End-of-mission press releases include statements from IMF staff teams conveying preliminary findings after a country visit. The views expressed in this statement are those of the staff of the IMF and do not necessarily represent those of the Executive Board of the IMF. Based on the preliminary findings of this mission, staff will prepare a report which, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

• Rediscovered mobility, political actions and diaspora support are the keys to the strong economic recovery in 2021.
• We expect growth to normalize in 2022 amid continued high pandemic risks.
• The political priorities are to make the budget more growth friendly and to guarantee the independence of the central bank.

Washington, DC: An International Monetary Fund (IMF) mission, led by Mr. Gabriel Di Bella, conducted a virtual tour from October 20 to November 4 as part of the 2021 Article IV consultations. At the end of the visit, the mission made the following statement:

Recovered mobility, political actions and support from the diaspora, the keys to the strong economic recovery of 2021

After contracting 5.3% in 2020, Kosovo’s real GDP is expected to rebound by 7-8% in 2021 thanks to renewed domestic mobility and extraordinary diaspora support. Compared to pre-pandemic levels, remittances in the first 8 months of 2021 have increased by around 40%, while service exports, which include diaspora tourism, have increased by 15%. . In turn, the government’s successful vaccination program has contributed to mobility gains, with Kosovo posting the highest vaccination rate in the Western Balkans at the end of October (47 percent). The continuation of this program in 2022, which will be funded by a budget allocation to secure additional vaccines for boosters and expand coverage, is commendable.

We expect a significant contribution from government policies to this year’s economic rebound:

• While fiscal policy will be less favorable than in 2020, policy actions have provided lifelines for vulnerable households and businesses and supported economic formalization. A cyclical rebound in revenues, budget cuts and weak investment budget execution (in part due to the lack of an operational board within the Public Procurement Review Body, PRB) will lead to a nearly balanced fiscal position in 2021, compared to a deficit of nearly 8% of GDP last year.
• In turn, financial policies allowed credit to continue to flow. The extension of the loan restructuring window in early 2021, combined with improved expectations, has resulted in increased credit growth, which, after some deceleration in 2020, is expected to increase by more than 10% ( year-on-year) in 2021.

Inflation will reach around 5% (year-on-year) by the end of 2021, due to rising energy and food prices. While the rebound in oil prices explained about half of the increase in 2021: S1, the acceleration in food prices contributed to inflation over the summer. While households have so far remained insulated from the sharp increase in electricity prices in Europe, a few companies have been affected by their exposure to the regional electricity market. While the second round effects are still not strong, core inflation has started to climb. We expect inflationary pressures to remain persistent until mid-2022 and gradually subside thereafter.

The banking sector remains broadly resilient. Capital and liquidity buffers are strong and NPLs are low, although the improvement in many financial soundness indicators is in part linked to the policy response to the pandemic. Despite the absence of systemic risks, there are pockets of vulnerabilities associated with the rapid increase in lending to the construction sector by small banks.

Outlook: Growth is expected to normalize amid still high pandemic risks

Absent any negative surprises from the pandemic, we expect real GDP to grow 3-4% in 2022, in part thanks to strong economic momentum this year. Economic activity will also be supported by the further expansion of domestic credit and the easing of fiscal policy, although the size of the latter will depend on the ability to increase the absorption of financed investment projects. from outside and the appointment by Parliament of administrators to the PRB Board of Directors. The rapid increase in cases last August is a reminder that new viral mutations continue to be the main downside risk. In this regard, the still low unused capacity of hospitals may result in the need to renew mobility restrictions if the number of cases increases again. On the positive side, the implementation of an ambitious program of government measures can boost growth, as well as the continuation of extraordinary support to the diaspora, which is expected to subside somewhat in our baseline scenario.

Fiscal policy priorities: making the budget more growth friendly

Windfall tax revenues provided by the diaspora should be used to fill gaps in social and economic infrastructure and diversify the engines of growth. Although the strength of the ongoing economic recovery suggests that fiscal policy is expected to return to fiscal rule from 2022, the budget should include an allocation for emergency spending should the virus return. In addition, the fully replenished fiscal cushions provide an opportunity to initiate the process of obtaining a rating for Kosovo public debt securities, which, over time, could increase the size and liquidity of the market. public debt. In turn, making the budget more growth friendly requires improving the composition, effectiveness and efficiency of spending. In this regard:

• The wage bill must remain within its legal ceiling. The new bill regulating public wages should enhance transparency and pay equity, but be based on wage coefficients that do not unsustainably increase the total wage bill.
• New social transfer programs must be well designed, targeted and transparent. The budget for 2022 could clarify the design and target beneficiaries of the programs envisaged to extend family allowances and transfers to unemployed mothers by 0.6% of GDP and the planned use of a block allowance for subsidies and transfers. 1.6% of GDP. The certification of veterans must be finalized, and the budget envelope for veterans benefits must be isolated from the expected increase in the minimum wage.
• The capacity of the health system must be increased, access to computers in schools and households expanded, and an allocation allocated to increase the number of commercial courts as foreseen in the bill currently under discussion. While security, defense and road infrastructure represent a large part of the investment budget, the risks of degradation call for the dedication of targeted resources to increase the share of households and schools with access to computers and to the expansion of hospital infrastructure. In turn, sustaining and consolidating recent gains in formalizing economic activity requires faster and more efficient commercial courts and continued efforts to improve tax policy and administration as well as increasing payments. electronic.
• Reducing pollution and emissions requires cleaner electricity generation. The installation of filters in Kosovo B, in collaboration with the EU, remains a priority in this area.

Financial policy priorities: Ensuring the independence of the Central Bank

We reiterate the urgency to fill the vacant positions on the Board of Directors of the Central Bank (CBK). This is essential for the CBK to adopt its budget, for monitoring its policies and for implementing the necessary reforms, including ensuring that the financial stability and macroprudential policy functions are properly represented on the board. administration of CBK.

Given the comfortable level of budget buffers, the new SDR allocation can be used to strengthen the CBK’s window for emergency assistance (ELA). This is important because the current size of the ELA is too small in relation to the potential liquidity risks of the financial sector. That said, the SDR allocation is expected to remain available for pandemic-related support if downside risks materialize.

With pandemic-related support measures appropriately removed in 2021, credit risk oversight needs to be stepped up. This will ensure that the provisioning reflects the underlying increase in solvency risks and that the capital buffers are sufficient to absorb write-downs and maintain the flow of credit. In this regard, the CBK should continue to develop its capacity to analyze bank risks in the context of the transition to IFRS9.

The mission wishes to thank the authorities and other stakeholders for the frank, open and constructive dialogue.