Press Release No. 15/266

Press Release: IMF Announces Staff Level Agreement with Kosovo on a New Stand-By Arrangement

June 9, 2015

An International Monetary Fund (IMF) mission, led by Mr. Jacques Miniane, visited Pristina during May 28 - June 9 to discuss the authorities’ economic reform program, which could be supported by a Stand-By Arrangement.

At the conclusion of the mission, Mr. Jacques Miniane, Mission Chief for Kosovo, made the following statement today in Pristina:

“The mission reached staff-level agreement with the authorities on an economic program that could be supported by a 22-month Stand-By Arrangement (SBA) with the IMF. Proposed access would total SDR 147.5 million (about €185 million), or 250 percent of quota. The staff level agreement is subject to approval by IMF Management and the Executive Board. Consideration by the Executive Board is expected by late July.

“Growth in Kosovo has remained relatively strong and resilient in recent years, driven in part by strong remittances from the Diaspora. However, there is consensus that higher growth is needed to bring incomes up to levels of neighboring countries and provide the high-quality jobs that Kosovo needs. To do so, the authorities intend to address infrastructure and skills gaps, tackle high labor costs, remove structural impediments to bank lending, and strengthen the business environment. Decisive action in these areas will help Kosovo’s economy achieve robust and more inclusive, private sector- and export-led growth.

“Fiscal policies will aim at maintaining average deficits over the course of the program within the fiscal rule’s 2 percent ceiling. This will keep public debt levels low and sustainable through the medium term. Adjustment will focus on containing the impact of last year’s pre-electoral decisions and improving the composition of the budget. In particular, by keeping public wages at current nominal values, containing spending on goods and services, and introducing revenue-enhancing efforts, space will be created for pro-growth priority expenditures. The combination of lower deficits and Fund disbursements will help return the government’s cash buffers to prudent levels.

“Kosovo’s banks are well-capitalized, liquid, and profitable, with improving asset quality. The authorities’ efforts in this area will focus on further strengthening financial sector safety and soundness, as some challenges remain. For instance, without its own currency, the Central Bank of Kosovo’s (CBK’s) capacity to act as a lender of last resort to the banking system is limited. As such, the authorities’ new program will prioritize adopting a new framework for emergency liquidity assistance (ELA), in line with international best practice. Along similar lines, the program will achieve full adoption of risk-based supervision at all banks in Kosovo, which will help the CBK better identify and address risks in the financial sector. Efforts will also be made to develop the CBK’s macroprudential policy toolkit and institutionalize the authorities’ crisis management capacity.

“Structural and institutional reforms and enhanced spending on infrastructure will aim at boosting Kosovo’s competitiveness and productive capacity and set the stage for higher and more dynamic growth in the medium term:

• To build much-needed infrastructure, the authorities plan to expand the investment clause of the fiscal rule to allow capital projects funded by multilateral and bilateral development agencies. This will boost investment in priority areas such as infrastructure and agriculture. Processes will be put in place to ensure transparency and strong oversight of these large projects. In addition, to ensure that debt remains low and sustainable, the expansion of the fiscal rule’s investment clause will require that approval of these new projects be contingent on total public debt remaining below 30 percent of GDP.
• While banks hold sufficient liquidity, credit growth is positive but could be higher, as structural obstacles such as inefficient court and collection processes influence elevated, though declining, interest rate spreads (currently about 750 bps) and collateral requirements. Under the program, the authorities and Fund staff will explore ways to supplement efforts already underway – such as steps to reduce existing court backlogs and refining the use of private enforcement agents for collections – to address such structural impediments.
• To ensure that future public wage increases are consistent with the state of the economy, the authorities will introduce a new rule linking growth in the public sector wage bill to an easily-monitorable macroeconomic indicator. This will also ensure that public sector wages are more aligned with private sector wages.
• Finally, the authorities intend to further strengthen the business environment and create a more transparent and level playing field, so as to attract domestic and foreign investment. In this regard, they will move toward centralized procurement and e-procurement in government, which will improve oversight and control of the procurement system.”

“The mission met with Prime Minister Mustafa, Governor of the Central Bank of Kosovo Hamza, Minister of Finance Hoti, and other public officials, representatives of the private sector, trade unions, and international partners. Fund staff are grateful to the authorities and all other counterparts for their excellent cooperation and frank and open discussions.”