Kosovo’s fast-growing economy
In 2024, Kosovo’s economy grew by 4.4%, making it the fastest growing economy of the Western Balkans. Private consumption was the main driver of GDP growth in 2024, supported by a lower unemployment rate, decreasing inflation and rising real wages. Investment also contributed positively, while negative net exports moderated growth. Inflation averaged 2.1% in 2024, hovering around the European Central Bank’s inflation target of 2%. The current account deficit widened moderately to 8.9% of GDP in 2024, primarily because Kosovo received less EU grants than in the previous year. The country’s goods trade deficit and service trade surplus remained largely unchanged. Visa liberalisation led to a surge in service imports, which was however more than offset by a substantial increase in service exports, mirroring strong growth in the number of visitors to the country. The fiscal deficit was consolidated substantially to 0.1% of GDP in 2024, on the back of a surge in public revenues, led by strong VAT collection. In 2025, economic growth, inflation and the current account deficit are expected to remain stable. The government plans to significantly increase spending, with a projected fiscal deficit of 2.2% of GDP.
Economic growth
In 2024, Kosovo’s economy grew by 4.4%, primarily supported by an increase in private consumption, which was driven by lower unemployment rates, fast disinflation, higher real wages and growth of household credit.
Consumers partly satisfied their increased demand through imports, which had a moderating effect on real GDP growth. After very low levels in recent years, public investment also picked up notably, contributing positively to growth.
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Inflation
After rapid disinflation throughout 2023, Kosovo’s inflation rate averaged 2.1% in 2024, in line with the European Central Bank’s (ECB) inflation target of 2%.
As Kosovo uses the euro as legal tender, it is subject to the monetary policy of the 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 continuously cutting its base rate since June 2024, interest rates in Kosovo are decreasing as well. Lower interest rates create room for more investment in the future, which is much needed.
Current account
Traditionally, Kosovo has a sizeable current account deficit, driven by a large goods trade deficit. In 2024, the deficit widened moderately to 8.9% of GDP, primarily due to a reduction in secondary income.
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The goods trade deficit remained stable. Imports rose due to stronger domestic demand, but the increase was largely offset by a corresponding increase in exports. The latter was driven mostly by a rebound of mineral and base metal exports, after low levels in 2023.
Against expectations, the country was able to widen its positive service trade balance by 0.6 pp of GDP. Since the first of January 2024, Kosovar citizens can travel into the Schengen Area for up to 90 days without needing a visa. Correspondingly, outbound tourism from Kosovo to the EU surged in 2024, as many citizens travelled to visit family members in the EU, which is home to the majority of Kosovo’s sizeable diaspora. As a result, service imports increased substantially by 1.5 pp of GDP, as was expected by most observers. What came somewhat surprisingly is the stark increase in service exports (+2.0 pp of GDP), which even outpaced growth in imports. The services that Kosovo exports are mostly tourism-related and thus mirror the flows of visitors in the country quite directly. In 2024, 694 thsd. visitors entered the country, an 11.7% increase from the previous year.
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Kosovo’s service trade surplus is much smaller than its goods trade deficit, making the country quite heavily dependent on secondary income to moderate its current account deficit. The main source of secondary income are remittances, which have decreased moderately to 12.8% of GDP in 2024. The decrease in remittances likely reflects increased in-cash transfers, in line with increased travel between Kosovo and the diaspora countries. Grants, most notably grants from the EU, are the second main source of secondary income for the country. In 2024, Kosovo received less grants from the EU than in 2023, when Brussels disbursed a large energy grant. Overall, secondary income decreased by 1.7 pp of GDP, causing the deficit to widen in 2024.
Public finance
The fiscal deficit was narrowed substantially to 0.1% of GDP in 2024. Consolidation was achieved on the back of a substantial increase in public revenues, primarily owing to much higher revenue collection from VAT, mirroring strong private consumption but also notable improvements in tax collection.
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Crucially, consolidation did not come at the expense of lower public spending. In fact, public expenditure increased, driven by higher public investment. The execution rate of budgeted public investment, which is reason for concerns throughout the last years, improved significantly from 68% to 75% in 2024. Although budget execution is still far from optimal, this is a positive development.
Outlook
For 2025, the IMF forecasts a real GDP growth of around 4%. Inflation is expected to stabilise around the ECB’s target of 2%. Kosovo’s current account deficit is also forecast to remain stable.
The government plans a more expansionary fiscal stance in the coming year, projecting a budget deficit of 2.2% of GDP. While revenues are expected to remain relatively stable, public spending is set to increase significantly. The projected increase in public spending reflects the government’s decision to increase pensions by 20%, which came into effect in October 2024, as well as a public sector wage hike planned in 2025. Moreover, authorities have foreseen a strong increase in public investment. Whether this will actually materialise hinges on further improving the execution of public investment.
The planned increase in public spending represents a fiscal stimulus that is in line with Kosovo’s fiscal rules. It aims to exploit the country’s low debt level to support domestic demand and to address social needs.
This Newsletter is based on the eighth issue of the Economic Monitor Kosovo.
