantial budget financing from privatization to preserve debt sustainability;

• Pursuing reforms to broaden the tax base and strengthen public financial management;

• Bolstering the government’s bank balances with the Central Bank of the Republic of Kosovo (CBK) to provide scope for emergency liquidity assistance (ELA), if needed;

• Providing the CBK with a mandate for ELA, affirm its independence, and further strengthen the banking system; and

• Improving the financial position of the energy sector.