Financial Stability Report No1 20 December 2010 - Banka Qendrore ...

Number 1Financial Stability ReportAs a small-open economy, Kosovo was affected by the global crisis during 2008-2009. Theimpact was transmitted mainly from the external sector through remittances and foreigndirect investments (FDI), which decreased during 2009 by 5.5 and 23.3 percent,respectively. In spite of the low base, also the decline of exports had a negative impact onthe economic activity in Kosovo. These developments increased the overall uncertainty onthe performance of the real sector of the economy, which led to a credit tightening by banks.This was considered as a precautionary measure for the quality of the credit portfolio ofbanks as a result of weaker performance of the real sector. Consequently, the slowdown ofcredit growth extended the negative impact of lower remittances and FDI on theconsumption and investment levels. However, the impact of the crisis to some extent wasoffset by the fiscal policy. The contribution of the fiscal policy in mitigating the effects of thecrisis is attributed to the increase of public spending, which is considered as the maindriver of the economic growth in 2009. Moreover, the decrease of corporate taxes stimulatedinvestments. The decrease of the income tax might have mitigated the negative effects ofthe crisis with regard to the consumption; on the other hand, the increase of the VAT ratemight have offset to some extent the effect of income tax reduction by putting upwardspressure on prices.According to the data from the Statistical Office of Kosovo (SOK), consumption during 2009decreased in nominal terms, however, as a result of deflation, in real terms consumptionincreased compared to the previous year. Also, investments in real terms recorded a highergrowth rate. Public spending increased in both, nominal and real terms. Therefore, theeconomy of Kosovo during 2009according to SOK data recorded a Figure 5. Real GDP growthpositive growth rate of 2.9 percent,8%while IMF estimated a growth rate of7%3.8 percent (Figure 5).6.3%6.9%The economic recovery in developedcountries during the first half of 2010was reflected also in Kosovo’seconomy. In this context, remittancesand FDI increased in the first half of2010, while exports doubled comparedto the same period of the previousyear. This improved the perceptions ofbanks for the business environment in6%5%4%3%2%1%0%Kosovo, thus contributing to a slight recovery of lending growth rates. Also, the continuousgrowth of public spending represents an important contributor to the improved economicactivity. Therefore, the real GDP growth in 2010 is projected to reach at 4.6 percentaccording to IMF projections and 4.8 percent according to the projections of the Ministry ofEconomy and Finance (IMF, 2010; MEF 2010).Prices during the first half of 2010 can be considered as stable. Consumer Price Index (CPI)in June 2010 recorded an annual growth rate of 2.2 percent (Figure 6). As for the annualaverage, a deflation rate of 0.4 percent was recorded in June 2010. Food and transportprices represent the main contributor to overall increase of prices during the first half of2010. The large impact of import prices and the lack of monetary policy instruments due tothe euroization have limitied to a large extent the options of Kosovo’s authorities toinfluence price developments in the country. Therefore, prices in Kosovo’s economy are4.0%3.4%5.0% 5.4%3.8%2.9%4.6%2006 2007 2008 2009 2010ProjectionIMFSource: IMF (2010c), SOK (2010a)MEF22 |