Thewesternbalkans
The European commission’s staff presented its assessment on economic development and new economic reform programs for the Western Balkan countries.
The main conclusions of the European Commission’s staff for third group of countries are as follow:
BOSNIA AND HERZEGOVINA
“In 2023, weaker external demand, higher interest rates and still high inflationary pressures resulted in a slowdown in economic growth (estimated at 2% in the programme). The ERP projects GDP growth to accelerate to around 3% in 2024 and 2025 and to 3.4% in 2026, benefiting from rebounding exports and increasing private and public investment.
In line with expected international price developments, inflation is projected to fall to around 1.9% by 2026.
An expected rebound in foreign demand, especially tourism, and subdued import growth are projected to reduce the current account deficit to 2.8% of GDP by 2026.
Foreign direct investment inflows are expected to remain stable at around 2% of GDP. Risks are mainly on the downside due to the programme’s optimistic projections for export growth amid a generally bleak global environment surrounded by considerable uncertainty and weak investment. The expected decline in inflation also appears optimistic given recent high wage pressures, partly reflecting labour shortages due to substantial emigration” the document said.
The fiscal framework projects expenditure-driven fiscal consolidation, leading to a small budget surplus in 2026. In view of recently adopted permanent expenditure measures, this benign scenario appears optimistic. On the revenue side, a shift in the growth drivers from private consumption to exports and investment is projected to lower the revenue-to-GDP ratio by 1 percentage point in 2024-2026. On the expenditure side, mostly unspecified measures to contain public consumption and ‘other’ spending, along with lower investment expenditure, are expected to reduce the spending-to-GDP ratio by 1.6 percentage points (pps).
However, the ERP’s fiscal framework is neither based on adopted budgets nor on a politically approved medium-term strategy. The planned drop in public investment is in contrast to the policy recommendations jointly adopted since 2015.
For 2024, the programme expects a slight increase in the deficit to 0.6% of GDP (mainly due to higher social spending). In 2025, lower spending on public investment and collective consumption is projected to almost balance the budget, while additional spending restraint in 2026 is set to result in a slight surplus of 0.3% of GDP.
The debt ratio is expected to decline from 26.7% of GDP in 2023 to 23% in 2026.
The reliability of the fiscal framework is reduced by a lack of political support and weak alignment with EU accounting standards, in particular on the definition of the general government. As a result, both the deficit and debt ratios may be higher than reported. Overall, despite the relatively low level of public debt, the fiscal scenario presented does not properly address the challenges the country is facing, in particular in view of the moderate growth outlook, high investment needs and challenges involved in moving towards EU accession.
The main challenges facing Bosnia and Herzegovina are expected by the Commission staff to be the following:
“A lack of cooperation among the country’s stakeholders and highly fragmented competences severely undermine country-level economic governance. The country’s ability to formulate consistent, countrywide short- and medium-term economic and fiscal objectives and strategies is seriously impeded by a high degree of institutional fragmentation, insufficient cooperation among key stakeholders, and excessively”.
KOSOVO
Following the document, is was some slowdown in economic activity in 2023, but Kosovo’s economic reform programme (ERP) expects GDP growth to pick up, mainly on the back of a robust increase in private and public investment. Annual output growth eased to a still buoyant 3.3% in 2023 from 4.3% in 2022, primarily due to the negative contribution of the external sector to GDP growth. The ERP baseline scenario projects an annual average GDP growth of 4.6% in 2024-2026, which appears to be overly optimistic. In particular, the strong increase in investment, a key growth driver in the ERP scenario, is likely to face constraints. These constraints are related to weak planning and insufficient implementation capacity for public investment projects and an uncertain economic environment for private investment. Major downside risks to this outlook stem from less dynamic growth in Kosovo’s main EU (and non-EU) trading partners, tighter financing conditions, an acceleration of emigration flows following the EU visa liberalisation and lower-than-expected financial inflows from the diaspora.”
The ERP expects a strong fiscal impulse in 2024, while ensuring compliance with the deficit rule in 2024-2026. Supported by strong revenue growth, the headline budget deficit fell to 0.2% of GDP in 2023, continuing the fiscal consolidation that started in 2021. Public capital spending increased substantially compared to 2022 but fell short of budget plans. The 2024 budget expects the headline deficit to rise to 2.7% of GDP, implying a strong fiscal stimulus mainly through an arguably very ambitious surge in public investment. However, the deficit (according to the fiscal rule definition) would not exceed the prescribed ceiling of 2% of GDP. The ERP expects the headline deficit to remain unchanged in 2025 and to fall to 1.9% of GDP in 2026.
The public debt ratio is set to increase but remain low at slightly above 20% in 2026. However, the domestic public debt investor base remains narrow and Kosovo does not have access to international debt markets.
Following the conclusions of the European Commission’s staff, he main challenges facing Kosovo are the following:
“The projected compliance with the deficit rule will serve as an anchor for fiscal policy but necessitates further reforms.
The significant increase planned in public investment requires comprehensive reforms to improve project planning and implementation. Despite the authorities’ continued efforts, Kosovo has made little progress in strengthening public investment management. Concrete steps, such as those recommended under the IMF’s updated Public Investment Management Assessment (PIMA), could improve the execution of capital spending.
There are key structural obstacles to competitiveness and inclusive growth:
- high administrative burden for businesses and citizens, lack of proper resolution of commercial disputes and limited access to finance, continue to have a negative impact on fair competition in Kosovo;
- the large informal economy reduces budget revenues and hinders investment and business development, thereby constraining economic growth;
- the insufficient and unreliable supply of energy gives rise to significant costs for businesses while also putting pressure on public finance;
- the education system does not adequately equip students with the necessary skills required by the labour market. This market is characterised by low participation and high unemployment rates, in particular for women and young people. Weak labour-market outcomes contribute to continuously high emigration.
These challenges are expected to be addressed through key structural reforms identified in Kosovo’s reform agenda under the new Growth Plan for the Western Balkans.
Comments: The trend of “belt tightening” continues for the countries of the Western Balkans and especially for Kosovo and BiH. Fiscal discipline and deficit reduction are embedded in the development agenda, but they are particularly pronounced in the latter two countries. Naturally, the experts of the European Commission also rely on the funds allocated for the economic growth of the countries of the Western Balkans in the so-called new Growth Plan for the Western Balkans.
