Kosovo’s Economic Growth to Decelerate in 2022 After a Strong Post-Pandemic Recovery

VIENNA  – The six countries of the Western Balkans region are facing a new range of economic challenges, despite a better-than-expected rebound from the recession caused by the COVID-19 pandemic, says the latest Western Balkans Regular Economic Report (#21 in the series).

GDP growth in the region reached 7.4 percent in 2021, after a contraction of 3.2 percent in 2020. This return to growth saw significant job creation, with employment demand helping to reduce poverty across all six Western Balkan economies. In 2021, the Western Balkan employment rate increased to a historical high of 45.8 percent. However, the post-pandemic recovery has been cut short, as the war in Ukraine sends shockwaves across the region. Growth for the Western Balkans is now forecast at 3.1 percent in 2022.

Kosovo’s economy experienced a full recovery, supported by private consumption, record growth in exports, an exceptional rebound in diaspora visits, strong credit growth, and a significant fiscal stimulus. As the economy recovered, the fiscal balance improved, and public debt growth decelerated on account of strong public revenue performance. However, the recovery was also accompanied by exceptionally high inflationary pressures, especially during the second part of the year, driven primarily by increases in import prices.

Prolonged impacts of recent external pressures may further deteriorate Kosovo’s economic prospects. Structural bottlenecks, such as outdated energy production capacities, further add to the uncertainty. Growth in 2022 is expected to decelerate to between 3 and 4 percent, assuming prices normalize during the second half of the year. Ongoing private investment and accelerated public investment and consumption are expected to be supportive of growth.

“There is a pressing need to tackle constraints to higher productivity growth and to invest in human capital for Kosovo to utilize its advantage of having a young population”, said Massimiliano Paolucci, World Bank Manager for Kosovo and North Macedonia. “If Kosovo does not strengthen its human capital, it will find more difficult to achieve faster and more inclusive growth, it will not have a workforce prepared for the jobs of the future, and it will not be able to compete in the global economy.”

The downside risks to the region’s economic outlook are daunting. An expanded conflict or prolonged war in Ukraine could trigger further disruptions to global trade and to energy and food prices. Refinancing risks could arise if external financial market conditions continue to tighten. Debt sustainability may become a concern if limited fiscal space is eroded by policy responses to higher energy and food prices amidst rising refinancing costs.

“In such an environment, government policy needs to focus on building resilience and on undertaking structural reforms to support growth and steer through the crises,” said Sanja Madzarevic-Sujster, World Bank Senior Economist and one of the report’s lead authors. “With limited fiscal space, countries will need to carefully weigh the costs and benefits of new spending commitments in response to higher energy and food prices, prioritizing the most vulnerable households.”

In the context of the energy crisis in Europe, the report also provides an assessment of the vulnerability of the Western Balkan countries to energy price shocks, measures adopted by the governments to mitigate the impacts, and how the crisis can affect the green energy transition going forward.

“In responding to the current energy crisis, and ensuring protection of the most vulnerable households and firms, the Western Balkans should also not lose sight of their long-term goals to achieve energy security and resilience as part of the green reform agenda,” adds Richard Record, World Bank Lead Economist and one of report’s the lead authors.

The report argues that sustained growth cannot happen without structural reforms to boost productivity, increase competition, invest in human capital, and strengthen governance. Measures to reduce business regulatory costs, increase market competition, support labor market participation, and strengthen the independence of public institutions would all be supportive of growth in an uncertain environment.

 

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