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Felix Schwickert, Leoluca Villa

Consumer confidence picks up – growth exceeds expectations

In 2023, Kosovo’s economy grew by 4.1%, exceeding most expectations. For 2024, the IMF projects a real growth rate of 3.8%, thereby forecasting Kosovo to be the fastest-growing economy of the Western Balkans. This projection may be revised upwards after stronger-than-anticipated growth in the first half of the year (5.6% in Q1-24 and 4.3% in Q2-24). Private consumption remained the primary driver of GDP growth in 2023, while substantially increased public investment also contributed positively.

  • Kosovo
NL 19 | September-October
Macroeconomic Analyses and Forecasting

Inflation decreased markedly throughout 2023 and stabilised at around 2% in the first half of 2024. The current account deficit narrowed significantly from 10.3% of GDP in 2022 to 7.7% of GDP in 2023, on the back of both a reduced goods trade deficit and a widened service trade surplus. The fiscal deficit was consolidated substantially to 0.2% of GDP in 2023, despite a strong increase in public spending. This positive dynamic was made possible by a stark growth in public revenues.

Economic growth

In 2023, Kosovo’s economy grew by 4.1%, primarily sup-ported by an increase in private consumption, which was driven by rising real wages, significant remittances, and higher bank lending. After very low levels in recent years, public investment also picked up notably, contrib-uting positively to growth.

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For 2024, the IMF forecast 3.8% real GDP growth, expecting Kosovo to lead the region. According to preliminary quarterly data from the Kosovo Agency of Statistics, actual growth in H1-24 exceeded expectations, standing at 5.6% in Q1 and 4.3% in Q2.

Inflation and monetary policy

Kosovo’s inflation rate peaked in 2022 and decreased significantly throughout 2023, averaging 5.2% for the year. This disinflationary dynamic was driven primarily by slower commodity price growth on international markets, particularly of food and energy prices. Throughout H1-24, inflation stood stable at around 2%.

Kosovo uses the Euro as legal tender, severely limiting its central bank’s capacity to influence interest rates in the country. Instead, interest rates in Kosovo depend largely on the monetary policy of the European Central Bank (ECB). Throughout 2023, the ECB kept base rates high, to support disinflation in the Eurozone. Correspondingly, interest rates for bank loans remained high in Kosovo, which stifled private investment in 2023. With the European Central Bank cutting base rates in 2024, interest rates in Kosovo are expected to decrease as well. This outlook boosts consumer confidence and creates more room for private investment.

Current account

Traditionally, Kosovo has a sizeable current account deficit, driven by a large goods trade deficit. In 2023, the current account deficit narrowed to 7.7% of GDP, on the back of both a consolidated goods trade deficit (by 0.6 pp of GDP) and a widened service trade surplus (by 1.5 pp of GDP).

The goods trade deficit shrunk, because goods imports decreased stronger than goods exports. The strong reduction in goods imports can be attributed to the disinflationary dynamic in 2023 described earlier. Food and energy import prices were much lower in 2023 than in 2022. The decrease of goods exports on the other hand reflects a reduction of actual goods exported (not merely a change in the price level) and was caused mainly by subdued demand from the EU as main export destination.

The widening of the service trade surplus was mainly supported by an increase in service exports. The diaspora-driven tourism sector, which accounted for 74.4% of all service exports in 2023, continued to develop strongly. Additionally, the much smaller, but dynamically evolving IT and telecommunication sectors contributed positively to widening the service trade surplus in 2023.

Remittances, as main source of secondary income in Kosovo, remained high (13.9% of GDP in 2023) and continued to contribute strongly to balancing out the large goods trade deficit.

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Public budget

The fiscal deficit was narrowed substantially to 0.2% of GDP in 2023, from 0.7% of GDP in 2022. This fiscal consolidation was achieved despite a marked increase of public spending, on the back of a substantial increase in public revenues.

Public expenditures increased by 1.1 pp of GDP, mainly driven by increased government consumption, i.e. higher wages and salaries following the introduction of a new public wage law. Public investment increased strongly from very low levels in the last years, owing to both an increase in the planned budget for public investments and improved budget execution. Despite having been improved, budget execution remained too low in 2023, with only 69% of the planned public investment being executed.

Public revenues increased significantly, reflecting the one-off reception of grants from the EU’s energy support package in 2023 (0.7% of GDP), but also an increase in the tax base – driven by formalisation of the labour market and wageincreases – and enhanced tax collection.

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Foreign direct investment

Standing at 8.8% of GDP, net inflows of foreign direct investment (FDI) reached a record level in 2023. In relative terms, Kosovo attracted more FDI than all its WB6 neighbours last year. 2023 therefore marked the preliminary peak of a dynamic of increasing FDI inflows that has been going on since 2020. Correspondingly, the country’s FDI stock also increased markedly in the last 3 years. It stood at 64.9% of GDP in 2023, which is around the regional average.

Most FDI that flows into Kosovo, however, comes from the diaspora and goes into the realestate sector (61% of total inflows). Only around 19% of total FDI inflows go into the manufacturing, service or energy sector, where the influx of foreign funds would have the largest positive impact on economic development. To spur growth, Kosovo should focus on attracting investments into the three aforementioned sectors. A positive development is the recently started series of renewable energy auctions. Minister Rizvanolli announced plans to raise around EUR 1.2 bn in investments in renewables through auctions until 2031.

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Outlook

The consumption mood in Kosovo has continuously improved throughout H2-2023 and H1-2024, reflecting the expectation of a low and stable inflation in 2024 and a rise in real wages. For 2024, we expect Kosovo to retain the growth momentum that came along with the renewed consumer confidence just described. To do so, it is crucial that the government uses its very solid fiscal stance to intensify its efforts to increase much needed public investment. For this, not only budget execution must be improved. Most notably, the cooperation with international financial institutions, that stand ready to assist in financing such investments but are underuti-lized by the government, should be extended.

This Newsletter is based on the seventh issue of the Economic Monitor Kosovo.

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