Press Release No. 15/477

Press Release: IMF Ends Visit to Kosovo Reaching Staff-Level Agreement on First Review of Stand-By Arrangement

October 23, 2015

An International Monetary Fund (IMF) mission, led by Jacques Miniane, visited Pristina during October 12–23 to conduct the first review of Kosovo’s economic program supported by a Stand By Arrangement. At the conclusion of the mission, Mr. Miniane made the following statement:

“The mission reached staff-level agreement with the authorities, subject to approval by IMF management and the Executive Board, on a set of policies needed to complete the first review under the SBA. Consideration by the Executive Board is tentatively scheduled for December 16. Completion of the review will make SDR28.1 million (€35.1 million) available to Kosovo.

“Kosovo is making good progress under its economic program. Following an economic slowdown last year, growth is expected to recover to 3.5 percent in 2015, driven largely by domestic demand spurred by strong remittance inflows and an acceleration in bank lending. Growth is expected to accelerate to close to 4 percent in 2016, supported by the implementation of the Brezovica resort investment. Looking toward the medium term, higher and more inclusive growth is needed to raise incomes, develop a productive private sector, and create jobs. We welcome the authorities’ efforts and policy actions towards fulfilling this objective.

“In this regard, we note with some concern that, in recent weeks, parliamentary activity has been stalled. This is delaying the approval of important legislation, some of which is critical to the government’s economic reform agenda and to the viability of Kosovo’s Fund-supported program. More importantly, the situation in parliament risks damaging investor confidence, ultimately to the detriment of all citizens.

“Performance under the program has been good so far. The authorities have comfortably met August targets under the IMF-supported program for both the fiscal balance and government cash buffers. They have also made commendable efforts to contain unproductive current spending, critical to freeing up space for needed capital expenditures and improving long-term growth prospects. Tax revenues have performed well, but the authorities need to ensure that some one-off revenues—from the privatization agency and the sale of telecommunications licenses—materialize as expected in the budget.

“The authorities are moving expeditiously to advance important legislation that will strengthen fiscal policy and help boost growth: First, an amendment to the investment clause in the fiscal rule will help bring in additional capital projects funded by multilateral and bilateral agencies. Important features built into the amendment aim to make the process transparent and keep public debt low and sustainable. Second, adoption of a public sector wage rule will help keep future public wage bill growth in line with broader trends in the economy and make Kosovo more competitive.

“Looking toward 2016, the authorities are committed to adopting a budget that will deliver a deficit of €98 million (1.7 percent of GDP), excluding new donor-financed projects. To this end, it is essential that the authorities continue their efforts to rein in current spending, including wages and salaries. As part of this budget, we support the recently-announced increase of social assistance benefits, as this scheme is well-targeted toward the most vulnerable in society. In addition, we welcome the government’s commitment to ensure that the obligations arising from the full implementation of the Law on Pension Schemes Financed by the State will not exceed €23 million per annum.

“Kosovo’s banks remain well-capitalized, liquid, and profitable. Lending has picked up and asset quality has continued to improve this year, with credit growth of 7.8 percent y/y and an NPL ratio of 7.5 percent as of August. The authorities have made good progress in strengthening up financial stability and identifying measures to boost bank intermediation and access to credit that Kosovo needs to support a more robust economy. The Central Bank of Kosovo (CBK) has adopted a new, high-quality framework for how it would extend liquidity to banks in emergency situations, although we do not expect this tool to be necessary in the near future given the currently healthy state of banks. Improvements to the bank supervision framework are also well underway; the CBK’s new, risk-based approach will allow it to better identify and address potential risks. The authorities recently introduced a system of private bailiffs that is already helping to improve the contract enforcement system and remove structural constraints to bank lending. Further work is needed on contract enforcement however, and we welcome the authorities’ commitment to address remaining weaknesses in this area.

“Reform of the public procurement process, which will improve public sector efficiency and, critically, transparency and governance, is well underway. The authorities have successfully launched centralized public procurement and should follow through by moving to an e-procurement process for all centralized procurement tenders. The authorities should also move quickly to fill the vacant positions in Public Procurement Review Board with qualified individuals, as this is another critical step to ensure the integrity 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, and international partners. Fund staff are grateful to the authorities and all other counterparts for their excellent cooperation and discussions.”