Report No. 169605-XK REPUBLIC OF KOSOVO Systematic Country Diagnostic Update REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Acknowledgments © 2022 International Bank for This report was prepared by a World Bank Group team led by Ana Maria Oviedo Reconstruction and Development / (Senior Economist, EECPV), Besart Myderrizi (Economist, EECM2), Asli Senkal The World Bank (Senior Economist, EECM2), and Levent Karadayi (Economist, CELCE), comprising the following team members from across the World Bank Global Practices, IFC Rruga Prishtine - Fushe Kosovo and MIGA: Gayané Hezo Naroyan, Lindita Lepaja, Mjellma Rrecaj (ECCKO), Silvia 10060 Pristina, Kosovo Mauri (SCAAG), Blerta Qerimi, Alper Ahmet Oguz (EECF2), Oya Pinar Ardic Alper Telephone: +383-38-224-454-1100 (EFNFI), Mediha Agar, Jonas Arp Fallov, Shiho Nagaki (EECG2), Harald Jedlicka Internet: https://www.worIdbank.org/ (ETIIC), Angela Demas (HECED), Ha Thi Hong Nguyen, Mrike Aliu (HECHN), en/country/kosovo Stefanie Koettl-Brodmann, Sarah Coll-Black, Zoran Anusic (HECSP), Natalija Gelvanovska-Garcia (IDD01), Rhedon Begolli (IECE1), Ian John Douglas Gillson (ETIRI), Violane Konar-Leacy, Eugeniu Osmochescu (CEUA1), Ramon Munoz- Rights and Permissions Raskin (IECT1), Nino Pkhikidze (ITRGK), Shpresa Kastrati, Klas Sander (SCAEN), The material in this work is subject Luiza A. Nora, Natacha Caroline Lemasle (SCASO), Axel E. N. Baeumler, Paul to copyright. Because The World Scott Prettitore (SCAUR), Caleb Travis Johnson (SMNUR), Zhimin Mao, Trandelina Bank encourages dissemination of Baraku (SCAWA), Nadia Fernanda Piffaretti, Sara Batmanglich, Sara Gustafsson its knowledge, this work may be (GTFS1), Lundrim Aliu (ECREX), Jonathan George Karver (EPVGE), Carlos Gustavo reproduced, in whole or in part, for Ospino Hernandez (EECPV). Sean Lothrop provided editorial services. noncommercial purposes as long as full attribution to this work is given. The work was carried out under the overall guidance of Anna M. Bjerde (Regional Vice President, ECAVP), Xiaoqing Yu (Director, Strategy and Operations, ECAVP), Any queries on rights and licenses, Wiebke Schloemer (Regional Director, CATDR), Jesper Kjaer (Chief Operations including subsidiary rights, should be Officer, CEUPM), Linda Van Gelder (Country Director, Western Balkans), Lalita M. addressed to World Bank Publications, Moorty (EFI Regional Director), Massimiliano Paolucci (Kosovo Country Manager), The World Bank Group, 1818 H Street Elene Imnadze (Senior Operations Officer, ECCKO), Ary Naim (IFC Country NW, Washington, DC 20433, USA; Manager), Ashley D. Taylor (Economic Adviser, ECAVP), Salman Zaidi (Poverty fax: 202-522-2625; and Equity Practice Manager), Jasmin Chakeri (Macroeconomics, Trade and e-mail: pubrights@worldbank.org. Investment Practice Manager), Richard James Lowden Record (Lead Country Economist and EFI Program Leader), Iamele P. Rigolini (HD Program Leader) People forge ideas, people mold and Simon David Ellis (SD/Infrastructure Program Leader), Visar Perani (Country dreams, and people create art. To Officer, CEUKO), Gianfilippo Carboni (Risk Management Officer, MIGEC). connect local artists to a broader audience, this report features the The team thanks the SCD peer reviewers Reena C. Badiani-Magnusson (EFI painting “Prizren pavements” by Program Leader and Senior Economist) and Fernando Gabriel Im (Senior Enver Hoxhaj, artist based in Prizren, Economist) for their insightful feedback. The team is also grateful to the Kosovo. Government of Kosovo, as well as donors, academics and civil society representatives who participated in the SCD Update consultations and provided Graphic design by: ET-digital. insightful comments and suggestions. ii REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Republic of Kosovo Systematic Country Diagnostic Update Contents: ACKNOWLEDGMENTS ii FIGURES v ABBREVIATIONS AND ACRONYMS vii 1. Introduction 1 2. Key recent economic and social developments 4 3. Policy Pathways to accelerate progress 9 Pathway 1: Increasing returns and equity of fiscal policy 11 Pathway 2: Improving business environment and trade integration 14 Pathway 3: Investing in human capital and increasing inclusion 18 Pathway 4: Improving environmental management and planning 24 4. Priorities for the policy agenda 28 Pathway 1: Increasing returns and equity of fiscal policy 29 Increasing equity of taxation and transfers 29 Increasing the effectiveness and returns to public spending 30 Maintaining fiscal sustainability 31 Pathway 2: Improving business environment and trade integration 32 Integrating Kosovo in the global economy 32 Building a more transparent and predictable business 33 environment Ensuring infrastructure supports sustainable productivity growth 34 iii REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Pathway 3: Investing in human capital and increasing inclusion 34 Building inclusive skills for the future and improve 34 the school-to-work transition Providing quality and affordable health services 36 Increasing equity and sustainability of social protection system 36 Pathway 4: Improving environmental management and planning 37 Prepare for climate change and a just transition 37 Clean and maintain natural resources 38 Foster productivity growth in agriculture 39 List of Annexes: Annex 1: Selected Economic Indicators — 2019-2024 40 Annex 2: Poverty trends and profiles 41 Annex 3: Social inclusion challenges 46 Women 46 Roma, Ashkali and Egyptian communities 47 Kosovo Serb community 47 Internal Displaced People (IDPs) and Returnees 48 Persons with Disabilities 48 Annex 4: Summary of Kosovo’s Risk and Resilience Assessment 49 Annex 5: Data availability and quality to inform policy decisions 50 Annex 6: Knowledge gaps 53 Annex 7: Team members 56 Annex 8: Consultations 57 Annex 9: List of references 59 iv REPUBLIC OF KOSOVO Systematic Country Diagnostic Update List of Figures: Figure 1: Kosovo experienced a decade of robust growth (2010- 4 2019)… Figure 2: …with an especially robust expansion observed 4 between 2014 and 2019. Figure 3: Kosovo has achieved the highest vaccination rate 5 against COVID-19 in the Western Balkans Figure 4: Consumption drives growth on the demand side… 6 Figure 5: …while services drive growth on the supply side. 6 Figure 6: Agriculture contributes less to total value added than it 6 does among peer countries… Figure 7: …and the agricultural sector contributes an especially 6 small share to total employment. Figure 8: The labor market has low labor-force participation, high 7 unemployment, and vast gender gaps Figure 9: Poverty reduction was halted by the pandemic, but it 8 resumed in 2021 Figure 10: Emigration from Kosovo accelerated between 2014 8 and 2019 Figure 11: Remittance inflows were stable but increased during 8 the pandemic Figure 12: An organizing framework to understand Kosovo's 10 development constraints Figure 13: Before 2020 Kosovo's fiscal deficit was stable and low… 11 Figure 14: …but the pandemic created a short-term fiscal imbalance. 11 Figure 15: Public revenue collection in Kosovo is below the 13 regional average Figure 16: Total factor productivity growth has been low in recent 15 years Figure 17: Most TFPR growth comes from factor reallocation 15 Figure 18: Informality, electricity, taxes, and political instability are 15 top business concerns in Kosovo Figure 19: Kosovo’s net FDI inflows are still below structural and 16 aspirational peers’ Figure 20: Most net FDI inflows have financed real estate purchases 16 v REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Figure 21: Kosovo's exports are among the lowest in the region… 16 Figure 22: …and they are also below their predicted level. 16 Figure 23: Health infrastructure in Kosovo is below peer countries 19 and the EU Figure 24: Primary education students lack foundational literacy and 20 numeracy skills Figure 25: Students in Kosovo had the lowest PISA 2018 20 performance in the Western Balkans Figure 26: Labor force participation and employment are structurally 21 low in Kosovo Figure 27: Most social protection spending is related to categorical 22 pensions Figure 28: Few, mostly urban municipalities have grown in 24 population since 2011 Figure 29: Kosovo has one of the lowest levels of agricultural labor 25 productivity among peer countries Figure 30: Several cities surpassed the maximum annual average 26 PM2.5 concentration of 25 μg/m3 Figure 31: Residential heating and power plants account for 70 26 percent of annual PM2.5 emissions Figure 32: Poverty headcount ratio (%) 41 Figure 33: Poverty gap index (%) 41 Figure 34: Shared prosperity (%) 41 Figure 35: Growth incidence curve, national, 2012-2017 41 Figure 36: Gini index by area, 2012-2017 42 Figure 37: Growth incidence curve, rural area, 2012-2017 42 Figure 38: Growth incidence curve, urban area, 2012-2017 42 Figure 39: Poverty incidence by household size (%) 43 Figure 40: Poverty incidence by number of children (%) 43 Figure 41: Poverty incidence by educational attainment of the 43 household head (%) Figure 42: Contribution of income components to change in poverty 45 Figure 43: Distribution of consumption expenditure 45 vi REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Republic of Kosovo Abbreviations and Government fiscal year July 1 – June 30 acronyms Currency equivalents (Exchange Rate Effective as of Currency Unit = Euro January 2022) US$1.00 = EUR 0.8839 ASA Advisory Services and Analytics MICS Multiple Indicator Cluster Surveys ASYCUDA Automated System for Customs Data MIGA Multilateral Investment Guarantee Agency BEEPS Business Environment and Enterprise Performance Survey MP Member of Parliament CAP Common Agricultural Policy MPO Macro Poverty Outlook CAPI Computer-Assisted Personal Interviews MSME Micro, Small and Medium Enterprise CBAM Carbon Border Adjustment Mechanism MTI Macroeconomics, Trade and Investment CEFTA Central European Free Trade Agreement MW Megawatt CEO Chief Executive Officer NCD Non-Communicable Disease CMU Country Management Unit NGO Non-Government Organization EBRD European Bank for Reconstruction and Development NQI National Quality Infrastructure EC European Commission NRW Nonrevenue Water ECAPOV Eastern Europe and Central Asia Poverty OECD Organisation for Economic Co-operation and Development ECOICOP European Classification of Individual Consumption OOP Out-Of-Pocket according to Purpose OSCE Organization for Security and Co-operation in Europe EFI Equitable Growth, Finance and Institutions PISA Programme for International Student Assessment ENTSO-E European Network of Transmission System Operators for Electricity PM2.5 Particulate Matter 2.5 ESA European System of National and Regional Accounts PPG Public and Publicly Guaranteed ETS Emissions Trading System PPP Purchasing Power Parity EU European Union QI Quality Infrastructure EUROSTAT European Statistical Office RCC Regional Cooperation Council FAO Food and Agriculture Organization RRA Risk and Resilience Assessment FCV Fragility, Conflict and Violence SAA Stabilization and Association Agreement FDI Foreign Direct Investment SAS Social Assistance Scheme GDP Gross Domestic Product SCD Systematic Country Diagnostic GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit SD Sustainable Development GNI Gross National Income SDC Swiss Agency for Development and Cooperation GP Global Practice SDG Sustainable Development Goal GWh Gigawatt hours SEETO South East Europe Transport Observatory HBS Household Budget Surveys SIDA Swedish International Development Cooperation Agency HD Human Development SILC Survey on Income and Living Conditions HLO High Level Outcomes SPI Statistical Performance Indicators HS Harmonized Commodity Description and Coding System STEM Science, Technology, Engineering and Mathematics IDA International Development Association STRI Services Trade Restrictiveness Index IDP Internally Displaced Person TFPR Total Factor Productivity based on revenue IFI International Finance Institution UNDCO United Nations Development Coordination Office IMF International Monetary Fund UNDP United Nations Development Programme ISCED International Standard Classification of Education UNHCR United Nations High Commissioner for Refugees IT Information Technology UNICEF United Nations Children's Fund ITS Intelligent Transport Systems USAID United States Agency for International Development KCA Kosovo Cadastral Agency VAT Value Added Tax KPST Kosovo Pension Saving Trust WBG World Bank Group KAS Kosovo Agency of Statistics WCO World Customs Organization LFP Labor Force Participation WDI World Development Indicators LFS Labor Force Survey WFP World Food Programme LGBTQ Lesbian, Gay, Bisexual, Transgender, and Questioning / Queer WHO World Health Organization MFI Microfinance Institution y/y Year-on-year Back to table of contents vii REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Throughout the document, references to comparator countries are as follows. Kosovo (KOS)'s selected structural peers are North Macedonia (MKD), Albania (ALB), Kyrgyz Republic (KGZ), Armenia (ARM), Moldova (MDA). Structural peers are chosen based on income per capita, popu- lation, services as a percentage of GDP, and young population as a percentage of overall population. Latvia (LVA), Uruguay (URY), Estonia (EST), Slovenia (SVN), Lithuania (LTU), and the Czech Republic (CZE) are selected as aspirational peers. Aspirational peers are chosen based on income per capita and population. Except for Uruguay, all compara- tors (structural and aspirational peers) have a planned economy/tran- sition legacy. Regional peers are Albania, Bosnia and Herzegovina (BIH), Montenegro (MNE), North Macedonia, and Serbia (SRB). viii REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 1. Introduction 1. Kosovo enjoyed steady socio-economic progress cating poverty and accelerating shared prosperity. in the decade before the pandemic. Between 2010 This report follows on the first SCD, completed in and 2019, Kosovo grew by an average 4.6 percent 2017, which highlighted fiscal policy, competitive- a year, which translated into an almost 50-percent ness, inclusion, and environmental sustainability increase in per capita income, and a 35-percent as priorities for sustainable poverty reduction poverty rate reduction.1 Kosovo’s growth perfor- and shared prosperity (Box 1). The SCD described mance was robust compared to peer countries of Kosovo’s recent development as a combination of similar or higher income per capita; and it accel- steady growth and poverty reduction. However, erated prior to the pandemic, in part thanks to a it also noted that persistently low employment steady expansion in consumption and investment— and labor-force participation rates, high levels of both relying on diaspora financing—public invest- emigration, and a heavy dependence on remit- ment in infrastructure, and financial deepening, tance flows had led to jobless growth, while weak amid a stable fiscal stance and a low inflation envi- institutions and slow progress in human develop- ronment.2 ment hindered gains in productivity and wellbeing. The analysis identified overarching priorities for 2. Recent events define a pivotal moment that establishing a more dynamic and open economy could shape the future path of Kosovo’s economy. driven by manufacturing and tradable services, a In 2020, the Covid-19 pandemic brought about more efficient public sector that invests in human Kosovo’s first recession since independence, development and closes socioeconomic gaps, and exposing the vulnerability of its growth drivers, a sustainable approach to environmental manage- especially diaspora visits and investment, to ment that preserves Kosovo’s natural resources for external factors. The depth of structural weak- future generations. Today, many challenges identi- nesses in health, education, and social assistance fied in the 2017 SCD continue to hamper Kosovo’s became apparent as well. While government progress and several structural weaknesses could responses were decisive and partly cushioned the worsen due to the pandemic, climate change, and shock, human capital losses have been significant. the energy transition. In this sense, this SCD is Thanks to domestic policies and an improvement in conducted as an “update,” as it largely maintains external conditions, the recession was short-lived, the conceptual framework in the previous SCD, and in 2021 the economy bounced back. Although describes how the structural conditions identified in traditional growth drivers will continue to dominate it have evolved, and proposes a revised set of devel- economic activity in the medium term, a new opment priorities for the next five years. momentum for merchandise exports and recent growth in formalization signal an opportunity to 4. Notwithstanding progress, the structural weak- consolidate structural changes. In this context, the nesses identified in the 2017 SCD continue to slow renewed political stability generates the conditions Kosovo’s economic convergence with the European to implement reforms and policies to put Kosovo Union. The country has seen significant progress on a path to faster and more inclusive economic since 2017, especially in macro-fiscal management, progress. Still, external factors pose significant risks access to finance, and more recently, merchandise for the recovery, as rising inflationary pressures are exports growth and private sector development. further exacerbated by the war in Ukraine, jeopard- However, structural barriers to growth persist. izing hard-earned social gains. Economic growth is driven primarily by credit- and remittance-financed consumption, which has 3. This Systematic Country Diagnostic (SCD) fueled a heavy reliance on imports, an expansion examines the current constraints and policy prior- of the non-tradable sectors and has slowed down ities for Kosovo to achieve the Twin Goals of eradi- the country’s competitiveness, productivity, and Back to table of contents 1 1 The poverty change is estimated between 2012-2019 as data are not comparable prior to 2012. 2 As a Euroized economy, Kosovo is sensitive to monetary policy in the EU. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update employment growth. The contribution of invest- almost 22 years, Kosovo has undergone a complex ment to growth has increased in recent years, and process of state-building, democratization, and despite new investment in wind energy; overall socioeconomic development. While free and fair investment remains heavily focused on non-trad- elections and active participation from civil society able sectors, particularly construction. Persistent are positive signs, Kosovo continues to face signif- governance gaps, infrastructure deficits, and low icant social, economic, and political vulnerabilities. labor-force participation rates continue to limit The 2021 Risk and Resilience Assessment identified investment and employment growth. Outmigra- three main risks: (1) contested statehood, linked to tion pressures hurt the labor market. Legacy enti- regional geopolitical uncertainty (2) economic and tlement benefits prevent an improved targeting of political disenfranchisement, particularly among social protection spending (though social spending youth and (3) institutional weakness in the rule in response to the pandemic was better targeted). of law.3 Notwithstanding recent progress, lack of Fiscal space and implementation capacity remain judicial independence creates an enabling envi- insufficient to invest in high-return public infra- ronment for corruption and leads to widespread structure. Finally, Kosovo is still not a member of the grievances.4 Weak institutions and accountability United Nations, and its citizens still do not enjoy a mechanisms hamper investment of public resources visa-free travel regime with the EU, both considered to build human and physical capital that stimulates important constraints to trade integration. job creation and the inclusion of youth into the labor market (Annex 4).5 In line with IDA19 policy commit- 5. Social risks persist amid a context of pandemic ments, the SCD update identifies solutions that recovery and elevated geopolitical uncertainty. For address Kosovo’s drivers of institutional weakness. Box 1: Summary of the 2017 Kosovo Systematic Country Diagnostic (World Bank, 2017) The 2017 Kosovo SCD provided a portrait of the economic and social developments in Kosovo—the youngest and one of the poorest economies in Europe—since its separation from the former Yugoslavia and later its declaration of independence. Kosovo’s growth model has relied on remittance-financed consumption, met mainly by imports and an expansion of non-tradable sectors. This model hindered competitiveness, with productivity stagnating and contributing much less to GDP growth than factor accumulation. The 2017 SCD identified weak governance, infrastructure deficits, and an abundance of low-skilled workers as the main factors that limit investment and employment growth. Historical legacy of war and weak institu- tions led governments to make an inefficient use of public resources, increasing public wages, benefits for veterans and former political prisoners, and investing in public infrastructure with low economic returns. The SCD proposed a set of four blocks of policy priorities that would shift the growth model of Kosovo towards a more competitive one based on manufacturing and tradables, a more efficient public sector that invests more in people and closes socioeconomic gaps, and a sustainable economy that preserves natural resources for the future. Pathway 1: While preserving fiscal discipline, reprioritize public expendi- tures and reorient taxation to address critical development challenges. Specifically, the country should align the budget more closely with development needs and improve the allocation and efficiency of public spending, and shift to direct taxation and strengthen tax administration. Pathway 2: Enhance the envi- ronment for private investment and business expansion in tradable sectors and make a determined effort to reap the full benefits of European integration. This implies capitalize on comparative advantages in manufacturing and tradable services; and reducing regulatory and infrastructure gaps. Pathway 3: Foster greater inclusion by building human capital and ensuring equal opportunities. First, invest in better quality and more job-relevant education, and provide a comprehensive set of policies to increase incentives for labor force participation by youth and women. Second, improve the social protection system so that the state can more effectively identify and reach the most economically excluded groups with cash transfers and other services. Pathway 4: Enhance the stewardship of the environment and natural resources for immediate social welfare advances and the long-term sustainability of inclusive growth. Namely, increase productivity in agriculture and manage natural resources sustainably, especially around the mining sector. Back to table of contents 2 3 World Bank (2021e). Data for this analysis covered the period 2017-2020. 4 Freedom House (2021). 5 In the context of the new SCD and Country Partnership Framework cycle, the updated Risk and Resilience Assessment provides an in-depth review of the evolution of social risks in Kosovo and the potential role of the World Bank Group in addressing them and building resilience. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 6. Kosovo can sustain faster and more inclusive labor force participation, high unemployment and economic growth by leveraging its comparative emigration, and persistent household vulnerability. advantages. Kosovo’s population is the youngest Rural areas, which are home to over half of popu- in Europe: a full 25 percent of Kosovars are under lation, have lower access to public services and age 14, far above the EU average of 15 percent economic opportunities, and rural communities (EUROSTAT 2021b). However, Kosovo will only reap are increasingly at risk from the mismanagement a demographic dividend if young workers are able of natural resources and the escalating effects of to find job opportunities at home. In addition, due climate change. to high levels of emigration, Kosovo has a large diaspora—primarily located in the European Union— 8. While most of the constraints identified in that still maintains a tight bond with the country. the 2017 SCD remain valid, energy policy, the The diaspora represents a vast stock of human low-carbon transition, and investment on human capital, as Kosovar emigrants possess skills, profes- capital have taken on renewed importance. While sional networks, and financial resources that could economic output recovered rapidly in 2021, the help the private sector attract investment, adopt pandemic’s impact on Kosovo’s already low levels of new technologies, and increase its competitive- human capital will not be apparent for several years ness. In addition, the Stabilization and Association and could lower the country’s long-term poten- Agreement (SAA) between Kosovo and the EU that tial growth rate. In the near term, strengthening entered into force in 2016, combined to Kosovo’s the delivery of basic services in health, education, proximity to the EU market represent an exceptional and social protection system are especially urgent opportunity. In recent years, Kosovo has greatly as the country grapples with the human and social expanded its digital infrastructure, establishing costs of the pandemic. The recent global spike in the basis for the development of e-commerce energy prices, against and outdated, unreliable, and other high-tech sectors. The country’s natural and polluting domestic energy production capacity assets are also underutilized, including its exten- and rapidly rising energy consumption also under- sive mineral resources (beyond coal) and a rich and score the urgency of near-term energy efficiency diverse array of natural and cultural attractions that measures and a longer-term energy strategy could boost tourism. Finally, Kosovo’s legal frame- centered on the green transition. Although Kosovo’s work for private-sector development is robust by institutional gaps, low levels of human capital, and international standards, though its implementation deficient infrastructure base are products of long- is uneven and often ineffective. standing historical factors, recent progress in areas such as digital development shows that change is 7. The SCD update revisits the constraints iden- possible when the right policies are in place. Section tified in the 2017 SCD against the backdrop of 4 of the SCD update identifies policies designed to internal economic and policy developments and leverage new opportunities for sustainable growth new challenges created by external factors. Section and inclusion in Kosovo, while taking into consider- 2 describes recent economic and social develop- ation their political feasibility and implementation ments in the country, especially since the onset of timeframe. the pandemic, while Section 3 details the structural barriers that constrain progress on the twin goals of eliminating extreme poverty and promoting shared prosperity. The analysis reveals that growth has been historically supported by consumption, while low-productivity investment by firms limits the number of jobs for new labor-market entrants. Credit deepening can increase consumption growth in the short-term, but with a decreasing effect. Meanwhile, informality weakens the mobilization of public revenues to finance high-quality services and infrastructure. In turn, the relatively low admin- istrative capacity and effectiveness limit the poten- tial for public expenditure to support productivity growth, safeguard environmental quality, or narrow socioeconomic gaps. These conditions result in low Back to table of contents 3 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 2. Key recent economic and social developments 9. Growth accelerated in the years prior to the exceeding its estimated potential (Figure 2).6 Still, by pandemic, but regional convergence remained a 2019, it would have taken Kosovo 35 years to catch distant objective. Overall, Kosovo’s growth perfor- up with new EU member countries such as Bulgaria, mance in the decade before the pandemic was even with a sustained GDP per capita growth rate robust compared to its structural and aspirational of 4 percent, assuming the latter grew at a rate of peer countries, except for Armenia, Moldova, and just 2 percent. Lithuania (Figure 1). From 2010 to 2014, the GDP growth rate was, on average, one percentage point 10. The COVID-19 pandemic upended this progress below its estimated potential, but it accelerated in 2020. Between March 2020 and February 2022, between 2015 and 2019 to an average 4.2 percent, total COVID-19 cases were confirmed for 225,664 people and 3,105 lives were lost to the virus (Box Figure 1: Kosovo experienced a decade of robust 2). The country’s health system, like many others growth (2010-2019)… around the world, was unprepared to handle the GDP per capita, thousands of USD 2010–19 virus and was overwhelmed at the onset of the 30 70 pandemic. GDP contracted by 5.3 percent in 2020 27 60 in real terms as service exports plunged and invest- 24 21 50 ment activity slowed. However, fiscal support 18 40 measures, coupled with increases in both remit- 15 tances and goods exports, mitigated the pandem- 12 30 9 20 ic-induced contraction. 6 10 3 0 0 11. A buoyant recovery is underway, but downside risks underscore the urgency of structural reforms. KOS KGZ MDA ARM ALB N.MKD LVA URY LTU EST CZE SVN A slow vaccination rollout picked up in the second half of 2021 and by February 2022 more than half Structural Peers Aspirational Peers of the population was fully vaccinated. As travel 2010 2019 Change 2010-2019 (right axis) restrictions relaxed and activity rapidly resumed, GDP growth turned positive again during the Figure 2: …with an especially robust expansion last quarter of 2020. Real GDP growth in 2021 is observed between 2014 and 2019. estimated to have exceeded 9 percent in 2021, driven Real GDP Growth (%) by a strong rebound in diaspora visits, fiscal support measures, export growth, and restored consump- 5 tion, all of which pushed economic activity above 4 pre-pandemic levels.7 Moreover, current forecasts indicate that the growth rate could remain above 4 3 percent through 2024. However, heightened infla- tionary pressures following the war in Ukraine and 2 pandemic-related risks threaten this outlook and could lower growth in the medium term. Persistent 1 increases in import prices, especially for energy and food, could exacerbate inflation, slow down growth, 0 Kosovo Structural Peers Aspirational and weaken Kosovo’s global competitiveness. Peers 2010-2014 2015-2019 12. A stable pre-pandemic fiscal stance was tempo- Source: WB MPO (Macro Poverty Outlook) (2021) and staff rarily affected by the response to the pandemic. As calculations. a result of Kosovo’s long-term fiscal discipline and Back to table of contents 4 6 According to the latest revision of National Accounts by the Kosovo Statistics Agency. 7 According to latest Kosovo Statistics Agency provisional statistics, growth in 2021 resulted at an even higher rate of 10.5 percent. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Box 2: Evolution of the COVID-19 pandemic and vaccination in Kosovo The COVID-19 pandemic took a significant social, economic, and human toll in Kosovo. With over 225,000 positive cases since the onset of the pandemic and over 3,000 deaths, COVID-19 has upended normal life and economic activity in the country, as it has in the rest of the world. Kosovo was hit by four waves of infections between early 2020 and early 2022, with intermittent movement restrictions imposed to contain the increase in cases. While the total number of cases and deaths per capita remains relatively low by the standards of some neighboring countries (Figure 3, left), the pandemic put tremendous pressure on Kosovo’s already fragile and inequitable health system. Likewise, the education system was unequipped to provide continuous remote teaching and prevent learning losses. This situation is expected to further lower human capital accumulation in Kosovo, which already showed a large deficit before the pandemic. The pace of vaccination accelerated significantly in the second half of 2021, and over half of the population is now vaccinated. In May 2021, less than 3 percent of the population had received at least one dose of the vaccine, the lowest rate in the region. By February 2022, in contrast, over 50 percent of the population had received at least one dose and 46 percent were fully vaccinated. While Kosovo’s vaccination rate now exceeds those of all neighboring countries, it remains below the EU average (Figure 3, right). Expanding vaccine coverage through the full rollout of the third dosage is important given the heavy reliance on diaspora visits. Figure 3: Kosovo has achieved the highest vaccination rate against COVID-19 in the Western Balkans Cases and vaccination in the Western Balkans, 2021-2022 People vaccinated per hundred, 2022 2 000 000 60 EU 74,9 1 800 000 50 Vaccination (%) 1 600 000 1 400 000 Total cases 40 Kosovo 50,4 1 200 000 1 000 000 30 800 000 Serbia 48,6 600 000 20 400 000 10 200 000 Montenegro 45,9 - 0 na ia o ia vo ia gr on an rb vi so North Macedonia 40,9 ne go Se ed lb Ko te A ze ac on er M H M th d or an Albania 44,1 N a ni os B Cases May Cases Feb Vaccination May Vaccination Feb Bosnia and Herzegovina 28,9 Notes: People vaccinated with at least one dose. Date varies between end January-mid February 2022. Source: Ritchie H. et al. (Our World in Data) (2020) and European Centre for Disease Prevention and Control. recent measures to strengthen it, the overall budget 2021, down sharply from 2020 and below the level deficit averaged 2.1 of GDP in the five pre-pandemic planned in the 2021 budget. In the medium term, years. Following a fiscal stimulus package mostly tax revenue collection is expected to decelerate consisting of current expenditures amounting to but remain strong. However, expenditure should 4.4 percent of GDP, the budget deficit more than outpace revenues due to a rebound in capital doubled to 7.6 percent of GDP in 2020.8 In 2021, expenditure and higher current expenditures from tax revenues increased by 29 percent y/y thanks energy subsidies and social transfers. The overall to the rebound in economic activity, formaliza- deficit is projected to remain below 3 percent of tion, but also rising inflation. Even with a continued GDP, in line with the fiscal rule. The total debt stock fiscal package equivalent to 3.2 percent of GDP, is projected to rise from 22.5 percent of GDP in 2021 the deficit is estimated at just 1.4 percent of GDP in to 27 percent by end-2024 (see Annex 1). Back to table of contents 5 8 The 2020 stimulus included an authorized withdrawal of 10 percent of pension savings. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 13. In the last decade, consumption has been the main driver growth, followed by investment. On the demand side, private consumption financed by remittances, consumer lending, and increasing pension and social transfers contributed the most to growth.9 Investment has increased its contribution to growth in the last years (Figure 4). Meanwhile, the average contribution of net exports has been negative, reflecting weak export competitiveness and a high level of import dependence. On the supply side, increased value added in services and industrial activity (to a lesser degree) have been the main growth drivers, while agriculture’s contribution has been negative, on average (Figure 5). Figure 4: Consumption drives growth on the Figure 5: …while services drive growth on the demand side… supply side. Contribution to growth, percentage points, 2010-2019 Contribution to growth, percentage points, 2010-2019 15,0 5,0 4,0 10,0 3,0 5,0 2,0 0,0 1,0 0,0 -5,0 -1,0 -10,0 -2,0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Consumption Investment Net exports Agriculture Industry Services Source: Authors, based on data from Kosovo Agency of Statistics. 14. Agriculture has lost ground in the economy, both in value added and employment. Agriculture’s impor- tance has diminished over time, both in terms of value added (Figure 6) and employment (Figure 7). In other countries, this pattern has indicated a standard process of structural transformation, in which ascendant industrial and services sectors supplant agriculture as drivers of growth. In Kosovo, however, declining agri- cultural productivity is responsible for the sector’s shrinking contribution to total output. Figure 6: Agriculture contributes less to total Figure 7: …and the agricultural sector contributes value added than it does among peer countries… an especially small share to total employment. Value added by key activities (%) Structure of employment, average 2012-2019 100 100% 90% 80 80% 70% 60 60% 40 50% 40% 20 30% 20% 0 10% 2010 2019 2010 2019 2010 2019 2010 2019 0% KOS Structural Aspirational Western Kosovo Western Structural Aspirational Peers Peers Balkans Balkans Peers* Peers** Agriculture Industry Services Agriculture Industry Services Source: WB MPO (2021). Back to table of contents 6 9 The composition of growth remained unchanged in 2020 and 2021. Remittances, higher public wages, and accelerated consumer lending thanks to lower interest rates fueled consumption. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Figure 8: The labor market has low labor-force participation, high unemployment, and vast gender gaps Labor force participation and employment Percentage of the working-age population 13% 14% 12% 13% 14% 12% 20% 18% 21% 19% 21% 18% 47% 45% 43% 46% 39% 43% 57% 58% 65% 63% 60% 56% 2015 2016 2017 2018 2019 2020 LFP Men Employment Men LFP Women Employment Women Source: Authors, based on Labor Force Survey data from Kosovo Agency of Statistics. 15. Growth did not translate into significant job 17. Limited job creation has hindered poverty creation, though labor formalization has increased reduction and slowed income convergence with recently. Historically, economic growth in Kosovo regional and EU peers. The poverty headcount rate has had a weak effect on job creation, and in the fell by 7.8 percentage points between 2012 and years prior to the pandemic the employment rate 2017, but most of that reduction took place before only marginally increased, reaching just 43 percent 2016, when GDP growth accelerated, illustrating for men and 14 percent for women by 2020.10 The the weak links between growth, employment, and labor-force participation rate is among the lowest poverty reduction in Kosovo. By 2019, one in five in the region at 39 percent, with a gender gap of Kosovars still lived on less than US$5.5 per day.12 over 35 percentage points (Figure 8).11 Unemploy- Slow income growth and poverty reduction hindered ment rates are chronically high at around 25 percent convergence with EU living standards, and in 2019 for all workers and 50 percent for workers between Kosovo’s per capita income was just one-fourth 15 and 25. The employment rate in Pristina is lower of the EU average.13 In 2020, the COVID-19 crisis than in other regions, but the capital accounts for caused the poverty rate to rise by an estimated 2.1 over half of all employed workers, of which almost percentage points. The crisis impacted Kosovo’s one-third are in the public sector (Siddiqui et al. economy primarily through the loss of diaspo- 2018). Despite persistently high unemployment and ra-driven tourism and slowing industrial activity, low rates of labor-force participation, tax data from which occurred despite both a substantial fiscal 2015 to 2018 indicate that an average of 10,000 stimulus and a net increase in remittances. With per formal jobs was added each year, twice the rate capita GDP growth bouncing back to an estimated observed between 2011 and 2014, and this trend 8.8 percent in 2021, the poverty rate is estimated continued despite the pandemic, as formal jobs to have fallen below 20 percent; however, these grew by around 10 percent in 2021. estimates remain provisional, as no data are yet available regarding the overall recovery of employ- 16. Yet, firms increasingly report labor shortages, ment (Figure 9). Moreover, the outlook for 2022 is which highlights the skills mismatch in the labor increasingly uncertain as prices rise sharply for food, market. Business association and local think-tank energy, and other key consumption goods. surveys conducted pre- and post-pandemic show that over 45 percent of firms in 2020 and 2021 faced 18. High levels of emigration and a heavy reliance a shortage of skilled workers. During consultations on remittances continue. Slow employment growth for the SCD update, business association repre- and limited public services have contributed to a sentatives emphasized that shortages are highest steady outflow of workers to the European Union in manufacturing jobs and include semi-skilled and elsewhere, as illustrated by the rising number of positions. The threat of outmigration also poses a first residence permits granted by EU28 countries significant challenge for retaining employees with to emigrants from Kosovo between 2014 and 2018 experience and accumulated technical skills. (Figure 10), and a reportedly high number of new Back to table of contents 7 10 The employment rate refers to the employed share of the working-age population. 11 The labor-force participation rate refers to the share of working age adults who are either employed or seeking employment. 12 This is the international upper-middle-income poverty line, which is calculated in 2011 purchasing-power-parity (PPP) terms. Using this line, Kosovo’s poverty headcount rate in 2017 (the last year for which data are available) was 24.4 percent. However, the official poverty headcount rate for 2017 was 18 percent, as it is based on a lower national poverty line of €1.85 per adult-equivalent per day. 13 In 2019, Kosovo’s per capita GNI (in PPP terms) was US$12,180, while the EU average was US$47,853. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Figure 9: Poverty reduction was halted by the pandemic, but it resumed in 2021 Poverty headcount 35 15 30 10 Population below US$5.5 (%) Percentage change 25 5 20 0 15 -5 10 -10 5 -15 0 -20 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 % change Actual Projected Source: World Bank (2021a). EU work permit applications. The Kosovo Agency of Statistics reports that Kosovars have emigrated Figure 10: Emigration from Kosovo accelerated mainly to Germany (35.3 percent), Switzerland (23 between 2014 and 2019 percent), Italy (7.3 percent) and Austria (5.6 percent). First permits to EU27 countries Social norms and proximity with host countries 80 have kept remittance inflows steady at about 12 percent of GDP from 2010 to 2019 but increased 60 during the pandemic (Figure 11). Meanwhile, diaspo- Thousands ra-driven tourism exports partially compensate for 40 a large trade deficit in goods. Considerable remit- tance inflows and foreign direct investment (FDI) 20 in real estate by the Kosovar diaspora are the main sources of financing for the current-account deficit. 0 Overall, Kosovo’s economy continues to depend on 2015 2016 2017 2018 2019 2020 the activities of the diaspora, which accounted for a combined 27 percent of GDP in 2020, and over 30 MNE MKD ALB SRB BIH KOS percent of GDP in 2021.14 Source: EUROSTAT (2021a). 19. After a period of political instability and frag- mentation, a new government was elected in 2021 Figure 11: Remittance inflows were stable but with a strong majority. A wide-coalition govern- increased during the pandemic ment formed following elections in 2017 lasted until Remittance inflows as a share of GDP July 2019, when the prime minister resigned. In the 20 following elections held in October, no single party 18 won a majority above 50 percent, and a coalition 16 between the two main parties was only established 14 in February 2020, but it collapsed within months. A 12 new government, formed in June 2020, was ruled 10 invalid in December by the Constitutional Court, 8 and fresh elections were called in February 2021. 6 Positively, the government formed in March 2021 4 followed the first post-independence election to 2 produce a winner with an over 50 percent parlia- 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021e mentary vote. Until 2020, political instability had undermined trust in the government, and levels of trust in public institutions were the second lowest Source: Central Bank of Kosovo and World Bank staff in the Western Balkans after Bosnia and Herzego- calculations. vina.15 Back to table of contents 8 14 The calculation incorporates remittance inflows, exports of travel services and inflows of real estate FDI. 15 Balkan Barometer (2020). This was confirmed by the May 2021 Public Pulse poll conducted by UNDP and USAID (UNDP 2021). REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 3. Policy Pathways to accelerate progress 20. The structural drivers of growth and the ture, and climate change, as well as the negative constraints to Kosovo’s development identified impacts of mining and coal-based energy produc- in the 2017 SCD remain valid, but the pandemic tion. The government has committed to implement and external risks underscore the importance of policies that promote environmental sustainability,17 fostering socioeconomic resilience and prevent- but achieving its objectives—and retaining access to ing inequality and social exclusion from worsen- environmental funds from the European Union and ing. Access to digital infrastructure and services has other sources—will require faster progress in areas proven crucial to overcome the physical constraints such as energy generation, transportation, waste imposed by the pandemic and are key recovery management, and climate adaptation. In addition accelerators. Meanwhile, the increasing urgency to strengthening environmental sustainability, a of transitioning to a growth model that supports well-implemented green-growth strategy can climate-change mitigation and adaptation—in line promote employment creation and economic inclu- with EU commitments—present a unique opportu- sion by creating new opportunities for the private nity for policymakers to take bold action to trans- sector. form Kosovo’s energy matrix and promote the expansion of environmentally sustainable economic 23. Four Policy Pathways capture the priorities for sectors, while also providing workers with the skills Kosovo to advance towards the Twin Goals. Follow- necessary to compete in those sectors. ing internal and external consultations, the SCD update identifies the following key strategic objec- 21. Poverty reduction and shared prosperity in tives for the achievement of the twin goals: (i) a more Kosovo depend on improved access to employment productive workforce with access to high-quality, opportunities. The central weakness of Kosovo’s high-income employment opportunities; (ii) a more economic model is its low capacity to generate competitive private sector that creates high-qual- employment, which primarily reflects limited invest- ity jobs and strengthens Kosovo’s integration into ments in infrastructure and human capital. In rural regional and global markets; and (iii) a more sustain- areas, agricultural productivity has been declining, able and resilient use of natural resources, including and semi-subsistence farming is common. With few a less carbon-intensive energy matrix and improved jobs available domestically, many workers emigrate urban planning and rural land use. In turn, the SCD in search of better opportunities, further eroding update organizes the identification of constraints the productivity of the national labor force. Unem- and policy priorities along four key Policy Pathways. ployment is strongly correlated with household poverty, and earnings growth is the main driver of 24. The policy recommendations presented in this poverty reduction.16 In this context, building human SCD update are organized according to the four capital (labor supply) while accelerating the creation corresponding Pathways, with specific priorities of high-quality jobs (labor demand) in an increas- defined and ranked according to their relative ingly competitive private sector could enable rapid impact. These Pathways (Figure 12) include: (i) progress on poverty reduction and shared prosper- Increasing returns and equity of fiscal policy by ity. regaining fiscal sustainability, prioritizing public expenditures and mobilizing revenues; (ii) Improv- 22. Long-term prosperity also requires a strategy ing business environment and trade integration to promote environmental sustainability, support by improving the rule of law, investing in produc- climate-change adaptation, and accelerate tive-enhancing infrastructure and facilitating trade; Kosovo’s transition to low-carbon growth. Like (iii) Investing in human capital and increasing inclu- most middle-income economies, Kosovo’s natural sion by improving health affordability and quality, resources are under increasing pressure from increasing the quality of teaching and reforming unplanned urbanization, low-productivity agricul- social assistance to benefit the poor more; and Back to table of contents 9 16 See Annex 2. 17 In November 2020, Kosovo endorsed the Green Agenda for the Western Balkans at the Sofia Summit. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update (iv) Improving environmental management and and inter-sectoral policies remains limited. In terms planning by increasing agricultural productivity, of prioritization of policies, the government has improving rural infrastructure; and reducing air finalized its National Development Strategy (2021- pollution in cities through better service delivery 2030), which should help to define key objectives, (transport, heating) and urban planning. Together, but these need to be linked to policy planning, the four Pathways and the policies included in them performance indicators, and budgeting. Evidence- will contribute to accelerate Kosovo’s progress based policymaking is limited. For example, the towards a more productive human capital, a more trade-offs, sustainability, and fiscal impact of new competitive private sector, and a more resilient and policies are frequently unknown, either for lack of sustainable environment. sufficient data or of mandates to produce such analysis.18 Key basic services under the responsibil- 25. Within each Pathway, the analysis highlights ity of local governments face considerable capacity Kosovo’s institutional constraints to quality and and governance constraints. Indeed, adminis- efficiency of service delivery. Public institutions at trations do not receive funding in line with their the national and local levels face constraints related competences; but they also have low accountabil- to planning, coordination, monitoring, and report- ity because municipal assemblies have weak over- ing that undermine service delivery. For instance, sight capacity. In summary, development outcomes despite recent efforts to set up inter-institutional described within each Pathway need to be linked structures for the implementation of EU-related to specific governance constraints that can then be reforms, efficient organization of donor assistance addressed through the relevant policy actions. Figure 12: An organizing framework to understand Kosovo's development constraints CONSTRAINTS PRECONDITIONS PATHWAYS Public financial management bottlenecks: insu cient Institutional capacity and coordination PATHWAY 1: revenue mobilization and limited spending Increasing returns and equity of fiscal policy e ectiveness PATHWAY 2: Slow private sector development: low firm growth and Improving business environment and trade survival; limited employment creation integration Economic and social vulnerability: low labor-force PATHWAY 3: participation and employment; gender and minority Investing in human capital and increasing exclusion inclusion PATHWAY 4: Environmental vulnerability: unsustainable resource Improving environmental management and use; high levels of pollution; disaster exposure planning Back to table of contents 10 18 See Annex 5. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Pathway 1: Increasing returns and equity of fiscal policy For a unilaterally Euroized economy, fiscal sustainability is a precondition for macroeconomic stability and socio-economic development. Kosovo maintained a stable fiscal stance, further enhancing rules-based fiscal policymaking and strengthening debt management. This allowed the government to conduct coun- ter-cyclical fiscal policy to mitigate the pandemic shock, though it had to temporarily relax its fiscal rules. Revenue mobilization improved gradually before the pandemic but accelerated in 2021, thanks in part to measures to increase formalization, which helped fiscal consolidation. Public debt decelerated in 2021 and it has the lowest level in the region. While important policies and investments are still pending, the scope for expanding public expenditure and enhancing its effectiveness is limited by the lack of access to international debt markets, exhausted privatization proceeds, prolonged multi-year investment projects, revenues fed by relatively low tax rates and a narrow tax base, combined with growing entitlement bene- fits, and a limited administrative capacity. 26. Kosovo strengthened fiscal discipline and ceiling from 2023. Debt sustainability analysis (DSA) maintained sustainable headline fiscal policy. By shows that Kosovo needs to run primary budget adhering to rules that limit fiscal deficit and debt deficits of below 2 percent of GDP to safeguard expansion, Kosovo maintained a stable headline fiscal sustainability by ensuring that public debt fiscal stance (Figure 13), until 2020. From 2015 to remains below 40 percent of GDP. 2019, the authorities: (i) introduced the public wage rule and included deficit reporting in the annual 27. The pandemic exerted unprecedented pressure financial statement to improve monitoring of the on public finances. In 2020, public revenue fell by minimum budget reserves rule, (ii) strengthened almost 9 percent y/y, while current public spending capacity for public debt planning and management, increased by a record 18.6 percent, driven by fiscal (iii) advanced the digitalization of tax administration stimulus packages totaling an estimated 4.4 percent and centralized tax debt collection, and (iv) stand- of GDP. Meanwhile, public investment dropped by ardized the use of e-procurement processes. As a more than 20 percent.19 Still, the budget deficit more result of these measures, from 2015 to 2019, the than doubled in 2020 to 7.6 percent of GDP, and overall budget deficit averaged 2.1 of GDP. After a more than half was financed by external concessional spike in 2020, the fiscal balance in 2021 improved sources (Figure 14).20 Public and publicly guaran- significantly, resulting below the fiscal rule ceilings. teed (PPG) debt jumped by 4.8 percentage points, The authorities are committed to enforce the deficit from 17.6 in 2019 to 22.4 percent of GDP in 2020. Figure 13: Before 2020 Kosovo's fiscal deficit was Figure 14: …but the pandemic created a short- stable and low… term fiscal imbalance. Fiscal balance (% GDP) Public revenues, expenditure and fiscal balance (% GDP) 0 35 0 -0,5 -1 30 -1 -2 -1,5 25 -2 -3 20 -2,5 -4 -3 15 -5 -3,5 10 -6 -4 -4,5 5 -7 -5 0 -8 Kosovo Albania North Armenia Moldova Kyrgyz 2010-2014 2015-2019 2020 2021-2024 Macedonia Republic Fiscal Balance (Average 2010-2014) Public Revenue Public Expenditure Fiscal Balance (Average 2015-2019) Fiscal Balance (right axis) Source: World Bank (2021b) and World Bank (forthcoming), Western Balkans Regular Economic Report: Spring 2022. Back to table of contents 11 19 Public investment suffers from low rates of budget execution, particularly for IFI-financed projects. 20 Almost half of the deficit in 2020 was financed by concessional IFI and donor financing (mainly WBG, IMF, and EU). REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 28. The fiscal deficit declined considerably in to GDP are lower in Kosovo than in most structurally 2021 and is expected to remain within the fiscal comparable and aspirational peers, reflecting lower rule over the medium-term. In 2021, tax revenues tax rates and social security contributions, as well a increased by almost 30 percent y/y, driven by a significant tax gap (Figure 15). The 2015 increase in rebound in economic activity, growing inflation, but the headline VAT rate, select excise rate increases, also strengthened tax compliance measures and growth in formalization—due to enhanced digitaliza- formalization incentives. Meanwhile, the govern- tion in tax administration, improved tax debt collec- ment implemented an economic stimulus package tion, and the recent fiscal support measures—have of around 3.2 percent of GDP, driving a 7 percent boosted domestic tax revenues. However, the use nominal increase in current spending. Public capital of discretionary tax exemptions such as for spon- expenditures increased remained stable relative to sorships and domestic manufacturing undermine output, at an estimated 5.5 percent of GDP, and at revenue mobilization. Meanwhile, the implementa- just above three-fourths of the capital budget. As tion of the SAA and the free-trade agreement with a result, the fiscal deficit declined to an estimated Turkey will further constrain revenue collection in 1.4 percent of GDP. Positively, the authorities used the near term. Almost 70 percent of tax revenue is the surge in tax revenue to decelerate domestic collected at the border, which increases the sensi- debt accumulation, and public debt relative to GDP tivity of public revenue to external shocks. Given the remained broadly the same compared to 2020. limited financing options, the government will need To return to the legally binding deficit ceiling of 2 to increase non-trade tax revenues to maintain percent of GDP from 2023, the government will fiscal sustainability and address the country’s devel- need to mitigate risks on the revenue and expend- opment needs. iture side. 31. Despite recent progress, informality remains a 29. Kosovo has no access to international financial major constraint for domestic revenue mobilization. markets and a domestic market with limited depth, Reducing the tax gap remains the key challenge on and privatization receipts have been depleted. the revenue side. A 2017 study of informality esti- Although public debt is the lowest in the Western mated the VAT and corporate income tax gap at Balkans, it started growing pre-pandemic and 33 percent and the personal income tax gap at 35 continued in 2020. Driven by higher primary deficits, percent.21 According to the 2019 Business Environ- PPG debt increased from 14.5 percent in 2016 to ment and Enterprise Performance Survey (BEEPS), 22.4 percent of GDP at the end of 2020. Almost firms in Kosovo regard competition from the all debt is held at the central level. Domestic-bond informal sector as a much greater concern than the issuance, launched in 2012, increased almost 10-fold tax burden. Kosovo’s persistently high rates of infor- between 2012 and 2020 (from 1.5 to 14.4 percent of mality reflect administrative capacity constraints GDP), with a significant share held by the Kosovo and gaps in the regulatory and governance envi- Pension Savings Trust. Unfortunately, the secondary ronment, as well as structural factors such as the market for domestic debt, and the overall depth of widespread receipt of informal remittances, the the domestic market is limited. Starting in 2023, the prevalence of small-scale agriculture, the legacy of authorities will have to repay a portion of pension transition from a largely state-controlled economy, withdrawals at a cost of 1 percent of GDP. Thus, and the legacy of conflict. reducing domestic debt in 2021 and launching retail (diaspora) bonds are important steps. External debt 32. A stronger fiscal risk management strategy is is mostly IFI-sourced and concessional, reaching vital to enhance fiscal governance and sustain- an estimated 7.6 percent of GDP at end-2021, and ability. In 2021, the government took important there is scope to increase concessional financing, steps to prevent accumulation of liabilities from but execution capacity needs to strengthen. Posi- expropriation, including by enhancing safeguards tively, authorities opted to utilize the IMF SDR to reduce expropriation costs. At the same time, allocations announced in 2021 to bolster macro- it has gradually settled payment arrears, including fiscal management buffers. Privatization proceeds for agriculture subsidies. Adopting a performance were an important source of financing until 2020, management framework for regional water compa- but they are largely depleted and associated with nies was also a positive step. However, future fiscal potential privatization related contingent liabilities. space will continue to be compromised by the potential materialization of these and other risks. 30. Public revenues have increased but remain vulnerable to external shocks. Tax revenues relative Back to table of contents 12 21 The World Bank’s 2014 Public Finance Review estimated the tax gap at 34 percent of annual collections, due largely to low VAT collection from domestic suppliers, as well as a significant gap in direct taxation. The World Bank is currently working with the authorities to update the tax-gap assessment to inform further efforts to improve compliance. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Figure 15: Public revenue collection in Kosovo is below the regional average Public revenues (% GDP) 60 50 40 30 20 10 0 MNE SRB BIH MKD ALB KOS Western Balkans Average 2010 2019 2020 2021e Source: World Bank (forthcoming), Western Balkans Regular Economic Report, Spring 2022. 33. Important reforms and new policies with high expanded significantly. Kosovo has the highest fiscal relevance face a limited fiscal space. Six internet penetration rate in the region. Digitaliza- important reforms with high fiscal relevance are tion of the civil registry, court case management, in motion and will define the expenditure port- procurement, tax filing, the municipal performance folio going forward, including reforms to: 1) public monitoring system, among others, represent signif- compensation, 2) pensions, 3) healthcare financing, icant advances. The recent use of digital means to 4) social protection, 5) early childhood education implement the vaccination process and deliver the and 6) energy. In addition, the government program Economic Revival Package through online applica- plans to implement new capital investment projects, tions and back-office data validation are proof that as the budget is crowded with previous multi-year digitalization has great potential to improve service projects with prolonged implementation. delivery. The government recently adopted the Law on Electronic Identification and Trust Services 34. Public expenditure effectiveness and equity in Electronic Transactions, but it still needs to be remain key challenges. Kosovo’s pre-pandemic implemented. Efforts to digitalize public service growth enabled public expenditure to increase by delivery remain scattered and interoperability is more than 40 percent between 2014 and 2019, and improving but remains limited. For instance, there even more since. The share of current spending in is no functional health management information total expenditure grew in the last five years to over system (MIS), while the education MIS has signif- 75 percent of total expenditure, driven primarily by icant limitations. The digitalization of cadaster increases in transfers and employee compensation.22 records is still ongoing, the e-inspections platform Other examples of inefficient current expenditure has yet to be established, and most public services are the proliferation of untargeted social transfers still require in-person interaction. Lack of interop- and pensions, the ineffective agricultural subsidy erability among systems, for example between the scheme and health expenditures without a proper Kosovo Financial MIS and e-Procurement platform, financing mechanism. Moreover, public investment limits the scope for improving public expenditure is undermined by weak management, procurement efficiency and service delivery. Furthermore, institu- bottlenecks, and budget entrenchment on multi- tionalization of performance-oriented processes in year road infrastructure projects with high expro- public service delivery is lagging. priation costs. Overall, expenditure decisions fail to tackle stated strategic priorities, and the budget 36. The current fiscal framework falls short of laying process remains untied to performance. Fiscal risks the foundations for a green transition. Kosovo is generated by the weak performance of publicly moving to address climate by reforming renewable owned enterprises (POE) intensified during the past energy support schemes, investing in energy effi- year’s recession. ciency and developing a new Energy Strategy that is expected to define an ambitious path to decar- 35. The scope of digitalization to improve public bonization. However, the current fiscal framework expenditure efficiency and service delivery has does not explicitly account for these policies. Once Back to table of contents 13 22 Data includes up to 2020. Public employment and compensation management are also found to be poorly prioritized and unsystematic. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update the new Energy Strategy is adopted, the fiscal costs Adequate fiscal buffers and a low level of public of required investments or policies will need to be debt allowed the government to provide liquidity explicitly identified and accommodated in the fiscal without disrupting public service delivery and framework to reflect the country’s commitment to a facilitated the financing of a sizable fiscal stim- green transition. Commitment to move away from ulus. Diversifying financing options to respond to fossil fuel subsidies, including through subsidized future shocks will be crucial. In addition, enhancing loans to POEs, will also need to be put in action. poverty-targeted social protection mechanisms Likewise, tax policies need to create incentives and would increase both sustainability and resilience. At address the costs of the transition, including by the same time, addressing Kosovo’s development adjusting fuel and vehicle import excises to build needs requires, besides maintaining adequate fiscal the necessary foundations for moving towards buffers and low debt levels, a significant increase in carbon taxation. revenue mobilization and spending effectiveness. 37. In summary, the COVID-19 pandemic corrob- orated the importance of a sustainable, effective, and equitable fiscal policy to mitigate the impact of shocks in a unilaterally Euroized economy. Pathway 2: Improving business environment and trade integration Kosovo advanced towards creating a more conducive environment for private sector development. Access to credit, improvements in transport and fixed broadband infrastructure, enhanced trade facilitation, contract enforcement, and a reduction in regulatory barriers, among others, helped increase formal private sector employment and export dynamism. However, firm-level productivity and greenfield foreign direct investment grew modestly, which constrained job creation. At the same time, employers struggle to hire and retain skilled workers. Despite progress, small firms, among others, have difficulties to access financing. Finally, securing a reliable energy supply and expanding productivity-enhancing infrastructure and digitalization continue to be key objectives. 38. The private sector in Kosovo is dominated by ased: only 9 percent of the firms have a female micro and small firms that operate in an ecosystem decision maker, and among those that do, access with little creative destruction. Micro, Small and to credit is lower (38.1 percent) compared to firms Medium Enterprises (MSMEs) account for more with a male decision maker (45.6 percent). These than 97 percent of formal firms in Kosovo.23 In terms outcomes chiefly result from Kosovo’s development of sales, medium and large enterprises are signifi- legacy. Against the backdrop of a small domestic cantly smaller than their EU counterparts. While the market which is highly sensitive to diaspora flows, market appears to be dynamic with a positive rate private sector competitiveness and export-orienta- of net firm creation—firm entry minus exit—it turns tion become key to firm growth and job creation. out this is only true if measured by the number of firms formally registering and deregistering, but not 39. Firm-level productivity growth is slow. A recent when only firms with an “active” taxpayer status are firm-level analysis finds that a Kosovar firm needs counted.24 In addition, firm density—the number of three times as many workers to produce the same firms per million inhabitants—is below both the EU output as a firm in the EU. Between 2013 and 2017, average and the level expected for Kosovo’s income revenue-based total factor productivity (TFPR) grew per capita. Because of low productivity, firm survival by an average of 0.5 percent (Figure 16) (World Bank and the share of exporters are lower than in compar- 2021b). TFPR growth was mainly driven by the relo- ator countries.25 Over a five-year period, fewer than cation of labor and other inputs from less efficient to 30 percent of micro enterprises grew out of their size more efficient incumbent firms (Figure 17), whereas class. Firm management is also heavily gender-bi- within-firm productivity growth, which results when Back to table of contents 14 23 Micro enterprises are defined as having fewer than 10 employees; small enterprises have 10 to 49 employees. 24 A taxpayer is considered active if they have made at least one tax declaration in the last 12 months. For 2019-2021, net firm entry is estimated based on the historic correlation between taxpayer status and formal registration. 25 Fewer than 6 percent of registered firms in Kosovo export and only half continue to export after a year. Only 6 percent of the firms have some foreign shareholding. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Figure 16: Total factor productivity growth has Figure 17: Most TFPR growth comes from factor been low in recent years reallocation TFPR Add: growth TFPR 2014–17 growth (% change) 2014-2017 (% change) 1 0,8 Exit 0,7 0,8 0,1 0,6 1,8 0,5 0,3 Aggregate 0,2 0,1 productivity growth Annual change (%) 0,0 1,5 0 0,1 -0,2 -0,3 Covariance -0,5 -0,5 -0,5 -0,9 Within TFPR -1 Value added per worker 0,6 -1,0 Sales per worker Entry -1,5 -0,4 2013 2014 2015 2016 2017 Source: World Bank (2021b). firms become more efficient through better manage- concerns was much higher in Kosovo than in Albania ment or innovation, was very limited. Similarly, the and Croatia (Figure 18) (World Bank 2020b). Inter- low contribution of firms entering or exiting the views with business associations confirmed this view market to aggregate productivity growth confirms and revealed that firms see regulatory uncertainty, lacking dynamism. Historically family-owned busi- inspections compliance, skilled worker shortages, nesses and firms operate with limited professional and delayed implementation of the legal framework management capacity, and relatively low investment for electronic identification as additional barriers in innovation and technology. Positively, a quarter of to business growth.27 Despite the recent moderni- firms in Kosovo reported to have accelerated digi- zation of the insolvency legal framework, it is rarely talization during the pandemic (World Bank 2020d). used due to low awareness and procedural hurdles to legally close a business and liquidate its assets.28 40. Despite improvements in the business envi- In addition, business leaders point to skills mismatch ronment, barriers persist. In the World Bank’s 2019 and difficulties to hire and retain skilled labor, in part Enterprise Survey, the share of managers who because of a migration pull (labor supply constraints reported informality and electricity supply26 as top are discussed in Pathway 3). Figure 18: Informality, electricity, taxes, and political instability are top business concerns in Kosovo Informal competitors Electricity Tax rates Political instability Corruption Tax administration Transport Access to finance Customs & trade regulations Poorly educated workers Licensing and permits Labor regulations Crime, theft and disorder Access to land Courts 0% 10% 20% 30% 40% 50% Percent reporting as top concern Kosovo Albania Croatia Source: World Bank (2020b). Back to table of contents 15 26 Cost of access to the grid, access to high-voltage supply for manufacturing, and overall long-term security of supply. 27 During consultations, private sector representatives noted that political constraints to doing business have relaxed more recently. 28 One sign of this problem is that from the 3,400 companies that stopped operating between 2010 and 2018, fewer than 200 firms formally deregistered. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Figure 19: Kosovo’s net FDI inflows are still below Figure 20: Most net FDI inflows have financed real structural and aspirational peers’ estate purchases 6 1600 Key FDI sectors 2008-2019 (in mil. EUR) 1400 250 10,0 5 9,0 1200 200 4 8,0 1000 7,0 150 Million USD 3 800 6,0 600 2 100 5,0 400 4,0 1 50 200 3,0 0 0 2,0 0 2015-2019 2015-2019 2015-2019 2015-2019 2010-2014 2010-2014 2010-2014 2010-2014 1,0 -50 0,0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Kosovo Structural Aspirational Western Real estate Financial and insurance Peers Peers Balkans Energy Construction Net FDI Inflows (% GDP) Net FDI Inflows, in mil. USD (right axis) Net FDI inflows (% GDP), right axis Source: World Development Indicators (WDI). Source: Central Bank of Kosovo. 41. There is significant room to attract foreign merchandise exports in particular stand below what direct investment (FDI). High FDI inflows have the is predicted for Kosovo’s level of income (Figure 22). potential to accelerate know-how accumulation Kosovo’s merchandise exports are concentrated in a and export readiness, and to facilitate access to limited number of products, with a significant share foreign markets. However, Kosovo attracts less FDI of metals and minerals, but with encouraging signs than its structural and regional peers (Figure 19). FDI of diversification in 2020 and 2021. The number of inflows are concentrated in non-tradable sectors exported goods increased from 1,500 in 2013 to with limited spillover effects, such as residential 1,700 in 2019, and a non-metal export (mattresses) real-estate investments by the Kosovar diaspora became a top export commodity for the first time (Figure 20).29 The number of greenfield FDI projects in 2021. The number of export destinations also is significantly lower than peers. rose. Kosovar companies export goods to nearly 80 destinations, 40 percent more than in 2013. 42. Kosovo’s export performance has gained Services trade remains highly concentrated in tradi- momentum, but export readiness could signifi- tional services, mainly travel services provided to cantly improve. Per capita merchandise and service diaspora visiting Kosovo, and transport, accounting exports are the lowest in the region (Figure 21), and for more than 90 percent of all services exports. Figure 21: Kosovo's exports are among the lowest Figure 22: …and they are also below their in the region… predicted level. Exports of goods and services per capita, 2018 Slovenia 21 747 14 Slovak Rep. 17 792 R2= 0,8958 GDP per capita US$ PPP, in logs European Union 17 588 12 Czech Rep. 17 549 Estonia 17 294 10 Lituania 15 097 Latvia 10 719 8 Croatia 7 601 Uruguay 4 909 6 Montenegro 3 883 Serbia 3 742 4 North Macedonia GDP per capita, PPP (log) 3 737 Bosnia and… 2 459 2 Albania 1 682 6 7 8 9 10 11 12 Moldova 1 377 Low income Middle-lower income Upper-middle income Kosovo 1 288 High income Aspirational peers Comparators Kyrgyz Rep. 481 Kosovo Source: WDI. Source: Kosovo Agency of Statistics and WDI. Notes: Figure21: Exports of goods and services are measured in current US$. The year 2018 was chosen to maximize the sample size.30 Figure 22: Data are latest available for the 2018–19 period; GDP per capita is measured at purchasing power parity (PPP) and current US$. Back to table of contents 16 29 High dividend repatriation on existing FDI subtracts from net FDI inflows. 30 Countries are classified according to the World Bank’s income level classification. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 43. Kosovo has implemented several reforms in network with Albania. Investments in renewable trade liberalization and facilitation. Kosovo enjoys energy and energy efficiency that contribute to tariff-free access to the regional market and Moldova improving sustainability of the sector have recently through CEFTA and to the EU market through the picked up but remain limited. Stabilization and Association Agreement (SAA). Kosovo recently signed Free Trade Agreements with 46. Kosovo has achieved a well-developed digital Turkey and the United Kingdom; and it became a connectivity (broadband) infrastructure, but digi- member of the World Customs Organization in talization uptake is lagging. In a joint effort with the 2017. Several trade facilitation improvements took private sector, fixed broadband penetration reached place in recent years, for instance, a reduction in 129 percent of Kosovar households at end-2020, the number of documents required by customs driven by high coverage rates in rural areas, which during border procedures, and the adoption of places Kosovo in the lead in Europe (World Bank the ASYCUDA World Customs Processing system, 2021b). In this sense, the country has laid a foun- which enables the online submission, processing, dation to connect citizens, businesses, and public and payment of import, export, and transit docu- institutions to each other, to take advantage of mentation and duties. The country also invested new economic opportunities nationally and abroad, in paperless cargo clearance processes and road and to build resilience to future shocks. Sizable connectivity. In services trade, Kosovo imposes benefits from digital transformation of Kosovo fewer restrictions than its peers for most services could be achieved from the broad digitalization of subsectors, except for professional services.31 real economic sectors, including of underlying infra- structures and business processes.34 44. Absence of a trade single-window constrains export readiness. Kosovo has adopted adequate 47. Trade and transport connectivity have improved, legislation and established the institutions for a but maintenance, resilience, and rural connectivity National Quality Infrastructure (NQI), but implemen- need more attention. Regional trade and trans- tation remains insufficient. Product certifications port facilitation are priorities considering Kosovo’s issued by Kosovo NQI authorities are not generally geographic location and access to the Durres accepted in EU markets. This process results in costs port. Kosovo’s road network provides transit links with few benefits for MSMEs wanting to improve to broader international corridors.35 As a member their product base and export to foreign markets.32 of the South-East Europe Transport Observatory Trade from and into Kosovo would be facilitated by (SEETO) Comprehensive Network, Kosovo has been an online, national import-export single window, actively rehabilitating a total of 310 km of roads and joint controls at the border, and a risk unit in the 148 km of SEETO core rail network. Large-scale Kosovo Food and Veterinary Agency. investments to develop the major trade corridors linking Pristina to Skopje and beyond have increased 45. Despite increased renewable energy invest- the connectivity between the country and the EU ment, Kosovo’s energy sector continues to rely on markets. However, maintenance funding is crowded outdated, inefficient, and highly polluting energy out by more politically visible priorities. Indeed, generation. Almost 95 percent of domestic elec- in recent years, maintenance expenditures have tricity generation relies on two lignite power plants been falling.36 Moreover, connecting rural to urban which are over 35 years old, highly polluting, and areas remains an unfinished but crucial agenda to create significant uncertainty for current and future increase access to markets, jobs, and opportuni- supply.33 Despite continued investments after ties for rural populations. Finally, the severity and privatization in 2013, energy distribution tech- frequency of natural hazards in the area is expected nical and commercial losses remain significant. As to increase and thereby affect critical infrastructure shown in Figure 18, electricity supply is still reported in the coming decade. as a top business concern, and SCD consultations revealed that the cost of access to the grid and to 48. Domestic credit to the private sector accel- high-voltage supply for manufacturing is a concern. erated since 2015, yet fewer than one in three Kosovo’s transmission system operator recently firms have access to finance. The establishment became a member of the European Network of and capitalization of the Kosovo Credit Guarantee Transmission System Operators for Electricity Fund (KCGF), and the introduction of private bailiffs (ENTSO-E). There has been some progress with were important steps to increase access to finance. regional integration in the electricity sector, including Concurrently, credit deepening increased over the through the establishment of a joint transmission last decade, but it remains among the lowest in the Back to table of contents 17 31 Preliminary data from Kosovo’s Services Trade Restrictiveness Index (STRI). The STRI for several countries is being expanded from the five sectors discussed in this report to nine. The STRIs shown here may thus be subject to revision. 32 National Quality Infrastructure (NQI) in 10 Questions (World Bank internal assessment). 33 (i) Kosovo A, which has three operating units of about 130 MW each, commissioned between 1970 and 1975; and (ii) Kosovo B, which has two 280 MW units, commissioned in 1983 and 1984. The remaining 4 percent of generation came from one medium-sized hydropower plant of 35 MW built in 1983 and other small hydropower plants built during the Yugoslav era. The country imports about 13 percent of total consumption at a 56 percent higher price it gets for its exports, since it imports during peak times of the heating season and exports mostly in off-peak times. 34 Such as custom product development, business process optimization, or IT consulting and project management. 35 Namely the Orient/East-Mediterranean corridor and the Trans-European Transport Network, helping connect parts of Central Europe with ports of the North, Baltic, Black, and Mediterranean seas. 36 Both in monetary value and as a share of the capital stock. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update region. The financial sector is profitable, sound, and services, and digitalization of the land registration highly liquid; however, fewer than one-third of firms process in general. However, persistent challenges (one in four micro-firms) have received loans, and remain, including public participation in the cadas- 70 percent of loans granted have a maturity of less tral reconstruction process, lack of registration of than three years. Larger firms in more concentrated women’s land rights because of traditional attitudes sectors are more likely to get credit; however, access towards property ownership and inheritance, and to credit is poorly correlated with firm productivity, lack of access for marginalized groups. At the same suggesting a misallocation of capital and a subop- time, the legalization of unpermitted construction timal contribution of the local financial system to has started but needs to be significantly acceler- long-term investment in Kosovo. Alternative firm ated. financing, especially for startups, is limited. A few recent initiatives are supporting the innovation 50. In summary, to create more jobs, the private ecosystem for business incubation and accelera- sector needs faster firm-level productivity growth, tion, but these remain incipient. On the firms’ side, along with greater formalization and more modern constraints to financial inclusion include low aware- infrastructure to gain access to foreign markets and ness, high informality, underdeveloped corporate capital. Despite the recent positive developments governance, and inadequate financial reporting. in regulatory environment and some dynamism in the firm landscape and exports, slow growth 49. The land market is still undergoing an incipient of domestic firms and limited foreign exposure, development phase, but there has been progress, remain significant constraints to attract larger FDI and legalization of unpermitted construction flows, increase value added, reduce Kosovo’s signif- should accelerate. So far, one-third of all properties icant trade deficit, and create jobs. At the same in priority economic areas (cadastral zones) have time, Kosovo’s private sector needs to be better completed registration. The government has also equipped to attract investment and create jobs in made major strides in the development of National sectors with value added. Spatial Data Infrastructure, provision of digital Pathway 3: Investing in skills and increasing inclusion Health indicators such as life expectancy have improved slightly in the last five years, but systemic limitations in healthcare came to the fore during the pandemic, and out-of-pocket (OOP) health costs continue to put vulnerable families at risk of poverty. In education, despite minor progress in learning outcomes, children in Kosovo have weak literacy and numeracy foundations, and secondary students have the lowest PISA performance in the Western Balkans. Finally, the social protection system has become more heavily skewed towards categorical pensions, whose eligible population continues to rise, while the targeted social assistance scheme’s coverage declined by almost half between 2005 and 2020, to only about 7 percent of the population, far below the poverty rate. As a result, the contribution of the social protection system to poverty reduction is limited, despite the relative high rates of expenditure. 51. A weak health system prevents faster improve- natal care, etc.), and non-communicable diseases ment of health outcomes and imposes a heavy (NCDs) affect a significant number of adults: financial burden of healthcare for the Kosovo about 21.6 percent of adults (18+ years) reported population. Despite progress, Kosovars live on having a chronic disease in 2017. Women’s health average four years less than their neighbors and 10 outcomes related to fertility are concerning and years less than the average European; and infant access to reproductive and sexual health is limited. mortality is around 11 per thousand deliveries, Only 9% of women aged 15-49 currently married among the highest in Europe. A large share of the or in union use a modern method of contraception population does not have routine medical attention (Kosovo Agency of Statistics and UNICEF 2020b). (e.g., blood pressure monitoring, consistent ante- Across the population, only 6% have private health Back to table of contents 18 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update insurance, and among those insured, only 1/3 are Table 1: Public health expenditure in Kosovo and women (and only 1 in 5 in rural areas) (Farnsworth peer countries (% GDP) N. et al 2018). Health costs are disproportionately 2018 borne by users. The government spent 3 percent of GDP in 2018 on health, substantially below most Bulgaria 4.34 other Western Balkan countries (Table 1) and EU members.37 Meanwhile, for each dollar spent by the Albania 3.0 public sector, OOP costs totaled 44 cents (equiv- alent to 30 percent of total health expenditures).38 Bosnia and Herzegovina 6.24 52. The COVID-19 pandemic has highlighted the Croatia 5.66 structural weaknesses in the health sector and underscored the importance of investing in health Kosovo 3.05 to improve the country’s resilience to future shocks. For 32 municipalities for which data are available, Latvia 3.72 only three meet the government’s target to have one physician per 1,000 inhabitants and only 16 Lithuania 4.40 municipalities meet the target of two nurses per 1,000 inhabitants. In hospitals, inpatient beds per Romania 4.43 100,000 inhabitants (226 in 2019) are significantly below neighboring countries and the EU average of Source: EUROSTAT and authors’ calculations for Kosovo. 532 (Figure 23). Likewise, over the last five years, the number of physicians fell by more than one-third, and the number of physicians and nurses per patient is among the lowest in Europe. Lack of qualified staff to perform lab tests and treat patients, absence of a unified information system to track and trace suspected infectious cases, monitor vaccination progress and vaccine side effects, and inadequate facilities for waste management, are some of the constraints that prevent the health system from protecting people and supporting the economic recovery. Figure 23: Health infrastructure in Kosovo is below peer countries and the EU Hospital beds per 100,000 population (2019) 900 800 700 600 500 400 300 200 100 0 Kosovo Montenegro North European Union Croatia Serbia Hungary Romania Bulgaria Macedonia - 27 countries (from 2020) Source: EUROSTAT (hospital beds) except for Kosovo: authors’ calculations based on KAS data. Back to table of contents 19 37 In 2019 it increased to 3.2 percent. 38 The recommended WHO threshold is about 20 percent of total health expenditures. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 53. Kosovo’s education system does not help chil- 1 in 7 demonstrate foundational numeracy skills dren acquire sufficient basic skills, especially those (Figure 24). With respect to secondary education, from vulnerable groups. Kosovo already had a results from the 2018 PISA assessment showed significant deficit in educational quality before the that most students performed below the threshold pandemic. To start, children’s school readiness is low, for functional literacy, and Kosovo had the lowest as few children attend preschool (15 percent of girls average scores of the Western Balkans (Figure 25). and boys under 5) and fewer among Roma, Ashkali Like other middle-income and aspirational peers, and Egyptian children (8 percent) and children in rural Kosovo spends 4.6 percent of GDP on education,40 areas (8 percent).39 As a result, the learning achieve- however, there are significant structural gaps that ment of children during primary education is limited: prevent students from gaining even basic compe- fewer than half of children ages 7–14 demonstrate tencies, including an allocation of spending heavily foundational reading and numeracy skills, and only biased towards teacher wages and little margin to one-third of children of the poorest wealth quintile invest in learning materials, equipment, and infra- do so. Among minority children, fewer than 1 in 5 structure. demonstrate foundational reading and fewer than Figure 24: Primary education students lack foundational literacy and numeracy skills Percentage Percentage of children of children aged aged 7–14 7 years who 41% Demonstrate foundational reading skills 18% 32% among poorest quintile 8% 42% Demonstrate foundational numeracy skills 13% 32% among poorest quintile 5% All Roma, Ashkali and Egyptian Source: Authors, based on data from the Multiple Indicator Cluster Survey (Kosovo Agency of Statistics and UNICEF 2020a). Figure 25: Students in Kosovo had the lowest PISA 2018 performance in the Western Balkans Reading Mathematics Science Year of first participation 500 450 400 2006 2006 350 2000 2000 2015 300 Albania Bosnia and Kosovo Montenegro North Serbia EU average Herzegovina Macedonia Source: OECD (2020). Back to table of contents 20 39 By age 5, enrollment increases significantly to 68 percent (similar for boys and girls); however, among Roma, Egyptian and Ashkali children it increases to just 36 percent, with a 10-point gap between boys (41 percent) and girls (31 percent). Kosovo Agency of Statistics and UNICEF (2020a). 40 Equivalent to 16 percent (2019) of total government expenditure. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 54. Within post-secondary education, women richest students could widen by 18 percent after are underrepresented in STEM fields and among only a short-term school closure. the academic community. Kosovo has reached gender parity in enrolment rates in pre-university 56. The dismal situation of the labor market raises education, however, there is a strong gender questions about whether employment can sustain segregation in the fields of study at the university growth and poverty reduction in a country that level. Women represent 85% of the students in is in demographic transition. Although Kosovo the field of education, 75% in health, and 69% was labeled the “youngest country” in Europe for in humanities and arts, but they are a minority having close to 40 percent of its population aged in natural and technical sciences; they are also 20 or younger in 2015, the country’s demographic less likely to attend vocational training centers dividend is narrowing. The share of under-20s (39%) and adult education courses (36%) (Agency was down to one-third in 2020, and in 2050 it is for Gender Equality 2020). Female teachers are projected to be just 20 percent. Meanwhile, the overrepresented in early education (pre-school), share of people 55 and older is expected to grow but their share falls in higher grades, and they are from 18 to 34 percent between 2020 and 2050. underrepresented among university professors, More importantly, the apparently low depend- both in public (34%) and private universities (26%) ency ratio (49 percent overall and only 14 percent (Farnsworth N. et al 2018). for old-age) ignores the low labor market activity rates of working-age Kosovars. Indeed, consid- 55. The pandemic highlighted the challenges for the ering only active working-age adults, the depend- education system to provide continuous services. ency ratio increases to 128 percent. Going forward, With schools closed from mid-March through June the potential for growth, revenue mobilization, and 2020 and intermittently since September 2020, poverty reduction through greater labor earnings the system had to be quickly adapted to provide will decline in the absence of a substantial increase remote teaching, which excluded many teachers in job creation, especially for low-skilled workers. and students due to lack of connectivity or access Moreover, the spatial, gender, and ethnicity aspects to digital devices. As a result, it is estimated that of access to employment continue to be critical because of the pandemic the percentage of for the sustainability of Kosovo as a cohesive and students performing below functional literacy could inclusive country.41 have increased slightly (from 79 to 80 percent) (World Bank 2021d). Moreover, remote teaching 57. The pandemic creates a renewed urgency to is likely to hurt students from lower socio-eco- understand the constraints to increasing employ- nomic households disproportionately. Estimations ment in Kosovo. Given the impacts of the pandemic based on PISA 2018 data suggest that the reading on critical sectors for employment such as hospi- achievement gap between the poorest and the tality and tourism, it is unclear whether job creation Figure 26: Labor force participation and employment are structurally low in Kosovo Activity rates by age, 2020 Employment rates by education, 2020 80 80 Percent of working-age population 70 70 % of population in age group 60 60 50 50 40 40 30 30 20 20 10 10 0 0 No formal Primary Secondary Secondary Tertiary Total 9 4 9 4 9 4 9 4 9 64 -1 -2 -3 -4 -5 -2 -3 -4 -5 education VET general - 15 25 55 35 20 50 30 45 60 40 Male Female Male Female Total Source: Labor Force Survey 2019, Kosovo Agency for Statistics. Back to table of contents 21 41 See a detailed analysis in Annex 3. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update for low skilled workers can accelerate soon. Even to increase the economic inclusion of women before the crisis, employment rates were extremely and young people. Measures include subsidies to low, as fewer than half of men and less than 15 employers who hire women, maternity allowances, percent of women across all education groups, and child supplements to women—with additional except for those with tertiary education, were economic support to those unemployed—and the employed (Figure 26). financing of job opportunities for young people. As of January 2022, over 14,000 women have bene- 58. Especially concerning, participation in the labor fitted from these measures. In addition, over 1,300 force among women and young people remains girls and women received a scholarship for the low, which further reduces growth potential and 2021-2022 academic year to pursue their studies in hinders the transition of young people into jobs. the fields of STEM, where they are currently under- Disproportionate share of family care responsi- represented. Moreover, to further boost youth bilities and lack of pre-school facilities are major employment, the government is preparing the barriers to women employment. Roma, Ashkali and introduction of a Youth Guarantee Scheme. Egyptian women are further constrained by higher school dropouts, child marriages and adolescent 60. Social protection in Kosovo consists mostly of pregnancies (Annex 3). Youth seeking jobs lack government-financed, categorical cash transfer soft or job-related skills, problem-solving skills and programs which are not poverty-focused and ability to work under pressure in part because the may distort incentives to work. Basic old-age education sector does not design curricula consid- and ex-contributory pensions42 and the relatively ering the needs of the labor market. Around 49 new war veteran’s pension represent the bulk of percent of youth have claimed intent to emigrate in the growing government’s expenditure on social the next two years (Riinvest Institute 2021). In this protection, which increased from 3.6 percent of context, there is a need to link better the constraints GDP in 2009 to 7.7 percent of GDP in 2020 (Figure for the private sector to accelerate job creation, and 27).43 Although overall social protection expenditure those of the workforce to participate in the market as a share of GDP is higher in Kosovo than in other and access those jobs, including lack of sufficient Western Balkan countries, only a small fraction skills, insufficient support systems (e.g., for women), (about 7 percent of total social transfers) is targeted aspirations incompatible with available options, and to the poor through the Social Assistance Scheme distortions generated by government policies or (SAS), while most spending goes to non-contribu- other income sources. tory pensions and disability benefits.44 59. The government adopted specific measures 61. The Social Assistance Scheme (SAS) covers only through the Economic Revival Package aiming a fraction of the poor, and it lacks the flexibility to Figure 27: Most social protection spending is related to categorical pensions €180 €600 €160 €500 €140 €120 €400 €100 millions millions €300 €80 €60 €200 €40 €100 €20 €- €- 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Basic old-age pensions Ex-contributory pensions Social Assistance Scheme War-related schemes and war veterans' pensions Disability, special pensions, labor market and other social assistance programs Total (right axis) Source: Ministry of Social Welfare and KAS Harmonized Indices of consumer prices. Data are in 2020 prices. Back to table of contents 22 42 Ex-contributory pensions refer to government-funded benefits awarded to individuals ages 65+ who contributed at least 15 years to the old Yugoslav system. 43 Figures include the Social Assistance Scheme, energy subsidies, and assistance to families with disabled children, assistance for foster families, and all government-funded pension schemes (basic and ex-contributory pensions, special pensions, war veterans and war-related pensions and disability pensions). 44 The government almost doubled spending on disability pensions in the last 10 years (from 0.28 percent of GDP in 2009 to 0.5 percent in 2019) as it increased the pension amounts for certain categories and increased coverage from about 18,500 in 2009 to almost 24,000 in 2020. However, disability pensions are only accessible for those declared 100 percent disabled and (for partial benefits) those who qualify for war-related or special pensions; and the assessment of disability status is not based on functionality and varies across programs. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update effectively respond to shocks. SAS coverage has sustainability, as the number of people eligible to declined in recent years from over 40,000 house- receive benefits continues to rise. These benefits holds in 2005 to about 25,600 in 2020, which corre- are also more generous than the social assistance sponds to about 7 percent of the population (1 in 4 benefits and may create disincentives to work. people in the poorest quintile). By contrast, poverty Meanwhile, only about a third of the population affects close to a quarter of the population. Recent of working age contributes to the second pillar, diagnostics of the design and implementation of the and contributory pensions only provide temporary SAS revealed rigid categorical eligibility criteria that support until the account is depleted. exclude the working poor, discourage people from participating in the labor market, and also exclude 64. In summary, Kosovo faces important gaps in many families with children over the age of five.45 human capital which could widen because of the The stringent categorical criteria meant it was not pandemic, and which the state is ill-equipped to possible to expand SAS coverage quickly to respond address. In the health sector, insufficient human to the pandemic. Instead, the SAS allowance was resources and infrastructure, and high OOP increased temporarily, and the period of eligibility costs have prevented faster progress in health was automatically extended by eliminating the outcomes for the population and have left it unpro- need to reapply and preventing beneficiaries from tected from the pandemic. Despite significant suddenly losing their benefits during the height of spending on human resources in the education the pandemic. In addition, the government put in sector, learning achievement is low overall and place a temporary program to support poor and particularly for children from poor socioeconomic unemployed households who were left out of other backgrounds. The ability of the sector to deliver government programs, managing to reach over education services digitally was minimal to ensure 28,700 families.46 It also allowed workers contrib- proper learning during school closures due to the uting to mandatory pensions (KPST) to withdraw COVID-19 pandemic. Likewise, the structure of the 10 percent or up to 1,000 Euro, and promised to social protection sector, which provides most cash replenish those with balances of up to 10,000 Euro transfers based on demographic conditions or starting in 2023.47 Social care services, which provide war-related status, does little to promote inclusion much needed support to particularly vulnerable of the poor and prevented the government from groups, are also limited in scope and thus tend to deploying cash assistance quickly to those affected be reactive rather than preventive.48 by the pandemic, even though the emergency measures were somewhat more successful than in 62. In addition, there is no flexible support other Western Balkan countries in reaching those in mechanism to compensate poor and vulner- the informal sector. able people for eventual energy tariff increases. Although Kosovo has one of the lowest prices of 65. Finally, Human Development sectors in Kosovo electricity for residential consumers, about 15.8 are not prepared to sustain a healthy, productive, percent of households and one-third of poor and resilient population that meets the challenges households spend 10 percent or more of their total posed by climate change. The health sector is budget on electricity and are thus electricity poor. failing to address the impacts of increasing urbani- As significant planned investments in the power zation and climate change on health outcomes; the sector are completed and tariffs are adjusted, the education sector has not managed to build the skills number of households facing affordability problems for the current and future workforce to access green could increase significantly.49 The current electricity and technologically advanced jobs, and the social flat subsidy paid to some SAS recipients and war protection system has not created mechanisms to veterans is simple and easy to implement, but it has help workers transition out of sectors such as coal limited potential to compensate all electricity poor while protecting their incomes, to protect them households affected by tariff increases. from the financial burden that energy reforms could create for poor and vulnerable households, or to 63. The pension system is costly, fragmented, and respond quickly to help people affected by climate inefficient. The non-contributory pension program shocks and other disasters. has universal coverage for a basic pension for all people over 65. Moreover, war veteran benefits and war-related pensions cover people who fought during the war and their surviving spouses and children up to age 26, raising concerns about fiscal Back to table of contents 23 45 Despite these limitations, 75 percent of SAS benefits go to people in the poorest quintile, among the best targeting in Europe and Central Asia. 46 The program used the existing SAS system and was targeted to households with no formal income. However, because informal work is high in Kosovo, it is likely that some households who qualified for the program were not necessarily poor. 47 While this provided much needed support to poor people during the pandemic, the system proved to have no use of digital tools, as payments were made in cash at the post office, and people applied to the program in person at the Centers for Social Work. 48 The government has initiated a reform of social services, but it does not yet include either investments in social workers (including their training) nor the introduction of a case management system to support the delivery of integrated benefits. 49 A 2019 World Bank study estimated that in case of a 50 percent tariff increase, electricity poverty could increase from 16 to 23 percent, based on the baseline elasticity estimate (ε = −0.5). Among vulnerable households, the most affected are those in the poorest quintile not benefiting from SAS and single-elderly households. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Pathway 4: Improving environmental management and planning Kosovo remains a predominantly rural country, however, agriculture’s economic contribution has dimin- ished because of low productivity, despite growing government support. Moreover, mismanagement of natural resources, especially water and land, is hampering sustainability in the rural sector, as pressure on resources increases from agriculture, industry and population demand growth and climate change. Lack of institutional coordination, capacity, and low investment in infrastructure explain the slow progress in this area. Finally, urban areas face unplanned growth, congestion and high air pollution levels, which are gradually worsening the quality of life and reducing their potential as Kosovo’s engines of economic growth. 66. A widely rural country that is slowly urbanizing, urbanization process that is taking place raises Kosovo faces the double hurdle of increasingly questions about how well-prepared urban munic- deteriorating natural resources, and congested, ipalities like Pristina are to manage the growing polluted urban areas. At the time of the 2011 Census, population and demand for services, while maxi- about 6 in 10 people in Kosovo lived in rural areas, mizing the opportunity to become economic poles. and very few municipalities had an urban share of As the country recovers from the pandemic, it will more than 80 percent. By 2019, estimates from the have to find ways to restore the sustainability of its Kosovo Statistical Office show population growth resources, to boost productivity and resilience in the of over 5 percent in only a handful of municipali- agriculture sector, and to implement better urban ties, including Pristina and Prizren (large and urban) development policies to achieve urban growth with and a couple small rural ones.50 Most other munici- quality of life. palities have either shrunk or remained roughly the same, according to these estimates (Figure 28). 67. Despite being a mostly rural country, agricul- Historically, poverty in rural areas has been signifi- ture’s role in the economy is declining, but its social cantly higher than in urban areas, although the gap role remains important. In the last three decades, has been falling since 2012. Still, economic oppor- the agriculture sector transformed completely, from tunities are very limited in rural areas, because of a state-run and capital intensive to family-owned, highly unproductive agricultural sector, and because low-scale and low-productivity.51 Since then, the increasingly natural resources including water and sector has shrunk in terms of its contribution to land are threatened by unmanaged pollution and growth. During 2009-2019, the share of agriculture collapsing infrastructure. At the same time, the in GDP nearly halved. In 2019, the share of agricul- Figure 28: Few, mostly urban municipalities have grown in population since 2011 Changes in population and rural share Bubble: total population 25% Est. change in total population 2011-2019 20% Prishtinë Prizren 15% Deçan Istog 10% Pejë Kaçanik Sknderaj Malishevë Gjakovë Rahovec Viti Lipjan Ferizaj Shtime Dragash 5% Mitrovicë Fushë Kosovë Suharekë Podujevë 0% Vushtrri -5% Gjilan -10% Obiliq -15% Kamenicë -20% -25% -30% 0% 20% 40% 60% 80% 100% Share of rural population in 2011 Source: Authors with data from population estimations from KAS. Back to table of contents 24 50 Pristina, the capital city, was estimated to have 216,000 inhabitants in 2019, followed by Prizren, with 193,000. 51 During the 1970s and 1980s, Kosovo had significant investment in agriculture. Led by state-owned enterprises (SOE), the sector became more capital-intensive and benefitted from subsidized inputs from Yugoslavia. Productivity gradually increased and the workforce declined, while agricultural exports to other regions in Yugoslavia grew. In 1989, when Kosovo lost its status as an autonomous region, unemployment increased as Albanian Kosovars were dismissed from their jobs in the public sector. SOE farms collapsed as investments plummeted, productivity dropped, and the share of the working population in agriculture doubled. Export markets were lost, marketing channels were disrupted, and farmers lost access to subsidized inputs. The break-up of cooperatives and SOEs changed the agricultural sector to one dominated by small, family-owned subsistence farms with low capital intensity and low productivity. (World Bank 2010, 2021b and FAO 2001). REPUBLIC OF KOSOVO Systematic Country Diagnostic Update ture in GDP (6.9 percent) was much lower than in can be efficient in Kosovo if they reach a minimum countries with a similar level of development, and size. Farmers’ human capital is a concern, as most closer to the one among aspirational peers.52 This of them have low levels of education and training decline resulted from a falling sectoral productivity despite being relatively young, in contrast to the rather than structural transformation, as agricultural farmer population in other countries. value added decreased by a cumulative 6.8 percent in real terms over the decade. Indeed, most farms 69. Public support to the agriculture sector has operate at a subsistence or semi-subsistence levels, recently increased, but it does not address struc- while commercial farmers face expansion obstacles. tural productivity constraints or support liveli- Two notable exceptions are agri-business, espe- hoods. Kosovo’s agricultural support system has cially food processing, which has grown steadily in veered closer to EU Common Agricultural Policy number of firms, annual turnover, and employment; (CAP) principles. It more than doubled (from around and agricultural exports which have increased in 24 to over 64 million Euro) between 2013 and absolute and relative terms as a share of total 2018, when budget transfers to agriculture reached exports.53 7.8 percent of agricultural output, above other Western Balkan countries except North Macedonia. 68. Farm size and structural efficiency barriers are However, the current level and direction of support holding back agricultural productivity. Most agri- is not directly addressing the constraints mentioned cultural production is carried out by very small farms above. Direct farm payments dominate (79 percent with inefficient methods, old technology, low cash- of expenditure), whereas capital expenditure (9 flows and weak integration with markets. Around percent) is much lower than that of the national 93 per cent of farms operate on less than 5 hectares budget (25.7 percent), despite significant infrastruc- and 73 per cent on less than 2 hectares, while only ture gaps. Subsidies go mostly to large farms (77.3 1.7 per cent of farms use 10 hectares or more. percent of total subsidies), close to the EU average Among comparable economies, only Albania shows (82 percent) while support to micro farms declined similar farm fragmentation. Additionally, since 2017 from 2.2 percent in 2015 to 1.2 percent in 2017. This the number of farms over 30 hectares fell by 28 implies that subsidies do not support the livelihood percent.54 Not surprisingly, Kosovo ranks low on of the poorest farmers. At the same time, there is agricultural labor productivity compared to similar limited evidence that subsidies increase produc- economies (Figure 29).55 But size is not the only major tivity; they appear to have no impact on technical cause of low farm productivity. Even medium farms efficiency and modest positive impact on scale effi- face efficiency constraints associated with manage- ciency for most farms except the largest. Overall, ment practices and structural obstacles in access to current farm subsidies are not yet compatible with credit, technology, markets, etc. that hinder trans- the CAP, and do not require compliance with envi- formation to more efficient units.56 However, larger ronmental standards (World Bank 2021b and World farms do perform better, which suggests that farms Bank 2021e). Figure 29: Kosovo has one of the lowest levels of agricultural labor productivity among peer countries Agriculture, forestry, and fishing, value added per worker (constant 2010 US$, 2018) 24987 25296 22598 18628 17008 12819 6631 5827 3147 3798 1813 KOS MKD ALB KGZ MDA LVA URY EST SVN LTU CZE Source: World Bank (2021) Country Economic Memorandum. Data from KAS and WDI. Back to table of contents 25 52 The share of agricultural employment in total employment is controversial in Kosovo. According to the Labor Force Survey it amounts to 5.2 percent (2019); however, other surveys such as the Millennium Challenge Corporation’s, Kosovo Labor Force and Time Use Study (2018) find a much higher agricultural employment share of 21.7 percent of total employment. According to experts, the official statistics from LFS vastly undercount agricultural employment. 53 In value, agricultural exports increased from 41.7 million euro in 2015 to 65.5 million in 2019; and the share of agriculture in total exports increased from 12.8 percent in 2015 to 17.1 percent in 2019. 54 Uncontrolled expansion of legal and illegal construction might have contributed to this phenomenon. 55 Among similar economies, Kosovo outperforms only Armenia and the Kyrgyz Republic. 56 Low access to credit, technology, outdated production management practices, lack of market opportunities, aggregators of products, storage facilities, limited value chains, an underdeveloped agricultural information system, and a dysfunctional land market are some of the constrains to agricultural competitiveness. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 70. Natural resource mismanagement, especially 72. Meanwhile, in urban areas, especially Pristina, for land and water, is jeopardizing sustainability in unplanned and unregulated growth is already rural areas. Inadequate investments in infrastruc- generating congestion and deteriorating quality ture; decision-making based on limited or unre- of life. As the main urban center and economic liable data; and lack of coordinated planning and engine in Kosovo, Pristina is not following a sustain- enforcement of regulations add pressure on an able urbanization path or helping lagging regions already constrained resource base. Water resources benefit from its economic dynamism. Located in a face threats from climate change, are often heavily closed valley, Pristina is growing with a combina- polluted, services are poorly managed and have low tion of sprawling, poorly connected, informal settle- financial sustainability. For example, while drinking ments and sub-urban clusters. The metropolitan water access has increased, nonrevenue water area is increasingly carbon intensive as it gener- (NRW) reached 58 percent in 2017, preventing utili- ates longer commuting and congestion dynamics. ties from improving the quality and sustainability of Moreover, an inadequate public transport service the service. NRW is due to a combination of factors (including informal taxis) competes with a growing, including outdated infrastructure and metering but old motor vehicle fleet.58 About 140 thousand devices, data-handling errors, and water misuse. vehicles enter the city daily, much more than the Likewise, sewage and wastewater treatment are still city infrastructure can manage, which generates minimal. Agricultural use of water resources is high increasing inefficiency and has a detrimental impact (irrigation accounts for 41 percent of total water on health and quality of life. Congestion, along with use), and lack of modern irrigation infrastructure the outdated bus fleet and the increasing trend of reduces efficiency and exacerbates water stress.57 importing secondhand diesel cars from Western A major challenge is weak and fragmented insti- European countries (on average, 6-7 years old), is tutional arrangements and capacity, as resource heavily contributing to the city’s air pollution.59 At management, utilities, and pollution control are the same time, uncontrolled construction develop- shared responsibilities between national and local ment has taken place in flood risk zones and other levels. Furthermore, a severe lack of funding for these sensitive land, increasing risks for floods and accel- activities limits the implementation capacity of any erating land degradation. policy or strategy. Finally, the current schemes for public and private sector complementarity for irri- 73. In addition to the transport and power sectors, gation service delivery seem inadequate. residential heating generates an unhealthy amount of PM2.5 emissions, especially during the 71. Contaminated land sites are largely unmanaged, winter.60 Indeed, air quality in Pristina has been which increases water pollution including trans- among the worst in the world in the last decade, boundary risks via surface water. Kosovo has not rivaling big cities like Beijing, Mumbai, and New adopted legislation on pollution prevention, control, Delhi (World Bank 2019). Its concentration of PM2.5 and polluter accountability. This undermines any is the 7th highest in Europe (IQAir 2021), and it is efforts to prevent future industrial pollution. Mean- also extremely concerning in Mitrovica, the Drenas while, hazardous mine waste, industrial discharge area, and the Obiliq area (Figure 30). In 2016, poor into rivers, and industrial dumpsites continue undis- air quality was estimated to cause 760 premature turbed and threaten natural resources and people’s deaths and cost between 2.5 and 4.7 percent of health. Around 200 sites (out of 4,000) are esti- GDP annually in Kosovo. The residential sector is the mated to require remediation from mining, indus- largest source of PM2.5 associated with the burning trial, tailings, and ash dumping. Partially controlled or of solid fuels, in particular firewood and coal, for uncontrolled landfills are often located near agricul- heating. Additional sources include energy (power tural areas, and although the number of illegal land- generation), industry, agriculture, and others (Figure fills decreased between 2019 and 2021 (from 2,529 31).61 Kosovo continues to rely heavily on coal, which to 1,189), it is still very high. In 2018 the government goes against the country’s own National Emission put in place the first policy to deal with contaminated Reduction Plan. land, but it has yet to be implemented. The strategy and action plan on integrated waste management 74. In summary, Kosovo has failed to develop a 2021-2030 was adopted, however, low coordina- productive and environmentally sustainable agri- tion and capacity, and a lack of results and moni- cultural sector, while its natural resource base is toring framework, suggests that implementation being depleted and climate-related vulnerability will be challenging (European Commission 2021). grows. Kosovo’s long-term deterioration of rural areas has contributed to a progressive reduction Back to table of contents 26 57 Only 17 percent of agricultural area is irrigated (lower than the regional average), which jeopardizes agricultural production. For instance, the drought in 2019 and flood in 2020 in Gjilan led to important losses in agricultural output. Kosovo has among the lowest levels of water-resource development and storage capacity globally, making it a priority to increase the efficiency of water management and use. 58 It is estimated that 25 percent of commuters use public transport, and 40 percent use informal taxis. 59 The vehicle fleet grew on average by 8.5 percent per year between 2012 and 2018, mostly with second-hand vehicles imported from Western Europe. In 2018, around 350,000 vehicles with an average age of 19 years circulated in Kosovo. Over three in four passenger vehicles use diesel fuel, typically producing more and longer-lasting emissions than gasoline vehicles. Only 3 percent of vehicles use Euro 6 diesel fuel (Euro 3 is the most common). The diesel bans and low emission zones that will be implemented in Western Europe could further increase the supply of older and “dirty” diesel vehicles in Kosovo. According to a World Bank study, transport is responsible for 1.1 MtCO2 or 10 percent of total Greenhouse Gas emissions of the country. 60 PM2.5 stands for “particulate matter with a diameter of 2.5 micrometers or less.” Fine PM2.5 is dangerous to human health as it finds its way deep into lungs and the bloodstream resulting in disease and death. Acidic and nitrogen compounds in the air can also be deposited on land and water, degrading their quality and affecting ecosystems, food quality and recreational use of such areas. In addition, some air pollutants are also climate warmers. 61 Over 70 percent of PM2.5 pollution originates within Kosovo. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update of agricultural production, depletion and misuse of natural resources, and chronic poverty and outmi- gration. The rural population has few economic opportunities given the lack of investment in infrastructure, skills, and sustainability of natural resources to sustain livelihoods and build resilience to climate change and other risks. The govern- ment has not yet taken any concrete measures to implement climate-related policies and raise public awareness. Since the 2019-2028 Climate Change Strategy was adopted, there has been little implementation progress, for example, the Law on climate change is in drafting stage, as is the action plan 2021-23 (European Commission 2021). 75. At the same time, the haphazard urbanization process is generating serious economic costs and threats to quality of life that need to be tackled. Unplanned city expansion, congestion, and poor quality of services are already affecting people’s health and the productivity of cities in Kosovo, thus undermining an urbanization process that should create economies of scale and bring economic pros- perity to the country. Figure 30: Several cities surpassed the maximum annual average PM2.5 concentration of 25 μg/m3 36 32 28 PM2.5 [μg m-3] 24 20 16 12 8 4 Figure 31: Residential heating and power plants account for 70 percent of annual PM2.5 emissions 50 100% 45 90% 40 80% Waste 35 70% Agriclture 30 60% 25 50% Transport 20 40% Industry 15 30% Residential combustion 10 20% Power plants 5 10% 0 0% Emissions of PM2.5 % in 2015 Source: World Bank (2019) using GAINS model with data from 2015. Back to table of contents 27 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 4. Priorities for the policy agenda Taking the evidence gathered and following a consultative process, the SCD update conducted a prioritiza- tion exercise to organize the policies according to three criteria. In addition to the evidence gathered in the preparation of this SCD update, an extensive internal and external consultation process helped the team to identify the most pressing constraints to achieve the twin goals and the policies associated to them. Under the guidance of the Country Management Unit, the team selected three criteria to rank policies in order of importance and suggest a sequencing to policymakers. The first criterion is policies’ impact on progress towards the twin goals, which in the view of most stakeholders, is the primary ranking criterion. The second is the feasibility of the policies under the current economic, governance, and capacity conditions. The third criterion is the time these policies would take to materialize into results, which puts into perspective their ability to deliver results in a shorter time frame and generate political support for longer-term reforms. 76. Following the prioritization process, policies that nesses have the skills they need to increase their would stimulate private sector growth and human competitiveness, and that people have opportuni- capital accumulation are considered as having the ties to improve their incomes through better jobs. highest impact on the twin goals (Table 2). Specif- However, these policies will depend on the govern- ically, placing the employment gap at the center of ment mobilizing more public revenues and increas- all development challenges for the country, stake- ing the returns to public spending by reallocating holders consistently prioritized policies to improve investment. In conclusion, the SCD update outlines the demand and the supply of workers. These poli- a set of priorities that generate the widest con- cies include those that would promote exports and sensus among all stakeholders, and this consensus FDI and improve the overall business environment suggests that policies that increase job creation through better governance and more consistent and access to jobs will deliver the most benefits and regulations. On the supply side, stakeholders agree generate the strongest public support. Importantly, that building human capital and improving school- these priorities are closely aligned to the priorities to-work transition are crucial to ensure that busi- outlined in the first SCD. Table 2: Priorities and sequencing criteria suggest employment is top priority Priority IMPACT FEASIBILITY TIMELINESS Increasing equity of taxation and transfers High Medium Medium PW1 Increasing returns to public spending Very high Medium High Maintaining fiscal sustainability Very high High High Integrating Kosovo in the global economy Top High High PW2 Building a more transparent and predictable business environment Top Medium High Ensuring infrastructure supports sustainable productivity growth Very high High High Building inclusive skills for the future and improve the school-to-work Top High High transition PW3 Providing quality and affordable health services Very high High High Increasing equity and sustainability of social protection system Very high Medium High Prepare for climate change and a just transition Very high Medium Medium PW4 Clean and maintain natural resources High Medium Medium Foster productivity growth in agriculture High Medium Medium Back to table of contents 28 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 77. Addressing governance constraints remains a 78. Timely, accurate, and consistent statistics are key cross-cutting priority. The current government crucial for evidence-based decision making and is in a strong position to make significant progress accountability. The availability of accurate and on governance and inclusion in Kosovo. The gov- timely data for policymaking remains a key con- ernment has a strong majority; it has successfully straint across sectors (Annex 5). For instance, the managed the pandemic and the economic recovery, quality and timeliness of national accounts statis- and it shows credible intention to fight corruption tics, which are key for the effective implementation and enact social reforms. Tackling Kosovo’s struc- of Kosovo’s rules-based fiscal framework, is often tural constraints remains a long-term effort and will subpar, and Kosovo has been slow to implement the require building on past progress, while incorporat- new Census and to publish the EU-SILC, both key ing new evidence and managing the trade-offs of instruments to measure living conditions and imple- reforms that will be costly for some. In this regard, ment effective and well-targeted social policies. transparency and engagement with the population are crucial for sustainable progress. Pathway 1: Increasing returns and equity of fiscal policy Increasing equity of taxation and transfers Consultation participants rate this priority with a high score on impact on the twin goals; they rate its feasibility as medium, given the impact of structural and political economy bottlenecks in expanding the tax base and reforming categorical social transfers, and time to deliver impacts as medium term on account of the longer period required to implement the required reforms. 79. First, Kosovo needs to ramp up efforts to diver- erty tax administration, including the new tax on sify financing and enhance tax revenue mobili- land, need to be accelerated; likewise, it is crucial to zation by incentivizing formalization to buttress better incorporate profits from rental activity or sale fiscal sustainability. Informality hampers both the of commercial real estate into the tax base. effectiveness and equity of tax policy. Risk-based, performance-oriented tax and customs administra- 80. Second, tax policy design should be advanced tion capacity should continue to improve alongside to promote effectiveness and equity. The Minis- efforts to increase integrity safeguards. Tax debt col- try of Finance, Labor, and Transfers should have lection efficiency and timeliness should also improve the capacity to analyze ex-ante the distributional in part thanks to targeted communication efforts to impact of taxation and review the existing frame- promote compliance. The credibility of the tax regis- work from an effectiveness and equity perspective. try and information needs to be further strengthened At the same time, it should evaluate the impact of by increasing the interoperability with other admin- past policy decisions, such as the reduction of the istrative databases, while efforts to further digitalize corporate income tax and dividend income tax, to the delivery of tax services should continue. The role inform future tax policy design. The progressivity of the Kosovo Financial Reporting Council, including of the personal income brackets and the statutory its regulatory functions vis-à-vis public accounting, rate of immovable property tax could be modified to should be modernized and their professional capac- enhance equity. Existing tax exemptions should be ities enhanced. Given that Kosovo depends heavily reevaluated to reduce the potential inequities they on remittances and services exports to the dias- create, either by design or through complex and pora, the government should work closely with the discretionary administration. The current statutory financial sector to incentivize digital transactions. rate and fragmentation in the structure of the value At the same time, the government should reduce added tax (VAT) should be reviewed to improve both the cost of regulatory compliance by lowering the collection and equity. Given Kosovo’s structural fea- costs and red tape of licenses and permits, and by tures, consumption taxation remains an effective implementing effective, risk-based, and consistent tool to collect revenues without excessive distor- inspections. Efforts to improve the immovable prop- tions, but tax refund processes should be further Back to table of contents 29 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update automated and streamlined. Tax policy also needs 82. Finally, on the expenditure side, institutionaliz- to consider the inherent barrier to revenue mobiliza- ing poverty targeting across social protection pro- tion imposed by the prevalent informality, which also grams is a key milestone to enhance fiscal policy reduces the scope to mobilize compulsory contribu- effectiveness and equity. Spending on subsidies tions for health or other social benefits. and transfers represents more than a third of total government expenditure, yet less than 2.5 percent 81. Third, the tax policy framework should be of total government expenditure is poverty tar- adjusted to incentivize the green transition in line geted. Kosovo’s young population and significant with the global trends. Kosovo will need to prepare remittances, providing an informal social safety net, for the EU’s upcoming carbon border adjustment have cushioned against pressures for higher spend- mechanism (CBAM). The EU CBAM will directly ing on pensions and social assistance. However, this impact Kosovo’s exporting performance. The July limited window of opportunity and the associated 2021 EU CBAM legislative proposal applies to the fiscal space is crowded by benefits which are not import of selected goods from the most emission poverty targeted. Spending on subsidies and trans- intensive and trade exposed sectors covered by fers increased from an average of 21 percent of total the EU’s Emissions Trading System (EU ETS), such expenditure in 2010 to 30 percent in 2019; jumping as electricity, base metals and minerals.62 The EU above 35 percent of total expenditure owing to CBAM was designed to have a targeted and limited the pandemic response in 2020 and 2021. Yet, the impact, but what comes next could be a game impact on poverty reduction could be significantly changer (World Bank 2021f). Though the overall higher. Given Kosovo’s limited public resources, impact may not be immediately large, some of the increasing the poverty targeting of existing entitle- manufactured goods exported to the EU could be ment benefits, managing their cost and further pro- significantly affected. However, the EU is likely to liferation, restructuring the social assistance scheme expand the CBAM to cover more sectors and more to increase coverage and generosity, improving products. Diversifying into renewable energy sources healthcare financing, and commencing a compre- will become particularly important both due to the hensive pension reform, are paramount for enhanc- CBAM and to ensure adequate energy supply. As ing the effectiveness and equity of fiscal policy in the an immediate first step, the government can review medium term and strengthening the sustainability the existing fuel excises to close the gap between of public finances in the longer term (see Pathway diesel and petrol excise rates and redesign excises 3 below for a further discussion on the necessary on vehicle imports to incentivize lower emissions. reform path for the institutionalization of poverty targeting in social protection policies). Increasing the effectiveness and returns to public spending Consultation participants rate this priority with a very high score on impact on the twin goals; they rate its feasibility as medium, subject to higher revenue mobilization and political stability, and they rate the time to deliver impacts as medium, given the depth of the reform. 83. The government of Kosovo needs to improve ture for education and public health is below that of public investment management (PIM) by, among regional peers. The IMF also highlights a tendency to others, allocating adequate resources for the “over-invest in new capital stock and under-invest maintenance of public assets. Public investment in maintenance.” This is partly because the budget has decreased from an average of 10.5 percent of preparation process does not include standard GDP during 2010-2014 to an average of 7.2 percent procedures to secure adequate maintenance allo- of GDP during 2015-2020, yet it remains high cations, and which is particularly problematic for compared to most regional peers. Transport invest- pre-university education and healthcare, but also ment, mainly in road infrastructure, accounted for other key sectors such as roads. the largest share of capital investment and the road network expanded by almost a quarter between 84. Given PIM bottlenecks, execution is chronically 2010 and 2020. However, PIM efficiency and low and undermines the utilization of concessional effectiveness remain limited. According to the IMF IFI financing. Aside from the implementation of two (2016), efficiency of public investment in Kosovo major highway projects, the level of capital budget trails regional peers by 30 percent, and infrastruc- execution remains persistently low. At end-2015, Back to table of contents 30 62 The proposal stipulates that, from 2026, EU importers of these goods will be required to buy carbon certificates related to the carbon price that would have been paid, had the goods been produced in the EU under the EU ETS. The price of these certificates will gradually approach full EU ETS price over 10 years, as free allowances in EU are phased out by 10 percent a year. Once non-EU producers show that they have already paid for the carbon used in the production of the imported goods, the corresponding cost can be fully deducted for the EU importer. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update the Kosovo Parliament approved an exception to for the implementation of projects financed through the legally binding deficit ceiling to create addi- concessional IFI financing. tional room for capital projects with concessional IFI financing. However, to date, implementation of 86. To increase public investment efficiency and capital projects with IFI financing remains extremely effectiveness, the government needs to enhance low despite Kosovo’s sizable infrastructure gap. evidence-based policymaking. Ensuring evidence- based policy requires improvements in data quality, 85. There is a pressing need to finalize existing timeliness, and availability and analyzing the impact projects, reorient spending to invest more on of government policies based on available admin- human capital, and rationalize capital investment. istrative and survey data. It also requires enhanced For example, historically driven by political economy utilization and strengthening of the Kosovo PIM considerations, many transport projects in the fiscal system. framework were introduced without due detailed technical preparation or financial planning, and there 87. In terms of transparency and accountability, are continuous extensions of project implementa- important progress has been achieved but citizen tion timelines, instead of plans to restructure stalled engagement needs to increase. For instance, citi- projects. On the other hand, funding allocation for zen-friendly budgets are regularly published, and maintenance for education and health infrastructure information on budget implementation is available remains limited. This is compounded by limited munic- on the fiscal transparency portal of the government. ipal fiscal space, and political resistance to school or Likewise, in 2020, more than 98 percent of primary healthcare network optimization. The urgency of policy documents and draft laws were published the situation is illustrated by the fact that over half online for consultation. At the same time the Open of pre-university students attend schools with no or Data Portal continues to increase the number of poor-quality physical infrastructure, including proper data sets available, but these are not always user- sanitation. Additionally, over 90 percent of spending friendly. Public consultations required by law are not in health and education accounts for wages. In recent systematically carried out with minimum standards, years, reforms to the Kosovo Privatization Agency and the Law on Access to Public Documents is not legislation enabled privatization receipts to finance always fully enforced. To make the ‘eKosova’ portal capital spending. However, this source is practically an effective single window for citizens and busi- exhausted. Given the long-term budget constraints, nesses, the data platform needs to be strengthened the government needs to prioritize carefully new and outstanding legal, operational, and technical capital projects and significantly enhance capacities challenges addressed. Maintaining fiscal sustainability Consultation participants rate this priority with a very high score on impact on the twin goals; they rate its feasibility as high, subject to political commitment, and they rate the time to deliver impacts as medium, given the depth of the reform. 88. Full reinstitution of fiscal rules is needed to 89. Debt management should continue to be ensure fiscal sustainability. The need for sizable strengthened to reinforce long term debt sustain- fiscal support interventions amidst the pandemic ability. In the absence of a credit rating, the banking impelled the relaxation of fiscal rules. However, sector in Kosovo, dominated by foreign owned banks, Kosovo is a Euroized economy, without access to can only have limited exposure to Kosovo’s domestic international financial markets, and with fiscal policy debt. On the other hand, Kosovo is estimated to have as its sole lever for macroeconomic management. reached a public and publicly guaranteed debt level Maintaining adequate fiscal reserves is needed to of 22.5 percent of GDP in 2021, but it has an esti- build resilience and preserve the ability to act against mated additional 8 percent of ratified undisbursed future shocks. In the medium to long-run, Kosovo’s debt through international financial agreements. debt trajectory is stable only under an average Against this background, Kosovo needs to continue deficit level of 2 percent of GDP. Hence, returning to improving debt management and transparency, the full implementation of a legally binding deficit including through better evaluation of fiscal risks ceiling is paramount to ensuring public debt and and by diversifying financing sources to effectively macroeconomic stability. address infrastructure and developmental needs. Back to table of contents 31 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update 90. The government should address fiscal risks lated contingent liabilities of 5 percent of GDP. In by improving corporate governance of POEs, addition, the Medium-Term Expenditure Framework including improved performance and fiscal risk published on May 6, 2021, notes that based on avail- monitoring. Contingent liabilities related to POEs, able data for 2017-2019, more than half of the POEs which may not be directly debt related, pose addi- run losses, but the largest driver of sector losses is tional fiscal risks (primarily through pressures higher Kosovo Telecom (Ministry of Finance, Labour and transfers, cross-subsidies, or on lending). Although Transfers 2021). Improving POE financial monitoring the extent of the overall fiscal risks posed by the and conditioning any future transfers on perfor- POEs is currently unknown due to lack of a struc- mance improvements is vital to public investment tured fiscal risk assessment, the latest IMF Article IV effectiveness and equity in Kosovo. reports results from testing a scenario of POE-re- Pathway 2: Improving business environment and trade integration Integrating Kosovo in the global economy Consultation participants rate this priority with the highest score on impact on the twin goals; they rate its feasibility as high, subject to better government coordination, improved business climate, and enabling public infrastructure, and they rate the time to deliver impacts as high. 91. First, boosting Kosovar exports requires Kosovar exporters. However, in consultations closing trade facilitation gaps. Establishing a single exporters acknowledge an important, de facto, window would enable traders to meet all regula- non-tariff barrier linked to the limited recognition tory obligations (licenses, permits, certificates, etc.) of Kosovo. Thus, minimizing all technical, non-tariff through a single-entry point online, which would barriers to trade within the Western Balkans and slash costs, delays, and informal payments. Insti- improving trade facilitation would broaden market tutional coordination with other customs admin- access to the EU for Kosovar exports, since most istrations to simplify cross-border procedures, exporters use the Western Balkans as an entry point applying joint border controls and interconnecting to a larger, global market. IT systems, would lighten trade time and costs and benefit traders and consumers. Establishing a 93. Third, FDI attraction and retention remain policy professional and transparent risk unit at the Kosovo priorities. A clear FDI promotion strategy would Food and Veterinary Agency (KFVA) would ensure establish roles and coordination mechanisms across uniform, risk-based inspections across sanitary and government agencies involved in investment, define phytosanitary departments. Finally, updating the sector priorities, and set targets and responsibilities 2017-time-release study supported by the World for the implementation of reforms to strengthen the Bank to measure the efficiency of border and clear- investment climate and build investor confidence. ance procedures, would help implement evidence- As a start, the investment promotion agency KIESA based reforms to facilitate trade (World Bank Group could more effectively deliver core investor services and Kosovo Customs 2017). if its mandate and reporting lines were reviewed in line with international best practices and its corpo- 92. Second, expanding regional market access for rate governance was enhanced by appointing a Kosovar exporters would build up access to inter- board of directors. Finally, reinstituting an effective national markets. From a regulatory and trade investor grievance mechanism would help investors policy perspective, Kosovo’s trade regime is rela- deal with current issues and build future confidence. tively open, as shown by the free trade agreements it has signed, including CEFTA, which eliminated all regional tariffs and opened its market to many Back to table of contents 32 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Building a more transparent and predictable business environment Consultation participants rate this priority with a very high score on impact on the twin goals; they rate its feasibility as high, subject to political commitment, and they rate the time to deliver impacts as medium, given the depth of the reforms. 94. Kosovo should press ahead with improvements sector, a stronger legal framework for the microfi- to the investment climate. Reducing the admin- nance sector, enabling the usage of movable collat- istrative burden, increasing regulatory certainty eral, and further enabling non-banks to participate and supporting financial deepening are necessary in the funding and payments markets will help close to foster formalization and private sector produc- the financing gap. Furthermore, the implementa- tivity growth and remain at the center of the policy tion of the recovery and resolution framework in the reform agenda. draft Banking Law and implementation of the insol- vency framework would strengthen the financial 95. First, reinforcing the rule of law, increasing sector. Finalizing the cadastral reconstruction and regulatory certainty and streamlining regulations formalizing inherited and unregistered property, as would encourage investment and raise firm effi- well as accelerating the legalization of unpermitted ciency. Above all, a sound business environment construction, would strengthen property rights and rests on a well-functioning justice sector. Efforts to improve access to finance. Finally, timely imple- strengthen the rule of law, such as allocating higher mentation of the E-IDAS Law will enable e-pay- human and physical (including digital) resources, ments and reduce cash transactions, contributing reducing court case backlogs, training judges on to formalization. business cases, and building justice system capacity to deal with cybercrimes are the foundations to a 98. Finally, reducing regulatory barriers to compe- conducive business climate in Kosovo. Beyond the tition can boost productivity growth and facili- justice sector, the implementation of the recently tate firm entry. Preferential treatment for POEs approved Law on Inspections will be an important should be limited and follow strictly the legislation step to improve the governance of business inspec- on state aid, including in relation to procurement, tions. The creation of an e-inspectorate system sub-lending and guarantees. Market entry and exit and adoption of risk-based inspections will reduce should be facilitated by simplified business regis- compliance costs, uncertainty, and corruption. In tration and deregistration regulations, particularly addition, a continued systematic assessment and through the introduction of the silence is consent simplification of local and national business licenses principle. Finally, the government can further foster and permits will contribute to facilitate businesses competition by reducing regulatory barriers in the activity and job creation. services and network sectors. 96. Second, private sector employers need a broader supply of skilled workers to increase productivity and grow. Improvements in firm productivity, export access, and quality are closely linked with the skills of firms and workers. Hence, investing in employee and managerial training, improving human capital skills by matching technical and vocational education and training (TVET) curricula to firm demands, strengthening the general education system to improve basic numeracy and literacy skills will lead to higher productivity for firms. Furthermore, equipping students with digital skills is crucial to effecting the digital transformation of Kosovo. 97. Third, promoting financial inclusion and enabling e-payments would improve access to finance and support entrepreneurship. Though increasing, still fewer than a third firms have access to formal finance in Kosovo. Enhanced competition in the financial Back to table of contents 33 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Ensuring infrastructure supports sustainable productivity growth Consultation participants rate this priority with a very high score on impact on the twin goals; they rate its feasibility as high, subject to political commitment, and they rate the time to deliver impacts as high, given the depth of the reform. 99. First, ensuring an adequate and sustainable motorization, such as establishing low-carbon public energy supply is central to support productivity transport corridors, creating alternative transport growth. The upcoming energy strategy with revised options, setting up smart mobility systems, and renewable energy targets will provide an opportunity increasing vehicle standards. Greater coordination to redefine the priorities in the sector and accelerate with and direct support to municipalities is needed the energy transition towards cleaner energy and to achieve improvements in green urban mobility. decarbonization. In parallel, the government is also working towards improving the legal framework for 101. Finally, enabling digitalization of the economy enabling competition in the renewable energy sector by improving and leveraging the broadband and scaling-up renewable energy investments. On infrastructure and preparing for the 5G transition the demand side, continued investment in energy will support productivity and trade growth. Kosovo efficiency, especially for heating, will contribute to should continue to invest in improving digital efficiency gains and a just transition. infrastructure by developing broadband access in rural areas. With the rise in demand for mobile data, 100. Second, closing logistics gaps and encouraging it is urgent to implement the second phase of the greener transport options are key to modernize the Frequency Release Plan to assign new spectrum transport sector. Investing in regional roads and and accelerate the development of the broadband upgrading Kosovo’s international rail link would market. Next, the country needs to prepare the boost exports and firm productivity. Following the national 5G strategy and ensure the effective large investment in transport infrastructure in the implementation of the laws on Cost Reduction last decade, improving maintenance in the sector in Telecommunications Technology Deployment is a priority. Deployment of Intelligent Transport and Electronic Identification. Moreover, leveraging Systems (ITS) in the main trade corridors would the digital infrastructure is even more important. protect the road network and increase the efficiency This requires increasing digital skills and business of operations and maintenance. The government, digitalization. The government could consider together with municipalities, can advance the adopting an E-commerce policy or legislation to green transition by investing in urban mobility close regulatory gaps for digital trade, which would infrastructure and implementing policies for greener facilitate business activity and boost productivity. Pathway 3: Investing in human capital and increasing inclusion Building inclusive skills for the future and improve the school-to-work transition Consultation participants rate this priority with the highest score on impact on the twin goals; they rate its feasibility as high, subject to reallocation of public expenditure and/or higher revenue mobilization, and better government coordination, and they rate the time to deliver impacts as medium term, given the depth of the reforms. 102. Students’ standardized tests scores and worker 2020 children in Kosovo could only expect to reach and employer surveys present a concerning picture 57 percent of their potential productivity by age 18, of the skillset of the current and future workforce in part because they lose an estimated 5.3 years of in Kosovo. According to the Human Capital Index, in schooling (out of 13.2) due to low learning outcomes Back to table of contents 34 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update (World Bank 2020c). Children (especially from poor considered under this re-optimization plan. The and ethnic minority families) are not acquiring the quality of learning also needs to be tracked closer, basic literacy and numeracy foundations needed to by improving the system of learning assessments learn more advanced concepts later in school and that guides teacher instruction and motivates training, and employers complain that technical and improvement over time, especially in lagging munic- socio-emotional skills are lacking in most graduates ipalities; and by implementing an education digi- looking for work. During consultations, employers talization plan equitably. Finally, the ministry could also highlighted the difficulty in finding skilled move forward with creating a student registry to manual labor, and the risks of training workers who track students’ academic performance that includes soon after start searching for better opportuni- an early warning system to identify students falling ties abroad. To fill this gap, employers are consid- behind or at risk of dropout and provide them with ering bringing workers from Asia, which would extra support. In this effort, the ministry can identify further exacerbate the jobs’ shortage that domestic and work with school support programs, such as workers face. Hence, a top priority for the govern- accelerated learning, tutoring, or after school extra ment is to set up long-term policies to increase curriculars, and supplements such as learning center learning outcomes in pre-university education. programs delivered by NGOs (especially for low-in- come families, minority children, and rural students). 103. First, the government needs to ensure children have the foundations for learning before 105. Third, schools and employers need to support they begin primary school. This implies working a smooth school-to-work transition of youth by with municipalities to increase preschool enrollment addressing youth’s incentives and aspirations. by expanding the preschool supply, for example School to work transition starts long before students through incentives for private providers and hybrid graduate. Between the end of primary and the public-private models. This expansion of supply start of upper-secondary education, information must ensure minimum quality, through licensing campaigns can educate children, especially girls, (for private providers), monitoring, and training for about labor market opportunities and earnings by all teachers. It is also important to raise awareness occupation in Kosovo’s private sector, skills required among parents of the importance of early childhood in different occupations, and training opportunities education to provide children with the basic learning in post-secondary education. This information is foundations and promoting access of children from the basis for selecting career and training paths in poor households. Broader access to childcare also post-secondary. Schools should also partner with reduces the barriers for women to participate in the private sector to increase work-based-learning economic activity. The draft Law on Early Childhood through internships and apprenticeships; and the Education should be actively disseminated and government needs to increase the labor market discussed to create awareness among the popu- relevance of technical and vocational education and lation, and it should be adopted and implemented training programs and university courses to build to build a quality and inclusive system of early the skills required by manufacturing and service childhood education. sector jobs. Alternative education and after-school programs can also support disadvantaged and 104. Second, in pre-university education authorities minority youth to build soft skills. As with learning need to improve the quality of learning outcomes. outcomes, information systems should also monitor Schools need to have sufficient human and physical school-to-work transition including employer inter- resources to deliver good education. This requires views and tracer surveys that provide feedback to increasing the efficiency of resource allocation in improve labor market information, career coun- the school system. Some steps include updating seling and intermediation services. the school mapping report and the education management information system; undertaking a school network optimization exercise (including the distribution of human resources); finalizing the adoption of the revised per-capita school-financing formula and including it in the next budget cycle; updating and communicating instructions; and guiding municipal administrations on the alloca- tion of school grants based on the revised formula. An extension of the school-day duration may be Back to table of contents 35 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Providing quality and affordable health services Consultation participants rate this priority with a very high score on impact on the twin goals; they rate its feasibility as high, subject to reallocation of public expenditure and/or higher revenue mobilization, and they rate the time to deliver impacts as medium term. 106. A universal health coverage policy will increase 107. The health service delivery system also needs access to quality and affordable health services for to be urgently strengthened to better deal with the the population. Previous administrations had placed growing burden of noncommunicable disease and social health insurance at the top of their agenda. future health emergencies. Specifically, authorities However, the adoption of the Health Insurance Law need to lay out a roadmap for improving quality of has experienced multiple delays. Lack of a universal health care services, including developing a master health insurance system leaves people unprotected plan for health facility network that defines the role from high OOP expenses to cover healthcare costs. and needs in human resources and infrastructure This also reduces people’s use of preventive care, of primary health care and hospitals; implement which ultimately increases private and public health an integrated health information system; and expenditure. A policy priority is then to increase strengthen the procurement system for phar- affordability and financial sustainability of healthcare maceutical products to achieve better value-for- by rolling out a social health insurance program with money. These reforms need to be accompanied robust poverty targeting; a well-defined benefit by a contingency plan for public health system to package and a provider contracting and payment improve preparedness and resilience face to future mechanism to optimize value for money in insurance health emergencies like COVID-19. strategic purchasing. By making small regular contributions to future health care needs through taxation or insurance premiums, a household can avoid facing the risk of unpredictable and potentially catastrophic OOP payments. This reform is crucial in the long term to generate additional resources for the health sector and reduce the financial burden to households from OOP health costs. Increasing equity and sustainability of social protection system Consultation participants rate this priority with a high score on impact on the twin goals; they rate its feasibility as medium, subject to targeting of social expenditure (reforms of categorical pensions) and/or higher revenue mobilization, and they rate the time to deliver impacts as medium term. 108. To boost the inclusion impact of social spend- Eliminating or significantly narrowing categorical ing, Kosovo needs to increase funding to pover- benefits (for example keeping only disability bene- ty-targeted benefits, by reallocating resources out fits and, over time, introducing poverty-targeting of categorical to targeted benefits. Kosovo has a for old-age pensions) would liberate resources to relatively high cash transfer expenditure, compared expand the Social Assistance Scheme and increase to other Western Balkan countries, at 7.4 percent its generosity. An initial step towards consolida- of GDP in 2021, up from 4.1 percent in 2009. Yet, tion would be to maintain the key structure of the over 90 percent goes to old-age pensions, war-re- current pension system and transfer other pensions lated pensions, and disability pensions, whereas (especially war-related) towards the general pension poverty-targeted transfers only represent about system and establish mechanisms to prevent future 0.7 percent of GDP.63 Given the still high mone- unsustainable benefit increases. This would also tary poverty linked to structural socio-economic allow to increase old-age, survivor, and disability conditions such as family size, education, and labor pension generosity with the aim of creating more market status, increasing the marginal impact of equity within the social protection system. cash transfers in reducing poverty and inequality requires improving their targeting and expanding 109. Second, the social protection system needs a coverage to more poor and vulnerable families. minimum infrastructure to identify eligible individ- Back to table of contents 36 63 This share declined from 0.8 percent of GDP in 2009. In terms of total social spending, SAS represented 19 percent in 2009 but only 9 percent in 2020, accounting for the increase in transfers in 2020 to respond to COVID-19. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update uals and channel benefits with flexibility and in a programs, the Employment Agency of the Republic coordinated manner. To improve the efficiency of of Kosovo needs to expand its employer outreach the social protection system, a single registry should and introduce proactive case management, and it be used to identify potential beneficiaries and assign could also explore ways to encourage employers to them benefits commensurate with their need. A hire young people and women by creating incen- unified registry allows the system to combine bene- tives for hiring through temporary wage subsi- fits and monitor households’ conditions over time, dies, among others. It is also key to strengthen the to prevent them from falling through the cracks. A Labor Market Information System by collaborating single registry also facilitates the temporary expan- closely with private service providers to collect more sion of programs to address increased need for comprehensive information on job opportunities, support in times of crisis and to generate compen- and to disseminate information on skills gaps and sation for shocks such as increased energy prices. shortages, job vacancies, wages, job profiles, train- Complemented with an integrated case manage- ing programs, etc. Finally, an assessment of eligibil- ment system within municipalities, such a registry ity criteria, benefit formula, generosity, sanctions in could help ensure that poor households access the case of non-compliance, and incentives to graduate full range of health and education services. is needed to identify possible adjustments to align the incentives of active labor market programs and 110. Third, the labor intermediation system needs to beneficiaries. Collaborating with non-public provid- be strengthened to improve its placement results ers in the provision of intermediation services and and generate the right incentives for employers employment programs can help overcome some of and workers. To improve the performance of the the capacity constraints in public provision. current labor intermediation and active labor market Pathway 4: Improving environmental management and planning Prepare for climate change and a just transition Consultation participants rate this priority with a very high score on impact on the twin goals; they rate its feasibility as medium, subject to higher revenue mobilization and better government coordination, and they rate the time to deliver impacts as medium term, given the depth of the reforms. 111. Kosovo needs to implement its Climate Change first step, Kosovo needs to speed up the implemen- Strategy. Climate change is already affecting liveli- tation of its Climate Change Strategy, including the hoods globally, and Kosovo is no exception.64 This adoption of the Law on Climate Change and the impact could become more acute in Kosovo as it action plan 2021-23. has a relatively large rural population that depends on already scarce land and water resources. More- 112. Municipal governments need increased urban over, the country’s legacy of coal-based energy, planning capacity to curb growing congestion, outdated infrastructure and unplanned urban improve the quality of life and increase resilience, development has rapidly increased air pollution and while the national government should support undermined sustainability. Kosovo’s power sector investments to improve air quality. Although is one of the most reliant on coal globally (~95% urbanization is advancing relatively slowly in Kosovo, of domestic power generation comes from coal- its negative effects, including increasing emis- fired power plants). As the EU moves towards the sions, are growing much faster. Pristina and other implementation of its Green Deal to reduce emis- cities already have among the worst air qualities in sions, reduce dependence on natural resources and Europe and the world, and this problem will only foster more inclusive economic progress, Kosovo get worse if residential heating does not become faces a unique opportunity to break with the past more efficient and people continue to expand urban and enter a path of more efficient and sustainable sprawling and rely on private vehicles. Considering resource use and energy mix, which can also create this, municipal government should contribute to new economic development opportunities. As a lowering emissions and increasing climate resilience Back to table of contents 37 64 The International Panel on Climate Change (IPCC) also identified the Western Balkans as one of the most vulnerable areas in Europe. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update by implementing strategies to improve livability and should progressively rely more heavily on renewable competitiveness of cities, by reducing congestion, sources, in line with the commitments to the Energy improving public transport systems, and reducing Community Treaty and EU Directives.65 This can be uncontrolled and sprawling development. The done through an assessment of alternative energy national government should also set targets to sources and revised targets for 2030 and beyond, reduce air pollution by increasing air quality stand- to be included in the National Energy and Climate ards, generating more data to monitor progress, Plan, as well as funded programs to ensure a just and to support investments to reduce generation energy transition by mitigating social impacts in of pollutants. coal mining regions. The government should also speed up the implementation of energy efficiency 113. The country also needs to accelerate its investments in residential buildings and the private energy transition. Although Kosovo achieved its sector, which needs to be accompanied by greater target share of energy consumption from renew- data collection to monitor, verify, and disseminate able sources in 2020 (25.7 percent), its energy mix progress on energy savings. Clean and maintain natural resources Consultation participants rate this priority with a high score on impact on the twin goals; they rate its fea- sibility as medium, subject to reallocation of public expenditure and/or higher revenue mobilization, and better government coordination, and they rate the time to deliver impacts as medium term. 114. Kosovo needs to improve water management However, its implementation requires building to reduce water stress and increase sustainability. government capacity at all levels, establishing Kosovo has low water availability and storage, and targets and a timeframe, and setting up proper its water basins will experience mounting stress from monitoring mechanisms. Some important decisions, demand due to agricultural, industrial and popula- such as the locations for new landfills in agreement tion growth, as well as climate change. To improve with the local authorities are still pending. Likewise, water sustainability, Kosovo needs to pursue a long- despite progress in the planning and construction term, multi-sectoral water management strategy of wastewater treatment plants, these are still not that prioritizes building institutional capacity and properly functional, and the country needs more upgrading infrastructure. Although Kosovo has a investment to clean up water sources and iden- 2017- 2036 Water Strategy, its implementation tify urban areas at risk for water contamination. needs to be improved.66 This includes making the Regarding land decontamination, the government river basin district authority operational, finalizing should set up and implement a long-term program flood risk and hazard maps, increasing data collec- to clean up the most polluted sites, building on the tion, and implementing monitoring mechanisms 2018 policy to deal with contaminated land. and green engineering programs for groundwater and water protection zones. On the utilities’ side, it is crucial to reduce NRW by increasing tariff collection and reducing (especially commercial) water losses. Better collection and dissemination of data would also increase accountability in the water sector. 115. Wastewater, solid waste management and land decontamination are also priorities to increase environmental sustainability, especially in rural areas. Household and industrial waste, including mine and industrial discharge have become serious threats to soil, water, and overall health. Large quan- tities of household waste and industrial discharge are dumped in unmanaged landfills and rivers each year. Authorities have made progress on legislation, for instance, through the adoption of the Strategy on Integrated Waste Management 2021-2030.67 Back to table of contents 38 65 In 2020, Kosovo’s renewable energy totaled 139 MW (95 MW of hydropower, 34 MW of wind and 10 MW of solar) (European Commission 2021). The planned construction of several small hydroelectric power plants needs to comply with environmental legislation and citizen engagement processes due to their environmental risks. 66 This includes the Water Law. 67 European Commission (2021) reports progress in the reporting of waste and adoption of modern, integrated municipal waste management plans for some, but not all munic- ipalities. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Foster productivity growth in agriculture Consultation participants rate this priority with a high score on impact on the twin goals; they rate its fea- sibility as medium, subject to reallocation of public expenditure and/or higher revenue mobilization, and better government coordination, and they rate the time to deliver impacts as medium term. 116. To increase farm productivity, the first step sification of the current area and the expansion of is to facilitate greater farm size. Kosovo has the equipped areas for irrigation, which will need to challenge of switching from small, subsistence be implemented in partnership with the private farming to a market-oriented agriculture. Evidence sector within and outside current schemes. Existing shows that larger farms are more competitive; irrigation companies need to improve reliability, however, the lack of a dynamic land market makes adequacy of the service, and cost recovery, e.g., it difficult to aggregate farmland. The govern- through performance contracts with users, technical ment needs to expedite cadastral reconstruction oversight, improved budgeting, tariff setting, and and legalization, by giving priority to economically cost recovery targets. Per the Irrigation Master Plan active agricultural land. This would consolidate the and Investment Framework a diversified support land market, increase access to finance, and protect model for irrigation expansion is needed, where agricultural land from construction. Enforcing investments in irrigation build on successful cases the agricultural land tax and introducing market- to avoid perpetuating non-viable farm models and based valuation of properties would encourage the are planned in complement with infrastructure and productive use of agricultural land. To increase scale, capacity building to improve productivity. small producer associations and cooperatives could better link farmers to finance and markets. The KCGF 119. Finally, the government can encourage farm agriculture window could also help micro and small productivity growth by decoupling farm support farmers to access financing, by providing financial and expanding financial products for farmers.68 products along the agricultural cycle (longer matur- The current subsidy design has a negative net ities) and developing agricultural risk management effect on farm efficiency because of factor misal- instruments. location. Instead, decoupling subsidies would encourage farmers to produce based on compet- 117. Second, promoting technology adoption and itive advantage, increase farm investment and helping farmers meet production standards would specialization, and shift land use to high-value grow the agri-food export base and create positive production. By establishing and enforcing envi- spillovers. Current support mechanisms are not ronmental farming standards, decoupled subsidies encouraging productivity enhancing investment. would promote the adoption of sustainable farming However, more public investment in public goods practices and increase Kosovo’s competitiveness in for farmers (advice, training, extension services, agri-food production.69 R&D, infrastructure, and storage) would provide farms with much needed technology to increase their competitiveness and would reinvigorate rural economies. Promoting forward and backward links for production, processing, and marketing and reducing import barriers and custom duties for capital goods and technologies would also support growth in agri-food exports with positive spillovers in the non-exporting rural economy. 118. Third, along with increasing water sustaina- bility, expanding sustainable irrigation is needed to sustain commercial farming. With only 17 percent of agricultural area irrigated (lower than the regional average) and a worsening situation for rainfed agri- culture, agricultural productivity will continue to decline. The revitalization of agriculture and the rural economy requires expanding the area under irrigation. This includes the revitalization and inten- Back to table of contents 39 68 “Decoupling” means separating agricultural subsidies from agricultural output or area cultivated, thus allowing farmers to produce according to market demand. Decoupled payments, instead, compensate farmers for compliance with higher environmental and animal welfare standards, which reduce price competitiveness, and for their contribution to clean air and landscape maintenance. Because they do not distort production, consumption, and international trade flows, decoupled payments comply with WTO require- ments (World Bank 2021b). 69 The Ministry of Agriculture has started preparing the Agriculture and Rural Development program 2021-2027, based on independent sector studies (European Commission 2021). REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Annex 1: Selected Economic Indicators — 2019-2024 KOSOVO 2019 2020 2021e 2022f 2023f 2024f Real GDP growth (percent) 4.8 -5.3 9.1 3.9 4.3 4.2 Composition (percentage points): Consumption 6.2 2.2 6.0 1.7 2.3 1.8 Investment -1.1 -2.4 3.1 2.7 2.4 2.5 Net exports -0.3 -5.1 0.0 -0.5 -0.4 -0.1 Exports 2.2 -8.4 15.0 1.7 1.9 2.1 Imports (-) 2.5 -3.3 15.0 2.1 2.3 2.2 Consumer price inflation (percent, period average) 2.7 0.2 3.4 5.4 1.6 2.2 Public revenues (percent of GDP) 26.8 25.4 28.7 28.4 28.2 28.2 Public expenditures (percent of GDP) 29.7 33.0 30.1 30.6 30.9 30.7 Of which: Wage bill (percent of GDP) 8.7 9.8 8.8 8.5 8.9 8.8 Social benefits (percent of GDP) 6.3 7.7 7.4 7.2 7.0 6.6 Capital expenditures (percent of GDP) 7.5 5.6 5.5 6.5 6.8 7.0 Fiscal balance (percent of GDP) -2.9 -7.6 -1.4 -2.2 -2.6 -2.5 Primary fiscal balance (percent of GDP) -2.6 -7.2 -1.0 -1.7 -2.2 -2.2 Public debt (percent of GDP) 17.0 22.0 22.1 24.0 25.3 26.9 Public and publicly guaranteed debt (percent of GDP) 17.6 22.4 22.5 24.3 25.4 27.0 Of which: External (percent of GDP) 5.8 7.8 7.6 9.2 9.9 10.6 Goods exports (percent of GDP) 5.6 6.9 9.9 9.8 9.8 9.9 Goods imports (percent of GDP) 45.8 44.2 56.7 55.2 55.0 54.7 Net services exports (percent of GDP) 13.1 5.7 14.2 12.6 13.5 14.4 Trade balance (percent of GDP) -27.1 -31.6 -32.7 -32.9 -31.7 -30.4 Net remittance inflows (percent of GDP) 11.6 13.8 15.7 14.7 14.1 13.9 Current account balance (percent of GDP) -5.6 -7.0 -9.1 -9.7 -9.0 -8.0 Net foreign direct investment inflows (percent of GDP) 2.7 4.2 4.2 4.2 4.0 4.0 External debt (percent of GDP) 31.2 37.2 37.3 — — — Real private credit growth (percent, period average) 7.8 7.6 7.5 — — — Nonperforming loans (percent of gross loans, end of 1.9 2.5 2.3 — — — period) Unemployment rate (percent, period average) 25.7 24.5 — — — — Youth unemployment rate (percent, period average) 49.4 49.4 — — — — Labor force participation rate (percent, period average) 40.5 37.8 — — — — GDP per capita (US$) 4,416 4,350 5,058 5,281 5,657 5,967 Source: Country authorities, World Bank estimates and projections. Back to table of contents 40 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Annex 2: Poverty trends and profiles This section describes the latest poverty tends and depth (measured by the poverty gap in Figure 33) the characteristics of the poor and the bottom 40 remain higher in rural than in urban areas, despite percent of the population. The analysis was con- the 11.5 percentage-point reduction in rural poverty ducted based on the Household Budget Survey in 2012-2016.70 In that period, the gap in the poverty 2012-2017 (latest year available). Welfare is meas- headcount rate between rural and urban areas con- ured in terms of consumption per capita, expressed tracted from 12.6 to 4.5 percentage points. In 2017 in PPP (2011) US dollars, and poverty is measured as the rural and urban poverty headcounts were 24.7 the percentage of the population with a per capita percent and 19.8 percent, respectively. As approx- consumption below the US$5.5 (PPP 2011) per imately 61 percent of Kosovo’s population lives capita, per day, poverty line used for upper-middle in rural areas, this implies that two-thirds of poor income countries. households are rural. Overall, consumption among the bottom 40 percent grew faster than median and Poverty fell and shared prosperity was positive mean consumption during this period both in urban over the 2012-2017 period. Poverty fell from 31.9 to and rural areas (Figure 34), and it grew relatively 23.6 percent of the population between 2012 and more among the bottom percentiles, which also 2016 (8.6 percentage points), but it increased again happen to be mostly rural. Consumption also grew in 2017 to 24.4 percent (Figure 32), driven by an significantly among the 95th percentile (Figure 35).71 increase in rural poverty. Both poverty and poverty Figure 32: Poverty headcount ratio (%) Figure 33: Poverty gap index (%) 40,0 9,3 36,9 8,1 35,0 7,6 7,2 31,9 6,9 6,3 6,6 6,4 30,0 6,0 6,1 6,1 5,7 5,6 5,6 27,4 25,0 4,8 4,8 4,8 Percent 24,4 4,5 24,3 20,0 19,8 15,0 10,0 2012 2013 2014 2015 2016 2017 Urban US$5.5 (2011 PPP) Rural US$5.5 (2011 PPP) Total US$5.5 (2011 PPP) Urban Rural Total 2012 2013 2014 2015 2016 2017 Figure 34: Shared prosperity (%) Figure 35: Growth incidence curve, national, 2,5% 2,3% 2,4% 2012-2017 Annual Growth Rate (2012-2017) 6 2,2% 2,0% 2,0% 4 1,8% 1,7% 1,5% 2 1,0% 0 -2 0,5% 0 10 20 30 40 50 60 70 80 90 100 0,0% Percentiles National Urban Rural GIC 95% Confidence Interval Annualized growth, Bottom 40% Annualized growth – total population Growth in mean Growth at median Source: Household Budget Survey. Back to table of contents 41 70 The poverty gap index measures the extent to which individuals fall below the poverty line (the poverty gaps) as a proportion of the poverty line. It measures the depth or intensity of poverty. It considers both the percentage of the population below the poverty line as well as the size of the gap between the poverty line and the average consump- tion of those below the poverty line. Compared to the poverty headcount, the poverty gap has the advantage of detecting changes in welfare that occur below the poverty line, such as households becoming less poor, but not enough to cross the poverty line. 71 The growth incidence curves present the percentage change in (real) consumption per capita for each centile of the population (ranked from poorest to richest) over the peri- od; indicating how consumption is growing in the poorest part of the distribution relative to those who are better off. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update There’s a noticeable increase in urban inequality incidence; this is the case for instance in Ferizaj, between 2012 and 2017. The Gini index increased in which has around 19 percent of the poor population urban areas and it lays above the national average but a poverty incidence of 44 percent. On the other since 2014. On the contrary, in rural areas inequality hand, Prizren has a lower poverty incidence (14.6 improved from 2012 to 2015 and although the Gini percent) but has 10.7 percent of the total poor. One index has increased, it was still lower in 2017 than notable exception is Pristina, which has both a high in 2012 (Figure 36). To understand this evolution, poverty incidence and a high share of total poor. growth incidence curves in rural and urban areas Poverty is heavily concentrated geographically. The between 2012 and 2017 show that growth at lower three regions with the highest poverty rates have percentiles of the consumption distribution was a higher share of the bottom 40 percent than that much higher than the mean and median in rural of the overall population. Furthermore, combined, than in urban areas (Figure 37). Indeed, in urban they account for 70 percent of the poor, 65 percent areas, growth at the bottom 40 percent was barely of the population in the bottom two quintiles, but higher than the average (Figure 38), while it was just over 50 percent of the overall population. significantly higher among the richest people. In the period 2016-2017, when inequality increased more Between 2012 and 2017, the main driver of poverty significantly, consumption did not grow for most reduction at the national level was consumption urban households, but for those in the 90th percen- growth, as opposed to changes in its distribution. tile. Whereas in rural areas the bottom 15 percentiles Despite the faster growth of consumption at the had slightly above-average growth, while the 90th lower parts of the distribution (Figure 35), poverty percentile experienced more significant growth, reduction can be linked to a larger extent to growth in hence increasing rural inequality in a lesser extent to the whole distribution (86%) rather than to changes urban inequality. in the consumption distribution (14%). This is espe- cially true in urban areas, where virtually all poverty Poverty incidence is highest in Ferizaj and in reduction is attributable to growth (Figure 38) Mitrovica, but the highest share of the poor are (112%),72 whereas in rural areas a larger share of concentrated in Pristina, followed by Mitrovica and poverty reduction came from changes in the distri- Ferizaj (Table 3). As in many countries, rural regions in bution (27%) from faster-than-average consump- Kosovo tend to have fewer poor but higher poverty tion growth among the poorest deciles (Figure 37). Figure 36: Gini index by area, 2012-2017 Table 3: Poverty Rates, distribution of the bottom 32,0 31,2 40%, by region, 2017 30,0 29,1 28,8 Share of the Share of Share of Regions Poverty % 29,1 29,0 poor bottom 40% population 28,0 27,4 27,6 28,0 26,3 27,4 Gjakov 4,7 1,9 4,3 9,8 26,0 26,4 26,5 26,7 26,5 Gjilan 14,3 6,0 6,2 10,2 24,0 25,7 25,5 25,4 Mitrovic 40,0 24,5 20,6 15,0 25,1 Pej 26,9 10,7 9,9 9,7 22,0 Prizren 14,6 10,7 13,9 17,8 20,0 Prishtin 24,7 27,3 29,8 27,0 2012 2013 2014 2015 2016 2017 Ferizaj 44,0 19,0 15,3 10,5 Urban Rural Total Total 24,4 100,0 100,0 100,0 Figure 37: Growth incidence curve, rural area, Figure 38: Growth incidence curve, urban area, 2012-2017 2012-2017 Annual Growth Rate (2012-2017) Annual Growth Rate (2012-2017) 20 20 10 10 0 0 -10 -10 -20 -20 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Percentiles Percentiles GIC 95% Confidence Interval GIC 95% Confidence Interval Growth in mean Growth at median Growth in mean Growth at median Back to table of contents 42 72 Changes in the consumption distribution had a negative impact on poverty reduction in urban areas or –12%. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Large households and households with children Figure 39: Poverty incidence by household size (%) have a higher likelihood of being poor and account 46,3 for a large share of the poor. There’s a clear positive relationship between household size and poverty 36,0 34,9 (Figure 39). Poverty incidence among households 28,6 26,8 26,2 with at most 2 members was 3.4 percent in 2017, 22,9 22,8 whereas it was 36 percent among households with 16,6 13,9 7 or more members. Likewise, over half of the poor 13,1 10,4 belonged to households with 7+ members. Similarly, 8,1 5,5 4,6 5,5 poverty is much higher for households with children. 3,4 1,7 In 2017 there was a 7-percentage-point gap in the <=2 3 4 5 6 7+ poverty incidence of households with no children 2012 2015 2017 and households with one child. This gap grows as the number of children increases, reaching 29 Figure 40: Poverty incidence by number of children percentage points between household with no (%) children and those with 3 or more children (Figure 46,7 45,6 42,6 41,4 40,7 40). Child dependency rates are considerably 37,0 higher in Kosovo than in the other Western Balkan 34,4 29,3 29,0 29,3 countries, especially among households from the 27,8 26,3 24,5 24,5 bottom 40% of the consumption distribution.73 21,6 21,3 19,4 18,6 Only Montenegro has a child dependency rate 15,3 13,4 13,1 12,3 12,2 higher than Kosovo among poor households (0.59 10,6 vs 0.51).74 Figure 40 confirms the positive rela- tionship between number of children and adult members and poverty incidence. However, the 2012 2013 2014 2015 2016 2017 table also shows that the presence of older adults No children With one child With two children With 3 or more children reduces the probability that the household is poor. Source: Household Budget Survey. Poverty is lower among more educated households. Poverty incidence is four times larger among house- holds whose head of household did not complete primary education, relative to those with tertiary educa- tion (Figure 41). Almost forty percent of poor household heads attained only primary education, against 32 percent in the entire population. By contrast, only 4.5 percent of poor household heads have tertiary education, against 16 percent in the entire population. Results from a regression analysis shown in Table4 confirm that having a household head with tertiary education reduces the probability of living in a poor household between 16% and 18% relative to households whose heads did not complete primary education. Figure 41: Poverty incidence by educational attainment of the household head (%) 51,7 48,4 39,2 32,0 35,3 29,5 25,4 16,3 4,6 3,3 4,5 8,2 Didn't complete primary Primary Secondary or vocational Tertiary Distribution of the Poor Population (%) Distribution of the Population (%) Poverty headcount Rate (%) Source: Household Budget Survey. Back to table of contents 43 73 Child dependency rates are defined as the proportion of children 0-14 of age to the number of working age individuals in the households (15-64 years of age). 74 Estimates using SILC 2018 for Western Balkan countries, except Bosnia and Herzegovina. The rates for the rest of countries are Albania, 0.45; North Macedonia, 0.36; Serbia, 0.31. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Consumption poverty is closely related to the main of age, those disabled, unemployed or with occa- income sources of a household, the employment sional employment show above-average rates of status of its individuals and, if employed, the sector poverty. Reporting being an employer as the main and type of employment. In 2017, households activity does not guarantee that the person will whose main source of income was salaried work avoid poverty, since 7% of these are poor. Due to were less likely to live in poverty than those whose larger household sizes and high dependency ratios, main source of income was occasional (per-diem) incomes from employment are spread thin among work. Poverty rates are highest among households the poor. For example, in 2017, more than a quarter that depend on social assistance as their main (27.2 percent) of households did not have a single source of income, followed by those who depend wage earner, and 46 percent were dependent on on benefits to families of children with permanent a single wage earner. Although in the population disabilities. Poverty rates are lowest among house- women have a higher chance than men to be poor, holds that depend primarily on remittances from female headed households have a lower proba- abroad, public sector wages, household businesses bility of consuming below the poverty line as shown income, war-related pensions, and those with in Table 4. Nonetheless, only about 10 percent of private sector wages. Among individuals 15+ years households are female headed in Kosovo. Table 4: Household characteristics and the probability of living in poverty Probit LPM Household characteristics Marginal effects Children 14 and under 0.055*** (0.002) 0.068*** (0.003) Individuals (15-64) 0.032*** (0.002) 0.037*** (0.002) Individuals (65+) -0.019*** (0.005) -0.018*** (0.006) Highest level of education completed, Primary -0.023 (0.016) -0.023 (0.014) Highest level of education completed, Secondary or vocational -0.082*** (0.016) -0.083*** (0.015) Highest level of education completed, Tertiary -0.178*** (0.016) -0.166*** (0.015) Sex of household head, Female -0.051*** (0.009) -0.047*** (0.010) Area of residence, Urban 0.000 (0.006) 0.003 (0.007) Wage share of total income -0.107*** (0.020) -0.136*** (0.025) Pension share of total income -0.004 (0.023) -0.003 (0.028) Social Assistance share of total income 0.260*** (0.024) 0.402*** (0.032) Remittance share of total income -0.119*** (0.022) -0.129*** (0.026) Property share of total income -0.113*** (0.038) -0.122*** (0.039) Observations 13,786 13,786 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 Source: Authors with Household Budget Survey data. Note: The table shows the marginal effects of household characteristics on the probability of being poor. The first column uses a probit model while the second one uses a linear probability model. The regression includes regional and year fixed effects, not shown. Labor earnings and pensions are the main sources of household income in Kosovo for all households, though income from social assistance also plays an important role among poor households. In 2017, labor earnings represented more than half of urban and rural poor households’ total income. These shares are lower than those for the total population. Labor earnings and pension shares are larger for poor households in urban areas relative to rural areas. Remittances represented around 12 percent of household income (8 percent for poor households) in rural areas, against 8 percent of household income in urban areas (6 percent for poor households). In contrast, social assistance represented only 4 percent of average house- hold income, but 13 and 12 percent for poor households, in urban and rural areas, respectively. Notably, between 2012 and 2017, urban poor households’ income relied relatively more on pension income and Back to table of contents 44 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update slightly less on labor earnings, social assistance, and remittances. Rural poor households had a similar trend but with a much lower increase in incomes from pensions. The decline in poverty between 2012 and 2017 was mainly driven by wages, which explained close to 80 percent of the total poverty reduction (5.6 out of 7.1 percentage points). This is particularly the case in urban areas, where it explains 152% in the reduction. Income from pensions and employment rates also contributed to poverty reduction, especially in rural areas. Besides pensions, non-labor income did not play a substantial role in poverty reduction. On the con- trary, social assistance, remittances, unemployment benefits, and agricultural sales played a very limited role in poverty alleviation. Figure 42: Contribution of income components to change in poverty Change in poverty between 2012-2017 Other income per adult 0,2 Agricultural sales per adult 0,2 Property per adult 0,2 Remittances per adult 0,2 Unemployment benefit per adult 0,2 SA per adult 0,0 Child benefits per adult 0,2 Pensions per adult -4,6 Labor earnings per occup adult -5,6 Shared of occupied adults -3,1 Share of adults -3,3 Consumption to income ratio 8,5 -8,0 -6,0 -4,0 -2,0 0,0 2,0 4,0 6,0 8,0 10,0 Rural Urban National Source: Household Budget Survey. Consistent with poverty reduction, the share of expenditure on food dropped by 8 percentage points for the average household between 2012 and 2017 in Kosovo, however, the poor spend 63% of total household consumption in Food by 2017. Food is by far the largest expenditure component for households in Kosovo at about 55% of total consumption as shown in Figure 43. For the poor, however, this share is 8 percentage points higher than the national average and 3 percentage points higher than the bottom 40%. Such higher-than-average shares of food consumption can leave poor households vulnerable to price shocks of basic consumption items. The second largest expenditure component for the poor is housing and utilities. At almost 9%, it is close to the national average of 10% and the same share as the bottom 40% households. The poor spend about 5.5% of their consumption on alcohol and tobacco, a similar share as what the national average and the bottom 40% spend on these items. Figure 43: Distribution of consumption expenditure 2012 2017 Alcohol & Housing/utilities, Alcohol & Housing/utilities, 10% tobacco, 6% 9% tobacco, 6% Communica Furnishings/HH tions, 4% equipment, 4% Clothing, 4% Transport, 4% Transport, 6% Communica tions, 3% Miscella Health, 4% Hotels/Rest Health, 3% neous, 2% aurants, 2% Recre Recre ation, Dura Hotels/ Dura ation, 1% Furnishings/HH Restaura bles, bles, 1% Food, 63% equipment, 3% nts, 1% 1% Educa tion, 0% Food, 55% Clothing, 5% Miscellaneous, 3% 1% Source: Household budget survey. Shares for each group add to 100%. Back to table of contents 45 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Annex 3: Social inclusion challenges As documented in the SCD (World Bank 2017), several groups in Kosovo face persistent economic and social exclusion, which increases their likelihood of being stuck in poverty across generations. The following groups have been identified as experiencing larger exclusion and vulnerability. Women Women are marginalized from economic oppor- and they are underrepresented among university tunities. While overall employment rates are low professors, both in public (34%) and private univer- in Kosovo, they are among the lowest in Europe sities (26%) (Farnsworth N. et al 2018). and Central Asia for women. In 2020, the female employment rate was 14%, compared to 43% for While men and women face similar barriers in men. Meanwhile, 79% of working-age women were access to health services, women’s health outcomes inactive, against 44% of men. For women who are related to fertility are concerning. Despite the lack employed, dominant sectors include education, of up-to-date official data, maternal and infant trade, and health care (53%), whereas men work mortality are concerning and highlight the need to predominantly in trade, construction, and manufac- strengthen perinatal and neonatal services. Child turing (44%) (KAS 2021b), although this seems to mortality is considered among the highest in Europe, have increased recently (Farnsworth N. et al 2018).75 with 16 children in 1,000 live births who die before A disproportionate share of family care respon- reaching their 5th birthday in Kosovo, which is four sibility falls on women, which contributes to their times higher than the European Union average of withdrawal from economic activity (a 2017 Millen- 3.9. The rate raises to 27 in 1,000 live births among nium Challenge Corporation study reported that Roma, Ashkali and Egyptian communities. Access 32% of women respondents indicated it as the to reproductive and sexual health remains limited: primary reason of inactivity). The lack of affordable only 9% of women aged 15-49 currently married pre-school facilities is another major barrier. There is or in union use a modern method of contraception little research on gender-based discrimination in the (Kosovo Agency of Statistics and UNICEF 2020b). labor market, however anecdotal evidence suggests Across the population, only 6% have private health that some women are discriminated during hiring insurance, and among those insured, only 1/3 are processes because of maternity leave. women (and only 1 in 5 in rural areas) (Farnsworth N. et al 2018). Within the education system women are underrep- resented in STEM fields and among the academic Women participation in public and private insti- community. Kosovo has reached gender parity in tutions is still limited. Women are still underrepre- enrolment rates in pre-university education, however, sented in political bodies, including public admin- there is a strong gender segregation in the fields of istration, security and justice systems, and local study at the university level. Women represent 85% governments. However, there has been notable of the students in the field of education, 75% in progress in the last parliamentary election, when health, and 69% in humanities and arts, but they are 40 women became MPs (the highest number a minority in natural and technical sciences; they are since 2008), and eight of the fourteen functional also less likely to attend vocational training centers committees of the Assembly are now chaired by (39%) and adult education courses (36%) (Agency women (European Commission 2021). for Gender Equality 2020). Women are also slightly more likely to attend public universities while men Gender-based and domestic violence are wide- are more likely to attend private universities. Female spread in Kosovo. Social norms and stereotypes teachers are overrepresented in early education influence attitudes towards violence, and in Kosovo (pre-school) but their share falls in higher grades, gender-based violence is still tolerated. The most Back to table of contents 46 75 In April 2021, the government extended the affirmative measure, first introduced in 2016, to increase registration of joint immovable property on behalf of both spouses for six years. As a result, female property ownership went from 104 in 2016 to 7,417 in 2020. European Commission (2021). https://ec.europa.eu/neighbourhood-enlargement/docu- ment/download/ec34a067-8477-4adc-a123-054b7d62abc4_en REPUBLIC OF KOSOVO Systematic Country Diagnostic Update recent reports indicate that 68% of women have gap in favor of Roma, Ashkali and Egyptian boys experienced some form of domestic violence in in upper-secondary completion. Young girls and their lifetime, and over 55 women died because women among Roma, Ashkali and Egyptian of domestic violence between 2015 and 2019 communities are more affected by child marriage (Kosovo Women’s Network 2019). The number of and adolescent pregnancies and have a higher cases of domestic violence reported to the police is fertility rate (3.6 compared to the national 2.3). increasing (over 1,000 annually) but is still low. Sexual One in ten women aged 20-49 have been married violence is rarely reported by the victims (Agency for before 18 years old in Kosovo, while the rate is 4 Gender Equality 2020). Health support, including in 10 among Roma, Ashkali and Egyptian women. mental health support, for victims of domestic Moreover, there are 13 live births per 1,000 adoles- and sexual violence is also insufficient. Identifica- cent girls aged 15-19 years in Kosovo, compared to tion and treatment of cases of sexual harassment 78 among Roma, Ashkali and Egyptian adolescent are challenging, despite evidence suggesting that girls of the same age (Kosovo Agency of Statistics 64% of women have experienced it in their lifetime and UNICEF 2020b). (Farnsworth N. et al 2018). Children from Roma, Ashkali and Egyptian commu- LGBTQ people in Kosovo are also marginalized and nities are more affected by poverty and child discriminated. Homophobia remains widespread mortality and have lower access to education and in the country. According to a 2018 study, 67% of health services. One in three children in Kosovo men and 55% of women believe that homosex- belongs to the poorest households, and almost half uality is not normal nor natural (OSCE Mission in of them are members of Roma, Ashkali and Egyptian Kosovo and UNFPA Kosovo 2018). LGBTQ people communities. For 1,000 live births, 16 children die face barriers to access health services, employ- before reaching 5 years in Kosovo, while among ment, and education, however a lack of data and Roma, Ashkali and Egyptian communities 27 children in-depth studies of this issue results in a significant for 1,000 live birth die. School attendance is lower knowledge gap regarding the key drivers that can among Roma, Ashkali and Egyptian communities be corrected by policy to reduce discrimination and compared to the national rates and the gap widens exclusion of this group (Farnsworth N. et al 2018). at each step of the education system. While 96% of children in Kosovo attend primary school, 94% Roma, Ashkali and Egyptian communities attend lower secondary, and 87% upper secondary, only 84% of Roma, Ashkali and Egyptian children Members of Roma, Ashkali and Egyptian commu- attend primary school, 64% lower secondary, and nities are among the most marginalized people only 31% upper secondary. Foundational skills in Kosovo and are highly affected by poverty. among Roma, Ashkali and Egyptian children aged According to the 2011 official records, Roma, Ashkali between 7 and 14 are below the national perfor- and Egyptian people constitute only 2.06% of the mances. Only 18% of Roma, Ashkali and Egyptian total population (35,784 people), however, they are children show foundational reading skills, compared believed to be undercounted by official statistics. to 41% on average, while 13% show foundational Roma, Ashkali and Egyptian communities face high numeracy skills compared to 42% on average. With rates of unemployment (48%). Among the 13% who respect to health, 73% of children between 24 and are employed, 70% work in informal jobs, compared 35 months are fully immunized, compared to 38% to 46% among the non-minority population.76 of fully immunized Roma, Ashkali and Egyptian Poverty is widespread among Roma, Ashkali and children (Kosovo Agency of Statistics and UNICEF Egyptian people, who also face high deprivation 2020b). and inadequate infrastructure, as they often live in informal settlements with limited access to water, Kosovo Serb community sanitation and electricity. Many of them depends on public social assistance (OSCE Mission in Kosovo Members of the Serb community face similar chal- 2020 and Agency for Gender Equality 2020). lenges to those experienced by the rest of the society but lack trust towards the public institu- Roma, Ashkali and Egyptian women and girls are tions. Surveys highlight a general dissatisfaction highly vulnerable. While both female and male with the political, economic and security situation of Roma, Ashkali and Egyptian have lower enrolment the country, and a high level of mistrust towards the rates in compulsory education compared to the rest government as well as towards the country political of the population, there is a 12 percentage-point leaders, both Serb and Albanian. Unlike members of Back to table of contents 47 76 Labor force participation rate among Roma, Ashkali and Egyptian women is extremely low, with a gender gap of 33 percentage points. World Bank (2019). https://documents1.worldbank.org/curated/en/642861552321695392/pdf/Breaking-the-Cycle-of-Roma-Exclusion-in-the-Western-Balkans.pdf REPUBLIC OF KOSOVO Systematic Country Diagnostic Update other communities living in the country, members Persons with Disabilities of the Serb community perceive public and personal security as one of the main issues affecting them Persons with disabilities in Kosovo face barriers (UNDP 2021). Despite the general mistrust, an in access to education, health and employment increased number of Kosovo Serbs possess personal opportunities and are more affected by poverty. documents issued by the Republic of Kosovo. While The number of persons with disabilities in Kosovo is 35% of surveyed members of the Serb community unknown due to lack of data and the use of multiple claimed to not possess them in 2016, the number definitions by different institutions and stakeholders. has decreased to 11% in 2020. Moreover, 73% An estimation suggests that there are 150,000 of respondents affirm to participate to elections persons with disabilities in the country (Hunt P. F. regularly or occasionally in Kosovo, compared to and Belegu-Caka V. 2017). Findings from the 2020 only 32% of respondents who in 2016 claimed Multiple Indicator Cluster Survey (MICS) show that having taken part to the 2014 elections (Marinković 8% of children between 2 and 17 years old have a M. M. et al 2020 and Jović N. et al 2016). functional difficulty in at least one domain,77 while among Roma, Ashkali and Egyptian children the incidence is higher (14%). Children with disabilities Internal Displaced People (IDPs) and in Kosovo experience barriers to access education. Returnees The main challenges are the lack of trained profes- sional staff, inadequate transportation, inaccessible Internal protracted displacement triggered infrastructure, including school rooms, and lack of by the 1999 crisis is still an unresolved issue in adapted learning equipment and materials. Girls Kosovo affecting about 16,100 people (UNHCR with disabilities face more difficulties than boys. The 2021). While the majority of IDPs are ethnic Serbs, rate of gross inclusion of girls with disabilities at the members of Roma, Ashkali and Egyptian communi- primary and lower secondary levels is 37%, while in ties and ethnic Albanians have also been displaced. upper secondary it decreases to 18% (Agency for According to a sample-based profiling assessment Gender Equality 2020). conducted in 2016, IDPs face similar challenges to the overall population of Kosovo, although in some Persons with disabilities face limited access to cases they experience worse outcomes, including economic opportunities and public services. A low levels of education, high rates of unemploy- 2019 survey of 404 persons with disabilities found ment, inadequate housing conditions, and difficult that only 15% of the respondents were currently access to health care. Education levels are lower employed. Among them, close to 1 in 3 reported than among the rest of the population, particu- earning low wages and 1 in 5 reported poor working larly for Roma, Ashkali and Egyptian-IDPs: 41% of conditions. A smaller share reported low access to men and 54% of women do not have a complete infrastructure (16%), health insurance and other secondary education. Employment outcomes benefits (15%), and transport (13%) (UNDP 2019). among IDPs are dismal: unemployment is prevalent (41% among Albanians, 84% among Roma, Ashkali and Egyptian, 43% among Serbs living in private accommodation and 62% among Serbs in collective centers), and the vast majority among those who are employed earn less than 300 EUR per month. Housing conditions are also problematic, especially for IDPs residing in collective centers, where close to 1/3 has no connection to the sewerage system. In terms of future perspectives, the majority of Albanian IDPs (62%) prefer to return to their places of origin, while the overwhelming majority of Roma, Ashkali and Egyptian IDPs (80%) and Serb IDPs (93% of IDPs living in private accommodation and 83% of IDPs living in collective centers) prefer to integrate in their places of displacement (UNHCR 2018). Back to table of contents 48 77 Domains are the following: seeing, hearing, walking, fine motor, communication, learning, playing, controlling behavior, self care, remembering, concentrating, accepting change, making friends, anxiety and depression. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Annex 4: Summary of Kosovo’s Risk and Resilience Assessment Kosovo is a post conflict society, whose further Governance, voice, and accountability: Kosovo consolidation process is linked to sustained progress ranked 104th among the 180 countries surveyed in institutional development and socio-economic in Transparency International’s 2020 Corruption inclusion. The main social risks the Risk and Resil- Perceptions Index, a slight improvement since 2012, ience Assessment identifies are: but still worse than Western Balkan neighbors such as Montenegro (45th) and Serbia (94th). Personali- Low interethnic cohesion: Since declaring independ- ty-centered political parties, a lack of policy-oriented ence in 2008, Kosovo has struggled to overcome public debate, and low governmental capacity have its legacy of conflict. Although recent developments prevented successive governments from advancing have helped ease political grievances, the structural long-term development objectives. The two Strat- causes of economic exclusion remain unresolved. egies for Cooperation with Civil Society (2014–2017 These continue to aggravate social tensions in a and 2019–2023) represent a positive step, but their context without legal freedom of movement in implementation has been slow. the European Union. Ethnic, regional, and political dimensions of risk that individually represent a low Source: World Bank (2017) SCD and World Bank (2021) Risk to medium level of risk of violence interact, and in and Resilience Assessment Update. so doing generate a risk of deeper social discontent and violence—particularly for young men. Low meritocracy and social inclusion: Close networks of family ties and loyalties dominate business relations in Kosovo. The April 2020 UNDP Public Pulse survey found that over 80 percent of respondents considered employment in the public sector to be based largely on family connections (30.8), party allegiance (30.4), bribery (13.8), or other personal connections and unethical practices, while less than 20 percent viewed public-sector employ- ment as primarily rooted in personal merit. The failure to build a truly meritocratic public adminis- tration exacerbates social fragmentation, under- mines trust in institutions, and generates economic and social costs by excluding qualified workers from valuable opportunities. Youth disenfranchisement: The youth unemploy- ment rate reached 49.4 percent in 2019, almost double the 25.7 percent overall rate. Moreover, due to low rates of labor-force participation, only 13.1 percent of 15-to-24-year-olds are employed, and 32.7 percent are neither employed nor in education or training. Kosovo is at risk of a “lost generation,” and this risk may worsen in the post-pandemic era. Youth disenfranchisement generates significant economic costs and can also intensify the threat of social unrest and violence. Back to table of contents 49 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Annex 5: Data availability and quality to inform policy decisions Timely, accurate, and consistent statistics are Population Census. Given the very limited staffing crucial for evidence-based decision making. For of the agency, staff turnover represents a signif- instance, the quality and timeliness of national icant loss of human resources. For instance, the accounts statistics are key for the effective imple- agency struggled to implement its workplan on the mentation of Kosovo’s rules-based fiscal frame- statistical business register after a key staff left, a work and having an accurate way to measure living similar situation has occurred in the production of conditions is key to implement effective targeting of the SILC. Limited staffing and capacity also reduce social policies. the amount of documentation of work processes, which further hurts institutional memory. Technical As the agency responsible for coordinating capacity of enumerators for surveys is also prob- Kosovo’s Statistical System, the Kosovo Agency lematic, especially regarding the upcoming Census. of Statistics (KAS) is the main institution in charge Currently, KAS has no robust system to monitor and of producing official statistics. Although external control the work of the interviewers who conduct assessments continue to note KAS’ progress along the data collection, for instance on issues such as several areas, they also point to remaining structural impartiality, confidentiality, and relevant quality challenges to produce accurate and timely data to dimensions. inform policymakers and to strengthen transpar- ency and accountability. On statistical infrastruc- Managerial capacity is also limited by the fact that ture, as the EC (2021) country report notes, the a CEO has not been appointed yet. Further, KAS implementation of the statistical legal framework premises and infrastructure remain inadequate, still needs to be strengthened. KAS should be which, among others, creates risks for data security.78 seen by all public institutions as the main agency Internal management faces challenges of limited in charge of coordination of the statistical system, internal communication between the departments including guaranteeing its access to administrative which creates bottlenecks for processing informa- data sources. Meanwhile, Kosovo received a score tion, especially for national accounts. In addition, of 46.9/100 for 2020 on the World Bank’s Statis- administrative capacity (only one person taking care tical Performance Indicators (SPI) overall score, of procurement and human resources) is severely which measures a country’s statistical perfor- limited and generates a significant risk of delays mance around 5 pillars designed to capture (i) use or cancellation of key processes for the Census of publicly accessible data; (ii) transparent meth- and other large operations. Increasing administra- odology; (iii) easy replicability; (iv) a time series to tive capacity is urgent considering the upcoming track performance; (v) clear portrayal of outcomes Census. and their supporting elements; (vi) being reflective of the SDGs; (vii) enable at-a-glance comparisons On macroeconomic statistics, several weaknesses on a global scale. remain in the production of accurate and timely national accounts. Kosovo does not have a proper As the EUROSTAT Peer Review (2015) noted, business registry to form the basis of the national KAS has challenges on cost-effectiveness, quality accounts’ production approach, and national management and relations with data users. accounts are also not prepared through the income Human resources continue to be a limiting factor approach. Quality of national account statistics in the production of timely and quality products. depends on the quality of business statistics, house- The agency has not replaced staff since 2013, it hold surveys, price statistics, and external accounts, currently has 13 positions to fill just to replace attri- among others. Hence, it would be important to take tion of staff (and will lose 10 more in the next years) a holistic assessment of the statistics in Kosovo in addition to needs of additional staffing regarding with the aim to improve national account statistics specialized surveys such as SILC and the upcoming and overall statistical quality. KAS compiles annual Back to table of contents 50 78 Kosovo Agency of Statistics (KAS) has reported to the Commission for Public Financial Oversight on the findings of the Audit on the performance of information technology in KAS, governance, operations management, and systems security. KAS management reported that out of 16 recommendations of the auditor, 9 of them have been implement- ed, 3 are in process and 4 of them will be implemented in cooperation with other relevant institutions. Among other things, he requested institutional support for the security of statistical data in KAS. The Auditor's Report assessed the rapid efficiency of KAS in implementing the auditor's recommendations and noted that KAS does not have the necessary mechanisms for information technology. REPUBLIC OF KOSOVO Systematic Country Diagnostic Update and quarterly national accounts, and has managed There is scope to improve the quality of LFS data to shorten the production period, however meth- collection, however. For instance, LFS data show odological inconsistencies need to be addressed. that informal employment (employees without a Annual and quarter sector accounts, supply/use contract) fell from 26.3% in 2016 to 13.4% in 2019, tables and the regional accounts are not regularly but this change cannot be explained and does not compiled. The number of ESA 2010 transmission match other data sources. Another gap in the LFS tables to EUROSTAT has seen some improvements is the scant information on wages, which is only in the last year. Monthly statistics for trade in goods collected using 10 salary ranges. Likewise, agri- are submitted to EUROSTAT. Balance of payments cultural employment is underrepresented in LFS data are compiled by the Central Bank and are compared to other surveys. The labor cost index, broadly in line with the EU standards; annual and structure of earnings data and job vacancy statistics quarterly data are submitted to EUROSTAT. Govern- are still not produced. ment finance statistics are published quarterly. The Harmonized Index of Consumer Prices is published Household consumption is measured by the based on EU Standards (ECOICOP classification). Household Budget Survey. In 2012, the Kosovo Agency of Statistics made major changes to the Structural business statistics are still limited, and reference periods for household expenditures, they lack key levels of disaggregation. Industry however bridges to the previous collection methods statistics are produced broadly in line with the were not developed and data is not comparable relevant regulation. KAS has, for the first time, backwards. HBS has been conducted regularly published services sector statistics (covering the until 2018; thereafter, it is being implemented period Q1 2018-Q4 2020) in March 2021. Construc- every 5 years. In 2019, using HBS data, the Kosovo tion sector statistics are largely not available; only Agency for Statistics and the World Bank finalized the construction cost index is produced on a quar- the latest poverty report referring to period 2012- terly basis. Industry statistics (PRODCOM survey) 2017. HBS data on subnational regions is likely to for the year 2019 has not been published. Foreign be biased because there is one HBS interviewer per Affiliates Statistics are not available. Tourism statis- region, and the interviewers do not rotate across tics and transport statistics are still not aligned with regions. For several topics, the HBS provides little the EU standards, while statistics on development detail or disaggregation. One notable example is and innovation are not produced on a regular basis. social protection benefits, on which the question- The ICT statistics for households started in 2018 naire does not distinguish among different types of and is now regularly being published whereas the pensions or social transfers (with exception of social ICT statistics for enterprises were collected for assistance category 1 and 2). the reference year of 2019 and results have been published in December 2020 but suffer from tech- The Survey of Income and Living Conditions nical problems. (EU-SILC) is being implemented for the third year in Kosovo. With support of the World Bank, EU-SIDA The preparation for the population census 2021 and experts from Bulgaria and Malta, the Kosovo was derailed by the pandemic and political insta- Agency of Statistics (KAS) collected the first wave bility. KAS conducted a very limited pilot test in of EU-SILC in 2018. The EU-SILC is an instrument 2020 but was not able to follow with the general for collecting timely and comparable micro-data on census in 2021, thus postponing it to end-2022. The income, poverty, social exclusion and living condi- government has recently approved the budget line tions. The EU-SILC is in line with the EUROSTAT for 2022 but funding does not meet the minimum methodology and is used by European Union required for the operation. The Census Law has still member states. Field data collection was done not been approved in Parliament. through the CAPI / tablet method (computer assis- tance for data collection) through the Survey Solu- Regarding labor statistics, since 2012 KAS has tions application. So far, only the 2018 report has collected the Labor Force Survey (LFS) year-round been published, with limited information on living to eliminate the seasonal bias. Since then, KAS standards. The report provides data on affordability also adopted International Labor Organization of expenditures, difficulties of households in making and EUROSTAT standards in defining labor market the necessary payments and quality of housing but status, and efforts were redoubled to capture small does not present information on income levels or activities and informal employment. Since 2016, other financial information. Results from the 2019 LFS data are also published on a quarterly basis. SILC haven’t been published yet. Back to table of contents 51 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Other social statistics are scarce. For example, education statistics are partially produced but are still not classified according to international educa- tion classification standards (ISCED 2011). Public health and crime statistics are not yet in line with EU standards. Vocational training statistics are still not produced. Occasional surveys such as the Multiple Indicator Multiple Cluster Survey (MICS) and the Labor Force and Time Use Survey help to fill knowl- edge gaps, but these are not conducted regularly and depend on external funding. For agricultural statistics, the Agency published data on annual agricultural crops, livestock produc- tion and orchard statistics. The agricultural holding survey is regularly produced, but the last farm structure survey was conducted in 2014 and the new one is not planned until 2023. Agricultural price indices and economic accounts for agriculture are produced on a regular basis. Supply balance sheets and the agriculture labor index are not yet produced on regular basis. Energy and environment statistics are partially in line with EU standards. KAS has shortened the deadlines for publishing energy balance results and has increased the number of statistical products sent to EUROSTAT. However, energy consumption statistics for residential, services and transport are not published regularly. The lack of energy efficiency indicators continues to be an obstacle to reporting on energy savings. Waste and water statistics are produced regularly. Greenhouse gas emission statistics are being collected but the information is not published regularly. Other environmental statis- tics such as air emissions accounts, environmentally related taxes by economic activity, environmental protection expenditure and material flow balances are not yet produced. Back to table of contents 52 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Annex 6: Knowledge gaps The SCD identified several knowledge gaps tances); minorities (barriers to inclusion of Roma, regarding key areas for development in Kosovo. Ashkali and Egyptian, ethnic Serbs, persons with These areas include labor markets (understanding disabilities, LGBTQ, etc.); gender (deeper analysis of whether queuing for public sector jobs and elevated trends in female employment, gender constraints to reservation wages reduces labor supply or crowds labor market participation); and political economy out private sector); informality (understanding (particularly the role and influence of various interest incentives to remain informal, as well as scale of groups). Since then, the World Bank has contributed corruption and illegal economic activities); migra- substantially to close this gap through the following tion (profile of Kosovo’s out-migrants, as well as studies (in addition to evidence generated by other the levels, frequency, and longevity of their remit- stakeholders in Kosovo): - Labor market • Ex-ante Evaluation of the Impact of Increases in Minimum Wages on Labor Market Outcomes in Kosovo (English) • Student Today, (Un)employed Tomorrow? Addressing Youth Unemployment in Kosovo • Kosovo Country Report: Findings from the Skills towards Employment and Productivity Survey - Informality • Promoting Tax Compliance in Kosovo with Behavioral Insights • Behavioral Support to Tax Compliance and the Informal Economy in Kosovo - Migration • Learning Needs Assessment for Remittance Receivers • Baseline Survey on Remittance Beneficiaries’ Financial Behaviors - Minorities: • Overview of Roma, Ashkali and Egyptian Communities in Kosovo • Breaking the Cycle of Roma Exclusion in the Western Balkans • Capacity Assessment of Kosovo’s Centers for Social Work - Gender • Gender Inclusion in Productive Investments in the Western Balkans • Closing the Gender Gaps among Marginalized Roma in the Western Balkans - Political economy • Risk and Resilience Assessment 2017 • Risk and Resilience Assessment 2021 During the preparation of the SCD Update, the team has identified additional key gaps in the knowledge base in Kosovo. Additional information to fill these gaps would enable a more precise identification of policy actions to address the priorities identified by the SCD Update. They include the following areas: 1. Climate change / Resilience / Green growth a. Climate change adaptation strategy and the action plan on climate change b. Public expenditure review of water sector c. Climate change impacts on future water resources availability and associated infrastructure needs d. Growth potential from technological upgrade and green investment Back to table of contents 53 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update e. Opportunities and challenges for green finance f. Sustainable energy strategy (re-assessing energy strategy considering developments in recent years, analyzing ex-ante impacts of proposed carbon taxation) g. Resilient Connectivity and Integration h. Inventory of contaminated sites/hotspots and strategy for contaminated sites i. Strategy for introduction of separation of waste and recycling j. Plans to implement livable cities’ policies at the local level 2. Digital development a. User financial behavior in digital financial services 3. Gender-disaggregated data on a. Financial inclusion b. Health services c. Domestic violence The current list is outlined in Table 5. Table 5: Recent analytical work in Kosovo by the World Bank Group and others Report / institution Year Agriculture for Jobs and Growth in the Western Balkans 2017 Air Pollution Management Kosovo/WB 2019 Annual Report on the State of Air/ Ministry of Environment 2019 Annual Report on the State of Environment in Kosovo/Ministry of Environment 2017 Balkans Digital Highway / Pre-feasibility studies / Market Study 2018 Baseline Survey on Remittance Beneficiaries’ Financial Behaviors 2017 Behavioral Support to Tax Compliance and the Informal Economy in Kosovo 2021 Business Pulse Survey, WB 2020 and 2021 Breaking the Cycle of Roma Exclusion in the Western Balkans 2019 Capacity Assessment of Kosovo’s Centers for Social Work 2018 Country Economic Memorandum 2021 CERP restructuring proposal 2020 Climate Change Strategy (2019-2028) and Action Plan (2019-2021)/Ministry of Environment 2018 Cybersecurity Maturity Model Assessment 2019 Developing a Framework for the Implementation of a Deposit Refund System in Kosovo/Ministry of 2018 Environment ECD Situational Analysis / WB 2021 Economic Reform Program 2019-2021/European Commission 2019 Enterprise Surveys: Kosovo Profile/World Bank/EBRD/EIB 2019 Ex-ante Evaluation of the Impact of Increases in Minimum Wages on Labor Market Outcomes in Koso- 2020 vo (English) Exploring the Potential of Agriculture in the Western Balkans 2018 Feasibility Study Report on Healthcare Institutions Infrastructure / EU 2019 FSAP, WB 2020 Gender Inclusion in Productive Investments in the Western Balkans 2020 HIF financing plan 2021 IFC Investor Perception Survey for the Western Balkans 2019 Indicative Strategy Paper (ISP) for Kosovo 2014-2020/EU office in Kosovo 2018 Investment Climate Statement, US Dept. of State 2020 Kosovo CEM – Boosting Foreign Direct Investment background note 2021 Back to table of contents 54 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Kosovo Constraints Analysis/Millennium Challenge Corporation 2018 Kosovo Country Economic ΜMemorandum - Key Drivers of Growth in Agriculture in Kosovo Using Mi- 2021 cro-Foundations, and the Role of the State in Crowding In/Out Agricultural Productivity Kosovo Country Report: Findings from the Skills towards Employment and Productivity Survey (English) 2019 Kosovo Integrated Waste Management Strategy (2019-2028) and Action Plan (2019-2021)/Ministry of 2020 Environment Kosovo Irrigation Master Plan 2020 Kosovo Progress Report/European Commission (Page 96) 2020 Kosovo Productivity Survey 2018 Kosovo Risk and Resilience Assessment 2021 Kosovo Social Assistance Scheme Study: Assessment and Reform Options 2019 Kosovo: A Future of Green Transport and Clean Air 2019 Kosovo: Pension Policy Challenges in 2020 Kosovo Social Protection Situation Analysis 2021 Learning Needs Assessment for Remittance Receivers 2019 Maternity, paternity and parental leaves in Europe: Comparison of family-related leave policies and key 2019 legal provisions with Implications for Kosovo MICS report / UNICEF 2020 Modernizing irrigation in Europe - Regional Activity ASA (P166828) New Risk and Resilience Assessment (upcoming) 2021 Pension System in Kosovo. Inputs for Social Expenditure Review and Comments on Teacher Benefits 2018 Proposal PHC Quality of Care Study / SDC 2018 Policy Note Financial Sector 2020 Policy Note Private Sector 2020 Pristina Mobility Assessment 2021 Pristina Sustainable Urban Mobility Plan 2019 Promoting Tax Compliance in Kosovo with Behavioral Insights (World Bank) 2019 Reform Momentum Needed, Western Balkans Regular Economic Report. No.15 (Focus on human capi- 2019 tal and spotlight on labor taxation) Report on contaminated sites in Kosovo/WB 2019 Report on Environmental Indicators/Ministry of Environment 2020 Report on Hazardous wastes in Kosovo/Ministry of Environment 2019 Report on Municipal Waste in Kosovo/ Ministry of Environment 2018 Retail Payments Cost Study 2021 Selected Issues Paper/IMF 2018 Social Protection and Health Expenditure Note / WB 2018 Strengthening the Integration of Disaster Risk Management and Climate Resilience in the Western 2018 Balkans Student Today, (Un)employed Tomorrow? Addressing Youth Unemployment in Kosovo 2020 Study on Outpatient Drug Prescriptions / WB 2017 Tax reform for climate mitigation and COVID-19 recovery in Kosovo ASA 2021 Water for green and resilient growth 2019 Water security outlook/World bank 2018 Western Balkans Labor Market Trends 2020 2020 Western Balkans Regional Investment Policy Review (UNCTAD) 2017 OSCE – Overview of Roma, Ashkali and Egyptian Communities in Kosovo 2020 USAID – Redesigning Procedures to Encourage Legal Recognition of Informal Relations to Property 2018 The Effectiveness of Social Behavior Change Communications (SBCC) in Changing Social Attitudes on 2018 Equal Rights to Property for Women – the Case of Kosovo ICR for Real Estate Cadastre and Registration Project (RECAP) 2018 Back to table of contents 55 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Annex 7: Team members The SCD Update core team comprises Ana Maria Oviedo, Asli Senkal, Besart Myderrizi, Gayané Hezo Naroyan, Levent Karadayi. The country team focal points are listed in Table 6. Table 6: GP, IFC and MIGA focal points Agriculture Silvia Mauri Digital Development Natalija Gelvanovska-Garcia Education Angela Demas, Mrike Aliu Energy and extractives Rhedon Begolli Environment Simon David Ellis, Shpresa Kastrati, Klas Sander Health Lorena Kostallari, Mrike Aliu, Ha Thi Hong Nguyen Macroeconomics, Trade and Investment Asli Senkal, Besart Myderrizi Poverty Ana Maria Oviedo, Jonathan George Karver Social Protection and Labor Stefanie Koettl-Brodmann, Sarah Coll-Black, Zoran Anusic Social Inclusion Bekim Ymeri, Natacha Caroline Lemasle Governance Mediha Agar, Jonas Arp Fallov, Shiho Nagaki Private Sector Development Blerta Qerimi, Harald Jedlicka Financial Sector Blerta Qerimi, Alper Ahmet Oguz, Oya Pinar Ardic Alper Urban Paul Scott Prettitore, Caleb Travis Johnson, Axel E. N. Baeumler Trade Blerta Qerimi, Ian John Douglas Gillson, Violane Konar-Leacy Transport Ramon Munoz-Raskin, Simon David Ellis, Nino Pkhikidze Water Zhimin Mao, Trandelina Baraku FCV Nadia Fernanda Piffaretti, Sara Batmanglich, Sara Gustafsson IFC Visar Perani, Levent Karadayi, Eugeniu Osmochescu MIGA Gianfilippo Carboni Back to table of contents 56 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Annex 8: Consultations Date Counterpart July 9 – September 15 Online Consultations: Kosovo Website & Facebook July 14 Think-Tanks & Business Associations: Mr. Muhamet Mustafa, Advisor at Riinvest Institute Mr. Arsim Brucaj, Director of Association of Microfinance Institutions of Kosovo Ms. Qëndresa Kukaj, Universum College Ms. Sytrime Dervisholli, German-Kosovar Business Association (OEGJK-KDWV) Ms. Arieta Pozhegu, Kosovo Wood Processors Association (SHPDK), CEO Ms. Filloreta Bajqinofci, European Investors Council, Economic Affairs Officer July 15 Civil Society Organizations: Mr. Muhamet Arifi, Balkan Sunflowers, CEO Ms. Judita Krasniqi, Democracy for Development Institute (D4D) Ms. Pranvera Selimi, Balkan Green Foundation Mr. Vilson Haxholli, Youth Initiative for Human Rights September 9 Mr. Florian Bieber, Professor of Southeast European History and Politics, University of Graz, Austria September 20 Ms. Nicole Farnsworth, Kosovo Women’s Network, Program Director and Lead Researcher Ms. Valmira Rashiti, Youth Initiative for Human Rights September 21 Mr. Sazan Ibrahimi, Association of Kosovo Municipalities, CEO September 22 Parliamentary Committee on Budget, Labor and Transfers: 1. Mr. Armend Muja (LVV), Committee Chairman 2. Ms. Jeta Statovci (LVV), Committee Member 3. Mr. Mergim Lushtaku (PDK), Deputy Committee Chairman 4. Mr. Eman Rrahmani (LVV), Committee Member September 23 Office of the Prime Minister: 5. Mr. Lulezon Jagxhiu, Advisor to the Prime Minister 6. Mr. Vedat Sagonjeva, Director of the Office for Strategic Planning 7. Mr. Florim Canolli, Director of International Assistance Department Ministry of Finance: 8. Ms. Vjosa Zeqiraj, Debt Management Officer, Treasury 9. Ms. Durime Haklaj, Debt Management Officer, Treasury September 23 Mr. Lutfi Haziri, Deputy President of LDK party and Mayor of Gjilan September 27 Mr. Miodrag Milicevic, NGO AKTIV (North Mitrovica) September 28 Mr. Mytaher Haskuka, Mayor of Prizren Back to table of contents 57 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update October 13 Development partners: - Mr. Neil Taylor, EBRD Mission Director - Mr. Arianit Blakaj, EBRD - Mr. Selim Thaci, IMF - Ms. Zeinah Salahi, USAID Mission Director - Ms. Hillen Francke, EU - Ms. Feride Zeka, EU - Mr. Tankut Soykan, Council of Europe - Ms. Isme Humolli, WHO - Ms. Chiara Amato, UN - Ms. Maria Suokko, UNDP - Ms. Marta Gazideda, UNDP - Ms. Yllka Pllana, UNDP - Ms. Dafina Mucaj, UNICEF - Mr. Dren Rexha, UNICEF - Mr. Bashkim Isufi, UNDCO - Mr. Jan Axel Voss, Embassy of Germany - Mr. Margus Sarapuu, GIZ - Mr. Jun Hirashima, Embassy of Japan - Mr. Kay Kurimoto, Embassy of Japan - Mr. Peter Verheyen, Embassy of Netherlands Deputy Head of Mission - Ms. Katrin Ochsenbein, Swiss Cooperation Agency - Ms. Krisztina Szabó, Embassy of Hungary October 21 Private sector companies: - Mr. Astrit Panxha – CEO of Producers Club - Mr. Visar Pacarada – Deputy CEO of Pro Credit Bank - Ms. Sytrime Dervisholli, German-Kosovar Business Association - Mr. Shpend Nura – CEO of KEP Micro Finance Institution - Mr. Visar Bytyqi – CEO of HIB (wholesales and retailer of fuel derivatives) Back to table of contents 58 REPUBLIC OF KOSOVO Systematic Country Diagnostic Update Annex 9: List of references: 1. 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