OREANDA-NEWS. April 01, 2015. A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments. The authorities have consented to the publication of this statement. 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. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

An International Monetary Fund (IMF) mission visited Pristina during March 19-30 for the 2015 Article IV consultation discussions, part of the IMF’s regular surveillance of all member countries. At the end of the visit, IMF mission chief Jacques Miniane thanked the authorities and other interlocutors for their excellent cooperation, high-quality discussions, and warm hospitality, and issued the following statement:

Growth in Kosovo has been reasonable and in some ways more resilient than in neighboring countries. But faster growth is needed to create jobs and reduce poverty. Following large spending commitments made in the run up to the elections, the fiscal deficit is expected to be higher than budgeted this year. The authorities need to gradually adjust to preserve fiscal sustainability, including by containing unproductive current spending to create space for priority expenditures. Kosovo’s banks are sound and well-supervised but more across-the-board efforts are needed to increase access to finance. A key challenge for Kosovo going forward will be to increase employment and raise the productive and export capacity of its economy. This will require addressing high labor costs and skills mismatches, ensuring energy security, and improving the business environment. Better harnessing donor financing would help to support these efforts.

1. Steady remittances have kept growth going despite external and domestic headwinds, and we expect the economy to expand by just above 3 percent this year. This is better than some of Kosovo’s neighbors, but still below what the economy needs to generate enough jobs and raise incomes.

2. Last year, the authorities significantly increased public wages and benefits, and met the fiscal rule only with deep cuts in much-needed capital spending. This year, the full year effect of these large commitments, together with higher spending on Route 6, are expected to push the budget deficit above the fiscal rule’s limit. But just as fiscal adjustment is important to preserve credibility and safeguard low public debt levels, so is the quality of this adjustment. Any consolidation should target unproductive current spending and leave space open for spending on things that Kosovo urgently needs, such as development projects, education, and health services. As such, the decision in the 2015 budget to keep public sector wages at 2014 levels was appropriate and should be carried forward. Recently approved increases in excise taxes are also welcome, as they bolster the state’s resources to face higher obligations in a relatively non-distortionary manner. Additional measures may be needed this year and next; a proper VAT and other tax reforms that yield a meaningful increase in revenues could be an important option.

3. In this context, a clear rule that limits public sector wage growth relative to specific macroeconomic indicators would be a good complement to the fiscal rule. The authorities are considering moving in this direction. Such a rule would help to prevent repeated discretionary jumps in public sector wages that have exceeded productivity gains, and diverted funds from priority items. Moreover, growth in Kosovo should ultimately come from the private sector. Limiting public sector wages would enable private companies to compete on more equal terms when it comes to attracting skilled workers.

4. Kosovo’s banks are well-capitalized, liquid, and profitable. Non-performing loans are stable at just above 8 percent and well provisioned. The authorities have recently taken appropriate measures to improve bank supervision, strengthen the emergency liquidity assistance framework (including by seeking letters of support from parents of foreign subsidiaries), and coordinate with foreign supervisors. Incipient efforts to oversee macroprudential policy are steps in the right direction and should be deepened.

5. But despite banks’ good health and ample liquidity, lending remains constrained, partly because of the environment in which banks operate. Due to the economy’s high levels of informality and an inefficient legal system, interest rate spreads are high (although they have been declining), and banks apply high collateral requirements. The authorities are taking steps to address some of these problems: establishing timelines for writing off bad loans, planning a bankruptcy law, and initiating a strategy to lower informality. But these initiatives are in their early stages and will take time. The authorities should also improve the capacity of the court system to deal with financial cases and clearing court backlogs. The introduction of private bailiffs is a move in the right direction.

6. A key challenge for Kosovo going forward will be to raise the productive and export capacity of its economy. This is, rightly so, the highest policy priority of the authorities. An immediate challenge will be to attend to Kosovo’s aging energy infrastructure. In the years ahead, the old power plants may not be able to provide a reliable and predictable supply of electricity to the private sector, presenting a key obstacle to development.

7. Kosovo has one of the lowest employment rates in Europe (overall and particularly among youth and women), partly due to large skills mismatches. The authorities should expand access to pre-primary education and improve the quality of education across all levels, with a particular focus on vocational training.

8. Finally, the country needs to continue to improve governance and the business environment. This means strengthening the rule of law and applying the same standards to everyone. Much of Kosovo’s de jure legal institutional framework has improved in recent years, but implementation has lagged and perceptions of corruption remain.

9. The authorities have identified these challenges and presented a broad government program. Its implementation will help foster stronger growth and unlock Kosovo’s potential.