Kosovo: an economy on hold
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The former Finnish President, Martti Ahtisaari, was appointed as the Special Representative for the future status process by the UN Secretary General in 2005. He has worked with all parties to agree on a final status for the province. His report was submitted in March 2006. Since then it has been widely discussed by the main stakeholders, leading to a new round of discussions due to end in November 2007.
Pillars for stabilisation and reconstruction
While discussions on the future status of the province are under way, over recent years UNMIK,with substantial EU support, has been working on building up the machinery of self-government and a modern society across many fields: banking, health, law and order, infrastructure, employment, enterprise and more. Under UNMIK leadership, this work is divided into four ‘pillars’: pillars I (police and justice) and II (civil administration) are led by the UN; pillar III (democratisation and institution-building) is led by the Organisation for Security and Co-operation in Europe; and pillar IV (covering reconstruction and economic development) is financed by the EU. UNMIK has increasingly handed over responsibilities to the Provisional Institutions of Self Government (PISG) of Kosovo, notably in the economic and fiscal area. The PISG is now in charge of budget preparation and management, even though each annual budget still has to be approved by the head of UNMIK.
Even before the conflict of 1999, Kosovo suffered from isolation and lack of investment, while the conflict itself resulted in damaged infrastructure, a drop in agricultural and industrial production, and a frozen financial sector unable even to make the most basic payments such as wages. Since 1999, large-scale financial and technical assistance from the EU (€2.4 billion in total) and other donors has achieved substantial progress in economic reconstruction and institution building, much of this being channelled through the European Agency for Reconstruction which is currently managing aid projects worth over €1 billion from the EU CARDS (Community Assistance for Reconstruction, Development and Stabilisation) programme. In 2007, the Commission launched its successor, the IPA (Instrument for Pre-accession Assistance) programme.
A key element in the EU efforts to rebuild Kosovo is its inclusion in the Stabilisation and Association Process (SAP) for the Western Balkans, and in particular a European Partnership adopted in 2006. Under the SAP, the EU works together with the Kosovo authorities to identify priorities and reforms which then form the framework for EU support. Importantly, the SAP and European Partnership mechanisms give a European perspective to the partner countries in the Western Balkans. Promoting economic development and establishing a functioning market economy is a key element of the Stabilisation and Association Process.
Support to the Kosovan economy
Kosovo: general government expenditure and revenue (in % of GDP) |
Macro-financial assistance (MFA) (see box) from the EU is of particular importance to Kosovo because, under its current political status, it has very limited possibilities to borrow from institutions like the IMF, World Bank, EIB or EBRD, and hardly any from private financial markets. The province is poor, with an annual per capita GDP of around €1 100, and the World Bank estimates that 37% of the population live in poverty. Unemployment is estimated at 44% (2005), although there is a large grey economy, and many of these are longterm unemployed. Today, Kosovo uses the euro as its currency. After the 1999 war, UNMIK decided to use the German mark – ending the use of the Yugoslav dinar – and the euro later replaced the mark. This means that the authorities do not have the means of an independent monetary policy. Further, for those in work, wages are relatively high, which reduces the province’s competitiveness and hinders trade. And Kosovo’s current account deficit is very high, reaching over 19% of GDP in 2006. In this macroeconomic framework foreign aid plays an important role in stabilising the economy – in 2006, total foreign aid still amounted to around 18% of GDP – and budgetary policy becomes a critical tool, a sustainable budget being vital.
Towards a sustainable economy in Kosovo
“The EU provides MFA to Kosovo simply because the fiscal and external positions are currently unsustainable without external assistance. It provides this aid as grants rather than as loans because Kosovo is unable to borrow due to its vulnerable fiscal and external situation,” explains Peter Grasmann, Head of Unit for Economic Affairs in the Western Balkans in DG ECFIN. In 2006, following the Commission’s request, the Council approved a grant of up to €50 million of macro-financial assistance for Kosovo, although it is currently on hold as the province produced, surprisingly, a surplus close to 4% last year, despite a predicted deficit. “This demonstrates why it can be so difficult to plan and implement economic policy in Kosovo,” Grasmann says. “Budgets are highly volatile. So we at DG ECFIN will keep monitoring the situation and intervene later with budget support if needed.”
The settlement of Kosovo’s status is urgent, as it would allow the economy to move forward by providing higher predictability and certainty for investors and normalising economic relations with the outside world. “On behalf of the Commission, DG ECFIN advised Ahtisaari on the economic and financial elements of his proposal, in particular on three issues,” relates Grasmann. “First we proposed a fiscal surveillance and dialogue with the Kosovo authorities, in co-operation with the IMF. We then looked at the sovereign debt of the former Yugoslavia. Here, some form of arbitration may be needed, depending on the outcome of the status settlement. Finally, there is the issue of property rights – where the devil is in the detail.”
Ownership issues
Kosovo has inherited many ‘socially-owned enterprises’ (SOEs) from its Yugoslav parent – for example, services and manufacturing companies – in addition to purely public enterprises, such as utility companies. UNMIK has privatised many of these SOEs and continues to do so, and this has raised strong Serb objections. “There are many appeals concerning the ownership, and thus the beneficiaries, of the privatisation of SOEs. For that reason, the privatisation receipts are now set aside in trust funds and cannot yet benefit the Kosovo economy,” warns Grasmann.
These issues are important for the EU because once a settlement of status is agreed, it will take a larger role in Kosovo, with an EU representative leading an international mission which will have to watch and secure the full implementation of the settlement. So, while an eventual settlement will help bring Kosovo and the Kosovan economy out of its present limbo, there is a difficult road ahead for negotiators.
Macro-financial assistance
Originally, macro-financial assistance (MFA) was an intra-Community mechanism for granting loans to Member States, usually to help balance their external accounts and relieve tight financial situations. These loans were temporary and administered by the Member State’s central bank in support of the national currency. In this form, MFA was an expression of economic solidarity between the Member States in the decades before Economic and Monetary Union. Later, following the break-up of socialist regimes and as the countries of Central and Eastern Europe moved towards accession, a number of them received MFA to ease external financial difficulties and crises and support economic stability on the road to the EU. Today, the main recipients of MFA are countries in the Western Balkans and Central Asia, where it is granted to provide temporary support to central banks, usually as loans but sometimes with grant elements and sometimes as outright grants. In this form, MFA plays a role in the Union’s international aid and development programmes, and its deployment is coordinated closely with programmes of the international financing institutions, such as the IMF and the World Bank, and is linked to economic reforms in the recipient countries.
