could disrupt international travel. Mean- while, the Russian invasion of Ukraine and KOSOVO Key conditions and associated sanctions could generate further inflationary pressure, especially for energy challenges and food, undermining consumption. Ris- ing energy costs pressuring public finances Table 1 2021 Kosovo’s GDP grew by 9.1 percent in 2021, since late 2021, given the vulnerability of Population, million 1.8 following a contraction of 5.3 percent in aged power-generation infrastructure. GDP, current US$ billion 9.0 2020. From Q2 of 2021, vaccination accel- Under the changing external conditions, GDP per capita, current US$ 5057.7 erated, and travel resumed, bolstering eco- maintaining fiscal space to support the a 24.4 Upper middle-income poverty rate ($5.5) nomic activity. Consumption and diaspo- economy is crucial. Furthermore, Kosovo a 29.0 ra-driven service exports remain key needs to build on the recent export growth Gini index b 72.5 growth drivers. momentum by further improving the reg- Life expectancy at birth, years Source: WDI, Macro Poverty Outlook, and official data. Private investment contributes increasing- ulatory environment and by investing on a/ Most recent value (2017), 2011 PPPs. ly but consists mostly of construction, with productivity-enhancing human capital b/ Most recent WDI value (2019). limited productivity spillovers. Positively, and infrastructure. merchandise exports increased significant- ly from pre-pandemic levels and, though Kosovo’s economy experienced a strong still low, are an encouraging sign of private recovery in 2021, supported by a rebound sector growth. The trade deficit, however, Recent developments remains high. in domestic demand and record export Low labor force participation, especially Strong credit growth, remittances, and for- growth. Inflation also intensified, driven for women, remains a pressing constraint eign direct investment (FDI), combined by increases in import prices. Growth is to growth. Overall, 1 in 3 working-age with a direct 3.2 percent-of-GDP fiscal expected to decelerate to 3.9 percent in adults was employed before the recovery stimulus and the spillover from quasi- 2022. The medium-term outlook remains accelerated; women’s employment in- monetary measures in 2020, restored confi- creased by 14 percent, but still only 16 per- dence and boosted domestic demand, dri- positive, but prone to elevated risks; with cent adult women were employed by Q1 ving an exceptional 9.1 percent real output the war in Ukraine significantly increas- 2021. Positively, formal employment in- growth in 2021. Meanwhile, trade in- ing inflationary pressures. Further re- creased throughout 2021. creased substantially. On the production forms to enhance competitiveness would Kosovo, a Euroized economy, has a good side, services and industry contributed the track record of headline fiscal manage- most, while agriculture contributed nega- help sustain Kosovo’s export momentum. ment. However, without access to inter- tively to growth. national financial markets, concessional Until Q1 2021, labor force participa- financing remains a significant source to tion and employment increased only close the infrastructure gap. for women (under 25 especially) and GDP growth is expected to reach 3.9 per- slightly fell for men. However, tax- cent in 2022, but there are significant risks. registered employment rose by near- While the pandemic appears to recede, ly 10 percent throughout 2021. Pover- risks of new vaccine-resistant variants ty is estimated to have decreased by FIGURE 1 Kosovo / Index of merchandise exports in USD, FIGURE 2 Kosovo / Actual and projected poverty rates and 2019Q4=100 percent real GDP per capita Percent Poverty rate (%) Real GDP per capita (constant LCU) 250 70 5000 4500 60 4000 200 50 3500 40 3000 2500 150 30 2000 20 1500 1000 100 10 500 Pre-covid 5 year Exports Merchandise trend 0 0 Actual Exports Merchandise 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 50 Upper middle-income pov. rate Real GDP pc 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1 Sources: Kosovo agency of statistics and World Bank staff calculations. Source: World Bank. Note: see Table 2. MPO 21 Apr 22 about 4 percentage points in 2021 to supporting the recovery through double- Headline inflation is expected to rise to under 20 percent. digit credit growth. 5.4 percent in 2022 but the negative im- Consumer price inflation jumped from 0.2 pact of the war in Ukraine on global trade percent in 2020 to 3.4 percent in 2021, and prices could increase inflation fur- reaching 7.5 percent in February 2022. Im- ther. As a net importer of food, agricul- port prices of energy, food and commodi- Outlook tural inputs, and energy, Kosovo is di- ties fueled inflation. rectly affected by global price surges of Manufacturing exports rose by almost As of March 2022, growth is projected to these goods, despite minor direct trade 70 percent year-on-year. Services’ exports reach 3.9 percent by year end, but there are links with Russia and Ukraine. Food and more than doubled as diaspora travel significant downside risks. While the post- energy inflation could affect the most vul- bounced back in 2021. Remittances also COVID recovery furthers economic activ- nerable households disproportionately, as increased by 26 percent y-o-y. However, ity, the consequences of the Russian inva- they devote large budget shares to these the recovery also increased import de- sion of Ukraine are still unfolding and items. Rising electricity costs might in- mand by almost 50 percent, resulting in could dampen economic prospects. crease fiscal pressures. On the other hand, a deterioration of the current account Private investment growth, from higher base metals’ export revenues could in- deficit (CAD). construction and export-related invest- crease from higher global demand. The fiscal deficit fell from 7.6 percent ment, is expected to support growth in Tax revenue collection is expected to re- of GDP in 2020 to 1.4 percent in 2021, 2022. Improved execution in public invest- main strong in 2022, however, expendi- thanks to a record 29 percent increase in ment should accelerate its recovery. How- ture should outpace revenues due to a re- tax revenues. Tax revenues were boosted ever, a positive contribution from invest- bound in capital expenditure and higher by the economic recovery, higher infla- ment hinges on the strength of diaspora current expenditures from energy subsi- tion, and formalization. Nominal current demand for real estate, a moderation in dies and social transfers. As a result, the expenditure grew by 7 percent, mostly construction input prices, and the ability of fiscal deficit is expected to widen to 2.2 due to the fiscal stimulus program. Nom- the Government to maintain current capi- percent of GDP and remain within the inal public capital expenditure increased tal budgeting against higher pressures for fiscal rule over the medium term. PPG but remains below its pre-pandemic share energy and social transfers. The current ac- debt is expected to reach 24.3 percent of of GDP. Public and publicly guaranteed count deficit is projected to exceed 9 per- GDP in 2022. (PPG) debt remained stable at 22.5 percent cent of GDP, as imports continue to rise of GDP. The financial sector strengthened, due to higher domestic demand. TABLE 2 Kosovo / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 4.8 -5.3 9.1 3.9 4.3 4.2 Private Consumption 5.6 2.5 7.0 1.7 1.8 1.8 Government Consumption 10.1 2.1 0.7 2.3 6.8 3.1 Gross Fixed Capital Investment 2.9 -7.6 10.5 9.0 7.5 7.7 Exports, Goods and Services 7.6 -29.1 69.1 5.0 5.5 6.0 Imports, Goods and Services 4.5 -6.0 27.9 3.4 3.6 3.5 Inflation (Consumer Price Index) 2.7 0.2 3.4 5.4 1.6 2.2 Current Account Balance (% of GDP) -5.6 -7.0 -9.1 -9.7 -9.0 -8.0 Net Foreign Direct Investment (% of GDP) -2.7 -4.2 4.2 4.2 4.0 4.0 Fiscal Balance (% of GDP) -2.9 -7.6 -1.4 -2.2 -2.6 -2.5 Debt (% of GDP) 17.0 22.0 22.1 24.0 25.3 26.9 Primary Balance (% of GDP) -2.6 -7.1 -1.0 -1.7 -2.2 -2.2 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 21.1 23.2 19.4 17.6 15.8 14.4 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2017-HBS.Actual data: 2017. Nowcast: 2018-2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2017) with pass-through = 0.7 based on GDP per capita in constant LCU. MPO 22 Apr 22