IMF Staff Concludes Visit to Kosovo with Agreement on Second and Third Review of the SBA Program

November 18, 2016

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.

• Agreement is subject to completion of policy actions on key fiscal and structural measures, and approval by IMF Executive Board.

• Fiscal discipline is broadly maintained. Efforts to keep current spending contained need to continue to create the space for necessary expansion of capital budget.

• Without reform, spending on war-related schemes could raise to more than €100 million per year, which is significantly more than Kosovo can afford.

An International Monetary Fund (IMF) mission, led by Jacques Miniane, visited Pristina during November 9-18, 2016, to hold discussions on the second and third reviews under Kosovo’s Stand-By Arrangement (SBA) with the IMF. At the conclusion of the visit, Mr. Miniane issued the following statement.

“The IMF mission had constructive discussions with the Kosovar authorities and reached staff-level agreement on policies needed to complete the second and third reviews under the SBA. The agreement is subject to completion of policy actions related to key fiscal and structural measures, and approval by IMF Management and Executive Board. Consideration by the Executive Board is tentatively scheduled for early 2017. The completion of the review would make available SDR 79.2 million (around €100 million), bringing the total funds disbursed to SDR 135.4 million (around €170 million).

“The economy continues to perform well, with growth of 4.1 percent last year, and a similar momentum to this year and next. Strong remittances, accelerating bank credit now growing at more than 9%, and ongoing large infrastructure projects have contributed to this performance. At the same time, the economy continues to face deep-seated structural challenges, including a persistently high trade deficit. Tackling these challenges will require additional and sustained efforts to develop a more dynamic and export-oriented private sector. This would further reduce the existing high level of unemployment.

“Fiscal discipline has been broadly maintained, although pressures are mounting from current spending. The robust growth performance is benefitting tax revenues, which are increasing in line with targets. This, combined with efforts to keep spending within budget allocations despite rapidly growing war veteran pensions, means that the government is highly likely to meet the €98 million deficit target in the budget and in the IMF program. Looking into 2017, the budget submitted to parliament strikes a good balance between fiscal prudence, with an expected deficit ex PAK and ex donor-financed capital projects of about €100 million, and attending to the country’s needs. In particular, efforts to keep current spending contained need to continue, to create the space for the necessary expansion of the capital budget.

“Over the last six months, there has been growing recognition that certain social and pension support schemes need to be reformed. Without reform, the larger than expected number of certified war veterans, together with the newly certified war disabled, could raise spending on war-related schemes to more than €100 million per year, which is significantly more than Kosovo can afford without foregoing much needed spending on other priority areas. These pension schemes are also discouraging people from staying in their jobs, looking for a job, or truthfully declaring income. In this context, the government is planning to reform these schemes, focusing on reclassifying the already certified war veterans according to their differing contributions during the war, and adjusting the benefits accordingly. This is aimed not only at budgetary savings and better labor market incentives but also for governance considerations. But for this reclassification to be successful and broadly accepted, it needs to be based on clear and transparent criteria set in the law, and led by a qualified and impartial commission.

“Banks remain liquid, profitable, and well capitalized, positioning them to remain important contributors to economic growth. Asset quality is also improving, with an NPL ratio at 5.1 percent in September. The Central Bank has recently approved a macro-prudential framework, its first, which will be key to identify and, if needed, handle systemic risks in the financial sector. Much progress has been made in the area of contract enforcement, progress which is giving banks greater confidence to lend at lower rates while demanding less collateral. Going forward, approval of the amended Law on Enforcement Procedures would deepen this progress, by making it harder for debtors to easily challenge enforcement orders and throwing back their cases in the courts. Another sector that needs attention is insurance: it is small, unprofitable, and thinly capitalized, and as such it is not contributing to the financial deepening of the country. The introduction of new prudential rules on January 1st will be the first step towards stabilizing this sector.

“Welcome progress is being made in the area of public procurement, aimed at making it more transparent and efficient. In this context, plans to move towards full e-procurement, and to continue expanding the list of centrally procured goods and services, are to be commended.

“Beyond this, efforts over the last two years to slowly realign wages with productivity trends, together with the slow upgrade of the country’s infrastructure, will slowly contribute to a more dynamic and diversified economy. But this is only a start: meaningfully raising Kosovo’s low living standards and creating jobs for Europe’s youngest population will also require strengthening the rule of law, finding ways to channel large Diaspora flows into more productive uses; and addressing energy security.

“We wish to thank all our interlocutors for their warm hospitality, and the frank and open discussions during the mission.”