The last state from the former Yugoslavia to achieve independence, Kosovo has been slow to rebuild industries devastated by war, which has resulted in a substantial trade deficit. Now the government is trying to build up sectors from mining to agribusiness, according to Kosovan Minister of Trade and Industry Hykmete Bajrami.

In January, Pristina adopted its first-ever national development strategy. Covering the years 2016-2021, the strategy focuses on addressing the main obstacles to economic development and competitiveness. “[We] are working to [make] structural reforms that will make Kosovo attractive for investment in manufacturing,” Bajrami tells bne IntelliNews in an interview on the sidelines of the European Bank for Reconstruction and Development’s (EBRD) annual meeting in London in mid-May.

The Kosovan government is already trying to boost domestic production, though Bajrami acknowledges that progress is slow. Current initiatives include helping local companies certify their products so they can export to the EU, and the launch of a credit guarantee fund to support lending to companies by reducing the collateral demanded by commercial banks.

Bajrami lists a number of sectors the government considers could be attractive for investors, including agriculture, mining and metal processing, energy and textiles. Forestry and wood processing is another area she believes has potential; “Kosovo could become a hub for furniture production.”

However, rebuilding the domestic manufacturing sector is not easy, given Kosovo’s “industrial underdevelopment”, which Bajrami blames on the 1998-1999 war of independence with Serbia and the decade of oppression and guerrilla warfare under Slobodan Milosevic that preceded it when nothing much functioned. “It is very hard to catch up with production nowadays,” she says.

Powerless

Another major problem for companies in Kosovo, weighing especially hard on the industrial sector, is electricity. The latest Business Environment and Enterprise Performance Survey (BEEPS) found that electricity supply was among the top three obstacles faced by companies operating in Kosovo, along with corruption and the informal sector.

This is set to be resolved after the construction of the massive Kosova e Re power plant by US-based ContourGlobal, which at a cost of €1bn will be the largest investment in the country’s history. Kosova e Re will replace the existing Kosova A thermal power plant, and is expected to have a capacity of 500 megawatts (MW). “Kosovo e Re will break ground in 2017 and will solve the energy problem,” says Bajrami. “The situation with power shortages after the war has [already] improved. There were lots of power cuts. We expect to solve the energy issue with Kosova e Re.”

While environmental groups have objected to the plans to build a new coal-fired power plant close to the Kosovan capital, Bajrami points out that the country’s options are limited, forcing it to take advantage of its large lignite resources. “When you do not have alternative sources, you have to use what you have. The new project will be more environmentally friendly compared to the existing power plant we have, which is old and has high CO2 emissions,” she points out, adding that Pristina will also “look at alternative sources and renewable energy.”

Another boost for Kosovo was the recent entry into force of the country’s Stabilisation and Association Agreement (SAA) with the EU – a first step on the long path to joining the bloc – which Bajrami forecasts will make the country more attractive to foreign investors, as it will give exporters access to EU markets. Kosovo also has preferential trade agreements with Japan, Norway and the US, and is about to ratify a similar agreement with Turkey.

However, given the low level of manufacturing in the country, Kosovo has a net trade deficit amounting to €2.3bn in 2015, according to data from the Kosovo Agency of Statistics. Currently, just over 10% of Kosovo’s imports are covered by export revenues. “The main barrier to trade is the industrial under-development of our country,” according to Bajrami. However, she also believes Kosovo was at a disadvantage when it signed an agreement to join the Central European Free Trade Agreement (CEFTA) in 2007. CEFTA members and the EU countries are Kosovo’s main trading partners. “[T]he country had just emerged from the war, and the government was not in a position to protect any of its exports. That was not the case for the other countries,” she says.

Tread carefully on Trepca

Kosovo has successfully resolved various issues bilaterally, including with its former overlord Serbia. Despite the troubled relationship between the two countries, Serbia is one of Kosovo’s top trading partners, and Kosovo’s imports from Serbia are worth around $400mn per year. But while trade is going strong, Bajrami indicates it is not trouble-free. “We are seeking to have equal treatment for our companies in the Serbian market as Serbian companies have in ours. Very often we have non-tariff barriers and we are forced to implement reciprocity measures, to put up barriers in response to Serbian barriers. What we are working for is to have equal treatment.”

Recent incidents include a blockade of Serbian trucks carrying gas and petroleum in retaliation against the Serbian authorities’ failure to recognise dangerous goods vehicle approval (ADR) certificates issued by Kosovo. In a separate dispute, Kosovan activists overturned trucks full of Serbian imports in retaliation for Belgrade’s decision to send Albanian-language textbooks destined for the Serbian Presevo valley back to Kosovo.

Overall, relations between Serbia and Kosovo remain tense, but have improved considerably over the last two years following the signing of the 2014 Brussels Agreement. Since then there have been regular top-level meetings between officials from both sides in the EU-brokered normalisation process.

However, the two sides are still at odds over the future of the Trepca mining complex, Kosovo’s largest industrial asset, which has been allowed to fall into disrepair. Belgrade claims ownership of part of Trepca, which has some of Europe’s largest mineral reserves, and wants the dispute to be resolved through an EU-facilitated dialogue. Pristina, on the other hand, would prefer a domestic resolution to the issue. Bajrami says Pristina has “no issue with Serbia as far as Trepca is concerned”, insisting flatly that “all the assets on the territory of Kosovo belong to Kosovo”.

Outlining the status of the government’s plans for Trepca, she says: “We are preparing a strategy about how we are going to go forward. We have a working group led by the prime minister himself to decide whether we will rebuild or privatise it, but we have not decided. But it belongs to the Republic of Kosovo.”

Any plans to either rebuild or privatise Trepca would meet with resistance from Serbia, but conversely, an attempt to ease tensions by brokering a solution with Belgrade would most likely anger Kosovo’s nationalist opposition. This is yet another issue that needs to be resolved to revive Kosovo’s industrial production.