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Following the 2020 COVID-19-induced recession, Kosovo and other Western Balkan countries have managed to make progress and rebound, given the faster-than-expected recovery in 2021, says the latest edition of the Western Balkans Regular Economic Update. The overall economic outlook looks promising, as output in 2021 is expected to exceed the 2019 levels by year-end, however, the risk remains high as the country is still struggling with the pandemic.
Economic activity is foreseen to expand by 7.1 per cent in 2021, up by 3.1 percentage points from the spring forecast. Exports and private consumption are expected to provide the highest contribution to growth. Private investment is also expected to add to growth. The key driver behind a faster recovery is the rebound in diaspora visits that fuel Kosovo’s service exports and informal remittances. Exports of services exceeded 2019 levels by June 2021, and by year-end are estimated to exceed 2019 levels by 9.5 percent. Exports of merchandise goods have also maintained a strong pace of growth, but their share of total output remains relatively low at 8.4 percent.
However, significant inflationary pressures, primarily from higher import prices, may undermine a stronger recovery in private investment. Public revenue is experiencing an unprecedented rebound due to higher economic activity, but also due to higher inflation and tax compliance measures. As a result, and against public investment under-execution against sluggish public investment, the fiscal deficit is expected to decrease in 2021.
Further, Kosovo needs to grow beyond its current potential to achieve higher living standards and more inclusive development. Thus, reforms should focus on
(1) entrenching macroeconomic stability and sound governance;
(2) increasing firm productivity;
(3) raising farm productivity;
(4) enhancing human capital; and
(5) boosting exports, competition, and private investment, especially foreign direct investment
“A momentum should be built for greater economic opportunities, with policies and investments focusing on longer term reforms to fundamentally transform Kosovo’s growth model into a job-creating model driven by higher productivity,” said Massimiliano Paolucci, World Bank Country Manager for Kosovo and North Macedonia. “This same call applies to the entire region.”
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