Moderate economic growth on the back of government spending

Nonetheless, Kosovo managed to reduce its current account deficit to 7.8% of GDP, owing mostly to increases in service exports and remittances. FDI inflows increased to 9% of GDP, the highest amount in the region.

Economic growth

Kosovo’s economy exhibited a moderate, but steady growth of 3.3% in 2023. Growth thus remained above the regional average and proved to be resilient in face of slowing demand from the eurozone.

GDP-growth in 2023 was driven mostly by domestic demand, specifically by public and private consumption as well as public investment.

Public consumption increased by 3.9% yoy, mainly due to the implementation of new legislation on public wages, which implied substantial wage increases for workers in the public sector. Growth in private consumption was made possible mainly by the ongoing growth in remittance inflows, which have again increased by 9.9% yoy, following the general growth-trend of recent years.

Investment drove growth too in 2023, mostly due to increases in public investment, which grew by a staggering 82.4% yoy.

Net exports negatively contributed to GDP growth, as absolute growth in imports substantially outnumbered absolute growth in exports.

Inflation

Kosovo experienced a surging inflation (11.6%) in 2022 following Russia’s war in Ukraine. 2023 was characterized by disinflation, with a moderate inflation rate of 5.0% yoy, which was the lowest in the West Balkan region.

Inflationary pressures in 2022 mainly arose due to stark increases in key consumption goods such as food and energy, which together make up around half of Kosovo’s consumption basket. Disinflation in 2023 was primarily a result of the global decrease in energy prices.

For the coming years, further disinflation is expected and data from the first quarter of 2024 is in line with that expectation, indicating on average an inflation rate of 2.0% yoy.

Current account

In recent years, Kosovo had a substantial current account deficit, caused primarily by a large goods balance deficit. The service balance was traditionally positive and together with primary and secondary income counterbalanced the goods balance deficit.

2023 was no exception to this, however there were some positive developments to record. The current account deficit was reduced quite substantially to 7.8% of GDP from 10.3% in 2022.

This reduction was achieved despite a growing goods balance deficit, which reflects both a decrease in goods exports (6.5% yoy) caused by a drop of base metal exports and an increase in goods imports (4.8% yoy), caused by increased demand due to the public investment offensive.

In contrast to this, the service balance surplus strongly increased, thanks to a stark increase in service exports (18.4% yoy). The secondary income surplus was also exacerbated, owing mainly to an increase in remittance inflows (9.9% yoy) from Kosovo’s large diaspora. These two positive developments were the key drivers behind the reduced current account deficit.

Reaching a reduction in the current account deficit despite the investment-led growth in goods imports was a very positive development in 2023.

Public investment

The strong growth (82.4% yoy) in public investment was at least partly a result of two legislative advancements. Before 2023, it was not possible to adjust public tenders if the general price-level changes. This deterred the private sector from applying for government projects in 2022, when inflation was high. In 2023, new legislation was introduced to make price-adjusting possible. In addition, since 2023 expropriation costs are taken into account when calculating the costs of government projects, resulting in both higher planned and executed public investment.

Despite the large increase in public investment in 2023, it fell substantially behind the initially planned expenditure. This is a longstanding problem in Kosovo and was as relevant last year as it was in previous years, despite the surge in public investment. Improving the execution of planned capital expenditure should thus be a priority for the government in coming years.

Foreign direct investment

Traditionally, Kosovo has not attracted much foreign direct investment. The country’s FDI stock per capita  (EUR 3,041) is the second lowest in the region. For comparison, Montenegro and Serbia, which have been most successful in attracting FDI in the past, have an FDI stock per capita that is more than twice as large.

The development in the last two years, however, was very positive. FDI inflows surged by 85% yoy in 2022. In 2023, FDI inflows grew again (9.1% yoy), thus even outperforming the previous years’ record inflows and totaling a whopping 9% of GDP. This made Kosovo the most successful country in attracting FDI in the West-Balkan region last year.

Important to consider alongside the total amount of FDI inflows, however, is the sectoral composition of FDI inflows. Usually in recent years, around 60% of FDI inflows in Kosovo were related to real-estate activities, around 20% of inflows could be attributed to the insurance and financial sector and around 20% to a mix of other sectors. In the last two years, FDI activity in Kosovo has by and large returned to this pattern, after 2021 was marked almost exclusively by real-estate related FDI inflows.

Generally, the sectoral composition of FDI inflows into Kosovo is not optimal. Attracting foreign direct investment into more labour-intensive sectors like manufacturing to promote employment and exports and to increase total factor productivity should be on top of Kosovo’s agenda for the coming years.

Outlook

For 2024, Kosovo’s GDP is forecasted to grow by 4.2%. This would mean a growth rate of almost one percentage point higher than in 2023, made possible by a much more favourable macroeconomic environment. Lower levels of inflation and interest, a higher international demand for Kosovo’s goods and services and strong private consumption are anticipated to be the main drivers of growth.

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