Western Balkans Regular Economic Report WORLD BANK GROUP No. 27 - Spring 2025 Adapting for Sustainable Growth Western Balkans Regular Economic Report No.27 | Spring 2025 Adapting for Sustainable Growth © 2025 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Acknowledgements This Regular Economic Report (RER) covers economic developments, prospects, and economic policies in the Western Balkans region: Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia. The report is produced twice a year by a team led by Isolina Rossi, Richard Record, and Maryna Sidarenka (Task Team Leaders). This issue’s core team included World Bank staff working on the Western Balkan countries (with additional contributions to specific sections): Christos Kostopoulos, Maryna Sidarenka, (Growth section), Sanja Madžarević-Šujster, Joana Madjoska (Labor section), Alexandru Cojocaru, Carlos Gustavo Ospino Hernandez, Anna Fruttero, Zurab Sajaia (Poverty section), Milan Lakićević, Esida Bujupi, Sanja Madžarević-Šujster, Tim Pionteck (Fiscal section), Vanessa-Paradis Olakemi Dovonou Lamissi, Tim Pionteck (Monetary section), Jane Hwang, Valeria Salomao Garcia, Gunhild Berg (Financial sector section), Sandra Hlivnjak, Angella Faith Montfaucon (External section), Richard Record, Lazar Šestović, (Outlook section), Sarah Coll-Black, Alicia C. Marguerie, Kevwe Sylvester Pela, Minah Kim (Spotlight). The team is thankful for comments received from the peer reviewers Victoria Monchuk and Miguel Eduardo Sanchez Martin. Research assistance was provided by Suzana Jukić and Tim Pionteck. Peter Milne and Timothy Justin Kortschak provided assistance in editing, and Vigan Kada assistance in designing. The dissemination of the report and external and media relations are managed by the External and Corporate Relations team comprised of Filip Kochan, Ana Gjokutaj, Jasmina Hadžić, Lundrim Aliu, Anita Božinovska, Gordana Filipovic, and Mirjana Popović. The team is grateful to Xiaoqing Yu (Division Director for the Western Balkans); Asad Alam (Regional Practice Director, Prosperity); Jasmin Chakeri (Practice Manager, Economic Policy); Paolo Belli (Practice Manager, Social Protection and Labor); and the Western Balkans Country Management team for their guidance in preparation of this report. The team is also thankful for comments on earlier drafts of this report received also from Ministries of Finance and Central Banks in Western Balkans countries. This Western Balkans RER and previous issues may be found at: www.worldbank.org/eca/wbrer/. Contents Adapting for Sustainable Growth 13 1. Overview  14 2. Sustained growth despite global challenges 18 3. Labor markets remain tight 21 4. Low labor force participation hinders further poverty reduction  25 5. Fiscal pressures are rising again 28 6. Persistent inflationary pressures 38 7. Credit growth has accelerated, calling for stronger oversight 41 8. External pressures continue to rise, while debt remains moderate 45 9. Heightened uncertainty clouds the regional economic outlook  48 10. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 51 Country Notes 78 Albania79 Bosnia and Herzegovina 82 Kosovo  85 Montenegro88 North Macedonia 91 Serbia  94 Figures FIGURE 2.1:  18 GDP growth in a changing external environment  18 FIGURE 2.2:  18 Consumption and investments were the main drivers of economic growth 18 FIGURE 2.3:  19 Trade was a drag on growth in 2024 in all WB6 countries  19 FIGURE 2.4: 19 The services sector drove growth, while industrial and agricultural output performance was uneven in 2024  19 FIGURE 3.1:  21 Employment growth has slowed down since spring 2024. 21 FIGURE 3.2:  21 In all WB6 countries, except North Macedonia, employment levels are above pre-crisis level.  21 FIGURE 3.3:  22 While employment in construction decelerated, in services it gained strength. 22 FIGURE 3.4:  22 Employment rates increased compared with 2023. 22 FIGURE 3.5: 23 The unemployment rate declined in most countries in 2024  23 FIGURE 3.6:  23 The youth unemployment rate is more than double the overall unemployment rate 23 FIGURE 3.7:  23 More people joined the Western Balkan labor force in 2024 23 FIGURE 3.8: 23 The female to male labor participation gap narrowed to 19 percentage points 23 FIGURE 3.9:  24 Average real wage and labor productivity in 2024 24 FIGURE 3.10: 24 Minimum wage as a share of average wage 24 FIGURE 4.1:  25 Poverty reduction continues, but in 2025 around 1.5 million people in the WB6 region are expected to remain in poverty  25 FIGURE 4.2: 26 Objective and subjective measures of inequality in the region differ 26 FIGURE 4.3: 27 Perceptions of a large gap between rich and poor correlate positively with the willingness to bear a financial burden to alleviate poverty and inequality 27 FIGURE 5.1: 28 Fiscal deficits widened in many WB6 countries in 2024... 28 FIGURE 5.2: 28 …despite positive revenue performance across most of the region 28 FIGURE 5.3:  30 Capital spending rebounded…  30 FIGURE 5.4: 30 …and almost all WB6 countries have turned to higher spending on social benefits 30 FIGURE 5.5: 30 Public and publicly guaranteed debt as a share of GDP declined to its lowest in a decade… 30 FIGURE 5.6: 30 …as did external public and publicly guaranteed debt 30 FIGURE 5.7: 33 Youth tobacco use 33 FIGURE 5.8:  33 Minimum cigarette excise (pack of 20, in €) 33 FIGURE 6.1:  38 Global inflation continued to ease in 2024 38 FIGURE 6.2: 38 Inflation heterogeneity among the WB6 countries persisted 38 FIGURE 6.3: 39 During 2024, WB6 countries’ core inflation remained persistently higher than headline inflation39 FIGURE 6.4: 39 Central banks continued easing monetary policies…39 FIGURE 6.5: 39 …while allowing for different degrees of exchange rate flexibility39 FIGURE 7.1:  42 Credit growth continues on an upward trend in H2 2024  42 FIGURE 7.2:  42 Strong corporate credit growth narrowed the gap with household growth  42 FIGURE 7.3: 42 Asset quality presented no significant movements, with the exception of Montenegro  42 FIGURE 7.4: 42 Capital levels remained relatively stable 42 FIGURE 8.1: 46 The WB6 current account deficit has widened in 2024… 46 FIGURE 8.2: 46 …reflecting weakened export performance in many WB6 countries 46 FIGURE 8.3:  46 The merchandise trade deficit picked up in 2024… 46 FIGURE 8.4:  46 …while remittances and net services exports stagnated  46 FIGURE 8.5:  47 At the regional level, FDI inflows almost fully finance the current account deficit in 2024, although country differences are sizable…  47 FIGURE 8.6: 47 …with the regional PPG external debt level projected to remain moderate in 2024  47 FIGURE 9.1:  48 Contribution to growth in WB6 countries, in percentage points 48 FIGURE 10.1:  52 Climate risk and vulnerability in the Western Balkans, compared with OECD countries 52 FIGURE 10.2:  56 Share of jobs “at risk” due to the green transition in total employment, by country 56 FIGURE 10.3:  58 Dimensions of workers’ vulnerability in the green transition: job displacement risk and skills gap challenges to occupations not at risk 58 FIGURE 10.4:  58 Share of workers in at-risk occupations by skills gaps to occupations not at risk 58 FIGURE 10.5:  59 Male workers are more likely to work in jobs at risk, but among workers in jobs at risk, women will endure more difficult job transitions 59 FIGURE 10.6:  60 Workers with high education level are less at risk than those with lower levels of education 60 FIGURE 10.7: 61 Social protection instruments are critical for supporting employment shocks and labor market transitions   61 FIGURE 10.8: 63 Equivalent replacement rates and contribution rates for unemployment insurance benefits  63 FIGURE 10.9:  67 Assessment of the readiness of social protection systems in the Western Balkans to scale-up  67 Tables TABLE 1.1:  16 Western Balkans outlook, 2022–2027 16 TABLE 5.1:  32 Yields on Western Balkan countries outstanding Eurobonds 32 TABLE 5.2: 32 Credit ratings of the Western Balkan countries 32 TABLE 5.3: 33 Cancer and cardiac mortality rates per 100,000 people 33 TABLE 5.4: 34 Health tax revenues in the Western Balkans, 2023 34 TABLE 5.5: 35 Excise rates for tobacco products (€ or percent), as of January 2025 35 TABLE 5.6: 36 Excise rates for alcoholic beverages, in € 36 TABLE 5.7:  37 Summary of impacts of rising tobacco excises  37 TABLE 9.1: 49 Real GDP growth, by country 49 TABLE 10.1: 63 Severance payments offer some short-term financial relief 63 TABLE 10.2: 68 Policy recommendations68 Boxes Box 5.1: ‘Sin’ Taxes in the Western Balkans: Improving Public Health and Tax Revenues 33 Box 7.1: Development financial institutions in the Western Balkans 44 Box 10.1: The Human Impact of Coal Transition in Bosnia and Herzegovina 55 Box 10.2: Data and methodology: workers in occupations at risk of displacement (“jobs at risk”)57 Abbreviations AE Advanced Economies NPLs Non-Performing Loans WB6 Country Abbreviations: BoA Benefit-to-Cost Ratio PDBs Public Development ALB Albania Bank of Banks BiH Bosnia and Herzegovina Albania PFM Public Financial KOS Kosovo CAD Current Account Deficit Management MKD North Macedonia CAR Capital Adequacy Ratio PPG Public and Publicly MNE Montenegro CESEE Central, Eastern and Guaranteed SRB Serbia Southeastern Europe Pp Percentage point WB6 CPI Consumer Price Index PPP Purchasing Power Parity DFIs Development Financial Q1 First Quarter Note: All comparisons are year-on-year Institutions Q2 Second Quarter unless otherwise stated. DG ECFIN The Directorate-General Q3 Third Quarter for Economic and Financial Affairs Q4 Fourth Quarter EC European Commission ROA Return on Assets ECA Europe and Central Asia rhs right-hand scale ECB European Central Bank RS Republika Srpska EIB European Investment SEPA Single Euro Payment Bank Area EMDEs Emerging Markets and SMEs Small and Medium Developing Economies Enterprises ESI Economic Sentiment SOEs State-Owned Indicator Enterprises EU European Union SSBs sugar-sweetened beverages FBiH Federation of Bosnia and Herzegovina TEPU Trade Policy Uncertainty index FCI Financial Condition Index UN United Nations FDI Foreign Direct US United States Investment VAT value-added tax FX Foreign Exchange WDI World Development GDP Gross Domestic Product Indicators GEPU Global Economic Policy WHO World Health Uncertainty index Organization H1 First Half yoy year-on-year H2 Second Half HICP Harmonized Indices of Consumer Prices ICT Information and Communications Technology IIMF International Monetary Fund LFS Labor Force Survey LAA Liter of absolute alcohol lhs left-hand scale NBS Global Skills National Partnerships Bank of Serbia NCDs Non-communicable diseases Adapting for Sustainable Growth WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 1. Overview The six Western Balkan economies (WB6) in North Macedonia, 3.0 percent in Montenegro, have shown encouraging signs of economic 3.9 percent in both Albania and Serbia, and 4.4 resilience, but are increasingly being buffeted percent in Kosovo. by multiple sources of uncertainty. As a group, the WB6 countries recorded GDP growth of 3.5 These growth dynamics were reflected in labor percent in 2024, up slightly from 3.4 percent markets, although the pace of employment in 2023. This implies a degree of convergence gains slowed during the course of 2024 in living standards with European peers, as the across much of the region. Nevertheless, the economies of the WB6 have been growing at WB6 employment rate increased by about 1.1 a faster rate than the EU average. Diversified percentage point (pp). Positive contributions sources of growth have helped the region during came from Bosnia and Herzegovina, North a period of sluggish external demand in Europe. Macedonia and Serbia, while other countries experienced a decline or stagnation in the total However, economic uncertainty—especially numbers of employed. Stronger domestic regarding shifts in global trade policy—has demand underpinned employment growth in increased to levels that are clouding prospects services. Agricultural employment increased only for investment and growth in the region. This in Albania and North Macedonia, while in the uncertainty could spill over to affect business other WB6 countries it continued to decline, confidence and consumer sentiment, impacting despite increased subsidies to the agricultural medium-term growth prospects. The primary sector to contain the impact of inflationary impact channel for the WB6 is a potential pressures. Public sector employment recorded an slowdown in Eurozone economic activity, which increase across all six countries, while employment in turn would affect the flow of trade (in both growth in manufacturing was weaker, especially goods and services), investments and remittances in countries facing subdued foreign demand. The with the region. At such a time, diversifying labor force participation rate improved over the sources of growth and renewing the structural last year on a regional level, but gains were lower reform agenda would be the most effective ways than in 2023. of sustaining economic resilience. Poverty in the six WB6 countries continued Despite some late-year deceleration, the overall its downward trend, albeit at a slower pace economic performance in 2024 reflected than during the pre-pandemic period. Before underlying resilience. Growth was supported 2019, the poverty rate decreased by almost 3 by strong domestic demand and scaled-up public percentage points annually. In contrast, between investment. With inflation falling back to single 2022 and 2025, this rate has fallen by about 3 digits and ending the year 2024 at 3.3 percent, percentage points in total. This slowdown reflects nominal wage growth was able to translate into a combination of weaker economic growth real increases in purchasing power, in turn boosting across the WB6 region and a series of shocks consumption. A generalized shift back towards that have eroded households’ purchasing power public capital investment was another major driver in recent years. In addition, the marginal impact of growth. At the same time, a continued weak of growth on poverty reduction has diminished external environment including sluggish growth due to structural labor market constraints. among key trading partners in the EU, negatively Further reductions in poverty will increasingly affected export dynamics in several economies in the require more targeted policies either through region. Overall, GDP growth in 2024 is estimated at labor market activation or better-targeted social 2.6 percent in Bosnia and Herzegovina, 2.8 percent transfers, as a high share of the remaining poor 14 Overview ADAPTING FOR SUSTAINABLE GROWTH are characterized by long-term unemployment. during the first half of the year and continued to increase in the latter months. By end-2024, year-on- Following three years of fiscal consolidation, year credit growth for the WB6 countries reached several WB6 countries saw rising fiscal deficits in an average of 12.3 percent, up from 6.5 percent at 2024. Revenue performance was strong but higher end 2023, marking the highest level of credit growth recurrent spending pushed fiscal deficits higher. since 2009. The fastest growth rates were observed The region’s average revenue-to-GDP ratio rose in Kosovo (17.8 percent), followed by Montenegro to 36.4 percent in 2024, up from 35.3 percent in (15.5 percent) and Albania (12.1 percent). Return 2023. However, public spending rose more sharply, on assets in the banking sector improved slightly, reaching 38.6 percent of GDP in 2024, compared while non-performing loans declined further to an to 36.8 percent in 2023. As a result, the average historically low level of 3.4 percent for the WB6 fiscal deficit widened to 2.2 percent of GDP in region as a whole by September 2024. Banks’ 2024, an increase of 0.7 percent compared to in capital adequacy ratios, which had strengthened 2023. Albania and Kosovo were the only countries during 2023, remained stable throughout 2024, to see improvements in their fiscal balances, driven with a WB6 regional average capital adequacy ratio by under-executed capital spending and strong tax of 19.3 percent. revenues. Serbia’s fiscal deficit remained stable at 2.0 percent of GDP , supported by solid revenue The WB6 countries experienced a performance. In contrast, Bosnia and Herzegovina, deterioration in their external positions in Montenegro, and North Macedonia all experienced 2024, primarily due to weaker trade balances rising fiscal deficits primarily due to higher and income accounts. The regional current government spending on wages, social benefits, account deficit (CAD) widened to 6.9 percent and interest payments, alongside weaker revenue of GDP in 2024, up from 4.1 percent in 2023. mobilization. Almost all countries (except Kosovo) saw weaker exports amid subdued economic activity in the In line with global trends, inflation continued EU, especially in Germany, to which the WB6 is a downward trajectory in the WB6 countries closely linked through regional value chains. At during 2024, although the pace of disinflation the same time, imports increased due to stronger varied across countries. However, price pressures domestic consumption, and higher public capital started to increase again in early 2025. In 2024, investments in several countries. The regional average inflation in the WB6 countries decreased merchandise trade deficit rose to 27.6 percent of sharply to 3.3 percent in 2024, down from 9.3 GDP in 2024, up from 26.4 percent of GDP in percent in 2023. However, the pace of disinflation 2023. After a multi-year period of rapid growth has varied across the region, with more persistence at in the tourism sector, services exports slowed year-end in Serbia (4.6 percent), North Macedonia during the year. Net services exports for the (3.5 percent) and Montenegro (3.4 percent), while WB6 region declined slightly to 12.1 percent price pressures were more muted in Albania (2.2 of GDP in 2024, from 12.4 percent of GDP in percent), Bosnia and Herzegovina (1.7 percent) and 2023. However, this aggregate mask increases Kosovo (1.6 percent). After a period of crises during in Albania, Kosovo and North Macedonia, and which price pressures were primarily external, decreases in Serbia, Montenegro and Bosnia and the main drivers of inflation are now domestic Herzegovina. Remittances declined as a share factors, including rising wages amid tightened labor of GDP during 2024, partly reflecting weak markets and due to higher food prices following economic conditions in host countries. adverse weather events. In a context of increased uncertainty, GDP Demand for credit expanded across all segments growth for the WB6 region is projected in 2024, including corporate, household and to slow to 3.2 percent in 2025, before consumer lending. Average credit growth rose recovering to 3.5 percent in 2026. Growth Overview 15 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 prospects for the region are subject to a in 2024. Serbia will be the second-fastest- high degree of risks and reflect uncertainty growing country in the WB6 region, with associated with the potential slowdown in growth reaching around 3.5 percent in 2025. EU growth. Private consumption and public Growth in Albania in 2025 is projected at 3.2 investment are expected to continue to play a percent. In Montenegro, growth is expected key role in driving growth. Kosovo will remain to reach 3.0 percent in 2025. In Bosnia and the fastest-growing country in the WB6 region Herzegovina growth is projected to reach 3.1 with GDP growth of 3.8 percent in 2025, percent in 2025, while in North Macedonia, albeit at a somewhat slower rate than seen growth in 2025 is projected at 2.6 percent. TABLE 1.1: Western Balkans outlook, 2022–2027 2022 2023 2024e 2025f 2026f 2027f Real GDP growth (percent) Albania 4.8 3.9 3.9 3.2 3.1 3.1 Bosnia and Herzegovina 4.2 2.0 2.6 2.7 3.1 3.5 Kosovo 4.3 4.1 4.4 3.8 3.8 3.8 North Macedonia 2.8 2.1 2.8 2.6 2.7 2.8 Montenegro 6.4 6.3 3.0 3.0 2.9 3.0 Serbia 2.6 3.8 3.9 3.5 3.9 4.2 WB6 3.5 3.4 3.5 3.2 3.5 3.7 Real GDP components growth (percent) Consumption 2.7 0.7 3.3 3.2 2.9 3.0 Investment 1.1 0.1 2.9 1.1 1.4 1.3 Net exports -1.0 2.3 -2.7 -1.1 -0.8 -0.6 Exports 6.5 1.5 0.5 1.0 2.1 2.4 Imports (-) 7.5 -0.8 3.2 2.1 2.9 3.0 Consumer price inflation (percent, period average) 11.9 9.0 3.4 2.9 2.6 2.5 External sector (percent of GDP) Goods exports 28.1 24.2 22.1 21.2 21.1 20.9 Trade balance -18.6 -14.1 -15.4 -16.4 -16.0 -15.8 Current account balance -7.7 -4.1 -6.9 -7.6 -7.3 -7.0 Foreign direct investment 6.8 5.0 5.6 4.9 4.9 4.9 External debt 75.3 66.7 66.0 53.4 52.9 52.2 Public sector (percent of GDP) Public revenues 34.5 35.3 36.4 36.5 36.5 36.5 Public expenditures 36.9 36.8 38.6 39.2 39.0 38.8 Fiscal balance -2.4 -1.5 -2.2 -2.8 -2.5 -2.3 Public and publicly guaranteed debt 49.6 45.1 45.2 45.9 46.1 45.6 Source: National statistical offices; Ministries of Finance; central banks and World Bank staff estimates. Note: e = estimate; f = forecast. 16 Overview ADAPTING FOR SUSTAINABLE GROWTH Risks—both domestic and external—are as entry into the Single Euro Payments Area clearly elevated, requiring an adaptive and the implementation of “green lanes” to approach to sustain growth. On the external facilitate cross-border trade, could further front, slower economic activity in the EU, as support business confidence, investment, and well as heightened global trade uncertainty, job creation in the region. could negatively affect the growth outlook for the WB6 countries, with negative The Spotlight in this edition of the Western consequences in terms of demand for the Balkans Regular Economic Report examines region’s goods and services exports as well how extreme climate events are amplifying as inward investment inflows. In addition, existing labor market vulnerabilities and continued uncertainties stemming from the creating new challenges for workers and ramifications of Russia’s ongoing invasion of employers. Rising temperatures, heavy Ukraine could disrupt trade and commodity precipitations and other severe weather markets, with negative implications for events, coupled with the global transition to inflation and growth. Domestically, adverse a low-carbon economy, are reshaping sectoral political developments and uncertainties employment patterns, particularly in energy, in several WB6 countries could lead to agriculture, and tourism. These changes are weakening business and consumer confidence driven by direct climate impacts—such as heat and a slower implementation of the structural stress, droughts, and floods—on workers, their reform agenda. Finally, the economies of the families, and firms, and by structural shifts in WB6 region are increasingly vulnerable to employment demand and skills requirements. extreme weather events, including droughts For example, tourism-dependent areas of the and floods, with potentially detrimental Western Balkans are increasingly vulnerable macro-fiscal implications. As a potential to extreme weather events that could reduce upside risk, a de-escalation of trade tensions visitor numbers, disrupt revenues, and threaten and economic policy uncertainty could see local employment. Looking ahead, the impacts stronger than expected exports and private of a changing climate and the greening of the investment, raising the region’s rate of growth. economy will require substantial workforce adaptation, including reforms to social During periods of uncertainty, an protection systems and employment services, accelerated pace of structural reforms would to better protect people and enable labor help support growth and convergence. market transitions.   Key priorities include addressing labor force barriers—particularly for women—increasing regional economic integration, improving governance standards, and strengthening market competition, all of which could boost productivity and long-term growth. For developing countries, the most effective response to higher trade protection abroad would be liberalization across trading partners. Faster EU accession-related reforms, such Overview 17 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 2. Sustained growth despite global challenges GDP growth in the Western Balkans average headline inflation for the WB6 region remained positive in 2024, despite a weaker declined to 3.3 percent in 2024, compared performance in the latter part of the year. with 9.0 percent in 2023, although it remained Economic growth was bolstered by strong higher than the EU27 average of 2.6 percent in domestic demand, driven by rising consumption 2024. Employment gains also bolstered well- and a surge in public investment in all WB6 being and positively contributed to consumption countries. However, adverse external conditions growth. In 2024, all WB6 countries reported and increasing pressures from slow growth in rising employment and activity rates, along key EU trading partners, particularly Germany, with declining unemployment rates (except weakened foreign demand for exports, especially for Kosovo). Higher consumer lending, which in the latter part of the year. This negatively increased by an average of 13.4 percent in affected export dynamics, resulting in a negative 2024 for the entire WB6 region, also supported contribution of net exports in all six WB6 consumption. In Montenegro, the contribution countries. Overall, estimated growth for 2024 of consumption to growth was the highest among is 2.6 percent in Bosnia and Herzegovina, 2.8 the WB6 countries at 7.6 percentage points, percent in North Macedonia, 3 percent in followed by Kosovo at 4.1 percentage points. Montenegro, 3.9 percent in both Albania and These two countries also stood out in terms of Serbia, and 4.4 percent in Kosovo (Figure 2.1). consumer lending growth in 2024, with increases of 17 and 22 percent, respectively. In Albania On the demand side, consumption supported and Serbia, consumption contributed 3.8 and 3 growth in all WB6 countries. The growth in percentage points to growth, respectively, while in consumption was driven by an increase in real North Macedonia, and Bosnia and Herzegovina, incomes, fueled by lower inflation and rising it contributed 2.7 and 2.5 percentage points, wages in both the private and public sectors. The respectively (Figure 2.2). FIGURE 2.1: FIGURE 2.2: GDP growth in a changing external Consumption and investments were the environment main drivers of economic growth1 Real GDP growth, percent Annual growth and percentage point contribution 2023 2024e 2025f Consumption Investment Net exports 7 10 Real GDP growth (%) 6.3 8 6 6 5 4 4.4 2 3.9 4.1 3.9 3.9 3.8 3.5 3.8 4 0 3.5 3.4 3.2 3.2 -2 3.0 3.0 2.8 2.6 2.7 3 2.6 -4 2.0 -6 2.1 2 1.5 -8 0.9 2023 2023 2023 2023 2023 2023 2024e 2024e 2024e 2024e 2024e 2024e 1 0.4 0 KOS ALB SRB MNE MKD BiH WB6 EU27 ALB BIH KOS MKD MNE SRB Source: National statistical offices and World Bank staff estimates. 1 Contribution to growth of consumption and investments were adjusted for Albania in 2023 and for North Macedonia in 2023-2024 to reflect high contribution of statistical discrepancy for these countries: -2.6pp in Albania and -0.7pp and 2.1pp in North Macedonia. 18 Sustained growth despite global challenges ADAPTING FOR SUSTAINABLE GROWTH Public and private investment was also a While domestic demand was the main significant driver of growth, contributing catalyst for growth in 2024, net exports positively to economic expansion across served as a drag. In four of the WB6 countries, all WB6 countries. Unlike in 2023, when both merchandise exports and imports as a the contribution of investment to growth percentage of GDP declined. However, the was modest and even negative for some WB6 reduction in the share of exports was more countries, 2024 saw a recovery in investment significant, reflecting lower external demand trends. In Serbia, public investment, including and leading to a worsening trade deficit. In financing for EXPO 2027, increased by 0.9 Montenegro, goods exports declined, while percentage point to reach 7.3 percent of imports remained stable as a share of GDP. GDP, the largest public investment outlay in Kosovo is the only country in the WB6 region the country in over a decade. This, together where goods exports increased, but imports with strong net FDI inflows, led to a 4.3 grew even more, resulting in a slightly higher percentage point contribution of investment trade deficit. The balance of net services to growth, the highest in the region. In North exports improved in three out of six countries Macedonia, investment contributed to growth, (Albania, Kosovo and North Macedonia), supported by highway construction, a sharp while in Montenegro, it deteriorated by contrast to 2023 when investment subtracted 2.7 percentage points of GDP, followed by from growth. In Montenegro, higher-than- Serbia (0.8 percentage points) and Bosnia planned public investments and strong FDI and Herzegovina (0.6 percentage points). inflows (6.6 percent of GDP) contributed Consequently, all WB6 countries recorded a 1.3 percentage points to growth. In Albania, negative contribution of net exports to growth Kosovo, and Bosnia and Herzegovina, a in 2024, estimated at 2.7 percentage points recovery in investment was also evident, with for the region (Figure 2.3). This development contributions ranging between 1.6 and 1.8 marks a shift from 2023, when net exports percentage points. positively contributed to growth in the region. FIGURE 2.3: FIGURE 2.4: Trade was a drag on growth in 2024 in all The services sector drove growth, WB6 countries while industrial and agricultural output performance was uneven in 2024 Net exports of goods and services, percentage point contribution to GDP growth Real growth rates by sectors, percent y-o-y Exports Imports Net Exports Agriculture Industry Service 3 5.2 5.3 6.0 4.0 1.9 1.9 4.0 2 3.3 4.0 3.0 2.9 3.1 1 2.3 0.2 0.6 1.8 1.6 0 2.0 0.5 -0.5 0.2 0.0 -1 -1.8 -1.3 -2.8 -1.5 -1.2 0.0 -2 -1.5 -1.8 -3.2 -3.4 -2.0 -3 -2.2 -0.9 -2.0 -4 -4.2 -4.0 -5.3 -3.5 -5 -6.0 -6 -5.5 -5.8 ALB BIH KOS MKD MNE SRB ALB BIH KOS MKD MNE SRB Source: National statistical offices and World Bank staff estimates. Sustained growth despite global challenges 19 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 The net export dynamics were different for On the production side, the performance each country, in some cases driven by lower of real sectors was mixed across the WB6 demand from trading partners and in others countries. The services sector remained the by higher imports. On the one hand, in North main driver of growth for all six countries Macedonia and Albania, lower demand from (Figure 2.4). For the WB6 countries except key trading partners was the driving force for Kosovo and North Macedonia, services reduced exports. In Montenegro, the negative sector growth was lower than the previous contribution of net exports amounted to 5.8 year. Industrial performance varied across percentage point (compared with just 0.3 of the WB6 countries. In Albania, industrial a percentage point in 2023), the largest in the output recorded modest growth of 1.8 region, and was driven by a 5-percent decline in percent, supported by stronger construction tourist overnight stays and stagnant industrial performance. In Bosnia and Herzegovina, production, especially in electricity. In North industrial output grew by only 0.5 percent Macedonia, exports declined more sharply in 2024 (after a 3.4 percent decline in 2023), than imports, as the country felt the impact of as manufacturing was adversely impacted by lower demand in the EU, particularly for car spillover effects from declining manufacturing parts. Consequently, the negative contribution in Germany. Meanwhile, industrial output of net exports amounted to 2.2 percentage in Kosovo and Serbia was more resilient to point (compared with a 5.5 percentage point external markets developments, thanks to positive contribution in 2023). In Albania, robust performance in the manufacturing and lower merchandise exports and higher imports construction sectors, resulting in industrial of goods, resulted in an overall negative output growth of 4 percent in Kosovo and 2.3 contribution of net exports by 1.5 percentage percent in Serbia. In contrast, industrial output point. Meanwhile, Serbia, Bosnia and was stagnant in Montenegro by 3.5 percent due Herzegovina, and Kosovo experienced higher to a decline in electricity production, which was import demand. In particular, in Serbia, net impacted by hydrometeorological conditions, exports subtracted 3.4 percentage point from and by 0.9 percent in North Macedonia, as growth (compared with a 2.7 percentage the car industry underperformed. Finally, point positive contribution in 2023) due agricultural output declined in Serbia and to lower-than-expected export growth as North Macedonia due to severe drought. In external demand weakened, while imports Bosnia and Herzegovina, despite severe floods remained high, partly explained by increased in 2024, agricultural output increased by 3 investment. In Bosnia and Herzegovina, percent, replicating its 2023 performance. In worsening terms of trade and an increase in Albania and Montenegro, agricultural output investment-driven imports resulted in negative growth was muted, remaining at the same level net exports, which subtracted 1.8 percentage as in 2023. In Kosovo, it recovered somewhat point from growth. Finally, in Kosovo, despite from a 3-percent decline in 2023 to 1.6 percent a positive performance of exports compared growth in 2024. with imports, the net exports contribution was negative at 1.3 percentage point due to the substantially higher share of imports in GDP (Figure 2.3). 20 Sustained growth despite global challenges ADAPTING FOR SUSTAINABLE GROWTH 3. Labor markets remain tight2 Employment growth has moderated since experienced a decline or stagnation in the total the spring of 2024 across the WB6 countries, numbers of employed. However, employment except for Bosnia and Herzegovina (Figure levels across all WB6 countries, except for 3.1). Nevertheless, the overall number of North Macedonia, are above the pre-crisis employed across the WB6 countries increased levels (Figure 3.2). This is consistent with the by about 83,800, on average, by December growth rebound post-crises, which is slower 2024 on an annual basis. Positive contributions for North Macedonia than for the rest of its came from Bosnia and Herzegovina, North Western Balkan peers. Macedonia and Serbia, while other countries FIGURE 3.1: FIGURE 3.2: Employment growth has slowed down In all WB6 countries, except North since spring 2024. Macedonia, employment levels are above pre-crisis level. Two-quarter averages, y-o-y employment growth, percent December 2019=100 6 30 125 25 120 4 20 15 115 10 110 2 5 0 105 0 -5 100 -10 -15 95 -2 -20 90 Jul-22 Jul-23 Jul-24 Jan-23 Jan-24 Sep-22 Sep-23 Sep-24 Mar-22 Nov-22 Mar-23 Mar-24 Nov-23 Nov-24 May-22 May-23 May-24 85 80 Dec 2019 Dec 2020 Dec 2021 Dec 2022 Dec 2023 Dec 2024 ALB MKD SRB WB6 ALB BIH KOS MKD BiH - rhs KOS - rhs MNE - rhs MNE SRB WB6 Source: National statistics offices and World Bank staff estimates. Stronger domestic demand underpinned in Bosnia and Herzegovina and Serbia given employment growth in services. In subdued foreign demand. The decline in December 2024, the strongest employment employment in the construction sector reached growth was in services (3.6 percent y-o-y) and double digits in North Macedonia, contrary construction (2.2 percent y-o-y), while public to other countries in the region, and despite administration employment strengthened strong construction output growth reported. again to 1.7 percent annual growth (Figure The WB6 employment rate (15+) passed 49 3.3). Agricultural employment increased only percent in 2024, an annual increase of 1.1 in Albania and North Macedonia, while in the percentage point (Figure 3.4). The largest other WB6 countries it continued to decline, annual increases were registered in Albania, despite increased subsidies to the agriculture Bosnia and Herzegovina, and Serbia, by 1.5, sector to contain the impact of food inflation 1.4 and 1.2 percentage points, respectively. and increase import substitution. Public sector Albania is still the front-runner in the WB6 employment recorded an increase across all region, with the highest employment rate of WB6 countries, while employment growth in 58.2 percent, although Montenegro gained manufacturing was weaker, in fact declining speed over the past three years, reaching 56.4 2 The analysis was affected by (1) incomplete publishing of quarterly Labor Force Survey (LFS) data for Albania and Kosovo for 2024, and by (2) revisions in Albania for 2023-2024, and Bosnia and Herzegovina, Montenegro, and North Macedonia for 2021-22 that reduced comparability with previous LFS data. Labor markets remain tight2 21 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 percent in 2024. At 51.4 percent, Serbia also in Kosovo remains low, below 37 percent, reached new highs, supported by the stronger reflecting structural challenges including low than expected growth performance. Although labor market participation, skills mismatches it increased slightly, the employment rate and gender disparities. FIGURE 3.3: FIGURE 3.4: While employment in construction Employment rates increased compared decelerated, in services it gained strength. with 2023. Employment level, 15+ years, percent, annual change Employment rate, 15+ years, 2024-23, percentage change Q1 23 2024 ALB MNE SRB MKD BIH KOS WB6 Q2 23 2023 9.7 Q3 23 2024 Q4 23 7.9 2023 6.8 Q1 24 Q2 24 2024 5.4 2023 4.7 Q3 24 3.9 2024 3.6 3.5 Q4 24 3.4 3.2 2.6 2.7 2.7 2023 2.5 2.3 2.1 2.2 1.6 1.5 1.7 1.7 1.7 1.6 1.6 2024 1.4 1.2 0.9 0.8 1.0 0.8 0.8 0.6 0.7 0.5 2023 2024 -0.4 2023 -1.5 -1.6 -2.1 2024 -2.3 -3.6 2023 General 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 Agriculture Industry Construction Services Government Source: National statistics offices and World Bank staff estimates. Source: National statistics offices and World Bank staff estimates. Note: Note: employment growth is weighted average. During 2024, unemployment declined across Despite recent improvements, a combination most of WB6 countries. The overall WB6 of high levels of inactivity, a large informal regional unemployment rate declined to 10.1 sector, skills mismatches, and continued percent in 2024 (Figure 3.5). As of December emigration dim youth labor market prospects. 2024, 748,600 people were unemployed in the The regional youth unemployment rate of 24.3 region—5.2 percent or 41,300 people less than percent in 2024 is more than double the overall one year ago. Bosnia and Herzegovina, Serbia, rate, although it declined by 0.6 percentage and North Macedonia recorded the largest points below the 2023 average (Figure 3.6). declines on an annual basis in the number of This is, however, 10 percentage points (pp) unemployed. In most WB6 countries, people above the youth unemployment rate in the EU, moved from unemployment into jobs; while which stood at 14.2 percent in December 2024. in Albania, and Montenegro they moved to There were 155,000 young people unemployed inactivity. Albania and Serbia reached a low in the WB6 countries at end-2024, some single-digit unemployment rates in September 13,800 fewer than at end-2023. The highest 2024 before rising slightly to 8.6 and 8.8 youth unemployment rates were recorded in percent, respectively. The unemployment Bosnia and Herzegovina and North Macedonia rate in North Macedonia, despite declining in 2024, where the youth unemployment by over 1.1 percentage point, was the highest rate increased to above 32 percent at the end among the WB6 countries, at 11.9 percent in of 2024, reflecting a slowdown in industrial December 2024. production and decelerating trade. 22 Labor markets remain tight2 ADAPTING FOR SUSTAINABLE GROWTH FIGURE 3.5: FIGURE 3.6: The unemployment rate declined in most The youth unemployment rate is more than countries in 2024 double the overall unemployment rate Unemployment rate, 15+ years, percent, and 2024-23, 15-24 years old, percent percentage change 2024 25 35 BIH KOSMKDMNE ALB SRBWB6 2023 2024 20 30 2023 25 2024 15 20 2023 2024 10 15 2023 10 2024 5 5 2023 2024 0 0 2023 BIH KOS MKD MNE ALB SRB 2024 Unemployment rate (2024) 2023 Unemployment rate (2021) Youth UR (2024) - rhs 2 4 8 6 0 12 14 10 Source: National statistics offices and World Bank staff estimates. Source: National statistics offices and World Bank staff estimates. The labor force participation rate improved for Montenegro. The labor force participation over the course of 2024 on a regional level, rate averaged 63.7 percent in Albania and but gains were lower than in 2023 (Figure Montenegro, a record for the region. In 3.7). The participation rate averaged 54.6 Kosovo, despite increasing moderately to 41.6 percent in 2024, which was 0.8 of a percentage percent in 2024, the participation rate remains point higher compared with 2023, with the significantly low, with large gender disparities. gains coming from all WB6 countries, except FIGURE 3.7: FIGURE 3.8: More people joined the Western Balkan The female to male labor participation gap labor force in 2024 narrowed to 19 percentage points Percent of population aged 15+ Labor force participation, percent MNE 63.7 80 ALB 63.7 70 60 SRB 56.2 50 WB6 54.6 40 30 MKD 52.3 20 BIH 49.1 10 KOS 41.6 Dec-21 Dec-23 Dec-24 2015 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 2015 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 2024 2023 MNE ALB SRB MKD BIH KOS Source: National statistics offices and World Bank staff estimates. The improvement of the participation rate is points by December 2024. With a 56.9-percent the result of women as well as men entering female participation rate, Montenegro set the the labor market (Figure 3.8). The most record for the WB6 region. Advances were also pronounced increase of female participation registered for the Albanian male participation was seen in North Macedonia, at 1.3 percentage (at 69.8 percent). Female participation rates are points, followed by Bosnia and Herzegovina at 1 also above the regional average of 45 percent percentage points, and Albania at 0.9 percentage for Albania and Serbia, while the gender gap Labor markets remain tight2 23 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 in Montenegro narrowed the most, by 3.1 The rise in minimum wages in the WB6 region percentage points during 2024. The female-to- has continued, with some countries linking male participation gap for the region declined these increases to the educational attainment slightly by 0.5 percentage points over 2024 of employees.  Since January 2025, the largest to 19.2 percent, with stark differences across increase in the region was observed in the countries, being almost double for Kosovo. Federation of Bosnia and Herzegovina (FBiH), Increasing labor participation will be crucial to where the minimum wage rose by 60 percent support future growth as aging and emigration to approximately €892.3 In Republika Srpska, erode the labor supply. the minimum wage was set in the range from around €6874 to around €1,023,5 depending Average real wage growth across the WB6 on the educational level of employees. As part countries remains strong amid persistent of the regular indexation, minimum wages in productivity constraints and labor shortages. Serbia and North Macedonia were increased by Serbia recorded the highest average real wage 13.2 and 8.1 percent for 2025, respectively. The increase in 2024, at 9.1 percent, followed by highest minimum wage in the region remains in North Macedonia, at 9.0 percent. Albania, Montenegro after the previous year’s increase, and Bosnia and Herzegovina recorded average which also differentiates employees based on real wage growth of around 8 percent, while their education level. Meanwhile, the minimum Montenegro followed with 6.9 percent growth. wage in Albania remained unchanged at around Wage growth was at least double that of €404, while Kosovo’s minimum wage, at €350, productivity growth in most WB6 economies continues to be the lowest in the region in (Figure 3.9). Bosnia and Herzegovina had the nominal terms but the highest in terms of its largest wage-productivity differential, while wage share of the average wage in the country. growth in Serbia was accompanied by a similar rise in productivity of 7 percent. FIGURE 3.9: FIGURE 3.10: Average real wage and labor productivity in Minimum wage as a share of average wage 2024 12.0 80 11.0 60 Wage y-o-y 10.0 MKD SRB 9.0 40 8.0 BIH ALB 7.0 20 MNE 6.0 5.0 0 ALB FBIH RS MKD MNE SRB -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Productivity y-o-y 2023 2024 Note: GVA per employment, except for Albania. Source: Eurostat, national statistical offices, national legal Source: National statistical offices. documents. 3 KM 1,744 in gross terms. 4 KM 1,344.3 5 KM 2,000 24 Labor markets remain tight2 ADAPTING FOR SUSTAINABLE GROWTH 4. Low labor force participation hinders further poverty reduction Poverty in the six WB6 countries continued its The broad outlook for continued reductions downward trend, albeit at a slower pace than in poverty is positive, reflecting recent during the pre-pandemic period. Before 2019, improvements in WB6 countries’ labor the poverty rate (measured at the US$6.85 per markets. Between 2022 and 2023, most day adjusted for purchasing power parity [PPP] WB6 countries experienced reductions in their at 2017 prices) decreased by almost 3 percentage unemployment rates and increases in activity rates, points annually. However, between 2022 and which are expected to support poverty reduction 2025, this rate has fallen by about 3 percentage over the projected period. However, labor force points in total. This slower reduction is attributed participation in the WB6 region remains low and to a combination of slower economic growth below the EU average of 75 percent, constraining across the WB6 region and a series of shocks further progress in poverty reduction. In 2023, that have strained households’ purchasing power countries such as North Macedonia, Bosnia and in recent years, as well as due to the declining Herzegovina, and Kosovo continued to have marginal impact of economic expansion in lower participation rates than the regional average lifting the remaining poor above the poverty line. of 54 percent. This highlights the urgent need for For example, high inflation during 2022–2023, WB6 governments to promote policies aimed at driven by surging food and energy prices, has enhancing labor force participation and increasing contributed to the erosion of households’ real employment opportunities that could lead to incomes in the region, particularly affecting more earning opportunities for households. In the poor. In 2025, the poverty rate is estimated addition, deeper reductions in poverty will also at around 11.1 percent, implying that around require more targeted policies either in terms of 1.5 million people in the WB6 countries have labor market activation or social transfers, as a incomes below that threshold (Figure 4.1). high share of the remaining poor are characterized by long-term unemployment. FIGURE 4.1: Poverty reduction continues, but in 2025 around 1.5 million people in the WB6 region are expected to remain in poverty Poverty headcount (% of population living on less 40 than $8.3/day 2021PPP) 30 28.9 26.2 20 22.9 18.9 18.7 14.5 13.6 12.6 11.6 15.2 10.7 10.0 10 0 2016 2017 2018 2019/e 2020/e 2021/e 2022/e 2023/f 2024/f 2025/f 2026/f 2027/f Note: Welfare is estimated in US dollars using 20172PPPs. Due to a lack of comparable data, the regional estimate excludes Bosnia and Herzegovina (BiH). Forecasts are based on GDP per capita in constant LCU, e = estimate, f = forecast. Source: World Bank estimates and forecasts based on 2021 income data from the Survey of Income and Living Conditions (SILC) for Montenegro; 2018 for Albania, 2019 for North Macedonia, 2022 for Serbia; and 2021 for Kosovo. Low labor force participation hinders further poverty reduction 25 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Public sentiment regarding economic appear to be monotonic, such that lower disparities remains a significant concern in levels of income inequality do not necessarily the WB6 countries. Despite falling poverty translate into lower perceptions of inequality. rates, there is widespread perception that the Worryingly, inequality is also perceived to be gap between rich and poor remains very high, on the rise—some two-thirds of adults in the despite measured levels of economic inequality Western Balkans region, and over 80 percent of that are relatively low by international adults in countries such as Albania and North standards. Over 70 percent of adults in the Macedonia—believe that the gap between the WB6 countries agree or strongly agree with rich and the poor has increased over the course the statement that the gap between rich and of the past four years. Studies suggest6 that poor should be reduced. This contrasts with factors such as increased insecurity, the rise the fact that all WB6 countries have Gini of non-standard forms of employment, labor coefficients well below 40, the World Bank’s market polarization, and greater inequality threshold for classifying countries as having a faced by younger cohorts compared with older high level of economic inequality. As Figure ones throughout their lifecycle, contribute to 4.2 shows, the relationship between measured these perceptions. inequality and perceptions thereof does not FIGURE 4.2: Objective and subjective measures of inequality in the region differ Measured Perceived 90.0 82.2 82.9 80.0 70.0 67.0 64.4 60.0 54.8 50.0 49.6 40.0 36.0 34.4 33.6 33.1 30.0 29.0 28.8 20.0 10.0 0.0 KOS ALB MNE MKD SRB BIH Note: Measured inequality is captured by the Gini Index, which takes values from 0 to 100. Perceived inequality is captured by the share of the population that thinks the gap between rich and poor in the past four years has become larger. Source: Gini Index: World Bank estimate for each country from the latest available year (2018, ALB: 2022, MNE; 2021, BiH, KOS; 2022, SRB; 2019, MKD). The BiH index based on expenditure data, all other based on disposable income data. Perceived Inequality: Life in Transition Survey, 2022–2023. Understanding the impact of perceived inequality, rather than objective measures, inequality on policy preferences is crucial greatly influence their policy preferences.7 in addressing economic disparities across Generally, how people perceive the gap the WB6 countries. Discrepancies between between rich and poor correlates positively observed and perceived inequality matter with their personal willingness to pay part because people’s subjective perceptions of of their income, or higher taxes, to alleviate 6 Bussolo, M., Davalos, M. E., Peragine, V., & Sundaram, R. 2018. Toward a New Social Contract: Taking on Distributional Tensions in Europe and Central Asia. Europe and Central Asia Studies. Washington, DC: World Bank. 7 Bussolo, M., Ferrer-i-Carnonell, A., Giolbas A., Torre, I. 2021. I Perceive Therefore I Demand: The Formation of Inequality Perceptions and Their Implications for Redistributive Policies. Review of Income and Wealth, 67(4), 861. https://doi.org/10.1111/roiw.12497 and Knell, M., & Stix, H. 2020. Perceptions of inequality. European Journal of Political Economy, 65, 101927. 26 Low labor force participation hinders further poverty reduction ADAPTING FOR SUSTAINABLE GROWTH poverty and inequality (Figure 4.3). Notably, perceptions of high inequality is a complex with the exception of North Macedonia, a task that requires, among other priorities, relatively high proportion of adults in the WB6 improving job opportunities, particularly for countries are willing to contribute financially young people, aligning skills with labor market toward narrowing this gap, reflecting the demands, and adapting the social protection strong inequality beliefs prevalent in their systems to the evolving jobs landscape (see countries. However, tackling these widely held Spotlight). FIGURE 4.3: Perceptions of a large gap between rich and poor correlate positively with the willingness to bear a financial burden to alleviate poverty and inequality 80 Kosovo WeBa Albania Other ECA Willing to pay to reduce poverty/inequality, % of adults Linear fit, all ECA Bosnia and Herzegovina 60 Serbia Montenegro 40 North Macedonia 20 0 60 70 80 90 The gap between the rich and poor should be reduced, % of adults Note: The full wording of each question is as follows: Reduce Gap: “The gap between the rich and the poor should be reduced”; and “Would you be willing to give part of your income or pay more taxes, if you were sure that the extra money was spent on each of the following? [Assisting the poor / reducing inequality]”. Source: Life in Transition Survey, 2022–2023. Low labor force participation hinders further poverty reduction 27 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 5. Fiscal pressures are rising again Following three years of fiscal consolidation, Bosnia and Herzegovina registered the highest three out of six WB6 countries have increased growth in budget revenues as percentage of GDP fiscal deficits in 2024. While revenue (an increase of 1.9 percentage points). Serbia, performance was robust in most countries, higher Albania, and Kosovo experienced solid revenue recurrent spending has driven fiscal deficits growth, with Serbia registering a 13.5-percent higher. As a result, the region’s average fiscal increase, driven by VAT and excise duties, deficit has increased by 0.7 of a percentage point and Albania recording a strong 10.3 percent of GDP , reaching 2.2 percent of GDP in 2024 year-on-year increase. Supported by recent tax (Figure 5.1). Albania has seen an improvement administration reforms, Kosovo continues to in its fiscal balance, primarily due to under- experience a strong performance of tax revenues. executed capital expenditures and robust tax During 2024, in Kosovo tax revenues grew revenues. Meanwhile, Serbia’s fiscal deficit by 9.3 percent, supported by a 10.6 percent remained at 2 percent of GDP , supported by increase in indirect taxes. However, in some WB6 strong revenue performance. In contrast, Bosnia countries, policy-driven tax reductions and weak and Herzegovina, Montenegro, and North revenue mobilization limited revenue growth. In Macedonia have experienced rising fiscal deficits Montenegro, the implementation of the pension primarily due to higher government spending contribution cuts under the Europe Now 2 on wages, social benefits, and interest payments, program reduced revenues in the last two months coupled with weak revenue mobilization or of 2024. Nevertheless, overall revenues increased policy-driven revenue losses. by 7 percent, mainly from VAT and corporate income tax, but also from excise revenue (see Revenue performance across the WB6 Box 5.1). Likewise, North Macedonia faced countries remained strong in 2024, with most challenges with weak, albeit improving, domestic countries benefiting from robust tax collection, revenue mobilization, which constrains its fiscal compliance gains and steady economic activity. space. In general, the WB6 region’s tax-to-GDP At the regional level, the government revenue- ratios are below the EU average, characterized by to-GDP ratio rose to 36.4 percent in 2024, up low corporate and personal income tax rates, and from 35.3 percent in 2023, reflecting an overall a heavy reliance on taxes on goods and services improvement across the WB6 region (Figure 5.2). and social security contributions. FIGURE 5.1: FIGURE 5.2: Fiscal deficits widened in many WB6 …despite positive revenue performance countries in 2024... across most of the region Fiscal balance, percent of GDP Contribution to change in the fiscal deficit, percent of GDP, 2024e 2022 2023 2024 Expenditure Revenue Deficit 1 0 6 -1 -0.2 4 -2 -0.8 2 -2.0 -2.2 0 -3 -2.5 -3.1 -2 -4 -4 -5 -4.6 -6 WB6 MKD SRB KOS ALB MNE BiH MKD MNE BiH SRB ALB KOS WB6 Source: National statistical offices, ministries of finance and Source: National statistical offices, ministries of finance World Bank staff estimates. and World Bank staff estimates. 28 Fiscal pressures are rising again ADAPTING FOR SUSTAINABLE GROWTH In 2024, fiscal pressures intensified across increases in spending also included delayed the Western Balkans, driven by rising cost-of-living adjustments to pensions and public expenditures, including from higher revisions to existing family allowances schemes. interest payments. Public expenditures across Meanwhile, with the exception of Montenegro, the WB6 increased in 2024, averaging 38.6 public wage spending continued to grow as a percent of GDP, up from 36.8 percent in share of GDP, with the WB6 countries’ average 2023 (Figure 5.311). Montenegro recorded wage bill increasing by 0.3 of a percentage point the highest expenditure share at 45.9 percent to 8.5 percent in 2024. North Macedonia and of GDP, primarily due to increased minimum Serbia recorded the highest increases at 0.7 and pensions and capital spending. Bosnia and 0.6 of a percentage point, respectively, while Herzegovina had the second-highest level of Albania, Kosovo, and Bosnia and Herzegovina spending at 45.3 percent, while Albania (28.9 saw moderate growth of 0.2–0.3 of a percentage percent) and Kosovo (30.1 percent) reported point. Despite phased public sector wage hikes, the lowest shares. The average primary deficit Albania’s wage bill remains the lowest as a share of the WB6 countries increased in 2024, of GDP at 4.5 percent, significantly below the averaging 0.6 percent of GDP (up from 0.1 regional average. Montenegro was the only percent in 2023). Montenegro experienced the country where the share of the wage bill remained most significant deterioration, shifting from a unchanged compared to 2023 at 10.6 percent of surplus of 2.4 percent in 2023 to a deficit of GDP, owing also to the removal, starting from 1.1 percent in 2024, followed by Bosnia and October 2024, of pension contributions paid by Herzegovina where primary deficit doubled employers at 5.5 percent of the gross wage. from 0.7 percent to 1.4 percent in 2024. North Most WB6 countries are experiencing Macedonia and Serbia faced moderate declines a rebound in capital spending, though in their primary deficits, while Albania notably with notable differences among them. improved its surplus. Interest payments across The regional average increased from 5.2 the region rose slightly, averaging 1.6 percent percent of GDP in 2023 to 5.4 percent in of GDP, up from 1.4 percent in 2023. 2024. Serbia led the region with a 0.9-of-a- Expenditure increases were widespread, percentage-point rise, reaching 7.3 percent, with social spending, primarily pensions, followed by Montenegro and Kosovo, which accounting for the largest share. Montenegro saw increases of 0.7 and 0.6 of a percentage recorded the most significant increase, rising by point, respectively. Bosnia and Herzegovina 1.7 percentage points, driven mainly by higher also recorded moderate growth of 0.4 of a minimum pensions, followed by Bosnia and percentage point. However, despite the overall Herzegovina with an increase of 2.8 percentage increase, under-execution of capital budgets points (Figure 5.3). North Macedonia, Serbia, remains a persistent issue across the region. and Kosovo experienced more moderate North Macedonia, in contrast, experienced a growth, while Albania had the smallest rise at sharp decline, with capital expenditure falling around 0.4 of a percentage point. Bosnia and by 1.5 percentage points to 3.9 percent, while Herzegovina, and North Macedonia allocated Albania remained unchanged at 5 percent. substantial shares of their budgets to pensions, The EU Growth Plan for the Western Balkans, with both countries spending nearly one- which channels financing through the Western fifth of their GDP on social benefits in 2024. Balkans Investment Framework, has the Ensuring the long-term sustainability of state potential to further boost public investment in pension systems remains a key challenge for the medium term, but addressing inefficiencies most WB6 countries, given rising spending in public investment management remains pressures, informality, and aging populations. crucial to ensuring that these funds translate In some countries - for example Kosovo - into tangible economic benefits. Fiscal pressures are rising again 29 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 FIGURE 5.3: FIGURE 5.4: Capital spending rebounded… …and almost all WB6 countries have turned to higher spending on social benefits Composition of estimated public spending, 2023 and 2024e, percent of GDP Contribution to change, 2024e, in percent of GDP Percent of GDP Wake bill Capital Expenditures Wage bill Social benefits 50 Social benefits Total expenditures Capital expenditures Total expenditures 40 5 30 4 20 3 10 2 0 1 2023 2023 2023 2023 2023 2023 2023 2024e 2024e 2024e 2024e 2024e 2024e 2024e 0 -1 -2 MNE BIH SRB MKD KOS ALB WB6 MNE BiH SRB MKD KOS ALB WB6 Source: National statistical offices, ministries of finance and World Source: National statistical offices, ministries of finance Bank staff estimates. and World Bank staff estimates. Regional public and publicly guaranteed in the region. Conversely, North Macedonia (PPG) debt as percentage of GDP has experienced an increase by 4.3 percentage remained broadly stable. By 2024, regional points, driven by persistently high fiscal deficits PPG debt reached 45.2 percent of GDP(Figure and increased issuance of domestic securities to 5.5). All countries in the WB6 region, except enhance liquidity. North Macedonia remains the Montenegro and North Macedonia, experienced only country in the region where PPG debt-to- reductions in their PPG debt-to-GDP ratios. GDP exceeds pre-pandemic levels. Montenegro’s Albania saw the most significant improvement, PPG debt increased by 2.2 percentage points, with a decrease of 3.3 percentage points, primarily due to the issuance of a Eurobond reflecting fiscal consolidation, robust economic intended to finance 2024 needs and establish a growth, and appreciation of the Albanian lek. buffer for 2025. In Bosnia and Herzegovina, PPG Supported by prudent fiscal management debt-to-GDP declined by 1.3 percentage points, that have helped to keep deficits low, Kosovo largely influenced by a favorable denominator experienced a continued decline in its PPG effect, negative net borrowing, and slow project debt-to-GDP ratio from 17.5 percent in 2023 implementation and disbursement. to 16.5 in 2024, maintaining the lowest ratio FIGURE 5.5: FIGURE 5.6: Public and publicly guaranteed debt as a share …as did external public and publicly of GDP declined to its lowest in a decade… guaranteed debt Public and publicly guaranteed debt, percent of GDP External public and publicly guaranteed debt, percent of GDPë Percent of GDP 2024e Percent of GDP 2024e 90 2023 80 2023 80 pre-pandemic 70 pre-pandemic 70 peak 60 low 60 50 50 40 40 30 30 20 20 10 10 0 0 MNE MKD ALB SRB BIH KOS WB6 MNE MKD SRB ALB BIH KOS WB8 Source: National statistics offices and World Bank staff estimates. Source: National statistics offices and World Bank staff estimates. 30 Fiscal pressures are rising again ADAPTING FOR SUSTAINABLE GROWTH In contrast to the general downward trend in significantly tougher borrowing conditions and total PPG debt-to-GDP , external PPG as a increased investor caution. In 2023, borrowing percentage of GDP increased across the region costs rose sharply: Serbia placed two Eurobonds in 2024. The region’s external PPG debt-to-GDP worth a combined US$1.75 billion, with coupon ratio increased from 29.9 percent in 2023 to 30.5 rates of 6.25 and 6.5 percent; North Macedonia percent in 2024, with all countries except Albania, issued a €500 million Eurobond at 6.96 percent; and Bosnia and Herzegovina experiencing and Albania raised €600 million at 5.9 percent— increases. Montenegro had the highest external all considerably higher than the historically lower PPG debt level, reaching 58 percent of GDP rates seen previously. This trend persisted into in 2024—a 5.7 percentage-point rise from the 2024, although borrowing costs eased slightly. previous year—driven primarily by a significant Montenegro successfully issued a US dollar- Eurobond issuance and additional borrowing denominated Eurobond in March 2024, securing from international financial institutions later in US$750 million at a coupon of 7.259 percent, the year, aimed at creating fiscal buffers for 2025. which attracted robust investor interest, exceeding In 2024, North Macedonia contracted a €1 the offering by over sixfold. Similarly, Serbia billion loan from Hungary, which was partly used issued a €1 billion Eurobond in June 2024 at a to refinance the €500 million Eurobond maturing coupon rate of 6 percent, highlighting continued in January 2025. Other countries experienced but slightly improved financing conditions more modest increases in their external PPG compared with 2023, yet still markedly above debt ratios, ranging from 0.9 of a percentage pre-pandemic borrowing costs. Nevertheless, point in North Macedonia to 0.1 percentage yields on the existing Eurobonds of the WB6 points in Serbia. Kosovo continued to have the countries decreased on average compared with six region’s lowest external PPG debt at 7.6 percent months ago (Table 5.1). Spreads with yields on of GDP . Throughout 2024 and early 2025, German bonds have narrowed as well. As of early the World Bank provided financing through 2025, credit ratings across the WB6 countries development policy loans, including €90.3 indicate stable economic outlooks, with some million for Kosovo, €153.7 million for Serbia, noteworthy improvements (Table 5.2). Serbia US$75 million for Bosnia and Herzegovina, achieved a significant milestone as Standard & and €80 million for Montenegro. These funds Poor’s upgraded its sovereign rating to BBB−, are intended to strengthen economic resilience marking the country’s entry into investment- and enhance environmental sustainability across grade status for the first time, reflecting prudent the WB6 region. In addition, Serbia and Kosovo fiscal management and strong economic maintain active engagements with the IMF, performance. This makes Serbia the only country which conducted reviews in December 2024 in the WB6 region with the investment grade and approved additional access to €36 million rating. Montenegro and Albania also experienced for Kosovo8 and €400 million for Serbia, with positive developments, both receiving an upgrade Serbia’s financing treated as precautionary. from Moody’s to Ba3 with a stable outlook. North Macedonia retained its BB+ rating with Fitch, Despite some stabilization in global market and Kosovo maintained a BB− rating, also from conditions, borrowing costs for the WB6 Fitch, both with stable outlooks. Albania’s Ba3 countries have remained elevated due to rating, and Bosnia and Herzegovina’s B3 rating ongoing economic uncertainty and higher remained unchanged according to Moody’s, with interest rates. After a brief pause in 2022, stable outlooks highlighting continued cautious most WB6 countries returned to international optimism. financial markets starting in 2023, encountering 8 Part of this amount is treated as precautionary 9 In March 2024, Montenegro hedged its US$750 million Eurobond by converting it into euros through a cross-currency swap, reducing the effective interest rate to 5.88 percent. Fiscal pressures are rising again 31 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 TABLE 5.1: Yields on Western Balkan countries outstanding Eurobonds   Yield in % Spreads (basis Coupon Maturity 28 Mar 26 Sep 5 Mar 18 Sep 10 Mar points) 2023 2023 2024 2024 2025 Albania 3.5 16/06/2027 6.5 5.5 4.5 4.4 3.9 171.7 3.5 09/10/2025 6.1 5.5 4.4 4.3 5.5 184.6 Montenegro 2.785 16/12/2027 8.4 6.8 6.2 5.1 4.4 218.0 3.375 21/04/2025 7.3 5.9 5.1 4.1 4.2 50.8 North 6.96 13/03/2027 - 6.0 5.2 5.0 4.3 214.9 Macedonia 2.75 18/01/2025 6.4 6.0 5.6 - - - 3.65 03/06/2026 - - - - 4.2 56.2 Serbia 3.125 15/05/2027 5.8 6.2 4.5 4.1 3.9 166.9 6.25 26/05/2028 - 6.8 5.9 5.1 5.6 357.3 Bosnia & 4.75 01/01/2026 7.0 7.1 7.9 5.8 7.7 548.2 Herzegovina, Republic of Srpska Source: https://www.boerse-frankfurt.de/en, accessed on 10 March 2025 Note: Spreads refer to spreads with yields on German bonds with the same or similar residual maturity. TABLE 5.2: Credit ratings of the Western Balkan countries Moody’s Standard & Poor’s Fitch Albania Ba3 (stable) BB (stable) — Bosnia and Herzegovina B3 (stable) B+ (stable) — Kosovo — — BB-(stable) Montenegro Ba3 (stable) B+ (stable) — North Macedonia — BB- (stable) BB+ (stable) Serbia Ba2 (positive) BBB- (stable) BB+ (positive) 32 Fiscal pressures are rising again ADAPTING FOR SUSTAINABLE GROWTH Box 5.1: ‘Sin’ Taxes in the Western Balkans: Improving Public Health and Tax Revenues The consumption of tobacco, alcohol and sugary drinks, which are usually subject to excise taxes, comes with substantial economic burdens due to higher health-care expenditures and reduced labor productivity. The effects for the whole economy are substantial; for example, the total estimated economy-wide cost of smoking only in Bosnia and Herzegovina was between 2.0 and 3.5 percent of GDP in 2019.10 The Western Balkans suffer from high prevalence rates of smoking, alcohol consumption, and unhealthy diets, which are significant risk factors for non- communicable diseases (NCDs) such as heart disease, cancer, respiratory illnesses, and diabetes. These health risks contribute to increased mortality and morbidity, with cancer and cardiac mortality rates having increased in all WB6 countries since 2011 (Table 5.3). This leads to a further worsening of otherwise dire demographic trends across the Western Balkans. TABLE 5.3: Cancer and cardiac mortality rates per 100,000 people Cause of death, rate per 100,000 ALB BiH KOS MNE MKD SRB people Neoplasms (2021) 165 272 72* 260 229 300 Neoplasms (2011) 120 235 57 232 224 283 % increase in 2021 vs. 2011 38 16 26 12 2 6 Cardiovascular diseases (2021) 528 569 255* 701 612 773 Cardiovascular diseases (2011) 358 481 237 614 620 744 % increase in 2021 vs. 2011 48 18 8 14 (1) 4 Note: *reference year for Kosovo is 2018. Source: Kosovo Statistics Agency, Global burden of Disease database https://www.healthdata.org/research-analysis/about-gbd An earlier initiation of unhealthy consumption habits leads to more severe health and economic consequences due to prolonged use. Statistics from a sample of European countries reveal that a staggering 76.1 percent of current smokers began smoking before the age of 18.11 In the Western Balkan countries, 14.5 percent of total youth aged 13–15 years old is using tobacco products (Figure 5.7). Preventing the initiation of smoking among youth is crucial for human capital protection, as it yields long-term benefits for individuals and society. FIGURE 5.7: FIGURE 5.8: Youth tobacco use Minimum cigarette excise (pack of 20, in €) Boys Girls Total ALB 30% 25% BIH 20% KOS 15% MNE 10% MKD 5% SRB 0% EU average ALB BIH KOS MNE MKD SRB 0.00 1.00 2.00 3.00 4.00 (2020) (2019) (2016) (2018) (2016) (2017) Note: Latest available. The age interval is 13-15 years old. Source: European Commission, 2024 Tobacco use refers to smoked and smokeless tobacco. Source: WHO: Global Youth Tobacco Survey 10 Economics for Health (2024). Gains from the Rise in Tobacco Excise Taxes in BiH. Link:https://www.economicsforhealth.org/ files/research/968/ubl-pb-tax-modeling-revised-final-draft-for-approval-9.12-acg-md-dg-18.12..pdf 11 https://pmc.ncbi.nlm.nih.gov/articles/PMC7813769/ Fiscal pressures are rising again 33 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Higher prices of harmful products, such as cigarettes, alcohol, and sugar sweetened beverages, can be a deterrent of consumption. A primary concern today is that the consumption of these products is not steadily decreasing in Europe and the WB6 countries as, for example, the rise in incomes without sufficient changes in excise taxes has made tobacco products more affordable in most of the WB6 countries.12 Moreover, the WB6 countries have excise rates on tobacco products, alcohol, and sugar-sweetened beverages (SSBs) well below the EU average (Figure 5.8). Health excise taxes serve a dual purpose primarily: they correct market failures by reducing the consumption of harmful products and at the same time generate significant tax revenue for governments swiftly and efficiently.13 Currently, the share of health tax revenues in GDP ranges between 1.1 and 2.5 percent in the WB6 countries (Table 5.4). The broader application and increase in health taxes in the WB6 countries that translates into higher prices of harmful products can help curb the prevalence of NCDs, thereby reducing public health spending and improving human capital. Furthermore, young people exposed to higher tobacco prices are, relative to adults, more likely to smoke less, be less inclined to start smoking, and more likely to quit if they have already started.14 TABLE 5.4: Health tax revenues in the Western Balkans, 2023 Excise revenues Per unit ALB BiH KOS MNE MKD SRB* Alcohol % of GDP 0.2% 0.2% 0.2% 0.3% 0.2% 0.2% Tobacco % of GDP 1.0% 1.9% 2.3% 1.4% 1.5% 1.6% SSBs % of GDP - 0.1% - 0.2% - - Total Health % of GDP 1.1% 2.2% 2.5% 2.0% 1.7% 1.8% Taxes % of total 4.2% 5.3% 8.5% 5.3% 5.2% 4.4% revenues Note: MNE has separate excise duties on carbonated and non-carbonated water and sugar, cocoa and ice cream products, of which the sum is used in this table. *Numbers for Serbia are for the year 2022. Source: Ministries of finance, the European Commission: Taxes in Europe Database 2022, World Bank staff calculations. As part of the EU accession aspirations, the WB6 countries will need to revise their current tax frameworks to comply with the minimum standards set out in relevant EU directives. The EU directives create obligations for member states in terms of tax structure,15 minimum tax rates,16 benchmarks, product definitions, and tax administration for alcohol and tobacco excise taxes.17 According to the Cigarette Tax Scorecard (Economics for Health),18 the WB6 countries achieve good scores for tax structure, as in most instances a mixed approach of ad valorem and specific tax is applied to products. The current EU average19 of the minimum specific excise is €192 per 1,000 cigarettes (Table 3). Montenegro, Bosnia and Herzegovina, and Serbia, although meeting the EU’s minimum threshold, are at half to EU average, while Albania, North Macedonia, and Kosovo require significant increases to reach even the minimum 12 The Urgency of Improving Tobacco Taxation in Europe: Lessons from the Tobacconomics Cigarette Tax Scorecard, 3e. Confer- ence of health tax reforms, Vienna, June 2024. 13 Health Taxes in North Macedonia. World Bank Policy Paper, February 2024. 14 Kjeld SG, Jørgensen MB, Aundal M, Bast LS. Price elasticity of demand for cigarettes among youths in high-income countries: a systematic review. Scand J Public Health. 2023 Feb;51(1):35-43. 15 Tax structure refers to the type of tax, tax base, other characteristics such as tiers and thresholds, and the scope of the tax. 16 The EU tobacco tax directive set a €90 minimum specific tax per 1,000 cigarettes, €60 per kilogram for fine-cut tobacco, and €12 per kilogram or 1,000 pieces for cigars and cigarillos. 17 Council Directive 2011/64/EU on Excise Duties on Tobacco. 18 https://www.economicsforhealth.org/cigarette-tax-scorecard/ 19 The EU average includes only those countries with a minimum specific tax requirement. 34 Fiscal pressures are rising again ADAPTING FOR SUSTAINABLE GROWTH rates of €90 per 1,000 cigarettes. With the current excise rates calendar for tobacco, North Macedonia would reach the EU minimum in 2030,20 while Albania only in 2035. In Bosnia and Herzegovina, the specific tax on tobacco was last increased in 2019, while the minimum excise is being annually adjusted, but only marginally. As result, there was no meaningful effect on cigarette consumption.21 Montenegro surpassed the EU minimum of €90 per 1,000 cigarettes in 2025, and any future adjustments will align with EU directive updates. This means that no price increases are currently planned after 2025, unless the EU goes along with the planned update of the Tobacco Tax Directive, which would more than double the current minimum tax rate. However, meeting the minimum rates will not be sufficient to improve public health sustainably. Demand for ‘sin’ products has been growing due to their higher affordability, and weak tax administration unable to control informal trade and the illicit market. Simulations for Bosnia and Herzegovina predict an increase in consumption, number of smokers and deaths under the current tax policy. The quantity of cigarettes sold has, after a steady decline between 2010 and 2018, risen again after 2020, partially due to decline in illicit market share and sizable income growth, which increased affordability.22 Serbia’s excise law has cigarette excise duty linked to the consumer price index with biannual adjustments, yet these increases are capped at 2 percent. Also, substitution tobacco products such as fine-cut tobacco, cigars and cigarillos, and e-cigarettes, are taxed at lower rates if at all (Table 5.5). Currently, Bosnia and Herzegovina, Albania (except for local production), Serbia, and Montenegro only meet the EU minimum for fine-cut tobacco, while substantial increases are necessary in North Macedonia and Kosovo. However, the majority of fine-cut tobacco escapes paying tax altogether due to the informal nature of the trade. Importantly, the new nicotine products such as e-cigarettes, tobacco heaters and nicotine pouches, etc., need to be addressed by excise laws. As a positive example, the tobacco excise duty was expanded to electronic and heated tobacco products recently in Albania, as well as to water pipe, chewing tobacco, sniffing tobacco, non-combustible tobacco products and e-cigarette liquids in North Macedonia. TABLE 5.5: Excise rates for tobacco products (€ or percent), as of January 2025 Taxed Product Per unit ALB BiH XKX MNE MKD SRB EU average Cigarettes Ad valorem - 42% - 25% 9% 33% 26% specific per 68.95 42.18 55.00 53.50 56.12 41.77 116.91 1,000 pieces min. specific - 91.53 - 91.50 56.12 86.01 191.98 Cigars & Ad valorem - 42% - - 9% - 17% Cigarillos specific per - - - - 409.55 243.35 111.45 1,000 pieces (193.71) * specific per kg 68.95 - 65.00 25.00 - - 174.25 min. specific - - - - - - 180.98 Fine-cut Ad valorem - - - - - 43% 39% tobacco specific per kg 68.95 30.91 73.22 60.00 60.00 39.55 130.38 min. specific - - - - - 60.21 181.87 Note: *MKD: cigar excise is €409.55, cigarillos are taxed with €193.71. Source: European Commission, countries’ excise laws, World Bank staff calculations. 20 North Macedonia’s new excise calendar states annual specific excise increases of €3.70 per 1,000 cigarettes (€0.074 per pack) until 2030. 21 https://www.economicsforhealth.org/files/research/968/ubl-pb-tax-modeling-revised-final-draft-for-approval-9.12-acg-md-dg-18.12..pdf 22 https://www.economicsforhealth.org/files/research/969/isea-simulation-model-mne-24.12.2024-md2.pdf Fiscal pressures are rising again 35 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Alcohol excise taxes in the WB6 countries are low as well, and unlike the EU Tobacco Tax Directive, the EU Alcohol Tax Directive sets a poor precedence. The EU minimum excise tax on alcohol23 remains very low and has not seen increases in recent decades, making alcohol more affordable over time. Despite all WB6 countries currently complying with the EU directive’s minimum tax for beer (€1.87 per liter of absolute alcohol [LAA]), these low rates are inadequate to promote moderate drinking or abstinence (Table 5.6). Regarding the €5.50 minimum per LAA for spirits, only Serbia falls short with its rate. For intermediate products, which require a minimum of €0.45 per liter of product, Montenegro (€0.10) and Serbia (€0.26) are below the threshold. In addition, excise taxes on still and sparkling wine are absent in half of the EU member countries, as the minimum tax rate is set at zero in the Directive. Positively, five of the WB6 countries have excises in place for still wine, the exception being North Macedonia. Furthermore, Albania and Montenegro have dedicated excise taxes for sparkling wine. However, most EU member countries have much higher rates than prescribed minimums, while in the WB6 countries current rates are insufficient to reduce the public health burden of alcohol consumption in the long term. TABLE 5.6: Excise rates for alcoholic beverages, in € Taxed Beverage Per liter of ALB BiH KOS MNE MKD SRB EU average Beer pure alcohol 6.75 2.60* 8.00 5.00 6.45 4.60** 8.90 Distilled Spirits pure alcohol 8.04 7.67*** 8.00 12.50 5.48 4.57 17.85 Still Wine finished product 0.95**** 0.13 0.63 0.25 0.00 0.26 1.22 Sparkling Wine finished product 0.49  0.13  0.63 0.35 0.00   0.26 2.01 Note: Assuming 5% alcohol content for beer and 12.5% alcohol content for wine. *BIH: discounted excise rate of €2 for SMEs **SRB taxes beer over 5% alc. With €5.20 ***BiH has a discounted rate for brandy: €4.09 **** ALB: €1.14 if alc. >12.5%, rates for SMEs lower: €0.29 if alc. <12.5%, €0.38 otherwise. Source: European Commission, countries’ excise laws, World Bank staff calculations. SSB taxes have been implemented in various countries to address public health concerns related to excessive sugar consumption.24 Findings from the United Kingdom suggests that a SSB tax leads to fewer dental caries, fewer overweight or obese children, and improvements in life expectancy, with the largest effect for children and adolescents in the most deprived areas.25 Currently, there is no EU directive on SSB taxes. Bosnia and Herzegovina has applied a tax on soft drinks, but the current amount of just €0.005113 per liter fails to create a strong incentive for customers to switch to sugar-free alternatives. In Montenegro, a new excise duty on sugar, cocoa and ice cream products was introduced in 2023, together with a new excise on non-carbonated water with added sugar, complementing the existing excise duty on carbonated water of €0.25 per liter. Albania has an excise duty on energy drinks of 30 lek/liter, yet because of caffeine, not sugar.26 Effective health taxation in the WB6 countries hinges on the implementation of specific taxes that target consumption directly, such as in the case of Albania and Kosovo, ensuring both public health benefits and sustainable revenue generation. Specific taxes are preferred over ad valorem taxes as they more effectively reduce consumption by increasing prices, particularly for cheaper products. Targeting cheaper tobacco products is important, as findings 23 Directives 92/83/EEC and 92/84/EEC. 24 World Bank, 2023, Health Taxes Knowledge Note #4 - Unpacking the empirics behind health tax revenue https://thedocs.world- bank.org/en/doc/f1f068e38935e2f5d92b7edf365d5089-0350032023/kn4-health-tax-revenues 25 https://pmc.ncbi.nlm.nih.gov/articles/PMC11008889/ 26 https://dogana.gov.al/english/c/171/198/258/legislation-on-excise 36 Fiscal pressures are rising again ADAPTING FOR SUSTAINABLE GROWTH from Montenegro suggest that prices for cheaper products are raised by industry less than the tax increase.27 Specific health taxes should be regularly adjusted for inflation and income growth to prevent products becoming more affordable over time. Tobacco taxes should be applied uniformly to all tobacco products to prevent switching to cheaper alternatives.28 Alcohol taxes should be based on alcohol content to target high-alcohol-content beverages.29 For SSBs, taxes should be based on sugar content, with tiered structures being preferable if administrative capacity allows, and should apply to all sugary drinks to avoid poor practices such as excluding fruit juices. When applied to sugar content rather than beverage volume, tax structure can also generate supply-side incentives for firms to lower sugar content, or to shift advertising to lower sugar products. An increase in the excise tax on tobacco products in the WB6 countries would lead to reductions in tobacco consumption, increased government revenues, and notable public health benefits (Table 5.7), but raising excises should be complemented by other policy efforts. Prevention campaigns should focus on public education to reduce initiation and increase cessation rates. Policies should also aim to limit second-hand smoke exposure by enforcing no- smoking zones in public areas, which should be regularly controlled. Addressing illicit trade by strengthening tax and customs administration is crucial. In addition, subsidies for tobacco growing should be abolished also to align with the EU rules. Currently, North Macedonia subsidizes local tobacco farming by dedicating to it up 25 percent of all agriculture subsidies,30 while Serbia abolished targeted subsidies for tobacco producers, although tobacco cultivation continues to be treated similarly to other crops and therefore receives subsidies. TABLE 5.7: Summary of impacts of rising tobacco excises ALB31 BiH32 KOS33 MNE34 MKD35 SRB36 Annual increase in excises, 5-8 15 10 15 16 15 percent Reduced consumption, percent 1.2 1-2.9 0.7 3.1-3.3 4.7-5.3 Increased government revenues, 4.0 114–159 12 11.5 7 percent mn BAM Averted premature deaths 2,300 1,200 1,150 2,300 320–678 Reduced smoking initiation, 13 5.9 6,500 percent youth 27 https://www.economicsforhealth.org/files/research/969/isea-simulation-model-mne-24.12.2024-md2.pdf 28 Health impacts of alcohol and tobacco use on the working age population and youth, WHO, Conference of health tax reforms, Vienna, June 2024. 29 Alcohol and Sugar-Sweetened Beverages taxation in Europe. Health Tax Project, World Bank Global Tax Program, Conference of health tax reforms, Vienna, June 2024. 30 World Bank. 2024. North Macedonia Public Finance Review. 31 https://tobaccotaxation.org/cms_upload/pages/files/261_report-the-impact-of-tobacco-tax-increases_-albania.pdf 32 https://www.economicsforhealth.org/files/research/968/ubl-pb-tax-modeling-revised-final-draft-for-approval-9.12-acg-md-dg-18.12..pdf 33 Berisha, A. & Prekazi, B. 2023. Tobacco smoking initiation among youth in Kosovo (Tobacconomics Working Paper No.23/8/1). 34 Institute for Socio-economic Analysis. 2025. Strengthening Public Health and Fiscal Revenues in Montenegro: Tobacco Taxation as a Policy Tool, Economics for Health. 35 https://www.economicsforhealth.org/files/research/954/analytica-policy-brief-tobacco-tax-modeling-evidence-from-north-mace- donia-final.pdf 36 https://www.economicsforhealth.org/files/research/892/tax-modeling-ies-2023.pdf Fiscal pressures are rising again 37 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 6. Persistent inflationary pressures During 2024, global inflation continued Mirroring global trends, average inflation in the its downward trajectory, largely driven by WB6 countries decreased sharply to 3.3 percent declining energy and goods prices, and the in 2024 down from 9.3 percent in 2023 (Figure impact of tighter monetary policies. The 6.2). Notably, inflation in the WB6 countries median global headline inflation declined fell below the median rate in emerging markets to 2.8 percent in September 2024, marking and developing economies (EMDEs) in May its lowest point since April 2021 (Figure 2024 for the first time since November 2021 6.1). This decline was largely driven by rapid and then dipped below 2 percent in most of disinflation in advanced economies thanks to the WB6 countries by September. However, the combination of the lagged effects of tight inflation remained persistently high in Serbia, monetary policies and the easing of supply at 4.6 percent in 2024 (from 12.1 percent in chain disruptions. In the Euro area, headline 2023), and North Macedonia, at 3.5 percent inflation saw an uptick to 2.4 percent in (from 9.4 percent). Headline inflation in December 2024, after dipping to 1.7 percent 2024 dropped to 2.2 percent in Albania, 1.7 in September (from 2.9 percent in December percent in Bosnia and Herzegovina, 1.6 percent 2023), mainly due to energy price base effects. in Kosovo, and 3.4 percent in Montenegro. Despite this positive trend, a resurgence in food In the WB6 countries, headline inflation inflation due to adverse weather events earlier further eased in 2024, narrowing the in 2024 led to a slight uptick in inflation during inflation gap with the EU. However, price the fourth quarter. pressures started to increase again in early 2025. FIGURE 6.1: FIGURE 6.2: Global inflation continued to ease in 2024 Inflation heterogeneity among the WB6 countries persisted Median inflation, percent, yoy WB6 headline inflation and CPI inflation, by country percent 11 Global 20 ALB BIH 10 Advanced economies KOS MKD 9 EMDEs 15 MNE SRB 8 WB6 7 10 6 5 5 4 3 0 2 1 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23 Mar-24 Jun-24 Sep-24 Dec-24 May-23 May-24 May-22 Nov-23 Nov-24 Nov-22 Mar-23 Sep-23 Mar-24 Sep-24 Mar-22 Sep-22 Jan-23 Jan-24 Jan-22 Jul-23 Jul-24 Jul-22 Source: World Bank Global Economic Prospects. Source: Eurostat; World Bank Global Economic Prospects. Core inflation in most WB6 countries recorded in December 2023, but still above the remained highly persistent, reflecting, among EU average. The core inflation gap between the other factors, continuing tight labor markets WB6 countries and the EU stabilized at around and rising wages. Core inflation in the WB6 1.2 percentage points in 2024 compared with countries remained on a stable downward 1.9 percentage points in 2023. Core inflation trend throughout the entire year, reaching 4.1 in the region remained above headline inflation percent in December 2024 (Figure 6.3). This after October 2023, signaling persistent price was a notable decrease from the 5.3 percent pressures. This gap was particularly pronounced 38 Persistent inflationary pressures ADAPTING FOR SUSTAINABLE GROWTH in Montenegro, where core inflation (6.1 percent) In 2024, the Consumer Price Index (CPI) outstripped headline inflation by an average of basket in the WB6 countries exhibited several 2.8 percentage points throughout 2024. Core common trends. In terms of prices of food and inflation remained elevated at 5.2 percent in North non-alcoholic beverages, the region experienced Macedonia and Serbia, and above 2 percent in increases above the average CPI rates in all Kosovo (3.2 percent), Albania (2.5 percent), and countries, with the exception of Albania. Vegetable Bosnia and Herzegovina (2.8 percent). prices increased in Albania and North Macedonia, while oils and fats led the food basket price increases in Kosovo, North Macedonia, and Serbia. Rental FIGURE 6.3: costs for housing were key drivers of CPI inflation During 2024, WB6 countries’ core in Albania, Bosnia and Herzegovina, and Serbia. inflation remained persistently higher than Household maintenance, the repair of dwellings, headline inflation and related services such as water supply and refuse collection experienced an uptick broadly across the Headline and core inflation, percent WB6 region. Service-related inflation remained 16 WB6 headline inflation higher than the average inflation rate in all WB6 14 WB6 core inflation countries, with some variations in specific services: 12 10 for example, in Albania and Serbia, medical 8 services were significant contributors; in Bosnia 6 4 and Herzegovina and Kosovo, financial services 2 were key drivers; and in Montenegro and North 0 Macedonia, recreational and cultural services stood Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 May-24 Jul-24 Sep-24 Nov-24 Jan-25 out. Prices for hotels and restaurants were notable contributors to inflation in Albania, and Bosnia Source: Statistical offices and World Bank staff calculations. and Herzegovina, and even more substantial drivers in Montenegro, North Macedonia, and Serbia. FIGURE 6.4: FIGURE 6.5: Central banks continued easing monetary …while allowing for different degrees of policies… exchange rate flexibility Policy rates, percent Exchange rate changes, percent 7 ALB 4 ALB MKD SRB 6 MKD 2 5 SRB 0 Eurozone -2 4 -4 3 -6 2 -8 1 -10 0 -12 Jul-21 Jun-19 Oct-19 Feb-20 Jun-20 Oct-20 Feb-21 Jun-21 Oct-21 Feb-22 Jun-22 Oct-22 Feb-23 Jun-23 Oct-23 Feb-24 Jun-24 Oct-24 Oct-20 Apr-20 Oct-22 Oct-23 Oct-24 Jan-20 Apr-22 Apr-23 Jan-23 Apr-24 Jan-25 Jan-22 Jan-24 Oct-21 Apr-21 Jan-21 Jul-20 Jul-22 Jul-23 Jul-24 Source: National central banks and ECB. Source: National central banks. Persistent inflationary pressures 39 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Central banks in the WB6 countries follow different approaches to monetary policy in response to shifting inflation and uncertain external conditions (Figure 6.4). For instance, the Bank of Albania maintained its base interest rate at 2.75 percent in February 2025, following a 25-basis-point cut in November 2024.37 In 2024, inflation decreased faster than expected, affected by food and oil prices amid a strengthening of the Albanian lek. The Bank of Albania expects inflation to converge to its 3-percent target in 2025.38 Meanwhile, the National Bank of North Macedonia reduced its policy interest rate by 20 basis points to 5.35 percent in February 2025, continuing with a careful normalization of the monetary policy, and acknowledging favorable trends in foreign reserves. Risks from domestic factors affecting aggregate demand and the potential for new protectionist measures may repeat inflationary pressures. In addition, volatility risks in commodity markets remain pronounced.39 The National Bank of Serbia kept its key policy rate at 5.75 percent, where it has been since September. Although inflation is moving within the target band, geopolitical tensions and global market fragmentation pose risks for price stability, due to their impacts on trade flows, supply chains, and economic activity. In addition, uncertainties regarding the global prices of energy, primary commodities, and specific raw materials in the food industry pose risks. 37 Bank of Albania. Press release monetary policy decision February 5, 2025. https://www.bankofalbania.org/Monetary_Policy/Latest_mone- tary_policy_decision_and_calendar/Document_Title_41223_1.html 38 Bank of Albania. Quarterly Monetary Policy Report 2025/I. 39 National Bank of the Republic of North Macedonia. Regular meeting of the Monetary Policy Executive Board, February 5, 2025.https:// www.nbrm.mk/ns-newsarticle-soopstenie-05022025-en.nspx 40 Persistent inflationary pressures ADAPTING FOR SUSTAINABLE GROWTH 7. Credit growth has accelerated, calling for stronger oversight During 2024, a positive trend in credit as of December 2024, up from 4 percent demand supported an acceleration in credit a year earlier. Kosovo, Montenegro, North growth and banks’ profitability across the Macedonia, and Albania all registered year- WB6 countries. With rapid credit growth on-year corporate loan growth in excess of 10 supported by banks’ comfortable liquidity percent in the last quarter of 2024. Household and capital levels, return on assets (ROA) loan growth also increased, rising from 8.4 improved slightly, while non-performing loans percent in December 2023 to 13.4 percent (NPLs) over total loans decreased by between year-on-year in December 2024. Household 0.4 percent points, reaching 3.4 percent by credit growth was particularly high in Kosovo September 2024—as to be expected during (22 percent) and Montenegro (17 percent), periods of significant credit expansion. followed by Albania and Serbia. In Kosovo, Banks’ capital adequacy ratios, which had higher credit growth reflects ongoing financial strengthened during 2023, remained stable deepening, amid sustained economic activity. throughout 2024, with a WB6 regional average capital adequacy ratio (CAR) of 19.3 percent. Credit demand was a key driver of credit growth during 2024. The Central, Eastern Credit growth at the WB6 regional level and South-Eastern Europe (CESEE) Bank reached a new high by the end of 2024, Lending Survey for the second half of 202440 consolidating the upward trend observed indicates that in CESEE countries credit in the first half of the year. Average credit demand strengthened significantly, driven growth steadily increased during the first half by retail business (mortgages and consumer of 2024 and continued to rise through into the credit). During the last 6 months of 2024, latter months of the year. By December 2024, credit demand rebounded in 5 of the 6 WB6 at the regional level, credit growth reached a countries covered in the CESEE Survey, year-on-year average of 12.3 percent, steadily supported by positive developments in both increasing from 6.5 percent as of December the corporate and household sectors. For 2023. This marked the highest level of credit example, in Kosovo credit demand expanded growth seen since 2009. Despite individual more than the regional average, supported country differences, across all WB6 countries by positive developments in the activity of credit growth was at least 9 percent. The small and medium-sized enterprise (SMEs), highest levels of growth were seen in Kosovo at consumer credit and house purchase segments. 17.8 percent, followed by Montenegro at 15.5 In Bosnia and Herzegovina, credit demand percent. increased in line with the regional average, driven by loans for households and SMEs. Corporate and household credit When looking at the supply of credit, the growth both surged, led by Kosovo and CESEE Bank Lending Survey shows that Montenegro. Reflecting sustained economic credit supply conditions tightened in North activity, corporate credit growth continued Macedonia and Albania. According to the to narrow the gap with household credit survey results, factors contributing to the growth, with the gap reaching its lowest level tightening of supply conditions in Albania since July 2023. Corporate credit growth included international factors associated to increased significantly, reaching 11.7 percent 40 https://www.eib.org/attachments/lucalli/20240262_economics_cesee_bls_2024_h2_en.pdf. The countries covered by the survey are Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Czechia, Estonia, Hungary, Kosovo, North Macedonia, Romania, Serbia and Slovakia. Credit growth has accelerated, calling for stronger oversight 41 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 the global market outlook, group capital including changes in local bank regulation. constraints and EU regulations. In North Credit supply conditions stayed neutral in Macedonia, key drivers of tighter credit supply Kosovo and Bosnia and Herzegovina. conditions were primarily domestic factors, FIGURE 7.1: FIGURE 7.2: Credit growth continues on an upward trend Strong corporate credit growth narrowed the in H2 2024 gap with household growth Change in nonfinancial private sector credit outstanding, Change in credit outstanding December 2024, percent, yoy percent, yoy BiH KOS MKD MNE SRB Firms Households percent 25 20 15 20 10 15 5 0 10 -5 5 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24 Jul-24 Oct-24 Jan-25 Apr-25 Jul-25 Oct-25 0 ALB BIH KOS MKD MNE SRB Source: IMF international financial statistics; central banks. Source: WB6 central banks. Asset quality remained relatively stable over Montenegro, despite a substantive improvement 2024 in most WB6 countries. However, in asset quality with NPLs decreasing from 5.8 bolstered by improvements in Montenegro and to 4.7 percent, continued to post higher-than- Serbia, the average NPL ratio across the WB6 average NPL levels. The CESEE Bank Lending countries decreased by 0.3 of a percentage point Survey forecasts further improvements for as of September 2024, reaching historically Albania and North Macedonia, but it anticipates low levels at 3.4 percent. Kosovo, Serbia, and a deterioration for Bosnia and Herzegovina, and North Macedonia reported the lowest NPL Serbia during 2025. ratios at 2.1, 2.7, and 2.9 percent, respectively. FIGURE 7.3: FIGURE 7.4: Asset quality presented no significant Capital levels remained relatively stable movements, with the exception of Montenegro Capital adequacy ratios Non-performing loans, percent of total loans 7 Dec-23 Mar-24 Jun-24 Sep-24 25 Dec-23 Mar-24 Jun-24 Sep-24 6 20 5 4 15 3 10 2 5 1 0 0 MNE ALB BiH SRB MKD KOS WB6 SRB MNE ALB BiH MKD KOS WB6 Source: IMF international financial soundness indicators; central Source: IMF international financial soundness indicators; central banks banks 42 Credit growth has accelerated, calling for stronger oversight ADAPTING FOR SUSTAINABLE GROWTH Robust levels of capital adequacy and stable financial sector risks, including real estate liquidity have supported the resilience of sector price and indebtedness dynamics, is the WB6 banking sector. As of September critical. While reported capital adequacy 2024, the CAR for WB6 banks averaged 19.3 cushions of banks in WB6 countries suggest percent, significantly exceeding the regulatory that a potential deterioration in asset quality minimum. Average capital levels have been would not significantly compromise their relatively stable since June 2023 and are balance sheets in the near term, uncertainties predominantly composed of high-quality Tier and risks associated with the outlook remain 1 capital. CARs of banks in Kosovo, despite substantial. Rapid credit growth can lead to a being systematically among the lowest in the deterioration in asset quality and pressures on WB6 region at 15.5 percent, are still above the bank’s balance sheets. Additionally, the rapid minimum regulatory CAR requirement of 12 expansion of credit can exacerbate existing percent. Liquidity levels in the WB6 countries vulnerabilities within the financial system, have been stable for the past decade, with the making it more susceptible to external shocks. liquidity ratio ranging between 28 and 29 Several positive initiatives are under way - for percent (28.1 percent as of September 2024). example in Kosovo and Serbia - to modernize Since 2020, North Macedonia and Serbia have the financial sector regulatory and supervisory consistently posted the lowest and highest framework with the goal of strengthening the liquidity ratios, respectively. resilience of the sector and aligning it more closely with EU standards.  Despite recent cuts, high interest rates have persisted in most jurisdictions, continuing Several factors currently heighten the risks to support banks’ profitability. The average to the outlook for the financial sector, ROA steadily increased (y-o-y), reaching 2.7 including ongoing geopolitical tensions, percent in September 2024, compared with market volatility, and weak growth prospects 2.4 percent in September 2023—the highest in the Euro area. This context reinforces the level in over a decade. Since 2023, Serbian necessity for continuous improvements in the banks have shown strong profitability, above surveillance of vulnerabilities and risks within the WB6 average. In September 2024, they individual banks and the banking systems. posted the highest profitability across the WB6 Surveillance should be underpinned by robust countries (3.1 percent), closely followed by legal frameworks, an effective supervisory Montenegro, at 3 percent. In Albania, which approach, and solid macroprudential tools, presented the lowest ROA (2.2 percent) across including loan-to-value and debt-to-income the WB6 countries, improvements have been measures and the buildup of capital buffers stalling due to a decline in lending rates after as necessary, enabling early corrective actions a slow but steady increase since late 2022. The to address emerging risks. Furthermore, decline in interest rates in most jurisdictions in in the current context of financial market late 2024 is likely to impact interest margins, development in the WB6 countries, well slowing or reversing the upward profitability managed development financial institutions trend observed since mid-2022. can play an important role in facilitating sustainable long-term finance in support of Recent months have seen an acceleration economic stability and growth (Box 7.1). in credit growth, which calls for stronger financial sector oversight, against potential risks to macroeconomic stability. Given the financial sector’s growing exposure to the real estate market in some countries, such as Kosovo, enhancing the capacity for monitoring Credit growth has accelerated, calling for stronger oversight 43 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Box 7.1: Development financial institutions in the Western Balkans41 Public development banks (PDBs) are state-owned development financial institutions (DFIs) that have a socio-economic objective. PDBs worldwide consist of a highly diverse set of institutions concentrated primarily in high-income and upper-middle income countries While their core activity is lending, they also play a significant role in supporting investments and offer a variety of different products, service a range of segments, and most rely on international capital on top of local funding and development partner support. The WB6 countries have many DBs and/or other DFIs focused on development finance, which could play a pivotal role toward these countries’ EU accession goals. DFIs aim to provide financing for under-financed economic sectors and can focus on tackling market failures associated to information asymmetries or externalities that result in under provision of credit, provide countercyclical support, reduce market coordination failures associated to policy initiatives, and/or fill a catalyst role for nascent market segments. Given the ambition of WB6 countries to gain EU accession, these institutions could implement EU plans and intermediate funds, particularly for regional priorities. The WB6 DFIs deploy a number of instruments and provide technical assistance to their targeted beneficiaries that could be better honed. They often leverage on a second-tier basis partial credit guarantees funds/schemes which, when properly utilized, backstop commercial bank lending to riskier economic segments. Some entities operate on a first-tier basis, competing with commercial banks, which duplicates existing financial services and leads to an unlevel playing field, negating the principle of competitive neutrality. Other DFIs provide technical assistance in the form of trainings, consulting and business matching which could be better honed. Challenges prevent some of the WB6 countries from reaping the gains of effectively organized and administered DFIs. Several DFIs in the WB6 region suffer from political interference, poor governance and weak financial performance. More specifically, some DFIs suffer from having weak legal foundations, lax supervisory enforcement, and inadequate corporate governance structures, resulting in politically connected lending. At times, their weak operations result in mistargeting and market distortions, crowding out the private sector and financial underperformance that required recapitalization. Global lessons should be taken into account when revaluating the role of DFIs. Authorities in the WB6 countries have been considering the establishment of new PDBs, transforming development funds into PDBs, and undertaking reforms of existing ones. Critical elements to ensure that DFIs add complementarity to the financial sector include: (i) mandate and corporate governance; (ii) oversight and (iii) risk management. DFIs should aim at identifying and servicing unmet market needs in order to crowd-in the private sector. Members of boards of DFIs should be qualified professionals, with a minority of public servants. DFIs should have financial sustainability requirements to provide incentives for adequate risk-taking and risk- pricing and should be subject to proper oversight. Finally, risk management functions should support financial sustainability objectives. This includes appropriately developed instruments and limited subsidies. PDBs should not take deposits from the public, should preferably operate through second-tier lending, be subject to appropriate prudential regulations and supervised by prudential supervisory authorities. 41 National Development Financial Institutions: Trends, Crisis Response Activities, and Lessons Learned https://documents1. worldbank.org/curated/en/542471633672135095/pdf/National-Development-Financial-Institutions-Trends-Crisis-Response-Ac- tivities-and-Lessons-Learned.pdf ; Greening National Development Financial Institutions: Trends, Lessons Learned, and Ways Forward https://openknowledge.worldbank.org/entities/publication/c36e3862-c356-426b-acf4-b663870a13f7 44 Credit growth has accelerated, calling for stronger oversight ADAPTING FOR SUSTAINABLE GROWTH 8. External pressures continue to rise, while debt remains moderate WB6 countries are facing mounting external Merchandise exports and imports in most WB6 sector pressures amid a challenging global countries have decreased as a share of GDP . As environment. Sluggish growth in key EU trading demand from the WB6 countries’ main trading partners, particularly Germany, has weakened foreign partners has declined, almost all WB6 countries demand for exports and expanded the current have felt the impact. The only country that registered account deficit (CAD). Although oil prices have growth in exports in 2024 was Kosovo, with an slightly moderated in 2024 compared with their peak increase of 12.6 percent, including a 9.5 percent in 2023 due to reduced demand from China, they increase in goods exports and a 13.4 percent increase remain high, keeping import costs elevated. Despite in service exports. Imports fell in all countries, except substantial foreign direct investment (FDI) inflows Bosnia and Herzegovina, Montenegro and Kosovo. that finance much of the CAD, ongoing geopolitical Despite the decline in imports, this did not lead to tensions and evolving global trade policies heighten a narrowing of the merchandise trade deficit, as the future risks. These disruptions could potentially lead decline in imports was smaller than that of exports. to increased trade costs, supply chain disruptions, and The trade deficit increased by 1.1 of a percentage broader market uncertainty. Consequently, the WB6 point compared with 2023, reaching 27.5 percent economies may face a potential deterioration of their of GDP in 2024 (Figure 8.3). The challenging external balances through 2025. economic environment, with Euro area growth remaining weak in 2024, has weakened exports The external position of the WB6 countries (as a percentage of GDP) and reduced demand for worsened in 2024, driven primarily by a imports of intermediate goods within the region. deterioration of their trade balances and declines Despite these challenges, demand for consumer in their income accounts. This change followed a goods imports remains robust, driven by private significant reduction in the CAD in 2023, which saw consumption, which is the main contributor to GDP a decrease of 3.6 percentage points compared with the growth in most WB6 countries. previous year. Specifically, the CAD worsened from 4.1 percent of GDP in 2023 to an estimated 6.9 At the regional level, during 2024, average net percent in 2024, though this is only slightly above the services exports declined as a percentage of GDP . average for the past five years (Figure 8.1). All WB6 Net service exports in WB6 countries decreased countries are projected to experience a more marked from 12.4 percent of GDP in 2023 to 12.1 percent widening of their current accounts in 2024 (Figure of GDP in 2024 (Figure 8.4). Net service exports 8.2). In Albania, the deterioration of the external ranged from 3.3 percent of GDP in Serbia to 21.4 position is mainly attributable to the rising trade percent in Montenegro. The performance of net deficit from continued decline in goods exports and service exports at the country level was mixed. rising imports, while primary and secondary income While Albania, Kosovo and North Macedonia balances improved. In Bosnia and Herzegovina, experienced an increase in net service exports as a trend was driven by a widening of the merchandise. percentage of GDP , Serbia, Montenegro and Bosnia In Kosovo, the CAD reached 9 percent of GDP and Herzegovina experienced a contraction. Tourism in 2024, a deterioration of around 1.4 percentage and diaspora travel service exports continue to points compared with 2023, driven by a worsening represent a significant component of service export of the trade balance and lower secondary incomes. in the region, although other sectors are gaining Similarly, in Montenegro and North Macedonia, prominence. For example, in Kosovo the growth the CAD widened due to a higher trade deficit, and performance of modern services, such as IT and other a decline in service exports and net income accounts business services, has been strong in recent years and in Montenegro. is encouraging. This has contributed to diversify the export base and signals potential for further growth. External pressures continue to rise, while debt remains moderate 45 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 FIGURE 8.1: FIGURE 8.2: The WB6 current account deficit has …reflecting weakened export performance widened in 2024… in many WB6 countries Percentage of GDP Percentage of GDP MNE KOS BiH ALB SRB MKD WB6 Goods exports Remittances 5 Goods imports Others 0 Net services exports Change in Current Account -5 12 -10 -15 8 -20 4 -25 -30 0 -35 -4 -40 -45 2007 2009 2020 2023 2024 -8 ALB KOS BiH MKD SRB MNE WB6 Source: Regional central banks, World Bank staff calculations. FIGURE 8.3: FIGURE 8.4: The merchandise trade deficit picked up in …while remittances and net services 2024… exports stagnated Percentage of GDP Percentage of GDP 40 20 Net services exports Remittances 38 WB6 18 36 16 34 14 32 12 30 10 28 8 26 6 24 4 22 2 20 0 2024e 2008 2009 2007 2020 2022 2023 2010 2012 2013 2014 2015 2016 2018 2019 2021 2017 2011 2008 2009 2020 2022 2023 2024 2025f 2007 2010 2016 2018 2019 2012 2013 2014 2015 2021 2017 2011 Source: Regional central banks, World Bank staff calculations. Remittances declined relative to GDP in almost amounting to 6.8 percent of GDP. Since then, all WB6 countries, reflecting weak activity in the trend has been somewhat mixed. Kosovo has host countries. This could reflect signs of reverse continued to attract high FDI since 2022, with migration and softening labor markets across the highest share of these investments concentrated the Euro area. Consequently, almost all WB6 in real estate activities. In Serbia, net FDI continued countries saw a slight decline in remittances, from to perform strongly, increasing by 7.9 percent in a peak of nearly 7 percent of GDP in 2022 to 6 euro terms (reaching €4.6 billion in 2024), with an percent in 2024. During 2024, net remittances increase in investments originating from Asia. In decreased in percentage of GDP in Kosovo from Montenegro, net FDI growth was positive reaching 13.4 percent of GDP to 12.8 percent. Similarly, 13 percent in 2024. In North Macedonia, net FDI they declined in Serbia (0.6 of a percentage as a percentage of GDP increased from 3.4 percent point), North Macedonia (0.2 of a percentage of GDP in 2023 to 7.1 percent in 2024. In Bosnia point), Montenegro (0.1 of a percentage point) and Herzegovina FDI has remained relatively stable. and Albania (0.1 of a percentage point), while in At the regional level, net FDI inflows are projected Bosnia and Herzegovina remittances increased to total 5.6 percent of GDP in 2024, 1.4 percent somewhat (0.4 of a percentage point). short of the external deficit. However, country-level At the regional level, around 79 percent of variations are significant. In Albania and North the CAD is financed by net FDI inflows in Macedonia net FDI inflows fully finance, and in 2024. Over the past decade, the WB6 countries some cases exceed, the external deficit. In other experienced a peak in FDI inflows in 2022 countries, such as Montenegro and Kosovo, FDI 46 External pressures continue to rise, while debt remains moderate ADAPTING FOR SUSTAINABLE GROWTH is only expected to finance between 38 and 68 of equity investments and reinvestments, with a percent, respectively, of their external deficits in smaller proportion in inter-company loans (Figure 2024. These inflows are predominantly in the form 8.5). FIGURE 8.5: FIGURE 8.6: At the regional level, FDI inflows almost fully …with the regional PPG external debt level finance the current account deficit in 2024, projected to remain moderate in 2024 although country differences are sizable… Percentage of GDP Percentage of GDP 20 CAD 2024 60 External PPG debt 18 net FDI 2024 (percent og GDP) 16 50 14 40 12 10 30 8 6 20 4 10 2 0 0 BiH ALB SRB KOS MNE MKD WB6 KOS BiH ALB SRB MKD MNE WB6 Source: Regional central banks, World Bank staff calculations. During 2024, the total external debt at the foreign currency, leading to FX reserves reaching a WB6 regional level slightly decreased from record-high level of EUR 29.3 billion, equivalent 66.7 percent of GDP to 66 percent, primarily to 9.6 months of imports of goods. In Albania, due to a reduction in private external debt. the flexible exchange rate regime has effectively However, this trend varied across countries. acted as a shock absorber, helping the economy in Albania and Montenegro saw a decline in total navigating external pressures. Over the past two external debt, while the other WB6 countries years, the lek has appreciated by a cumulative 15.5 experienced an increase. Specifically, Albania, percent against the euro, falling below 100 lek per Kosovo, and Montenegro recorded a decrease euro in August 2024. This appreciation has been in private external debt as a percentage of GDP driven by strong export earnings, remittances, and between 2023 and 2024. In contrast, North investment inflows. During the first nine months Macedonia and Bosnia and Herzegovina saw an of 2024, the Bank of Albania intervened in the increase in private external debt, while in Serbia foreign exchange market, purchasing foreign it remained flat. During 2024, several countries currency equivalent to about 2.6 percent of the experienced an increase in public and publicly 2023 GDP . These interventions helped boost guaranteed (PPG) external debt reflecting foreign reserves to cover 6 months of imports by their dependence on external financing. These September 2024. Notably, all countries, except countries included Kosovo, Montenegro, North for Kosovo, exceeded the standard metric of Macedonia and Serbia. PPG external debt as a 3 months of imports. The region’s reliance on share of GDP declined in Albania and Bosnia and external financing underscores the importance Herzegovina. of maintaining investor confidence and macroeconomic stability. Additionally, structural Throughout 2024, most countries in the reforms aimed at enhancing competitiveness and region experienced an increase in foreign diversifying the export base are crucial for long- exchange (FX) reserves. In Serbia, the National term economic resilience. Bank of Serbia (NBS) continued to intervene in the foreign exchange market to prevent significant fluctuations in the exchange rate. Consequently, in 2024, the NBS became a net purchaser of External pressures continue to rise, while debt remains moderate 47 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 9. Heightened uncertainty clouds the regional economic outlook Following a year of moderate growth in 2024, GDP growth in the WB6 region is projected the global economy in 2025 appears to be set to slow to 3.2 percent in 2025 as the region for a period of sharply heightened uncertainty, absorbs the indirect impact of policy resulting in a growth rate that will be insufficient uncertainty. Private consumption and, to a lesser to foster sustained economic development extent, public investment are expected to be the and poverty reduction. Global economic policy main drivers of growth, especially in Kosovo and uncertainty—especially regarding trade —has Serbia. Net exports are expected to subtract from increased in recent months to record levels that growth over the projection period, reflecting the are clouding prospects for investment and growth. impact of weakening export growth and slowing In the ECA region, following years of successive activity among key trading partners, especially negative shocks, GDP growth is expected to reach in the EU. Private investment is expected to 2.5 percent in 2025, amid depleted fiscal space. be negatively impacted by policy uncertainty, Similarly, GDP growth in the Euro area has been especially in sectors where the WB6 economies revised downward42. Increased economic policy are closely integrated into EU-centric value chains. uncertainty and further ramifications stemming Recent international trade policy shifts could also from Russia’s invasion of Ukraine and the conflict contribute to a further slowdown in export growth in the Middle East will all weigh on Europe’s in some countries, with negative consequences on outlook. In addition, an increase in the frequency external balances. In the current context, however, of extreme weather events could hurt short-term it is difficult to gauge their full impact as policy growth while amplifying the slowdown in the shifts may continue to unfold. fundamental drivers of longer-term growth. FIGURE 9.1: Contribution to growth in WB6 countries, in percentage points Consumption Investment Net exports 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 2024 2025 2026 Source: World Bank staff estimates and projections 42 ECB, March 2025 48 Heightened uncertainty clouds the regional economic outlook ADAPTING FOR SUSTAINABLE GROWTH In 2025, Kosovo, Serbia and Albania will see are expected to boost private consumption, with comparatively stronger rates of growth in the growth projected to reach 2.7 percent in 2025. WB6 region, with relatively weaker growth rates In Albania and Montenegro, consumption and expected in Montenegro, Bosnia and Herzegovina investment are expected to be key contributors to and North Macedonia. Kosovo will remain the growth, with 2025 growth in Albania projected fastest-growing country in the region, with GDP at 3.2 percent and in Montenegro projected at 3 growth expected to reach 3.8 percent in 2025, percent (Table 9.1). albeit at a slower rate than seen in 2024. The key driver will be consumption (contributing by Growth in the Western Balkans is expected to 4 percentage points to growth) with investment pick up in 2026 and 2027 on the assumption contributing 1.3 percentage points. Serbia is of increased global economic certainty, stronger expected to be the second-fastest-growing country exports and improved business confidence. in the WB6 region, with growth averaging 3.5 Growth for the WB6 as a whole is projected at percent in 2025, and with similar drivers of growth 3.5 percent in 2026 and 3.7 percent in 2027 as (consumption contributing by 3.1 percentage individual country growth rates move closer to points and investment by 1.4 percentage points). their potential. This moderate growth acceleration The other WB6 countries will grow in the range would be supported by increased investment, of 2.6–3.2 percent in 2025, in line with or below resilient consumption and a gradual recovery in the WB6 regional average. In North Macedonia, net exports. growth is expected to reach 2.6 percent in 2025 supported by an increase in public spending. In Bosnia and Herzegovina, stronger real incomes TABLE 9.1: Real GDP growth, by country   2024 2025 2026 2027 Albania 3.9 3.2 3.1 3.1 Bosnia and Herzegovina 2.6 2.7 3.1 3.5 Kosovo 4.4 3.8 3.8 3.8 North Macedonia 2.8 2.6 2.7 2.8 Montenegro 3.0 3.0 2.9 3.0 Serbia 3.9 3.5 3.9 4.2 Western Balkans 3.5 3.2 3.5 3.7 While headline inflation fell in 2024, could lead to more persistent inflation in 2025 inflationary pressures have started re- and 2026. In Kosovo, inflation is expected to emerging in early 2025 in some WB6 stabilize at around 2 percent over the medium countries, and core inflation remains high term. Albania is expected to experience a in several of them. Inflation is expected to marginal increase in inflation pressures in 2025 gradually decline to below 3 percent over the and 2026, driven by persistent domestic price course of 2025, but trends across the WB6 pressures, while the other WB6 countries are countries are diverging, with inflationary expected to experience a gradual decline in pressures on the rise in the first months of consumer price inflation. The most significant 2025, and uncertainty remaining high. Possible decrease in inflation is expected to take place inflationary effects from trade policy shifts, in Serbia, where inflation has remained more together with sustained services inflation, elevated compared with other WB6 countries. Heightened uncertainty clouds the regional economic outlook 49 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Risks, both domestic and external, are clearly The WB6 countries can enhance their growth elevated, requiring an adaptive approach prospects by accelerating the implementation to sustain growth. On the external front, of structural reforms. The WB6 countries slower economic activity in the EU, as well continue to face substantial challenges, such as as heightened trade policy uncertainty, would low labor market participation, high levels of negatively affect the growth outlook, with informality, and sluggish productivity growth. negative consequences for the demand for the These issues hinder economic progress and regions’ goods and services exports, business limit the potential for sustainable development. confidence as well as inward investment inflows By focusing on key areas such as improving and remittances. Recent trade policy shifts access to finance, enhancing connectivity, and may impact export and investment activity in facilitating trade, these countries can create a several countries in the region. In addition, more conducive environment for economic continued uncertainties stemming from the activity and higher competitiveness. In addition, ramifications of Russia’s invasion of Ukraine fostering domestic private sector development is could disrupt commodity markets and trade, crucial for generating employment opportunities with negative implications for inflation and and driving innovation, which are essential for growth. At the domestic level, adverse political long-term growth. developments, elections and uncertainties in a number of countries of the Western Balkans The implementation of EU accession-related could lead to weakening business confidence reforms can provide a significant impetus to and a slower implementation of the structural WB6 regional growth. For instance, reforms reform agenda. High current account deficits, aimed at facilitating access to the Single Euro as well as dependence on external financing and Payments Area (SEPA) could streamline remittances, expose several countries to risks financial transactions, enhance economic associated with external shocks. Finally, most integration with the EU and support growth. economies in the WB6 region are increasingly Additionally, implementation of reforms under vulnerable to droughts, floods, wildfires and the New Growth Plan for the Western Balkans other extreme weather events, with potentially will be important for boosting competitiveness detrimental macro-fiscal implications. and fostering economic convergence with the EU. Trade facilitation reforms, which In the face of significant economic simplify and expedite the movement of goods uncertainties, the WB6 countries will need across borders, are now more important than to carefully calibrate their monetary and ever in reducing trade costs and can play a fiscal policies. In addition to accelerating the pivotal role in enhancing regional trade and implementation of the structural reform agenda, attracting foreign investment. By accelerating it is crucial for the countries in the region to the implementation of these reforms, the WB6 find an appropriate policy stance that balances countries can not only improve their economic the need for caution with the imperative to outlook but also strengthen their resilience support sustainable economic growth. For and bolster their position within the broader countries with independent monetary policies, European economic landscape. a proactive approach to monetary policy can help absorb shocks and contain inflationary pressures. Maintaining fiscal policy prudence, including building buffers, is a priority during times of uncertainty. This balanced approach will help ensure that the region can weather external shocks while fostering an environment conducive to sustainable growth. 50 Heightened uncertainty clouds the regional economic outlook ADAPTING FOR SUSTAINABLE GROWTH 10. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans I. Vulnerable Economies, Fragile Workforces: The Extreme Weather and Green Transition Challenge in the Western Balkans Extreme weather and the energy transition outward migration of skilled workers—nearly are compounding existing labor market one in four people from the region lives abroad— vulnerabilities in the Western Balkans, further constrain growth prospects. On the threatening worker productivity and one hand, increasing weather hazards—such economic growth. Despite progress in reducing as extreme heat, droughts, floods, and shifting unemployment over the past decade, the region rainfall patterns—reduce worker productivity, still faces significant structural challenges. In increase occupational health risks, damage 2024, unemployment averaged 10.1 percent, productive assets, and disrupt key economic with notable variation across countries (ranging sectors reliant on stable weather conditions, from 8.6 percent in Albania and Serbia, to such as agriculture, construction, and tourism.44 12.6 percent in Bosnia and Herzegovina)43. On the other hand, green policies, particularly Youth employment remains a critical concern, those linked to the energy transition and GHG with an average unemployment rate of 25 emissions reductions, are beginning to create percent—rising to 28.8 percent in Bosnia structural shifts in employment, posing both and Herzegovina—while female labor force challenges and opportunities for workers and participation is notably lower at 45 percent, industries across the region. Understanding compared to 64.2 percent for males. Inactivity the nuances of these dual forces is critical in reaches 45.4 percent of the working age designing policies that protect workers and population on average, peaking at 58.4 percent promote a just and equitable transition to a for Kosovo. High informality rates and the more resilient economy in the Western Balkans. II. Climate Hazards: A Threat to Worker Productivity and Earnings Damage from extreme weather varies across and vulnerable than Organization for Economic economies in the Western Balkans, with some Cooperation and Development (OECD) sectors being more vulnerable than others.45 countries (Figure 10.1). Modeling carried out The frequency and intensity of natural hazards by the World Bank estimates that the impact is increasing, with heightened risks of flash of weather hazards, namely riverine floods, floods, coastal flooding, wildfires and landslides. droughts, and labor heat stress, will reduce the These hazards often occur simultaneously or in level of Gross Domestic Product (GDP) in 2050 sequence, resulting in compounding risks, with by 16 percent in Serbia, 14 percent in Bosnia the six Western Balkan countries more exposed and Herzegovina, 8 percent in Montenegro, 43 Source: National statistics offices and World Bank staff estimates. Labor force participation rate, unemployment rate and inactivity rate are computed over people aged 15 and older. Youth refer to those between the ages of 15 and 24. 44 Burke, M., Hsiang, S. M., & Miguel, E. 2015. Global non-linear effect of temperature on economic production. Nature, 527(7577), 235–239; Dell, M., Jones, B. F., & Olken, B. A. 2012. Temperature shocks and economic growth: Evidence from the last half century. American Economic Journal: Macroeconomics, 4(3), 66–95 and Hsiang, S. M. 2016. Climate econometrics. Annual Review of Resource Economics, 8(1), 43–75, 3. 45 Unless stated otherwise, the sections below draw on World Bank. 2024. “Western Balkans 6 – Country Climate Development Report.” Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 51 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 7 percent in Albania, and 4 percent in both crop loss. Meanwhile, hydropower-dependent Kosovo and North Macedonia.46 These impacts countries such as Montenegro and Albania vary across sectors. Tourism, which generates face energy disruptions due to declining water over one-quarter of GDP in Montenegro and availability, while Serbia, and Bosnia and Albania, is increasingly at risk from extreme Herzegovina’s reliance on hydropower and weather events, coastal erosion, and rising coal-based energy further exacerbates risks, temperatures, threatening businesses and as declining water levels reduce hydroelectric employment.47 Agriculture, a key employer in output, wildfires damage power infrastructure, Albania (35 percent), Bosnia and Herzegovina and rising temperatures undermine thermal (17 percent), and Serbia (12.8 percent), is power plant efficiency. In Kosovo, where 97 among the sectors most vulnerable to weather- percent of electricity comes from aging lignite- related shocks.48 For instance, severe flooding fired power plants, extreme weather threatens in Albania in 2017 inundated 15,000 hectares energy security by reducing thermal efficiency of crops, impacting thousands of families. In and exacerbating air pollution, with health and Serbia, a drought in 2024 resulted in significant economic consequences.49 FIGURE 10.1: Climate risk and vulnerability in the Western Balkans, compared with OECD countries Annual extreme heat days increase in 2050 High Average annual risk to assets Medium Maize yield change in 2050 Low Population exposed to high flood risk (%) Share of population exposed to No data sea level rise and costal floods in 2050 Share of transport network exposed Bosnia and Herzegovina Albania Kosovo Montenegro Serbia OECD North Macedonia Source: World Bank Climate Change Group in: World Bank. 2024. “Western Balkans 6 – Country Climate Development Report.”46474849 46 Percent reduction in 2050 GDP under trend growth from selected impact channels, namely riverine floods, droughts (through the impact on maize and wheat), and labor heat stress obtained with the climate-enhanced macro-structural model of the World Bank, MFMOD, under RCP 4.5. World Bank. 2024. “Western Balkans 6 – Country Climate Development Report.” 47 For example, Albanian cities such as Vlora, Shkodra, and Tirana are experiencing worsening extreme heat and air pollution, with urban heat island effects disproportionately affecting certain neighborhoods. While these cities attract visitors, increased heat stress and deteriorating air quality could pose challenges for tourism and outdoor activities. 48 Albania and Bosnia and Herzegovina: 2023 data from the World Development Indicators; Serbia: 2024 Labor Force Survey. 49 Kittner, N., & Kammen, D. M. 2018. The battle for replacing coal with renewable energy in Kosovo. 52 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH Climate hazards have a direct impact on overlap with socioeconomic vulnerabilities. For people, lowering incomes and damaging example, flooding tends to be more frequent productive assets. In the Western Balkans, in rural, declining municipalities in Bosnia rising temperatures and declining precipitation and Herzegovina, and Serbia, even though the have already begun to impact workers. The risk of flooding is highest along the Danube International Labour Organization (ILO) and Sava rivers, which flows through Belgrade estimates that heat stress will affect countries and other secondary cities in Serbia. The risk in the Western Balkans differently, with the of landslides and wildfires is prominent in highest estimated loss in Albania, where 0.07 hilly and mountainous areas, which are often percent of working hours are projected to be remote and economically struggling regions. lost in 2030, equivalent to about 700 full- This pattern is evident in southern Bosnia time jobs.50 Heat stress increases the risk of and Herzegovina, as well as southern Albania. workplace accidents, with heat-related fatalities Mountainous municipalities near the Albania- often occurring during the first days in a North Macedonia border face some of the new job, and making the performing of tasks highest landslide risks in the region while harder.51 Rising temperatures also contribute also being among the most rural and isolated to increased absenteeism due to heat-related communities​ . While weather hazards thus may illnesses, further reducing worker productivity. affect less people than if they occurred in more The direct impact of natural hazards on jobs populated areas, there is a risk that these events in the Western Balkans was witnessed during will exacerbate existing vulnerabilities across the the 2014 floods, with damage to economic Western Balkans, disproportionately affecting and transport infrastructure leading to 33,500 people living in areas experiencing higher wage workers losing their jobs in Bosnia and rates of unemployment and lower economic Herzegovina, and 51,800 jobs temporarily activities, who will struggle to recover from being lost in affected municipalities in Serbia.52 these events. More recently, the October 2024 floods in Bosnia and Herzegovina caused severe economic The negative impacts of natural hazards on and employment disruption, displacing 1,100 labor productivity, incomes, and assets can households, destroying 800 homes, and severely push people into poverty. The losses due to impacting agriculture and small enterprises.53 extreme weather events overwhelmingly fall on poor and vulnerable households.54 Beyond The impacts of weather hazards in the Western living in more vulnerable areas, poor people Balkans are often localized, affecting rural, have limited access to savings, credit and isolated, and economically declining areas. insurance to help them manage losses of income A spatial analysis carried out for the Western or assets.55 While current data on damage and Balkans County Climate and Development losses in the region tend to focus on the impacts Report (CCDR) highlights key ‘hotspots’— of disasters on public assets and infrastructure, locations where extreme weather hazards some recognition of, and evidence on, the 50 International Labour Organization (ILO), 2019. Working on a warmer planet: the impact of heat stress on labour productivity and decent work. Geneva: ILO. 51 Eurofound 2024, Job quality side of climate change, Working conditions and sustainable work series, Publications Office of the European Union, Luxembourg. 52 Given that this event occurred in 2014, it is possible that many of the affected workers in Bosnia and Herzegovina regained employment over time, though specific longitudinal data on job recovery is not provided in the available statistics. 53 United Nations Bosnia and Herzegovina (UN BiH). 2024. Multi-sector Initial Rapid Assessment (MIRA) – October 2024 Floods; Inter- national Organization for Migration (IOM). 2025. Flood and Landslide Response Situation Report – Bosnia and Herzegovina, February 2025. 54 Hallegatte, S., Vogt-Schilb, A., Bangalore, M., & Rozenberg, J. 2017. Unbreakable: Building the Resilience of the Poor in the Face of Natu- ral Disasters. Climate Change and Development Series. Washington, DC: World Bank 55 Brunckhorst, B., Hill R., Mansuri G., Nguyen T., and Doan M. 2023. “Climate and equity: A framework to guide policy action.” Poverty and Equity Global Practice. Washington, DC: World Bank. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 53 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 human impact of shocks is emerging.56 For (CBAM), are expected to significantly impact example, the post-disaster needs assessment the region’s economies, which remain among the of the 2019 earthquake in Albania found that most carbon- and energy-intensive in Europe. poverty rates increased in the affected regions by 2.3 percent.57 In Serbia, the 2014 floods As the Western Balkan countries seek to pushed an estimated 125,000 people into mitigate GHG emissions and promote poverty—an increase of nearly 7 percent in environmental sustainability, labor markets the poverty headcount.58 In addition, studies will undergo transformations, with job losses, indicate that households or neighborhoods structural changes, and new opportunities with lower income levels are more susceptible emerging.61 While polluting “brown” industries to urban heat island effects, with negative will see job losses due to decarbonization efforts, implications for their health, which can affect other sectors, particularly green sectors, will their ability to work.59 experience new employment opportunities driven by investments in renewable energy, III. Climate Policies: Driving energy efficiency, and sustainable infrastructure. Transformations in the Workforce Green jobs are a growing share of employment and are expected to expand further, globally and All Western Balkan countries are committed to in the region, provided that the right policies reducing GHG emissions. Five countries (except are implemented.62 Only a minority of these are Kosovo) as signatories to the United Nations totally new occupations (1 percent), with most Framework Convention on Climate Change green jobs either being existing jobs experiencing (UNFCCC) and the 2015 Paris Agreement, an increase in demand or jobs experiencing skills adopted GHG emission reduction targets in their changes.63 Beyond job creation, many existing updated Nationally Determined Contributions positions will undergo substantial transformation (NDCs) submitted in 2021–22. The requirement in their task content, requiring workers to reskill to transpose European Union (EU) legislation as or transition to new roles. The primary challenge part of the EU accession process is also driving will be in addressing mismatches between national commitments. All six countries pledged available skills and the geographic location of to the 2020 Sofia Declaration, aiming to align new employment opportunities. with the EU’s 2050 net-zero target and phase out coal subsidies.60 These commitments, along with the EU’s Carbon Border Adjustment Mechanism 56 Fitzgibbon C, Coll-Black S, Pop L. Towards Adaptive Social Protection in Europe and Central Asia: A Synthesis Report (English). Washing- ton, DC: World Bank Group. 57 Government of Albania. 2020. Albania: Post-Disaster Needs Assessment. Volume A Report/Tirana, February 2020. Tirana: Government of Albania. 58 Government of Serbia. 2014. “Serbia Floods 2014,” Recovery Needs Assessment. 59 World Bank. 2020. Analysis of Heat Waves and Urban Heat Island Effects in Central European Cities and Implications for Urban Planning. Washington, DC: World Bank. 60 National commitments are also motivated by concerns within countries about air pollution and the impact of climate change. For a discussion of these national climate change policies and plans, see World Bank. 2024. “Western Balkans 6 – Country Climate Development Report.” 61 The transition to greener forms of production, distribution and consumption that reduce the carbon footprint of goods and services, as well as promote environmental sustainability is often called the green transition or greening process, which is playing out alongside broader changes in the use of technology and other global trends. 62 In this Spotlight, we use an occupation-specific measurement to identify green jobs at the task level, based on O*NET classification and dis- tinguishing between Green Increased Demand, Green Enhanced Skills, and Green New and Emerging jobs. Note that there are alternative approaches to green jobs measurement based on output-based measurement (production of environmentally beneficial goods and services), process-based measurement (roles that reduce environmental impact), or entity-level measurement (categorizing entire industries or firms as green using input-output modeling). 63 While the proportion of jobs classified as “green” varies depending on definitions and methodologies, this share is expected to grow significantly, as research indicates a strong link between economic development and green job creation, with 24 million new green jobs projected by 2030. Studies in Latin America show that a one percent increase in GDP per capita is associated with a 0.4 and 4.1 percentage point rise in new/emerging and enhanced skills green jobs, respectively. See Winkler, H.J., Di Maro, V., Montoya, K., Olivieri, S., and Vazquez, E.J., 2024. Measuring Green Jobs: A New Database for Latin America and Other Regions. World Bank Group. Green jobs creation estimate is from International Labour Office, 2018. World employment and social outlook 2018: Greening with jobs. International Labour Organisation (ILO). Geneva: ILO. 54 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH Energy and mining sector workers in the Plan) and Bosnia and Herzegovina, which was Western Balkans are already experiencing already experiencing a steady decline in coal these impacts, with wider risks to local mining employment, risking up to 17,000 direct communities. One of the most significant and indirect jobs.64 Decarbonization policies transitions is already occurring in coal mining further affect employment in thermal power regions (in Serbia, Bosnia and Herzegovina, plants, with ongoing restructurings in major and Kosovo), where the gradual phasing-out state-owned electricity utility companies. The of lignite mining and coal-fired plants is set to local labor markets in some municipalities will have substantial labor market consequences. The be further affected and are at risk of economic phasing-out of coal in Serbia, and Bosnia and decline, given their heavy economic dependence Herzegovina is driving job losses, with Serbia on the coal sector (see Box 10.1) and already high projecting 12,000 job cuts by 2030 (based on unemployment rates. the country’s National Energy and Climate Box 10.1: The Human Impact of Coal Transition in Bosnia and Herzegovina In Bosnia and Herzegovina (BiH), coal has long been the foundation of local economies, particularly in Tuzla, Zenica-Doboj, Central Bosnia and Herzegovina, and southern parts of Republika Srpska. The industry supports not just the 14,600 workers directly employed in coal mining, but also an additional 2,400 employed upstream in firms supplying inputs or directly supporting the sector’s value chain. In municipalities such as Tuzla, Banovići, Ugljevik, Breza, and Kakanj, coal-related employment accounts for over 20 percent of local jobs on average (and up to 50 percent of local jobs in some of these municipalities), making the transition away from fossil fuels a major economic and social challenge. The push for renewable energy, the EU’s decarbonization targets, and the introduction of the CBAM, combined with the difficult economic situation of the sector exhibiting low returns, is accelerating the decline of BiH’s coal sector. By 2030, the industry could lose half of its workforce, driven by declining demand and the planned closure of selected mines or pits, and the downsizing of related thermal power plants. The situation is particularly urgent in Zenica and will become so in Breza and Kakanj, where shutdowns are expected to close more than 5,500 direct jobs within the next decade. In towns where mining is the dominant employer, the loss of coal jobs could push local unemployment rates to 40–50 percent, placing extreme pressure on households and the broader regional economy. The coal transition is particularly difficult for older workers, many of whom have spent decades in the sector and are not competitive in the labor market. Beyond job losses, the decline of coal has wider economic and social consequences. The local labor market of some of those coal municipalities will be at risk of economic decline and the budgets of local governments may be further affected given that coal revenues account for a significant percentage of municipal budgets, reaching 60 percent in Banovići and Kakanj, for example. Local businesses, from small shops to transport providers, will also suffer, as the loss of coal wages could lead to income declines of 30–50 percent. These economic pressures will likely accelerate youth out-migration, as younger generations leave coal-dependent towns in search of better opportunities elsewhere, further weakening the local economy and contributing to regional demographic decline. Source: Ferre, Celine; Oruc, Nermin; Pela, Kevwe Sylvester; Ruppert Bulmer, Elizabeth N. 2023. Jobs Diagnostic for Bosnia and Herzegovina – Implications of Coal Transition (English). Jobs Series; Issue No. 31, Washington, DC: World Bank Group. 64 Ferre, Celine; Oruc, Nermin; Pela, Kevwe Sylvester; Ruppert Bulmer, Elizabeth N. 2023. Jobs Diagnostic for Bosnia and Herzegovina – Implications of Coal Transition (English). Jobs Series; Issue No. 31 Washington, DC: World Bank Group Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 55 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Beyond the immediate impacts of the countries, the highest share being in Kosovo). phasing-out of coal, many more occupations For these people, there is a risk of decreasing will be at risk due to the green transition, productivity followed by job loss in the medium affecting around one in five workers in the term, in the absence of retraining. Compared Western Balkans. Across Western Balkan with other Western Balkan countries, Albania countries, about 20 percent of the employed has the lowest overall share, with 11 percent workforce is deemed “at risk” in the short to of its workers at risk of displacement, given its medium term, which corresponds to about 2.8 economy and energy production structure.65 million workers (see Box 10.2 for methodology). Across the region, the mining and quarrying Jobs “at risk” comprise both jobs in highly sector, which includes coal mining, and the polluting industries (“brown jobs”) and non- manufacturing sector, are the most vulnerable brown jobs that require significant shifts in task to the green transition. In contrast, the services content due to the green transition (called “shift sector faces comparatively lower risks across in task”). “Brown jobs”, in which workers are countries, as does the agriculture, forestry and at risk of displacement and therefore income fisheries sector.66 In this regard, countries with loss, make up 7 percent of total employment a higher share of employment in those two across Western Balkan countries (varying from sectors, such as Albania, face an overall lower 4 percent in Kosovo to 9 percent in Bosnia number of workers at risk. Recognizing this and Herzegovina). However, an additional variability, Western Balkan labor markets will 13 percent of workers may not lose their jobs be broadly affected by the ongoing structural in the short run but will require substantial transformation due to the green transition, upskilling due to significant shifts in task much beyond the direct job losses of brown content (ranging from 6 to 17 percent across industries. FIGURE 10.2: Share of jobs “at risk” due to the green transition in total employment, by country Brown Jobs Shift in Task 25% Share of workers (%) 20% 15% 10% 5% 0% Herzegovina Kosovo Serbia Albania Bosnia and Total Macedonia North Source: World Bank staff calculations. Note: Jobs at risk due to the green transition include “brown jobs” at risk of displacement identified from the most polluting industries and “non-brown” jobs with a significant shift in task (“shift in task”), following O*NET ‘Green Economy’ classification. See Box 10.2 for detailed definitions and underlying methodology used. World Bank staff calculations based on the methodology of Gukovas, Gar- rote-Sanchez, Makovec (forthcoming, 2025). Estimates for Montenegro are unavailable due to the lack of 3-digit occupational data. 65 This is due to Albania’s energy production structure, which relies on hydropower rather than coal, and a higher proportion of workers in Albania being employed in agriculture, forestry and fisheries, and services, sectors that are typically associated with fewer task shifts, than in other Western Balkan countries, further reducing its labor market’s vulnerability to the green transition. 66 This does not suggest that the agriculture, forestry and fisheries sector is not at risk due to environmental degradation or other challenges. However, this is beyond the scope of this analysis. 56 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH Box 10.2: Data and methodology: workers in occupations at risk of displacement (“jobs at risk”) In the analysis that follows, brown jobs and jobs with significant shift in task content are together classified as “occupations or jobs at risk” in the short to medium run due to the green transition. Those occupations that are not at risk are classified as safe and referred for clarity as “occupations not at risk”. More specifically: – “Brown jobs” are defined as occupations that are much more likely to be in industries that are among the top 5 percent most pollution-intensive industries (in the United States) based on their level of emissions per worker, including CO₂ emissions and GHG emission intensity. These jobs are considered at high risk of direct displacement or reallocation due to ongoing efforts to reduce GHG emissions in the short to medium run. – Jobs requiring a significant shift in task content (referred as “shift in task”) due to new environmental policies, sustainable technologies, and green business practices are identified using the O*NET ‘Green Economy’ classification. Those jobs are considered at risk in the medium run given the extent of the change in task content, which would require workers to either undergo substantial upskilling or to be displaced and transition to a different job. Additional methodological details on how those occupations are identified are provided in the Annex. The overall methodology used is based on Gukovas, R. M., Garrote-Sanchez, D., & Makovec, M. (forthcoming). Who’s at risk of the Green Transition? An analysis of the Extensive and Intensive Margin across countries in Europe and Central Asia. The analysis uses the most recent and available microdata of the Labor Force Survey (LFS) for each of the Western Balkan countries, namely Albania 2018, Bosnia and Herzegovina 2023, Kosovo 2022, North Macedonia 2023, and Serbia 2023. Montenegro is not included given lack of 3-digit occupational-level data in the LFS, which is required for this analysis. The transition challenge will differ among will necessarily have to undertake these transitions at affected workers, with some experiencing longer the same time, this provides a benchmark for the and more costly transitions due to larger skills extent of job transitions required in the region. It gaps, affecting close to half of the workers in is noteworthy that retraining needs are not evenly jobs at risk. Among workers in jobs at risk due to distributed within countries, with certain workforce the green transition, not all will face difficulty in segments—depending on education level and other transitioning to alternative jobs equally. Some will demographic factors—facing higher barriers to require minimal retraining, while others will face transition. These barriers are compounded by the lack significant skill mismatches, making the transition of employment opportunities for which the skills gap more difficult. Workers in at-risk occupations could be reasonably closed in some areas (as in some who face large skill gaps (the upper quadrant in coal communities, for example Banovići in Bosnia Figure 10.3) account for 9 percent of all workers.67 and Herzegovina) offering comparable salaries and As a result, these workers will endure more costly working conditions, at times necessitating workers to transitions to new jobs because of substantive skills relocate. Workers’ preferences in terms of reservation gaps, although this varies across “brown” and “shift wage, sector, or mobility can be far from the reality of task” occupations (Figure 10.4). While not all workers the local labor market.68 67 This is equivalent to roughly 50 percent of workers in at risk occupations. In this analysis, skill gaps are measured with respect to the closest occupation “not at-risk”, which would be the occupation with highest share of similar skills required and not affected by the green transition, available in the local labor market. Occupations “not at-risk” are defined in opposition to occupations at-risk. The location of these occupa- tions, or any need for relocation, is not considered. Refer to Box 10.2 and the Annex for complete definition and methodology details. 68 This is documented for coal mine workers in Banovići and Zenica, two municipalities in Bosnia and Herzegovina, through an Employment, Skills and Preferences survey (results publication forthcoming). Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 57 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 FIGURE 10.3: Dimensions of workers’ vulnerability in the green transition: job displacement risk and skills gap challenges to occupations not at risk 30 Building finishers & related trade 20 Skills gap (%) Garment & related trade workers Assemblers (plant & Machine) Plant & machine Engineering professionals operators 10 0 0 20 40 60 80 100 Percent of jobs in at risk occupation (%) Source: World Bank staff calculations. Note: On the horizontal axis, “Occupations at risk” correspond to “brown jobs” and jobs which are not brown but are considered to undergo significant shift in their task content (“shift in tasks”). On the vertical axis, “Skills gap” is the share of skills missing when comparing skills required in the current occupation and skills required in the closest occupation not at risk. The skills gap (a continu- ous variable between 0 and 1) measures the distance between an occupation and the nearest safe occupation. A skills gap equal to or exceeding the median skills gap (≥0.117) is considered large while those less than the median and not equal to zero is considered small. The bubble size represents the size of employment in different occupations across Western Balkans. Authors calculations based on the methodology of Gukovas, Garrote-Sanchez, Makovec (forthcoming, 2025). Estimates for Montenegro are unavailable due to the lack of 3-digit occupational data. Refer to Box 10.2 and Annex for full methodology details. FIGURE 10.4: Share of workers in at-risk occupations by skills gaps to occupations not at risk Large Skill gap Small skill gap 18% 16% 14% 12% 10% 8% 6% 4% 2% 4% 4% 5% 5% 5% 4% 5% 4% 0% 2% 2% 3% 2% Shift Brown Shift Brown Shift Brown Shift Brown Shift Brown Shift Brown in Jobs Task in Jobs Task in Jobs Task in Jobs Task in Jobs Task in Jobs Task Albania Bosnia and Kosovo North Serbia Total Herzegovina Macedonia Source: World Bank staff calculations. Note: Jobs at risk due to the green transition include “brown jobs” at risk of displacement identified from the most polluting occupa- tions and “non-brown” jobs with a significant shift in task (“shift in task”), following O*NET ‘Green Economy’ classification. See Box 10 for detailed definitions and underlying methodology used. Authors calculations based on the methodology of Gukovas, Garrote-San- chez, Makovec (forthcoming, 2025). Estimates for Montenegro are unavailable due to the lack of 3-digit occupational data. The skills gap (a continuous variable between 0 and 1) measures the distance between an occupation and the nearest safe occupation. A skills gap equal to or exceeding the median skills gap (≥0.117) is considered large while those less than the median and not equal to zero is considered small. 58 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH IV. Who is most vulnerable to the green transition? Although male workers are more exposed, transitions will be overall smoother for them with 27 percent of them in jobs at risk, than for women. While female workers tend to their current jobs equip them with more be better educated than male workers, women transferable skills than women, who exhibit are often in lower-paying, lower-skilled services larger skills gaps. Overall, male workers sector jobs. This limits their ability to transition are more exposed to the negative effects of to new occupations in the future - especially in green policies than female workers, as they industries better positioned for adaptation to are more prone to work in “brown jobs” green policies, as those later transitions tend such as in heavy or extractive industries or in to rely more on transferable skills and less on occupations affected by task transformation. degrees. Underrepresentation in technical and While this varies across countries (from 14 vocational training further exacerbates this percent in Albania to 30 percent in Bosnia and mismatch, while societal norms shape career Herzegovina), men are systematically more choices, discouraging women from entering at risk (Figure 10.5b). However, among male STEM fields and technical professions, which workers in occupations at risk, fewer tend to are critical pathways to better employment and have larger skills gaps between their current in particular to green jobs (which are associated position and the closest occupation not at with a higher wage premium).69 As a result, risk, making their transitions smoother than women face greater challenges in transitioning those of female workers in occupations at risk to alternative employment, making their job (Figure b). In other words, while men are more transitions harder than men. at risk of having to transition to new jobs, those FIGURE 10.5: Male workers are more likely to work in jobs at risk, but among workers in jobs at risk, women will endure more difficult job transitions a. Occupations at risk by gender (% of workers in jobs at b. Skills gaps by gender (% of workers with large skills gaps, risk) conditional on being in a job at risk) 35% Female Male 80% Female Male 30% 70% Share of workers (%) Share of workers (%) 25% 60% 20% 50% 15% 40% 30% 10% 20% 5% 10% 0% 0% Albania Bosnia Kosovo North Serbia Total Albania Bosnia Kosovo North Serbia Total and Macedonia and Macedonia Herzegovina Herzegovina Source: World Bank staff calculations. Note: “Occupations at risk” correspond to “brown jobs” and jobs that are not brown but are considered to undergo significant shift in their task content “shift task”. “Skills gap” is the share of skills missing when comparing skills required in the current occupation and skills required in the closest occupation not at risk. Refer to Box 10.2 and Annex for full methodology details. World Bank staff calcula- tions are based on the methodology of Gukovas, Garrote-Sanchez, Makovec (forthcoming). Figure 5b focuses only on workers with large skills gaps (a skills gap equal to or exceeding the median skills gap (≥0.117) is considered large, see Annex). Since large and small skills gaps sum to 100 percent, the unreported share corresponds to workers with small skills gaps. 69 IMF (2022). “Transitioning to a Greener Labor Market: Cross-Country Evidence.” IMF Working Paper No. 22/146. Washington, DC: International Monetary Fund and European Training Foundation (ETF). 2024. Gender Dimension of Labour Market Transitions: Implica- tions for Activation and Skills Development Policies of the EU Neighbouring Countries. European Training Foundation. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 59 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 While all age groups are impacted by the levels of education are significantly less likely to green transition, young workers exhibit more see their jobs displaced or experience a significant severe skills gaps to alternative jobs and green task change compared with those with low and occupations. All age groups are impacted by the mid-education levels (Figure 10.6). Albania’s green transition in terms of jobs at risk. However, economic and energy structure again sets it apart young people tend to exhibit larger skills gaps to from regional trends where, while facing overall alternative safe occupations than older workers, lower levels of risk, mid-educated workers are most which means larger retraining needs. For example, vulnerable. High-educated workers in at-risk jobs 50 percent of those aged 15–34 years old have face smaller skills gaps to transition to safer (not- a substantial skills gap, which is 10 percentage at-risk) jobs in the region. Considering that in the points more than among those aged 55–64 years medium- to long-term green occupations are the old. Generally, these skills gaps decrease with age. safest, then low-educated workers consistently Worryingly, in terms of the transition to green lag with large skills gaps, as those occupations occupations, most younger workers will face large require skills usually associated with higher levels skills gaps, which tend to be lower among older of education (e.g., STEM studies).71 This poses workers, suggesting a mismatch between education a critical challenge for countries in the Western and training, and labor market needs, as well as their Balkans to take advantage of opportunities tendency to carry-out more junior tasks.70 that will emerge from the green transition, given the region’s overall lower levels of human Workers with low or medium levels of education capital development. These gaps in skills among work more frequently in occupations at risk. workers also point to the critical role that social Across the Western Balkans, workers with high protection systems will play in enabling workers to successfully navigate the green transition. FIGURE 10.6: Workers with high education level are less at risk than those with lower levels of education 35% Share of workers in occupations at risk (%) 30% 25% 20% 15% 10% 5% 0% Albania Bosnia and Kosovo North Serbia Total Herzegovina Macedonia Low education Mid Education High Level Education Source: World Bank staff calculations. Note: “Occupations at risk” correspond to “brown jobs” and jobs that are not brown but are considered to undergo significant shift in their task content. Low level of education corresponds to no education and primary education, mid-education corresponds to secondary education (up- per and lower secondary) and high-level corresponds to above secondary education. Refer to Box 10.2 and Annex for full methodology details. World Bank staff calculations are based on the methodology of Gukovas, Garrote-Sanchez, Makovec (forthcoming).70 71 70 More specifically, 90 percent of workers aged 15–24 and 88 percent among works aged 25–34 have a large skills gap to green occupations. Importantly, it is somewhat expected that youth recently out of the education system possess more transferable skills. However, this analysis considers the skills composition of the current occupations held by youth, which tend to be more junior in nature. 71 Low-educated workers have the largest skills gap to green occupations at 91 percent, compared with 86 percent for mid-educated workers and 62 percent for highly educated workers. While these estimates vary across countries, the overall trend remains consistent across the Western Balkans. 60 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH V. Gaps in social protection threaten labor income and job transitions in the Western Balkans Social protection systems can help workers who remain ineligible for social assistance, navigate the impacts of extreme weather and making these groups particularly vulnerable. green policies thereby helping to ensure that Beyond these gaps in income support, workers no one is left behind. As described in Figure in occupations at risk will require reskilling and 10.7, a range of social protection instruments upskilling to remain productive and employed. help workers adapt to changes in the labor Such training opportunities in the Western market. Most of these instruments are found Balkans tend to be limited, with low provision within the established social protection systems and weak links to the private sector. Investments in the Western Balkans, although their reach in the Public Employment Services (PESs) are and effectiveness differ across individual limited and tend to focus on promoting the employment situations and countries. Given activation of unemployed vulnerable groups, the current design of these instruments and leaving many other jobseekers with little the funding allocated to them, in the face of support. Finally, there is little scope for social employment shocks, there are critical gaps for protection systems to provide temporary informal sector workers, new labor market support in the face of weather hazards to entrants, and those people for whom the loss prevent people from falling into poverty. These of labor income pushes them into poverty but issues are explored in the paragraphs below. FIGURE 10.7: Social protection instruments are critical for supporting employment shocks and labor market transitions   Transition from jobs at risk to safe jobs Barriers: Policy tools for affected workers: Age of workers Employment protection regulation (e.g. severance payments) Low levels of foundational skills for some occupations Physical / mental health issues for Social insurance system: specific occupations Unemployment benefits Lack of geographical mobility Early retirement options Risks: Social Assistance system or other cash benefits: Temporary targeted income support (e.g. poverty-targeted Skills gap to transition to other occupations benefits, temporary lost wage top-ups) Demand for skills being in other locations Unemployment assistance Households dependent on the income from brown sector Long-term unemployment for those less Active Labor Market Programs and Intermediation support: attractive on the labor market (older Upskilling and re-skilling programs workers, low-skilled workforce in sectors Mobility allowances with low demand) Specialized counseling / placement services Source: World Bank staff Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 61 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Income support for employment high long-term unemployment, which limits shocks arising from climate hazards or eligibility under benefits designed for short-term green policies labor transitions, pointing to the limitations of unemployment benefits for workers at risk who Labor regulations and unemployment may experience prolonged transitions (see Annex, insurance provide income support to displaced ).76 For these people, navigating their labor market workers, although gaps in coverage leave transition means relaying on savings and informal many workers vulnerable. With large-scale networks. retrenchments expected as a result of green policies, severance payments serve as a first While many workers are eligible for income layer of protection for displaced workers, with support, analysis suggests that the level and unemployment benefits offering a second layer.72 duration of this support is likely insufficient These income support measures are particularly to enable successful employment transitions. important in areas with unfavorable labor markets Across most countries in the Western Balkans, for jobseekers. All Western Balkan countries severance packages tend to offer short-term mandate severance pay in their labor laws, and all financial relief, with the severance structures except Kosovo have established unemployment heavily tenure-based (Table 10.1). This means insurance systems. Analysis suggests that these that benefits are inexistant or significantly lower schemes will protect most workers in brown for newer labor market entrants, reducing their occupations, with estimated coverage rates financial cushion during employment transitions, ranging from 91 percent in North Macedonia to as observed during the COVID-19 crisis. While 67 percent in Albania.73 Workers at risk due to a most workers in the Western Balkans are eligible significant change in task content are somewhat for unemployment insurance, these benefits less well covered, with estimated average coverage provide on average moderate to low levels of rates falling from 83 percent among workers in income replacement77, and are not necessarily brown jobs to 75 percent among those facing a based on workers’ previous wages (as in Albania shift in tasks.74 Informal employment and the and the Federation of Bosnia and Herzegovina; failure to meet eligibility requirements for labor Figure 10.8). In Montenegro, the average benefit market entrants, such as among youth, further relative to the beneficiary’s previous income is exclude some workers. In all countries, coverage the lowest among neighboring countries. Such of unemployment benefits is lowest among new design parameters mean that households will market entrants.75 Notably, despite relatively face a relatively important loss of income when high overall coverage rates, administrative data unemployed, especially for households with a reveal a more complex reality, as many registered single breadwinner. jobseekers in the Western Balkans receive no unemployment benefits. This is mainly due to 72 Severance is a one-off payment provided by an employer upon termination of a formal contract (based on tenure and nature of termination), while unemployment benefits provide ongoing financial support for a limited period to eligible unemployed individuals, helping smooth income and enabling them to seek a good job match. Severance payments act as a form of insurance against unexpected job loss, providing relative short-term income stability, and are especially important in the absence of unemployment benefits or when these systems are weak. Unemployment benefits, which are typically funded through payroll tax, aim to mitigate income loss and allow jobseekers to find a better job match, which improves productivity in the long run, and prevent households from falling into poverty. 73 World Bank staff calculations, based on the identification of workers at risk described in the previous section. Access to unemployment benefits during job transitions depends on workers’ pension contributions, with eligibility requiring a minimum contribution period. Assumptions used for the analysis are presented in Annex. 74 In some countries, workers at risk and facing a large skills gap are even less well protected, with only 52 percent of these workers in Albania eligible for unemployment benefits. 75 An average of 10 months of continuous contributions in the region is required to initiate eligibility for unemployment benefits. 76 In North Macedonia, for example, only between 4 and 6 percent of all registered jobseekers receive the benefit per month. In Serbia, unemployment benefits are claimed by only 6 percent of the registered unemployed. Source: administrative data from respective Public Employment Services. 77 In the Federation of Bosnia and Herzegovina, at the lower levels of the salary distribution, the replacement rate is relatively high, but this rate is moderate (and further decreasing) for those at average wage and above. 62 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH TABLE 10.1: Severance payments offer some short-term financial relief Severance pay for redundancy dismissal (in weeks of salary) Country For a worker with 1 For a worker with For a worker with Average for workers year of tenure 5 years of tenure 10 years of tenure with 1, 5, and 10 years of tenure Western Balkans Albania 0 10.7 21.4 10.7 Bosnia and Herzegovina 0 7.2 14.4 7.2 Kosovo 0 8.7 13 7.2 Montenegro 1.3 6.5 13 6.9 North Macedonia 4.3 10.8 15.2 10.1 Serbia 1.4 7.2 14.4 7.7 Selected EU countries Bulgaria 4.3 4.3 4.3 4.3 Croatia 0 7.2 14.4 7.2 Czech Republic 8.7 13 13 11.6 Greece 8.7 13 26 15.9 Hungary 0 8.7 13 7.2 Poland 4.3 8.7 13 8.7 Portugal 1.7 8.6 17.1 9.1 Romania 0 0 0 0 Slovenia 0.9 4.3 10.8 5.3 Spain 2.9 14.3 28.6 15.2 Source: World Bank, Employing Workers database, 2020.78 FIGURE 10.8: Equivalent replacement rates and contribution rates for unemployment insurance benefits 90% 2.5% 80% 70% 2.0% 60% 50% 1.5% 40% 1.0% 30% 20% 0.5% 10% 0% 0.0% Albania Bosnia and Bosnia and Montenegro North Serbia Herzegovina Herzegovina Macedonia (FBIH) (RS) Replacement rate at minimum wage Replacement rate at average wage Employer + Employee contribution rate Source: World Bank staff calculations based on parameters identified in Annex, based on the following data sources: For minimum wage and average wage (excluding FBIH and RS): SEE Jobs Gateway Database. Minimum wage and average wage (FBIH & RS), as well as Employer + Employee contribution rate: Agency for Statistics of Bosnia and Herzegovina; World Bank (2024).79 Note: Equivalent replacement rates are computed as the percentage of earnings at minimum wage (blue) or at average net wage (orange) that is replaced by unemployment benefits after job loss. Those two cases serve as benchmarks for the real wage replacement 78 World Bank. (2020). Employing Workers Dataset. World Bank Group. Accessed March 7, 2025. https://www.worldbank.org/en/research/ employing-workers/data. The table does not reflect any policy changes introduced after 2020. 79 World Bank (2024). Western Balkans Labor Market Brief 2022. Vienna Institute for International Economic Studies (wiiw) & World Bank. https://data.wiiw.ac.at/seejobsgateway.html. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 63 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 rate that a worker would face. resort income support (LRIS) programs and For older workers, early retirement is a large share of social assistance spending no longer an option when faced with being allocated to war veterans and their unemployment, as fiscal pressure is gradually families, and people with disabilities, among preventing the use of early transition other categorical groups.81 As a result of these windows to the region’s pension systems. factors, people who fall into poverty but are An estimated 19 percent of all workers who able to work are often excluded from social are in occupations at risk and face a large skills assistance, with variation across countries. In gap to safe occupations are aged 55 to 64 Kosovo, for example, the presence of children, years—an age group that is often more likely caregiving and dependency of family members, to experience unemployment than younger and an inability to work are eligibility criteria groups in the Western Balkans and for whom for the LRIS, although reforms are underway the cost of retraining may offer limited returns. to remove these disincentives to work. In both While pension programs could potentially entities of Bosnia and Herzegovina, to be facilitate workforce transitions through early eligible for the LRIS, a household must have retirement options for displaced older workers no members who are able to work. In contrast, with few employment prospects, their long- extremely poor households with adults who term sustainability faces mounting pressure can work are eligible for support in Albania due to demographic shifts. Beyond structural and North Macedonia.82 Thus, although adjustments to their pension schemes in temporary social assistance is likely needed to response to these issues, all countries are support people who lose labor income and are starting to integrate into their models the not eligible for unemployment benefits from need for productive aging, in other words, falling deeper into poverty, such support is maintaining people longer in the labor market currently not forthcoming. and supporting their productivity as they age. Legislation that phases out early retirement Reskilling and upskilling, ALMPs windows is one signal of this direction with, and employment services to enable for example, North Macedonia having transitions to new employment abolished general early retirement, and Bosnia and Herzegovina and Montenegro gradually Public Employment Services in the Western phasing out early retirement windows.80 Balkans are not equipped to support affected workers through the challenges ahead. While Social assistance in the Western Balkan demands on employment services are large, countries offers little, if any, temporary low funding and limited capacity constrain the support, in response to job or income losses, reach and effectiveness of employment services given their strict eligibility criteria and and programs83 in the Western Balkans. While limited funding. The share of social assistance the EU invests an average of 1.19 percent of funding going to the poorest families is much GDP in labor market programs, spending lower across the Western Balkans than in the in the region is significantly lower, with rest of the Europe and Central Asia region. Montenegro allocating 0.5 percent, Bosnia and This is due to minimal spending on last- Herzegovina allocating 0.4 percent (average 80 In all countries, the early retirement, proportional to the service period, remains available for hazardous and arduous occupations. Review of the hazardous occupations and analyzing reform options to better integrate hazardous and non-hazardous service periods in underway in North Macedonia. 81 Brodmann, S., Coll-Black S., and von Lenthe, C. 2023. Advancing Social Protection in the Western Balkans: Opportunities for Reform. Washington, DC: World Bank. 82 Provided that these households are assessed as being eligible based on the proxy means test in Albania and means test in North Macedonia. 83 Employment services refer to the range of services and resources that are available to both employers and job seekers to facilitate the match- ing of workers to available jobs. Some examples of labor market services include job placement, matching, career counseling. 64 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH between Federation of Bosnia and Herzegovina Retraining and continuous skills development and Republika Srpska), North Macedonia opportunities in the Western Balkans are 0.4 percent, Serbia 0.3 percent, Kosovo 0.1 fragmented, available through various percent, and Albania below 0.1 percent.84 This channels: (i) ALMPs offered by PESs that are affects the ability of PESs to deliver quality typically subsidized and targeted at specific employment services to jobseekers. Even as unemployed groups; (ii) private training retrenchments start to affect brown industries, providers; and (iii) workplace-based training PESs in the Western Balkans already face high for current employees. However, the provision caseloads, ranging from 816 in Serbia to 2,184 of training across these three channels is low in Kosovo (as at 2020), well above the ILO and underfunded. First, as discussed above, recommended caseload of 100. While some the public provision for and budget allocated countries are moving toward allowing private to such upskilling and reskilling through the sector involvement in service provision, PESs is limited, with simple wage subsidies outsourcing remains absent in some and either or wage subsidies for on-the-job training ineffective or delayed in others. preferred. The private market for training provision, which could serve both current The scale of active labor market programs workers (firm externally conducted training) (ALMPs) is limited, and their menu of and unemployed (through PES outsourcing programs is not geared toward addressing arrangements) is underdeveloped and mostly the effects of weather-related hazards and concentrated in economic hubs. Finally, firms green policies on workers. Spending on in the Western Balkans invest little in training ALMPs is consistently less than half of labor their workforce, prioritizing immediate labor market spending, with larger shares dedicated needs over long-term investment in workforce to passive support (such as unemployment skills and prioritizing on-the-job training that benefits), aapart from Republika Srpska.85 relies heavily on internal capacity rather than This results in small programs and a limited dedicated internal or external trainers. Low range of options, with subsidized training and retention rates86 in employer-led training retraining opportunities underrepresented. further discourage firms from investing in Wage subsidy programs, which are over- workforce development due to concerns represented among ALMPs, target specific about poaching and high turnover, a challenge groups of jobseekers but do not target sectors worsened by the proximity to hiring markets or occupations that could be better aligned in EU countries. Beyond the weak provision with new sectorial trends emerging from the overall, the procurement and monitoring green transition. Critically, the effectiveness of systems are not in place for PESs to adequately ALMPs is significantly hindered by the lack leverage private provision of training. In of robust connections to employers and their addition, while some countries have a rather labor market needs. structured public training system around Technical and Vocational Educational and Without access to market-relevant Training (TVET) and Vocational Education retraining opportunities, workers will and Training (VET) systems (e.g., Albania), struggle to transition to new occupations in others, such as Bosnia and Herzegovina, or stay productive in their changing jobs; the public training sector is weak. Publicly led however, training options are limited. training generally struggles with curriculum 84 This includes active and passive labor market programs as well as employment services. Brodmann, S., Coll-Black S., and von Lenthe, C. 2023. Advancing Social Protection in the Western Balkans: Opportunities for Reform. Washington, DC: World Bank. 85 In 2018 in Republika Srpska, the share is close to half. 86 In Kosovo, for instance, only 26 percent of trainees remain with their employer post-training (Millan et al., 2023) – Millan, Natalia; Anu- sic, Zoran; Koettl-Brodmann, Stefanie; Coll-Black, Sarah; Rigolini, Iamele P.; Von Lenthe, Cornelius Claus. 2023. Western Balkans Social Protection Situational Analyses: Kosovo. Washington, DC: World Bank Group.  Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 65 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 misalignment and a lack of structured employer only country that has established the legal partnerships, a challenge shared with TVET. 87 basis to expand its national poverty-targeted As a result, without co-financing mechanisms, social assistance program to additional poor tax relief, or structured incentives, employer- households affected by natural disasters. led training in the region is likely to remain Building flexibility into social assistance fragmented, ad hoc, and insufficient to address programs addresses the constraints witnessed long-term labor market demands. during the COVID-19 pandemic, when social assistance programs could not assist poor Protecting people from the negative individuals who had lost income but did not effects of climate hazards on incomes fit the categorical eligibility criteria.90 and assets Investments in digital delivery systems Social protection programs are unable provide a foundation for building such to respond when climate shocks damage shock-response capacities. The social people’s assets or lower their income and protection programs in all countries are consumption, beyond the provision of embedded in strong institutions, with modest one-off support in some areas. While dedicated front-line staff, and are underpinned weather hazards can disrupt employment by digital information systems. However, in vulnerable sectors, such as tourism, or levels of interoperability of these digital when extreme weather events occur, such as systems between programs and with other flooding, for many other people, these impacts government ministries vary. Where these will be in the form of lost assets, constrained systems are advanced, as in North Macedonia, access to services and, for some, higher interoperability has enhanced application and prices. Such impacts have the potential to verification processes, providing a foundation drive people into poverty without temporary to rapidly enroll new beneficiaries affected by social protection support. Currently, however, extreme weather shocks. Experience from the social protection systems in the region are COVID-19 pandemic response in Albania unable to flexibly respond to such emerging and Montenegro points to how existing needs, as described in the paragraphs above. social assistance beneficiary registries could be The notable exception is the one-off financial leveraged to rapidly identify poor households assistance (OFA) programs in Kosovo, North for support, especially if linkages with early Macedonia, Bosnia and Herzegovina, and warning systems were established to inform Serbia which, while designed to respond to an early response. However, this aim would household-level idiosyncratic shocks, have need to be embedded into program design, been deployed during weather-related disasters, as set out in legislation, backed by sufficient such as floods.88 Countries have also taken funding, and an alignment of social protection steps to expand the reach of their programs and disaster risk management policies. for energy vulnerable consumers, which Overall, social protection systems in the provide targeted assistance to help households Western Balkans could be much better to pay their energy or electricity bills during harnessed to protect households from the winter months.89 North Macedonia is the 87 Across the six countries, employers frequently report dissatisfaction with vocational graduates’ job readiness, citing outdated curricula and insufficient work-based learning opportunities. See Special Topic in World Bank. 2020. Western Balkans: Labor Market Trends 2020. Wash- ington, DC: World Bank Group. 88 Social services, which are generally underdeveloped in the region, are envisioned to provide lifesaving support to disaster-affected households in North Macedonia and Serbia (such as shelter for displaced populations). 89 These initiatives have largely been in response to increases in energy prices arising from climate policies or Russia’s invasion of Ukraine. However, they offer an example of how these programs could be used to response to colder, longer winters or hotter summers. 90 See, for example: Brodmann, S., Coll-Black S., and von Lenthe, C. 2023. Advancing Social Protection in the Western Balkans: Opportuni- ties for Reform. Washington, DC: World Bank. 66 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH weather-related shocks. Figure 10.9 presents institutional arrangements. Based on this an assessment of the capacity of the social assessment, Western Balkan countries are rated protection systems in the Western Balkans to as ‘emerging’ or ‘established’ in their readiness respond to climate shocks along four pillars: and ability to utilize their social protection (i) programs and delivery systems; (ii) data systems in response to shock. and information; (iii) financing; and (iv) FIGURE 10.9: Assessment of the readiness of social protection systems in the Western Balkans to scale-up   Programs and delivery Data and information Institutional Financing systems arrangements Albania Established Established Emerging Nascent Bosnia and Emerging Emerging Emerging Nascent Herzegovina Kosovo Emerging Emerging Nascent Nascent Montenegro Established Established Emerging Nascent North Macedonia Established Established Established Emerging Serbia Established Established Established Established Source: Fitzgibbon C., Coll-Black, S. 2023. Findings of the World Bank Stress Test in the Western Balkans Draft. Washington, DC: World Bank. Note: For each of the four pillars (programs and delivery systems, data and information, financing, and institutional arrangements), a set of questions was qualitatively assessed using existing studies, research, and consultation to devise a rating from one and five, indicating progress from latent to advanced, based on the methodology detailed in: World Bank. 2021. Stress Testing Social Protection: A Rapid Appraisal of the Adaptability of Social Protection Systems and Their Readiness to Scale Up – A Guide for Practitioners. Washington, DC: World Bank Group. VI. Moving Forward: Creating Resilient and Inclusive Social Protection Systems Workers are affected by both weather hazards transition, while enabling firms to seize new and green policies, requiring support and opportunities by promoting labor mobility, and protection to navigate those challenges, keeping workers aligned with evolving demand to sustain gains in poverty reduction and and job requirements. While training for the economic growth in the region. Both climate stock of workers is needed, adequate training for hazards and green policies will increase the the future workforce is required too. This will likelihood of job loss, with acute risks in specific ultimately require investments in the educational sectors and localized areas, either due to their curricula of schools and teachers, as well as the inherent exposure to climate hazards or the development of the research and development nature of their economic activities (e.g., coal capacities of universities to take advantage of the extraction). While labor markets in the Western opportunities of the green transition. These efforts Balkans are mostly formal, gaps in the protection will require strong coordination with the private offered by social protection policies put workers sector to ensure market needs are taken into and their families at risk of poverty and long- account. While recognizing the need to invest term unemployment. Beyond the immediate in the future workforce, the paragraphs below, as response to these employment shocks, forward- summarized in Table 10.2, focus on protecting looking interventions are required to enable and retraining the existing workforce, given their workers and unemployed people to reskill to take risk of heightened unemployment. To this end, on different jobs or upgrade their existing skills this section considers measures that policy makers to respond to the changes in demand for skills in the Western Balkans could consider so that no induced by green policies. These investments one is left behind. will ensure no one is left behind in the green Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 67 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 TABLE 10.2: Policy recommendations Policy recommendation Responsible institution Reform training systems and ALMPs to prepare workers with skills needed for the green transition Invest in larger-scale upskilling and reskilling programs including by Ministries of Labor, Public reforming their financing and design to expand opportunities for lifelong Employment Services, with Ministries learning, including on-the-job. of Economy Invest in labor-market responsive training for workers and unemployed Ministries of Labor, Public (curricula, instructors, infrastructure, equipment, firm incentives). Employment Services, Private Sector Associations Establish solid Labor Market Information Systems to identify on a regular Ministries of Economy and/or basis change in skills demand and new occupations associated with the Ministries of Labor, coordination greening of the labor market. with multiple institutions including Statistical Agencies Strengthen the labor protection system, balancing the need for flexibility to allow firms to adapt Strengthen labor income protection systems, including for informal Ministries of Labor, Ministries of workers, to respond to a likely increase in employment shocks. Social Protection Consider targeted labor mobility schemes for retrenched workers in Ministries of Labor communities highly affected by industry shutdowns. Enhance flexibility of social protection systems to better protect people from weather-related shocks Modify social protection legislation to allow programs to respond to Ministries of Social Protection, shocks, aligning with disaster risk management and environmental municipalities legislation. Put in place social protection delivery systems that can rapidly expand to Ministries of Social Protection, reach new people. municipalities where relevant Establish disaster risk financing instruments that will fund the expansion Ministries of Finance, Ministries of of social protection systems when shocks occur. Social Protection Reform training systems and ALMPs to prepare workers with skills needed for those jobs that are not at risk from green transition Invest in larger-scale upskilling and billion in Serbia.92 Moving to green jobs, which reskilling programs, including by reforming can serve as an upper bound, is estimated to be their financing and design to expand on average three times more costly. Without co- opportunities for lifelong learning, including financing mechanisms, tax relief, or structured on-the-job training. Ensuring that workers incentives, employer-led training will continue can successfully transition into safe, sustainable to be ad hoc and short term. As labor markets jobs requires a coordinated approach to shift due to green policies and automation, financing and delivering reskilling programs at governments would need to establish sustainable scale.91 Based on the analysis of jobs at risk and funding models that incentivize private sector the current costs of locally provided training, engagement while ensuring that workers have estimates suggest that retraining workers in access to affordable, flexible training pathways. at risk occupations with significant skill gaps A key policy is to establish funds co-financed would range from US$122.7 to US$173.7 by governments, employers, and international million in Albania to US$2.69 to US$3.81 partners to subsidize training costs, particularly for 91 The design and financing of these programs should recognize the high rates of emigration in the region, and thus could consider global skills partnerships and other innovations, as well as careful consideration of these aspects when designing incentives for firm-driven training investments, as detailed in the Fall 2024 Regional Economic Report. 92 The estimation focuses on workers in at-risk occupations with significant skills gaps. Montenegro was excluded from the analysis due to data limitations in assessing workers in at-risk occupations. Unit costs are assumed uniform across countries and based on local retraining / upskilling costs collected in 2024 in Bosnia and Herzegovina. The cost range is based on the duration of training. 68 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH workers in high-risk sectors such as coal, heavy industries evolve, workers need lifelong learning industry, and traditional manufacturing, ideally opportunities to adapt to new technologies, with scope to offer training before workers are environmental regulations, and changing job dismissed. Funding to support such investments demands. This requires integrating modular towards a just transition is expected from the EU approaches and certifications, enabling workers to Growth Plan.93 Tax incentives, wage subsidies, upskill progressively over time. Earlier investments and public-private partnerships in the training in reskilling would also strengthen the demand sector can further encourage growth of this for and supply of late-career labor, increasing private market, and incentivize firms to invest in employment opportunities for older workers. long-term workforce development, shifting the Critically, these shortcomings are also visible in focus from short-term skills acquisition toward the TVET system, where, without coordinated sustainable employment transitions. PESs also public-private efforts, TVET institutions will have a role to play in expanding the scale of continue to struggle with outdated curricula, retraining programs and their reach to a broader weak employer linkages, and low participation in range of vulnerable groups, such as current workplace-based learning programs. workers facing significant task changes. The German PES in Bremen, for example, finances Invest in solid Labor Market Information the upskilling and reskilling of ArcelorMittal’s Systems (LMISs) to identify changes in skill workers given changes in steel production, which demand and emergence of new occupations have arisen due to decarbonization policies and associated with the greening of the labor the transition to green steel. Given the cost of market. Investing in LMISs is crucial for retraining, structured financing mechanisms understanding and addressing the dynamics should ensure that workers, especially those in of both labor supply and demand. Frequent occupations or sectors already identified at risk, labor market tracking provides insights into have access to retraining/upskilling programs and employment trends, sectoral shifts, geographical industry-driven certification programs. However, mismatches, and emerging skills demands. This training cannot be a one-time intervention. enables the design of targeted training programs or curricula realignments in the education sector, To reach the quality of retraining programs including for the needs of the green economy, as and ALMPs needed, invest in the conditions well as the design of targeted interventions (e.g., needed for labor-market responsive training. mobility incentives). However, the availability of In addition to their limited scale and reach, public accurate, comprehensive, and up-to-date data, is a training provision across countries in the Western pre-condition for LMISs. For that, governments Balkans fails to meet private sector demands due should invest in underlying information to its misalignment with labor market needs. systems in respective relevant institutions, For current workers, VET systems provide promote coordination and data-sharing across opportunities that are limited in scale compared institutions generating relevant data, and build with needs and are missing links to PESs to be internal capacity for analytics generation and efficiently used to retrain displaced workers. In dissemination. addition, training programs tend neither to be informed by labor market trends, nor designed in accordance with private sector needs. The same holds true for other ALMPs. Governments should expand employer engagement in curriculum design, ensuring that these programs integrate green skills and digital competencies. As 93 See for example: https://enlargement.ec.europa.eu/news/commission-approves-reform-agendas-albania-kosovo-montenegro-north-macedo- nia-and-serbia-paving-way-2024-10-23_en Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 69 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Strengthen the labor protection workers in the coal mine communities described system, while balancing the need for in Box 10.1 , to assist them to relocate to other flexibility to allow firms to adapt areas within their countries. Strengthen labor income protection systems, Enhance the flexibility of the social including for informal workers, to respond protection system to better protect to a likely increase in job-related shocks. people from weather shocks While analysis suggests that many displaced workers in the Western Balkans are likely Modify legislation to allow social protection eligible for unemployment benefits, the extent programs to expand coverage to additional to which they support successful labor market vulnerable people in response to natural transitions is unclear. A thorough review, disasters. Despite ongoing reforms, social including contribution rates, replacement protection systems are currently unable to respond rates, conditions and processes to open rights, flexibly to extreme weather events, beyond modest as well as their duration, is warranted across all payments through OFA and increasing payments countries, taking into consideration the need to existing beneficiaries in some countries. The to allow firms to adapt flexibly to economic ability to expand horizontally to new beneficiaries challenges while also protecting workers. Gaps quickly through social protection programs requires in unemployment benefits and social assistance that legislation be modified, setting out transparent leave informal workers, new market entrants, eligibility criteria and the grounds upon which and workers who fall into poverty due to job such temporary support would be triggered. Such loss, particularly vulnerable. Countries across the support should be carefully targeted to affected globe are introducing innovations to extend the populations, specifically people who are poor and coverage of income support instruments (whether vulnerable, with no access to insurance or other social insurance or alternative non-contributory support. Given that extreme weather shocks in the instruments) for low-income workers, who tend to Western Balkans are often localized, in addition be informal. Examples include the establishment to building the legal framework to allow national of dedicated financial products, including programs to respond to shocks, governments individual savings accounts, accompanied, at should establish localized response modalities. The times, by matching grants from governments and OFAs, which exist in all countries except Albania, behavioral nudges, such as through automatic and have been used to respond to local shocks in reminders.94 While these innovations are often some cases, could be modernized to achieve this dedicated to expanding pension access, they objective. This would require the establishment of may offer ideas for extending the coverage of operational procedures for OFA to provide both unemployment insurance in the Western Balkans. one-off and recurrent payments, as needed, the Australia’s scalable, means-tested unemployment use of established delivery systems (see below) and protection system also offers insights: providing robust monitoring. Aligning these policy objectives non-contributory income support based on with disaster risk management would provide the financial need rather than employment history, basis for intersectoral coordination and action. In it has proven effective in maintaining inclusivity addition, a better understanding of the individual and economic stability. In addition, there may and household impacts of weather hazards is needed be a need to selectively consider targeted labor to inform the design of any temporary expansions of mobility schemes for workers who are faced with social protection programs to better ensure that it is few employment opportunities in the local labor targeted to the people most in need of such support. market when industries shutter, such as older 94 See, for example, Bosh, M., et al. 2019. How to promote retirement savings for low-income and independent workers: the cases of Chile, Colombia, Mexico and Peru. IDB Technical Note, 1777. Inter-American Development Bank. 70 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH Put in place social protection delivery Finally, dedicated financing is required both systems that can rapidly expand to reach new for these systems investments but, more beneficiaries. To be effective, reforms to the critically, to quickly fund the expansion of the social protection legislative framework need to social protection system when shocks occur. be complemented with investments in delivery The economic benefits of targeted, temporary systems to enable the quick identification of people social protection support are greater when in need of support, their enrolment and payment, provided early to affected people, even before the supported by robust complaints and grievance climate hazard has occurred.97 For this, funding mechanisms. This includes: (i) investments in the needs to be arranged in advance, such that it can interoperability of social protection information be rapidly deployed when needed. Given the systems with other government databases to limited recognition of the role of social protection allow for rapid identification of eligibility; (ii) in disaster response, there have been no efforts to investments in integrated social registries, where model the disaster risk financing requirements for appropriate; and (iii) the establishment of standard a social protection response to any climate event operating procedures to ensure system capacity in the region.98 Such analysis would be required to during disasters, supported by capacity building determine the amount that should be allocated to and staff training. All six countries have put in fund the expansion of social protection programs, place digital systems to support the delivery of within a national disaster risk financing strategy. their social assistance programs, which provide the There could be scope to employ revenue recycling basis for further investments to support the rapid from carbon prices to limit the additional fiscal identification and enrollment of people in need burden that this would entail.99 of support when a disaster strikes. For example, in Ukraine, during the COVID-19 pandemic, VII. Conclusion  unemployment benefits could be applied for through the Diya app, which was widely used.95 The Western Balkans stands at a critical In 2022, when severe flooding affected Pakistan, juncture, with an urgent need to reform its investments in the delivery systems of the Benazir social protection systems for the challenges Income Support Program (BISP), the national ahead. As extreme weather intensifies and the cash transfer program, allowed the government to global transition to a low-carbon economy provide a one-time payment to 1.76 million poor accelerates, the region must confront structural households in flood affected areas. The data from vulnerabilities in its labor markets while the National Socio-economic Registry, through seizing opportunities for sustainable economic which BISP identifies households eligible for transformation. Rising temperatures, extreme support, together with flood exposure maps, weather events, and sectoral shifts—particularly identified areas where families most vulnerable in energy, agriculture, and tourism—are already to the floods were concentrated, helping channel disrupting employment patterns, exacerbating scare resources.96 existing labor market fragilities, and deepening economic disparities. Without urgent reforms to and investments in social protection 95 By the end of 2021, 12 million individuals or around a quarter of Ukraine’s population used Diya, which is a smartphone application. See: Coll-Black, Sarah; Von Lenthe, Cornelius; Brodmann, Stefanie; Shaw, William; Sandford, Judith; Gonzalez, Alejandro; Rigolini, Jamele. 2023. Social Protection in a World of Crisis: Learning from the Response to the COVID-19 Pandemic in Eastern Europe and the South Caucasus. Social Protection and Jobs Discussion Papers; No. 2304, June 2023. Washington, DC: World Bank 96 These delivery systems include the National Socio-economic Registry through which BISP identifies household eligible for support. Guven M. Z Fnu, GN Jamy. The Evolution of Benazir Income Support Programme’s Delivery Systems: Leveraging Digital Technology for Adaptive Social Protection in Pakistan (English). Washington, D.C.: World Bank Group.  97 See, for example, the discussion of early action in World Bank. 2024. Rising to the Challenge: Success Stories and Strategies for Achieving Climate Adaptation and Resilience. World Bank. 98 For a discussion of disaster risk financing, see World Bank Group. 2014. Financial Protection Against Natural Disasters: An Operational Framework for Disaster Risk Financing and Insurance. Washington, DC. 99 Western Balkans 6 – Country Climate Development Report. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 71 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 systems in the Western Balkans, these trends Delayed action will lead to deeper economic will further destabilize livelihoods, increase and social fractures, risking widespread unemployment, and widen socioeconomic job displacement, rural-urban migration inequalities, disproportionately affecting pressures, and long-term productivity losses. vulnerable workers in sectors sensitive to Conversely, proactive policies can position the extreme weather events and those that are Western Balkans as a leader in environmental- carbon-intensive, and in areas that are already conscious economic transformation, attracting faced with multiple forms of deprivation. The investment, fostering innovation, and ensuring urgency of these reforms cannot be overstated. that no worker or community is left behind. Annex I: Methodology Employed in Estimating Jobs at Risk, Skills Gaps and Transitions This annex elaborates the methodology described 3-digit classification used in Europe. Occupation in Box 10.2, as follows: exceeding the median intensity threshold for at risk occupations (≥0.293) are classified as brown Brown jobs are identified in two steps, following jobs. This threshold is based on a continuous Vona et al. (2018) and using employment data variable estimating the share of jobs within from the United States. Industries (at the four- each occupation that are either brown or will digit NAICS-level) are first ranked based on their require significant task transformation due to pollution-intensity, measured as emissions per the green transition. To account for potential worker, for at least three pollutants, including overlap between brown and transitioning jobs, a CO₂ emissions and criteria air pollutants retraining share is calculated as the average of an regulated by Environmental Protection Agency upper bound (assuming no overlap) and a lower (i.e., CO, VOC, NOx, SO₂, PM10, PM2.5 and bound (assuming full overlap). The median of lead). Once ranked, the top 5 percent industries this retraining share variable, excluding zero are selected, with leads to 62 industries values, is 0.239. identified as “brown” or having the highest pollution intensity. These industries tend to Jobs requiring a significant shift in task content employ workers in fields such as manufacturing, (referred as “shift in task”) are identified using mining, quarrying, and oil and gas extraction, the O*NET ‘Green Economy’ classification, construction and extraction, installation and category 3 corresponding to occupations maintenance, production, and transportation. expected to undergo significant changes in task In a second step, and because some occupations content as a result of new environmental policies, in those industries may not be that much at risk sustainable technologies, and green business (e.g., managerial types of positions), brown jobs practices. These occupations are not in specific are identified as those most prevalent among industries; rather, they are determined at the those polluting industries compared with other occupation level, based on expected skill and industries of the United States economy (by task changes. Those occupations are expected selecting occupations with a probability of being to remain in demand but will require upskilling conducted in polluting sectors seven times higher and retraining to match new requirements in than in any other occupation). In transposing the short to medium term. Similar to brown this methodology to the Labor Force Survey jobs, a threshold of 0.239 is applied to identify data in the Western Balkans, the occupation level occupations that will require substantial change data are aggregated from US SOC at the 8-digit in task content. level to ISCO at the 4-digit level, creating a composite indicator of how likely an occupation Skills gaps are a continuous variable (between is brown (ranging from 0 to 1) in the ISCO 0 and 1) representing the gap between a 72 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH given occupation and the closest occupation considered safe (occupation not at risk). If the gap is greater than the median skills gap (i.e., ≥0.117) it is considered a substantial skills gap. The closest occupation is computed using Jaccard Similarity Index (JSI), which measures the skill similarity between every pair of occupations. Then the skills gap is calculated as the share of skills in the closest occupation that are not in use in the occupation of origin. The skills composition of the occupation is based on O*NET on includes attributes of knowledge, skills and abilities. This measure represents the cost of transitioning workers to new jobs. Finally, “green jobs” are defined based on the O*NET ‘Green Economy’ program classification, where the “greenness” of an occupation is determined by the extent to which its tasks and skills align with environmentally sustainable activities. Based on methodology by Gukovas, Garrote-Sanchez, Makovec (forthcoming) an occupation is considered green if it has a greenness score greater than 0.04 (median value of greenness across all occupations). Green occupations are a subset of occupations not at risk. The analysis uses the most recent and available microdata of the Labor Force Survey (LFS) for each of the Western Balkan countries, namely Albania 2018, Bosnia and Herzegovina 2023, Kosovo 2022, North Macedonia 2023, and Serbia 2023. Montenegro is not included given a lack of occupational-level data in the LFS, which are required for this analysis. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 73 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Annex II The assumptions detailed in Table 10.1 below and, consequently, the unemployment are used to simulate unemployment benefits for benefit cost. In the case of Kosovo, there is Albania, Bosnia and Herzegovina, Serbia, and no formal Unemployment Insurance (UI) or North Macedonia. Estimates for Montenegro Unemployment Assistance (UA) program, are unavailable due to the lack of three-digit meaning individuals who lose their jobs do not occupational data, preventing the estimation receive specific unemployment benefits. of the share of people at risk from the transition Albania Bosnia and North Macedonia Serbia Montenegro Herzegovina Minimum 12 8 in FBiH, 12 in 9 12 required RS, 12 in Brcko contribution period (months) Min. and max. Flat rate 12,000 FBiH: No min or Maximum: 80% of Minimum: 80% of benefit amount lek/month max since it is the national average minimum wage; flat rate based on net wage Maximum: 160% national average of minimum net monthly wage.  salary (1,310 BAM) RS: minimum 30% of the average wage salary in RS previous year, maximum average wage salary in RS for the previous year. No min/max for Brcko. Duration of the 13 12 in FBiH, 8 in 4 13 unemployment RS, 4 in Brcko benefit after 1 year of contribution (weeks) Duration of the 39 24 in FBiH, RS 17 26 unemployment and Brcko benefit after 5 years of contribution (weeks) Duration of the 52 36 in FBiH and 26 26 unemployment RS, 24 in Brcko benefit after 10 years of contribution (weeks) 74 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH Replacement Flat rate FBiH: Flat Wage Wage Since 2019, the rate (not wage rate (not wage replacement: 50% replacement: 50% unemployment replacement). replacement). of the average of the average benefit (UB) has 50% of national 40% of the monthly net wage salary in the last been set at 120 minimum wage average net of the employee 6 months. percent of the (i.e., 12,000 lek/ monthly salary for the last 24 wage coefficient month in 2018). in FBiH the last months. (€90), resulting three months. in a gross UB of €108 per month. Wage replacement in RS and Brcko: RS 40% of the individual’s average salary over the last three months (increased to 50% after 15 years of contributions); Brcko 45% of the individual’s average salary over the last three months (increased to 50% after 15 years of contributions) Additional 5% for After the first each dependent 12 months, child until qualifying the age of 18 recipients receive (provided that 40% of average they are enrolled monthly net in school), and wage. until 25 for those in tertiary education. The total additional payments of 5% per child may not exceed 30% of the fixed rate. Coverage Employees who RS & Brcko: Employees/ Employees/ report they are employers/ employers/ entitled to social FBiH: Employees/ self-employed self-employed security scheme employers who who report they who report they benefits or their report they are registered exercise pension employer pays contribute to in pension and disability social security pension, are and disability insurance rights contributions eligible insurance fund at their job. on their behalf of the RM and (Only employees private pension are considered insurance funds. since they are the only group that answers questions regarding social security contributions.) Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 75 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Employment Assume that a Assume that a Assume that a Assume that a status respondent is respondent is respondent is respondent is currently working currently working currently working currently working if their occupation if their occupation if their occupation if their occupation code for the main code for the main code for the main code for the main job is available in job is available in job is available in job is available in the survey. the survey. the survey. the survey. Citizenship Assume that it Assume that it Assume that it Assume that it does not matter does not matter does not matter does not matter to receive UB. to receive UB. to receive UB. to receive UB. Country of place Assume that if Assume that if Country of place Assume that if of work for main country of place the country of of work for MKD country of place job of work is outside place of work is is not available. of work is outside of the country, outside of the Thus, assume of the country, the person is not country, the those who are the person is not eligible. person is not contributing are eligible. eligible. eligible. 76 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 77 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Country Notes 78 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH Albania • Growth remained strong in 2024, at around 3.9 percent, driven by private consumption, tourism, and construction, while inflation pressures eased. • Poverty slightly declined amid ongoing job and wage expansion. Rising geopolitical tensions and uncertainty in trade policy pose risks to the medium- term outlook, as prospects hinge on external demand and continuity in structural reforms. • European Union (EU) accession efforts are expected to support convergence and long-term growth. Key conditions and challenges Recent developments Albania is an open economy, leveraging its Growth held steady at 4 percent in the first three EU proximity for exports, investment, and quarters of 2024, mirroring the 2023 performance. remittances. Growth has averaged 3% annually Services and construction led the expansion, while over the 10 years, yet Albania’s per capita income industry and agriculture slowed. On the demand remains one-third of the EU average (2021 side, private consumption and investment drove real US$). Despite structural challenges, the growth, while net exports weighed negatively, economy has shown resilience to 2019-2022 due to a slowdown in goods exports. Economic crises, averaging 4.2 percent growth per annum sentiment indicators suggest higher domestic in 2022–2024, supported by increased trade with confidence (Figure 1). The employment rate the EU, a strong tourism sector, and hydropower averaged 68.6 percent in 2024, with male and production, which meets up to 90 percent of female employment rates rising by 2.0 and energy demand in normal rainfall years. The falling by 0.3 percentage points, respectively. exchange rate has appreciated significantly in recent Unemployment declined to 9.4 percent, with years, reflecting sustained inflows from export youth unemployment (15–29) remaining high at earnings, remittances, and foreign investment. 18.9 percent. Administrative data shows that the While signaling economic strength, this also average wage grew by 9.8 percent in 2024, with made Albanian goods less competitive abroad. increases across all economic sectors. Overall, Structural challenges restraining long-term growth poverty declined by 1.7 percentage points to and income convergence include outmigration, reach 17.3 percent. In 2024, inflation more than an aging population, weak labor force skills, halved relative to 2023, averaging 2.2 percent, and fiscal pressures from weather-related risks. mainly due to lower import-driven pressures. Addressing these challenges requires raising Domestic inflationary pressures are now the main additional government revenues and increasing driver of rising consumer prices. As of December spending efficiency, alongside accelerating EU- 2024, fiscal performance remained robust, with aligned reforms to enhance productivity, the revenues growing by 10.4 percent versus 8.0 business environment, and market integration. percent for expenditures. Capital spending was While poverty has declined, inclusive growth sluggish but gained momentum late in the year, policies and stronger social protection are needed ending 2024 with an 87 percent execution rate. to support vulnerable groups. Cash balances remained stable, ensuring ample liquidity. The primary surplus adhered to fiscal Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 79 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 rules, while the overall budget deficit stayed low widened to an estimated 1.5 percent of GDP but at 0.8 percent of GDP. Public debt continued to remained below the five-year average. This was decline, reaching 54.2 percent of GDP in 2024, mainly due to a rising trade deficit resulting from driven by fiscal consolidation and exchange the continued decline in goods exports and rising rate appreciation. Credit expansion remained goods imports, while primary and secondary strong through December 2024, growing by 12 income balances improved. Net foreign direct percent y-o-y, with double-digit increases for investment (FDI) continued performing strongly, both private businesses and households. Gross increasing by 6.1 percent y-o-y. Foreign currency non-performing loans declined to 4.2 percent reserves reached USD 6.6 billion as of December in December 2024 from 4.7 percent in 2023. 2024, up from USD 6.4 billion in the previous During Q1-Q3 2024, the current account deficit year. Outlook Economic growth is expected to moderate to 3.2 balance is expected to remain positive from percent in 2025 and 3.1 percent in the medium- 2025 onward, averaging 0.4 percent of GDP. term, amidst global trade policy uncertainty and This projection assumes partial execution of the evolving global outlook. Poverty is projected capital expenditures and does not fully reflect to decline to 16 percent. Inflation is expected the Medium-Term Revenue Strategy 2025- to increase and reach the 3 percent target and 2027. Meanwhile, public debt will decline fluctuate around that level in the medium- further, reaching an average of 52.8 percent of term. This trajectory will be shaped by ongoing GDP over 2025–2027. Risks to the outlook domestic pressures, including wage growth, as include heightened geopolitical tensions and well as disrupted supply chains driven by shifts further uncertainty surrounding global trade in trade policy. The current account deficit and economic policies. These factors could is expected to fluctuate around 3.7 percent further impact near-term growth in the EU, of GDP from 2025, rising to 4.1 percent by which remains Albania’s key economic partner. 2027 but remain below the historical average. Domestic fiscal risks from public-private While major public capital investments will partnerships and state-owned enterprises add to drive higher imports, continued improvements vulnerabilities. However, effective EU Growth of service exports will help keep the deficit Agenda implementation and strong tourism below historical levels. Albania’s primary fiscal receipts represent upsides to the uncertainty. 80 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH ALBANIA - Selected Economic Indicators ALBANIA 2022 2023 2024e 2025f 2026f 2027f Real GDP growth (percent) 4.8 3.9 3.9 3.2 3.1 3.1 Composition (percentage points): Consumption 4.3 1.0 3.8 2.5 2.4 2.5 Investment 0.3 -0.3 1.6 1.9 1.5 1.5 Net exports 0.2 3.2 -1.5 -1.3 -0.9 -0.8 Exports 5.4 3.3 0.2 1.3 1.3 1.3 Imports (-) 5.2 0.1 1.8 2.5 2.1 2.1 Consumer price inflation (percent, period 6.7 4.8 2.2 3.0 3.0 3.0 average) Public revenues (percent of GDP) 26.6 27.2 28.1 28.4 28.5 28.3 Public expenditures (percent of GDP) 30.3 28.5 28.9 30.5 30.1 30.2 Of which: Wage bill (percent of GDP) 3.9 4.2 4.5 4.8 4.8 4.7 Social benefits (percent of 11.3 10.7 10.9 10.8 10.7 10.8 GDP) Capital expenditures (percent 5.2 5.0 5.0 5.5 5.7 5.9 of GDP) Fiscal balance (percent of GDP) -3.6 -1.3 -0.8 -2.1 -1.6 -1.9 Primary fiscal balance (percent of GDP) -1.8 0.7 1.3 0.2 0.6 0.3 Public debt (percent of GDP) 60.3 54.5 51.7 51.2 50.3 49.4 Public and publicly guaranteed debt 64.1 57.5 54.2 53.7 52.7 51.9 (percent of GDP) Of which: External (percent of GDP) 30.0 26.2 24.0 23.2 22.2 21.7 Goods exports (percent of GDP) 10.7 8.4 7.0 8.0 8.0 9.0 Goods imports (percent of GDP) 34.4 29.3 28.1 29.1 29.4 29.7 Net services exports (percent of GDP) 13.3 15.4 15.6 14.5 14.0 14.1 Trade balance (percent of GDP) -10.4 -5.5 -5.5 -6.6 -7.4 -6.6 Net remittance inflows (percent of GDP) 4.6 4.3 4.2 4.2 4.1 4.0 Current account balance (percent of GDP) -5.9 -1.2 -2.4 -3.7 -4.0 -4.1 Net foreign direct investment inflows 6.6 5.8 5.0 5.6 5.9 6.2 (percent of GDP) External debt (percent of GDP) 54.0 46.3 40.1 39.4 38.7 38.6 Real private credit growth (percent, 2.9 -1.8 7.8 - - - period average) Nonperforming loans (percent of gross 5.0 4.7 4.2 - - - loans, end of period) Unemployment rate (percent, period 10.9 10.1 9.4 - - - average) Youth unemployment rate (percent, 24.9 23.6 21.7 - - - period average) Labor force participation rate (percent, 62.4 62.4 63.7 - - - period average) GDP per capita, PPP (current 19,430 21,208 22,035 22,740 23,445 24,172 international $) Poverty rate (percent of population) 21.7 19.0 17.3 16.0 14.9 13.8 Source: Country authorities, World Bank estimates and projections. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 81 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Bosnia and Herzegovina • Real growth improved to 2.6 percent in 2024, driven by increased consumption and investment. • Commodity prices remained high, but overall inflation slowed to 1.7 percent owing to drop in energy prices. • The fiscal deficit widened due to higher spending on wages, goods and services. Public debt levels remained moderate. Key conditions and challenges those with more than 2 children or members with disability being most vulnerable. Low To begin EU accession negotiations, Bosnia investment rates and a private consumption-led and Herzegovina (BiH) must address 14 growth model create challenges for achieving predominantly political measures concerning faster economic convergence with the EU27. democracy, the rule of law, fundamental rights, Accelerating key structural reforms, including and public administration. Concurrently, improving the oversight and management of advancements in internal market integration, state-owned enterprises, enhancing the business state institutional consolidation, enhancing environment, improving youth employment state supervisory and regulatory institutions, policies, reducing labor costs, and transitioning and reducing an excessively large public sector from coal to green energy, is crucial. are required to complete economic criteria. BiH has benefited from macroeconomic stability Recent developments over the past decade through three key policy anchors: the Euro-linked currency board, the In 2024, real growth improved to 2.6 percent, nationwide collection of indirect taxes, and EU up from 1.9 percent in 2023, reflecting two accession prospects. Macroeconomic stability offsetting forces. First, domestic demand has been supported by fiscal prudence: during increased by 4.4 percent due to higher 2015-2019, fiscal surpluses were 1-3 percent of consumption and investment. Second, net GDP. Although fiscal deficits have re-emerged exports decreased by 23 percent owing to during, and after, the pandemic, public debt worsening terms-of-trade and an increase in levels remain relatively low, at approximately investment-driven imports. A slowdown in 34 percent of GDP. Despite achieving real inflation bolstered real disposable income, income growth of 3 percent annually since and private consumption. Average monthly 2015, per capita GDP remains only one-third net wages increased by 7.8 percent y-o-y of the EU27 average. The official poverty in December 2024. However, industrial rate fell from 16.9 percent in 2015 to 13.5 production growth continued to decline, percent in 2021, but significant vulnerability contracting 4 percent annually. Inflation slowed to economic shocks remains, with 40 percent to 1.7 percent in 2024, from 6.1 percent the of adult population reporting not being able year before. Prices of most goods and services to make ends meet for more than 1 month in increased faster than food prices, resulting the case of loss of the main source of household in core inflation (2.8 percent) outpacing income. Higher poverty rates are linked to lower food inflation (2.1 percent) in 2024. This labor market participation and educational deceleration in inflation resulted from a drop in attainment, with all-elderly households, and transport prices and a deceleration in prices of 82 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH housing, water, electricity, and gas. Labor force percent of GDP in 2024, 0.9 pp larger than participation improved during the first three the year before, owing to high wages and quarters of 2024 (LFS). Unemployment fell to spending on goods and services. Meanwhile, 12.2 percent, a 0.5 pp drop compared to the the current account deficit (CAD) widened to end of 2023, while the economic activity rate 4.6 percent of GDP in 2024 – 2.3 pp higher increased by 1 pp to 49.6 percent. However, than in 2023 – as the merchandise trade deficit improvements were driven by those with at widened to 22.2 percent of GDP. In 2024 least tertiary education; with more subdued almost three-fourths of the CAD was financed improvements among those with lower by the FDI inflows, mainly into the foreign- educational attainment. owned banking sector. Nevertheless, total external debt remains relatively low, below 50 Higher government spending contributed to percent of GDP. an estimated consolidated fiscal deficit of 2.5 Outlook Real GDP growth in BiH is projected to increase markets. Robust growth in private consumption to 2.7 percent in 2025, and 3.1 percent in 2026, and higher imports of consumer goods are with stronger real incomes boosting private expected to see the CAD deteriorate slightly consumption. Inflation is expected to increase but stabilize below 4.8 percent of GDP despite mainly driven by an increase in the price of food some medium-term pickup in exports of and services, triggered by the global economic goods and services. The outlook has significant uncertainty and implementation in 2025 of downside risks. A potential escalation of global the FBiH Government Decision to increase the economic uncertainty and domestic political minimum wage by 60 percent. The introduction frictions could lead to lower investments and of subsidies in 2025 to compensate employers delay essential economic structural reforms. for contributions (health and pension) will Ongoing conflicts in Ukraine and the Middle also add to the deficit, as will the expected set East could also constrain the EU’s economy, of fiscal laws intended to reduce the aggregate further affecting demand for BiH exports, contribution rate from 41.5 to 36 percent. In FDI and remittances. Inflation, reduced the short-term the attention of policy makers aggregate demand, and limited remittance is on meeting the legislative requirements for inflows pose additional challenges for poverty initiating EU accession negotiations, with only reduction. Maintaining pro-poor growth and little space for economic structural reforms improvements in welfare at the bottom of the in 2025, besides fiscal. By 2027, real output income distribution, as well as improving the growth is projected to reach 3.5 percent, sustainability of the pension fund and the well- supported by investments and consumption being of the elderly, will require improved labor stemming from improved economic conditions market participation, particularly at the lower in the EU and strengthening domestic labor end of educational attainment. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 83 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 BOSNIA AND HERZEGOVINA - Selected Economic Indicators BOSNIA AND HERZEGOVINA 2022 2023 2024e 2025f 2026f 2027f Real GDP growth (percent) 4.2 1.9 2.6 2.7 3.1 3.5 Composition (percentage points): Consumption - - 2.5 4.2 2.3 2.8 Investment - - 1.8 -0.2 0.8 0.6 Net exports - - -1.8 -1.3 0.0 0.1 Exports - - -0.5 -0.5 0.9 1.0 Imports (-) - - 1.2 0.8 0.9 0.9 Consumer price inflation (percent, period 14.0 6.1 1.7 3.0 1.8 1.4 average) Public revenues (percent of GDP) 40.2 40.8 42.7 43.3 43.5 43.9 Public expenditures (percent of GDP) 39.7 42.5 45.3 45.4 44.6 44.0 Of which: Wage bill (percent of GDP) 10.3 10.8 11.0 11.5 11.3 11.1 Social benefits (percent of GDP) 17.4 19.0 19.8 19.8 19.8 19.9 Capital expenditures (percent 3.5 3.7 4.1 4.2 4.1 3.9 of GDP) Fiscal balance (percent of GDP) 0.5 -1.6 -2.5 -2.2 -1.1 -0.1 Primary fiscal balance (percent of GDP) 1.1 -0.7 -1.4 -1.2 -0.1 0.7 Public debt (percent of GDP) 29.3 26.4 25.4 24.9 24.5 23.9 Public and publicly guaranteed debt 31.5 28.5 27.2 26.9 27.4 26.5 (percent of GDP) Of which: External (percent of GDP) 24.9 21.0 19.6 19.2 18.8 18.3 Goods exports (percent of GDP) 35.9 31.1 29.2 26.2 25.5 24.7 Goods imports (percent of GDP) 58.2 51.6 51.7 48.9 47.6 46.4 Net services exports (percent of GDP) 8.7 8.8 8.5 7.6 7.3 6.8 Trade balance (percent of GDP) -13.6 -11.7 -14.0 -15.1 -14.8 -14.9 Net remittance inflows (percent of GDP) 7.9 7.6 8.0 7.8 7.6 7.5 Current account balance (percent of GDP) -4.4 -2.3 -4.1 -4.9 -4.7 -4.8 Net foreign direct investment inflows 3.1 3.4 3.6 3.5 3.5 3.4 (percent of GDP) External debt (percent of GDP) 51.5 47.3 48.1 46.1 44.2 42.3 Real private credit growth (percent, period -8.1 -0.7 7.2 - - - average) Nonperforming loans (percent of gross 5.4 3.8 3.2 - - - loans, end of period) Unemployment rate (percent, period 15.4 13.2 12.7 - - - average) Youth unemployment rate (percent, period 35.1 30.1 30.1 - - - average) Labor force participation rate (percent, 47.6 47.8 49.1 - - - period average) GDP per capita, PPP (current international $) 17,898 18,256 18,731 19,311 19,987 20,747 Source: Country authorities, World Bank estimates and projections. 84 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH Kosovo • Economic performance in 2024 was positive, amid a declining trend in poverty, strong private consumption and decreasing inflation. Prudent fiscal policy has helped keep the fiscal deficit and debt low. • GDP growth in the medium term is expected to reach 3.8 percent, supported primarily by consumption • However, economic uncertainty, especially in global trade policy, could impact exports and growth in 2025 and 2026. Key conditions and challenges change in this direction. Despite a declining trend, poverty remains high and characterized by Kosovo’s economy continued its robust significant regional disparities. Poverty is more performance during 2024, although structural prevalent among people with lower education challenges hinder faster progress in income and families with children, hence accelerating growth and poverty reduction. A track record human capital accumulation remains a priority. of prudent fiscal management and continued Gains in gender equality have been modest. improvements in revenue generation, framed Low labor force participation and employment, within a solid rule-based fiscal framework, have especially among women, remain key supported stability over the course of the years. constraints to poverty reduction. Accelerating Balancing sustainability with development convergence with EU per capita income levels objectives requires further efforts in enhancing requires improvements in the governance tax revenue mobilization. Kosovo needs to framework and higher investments in human generate additional resources for its growing and physical capital, and the implementation investment needs, including in the areas of of the structural reform agenda. energy, infrastructure, human capital and connectivity. Improving the effectiveness of Recent developments public financial management remains critical to sustained revenue mobilization. Low firm Despite a challenging external environment, dynamism and access to finance continue real GDP growth remained robust in to hamper private sector development and 2024, averaging 4.4 percent supported by employment creation. Net exports subtracted declining inflation and higher wages. Private from growth in the last decade driven by low consumption continued to sustain growth in export competitiveness and import dependence. Q4 (4.2 percent), alongside a pickup in gross Economic uncertainty – especially regarding capital formation (9 percent). Exports of goods global trade policy – could impact prospects and services continued to increase in Q4 (11.1 for investment and growth. To create a more percent). On the supply side, manufacturing conducive environment for private sector and construction activity growth remained development and increase competitiveness, strong in Q4 (4.3 percent and 3.9 percent, Kosovo’s growth model requires further respectively). After averaging 1.6 percent in diversification of its production and export base. 2024, consumer inflation reached 1.7 percent The recent performance of the ICT and other by February 2025. However, domestic price business services sectors represents a positive pressures continued to persist, as reflected in the Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 85 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 increase in the production and construction Outlook cost index during 2024. Formal employment increased by 2.4 percent between January GDP growth is expected to reach 3.8 percent and September 2024. The current account in 2025 and 2026, driven by consumption deficit (CAD) increased, reaching 9 percent and investment activity. Higher wages, credit of GDP in 2024, driven by a deterioration growth and a high level of public transfers are of the goods balance. Remittances inflow expected to support consumption. An increase growth was modest (1.4 percent), reflecting in social spending and wages, and increased weaker activity in origin countries. Fiscal execution of public investment is expected to outturns have been positive with preliminary drive the fiscal deficit to 1 percent of GDP in data for 2024 indicating a deficit of 0.2 2025. The outlook is subject to a high degree percent of GDP. Robust tax revenue growth of uncertainty and risks. A further slowdown (9.3 percent), particularly from indirect taxes in EU activity, as well as heightened trade (10.6 percent), combined with rising, but still uncertainty, has the potential to negatively under-executed capital expenditures (16.7 affect growth through reduced demand of percent) contributed to this outcome. The goods and services exports and decreased financial sector remains stable and financial inward investment flows. At the domestic deepening continues. In 2024, the average level, delays in forming a new government (y/y) increase of new loans was 22 percent. could negatively impact investment and the Bank asset quality remains satisfactory, with implementation of the structural reform non-performing loans remaining stable at 2 agenda. Geopolitical uncertainty, and that percent by September 2024. Poverty reduction associated with the domestic political context, is projected to have continued, with a decline also entail risk. Kosovo has a lower elasticity of 3 percentage points in 2024 due to higher of poverty reduction in response to economic growth. growth compared to its peers. Therefore, further progress in reducing poverty will depend on the ability to sustain higher growth rates in the future. A tighter labor market could help boost wages, but policies to increase the quality of education and skills of lower educated workers could provide an additional boost. The decline in population, partly due to outmigration, could be offset by increasing female labor force participation, currently constrained by factors such as lack of childcare services. Expanding childcare services would improve labor market opportunities for women and enhance children’s school readiness through better early childhood education (ECE), while also creating additional job opportunities. 86 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH KOSOVO - Selected Economic Indicators KOSOVO 2022 2023 2024e 2025f 2026f 2027f Real GDP growth (percent) 4.3 4.1 4.4 3.8 3.8 3.8 Composition (percentage points): Consumption 2.7 3.4 4.1 4.0 4.2 4.2 Investment -1.1 1.4 1.6 1.3 1.3 1.3 Net exports 2.7 -0.5 -1.3 -1.7 -1.9 -1.9 Exports 6.4 2.8 1.9 1.3 1.1 1.1 Imports (-) 3.7 3.3 3.2 3.0 3.0 3.0 Consumer price inflation (percent, period 11.6 4.9 1.6 1.9 2.0 2.0 average) Public revenues (percent of GDP) 27.9 29.3 29.9 30.1 29.8 29.5 Public expenditures (percent of GDP) 28.4 29.6 30.1 31.2 31.1 31.0 Of which: Wage bill (percent of GDP) 7.3 7.9 8.0 8.2 8.1 8.1 Social benefits (percent of GDP) 8.1 7.0 7.6 7.2 7.1 7.1 Capital expenditures (percent 4.7 5.7 6.3 6.7 6.9 6.3 of GDP) Fiscal balance (percent of GDP) -0.5 -0.3 -0.2 -1.0 -1.3 -1.5 Primary fiscal balance (percent of GDP) -0.1 0.1 0.2 -0.7 -0.9 -1.1 Public debt (percent of GDP) 19.7 17.2 16.6 17.4 17.9 18.8 Public and publicly guaranteed debt 20.0 17.5 16.6 17.4 17.9 18.8 (percent of GDP) Of which: External (percent of GDP) 7.2 7.2 7.6 8.7 9.1 9.5 Goods exports (percent of GDP) 10.5 9.0 9.5 9.1 8.6 8.4 Goods imports (percent of GDP) 58.7 56.6 57.0 56.8 56.0 55.8 Net services exports (percent of GDP) 15.4 16.9 17.2 16.0 18.2 17.6 Trade balance (percent of GDP) -32.8 -30.7 -30.3 -31.7 -29.2 -29.8 Net remittance inflows (percent of GDP) 13.4 13.4 12.8 11.9 11.3 11.1 Current account balance (percent of GDP) -10.3 -7.6 -9.0 -8.7 -7.8 -7.3 Net foreign direct investment inflows 6.3 5.9 6.1 6.0 6.0 6.0 (percent of GDP) External debt (percent of GDP) 38.6 39.8 40.4 42.5 43.6 44.7 Real private credit growth (percent, period 5.2 8.8 12.2 - - - average) Nonperforming loans (percent of gross 2.0 2.0 1.9 - - - loans, end of period) Unemployment rate (percent, period average) 12.6 10.9 - - - - Youth unemployment rate (percent, period 21.4 17.3 - - - - average) Labor force participation rate (percent, 38.6 40.7 - - - - period average) GDP per capita (US$) 5,445 6,158 6,643 7,144 7,745 8,188 Poverty rate (percent of population) 22.2 19.5 16.4 14.4 12.4 10.5 Source: Country authorities, World Bank estimates and projections. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 87 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Montenegro • • Montenegro experienced strong post-pandemic growth, which moderated to 3 percent in 2024 and is projected to remain at 3 percent in 2025, amid global uncertainties. • • While public debt is sustainable, expected to average 65.6 percent of GDP from 2025-2027, uneven debt repayments pose a vulnerability that requires careful fiscal management. • • EU accession remains a strategic priority, amidst progress on economic reforms and political stability. Key conditions and challenges 2027 further adds to the fiscal challenges. After three years of political instability following Montenegro, with its small open economy and the 2020 elections which represented the first EU aspirations, has demonstrated resilience major power shift in 30 years, Montenegro’s despite being susceptible to external and domestic government, formed in October 2023 and shocks. As a euroized economy, it relies heavily reshuffled in July 2024, has made EU accession on fiscal policy for macroeconomic stability. its priority. In June 2024, a positive Interim The country’s heavy dependence on tourism, Benchmark Assessment Report marked a crucial coupled with environmental degradation, step toward closing chapters and moving closer highlights the need for an improved approach to EU membership. Yet, the delay in the 2025 to sustainable development. Following a 15.3 budget adoption highlights continuing political percent contraction in 2020, the economy challenges. recovered quickly in 2021-23, averaging an annual growth of 8.6 percent. However, growth Recent developments slowed to 3 percent in 2024, primarily due to a weaker-than-expected tourism season. In 2022, GDP growth slowed from 6.3 percent in 2023 Montenegro initiated significant fiscal reforms to 3.0 percent in 2024. Although private to stimulate job creation and raise wages under consumption and investment remained robust, the Europe Now program, which included supporting growth, a 5 percent decline in abolishing healthcare contributions, adopting tourist overnight stays and stagnant industrial progressive income taxation, introducing a tax production due to a decline in electricity allowance, and increasing the minimum wage. production, negatively impacted net exports In 2024, the government implemented the and overall growth. Meanwhile, employment second phase of this program, further raising continued to expand across all sectors. 2024 minimum pensions and wages, and halving LFS data show an employment rate of 56.4 pension contributions. These measures, while percent and an activity rate of 64.3 percent, leading to a tax revenue shortfall, even with with unemployment falling to 11.5 percent. increased indirect tax collections, are expected By December 2024, average net monthly to keep the budget deficit at above 3 percent wages had risen to €1,012, marking a 21.7 in the medium term. Even though Montenegro percent y/y real increase following the pension successfully reduced its public debt from 103.5 contributions cuts. Inflation dropped to 3.4 percent of GDP in 2020 to 61.3 percent in percent in 2024, a significant decrease from 2024, a lumpy debt repayment profile in 2025- 8.6 percent in 2023. Poverty (income below 88 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH $6.85/day in 2017 PPP) is projected to have debt. The fiscal deficit rose to 3.1 percent of declined to 8.9 percent in 2024. The financial GDP in 2024. Despite the absence of one-off sector remains robustly capitalized and liquid, revenues that contributed to a budget surplus with strong credit growth. As of December of 0.6 percent of GDP in 2023, revenues 2024, the capital adequacy ratio stood at 19.4 still grew strongly by 7 percent. The largest percent, and non-performing loans dropped to contributions to revenue growth came from 4.1 percent from 5.8 percent a year ago. VAT and CIT. Meanwhile, expenditures increased by 17 percent, primarily due to In 2024, the current account deficit (CAD) higher social spending (including higher widened due to lower service exports and a minimum pensions) and increased capital decline in net income accounts. Net FDI grew expenditures. Public debt is estimated at 61.3 by 13 percent, covering just over a third of percent of GDP, with around 4 percent of the CAD, with the remainder covered by new GDP held in deposits. Outlook Amid an unfavorable global outlook and out of the labor force, mainly in the northern trade policy uncertainties, GDP growth is region. Thus, reducing poverty requires targeted projected to average 3 percent during 2025- policies alongside sustained economic growth. 27, primarily driven by private consumption The fiscal deficit is expected to increase in 2025 and investments. Higher net real wages, credit to approximately 4 percent of GDP before growth, and solid employment are expected gradually declining to 3.6 percent in 2027. to drive a 3 percent growth in 2025, despite Implementing additional fiscal consolidation the closure of the thermal power plant for measures would enhance fiscal performance. reconstruction, which will require increased Public debt is expected to rise to around energy imports. The CAD is projected to 65.8percent of GDP in 2027. Ensuring debt widen to 18.5 percent of GDP in 2025 due to sustainability will necessitate fiscal discipline, higher energy imports, with just over a third particularly given the significant financing of it financed by net FDI, the rest financed needs over 2025-27 and elevated external through new borrowing. Inflation is expected financing costs. Downside risks include to soften to 2.9 percent in 2025 and further extended geopolitical and trade uncertainties to 2.3 percent in 2026. Poverty is projected that could have significant additional adverse to decline to 7.5 percent in 2027. Most of the indirect effects on Montenegro’s growth poor are chronically unemployed, students, or through its main trading partners. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 89 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 MONTENEGRO - Selected Economic Indicators MONTENEGRO 2022 2023 2024e 2025f 2026f 2027f Real GDP growth (percent) 6.4 6.3 3.0 3.0 2.9 3.0 Composition (percentage points): Consumption 8.1 5.9 7.6 5.2 3.7 3.5 Investment 3.3 0.7 1.3 1.1 0.9 0.9 Net exports -5.0 -0.3 -5.8 -3.4 -1.6 -1.4 Exports 9.4 4.3 -1.5 0.0 1.5 1.7 Imports (-) 14.3 4.5 4.2 3.4 3.2 3.0 Consumer price inflation (percent, period 13.0 8.6 3.4 2.9 2.3 2.0 average) Public revenues (percent of GDP) 39.2 42.2 42.7 41.4 41.8 41.9 Public expenditures (percent of GDP) 42.9 41.6 45.9 45.5 45.6 45.6 Of which: Wage bill (percent of GDP) 10.5 10.6 10.6 10.6 10.5 10.5 Social benefits (percent of GDP) 11.3 11.9 13.6 13.8 13.8 13.8 Capital expenditures (percent 6.0 5.0 5.7 5.8 5.8 5.8 of GDP) Fiscal balance (percent of GDP) -3.7 0.6 -3.1 -4.0 -3.7 -3.6 Primary fiscal balance (percent of GDP) -2.1 2.4 -1.1 -1.8 -1.3 -1.2 Public debt (percent of GDP) 69.2 59.3 61.3 64.6 66.5 65.8 Public and publicly guaranteed debt 70.9 60.8 63.0 66.2 68.0 67.2 (percent of GDP) Of which: External (percent of GDP) 61.8 52.3 58.0 60.1 61.9 60.0 Goods exports (percent of GDP) 12.9 10.2 8.9 8.1 8.6 8.8 Goods imports (percent of GDP) 58.0 52.9 53.0 53.6 53.3 52.5 Net services exports (percent of GDP) 22.2 24.1 21.4 21.2 20.6 20.2 Trade balance (percent of GDP) -22.9 -18.6 -22.7 -24.3 -24.1 -23.5 Net remittance inflows (percent of GDP) 6.5 4.7 4.6 4.7 4.7 4.6 Current account balance (percent of GDP) -12.9 -11.3 -17.3 -18.5 -18.1 -17.4 Net foreign direct investment inflows 13.2 6.2 6.6 6.9 6.9 6.9 (percent of GDP) External debt (percent of GDP) 158.7 129.6 127.6 .. .. .. Real private credit growth (percent, period -4.9 -2.3 7.2 - - - average) Nonperforming loans (percent of gross 6.3 5.8 4.1 - - - loans, end of period) Unemployment rate (percent, period 14.7 13.1 11.5 - - - average) Youth unemployment rate (percent, period 29.4 23.3 26.2 - - - average) Labor force participation rate (percent, 58.9 63.9 63.7 - - - period average) GDP per capita, PPP (current international 27,027 30,887 33,148 34,814 36,638 38,782 $) Poverty rate (percent of population) 10.5 9.3 8.9 8.5 8.0 7.5 Source: Country authorities, World Bank estimates and projections. 90 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH North Macedonia • Growth in 2024 edged up, supported by services and highway construction, while industrial production declined due to falling external demand for automotive supply-chain products. • Inflationary pressures resurfaced at the end of 2024, despite continued efforts to control domestic prices. As public sector wages, pensions, and subsidies increased, fiscal consolidation has been postponed to 2025. • The outlook remains positive, supporting a decline in poverty, but underlying structural vulnerabilities are rising. Key conditions and challenges Recent developments Growth strengthened in 2024, predominantly driven After a significant revision of national accounts, by public investment and public consumption. real GDP growth moved up to 2.8 percent Poverty, as measured by the upper middle-income in 2024. Output growth was driven by poverty line of USD 6.85 per day, is estimated to government consumption and investments, have declined marginally in 2024 due to easing while net exports dived into negative territory. inflation and rising real wages vis-à-vis 2023. Fiscal On the production side, growth was led by sustainability remains a key challenge. The average services and construction, largely related to fiscal deficit with the State Roads Enterprise, which highways, while manufacturing battled with has remained at 5 percent of GDP since 2021, is weak external demand for car-supply parts. expected to decrease to 4 percent—by the end of Labor market indicators (15+) improved the projection horizon. Newly introduced fiscal rules further in 2024, with a 0.4 pp increase in on the deficit and debt were breached in 2024 led the employment rate and 0.1 pp increase in by higher social transfers, public sector wages, and the participation rate to 45.8 percent and interest payments. Fiscal consolidation efforts will 52.3 percent, respectively, but gains were not be needed ahead of large Eurobond repayments uniform. While the total unemployment rate due in 2026-2028. At the same time, a continuous dropped to 12.4 percent, this was driven by buildup of price pressures, including due to real those with primary and secondary education. wage growth above productivity increases, prolonged The unemployment rate among those with inflationary pressures. Containing further wage higher education increased by 1.7 pp. The growth, eliminating anti-competitive practices, and youth unemployment rate (15-24) remains enabling enforcement of competition rules can high at 28.9 percent. Headline inflation went foster competition and reduce markups and thus up from a 3-year low of 2.2 percent in August price pressures. The long-term growth prospects are 2024 to 5 percent in February 2025, in part due strongly tied to the pace of reform implementation to high food prices despite the introduction of and structural transformation of the economy. price and margin caps for over 1,000 products. Implementation of the Reform Plan that would Both core inflation and producer prices surged advance the European Union (EU) accession above 5 percent, as wages, albeit decelerating, process, as well as focusing on labor, energy, digital, continued growing. As inflation decelerated to and governance reforms could bring important 2.7 percent in March 2025, the Central Bank growth dividends. kept the main policy rate unchanged at 5.35 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 91 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 percent. The fiscal deficit (general government) been steady, around 20 percent. Credit growth, increased to 4.6 percent of GDP in 2024, with at 11.2 percent at end-2024, picked up by close significant under-execution of capital spending to 6 pp relative to end-2023, while the NPL and reallocation to rising current spending. ratio remained stable at 2.6 percent at end- The public debt to GDP ratio surged to 62.4 2024. The current account deficit deepened percent, with arrears at 4.1 percent of GDP to 2.25 percent of GDP in 2024, as the trade in 2024. The stability of the banking sector deficit widened to 20 percent, financed by has been strengthened with an increase in the strong foreign direct investment (FDI) inflows, capital adequacy ratio to a historical high of services exports and remittances. External debt 19 percent in Q3 2024, and solvency at above stood at 76.9 percent of GDP in Q3 2024, of pre-pandemic value, while the liquidity rate has which 56.4 percent is long-term. Outlook The medium-term outlook remains positive, among youth and those with lower levels of but underlying vulnerabilities are rising. The education would be needed to sustain poverty recent shifts in global trade policy and increased reduction in the medium-to-long term. The uncertainty, while having a low direct impact, medium-term growth forecast relies on the will indirectly affect the economy through assumption of the accelerated pace of EU multiple channels. Growth is expected to accession negotiations and stronger reform average 2.8 percent during 2025-2027, below effort to support the structural transformation earlier projections, as higher spending on public of the economy. Low diversification of products investment projects is offset by slowing private and markets undermines the focus of an export- consumption and exports. Headline inflation led long-term growth strategy. Moreover, the is projected to remain above the long-term persistence of low productivity, inefficient average until 2027, but to fall towards the 2 capital allocation, weaker external demand, and percent target thereafter. Supported by the inflation-suppressed consumption continue positive growth outlook, the USD 6.85 poverty to overshadow the projection horizon. In this rate is projected to decline by a further 1.4pp context, advancing on the EU Reform Plan, by the end of 2027, but implications of rising including on green transition goals, is crucial for trade policy costs on the labor market and fostering sustainable growth over the medium poverty remain uncertain in the short-term, and to long term. improvements in the labor market participation 92 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH NORTH MACEDONIA - Selected Economic Indicators NORTH MACEDONIA 2022 2023 2024e 2025f 2026f 2027f Real GDP growth (percent) 2.8 2.1 2.8 2.6 2.7 2.8 Composition (percentage points): Consumption 3.6 0.7 2.7 1.7 1.7 1.7 Investment 4.6 -4.1 2.3 1.0 1.3 1.5 Net exports -5.4 5.5 -2.2 -0.1 -0.3 -0.4 Exports 7.4 -0.5 -2.8 -1.0 1.6 2.2 Imports (-) 12.8 -6.0 -0.6 -0.9 1.9 2.6 Consumer price inflation (percent, period 14.2 9.4 3.5 2.5 2.3 2.0 average) Public revenues (percent of GDP) 31.6 32.7 34.0 34.5 34.5 34.8 Public expenditures (percent of GDP) 35.9 37.1 38.6 38.7 38.4 38.3 Of which: Wage bill (percent of GDP) 6.4 6.8 7.5 7.5 7.4 7.4 Social benefits (percent of 16.2 16.6 18.0 17.6 17.1 16.8 GDP) Capital expenditures (percent 4.1 5.3 3.9 4.4 4.5 4.6 of GDP) Fiscal balance (percent of GDP) -4.3 -4.4 -4.6 -4.2 -3.9 -3.5 Overall fiscal balance with the Public -4.7 -4.6 -4.8 -4.4 -4.2 -3.8 Enterprise for State Roads included (percent of GDP) Primary fiscal balance (percent of GDP) -3.2 -2.9 -2.7 -2.3 -1.8 -1.2 Public debt (percent of GDP) 49.6 49.7 53.8 55.1 56.3 57.1 Public and publicly guaranteed debt 58.0 58.1 62.4 64.0 63.6 63.1 (percent of GDP) Of which: External (percent of GDP) 38.7 39.1 40.0 37.3 37.3 37.0 Goods exports (percent of GDP) 56.2 49.7 43.6 41.8 42.0 42.0 Goods imports (percent of GDP) 82.9 67.8 63.7 61.1 61.5 62.2 Net services exports (percent of GDP) 5.8 5.0 6.9 7.2 7.5 8.5 Trade balance (percent of GDP) -20.9 -13.0 -13.2 -12.1 -12.0 -11.7 Net remittance inflows (percent of GDP) 2.7 2.3 2.1 2.0 2.0 2.0 Current account balance (percent of GDP) -6.1 0.4 -2.3 -2.8 -2.4 -2.0 Net foreign direct investment inflows 5.0 3.4 7.1 2.5 2.3 2.0 (percent of GDP) External debt (percent of GDP) 82.8 76.8 79.2 78.8 78.1 77.7 Real private credit growth (percent, period -4.0 -2.9 3.5 - - - average) Nonperforming loans (percent of gross 2.8 2.7 2.6 - - - loans, end of period) Unemployment rate (percent, period average) 14.4 13.1 12.4 - - - Youth unemployment rate (percent, period 32.5 29.3 29.0 - - - average) Labor force participation rate (percent, 55.2 52.3 52.3 - - - period average) GDP per capita, PPP (current international $) 20,329 20,756 21,337 21,892 22,483 23,112 Poverty rate (percent of population) 17.7 17.4 16.6 16.0 15.7 15.2 Source: Country authorities, World Bank estimates and projections. Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 93 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Serbia • The growth rate of the Serbian economy in 2024 is estimated at 3.9 percent. • Growth of GDP is expected to slow down in 2025, with risks tilted to the downside. • The incidence of poverty declined to 7.7 percent in 2024 and is projected to continue to decline albeit at slower rate, as the remaining poor are often characterized by chronic unemployment and thus not benefiting from economic growth. Key conditions and challenges Recent developments Growth in 2024 is estimated at 3.9 percent, Relatively strong growth in 2024 was driven y/y, higher than the previously projected 3.5 by a recovery of private sector consumption percent, thanks to a better-than-expected and investment. On the other hand, net performance of the construction and services exports made a small negative contribution to sectors in the first half of the year. However, a growth in 2024 due to lower-than-expected severe drought that hit Serbia in the summer export growth, as external demand weakened, of 2024 significantly impacted agriculture and imports remained at a high level (in and contributed to a growth slowdown in the part explained by increased investment). second half of the year. On the expenditure side, Manufacturing remained resilient to external consumption and investment were the main developments (i.e. lower demand from the drivers of growth in 2024 while net exports had EU), with output growing by 3.1 percent y/y. a marginal negative contribution. Consumption Labor market indicators continued to improve started to recover due to the continued increase in 2024. The unemployment rate averaged 8.6 in real incomes (both in the public and private percent in 2024, and the employment rate sectors). However, there is still a high degree continued to increase (reaching a record high of volatility associated with agriculture (and level of 51.4 percent) even though informal related food industry) output. This underscores employment declined marginally. Wages the critical need for Serbia to introduce policy increased by 14.2 percent in nominal terms and investment measures to mitigate the (9.2 percent in real terms) in 2024 compared negative impact of increasing weather shocks to 2023. Pensions on average were 19.4 percent and to promote private sector participation in higher in 2024 than in 2023 (in nominal these measures. Over the medium term, under terms). The poverty level (based on the upper- the baseline scenario, the Serbian economy is middle income line of $6.85/day in 2017 PPP), expected to grow at around 3.5-4 percent, based stayed at an estimated 7.3 percent between on higher public investment. With limited 2022 and 2023, as private consumption growth space for future stimulus packages, structural was modest, affected by the high inflation reforms are needed to accelerate private sector- and the phasing out of government support led growth. programs, which had fueled the strong post- COVID-19 recovery of 2021. Inflation started to decline gradually in the first half of 2024 before increasing again in the second half of the 94 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH year. The inflation index edged up again due to account deficit increased significantly in 2024 an increase in food prices, rents, and communal to reach 6.3 percent of GDP (compared to 2.4 services. The NBS lowered the key policy rate percent in 2023). The trade balance widened by to 5.75 percent in September 2024 and has 22 percent in euro terms in 2024, to reach 9.8 kept it unchanged since. Budgetary revenues percent of GDP. At the same time the surplus overperformed significantly in 2024 (up 13.5 in services trade decreased by 11 percent in euro percent in nominal terms, or 8.5 percent in terms, while the surplus in net transfers declined real terms, y/y), primarily thanks to a higher- by 5 percent. The net income deficit increased than-planned collection of contributions for by 31 percent. Net FDI inflows continued to social insurance, VAT, and excises. Over the perform strongly, increasing by 7.9 percent in same period, expenditures increased by 13.1 euro terms (to reach EUR 4.6 billion in 2024). percent in nominal terms (8.1 percent in real Foreign currency reserves increased to a record terms). As a result, the consolidated fiscal high level of EUR 29.3 billion by year-end. deficit increased only slightly in nominal terms Overall credit increased by 10 percent (y/y) but remained the same as a share of GDP at 2 through December 2024. However, loans to percent. Public debt hovered around 48 percent businesses increased by only 5.6 percent by of GDP throughout 2024 and reached 47.6 year-end (y/y). Gross nonperforming loans percent at the end of December. The current declined to 2.5 percent in December 2024. Outlook The Serbian economy is expected to grow at compared to 2023/2024 since the government around 3.5-4 percent over the medium term, embarked on large-scale public infrastructure driven primarily by consumption and, to spending plans. Sustained economic growth will some extent, by investment. However, there continue to lift more Serbians out of poverty. are downside risks. Downside risks relate However, the remaining poor are increasingly to the performance of SOEs which might concentrated among pensioners, the long-term require support from the budget, external unemployed, or those completely out of the demand for Serbian exports might decrease labor force. Thus, targeted social assistance or given uncertainty in trade policy, and the other direct channels will become essential to impact of extreme weather on agriculture and ensure further poverty reduction. infrastructure could be significant. Inflation is expected to decline gradually and stay within the NBS target band over the medium term. The fiscal deficit is now projected to increase Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 95 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 SERBIA - Selected Economic Indicators SERBIA 2022 2023 2024e 2025f 2026f 2027f Real GDP growth (percent) 2.6 3.8 3.9 3.5 3.9 4.2 Composition (percentage points): Consumption 2.5 -0.1 3.0 3.1 3.3 3.4 Investment 1.0 1.2 4.3 1.4 1.6 1.5 Net exports -0.8 2.7 -3.4 -1.0 -1.0 -0.6 Exports 8.9 1.6 1.9 2.1 3.2 3.6 Imports (-) 9.7 -1.1 5.3 3.0 4.2 4.2 Consumer price inflation (percent, period 11.9 12.1 4.6 3.1 3.0 3.0 average) Public revenues (percent of GDP) 41.3 39.4 40.9 41.1 40.8 40.8 Public expenditures (percent of GDP) 44.1 41.4 42.9 44.1 43.9 43.8 Of which: Wage bill (percent of GDP) 9.2 8.8 9.4 9.7 9.7 9.8 Social benefits (percent of 12.5 12.5 13.1 13.3 13.4 13.2 GDP) Capital expenditures (percent 6.8 6.4 7.3 7.3 7.3 7.4 of GDP) Fiscal balance (percent of GDP) -2.9 -2.0 -2.0 -3.0 -3.0 -3.0 Primary fiscal balance (percent of GDP) -1.4 -0.4 -0.1 -0.9 -0.9 -1.0 Public debt (percent of GDP) 50.5 46.0 45.3 47.3 46.8 46.3 Public and publicly guaranteed debt 52.9 48.4 47.5 47.3 46.8 46.3 (percent of GDP) Of which: External (percent of GDP) 34.0 33.7 33.8 36.5 36.0 36.0 Goods exports (percent of GDP) 42.4 37.1 34.6 34.2 33.6 32.3 Goods imports (percent of GDP) 57.2 46.0 44.5 45.9 45.1 43.8 Net services exports (percent of GDP) 3.6 4.1 3.3 3.1 3.2 3.2 Trade balance (percent of GDP) -11.2 -4.8 -6.6 -8.6 -8.3 -8.3 Net remittance inflows (percent of GDP) 5.9 4.9 4.3 4.4 4.4 4.2 Current account balance (percent of GDP) -6.6 -2.4 -6.3 -7.0 -6.7 -6.5 Net foreign direct investment inflows 6.8 5.6 5.4 4.8 4.9 4.7 (percent of GDP) External debt (percent of GDP) 66.0 60.4 60.5 60.4 60.0 57.7 Real private credit growth (percent, period -2.7 -9.2 0.8 - - - average) Nonperforming loans (percent of gross 3.4 3.2 2.5 - - - loans, end of period) Unemployment rate (percent, period 9.5 9.4 8.6 - - - average) Youth unemployment rate (percent, 24.3 25.0 23.0 - - - period average) Labor force participation rate (percent, 54.7 55.4 56.2 - - - period average) GDP per capita, PPP (current international $) 24,655 26,305 27,985 29,866 31,776 33,807 Poverty rate (percent of population) 8.3 8.2 7.7 7.0 6.2 5.8 Source: Country authorities, World Bank estimates and projections. 96 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans ADAPTING FOR SUSTAINABLE GROWTH Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans 97 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.27 SPRING 2025 Adapting for Sustainable Growth Western Balkans Regular Economic Report No. 27 - Spring 2025 98 Spotlight: From Climate Shocks to Green Careers - Supporting Workforce Transitions in the Western Balkans