Kosovo’s economic growth is expected to reach 4.1% in 2017, among the highest in the region, which will be driven by high investment and exports, the International Monetary Fund (IMF) said on December 13.

The country posted real GDP growth of 3.4% in 2016. GDP increased by a real 4.6% y/y in the second quarter of 2017, accelerating from a 3.9% y/y rise in Q1.

The staff concluding statement of the IMF's 2017 Article IV Mission was  issued after the mission led by Stephanie Eble visited Pristina during November 29-December 12.

“Kosovo has made significant progress during the last years, including under the recent stand-by arrangements in ensuring fiscal discipline, strengthening the health and resilience of the financial sector, and enhancing growth,” the IMF said in a statement on December 13.

The IMF underlined that policies now should focus on reforms to improve competitiveness, reduce income inequality, and achieve stronger and more inclusive growth.

For this to be achieved, the Kosovan authorities need to undertake measures to further improve productivity and private sector activity, and enhance the budget composition without expanding the budget gap while safeguarding financial sector stability, the IMF said.

Headline inflation has increased due to higher international food and fuel prices and is expected to average 1.5% this year.

In the medium-term, real GDP growth is expected to remain at 4%, driven by private consumption and investment, with exports making an increasing contribution to growth.

Inflation is projected to remain slightly above the euro area average of 1.8%, reflecting moderate productivity gains.

Kosovo needs higher growth to accelerate job creation and increase incomes, the IMF suggested. Medium-term growth could surpass 4% should the planned new power plant project - agreed by the government and investor ContourGlobal on December 13 - and reforms be implemented that attract more private sector foreign and domestic investments and mobilise large-scale financing for key capital projects from international financial institutions.

However, IMF warned that risks to political stability could undermine confidence and stop reforms, while social spending pressures could crowd out productive spending.

Furthermore, dependency on remittances continues to leave Kosovo vulnerable to potential external shocks, the IMF noted

The IMF said that important structural changes remained weak and underlined the need for Kosovo to improve its business climate. It suggested that better governance and a more efficient judiciary can help attract much needed investments.

However, the fund welcomed the planned reforms focused on increasing labour force participation and addressing unemployment.

The fiscal stance remains appropriate from an economic stability and development perspective. In line with the supplementary budget, the 2017 budget deficit is expected to be about 1.5% of GDP, well below the fiscal rule’s deficit ceiling of 2% of GDP, the IMF said.

The draft 2018 budget targets a deficit of 1.8% of GDP. However, the IMF suggested that the overall budget composition should be improved over time.

The authorities are advised to broaden the tax base by further strengthening the tax and customs administration to reduce the informal economy.

In the terms of the banking system, the IMF said that Kosovo’s banks are well capitalised, liquid and profitable, but bank oversight could be further strengthened.