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COUNTRY CONTEXT

Kosovo is a parliamentary republic. It declared independence on February 17, 2008, and is recognized as an independent country by more than 100 United Nations members. Kosovo is a potential candidate for EU membership and signed a Stabilization Association Agreement with the EU that has been in force since April 2016. The last parliamentary elections were held on February 14, 2021, and the current government was elected on March 22, 2021.

Kosovo has experienced steady economic progress since independence, with a nearly 50% increase in per-capita income and a 35% reduction in the poverty rate. The country has successfully transitioned away from a growth model based on high dependence on foreign aid inflows, outperforming peer countries of similar per-capita income thanks to a steady expansion in consumption and investment, with a strong impetus from diaspora inflows, public investment in infrastructure, and financial deepening, amid a stable fiscal stance and an environment of low inflation.

To continue to grow, Kosovo needs to unleash productivity gains and create more quality jobs. This will require addressing infrastructure bottlenecks, prioritizing human capital investment, and creating an environment more conducive to private sector development. Further actions are also needed to promote environmental sustainability, including the fulfillment of the EU¡¯s environmental acquis.

Last Updated: Oct 22, 2024

Strategy

The (CPF) for Kosovo for FY2023-2027 aims to support the country in accelerating its competitiveness for higher job creation and living standards. It outlines priorities for World Bank Group engagement in the country over the next five years, which will contribute to greater public service efficiency and quality, more formal private sector jobs, and increased environmental resilience. The CPF aims at delivering a comprehensive World Bank Group program of lending operations and advisory services and analytics.

The most recent International Development Association (IDA) lending projects will support investments in early childhood development and health sector strengthening. The indicative resource envelope during the first three years of the CPF period amounts to $127 million in IDA 20 financing and is provided on concessional terms, with zero or very low interest charges and long repayment periods. The active IDA and trust fund-financed projects total around $311 million.

11 Active Lending Projects ($ 311.8 million):

• Kosovo Strengthening Digital Governance for Service Delivery Project ($20)
• Fostering and Leveraging Opportunities for Water Security Program ($27.4)
• Kosovo Digital Economy Project ($25)
• Energy Efficiency and Renewable Energy Project ($31)
• Water Security and Canal Protection Project ($16.99)
• Real Estate and Geospatial Infrastructure Project ($16.5)
• Kosovo Social Assistance System Reform Project ($55.93)
• Kosovo Development Policy Operation ($100)
• Early Childhood Education and Care for Kosovo's Human Capital Project ($20)
• Kosovo Comprehensive Approach to Health System Strengthening ($20)
• Improvement and Rehabilitation of Irrigation Systems Project ($10)

Last Updated: Oct 22, 2024

Recent Economic Developments

GDP growth accelerated in the first quarter of 2024, with provisional estimates indicating a 5.6% increase. Private consumption growth (9.7% YoY) provided the highest contribution. On the supply side, net taxes on products contributed most to the growth. Consumer inflation decelerated, averaging 2.1% between January and August 2024. Core inflation, however, remains elevated (3.6% by August). Labor market formalization continued in 2023, reflected in a 4.5% increase in formal employment.

The current account deficit for the first half of the year increased by one quarter from the same period of last year, driven by a higher deficit in the goods balance. Cumulative remittances¡¯ growth by July slowed down to 0.5%, compared to 11.3% during the same period of last year. By August 2024, the government ran a fiscal surplus and tax revenues grew by 11%, reflecting increased compliance and formalization gains. Expenditures increased by 14%, driven by increases in wage spending. In the first quarter of 2024, public and publicly guaranteed debt (PPG) fell to 15.8% of GDP, down from 17.5% in 2023. The financial sector remains robust. By July 2024, credit increased by 13.6% (YoY) and nonperforming loans remained stable at 2%. Poverty reduction is projected to continue, with a decline of 2.2% percentage points in 2024 (from 21.4% in 2023) due to slightly higher growth.

Economic Outlook

GDP growth is projected to accelerate to 3.8% in 2024 and gradually converge towards 4% over the medium term. Growth is likely to be spurred by consumption, underpinned by rising incomes, credit, and public spending. Public infrastructure and private real estate investments, along with post-2025 renewable energy investments, are also expected to contribute to growth. On the production side, services and construction will provide the highest contribution. Merchandise exports will remain subdued in 2024, gradually recovering by 2026. International price stabilization is expected to slow domestic consumer price inflation to 2% in 2024. However, upward pressure on wages could keep core inflation higher. Outmigration and increased travel spending abroad, associated with visa liberalization, represent a drag on growth. The current account deficit is expected to deteriorate in 2024 but improve starting in 2025. Real estate FDI is projected to increase, but more greenfield and productive FDI is needed. Driven by higher current and capital expenditures, the fiscal deficit is expected to edge up to 1.1% of GDP in 2024 and remain in line with fiscal rules over the medium term. With growth expected to accelerate, poverty is also projected to decrease.

Last Updated: Oct 22, 2024