Solid growth, high trade deficit
In the first half of 2025, Kosovo’s economy grew by 3.8%, a solid outcome given the ongoing political deadlock, but slower than the 5.4% recorded in 1H2024. Growth was mainly driven by private consumption, while investment and public consumption also contributed positively. The widening negative trade deficit weighed heavily on growth. Inflation rose steadily to 4.5% in August, driven by higher food and energy prices. The current account deficit widened to 16.7% of GDP in 1H2025, driven by a strong increase in goods imports. Public expenditure and revenue in 1H2025 were broadly in line with the planned budget for 2025, which foresees higher public consumption and stable public revenues.
Economic growth
In the first half of 2025, Kosovo’s economy grew by 3.8%. This is a solid performance in regional comparison, particularly given the ongoing political deadlock following the February elections. However, it also marks a notable slowdown compared to the 5.4% growth recorded in the same period of 2024.
Growth was driven mainly by private consumption, which continued its strong momentum. Investment again contributed positively, as well as public consumption, which picked up notably. By contrast, net exports (i.e. exports – imports) made a significant negative contribution to growth. This partly reflects the usual seasonal pattern in external trade, which will be discussed later. In the first half of 2025, however, the negative impact was especially pronounced due to high electricity imports, needed to offset the sharp decline in domestic electricity generation following the overhaul of the Kosovo B lignite power plant.
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Inflation
As Kosovo uses the euro as legal tender, it is subject to the monetary policy of the European Central Bank (ECB). After rapid disinflation throughout 2023, Kosovo’s inflation rate averaged 1.6% in 2024, below the ECB’s target of 2%.
In 2025, inflation is rising again. In the first months of the year, higher prices for food and non-alcoholic beverages were the main drivers. Since March, energy prices have also increased. Both the 16.1% rise in regulated electricity tariffs for firms and households and the liberalisation of electricity prices for large firms in June contributed to this trend. Higher energy costs, in turn, have created upward pressure on prices for other goods and services, particularly food, transport, and hospitality.
By August, inflation stood at 4.5%, well above the ECB’s target. If the current trend continues, higher inflation could weigh on private consumption by reducing real wages and dampen investment through higher interest rates. It therefore requires close monitoring.
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Current account
Kosovo traditionally records a sizeable current account deficit, driven by a large goods trade deficit that exceeds the surplus in service trade. In 2024, the current account deficit stood at 8.8% of GDP. In the first half of 2025, it widened considerably to 16.7% of GDP.
As noted earlier, Kosovo’s current account is highly seasonal. While the goods trade deficit usually shows little variation, the surplus in service trade is significantly lower in the first half of the year. This is mainly because the surplus is largely driven by tourism-related service exports, with most tourist arrivals occurring in the second half of the year during the summer and Christmas holidays.
Taking this seasonality into account, the most informative comparison is between the first halves of 2024 and 2025. In 1H2025, the current account deficit was 3 percentage points of GDP higher than in 1H2024, mainly due to a sharp rise in the goods trade deficit, which more than offset an expansion in the service trade surplus. The primary and secondary income balances remained broadly unchanged.
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The widening of the goods trade deficit was driven by a substantial increase in goods imports, reflecting not only the surge in electricity imports mentioned earlier but also higher vehicle imports (mainly cars from Korea) and rising machinery imports. The expansion of the service trade surplus, on the other hand, mirrors the strong development of foreign (mostly diaspora) tourist arrivals in Kosovo.
Public finance
The 2025 budget plan foresees a widening of the fiscal deficit to 2.2% of GDP. Specifically, higher expenditures are planned, while revenues are estimated to remain broadly unchanged.
Similar to the current account, Kosovo’s public budget shows clear seasonality. As in many countries, public investments are typically executed toward the end of the year before allocated funds expire. This pattern often results in a fiscal surplus in the first half of the year, even when the overall annual balance is negative.
Taking this seasonality into account, it is again most informative to compare the first halves of 2024 and 2025. In the first half of 2025, Kosovo recorded a fiscal surplus of 2.7% of GDP, significantly lower than the 4.3% surplus recorded in the same period of 2024. These developments are broadly in line with the 2025 budget plan.
Public consumption increased stronger than planned, mainly driven by higher social transfers following the comprehensive 20% pension increase enacted in October 2024. Public investment also rose slightly. Public revenue exceeded expectations, primarily driven by strong indirect tax collection, supported by robust domestic consumption.
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Outlook
As highlighted by several key macroeconomic indicators in the first half of 2025, Kosovo’s economy remains highly exposed to shocks due to its unreliable domestic electricity generation. The temporary shutdown of the “Kosovo B” lignite power plant necessitated large-scale electricity imports, which, in turn, slowed growth and widened the trade deficit. Reducing this vulnerability by developing new renewable and decentralised energy generation capacities should, therefore, be a top priority for Kosovo. To make power generation investments profitable, it is crucial that electricity prices rise from their currently artificially low levels. The recent increase in electricity tariffs and the liberalisation of prices for larger firms are significant steps in this direction. Moving forward, further rounds of liberalisation will be necessary to attract much-needed investments in energy generation.
A more detailed analysis will be presented in our forthcoming issue of the Economic Monitor Kosovo.
