“Alarmi” World Bank for Kosovo's economic downturn

Economic growth in Kosovo in 2022 is expected to slow down to the level of between 3 and 4 percent, assuming prices will normalise during the second half of the year. Continued private investments and accelerated investment and public consumption are expected to be supportive of growth.

So says the World Bank's latest regular economic report on Kosovo.

Kosovo's economy reportedly experienced a complete recovery supported by private consumption, record export growth, extraordinary return of visits by diaspora, strong credit growth, and considerable fiscal incentives.

With the recovery of the economy improved fiscal balance and public debt growth slowed thanks to the strong performance of public revenues. However, the World Bank recalls that recovery was accompanied by extremely high inflationary pressures, especially during the second part of the year, driven mainly by increasing imports prices.

Prolonged effects of recent external pressures could further exacerbate Kosovo's economic prospects. Structural obstacles, such as aging power generation capacities, add to uncertainty.

The increase in 2022 is expected to slow to the level of between 3 and 4 percent, assuming that prices will normalise during the second half of the year. Continued private investments and accelerated investment and public consumption are expected to be supportive of growth.

There is an urgent need to address restrictions on higher productivity growth and investment in human capital so that Kosovo can take advantage of the advantages of young population”, said Massimiliano Paolucci, World Bank Country Manager for Kosovo and Northern Macedonia.

“If Kosovo does not strengthen its human capital, it will be more difficult to ensure faster and more comprehensive growth, there will be no workforce prepared for future jobs, as well as will not be able to compete in the global economy,” has added it.

In contrast, the report mentions that the six countries of the Western Balkan region are facing a new range of economic challenges, despite better recovery than expected from recession caused by the COVID-19.

BPV growth in the region hit 7.4 percent in 2021, following a 3.2 percent contraction in 2020. This increased return brought considerable job openings, and employment demand helped reduce poverty in all six Western Balkan economies.

In 2021, the employment rate in the Western Balkans reached 45.8 percent in history. However, the recovery after pandemic was interrupted by waves of shocks that war in Ukraine has sent throughout the region. Already, growth for the Western Balkans is projected to be 3.1 percent in 2022, further in the report.

The risks of falling for the region's economic perspective seem extremely distressing. Enlarging the conflict or prolonging the war in Ukraine could cause further turmoil in global trade and energy and food prices. Refinance risks may arise if external financial market conditions continue to tighten. Retirement of debt can become a concern if limited fiscal space is eroded by policy responses to rising energy and food prices, while refinance costs increase, the World Bank notes.

“in such an environment, government policy should focus on building sustainability and on the company of structural reforms to support growth and find direction along crises,” said Sanja Madzarevic-Swister, World Bank Senior Economist and one of the report's leading authors.

With limited fiscal space, countries would have to weigh carefully the costs and benefits of new expenses in response to rising energy and food prices, giving priority to more vulnerable families,” she added.

In the context of the energy crisis in Europe, the report also provides an assessment of the vulnerability of the countries of the Western Balkans to shocks from energy prices, measures taken by governments to ease impacts, and how the crisis may impact the movement ahead with the transition of green energy.

To respond to the current energy crisis and to ensure protection of households and most vulnerable firms, Western Balkan countries should not forget their long-term goals of achieving energy security and residence as part of the green reform agenda,” adds Richard Reccord, World Bank chief economist and one of the main authors of the report.

The report argues that sustainable growth cannot happen without structural reforms that increase productivity, increase competitiveness, invest in human capital, and strengthen governance.

Measures for lowering business regulatory costs, increasing competition in the market, supporting participation in the labour market, and strengthening public institutions' independence would all be supportive of growth in an uncertain environment.