Republic of Kosovo - Economy

Economy

Kosovo was the poorest part of the former Socialist Federal Republic of Yugoslavia (SFRY), and in the 1990s its economy suffered from the combined results of political upheaval, the Yugoslav wars, Serbian dismissal of Kosovo employees, and international sanctions on Serbia, of which it was then part.

After 1999, it had an economic boom as a result of post-war reconstruction and foreign assistance. In the period from 2003 to 2011, despite declining foreign assistance, growth of GDP averaged over 5% a year. This was despite the global financial crisis of 2009 and the subsequent eurozone crisis. Inflation was low.

Kosovo has a strongly negative balance of trade; in 2004, the deficit of the balance of goods and services was close to 70 percent of GDP, and was 39% of GDP in 2011. Remittances from the Kosovo diaspora accounted for an estimated 14 percent of GDP, little changed over the previous decade. Most economic development since 1999 has taken place in the trade, retail and construction sectors. The private sector which has emerged since 1999 is mainly small-scale. The industrial sector remains weak. The economy, and its sources of growth, are therefore geared far more to demand than production, as shown by the current account, which was in 2011 in deficit by about 20% of GDP. Consequently Kosovo is highly dependent on remittances from the diaspora (the majority of these from Germany and Switzerland), FDI (of which a high proportion also comes from the diaspora), and other capital inflows.

Government revenue is also dependent on demand rather than production; only 14% of revenue comes from direct taxes and the rest mainly from customs duties and taxes on consumption. In part this reflects low levels of production as shown in the current account; but in part it reflects very low direct taxation rates. In 2009 corporation tax was halved from 20% to 10%; the highest rate of income tax is also 10%.

However, Kosovo has very low levels of general government debt (only 5.8% of GDP), although this would rise if Serbia recognised Kosovo and an agreement was reached on Kosovo's share of SFRY debt (which Serbia estimated in 2009 at $1.264 billion and which it is currently servicing, though Kosovo is putting money into a separate account to take account, on a conservative basis, of potential liabilities). The Government also has liquid assets resulting from past fiscal surpluses (deposited in the Central Bank and invested abroad). Under applicable Kosovo law, there are also substantial assets from privatisation of socially owned enterprises (SOEs), also invested abroad by the Central Bank, which should mostly accrue to the Government when liquidation processes have been completed.

The net foreign assets of the financial corporations and the Pension Fund amount to well over 50% of GDP. Moreover, the banking system in Kosovo seems very sound. For the banking system as a whole, the Tier One Capital Ratio as of January 2012 was 17.5%, double the ratio required in the EU; the proportion of non-performing loans was 5.9%, well below the regional average; and the credit to deposit ratio was only just above 80%. The assets of the banking system have increased from 5% of GDP in 2000 to 60% of GDP as of January 2012. Since the housing stock in Kosovo is generally good by South-East European standards, this suggests that (if the legal system's ability to enforce claims on collateral and resolve property issues is trusted), credit to Kosovars could be safely expanded.

The United Nations Interim Administration Mission in Kosovo (UNMIK) introduced an external trade office and customs administration on 3 September 1999, when it established border controls in Kosovo. All goods imported to Kosovo face a flat 10% duty. These taxes are collected at all Customs Points at Kosovo's borders, including that between Kosovo and Serbia. UNMIK and Kosovo institutions have signed free-trade agreements with Croatia, Bosnia and Herzegovina, Albania and the Republic of Macedonia.

The euro is the official currency of Kosovo. Kosovo adopted the German mark in 1999 to replace the Serbian dinar, and later replaced it with the euro, although the Serbian dinar is still used in some Serb-majority areas (mostly in the north). This means that Kosovo has no levers of monetary policy over its economy, and must rely on a conservative fiscal policy to provide the means to respond to external shocks. Officially registered unemployment stood at 40% of the labour force in January 2012, although some estimates have put it as high as 60%. The IMF have pointed out, however, that informal employment is widespread, and the ratio of wages to per capita GDP is the second highest in South-East Europe; the true rate may therefore be lower. Unemployment among the Roma minority may be as high as 90%. The mean wage in 2009 was $2.98 per hour.

The dispute over Kosovo's international status, and the interpretation which some non-recognising states place on symbols which may or may not imply sovereignty, continues to impose economic costs on Kosovo. Examples include flight diversions because of a Serbian ban on flights to Kosovo over its territory; loss of revenues because of a lack of a regional dialling code (end-user fees on fixed lines accrue to Serbian Telecoms, while Kosovo has to pay Monaco and Slovenia for use of their regional codes for mobile phone connections; no IBAN code for bank transfers; and no regional Kosovo code for the Internet. Nevertheless, Information and communications technology in Kosovo has developed very rapidly and one survey has suggested that broadband internet penetration is comparable to the EU average.

A major deterrent to foreign manufacturing investment in Kosovo was removed in 2011 when the European Council accepted a Convention allowing Kosovo to be accepted as part of its rules for diagonal cumulative origination, allowing the label of Kosovo origination to goods which have been processed there but originated in a country elsewhere in the Convention. Since 2002 the European Commission has compiled a yearly progress report on Kosovo, evaluating its political and economic situation. Kosovo became a member of the World Bank and the International Monetary Fund on 29 June 2009.