Economy of Kosovo

Developments from 1999

After strong increases in 2000 and 2001, as a result of post-war reconstruction and foreign assistance, growth in GDP was negative in 2002. In the period from 2003 to 2011 it resumed its upward trajectory, despite declining foreign assistance, averaging over 5% a year. It is noteworthy that growth continued during the financial crisis of 2009, and returned to 5% in 2011 Inflation was low, while the budget posted a deficit for the first time in 2004. Kosovo has a negative balance of trade; in 2004, the deficit of the balance of goods and services was close to 70 percent of GDP, and was 39% of GDP in 2011. Remittances from the Kosovo diaspora accounted for an estimated 14 percent of GDP, little changed over the previous decade.

Most economic development since 1999 has taken place in the trade, retail and construction sectors. The private sector which has emerged since 1999 is mainly small-scale. The industrial sector remains weak. The economy, and its sources of growth, are therefore geared far more to demand than production, as shown by the current account, which was in 2011 in deficit by about 20% of GDP. Consequently, Kosovo is highly dependent on remittances from the diaspora (the majority of these from Germany and Switzerland), FDI (of which a high proportion also comes from the diaspora, and other capital inflows). Government revenue is also dependent on demand rather than production; only 14% of revenue comes from direct taxes and the rest mainly from customs duties and taxes on consumption.

However, Kosovo has very low levels of general government debt (only 5.8% of GDP) and government liquid assets resulting from past fiscal surpluses (deposited in the Central Bank and invested abroad). Under applicable Kosovo law, there are also substantial assets from privatisation of socially-owned enterprises (SOEs), also invested abroad by the Central Bank, which should mostly accrue to the Government when liquidation processes have been completed. The net foreign assets of the financial corporations and the Pension Fund amount to well over 50% of GDP.

Moreover, the banking system in Kosovo seems very sound. For the banking system as a whole, the Tier One Capital Ratio as of January 2012 was 17.5%, double the ratio required in the EU; the proportion of non-performing loans was 5.9%, well below the regional average; and the credit to deposit ratio was only just above 80%. The assets of the banking system have increased from 5% of GDP in 2000 to 60% of GDP as of January 2012. Since the housing stock in Kosovo is generally good by South-East European standards, this suggests that (if the legal system's ability to enforce claims on collateral and resolve property issues is trusted), credit to Kosovars could be safely expanded.

The United Nations Interim Administration Mission in Kosovo (UNMIK) introduced an external trade office and customs administration on September 3, 1999, when it established border controls in Kosovo. All goods imported to Kosovo face a flat 10% duty. These taxes are collected at all Tax Collection Points at Kosovo's borders, including that between Kosovo and Serbia's uncontested territory. UNMIK and Kosovo institutions have signed free-trade agreements with Croatia, Bosnia and Herzegovina, Albania and the Republic of Macedonia.

The Euro is the official currency of Kosovo. Kosovo adopted the German mark in 1999 to replace the Yugoslav dinar, and later replaced it with the euro, although the Yugoslav (and later Serbian) dinar is still used in some Serb-majority areas (mostly in the north). This means that Kosovo has no levers of monetary policy over its economy, and must rely on a conservative fiscal policy to provide the means to respond to external shocks.

Officially registered unemployment stood at 30.9% of the labour force in September 2013, although 63.1% of the population are not economically active. The IMF have pointed out that informal employment is widespread, and the ratio of wages to per capita GDP is the second highest in South-East Europe; the true rate may therefore be lower. Unemployment among the Roma minority may be as high as 90%. The mean wage in 2009 was $2.98 per hour.

The dispute over Kosovo's international status, and the interpretation which some non-recognising states place on symbols which may or may not imply sovereignty, continues to impose economic costs on Kosovo. Examples include flight diversions because of a Serbian ban on flights to Kosovo over its territory; loss of revenues because of a lack of a regional dialling code (end-user fees on fixed lines accrue to Serbian Telecoms, while Kosovo has to pay Monaco and Slovenia for use of their regional codes for mobile phone connections); no IBAN code for bank transfers; and no regional Kosovo code for the internet. A major deterrent to foreign manufacturing investment in Kosovo was removed in 2011 when the European Council accepted a Convention allowing Kosovo to be accepted as part of its rules for diagonal cumulative origination, allowing the label of Kosovo origination to goods which have been processed there but originated in a country elsewhere in the Convention.

Since 2002 the European Commission has compiled a yearly progress report on Kosovo, evaluating its political and economic situation. For 2008 the European Commission reported a GDP growth of 5.4% – essentially due to public investment (194% growth, compared to a 10.2% decline in private investment) – but the report also noted that the unsatisfactory state of the statistical system does not allow for a comprehensive assessment of the situation.

Kosovo became a member of the World Bank and the International Monetary Fund on 29 June 2009.

Foreign Direct Investment

Leading Countries in Foreign Direct Investment (FDI: from 2007 to 2011) Germany: €292 million; United Kingdom: €251 million; Slovenia: €195 million; Austria: €133 million: Switzerland: €115 million; the Netherlands: €109 million, Albania: €70 million, Turkey: €64 million, the United States: €31 million, and France: €5 million.

FDI in Kosovo is still a relatively small contribution to the Kosovo economy, compared with other transition economies. Much of the reason is, apart from a late start in 2000-2001, because of legal and political uncertainties, and an incomplete, contested, and very slow system of privatisation before the declaration of independence in 2008. Thus Kosovo still retains a state-owned telecommunications company, a state-owned electricity monopoly (with the largest lignite reserves in Europe), and a ski-resort in Brezovica (a Serb-majority area) which was the Winter Olympics reserve site during the Sarajevo Winter Olympics. All of these are now under the process of privatisation. Other infrastructure companies (water, railways) may also be privatised.

While there remain significant disincentives to investment in Kosovo (a small domestic market, residual political uncertainty, perceptions of corruption, and a slow and uncertain judicicial system), there are also incentives. These include a much younger workforce than elsewhere in south-eastern Europe, which has been more exposed to Western European culture and has higher linguistic standards (see next paragraph); a low corporate tax-rate; access to the EU and CEFTA markets; and a government with low debt and low contingent liabilities in terms of pension and other social welfare transfers. Information and communications technology in Kosovo has also developed very rapidly and broadband internet penetration is comparable to the EU average.

Transportation

Road network

The road network consists of 630 km of main roads. A highway connecting Kosovo with Albania and Serbia is currently nearing completion, and offers an alternative from the EU to the routes through Serbia or Montenegro which are less developed. (Albania has reached an agreement with Kosovo allowing it to use the port of Shëngjin). Construction of a highway to the Macedonian border is now planned.

Kosovo Railways

Combined length of 330 km. It covers the entire territory, connecting both the south with the north and east with west. However, there is currently no functioning interconnection with the Serbian rail network, although there is interconnection with the Macedonian network.

Air transportation

Pristina International Airport Adem Jashari is, with over one million passengers per year, one of the most frequented airports of the region, despite the fact that Serbia does not permit overflying of its territory by aeroplanes flying to or from Kosovo.

Energy

Kosovo Energy Corporation (KEK) is currently the sole power corporation in the Republic of Kosovo. KEK is vertically integrated and was legally incorporated at the end of 2005. It relies on extensive lignite deposits - 14.7 billion tonnes, the fifth largest in the world, with a relatively high calorific value for lignite, and is currently under a privatisation process. In 2009 demand was met by lignite generation (4,656 GWh), imports (611 GWh) and hydro (121 GWh).

In Yugoslav times, Kosovo was a net exporter of electricity. But its current generating capacity has been affected by many factors. The generation units were designed for a life of 30 years but have all operated for longer than 28 years, and in some cases for 50 years. They were part of a much wider integrated energy system in which they could be shut down for maintenance without local economic consequences. Maintenance was reduced in the period from 1989 to 1999; and expert (Albanian) workers were sacked in 1990 and expert (Serb) workers left in 1999.

Distribution has also suffered. The Northern (Serb-majority) municipalities have received electricity without any ability by KEK to receive payment, as has also been the case for much of the 1999-2007 period in southern Serb-majority areas. (Many Albanians also avoided their payments at this period). Transmission of electricity through Kosovo from Serbia to Macedonia has not created any income for Kosovo because of the status dispute.

Wines

Wine has always historically produced in Kosovo, both red and white. Currently the wine industry is successful and growing after the war in the 1990s. The main heartland of Kosovo's wine industry is in Orahovac (Rahoveci) where millions of litres of wine is produced. The main wines produced in Kosovo include Pinot noir, Merlot and Chardonnay. Kosovo has recently been exporting wines to Germany and the United States.

Trade

Kosovo is a small open economy and mainly imports more goods and services than it exports. It is committed to trade liberalization. Participation in regional and wider trade facilitating mechanisms has been one of the main policy objectives of Kosovo institutions. Enhancing trade in Kosovo through liberalized trade requires three aspects to be in place, import rationalization and replacement, trade facilitation and export promotion. This is the UNCTAD (United Nations Conference on Trade and Development) integrated export strategy which gives equal importance to competitiveness in the domestic market and competitiveness in the foreign market.

Kosovo's largest export market is Italy (averaging an amount of €84 million), followed by Albania (€34 million), Republic of Macedonia (€31 million) and Germany(€24 million). Imports are mostly from European Union and CEFTA countries. Republic of Macedonia is the biggest exporter in Kosovo (with €366 million) followed by Germany (€293 million), Serbia (€255 million) and Turkey (€184 million). Exports until December 2011 reached €319 million, dominated by significantly larger imports of €2.49 billion. This is a 7.8% increase for exports and 15.5% for imports compared with the same period in 2010.

The foreign trade shows a net deficit of €2,17 billion for December 2011, which is increased for 302 million compared to the same period 2010. One of the worst problem faced by Kosovo is the negative trade balance, this is made worse by the high level of informal economic activity and an uncontrolled Black market, led by illegal groups in northern Kosovo. Exports are dominated mainly by raw materials. Kosovo's liberal trade regime is characterized by simplicity and neutrality, key features considered to be important for stimulating private sector led growth as well as creating the conditions for healthy exports. But as trade liberalization has not been accompanied by an improvement in the competitiveness of the emerging domestic production sectors, Kosovo is facing a huge trade deficit.

In June 2009, Kosovo joined the World Bank and International Monetary Fund, and Kosovo began servicing its share of the former Yugoslavia's debt. In order to help integrate Kosovo into regional economic structures, UNMIK signed (on behalf of Kosovo) its accession to the Central Europe Free Trade Agreement (CEFTA) in 2006. Serbia and Bosnia and Herzegovina previously had refused to recognize Kosovo's customs stamp or extend reduced tariff privileges for Kosovo products under CEFTA, but both countries resumed trade with Kosovo in 2011.

Banks

Banks in Kosovo

profit 37 million Euros in 2011

Commercial banks operating in Kosovo marked their highest profit since their establishment. During 2011, the eight commercial banks operating in the country's financial markets have recorded together a profit of over 37 million Euros.

"ProCredit Bank" and "Raiffeisen Bank" marked the greater percentage from the total profit. The first recorded a profit of 16.8 million Euros, while the "Raiffeisen" has recorded a profit of over 12 million Euros. Compared with 2010, the commercial banks had around 5 million Euros more profit in 2011. The total net value of loans granted by commercial banks listed on 31 December 2011 amounted to 1.562 billion Euros. Meanwhile, in 2010, the net value of loans granted by commercial banks was 1.335 billion Euros. During 2011, lending increased by 227 million Euros. The value of deposits during 2011 has increased by 100 million Euros, reaching a total of 2.097 billion Euros. [2] The United States and Kosovo in September 2012, signed a groundbreaking agricultural development credit scheme worth over €20 million euro. The program is to provide loan guarantees to six Kosovo banks to issue loans to farmers and agricultural businesses, increasing lending to a sector that is constrained by lack of access to credit.

Commercial banks of Kosovo

Banka Ekonomike

BKT Kosove

BPB Banka per Biznes

LESNA nbfi

NLB Prishtina

Procredit Bank Kosova

Raiffeisen Bank Kosovo J.S.C.

TEB Kosovo

Türkiye İş Bankası (ISBANK) [3]

[4]

Telecommunications

Kosovo has two GSM 900 MHz networks, both of them with "foreign" international prefix, making it quite a unique case in the GSM World market. Because of the still unclear political situation, Kosovo does not have its own international prefix code. So landline numbers still use the +381 Serbian code, while the two mobile operators use +377 Monaco prefix (Vala) and +386 Slovenian one (IPKO). Telenor and Telekom Srbija (Serbian operators) used to have coverage in Pristina and some other little areas of Kosovo, but their towers have been dismantled in the independentist territory, so that GSM coverage is now offered only by the two local operators. In 2009 also the first MVNO appeared in Kosovo. It's called D3 and uses IPKO's Slovenian network. The secondo MVNO, Z Mobile, uses Vala's network and Monaco prefix.

There are two virtual operators :

D3 Mobile - 043 prefix

Z Mobile - 045 prefix [5]

GSM-services in Kosovo are provided by Vala, a subsidiary of PTK, and IPKO, a company owned by Slovenian Telecom, which has acquired the second mobile operator license in Kosovo and has started operations in late 2007. Vala has over 850.000 subscribers, mostly using the pre-paid system, whereas IPKO has gained over 300,000 subscribers within just a few months.

Market share

Based on the report of the TRA, VALA remains the leader in mobile telephony market in Kosovo, taking over 67% of the total, if included Z-mobile virtual operator, which uses the infrastructure VALA network.

Internet in Kosovo

KV - 2,350,000 population (2015) - territorial area: 10,908 km²

Capital city: Pristina - population 500,000 (est.)

950,000 Internet users as of Dec. 2011, 40.7% penetration, per GfK.

Facebook users, 700.000 (est.)

[6]

IPKO

Post and Telecom of Kosovo (PTK)

Kujtesa

Industry

Kosova Steel

Eco Trade