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Contents
• Country Context and Development Challenges
• Designing the New CPF
• SCD Priorities
• Government Agenda
• Lessons Learned from Previous Engagement
2
Kosovo: Fragile post-conflict state aspiring to EU
• Kosovo declared independence in February 2008, after being UN protectorate since 1999.
• Incomplete diplomatic recognition remains a key obstacle. Kosovo is recognized as
independent by 109 out of 193 UN member countries, and 23 out of 28 EU member states.
• Other causes of fragility: weak rule of law; lack of interethnic cohesion; traditionally close
network of personal ties and loyalties dominate business relations; high youth unemployment
and risks of radicalization; poor governance and accountability; challenges with including
minorities and integrating returnees and IDPs; and lagging regions.
• Kosovo is potential candidate for EU membership. In recent years, the country has
accelerated its EU integration process, including through: (i) signing the Stabilization and
Association Agreement (SAA) with the EU in October 2015 which came into effect on April 1,
2016; and (ii) deepening coordination with the EC on economic policies and governance issues.
4
Growth in Kosovo has been positive and above Western Balkans average
Real GDP Growth, 2008-2016
Source: World Bank staff calculations based on data from national statistical offices.
5
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2008 2009 2010 2011 2012 2013 2014 2015 2016
Kosovo SEE6
(Est.)
Growth is driven mainly by consumption fueled by remittances and ODA
17.2
9.4 11.2
4.17.6 8.4
10.5
2.93
1.9
2.3 2.2
Net ODA percent of GDP (2009-12)
Personal Remittances percent of GDP (2009-12)
Kosovo decomposition of real GDP
growth, 2011-2016Kosovo remittances and ODA, percent
GDP, 2009-2012
6
4.4%
2.8%3.4%
1.2%
3.9%3.6%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
2011 2012 2013 2014 2015 2016
Consumption Investments Net exports Real GDP growth
(Est.)
Limited role of exports that remain unsophisticated and poorly diversified
18.4
32.929.6
49.6
39.134.3
Kosovo Albania BiH FYR Macedonia Montenegro Serbia
Export, percent of GDP 2009-13
44%
6%
15%13%
4%
16%
Base metals52%
Mineral products
Agriproduce13%
Light mnfg9%
Chemicals6%
Machinery4%
Other 10%39%
51%
Italy15%Other European
Western Balkans39%
China & india22%
Export Composition by Country
2005 (inner circle) vs 2014 (outer circle)
Export Composition by Product Groups
2005 (inner circle) vs 2014 (outer circle)
7
-10
0
10
20
30
40
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
FDI, net inflows (% GDP)
KSV ALB BIH HRV
MKD MNE SRB SVN
0
2,000
4,000
6,000
8,000
KSV BIH MKD ALB SVN SRB HRV MNE
FDI, net inflows per capita (US$)
2004-2009 2010-2015
0
1,000
2,000
3,000
4,000
Jobs Created by FDI Projects in Kosovo
Source: WB WDI
Source: FDI Markets
FDI Performance is weak and new FDI jobs were in non-tradable sectors
8
Infrastructure Bottlenecks are among the Top Constraints for
Private Sector Growth….
50
29
22
10
7 6
18
23
54 4 5
2
9
0
20
40
60
KSV MCD ALB BiH SRB MNE ECA
Infrastructure challenges
Percent of firms identifying electricity as a majorconstraint
Source: BEEPS 2013 and EBRD
…. Investment Climate Reform Agenda Is Yet To Be Completed….
9
66
47
136
124
32 28
5767 71
48
163
0
40
80
120
160
200
Doing Business Rank, 2016
43
2014 14
6 8
45
1912
22
7 4
62
8
29
17
510
0
20
40
60
80
Kosovo Macedonia BiH Serbia Albania Montenegro
Percent of firms identifying A2F a major constraint for growth%
Small (5-19) Medium (20-99) Large (100+)
…. and Financial Intermediation Remains Low and Access to Finance Problematic
17 15
2823
42 41
52
34 35
4451
54 55
65
0
10
20
30
40
50
60
70
KSV ALB SRB MKD BIH SVN HRV
Domestic credit to private sector, % of GDP
2005 2015
7181
6281
55 56
0
25
50
75
100
Kosovo Albania BiH Macedonia Montenegro Serbia
Sources of financing of investment by private firms, %
Internal Resources Banks Supplier Credit Stock Market Other
299276
255 243
190
150
0
100
200
300
Kosovo Macedonia Albania Montenegro BiH Serbia
Value of collateral needed for a loan % of the loan amount
Source: BEEPS 2013Source: WB WDI
Source: BEEPS 2013Source: BEEPS 2013
Kosovo has the potential to achieve exceptional growth performance if it utilizes its demographic dividend…
Population Pyramid: Kosovo vs BiH comparison
11
Bosnia and Herzegovina
…but it continues to face high structural unemployment, low labor force participation rates, and ...
Sources: World Bank staff calculations based on national statistical offices.
Note: The regional total excludes Kosovo.
Kosovo unemployment rate, percent of LF,
2015
Sources: National statistical offices and Eurostat 2015 data.
Note: Kosovo data is for population aged 15-64.
Activity rates as percent of population
over 15 years of age, 2015
12
0
10
20
30
40
50
60
70
80
ALB BiH KSV MKD MNE SRB SEE6 EU28
Largest gender gap in Western Balkans
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
KSV BiH MKD SRB MNE ALB
long term other
... a large reliance on non-wage income in households …
Kosovo: Income shares by source and consumption decile
Source: HBS, Kosovo Agency of Statistics13
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 2 3 4 5 6 7 8 9 10
Shar
e o
f to
tal H
H in
com
e
Decile
2015
Other
Net income from own business
Domestic remittances
Foreign remittances
Pensions
Social welfare receipts
Rent, dividends and interest
Per diem work
Wages and salaries
Kosovo in a self-perpetuating cycle…
Remittances/
Aid Fuelling domestic demand
Tradeables: Large imports of goods/small exports
performance
Non Tradables: sector expansion or price
pressures
Limiting business expansion/investment
opportunities in tradeables
Lack of Job
Creation
Migration
Limited competitiveness
/productivity
Narrow production base and low productivity
Large Appeal for Public Sector Employment/
Increase in Reservation Wages
Large Under- employment in Agriculture and low
labor force participation
Inadequate human capital
base
14
…leading to declining productivity
50
100
150
200
250
300
2003Q4 2004Q4 2005Q4 2006Q4 2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4
Average Wage Public Average Wage private
Average Wage GDP per worker(constant LCU)
Wages and Productivity in Kosovo
Source: Ministry of Finance data.
Note 100= 2003Q4 15
Sources: World Bank staff calculations based on national statistical offices.
Note: The regional total excludes Kosovo.
Poverty headcount in Kosovo, 2000-
2013
Despite progress in poverty reduction, Kosovo remains one of the poorest country in Europe
0
10
20
30
40
50
60
2000 2002/03 2003/04 2004/05 2005/06 2009 2010 2011 2012 2013
Percent of population
Old seriesNew series
Real GDP per capita, percentage of EU
average income per capita
15
20
25
30
35
40
45
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
ALB BIH KSV MKD MNE SRB SEESource: World Bank staff analysis of Kosovo Household
Budget Surveys
16
Need to rebalance growth towards higher productivity and greater competitiveness
Declining marginal benefits: shrinking ODA by reduced security concerns; slowing pace of public investment by past reconstruction efforts; dynamism of the non-tradable sector aconstrained by the small internal market.
Mounting social pressure: protracted low job creation, demographic pressures, and emigration.
EU accession: structural transformation and heightened productivity to cope with competitive market forces and provide opportunities for income catch up.
Reforms to support rebalancing of growth towards higher
productivity and greater competitiveness:
While preserving fiscal discipline, reprioritize public
expenditures and reorient taxation
Improve energy security via affordable and
comprehensive energy strategy
Enhance the infrastructure networks and environment for
business expansion in tradable sectors to reap the
benefits of European integration.
Strengthen inclusion by building human capital and
providing equal opportunities to tap into
unemployed/underemployed resources.
Improve stewardship of Kosovo’s environment and natural
resources. 17
Maintaining macroeconomic stability while
reprioritizing public expenditure
Reducing infrastructure
bottlenecks and creating a more
attractive business environment for
private investment and expansion of tradable
sectors
Better stewardship and greater
productivity of natural resources
Greater inclusion by building
human capital and providing equal opportunities
Rebalancing growth towards higher productivity and greater competitiveness
Key Priorities
Refocusing Kosovo’s growth agenda requires retaining several features of its economy as a foundation, while increasingly tapping into production factors—natural and human resources—that are either chronically underused or not used at all. This will help expand opportunities for the poor to sustainably improve their welfare, reduce poverty, and promote shared prosperity. To broaden the economy’s narrow production base, boost job creation, and reduce the heavy dependence on imports, Kosovo’s current growth strategy needs to be amended across the board through
new governance, macroeconomic, structural, and social policies.18
Detailed Priorities
19
Align the budget more closely with development needs and improve the allocation and efficiency of public spending: As the economy
becomes euroized and given the benefits of structural reform and the changes in income policies, the scope for macroeconomic policy is limited
by the availability of fiscal buffers and external financial support. Proper balance between stabilization and development objectives needs to be
achieved. Kosovo is sensitive to political business cycles and prone to election-related episodes of fiscal largesse. There has also been a
tendency to overinvest in physical infrastructure, particularly roads. It is expected that, soon, the combination of these factors will either cause
the deficit to surge or crowd out priority development-focused spending. Serious trade-offs will be needed, particularly if new power generation
facilities require public resources. Regardless of the magnitude of public spending in the energy sector, reprioritizing expenditures across sectors
would contribute more to addressing the poverty and unemployment challenges and would provide more value for money.
Shift to direct taxation and strengthen tax administration: Meeting all fiscal needs will be more difficult if, as expected, border revenues,
which make up over 70 percent of total revenues, decline as EU integration and free trade agreements advance. A gradual shift to domestic
revenue and direct taxation is necessary and feasible. Tax policy also needs to reflect the degree of compliance, the size of the shadow
economy (which is estimated at 27–35 percent of gross domestic product), and the capacity of the tax administration to adopt appropriate
international best practice.
Maintaining macroeconomic stability while
reprioritizing public expenditure
Detailed Priorities
20
Capitalize on comparative advantages: Kosovo already has comparative advantages in several goods (garments, textiles, and food) and services (travel and
communications). Manufacturing has the potential not only to spur income and exports, but also to generate employment among skilled and unskilled workers. Given
their direct impact on other sectors and on human capital formation, modern services, which are already a major source of income, have the potential to transform
Kosovo’s economy. However, manufacturing and modern services have been held back by large regulatory and infrastructure gaps.
Ensure good governance and reinforce the rule of law: Good governance is an element of the soft infrastructure that is necessary for a well-functioning, competitive,
and innovative market economy that has discarded the socialist legacy. The inadequate development and performance of governance institutions, particularly the
shortcomings of the judicial system, are a major obstacle to business success. Because they raise the costs and risks associated with doing business, they encourage
the offering, giving, receiving, and soliciting of bribes. Addressing gaps in soft infrastructure would also help strengthen social cohesion.
Enhance the business environment. The establishment of an effective legal, regulatory, and administrative framework to govern trade and investment would help
enhance the capacity of businesses to withstand competitive pressures and connect with global value chains, thereby generating jobs and spurring competition,
innovation, and productivity increases. A number of policies that support trade and investment need more work, including in strengthening property rights; reforming and
streamlining licensing; reforming inspections; implementing customs and trade regulations; streamlining standardization, accreditation, and certification systems;
enhancing foreign direct investment and export promotion; clarifying competencies on competition; and tightening the arrangements for corporate governance, financial
reporting, and auditing. Secure property rights: develop the land market, and coordinate the use of national geographical data.
Ensure reliable and affordable energy: Energy insecurity has heavy costs for businesses and is the largest obstacle to attracting high-quality FDI to Kosovo. Relying
on external suppliers is not realistic from either a supply security or a cost perspective. Short-term energy deficit problems can be addressed partly by regional
interconnectivity. In the long run, though, even taking into account the costs of managing environmental and social externalities, the best value-for-money option is an
energy strategy that incorporates renewable energy, energy efficiency measures, and a new power plant.
Increase connectivity. In a small and landlocked economy, connectivity is critical to successful integration with regional and global markets. Kosovo has invested
heavily in new physical capital, but the investment in new highways risk squeezing out other public investments. Also strategic for Kosovo’s competitiveness is
addressing infrastructure bottlenecks in broadband digital communications, which can pave the way for income growth and job creation.
Reducing infrastructure bottlenecks and
create a more attractive business environment
Detailed Priorities
21
Counter the effects of decades of neglect and war: Given the country’s abundance of natural resources and its fertile land, greater productivity and sustainability in
agriculture and mining—where Kosovo benefits from comparative advantages—are critical to exports and to import substitution because they can generate resources for
development. Modernizing agriculture and mining, building up institutions and policies, and setting technical standards and regulations will be critical to addressing
environmental and health risks and to aligning with EU norms. Consideration should also be given to the impact of trade agreements.
Increase productivity in agriculture. Agriculture accounts for about 12 percent of GDP and 25–35 percent of total employment. In Kosovo, it is also a safety net. About
60 percent of the population own land for cultivation, and 30 percent own livestock. About 60 percent of the poor live in rural areas and, to a large degree, depend
directly or indirectly on agriculture for their livelihoods. However, there are structural and interrelated challenges to agriculture’s competitive and growth potential,
including insufficient scale, financing, integration, and market links. Alignment with EU and international standards and technical regulations needs to be ensured. The
sector will need to adapt to the drought and flood threats of climate change, which will affect Kosovo’s limited water resources.
Manage natural resources sustainably. Kosovo has large reserves of lignite, lead, zinc, silver, nickel, cobalt, copper, iron, and bauxite, and high-quality construction
minerals such as andesite, basalt, diabase, gabbro, granite, limestone, and marble. Mining, which was a mainstay of the economy of the former Yugoslavia, has the
potential to generate exports, growth, and resources for development. It is estimated that Kosovo’s mineral endowment is sufficient to offset the start-up costs necessary
for major upgrades. The principal challenge to relaunching Kosovo’s mining industry is attracting private investment, considering that sectoral governance is weak and
Kosovo’s status is unresolved. Reforms to improve the rule of law and minimize discretionary decision making are necessary; but so, too, is addressing a legacy of
unresolved labor, social, and environmental issues that affect workers and communities. Remedying environmental legacies related to mining will be vital to relieving
health impacts, bringing degraded land back into productive use, and reducing public opposition to production.
Better stewardship and greater productivity
of natural resources
Detailed Priorities
22
More jobs and more productive workers are vital to building the critical human capital that is necessary to ensure that low-income
households participate in and benefit from economic growth. Kosovo has a young population and a potentially large demographic dividend,
which makes the jobs agenda all the more critical. Improving the quality and relevance of education at all levels and ensuring equitable access
to educational opportunities at early ages is a first step that needs to be complemented by more opportunities to acquire the skills that private
employers are seeking. The development of these skills opens up wage employment opportunities, but it may also stimulate greater self-
employment and entrepreneurship in such areas as agribusiness, information and communication technology (ICT)–enabled jobs, and other
emerging sectors. Given Kosovo’s extremely low labor force participation, improved opportunities are needed for women and minorities.
For greater social inclusion and cohesion, policies are needed to enhance the opportunities of all wealth groups, ethnicities, and regions to
access health care, education, and social protection equitably. A large share of the population is vulnerable to income shocks and falling back
into poverty, and the social safety net has major gaps. Building up institutions, improving targeting, and making public spending more efficient in
health care, education, employment services, and last-resort social assistance would promote equal opportunity and short-term protection.
Given Kosovo’s history, better targeting and coverage in social protection is paramount, and budgetary support should be directed to the poor
rather than special interest groups. Shortcomings in the inclusion and participation of women at all levels of society are a major concern. Health
outcomes could be enhanced by shifting the focus from hospitals to primary care, water, and sanitation to meet basic needs.
Greater inclusion by building human capital and
providing equal opportunities
Detailed Priorities
Improve the allocation and efficiency of public expenditure
Strengthening tax policy and administration
Deepen and widen financial intermediation
Improve governance, rule of law and business climate
Reduce energy bottlenecks
Increase productivity in agriculture
Ensure sustainable management of natural resources
Reduce transport bottlenecks
Maintaining macroeconomic stability
Reducing infrastructure bottlenecks and create a more attractive
business environment
Better stewardship and greater productivity of natural resources
Increase employment and labor productivity through education
Increase quality and equality of opportunity through labor policies
Increase quality and equality of opportunity through social
protection
Building human capital and providing equal opportunities
Reduce ICT bottlenecks
Increase the quality and equality of opportunity
through health
23