Politics 

After left-wing, nationalist Vetevendosje led by Prime Minister Albin Kurti came to power in March 2021, winning a landslide election victory, the party suffered a huge loss in the local elections held in October 2021, which prompted the opposition to call for snap elections.

The loss suffered in the local elections weakens Kurti's position. Vetevendosje won only four mayoral positions out of 38, of which ten are reserved for ethnic Serbs in the country. Most mayors were elected from the opposition Democratic League of Kosovo (LDK), the Democratic Party of Kosovo (PDK) and the Alliance for the Future of Kosovo (AAK). The Serb List won ten mayoral positions. Vetevendosje candidate for Pristina mayor, Arben Vitia, failed to win the second round of the election as voters opted for Perparim Rama from the opposition LDK. 

Nonetheless, following several years of political instability, Fitch rating agency expects the political situation to improve in Kosovo in 2022, as Vetevendosje still enjoys a strong mandate from the 2021 general election. The forecast also reflects an expected improvement in the COVID-19 situation in the country and continued economic growth, as the domestic vaccination programme helps suppress the virus. Kosovo now has the highest vaccination rate in the Western Balkans. Kosovo was the last country in the Western Balkans to start its vaccination rollout but it made quick progress and ended 2021 with a low daily number of new infections of below 10. While this has since increase, as of mid January Kosovo had the lowest daily case count in the region. 

Externally, Kosovo is facing a year in which reaching an EU-mediated agreement with Serbia on the normalisation of relations with Belgrade will again be the political focus.

After Kurti came to power, the talks with Serbia stalled and the relationship deteriorated, as Kurti’s government re-imposed some reciprocity measures on Serbia.

EU High Commissioner Josep Borrell has said that establishment of the Association of Serbian Municipalities to which the Serbian side insists is part of the Brussels agreements and must be implemented by the Kosovan side.

Kosovo declared independence from Serbia in 2008, but it is still not recognised by Belgrade as a separate state. Five EU members also do not recognise Kosovo. This effectively stymies its progress towards EU accession until a resolution is reached with Serbia, which is already in the midst of accession negotiations.

In December 2021, Kosovo informed the EU’s Stabilisation and Association Council (SA Council) about its intention to apply for EU membership, but its relationship with Belgrade needs to be normalised first.

The SA Council members agreed on the need for Kosovo to continue with reforms and for increased focus by all political actors, strengthening of the administrative capacities and an effective coordination structure within the Kosovan institutions and reiterated the importance of visa liberalisation for Kosovo citizens.

Kosovo’s government committed to enhance the rule of law, fight against corruption and organised crime and respect for fundamental rights, as well as to pursue public administration reform and economic development, and support education and employment.

Problems lie ahead as Justice Minister Albulena Haxhiu said in January that Pristina will proceed with the vetting of the country’s judges and prosecutors despite the EU’s objections. EU officials have discouraged Kosovo from pursuing justice reforms according to the format used in Albania which, they argued, may lead to so many dismissals courts and prosecution offices become dysfunctional. 

The first trial for war crimes committed by the former Kosovo Liberation Army (KLA) during the independence war with Serbia in 1998-99 began in The Hague on September 15, 2021 with former KLA member Sali Mustafa in the dock.

The trial against former Kosovan President Hashim Thaci, ex-parliament speaker Kadri Veseli, Rexep Selimi and Jakup Krasniqi, who were sent to The Hague in November 2020 is expected in 2022 by the Kosovo Specialist Chambers and Specialist Prosecutor’s Office.  

The possibility of protests in support of Thaci when the trial starts is not excluded.

Thaci was charged with war crimes committed during his time as a senior KLA member. He resigned on November 5, 2020. He was replaced by Vjosa Osmani, who officially took office in April 2021.

 

Macroeconomy 

GDP growth: According to the International Monetary Fund (IMF), Kosovo’s GDP is expected to grow by 3-4% in 2022 in the absence of any negative pandemic-related surprises, following a projected real growth of 7-8% in 2021. 

In 2021, Kosovo experienced a much faster recovery than previously expected. The key driver behind the faster recovery was the rebound in diaspora visits that fuelled Kosovo’s service exports and informal remittances.

Kosovo's Minister of Economy Artane Rizvanolli projected that GDP growth in 2021 could be even higher than the projection of 7.9% included in the budget revision, possibly reaching 10%.

The 2022 GDP growth will be driven partly by 2021’s strong economic momentum, according to the IMF. The economic activity will also be supported by continued domestic credit expansion and fiscal policy easing, though the size of the latter will depend on the capacity to increase the absorption of externally-financed investment projects. The rapid surge of cases in August 2021 is a reminder that new virus mutations continue to be the main downside risk. In this regard, still-low spare capacity of hospitals may result in the need to renew mobility restrictions should cases rise again. On the upside, the implementation of an ambitious programme of government measures can push growth higher, as well as the continuation of extraordinary diaspora support, which is projected to subside somewhat in the IMF’s baseline projection.

The European Bank for Reconstruction and Development (EBRD) has projected growth of 4.5% for 2022. According to the EBRD, the main risks to the outlook relate to the pandemic and potential weaknesses in the external sector.

External environment: Kosovo’s current account deficit is projected by the IMF to slow down to 6.7% of GDP in 2022 from 7.9% of GDP in 2021.

The draft budget for 2022 aims to consolidate the economic revival, ensure the sustainability of public finances, reorient the economy towards production and exports, as well as to support employment and sustainable economic development.

Kosovo's imports dwarf its exports, with the country reporting a trade deficit of €2.82bn in 2020, 9.3% down from a year earlier. Kosovo’s trade gap widened by 39.7% y/y to €3.15bn in the first ten months of 2021. The trade gap started to increase rapidly from February 2021.

According to the World Bank, in 2021 exports of merchandise continued their expansion and gradual diversification from 2020. However, significant inflationary pressures, primarily from higher import prices, may undermine a stronger recovery in private investment.

Kosovo’s Import Price Index (IMPI) grew by 6.9% y/y in the third quarter of 2021, decelerating from a 7.7% y/y increase in the previous quarter. 

Kurti has cited World Bank statistics showing that about 78.5% of manufacturing companies in Kosovo use materials, inputs or other supplies that are of foreign origin and on average 47.4% of total inputs are imported.

"This is a clear message of the need to reorient the economy towards production and exports and towards sustainable development," Kurti said.

According to the World Bank, imports are expected to increase by over 30% in 2021 to meet the rebound in consumption, exports, and investment, with exports of merchandise increasing by 35%. Though growth in exports is expected to outpace the rebound in imports, as imports grow from a higher base, the current account deficit is projected to reach 8.5% of GDP, up from 7% in 2020. At the same time, foreign direct investment, driven by higher dividend repatriation, is expected to drop from 4.1 to 3.8% of GDP.

Inflation and monetary policy: Kosovo’s inflation is expected to increase to about 5% year on year by end-2021, on higher energy and food prices. Inflation pressures are expected to remain persistent through mid-2022 and gradually ease thereafter. According to the IMF, average inflation is seen speeding up to 3.6% in 2022 from 3.1% in 2021.

Kurti announced that the government is preparing a package of measures that will help citizens to more easily overcome the financial difficulties created by price increases.

The World Bank said that inflationary pressures heightened significantly during 2021, in line with global trends, creating challenges for private investment. Consumer price inflation, driven primarily by higher import prices, is expected to reach an annual average of close to 3.5% in 2021 and to slow down to 1.8% in 2022.

Industrial production: Production in Kosovo’s manufacturing industry rose by an annual 3.3% in the third quarter of 2021, slowing significantly from a 43.6% increase in the previous quarter, according to the latest statistics office data. This reflects the low base in 2Q20, due to the spring 2020 lockdown. 

The output in the mining sector soared 111.5% y/y in the third quarter of 2021, following a 12.7% y/y increase in the previous three months.

The mining sector is an important contributor to Kosovo's economy. The country has reserves of lignite and metal and mineral deposits.

The production in the electricity, gas and air conditioning sector jumped up by 36.9% y/y in 3Q21, following a 9.6% increase in the second quarter of 2021.

The production in water supply and waste management soared by 72.9% on an annual basis, following a 75.2% y/y jump in the previous quarter.

Kosovo’s producer price index (PPI) went up by an annual 6.9% in the third quarter of 2021, speeding up significantly from a 3.6% y/y increase in the previous quarter, according to statistics office data.

After falling for most of 2020, the PPI started to increase since the fourth quarter of 2020 and speeded up the pace of growth in the first three quarters of 2021.

The index rose 4% from the previous three months in 3Q21, after ticking up 0.4% q/q in the second quarter.

In annual terms, Kosovo posted the largest PPI increases in the supply of electricity, gas, steam and air conditioning (17%), production of metals (12.1%), furniture (9%), metal products (4.7%), and rubber and plastics (4.7%). The increase was offset mostly by dropping production prices of leather (-3.3%) and the group of other ores (-0.8%).

 

Real economy 

Retail: Sales by vendors of food, drinks and tobacco in Kosovo fell by 2.8% y/y in the second quarter of 2021, after dropping 14.6% y/y in the previous quarter, according to statistics agency data.

Sales of food, drinks and tobacco in specialised stores have been falling year on year for six consecutive quarters since the first quarter of 2020 with the outbreak of the coronavirus pandemic. 

Compared with the previous quarter, sales of food, drinks and tobacco in specialised stores increased 5.8% in 2Q21, reversing a 36.7% decrease in 1Q21.

Banks: According to the IMF, Kosovo’s banking sector remains resilient overall. Capital and liquidity buffers are strong and non-performing loans (NPLs) are low, though the improvement in many financial soundness indicators is partly linked with the policy response to the pandemic. Despite the absence of systemic risks, there are pockets of vulnerabilities related to the fast increase in lending to the construction sector by smaller banks.

Although, according to IMF forecasts, the Kosovar economy had a decline of 6% due to COVID-19 in 2020, the banking sector remains well capitalised and profitable. The report estimates that financial services and bank lending have improved significantly in recent years. In March 2021, non-performing loans were at the level of 2.7%, while interest rates dropped significantly, from an average of 12.7% in 2012 to an average of 3.1% in March 2021. Overall, Kosovo’s NPLs remain the lowest in the Western Balkans region.

According to the central bank of Kosovo, bank lending continues to be a very important and sustainable source of private sector financing in the country. The value of bank loans had reached €3.57bn by September 2021, marking a significant annual increase of 12.2% y/y. However, despite the satisfactory trend of increasing bank lending, it is considered that the level of financial intermediation in Kosovo continues to be below the average of the countries in the region, which shows that, in relation to the size of the economy, there is further room for expansion of the lending activity. 

Industry: The World Bank says that in the medium term, there is a pressing need to focus policies on tackling constraints to higher productivity growth and investing in human capital. Kosovo needs to grow beyond its current potential to achieve higher living standards and more inclusive development. Thus, reforms should focus on entrenching macroeconomic stability and sound governance, increasing firm productivity, raising farm productivity, enhancing human capital and boosting exports, competition, and private investment, especially foreign direct investment.

Energy & Power: Kosovo relies heavily on electricity generation from thermal power plants (TPPs), but often faces an energy crisis due to its outdated TPPs, which constantly need repair. The sector entered 2022 in a state of crisis, and the government announced on December 24 that the country will experience 60 days of planned daily power cuts after the government as part of emergency measures to deal with the energy crisis. 

The government said that due to the significant increase in electricity consumption, insufficient domestic power generation and the global energy crisis that has resulted in the enormous increase in electricity prices on international market, the Kosovan energy system is facing huge difficulties.

Difficulties in the electricity supply occurred especially during December 2021 due to breakdowns in the Kosova B power plant’s units and a significant increase in electricity consumption.

Kosovo’s power production from TPPs totalled 1,358 GWh in the third quarter of 2021, dropping by 11.7% from a year earlier, after going up 15% y/y in the previous quarter. Hydropower production decreased 4.9% y/y to 41.1 GWh in the third quarter of 2021. Coal production in Kosovo totalled 1.884mn tonnes in the period under review, slightly down from 1.897mn tonnes a year earlier. 

Kosovo’s government is drafting a National Energy Strategy 2020-2031, that will ensure an energy transition under which it plans decarbonisation by 2050. This will be the first energy strategy based on data compiled by experts. 

The strategy will ensure maintaining energy security, prices affordable for consumers, increasing the use of clean energy, and ensuring regional integration of the energy market.

The IMF said that reducing pollution and emissions requires cleaner electricity generation. The installation of filters in Kosovo B, in collaboration with the EU, remains a priority in this area.

Construction: Kosovo’s construction cost index (CCI) jumped by an annual 15.2% in the third quarter of 2021, speeding up from a 12.1% increase in the previous quarter, the Kosovo Agency of Statistics (KAS) data indicated. This was the biggest increase of the CCI in Kosovo ever. In 2020, the index rose only in the fourth quarter.

The increase of the index was mainly observed in the categories of materials (20.5%), energy (17%), other costs (4.3%), machinery (3.4%) and salary (2.3%). The increase in prices was mainly neutralised by the decrease in transport prices (-2.8%).

The construction sector jumped by 27.3% y/y in the second quarter of 2021, which was among the biggest increases of any sector of the economy.

The budget for 2022 allocates funds for the construction of a road leading from the Kosovan town of Prizren to Tetovo in North Macedonia.

Kosovo's Prime Minister Albin Kurti expects the construction of the Pristina-Podujevo (near the border with Serbia) motorway to be completed in 2022. The expansion of the Pristina-Podujevo motorway started in 2016 and was supposed to be completed within three years. However, even though five years have passed, the construction of the road is not finished due to difficulties regarding expropriations.

Major Sectors: Construction comprises almost 60% of private investment activity in Kosovo. The sectoral structure of foreign direct investment (FDI) in Kosovo is dominated by real estate. In the first nine months of 2021, FDI totalled €389mn, of which €265mn went to real estate activities.

 

Budget and debt 

Kosovo’s 2022 budget foresees the highest and most comprehensive set of expenditures so far.

Budget revenues are expected to amount to €2.36bn, which represents an annual increase of 15%, according to the finance ministry.

The draft budget for 2022 aims to consolidate the economic revival, ensure the sustainability of public finances, reorient the economy towards production and exports, as well as to support employment and sustainable economic development.

More specifically, the budget plans investment in education by construction of new kindergartens and free education for all students. Furthermore, the 2022 budget aims to help vulnerable groups of citizens and supports the creation of new jobs and startup businesses. 

For the health system, the 2022 budget provides an additional €24mn for the provision of essential medicines.

The IMF said though the strength of the ongoing economic recovery suggests that fiscal policy should revert to the fiscal rule beginning in 2022, the budget needs to include an allocation for emergency expenditures should the virus strike back. Moreover, the fully replenished fiscal buffers provide an opportunity to initiate the process to obtain a rating for Kosovo’s public debt securities, which in time could expand the size and liquidity of the public debt market. In turn, making the budget more pro-growth requires improving the composition, effectiveness, and efficiency of spending.

While security, defence and road infrastructure comprise a large portion of the investment budget, downside risks call for devoting targeted resources to increase the share of households and schools with access to computers and the expansion of hospital infrastructure, the IMF warned. Sustaining and consolidating recent gains in formalisation of economic activity requires faster and more effective commercial courts and continuing efforts to improve tax policy and administration as well as increasing electronic payments.

According to the World Bank, higher fiscal deficits are likely due to a possible acceleration of public expenditure growth in the medium term. Public revenue and public expenditure are projected to increase by an average of 4% and 7.6% per year in the medium term, fuelling an increase in the level of the fiscal deficit compared to 2021. Public revenue growth will decelerate, mainly because of the absence of one-off contributors, such as dividend income, and because of a slowdown in import growth and inflation compared to 2021. Expenditure growth will be fuelled by an acceleration in public investment spending, but also increased current expenditure driven by the implementation of the Economic Revival Plan. As a result, fiscal deficit levels are expected to increase from 2021 to an average of 2% of GDP over the medium term. With limited availability of privatisation proceeds over the medium term, the deficit is projected to be financed primarily through new domestic debt and concessional external debt. Public and publicly guaranteed debt relative to output is projected to rise from 23.2% in 2021 to 27.8% by end-2023.

 

Markets 

Kosovo has no stock market. 

There are some internationally listed companies providing exposure to Kosovo such as London-based quarrying, stone processing and dimension stone marketing company Fox Marble, listed on the London Stock Exchange’s AIM market, and Beowulf Mining, listed on the AIM in London and Spotlight in Sweden. Beowulf is a UK registered Nordic focused exploration and development company that has a 46.1% interest in Vardar Minerals Ltd, a UK registered exploration company with a focus on the Balkans.