Financial Stability Report No1 20 December 2010 - Banka Qendrore ...
Financial Stability Report No1 20 December 2010 - Banka Qendrore ... 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 |
Financial Stability ReportNumber 1largely determined by price movements in the international markets. For instance, importprices until June 2010 recorded an annual increase of 3.8 percent, largely influencing theprice level in Kosovo. Producer prices during the first half of 2010 remained stablecompared to the previous year (0.2 percent increase in June 2010 compared to June 2009).The high unemployment ratecontinues to be one of the mainchallenges for the Kosovo’s economy.According to the Labor MarketSurvey conducted by the StatisticalOffice of Kosovo (SOK), theunemployment rate in Kosovo stoodat 45 percent in 2009. Unlike manycountries of the region and the EU,where the global crisis led toincreased unemployment rate, theunemployment rate in Kosovo hasnot been negatively affected by thecrisis, but decreased by around 2percentage points. However, Kosovo remains the country with the highest unemploymentrate in the region (Figure 7).Fiscal policy in the postwar period in Kosovo may be considered as conservative and mainlycharacterized by budget surpluses or low deficits. This approach to fiscal policy to someextent reflects the limitations of government to finance budget deficits due to the lack ofinstruments (e.g. lack of law on public debt until 2009). Consequently, the only sources forfinancing the budget deficit were thepreviously accumulated surplusesand donor support to the Kosovobudged from the internationalcommunity.Figure 6. Consumer Price Index, annualchange20%15%10%5%0%-5%-10%Similar to other countries, public33.835spending had a significant role in 3024.12523.4mitigating the effects of the global19.12016.814.4crisis in Kosovo. However, unlike 1513.09.48.49.16.8 7.58.9many countries where the country's 107.05.65n.a.budget was used for direct assistancen.a.0to financial institutions or othersectors of the economy throughvarious forms of transfers, the2008 2009increased public spending in Kosovo Source: SOK (2010b)stimulated the overall level ofconsumption and investment in the economy through increased government investments,especially in infrastructure.In 2009, Kosovo’s budget recorded a deficit equivalent to 2.2 percent of GDP, which resultedfrom the higher growth rate of expenditures. Budget expenditures in 2009 recorded agrowth rate of 29.7 percent, while budget revenues, increased by 21.7 percent. As a result ofthe import-based economy, the main source of budget revenues in Kosovo consist of border14.0%0.5%-4.0%0.1%JanFebMarAprMayJunJulAugSepOctNovDecJanFebMarAprMayJunJulAugSepOctNovDecJanFebMarAprMayJunSource: SOK47.55045.44540KosovoMacedonia32.22008 2009 2010Figure 7. Unemployment Kosovo, region andEurope, in percentB&HMontenegroCroatiaSerbiaAlbaniaBulgariaEurozoneEU| 23
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<strong>Financial</strong> <strong>Stability</strong> <strong>Report</strong>Number 1largely determined by price movements in the international markets. For instance, importprices until June <strong>20</strong>10 recorded an annual increase of 3.8 percent, largely influencing theprice level in Kosovo. Producer prices during the first half of <strong>20</strong>10 remained stablecompared to the previous year (0.2 percent increase in June <strong>20</strong>10 compared to June <strong>20</strong>09).The high unemployment ratecontinues to be one of the mainchallenges for the Kosovo’s economy.According to the Labor MarketSurvey conducted by the StatisticalOffice of Kosovo (SOK), theunemployment rate in Kosovo stoodat 45 percent in <strong>20</strong>09. Unlike manycountries of the region and the EU,where the global crisis led toincreased unemployment rate, theunemployment rate in Kosovo hasnot been negatively affected by thecrisis, but decreased by around 2percentage points. However, Kosovo remains the country with the highest unemploymentrate in the region (Figure 7).Fiscal policy in the postwar period in Kosovo may be considered as conservative and mainlycharacterized by budget surpluses or low deficits. This approach to fiscal policy to someextent reflects the limitations of government to finance budget deficits due to the lack ofinstruments (e.g. lack of law on public debt until <strong>20</strong>09). Consequently, the only sources forfinancing the budget deficit were thepreviously accumulated surplusesand donor support to the Kosovobudged from the internationalcommunity.Figure 6. Consumer Price Index, annualchange<strong>20</strong>%15%10%5%0%-5%-10%Similar to other countries, public33.835spending had a significant role in 3024.12523.4mitigating the effects of the global19.1<strong>20</strong>16.814.4crisis in Kosovo. However, unlike 1513.09.48.49.16.8 7.58.9many countries where the country's 107.05.65n.a.budget was used for direct assistancen.a.0to financial institutions or othersectors of the economy throughvarious forms of transfers, the<strong>20</strong>08 <strong>20</strong>09increased public spending in Kosovo Source: SOK (<strong>20</strong>10b)stimulated the overall level ofconsumption and investment in the economy through increased government investments,especially in infrastructure.In <strong>20</strong>09, Kosovo’s budget recorded a deficit equivalent to 2.2 percent of GDP, which resultedfrom the higher growth rate of expenditures. Budget expenditures in <strong>20</strong>09 recorded agrowth rate of 29.7 percent, while budget revenues, increased by 21.7 percent. As a result ofthe import-based economy, the main source of budget revenues in Kosovo consist of border14.0%0.5%-4.0%0.1%JanFebMarAprMayJunJulAugSepOctNovDecJanFebMarAprMayJunJulAugSepOctNovDecJanFebMarAprMayJunSource: SOK47.55045.44540KosovoMacedonia32.2<strong>20</strong>08 <strong>20</strong>09 <strong>20</strong>10Figure 7. Unemployment Kosovo, region andEurope, in percentB&HMontenegroCroatiaSerbiaAlbaniaBulgariaEurozoneEU| 23
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