Press Release No. 18/35

IMF Executive Board Concludes Article IV Consultation with Kosovo

February 2, 2018

On February 2, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV consultation [1] with Kosovo.

Kosovo has made significant progress since the 2015 Article IV consultation in ensuring fiscal discipline and strengthening the financial sector. The fiscal deficit has been kept well below the 2 percent of GDP fiscal rule ceiling, government bank balances are now above the minimum level of 4.5 percent of GDP, and public debt remains low. Banks remain healthy and credit growth has increased.

Notwithstanding, important structural challenges remain. Weak external competitiveness, high informality, low labor force participation and high unemployment, particularly among young workers, and a large infrastructure gap continue to constrain Kosovo’s growth potential.

While medium-term growth is now projected at around 4 percent, more and better growth is needed to accelerate income convergence with the EU and reduce inequality. The fiscal deficit is expected to remain within the fiscal rule while accelerating IFI-financed investment. The trade deficit is expected to remain high, though on a declining path, but largely funded by non-debt creating inflows, namely remittances and FDI.

Kosovo does currently not engage in multiple currency practices or maintain exchange restrictions on payments and transfers for current international transactions, except for restrictions imposed solely for reasons of international or national security that have been notified to the Fund. Kosovo notified the IMF on January 11, 2018 that it has accepted the obligations of Article VIII, Sections 2, 3 and 4 of the IMF's Articles of Agreement. [2]

Executive Board Assessment [3]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Kosovo’s strong economic performance and progress made under the recent Stand‑By Arrangement to advance macro‑financial stability through fiscal discipline and financial sector reforms. Directors noted, however, that important structural challenges remain and that continued commitment to sound policies and reforms is key to achieving durable and inclusive growth, and improving prospects for income convergence with regional peers.

Directors encouraged the authorities to accelerate structural reforms to boost productivity and private sector development, and address the high informality as well as unemployment, particularly among the youth. They agreed that priority needs to be given to reforming the education sector, enhancing the functioning of the labor market, fostering a business‑friendly environment, and improving governance, particularly by strengthening the anti‑corruption regime and implementing the procurement reforms. Directors noted that improving competitiveness will also require prudent income policies. In this regard, they recommended that any increases in the minimum wage be in line with the current rule‑based minimum-wage‑setting mechanism.

Directors commended the authorities for continued budget discipline and welcomed the adoption of the 2018 budget, which is aligned with the fiscal rule and strikes an appropriate balance between fiscal discipline and developmental needs. They emphasized that to support growth, the overall budget composition should continue to create fiscal space for growth‑enhancing spending in education, health, and infrastructure without compromising capital spending. Directors encouraged the authorities to avoid large current spending increases, broaden the revenue base by strengthening tax administration, and bolster the public investment framework to accelerate the absorption of IFI financing for capital projects. Moving forward with reform of war veteran benefits will also be important.

Directors welcomed the progress made in strengthening the financial sector and reducing structural impediments to bank lending. They encouraged the authorities to maintain the reform momentum, including further strengthening the supervisory framework and continuing to improve access to credit while carefully monitoring developments in the real estate sector. Further enhancements to the AML/CFT framework and improving the performance of the insurance sector will also be helpful.

Directors welcomed Kosovo's acceptance of the obligations of Article VIII, Sections 2, 3, and 4, which will send a positive signal to investors.