Kosovo’s Economy Projected to Contract by 4.5 Percent in 2020 Due to COVID-19

The Western Balkans region is expected to enter a recession in 2020, with all six countries forecast to experience negative growth as they continue to grapple with the economic impacts of the COVID-19 (Coronavirus) pandemic.

Regional growth in the Western Balkans is forecast to be between -3 and -5.6 percent, according to the World Bank’s latest Regular Economic Report (RER) – which uses a baseline scenario and a downside scenario in the face of high uncertainty brought on by the pandemic. The baseline scenario assumes that the outbreak in Europe begins to slow soon enough, such that containment measures can be lifted by the end of June and a gradual recovery can begin in the second half of 2020. The downside scenario assumes the outbreak lingers and containment measures can only be lifted at end of August, with a recovery of economic activity only in final quarter of 2020.

“The magnitude of the recession depends on the duration of the pandemic in Europe. While the economic impact of the ongoing pandemic in the region is difficult to forecast, there is little doubt that this pandemic is wreaking havoc on lives around the region – taxing health care systems, paralyzing economic activity, and undermining the wellbeing of people,” says Linda Van Gelder, World Bank Country Director for the Western Balkans.

“Over the medium-term, growth is expected to rebound strongly in the region, as economic activity gradually returns to normal, but this also depends on the length and intensity of the current crisis, as well as what steps policymakers take to address this pandemic.”

Real GDP Growth, Two Scenarios for 2020
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The recession in all Western Balkan countries will be driven by a significant drop in both domestic and foreign demand during the pandemic. Travel restrictions and social distancing measures have a particularly protracted impact on tourism and services, the latter accounting for around 50 percent of total employment in five countries in the region and 75 percent in Montenegro. Supply-side disruptions and lower demand further affect many manufacturing sectors, while liquidity constraints and acute uncertainty stifle investment.

The main risk for the Western Balkans is that a prolonged pandemic, as well as a deeper recession in the European Union, could make the unfolding economic crisis difficult to handle.

According to the report, quick, bold, and carefully designed mitigation measures can limit the social and economic impact of this crisis. Governments in all six countries have announced fiscal and social measures to support households and businesses during the emergency-ranging from 1 percent to 6.7 percent of GDP. Countries that entered the crisis with larger fiscal and external buffers have more space to finance larger support programs.

The announced short-term measures are necessary and aligned with the policy responses of EU countries. However, more people in the Western Balkans rely on self-employment, part-time work, and incomes from informal activities. These groups are vulnerable to the crisis but difficult to support through conventional measures.

According to the report, additional support – fine-tuned to the local context – may be necessary to support all vulnerable groups in the region. Several Western Balkan countries, for example, announced an expansion of the coverage of existing social transfer programs to support self-employed families and more vulnerable people. Given the uncertain length of this crisis, policymakers everywhere face the same policy dilemma: using all available fiscal space to mitigate the immediate impact can backfire if the crisis endures. Policy responses should therefore be calibrated to mitigate the immediate effects, adjust to new realities that may emerge, and to leave space to prepare the economy for a recovery.

For Kosovo, the report projects that the economy will contract by 4.5 percent in 2020, followed by a rebound in 2021. The outbreak of COVID-19 and the necessary containment measures are putting investment, private consumption, but also exports and remittances from the diaspora, under unprecedented strain. While consumption may rebound as the economy recovers, service exports and investment will take longer to recover. Against this background, public revenues will experience a significant shortfall.

Because Kosovo entered the crisis with some fiscal buffers (high government deposits, relatively low public debt), it now has some fiscal room to mitigate the effects of the pandemic, albeit limited by the concurrent growth of current expenditure. However, a prolonged outbreak and containment measures may lead to a more severe recession and a larger revenue shortfall, further limiting the fiscal space for policy response. In addition to a general deferral of tax payments, the caretaker government has rapidly taken action and announced an emergency response package of about 2.8 percent of GDP to support affected citizens, businesses, and professions. Adequate targeting for those most in need remains crucial in softening the immediate economic, poverty, and social impact of the crisis. It will be important to maintain some fiscal space to be able to provide additional support if the crisis lasts longer and to support the necessary economic recovery.

World Bank is finalizing a program of activities, likely to exceed €120 million, to support Kosovo manage and mitigate the impact of COVID-19. It includes a new fast-track project to respond to urgent health sector priorities and protect the income of households, a restructuring of already approved projects to mobilize funds in support of SMEs, and budget support for economic recovery and to help authorities meet their financing needs.

“World Bank is committed to remain a strong partner for Kosovo during these difficult times and our teams are working to respond as quickly as possible and help Kosovo with the COVID-19 crisis”, said Marco Mantovanelli, World Bank Country Manager for Kosovo. “Following World Bank approval, swift signing of the agreement by the Government as well as ratification by the Parliament is needed to ensure that funds are available to benefit Kosovo and its citizens”.

The report focuses on the macroeconomic impact of COVID-19 in the Western Balkan countries, setting the stage for additional analysis. A series of Regular Economic Report notes, looking at the impact on specific economic areas, social sectors, and on poverty and income distribution in the region, will be be published in a follow-up e-launch in May.

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