Kosovo banks health, credit growth impresses IMF

The Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV consultation with Kosovo.

Kosovo has made significant progress since the 2015 Article IV consultation in ensuring fiscal discipline and strengthening the financial sector. The fiscal deficit has been kept well below the 2 percent of GDP fiscal rule ceiling, government bank balances are now above the minimum level of 4.5 percent of GDP, and public debt remains low. Banks remain healthy and credit growth has increased.

Notwithstanding, important structural challenges remain. Weak external competitiveness, high informality, low labor force participation and high unemployment, particularly among young workers, and a large infrastructure gap continue to constrain Kosovo's growth potential.

While medium-term growth is now projected at around 4 percent, more and better growth is needed to accelerate income convergence with the EU and reduce inequality. The fiscal deficit is expected to remain within the fiscal rule while accelerating IFI-financed investment. The trade deficit is expected to remain high, though on a declining path, but largely funded by non-debt creating inflows, namely remittances and FDI.

Kosovo does currently not engage in multiple currency practices or maintain exchange restrictions on payments and transfers for current international transactions, except for restrictions imposed solely for reasons of international or national security that have been notified to the Fund. Kosovo notified the IMF on January 11, 2018 that it has accepted the obligations of Article VIII, Sections 2, 3 and 4 of the IMF's Articles of Agreement, whereby the IMF members undertake not to impose restrictions on the making of payments and transfers for current international transactions, and not to engage in any discriminatory currency arrangement or multiple currency practice, except for restrictions imposed solely for reasons of international or national security that have been notified to the Fund or which have been approved by the IMF Executive Board.

Executive Directors agreed with the thrust the staff appraisal. They welcomed Kosovo's strong economic performance and progress made under the recent Stand-By Arrangement to advance macro-financial stability through fiscal discipline and financial sector reforms. Directors noted, however, that important structural challenges remain and that continued commitment to sound policies and reforms is key to achieving durable and inclusive growth, and improving prospects for income convergence with regional peers.

Directors encouraged the authorities to accelerate structural reforms to boost productivity and private sector development, and address the high informality as well as unemployment, particularly among the youth.

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