Overview

Kosovo Brief 2005

Overview

Kosovo is one of the poorest economies in Europe, with per capita income an estimated €964 per annum. Located in the heart of the Balkans, Kosovo is landlocked and was adversely affected in the 1990s by civil conflict related to the disintegration of the Socialist Federal Republic of Yugoslavia. Over the course of the 1990s, poor economic policies, international sanctions, weak access to external trade and finance, and ethnic conflict severely damaged the economy, leading to a halving of output in the early 1990s and a fall of another 20 percent due to the 1998-99 conflict. Kosovo is estimated to have a population of around 2 million people, of which 90 percent are ethnic Albanian, 5 percent Serbian and 5 percent other minority groups, although no census has recently been conducted.

In accordance with UN Security Council Resolution 1244, Kosovo is under United Nations interim administration (United Nations Mission in Kosovo – UNMIK). Following elections in November 2001, the Provisional Institutions of Self-Government (PISG) – including the President, the Assembly, and the Government of Kosovo – have been established. Elections were also held in October 2004. The launching of discussions on final status is dependent on the government’s commitment to democracy, good governance and the protection of human rights, as encapsulated in the “Standards for Kosovo”[1]. Progress towards these Standards is expected to be reviewed in mid-2005.

Source: Statistical Office of Kosovo, IMF and World Bank staff estimates

Developments since 1999. Since the end of the conflict in June 1999, Kosovo’s reconstruction has proceeded well, owing to local efforts as well as generous donor support of around €2 billion. Basic infrastructure destroyed in the conflict has largely been reconstructed. Over 50,000 houses have been rebuilt, providing homes to about 300,000 people. Agricultural production has increased significantly, with wheat, beef and milk production now exceeding pre-conflict levels and 1,400 km of roads have been rehabilitated. Furthermore, the construction of health clinics and schools throughout Kosovo has helped to ensure that the basic infrastructure for health and education services are largely in place. However, key challenges still remain for Kosovo, particularly in the economic and social spheres. Also protection of minorities remains a key concern. There remains little integration between Albanian and Serb communities. Empowerment is particularly problematic for minorities. Both income and non-income forms of poverty (such as access to health and education) are highest among non-Serb minorities. However, some efforts on reconciliation have been made. Following the March 2004 riots, the PISG spent €6.6 million on rebuilding Serb houses. A pilot project on decentralizing more authority to the sub-municipal level in Gracanica is being planned – a process intended to strengthen the ownership and participation of minorities in decision-making in Kosovo.

Economic environment. After an initial post-conflict bounce in 2000, economic growth has slowed (21.2 percent in 2000; 5.4 percent in 2004). The industrial sector of the economy remains weak and the electric power supply remains unreliable, acting as a key constraint. Unemployment continues to be pervasive, and remains particularly problematic among young people. However, progress has been made in implementation of liberal market policies. Kosovo is one of the most liberal trading regimes in the world with a zero and 10 percent tariff rate and no quantitative barriers. Use of foreign exchange has been legalized for all domestic transactions, establishing the euro as the de facto local currency. This has provided a stable exchange rate and low inflation.

Social environment. Poverty is widespread, but shallow. 37 percent of population live in poverty (below €1.42 per adult equivalent per day); and 15 percent in extreme poverty (€0.93 per day). However, most of the poor are close to the thresholds that classify them as such. Children, the elderly, female-headed households, the disabled, the unemployed, precarious job holders, residents of secondary cities, and non-Serb ethnic minorities (such as Roma and Slav Muslims) are the groups most at risk in terms of income poverty. In non-income dimensions of poverty, education outcomes are low, but there are signs of improvement. Half of the adult population has only completed primary education, and 6 percent are illiterate. However, progress has been made. Primary school enrolment rates were 95.4 percent in 2003, and the illiteracy rate has been reduced to less than 0.5 percent among children and youth. But the quality of education still remains a problem. With insufficient space and classrooms, children do not have a full-day’s education. Instead, schools operate on 3-4 shifts per day. Health outcomes are among the worse in South East Europe. Infant mortality rates (18-44 per 1,000) are the highest in the region, with inadequate nutrition a persistent problem. Tuberculosis, disability and mental health problems are major issues.

Challenges Ahead

·        Preventing an upsurge in violence. Continuing ethnic tensions were evident in the events of March 2004 and further efforts to encourage reconciliation among all communities is required urgently. Against a potential backdrop of final status negotiations, a significant international presence remains important to ensure stability.

·        Building, not backtracking on economic advantages. The authorities should ensure that there is no backtracking on economic achievements (including their liberal trading regime), either by major fiscal relaxation or an increase in protectionist policies. Instead these advantages should be built upon to improve the investment climate in Kosovo.

·        Raising Kosovo’s export potential. The mining and energy sectors hold substantial potential to be a key source of future growth in Kosovo. Kosovo has abundant resources of lignite, lead and zinc, ferrolnickel, magnesite and crushed stone, and relatively low transport costs to Western European markets. In particular, utilization of lignite resources (by attracting in private investment) holds potential for the energy sector to become an engine of growth rather than a drain on public resources. With fertile land and a temperate climate, agriculture is another potential source of growth.

·        More effective targeting to reduce poverty and unemployment. Improving employment opportunities (particularly for youth), improving health and education outcomes, increasing the efficiency and equity of social service delivery, and reducing a sense of vulnerability among many members of the population (particularly ethnic minorities).

World Bank Assistance

The World Bank has committed over $80 million to Kosovo since the end of the conflict. All assistance has been provided as grants. Reflecting Kosovo’s post-conflict situation, Bank assistance to date has been heavily focused on directly providing opportunities for the poor and those most affected by conflict, and improving critical social services and the ability of poor people to gain access to those services. Bank assistance has focused strongly on providing opportunities for all communities in Kosovo, including the minority ethnic Serbian population and other minority groups. Assistance has also been directed towards building up the capacity of local institutions, increasingly important as they assume more responsibilities from the international community.

As Kosovo moves from needing post-conflict reconstruction to longer-term economic development, Bank assistance will need to respond to this shift. Under the current Transitional Support Strategy $15 million is being provided to support three key objectives:

·        Promoting broad-based economic growth and employment. Through a business environment technical assistance grant, helping address some of the key institutional and operational constraints that continue to confront firms

·        Helping restructure the energy and mining sectors. Through the Bank’s third technical assistance grant to these sectors, helping the authorities meet their obligations under the Athens Memorandum Framework (allowing participation in the Southeast Europe Regional Electricity Market), and supporting the development of a mining strategy and policy

·        Building capacity to strengthen economic and public expenditure management. Assist in further institution building to help address cross-cutting problems in budget formulation, budget execution and procurement.

A new strategy is anticipated in mid-2005. As Kosovo moves from reconstruction to longer-term economic development, it is anticipated that the new strategy may focus more strategically on growth and poverty reduction initiatives, particularly in the energy and mining sectors.

World Bank Financing

In total, the World Bank has committed US$80.4 million to Kosovo since 1999. Of this, approximately US$60 million had been disbursed as of June 30, 2005. All funding has been on grant terms. Financing has come from a variety of sources. Immediately after the conflict, grants were provided from the Bank’s Post-Conflict Fund. In 2000, a Trust Fund for Kosovo was established with financing from the Bank’s net income. With the introduction of post-conflict grants in IDA-13, recent funding has come from this source. Under IDA-14, grants to Kosovo will continue until there is any change in status.

In addition to financing from these sources, the International Finance Corporation, the private sector arm of the Bank Group, has been active in Kosovo, especially in providing equity investments in the Pro-Credit Bank to support small and micro-credit to Kosovo businesses.

As of June 30, 2005 (by fiscal year, in US$ million)

Grants by Sector

*Fiscal Year from July 1 to June 30

For more information, please contract:

Neil Bush, Strategy and Operations Officer

Phone: Pristina (381) 38 249 459

E-mail: nbush@worldbank.org