ECONOMIC BULLETIN - rks-gov.net

Government of the Republic of Kosovo

Ministry of Finance

ECONOMIC BULLETIN

January – June 2015

Republika e Kosovës - Republika Kosova - Republic of Kosovo

Qeveria - Vlada - Government

Ministria e Financave - Ministarstvo za Finansije - Ministry of Finance

Economic Bulletin of Kosovo

January – June 2015

Department for Economic and Public Policy and International Financial

Cooperation

Macroeconomic Unit

August 2015

Published by Macroeconomic Unit, DEPPIFC, Ministry of Finance

Official webpage: www.mf.rks-gov.net

Email: [email protected]

phone: +381 38 200 34 331

Editorial Council: Arment Merovci

Berat Havolli

Nora Kokaj

Semra Tyrbedari - Çitaku

Note: Use of data from this publication is permitted only by quoting the source. The

Bulletin is published on mid-term basis, and any improvements therein shall be made in

the webpage

The Ministry of Finance is committed to providing relevant and timely information on economic

developments in Kosovo. This publication is an attempt to provide information on

developments during the first half of the year, as the period comes to and end. This is a slight

change compared to previous editions, which used to report on biyearly developments by the

end of the following six-month period. This publication also contains information on the

business climate, a section which is a result of the cooperation with the Kosovo Chamber of

Commerce. Ministry of Finance thanks the Kosovo Chamber of Commerce for providing the

data on IFO business survey.

http://www.mf.rks-gov.net/

mailto:[email protected]

Content

Executive Summary ............................................................................................................................. 2

1. Economic developments ............................................................................................................. 3

1.1. Real Sector ............................................................................................................................. 3

1.1.1. The labour market ........................................................................................................ 5

1.1.2. Prices .............................................................................................................................. 6

1.1.3. Social Welfare ............................................................................................................... 7

1.1.4. Business Climate .......................................................................................................... 7

1.2. External Sector ...................................................................................................................... 9

1.2.1. External demand and its structure ............................................................................ 9

1.3. Banking Sector .................................................................................................................... 10

1.3.1. The structure of deposits and loans ......................................................................... 11

2. Fiscal Developments .................................................................................................................. 12

2.1. Government Budget Revenues ........................................................................................ 14

2.1.1. Tax revenues from the border .................................................................................. 14

2.2. Government Budget Expenditures .................................................................................. 17

Economic Bulletin | January - June 2015 1

Abbreviations

KSA TAK

EU GDP

CEFTA KC

IMF MoF

MLSW CPI FDI

Q KCC VAT

Kosovo Statistical Agency Tax Administration of Kosovo European Union Gross Domestic Product Central European Free Trade Agreement Kosovo Customs International Monetary Fund Ministry of Finance Ministry of Labour and Social Welfare Consumer Price Index Foreign Direct Investment Quarter Kosovo Chamber of Commerce Value Added Tax

In case of any discrepancies between versions, the Albanian version shall prevail


Executive Summary

Compared with the previous year, data for the first half of this year signalled an accelerated

pace of economic growth in 2015. The turnover of enterprises declared during the first six

months of 2015 increased by 6.6%, with energy (energy production), trade, as well as the

financial sector and agriculture as the main contributors to this increase. Data on the

structure of imports show an increase of 5.4% in import of investment goods; the import of

these goods represents around 30% of total imports. FDIs were over four times higher than

in the same period of 2014- around 130 million more. FDIs during this period were

concentrated in construction and immovable property, while a significant increase was

observed in financial services and energy. A development worth mentioning and which is

elaborated in more detail in a separate section of this bulletin is that during June 2015, the

Government of Kosovo negotiated a Stand-By Arrangement Programme with the IMF. This

programme focuses on strengthening public finances by implementing the fiscal rule, the

appropriate level of bank balance, and improving the cost structure and creating fiscal space

for large development investments financed by International Financial Institutions.

EU Guidelines for drafting the Economic Reform Programme1, considering the position in

which Kosovo is today, suggests that efforts should be focused on competitiveness

(particularly in the regional aspect) as a development priority for Kosovo. This is expressed

through the ongoing efforts of the Government in terms of capital investments, improving

the business climate, and support of local production in various forms. The year 2015 was

manifested by a number of changes, which is expected to bring about significant positive

changes to the economy2. More specifically, it is the changes to the tax system of Kosovo

which are expected to stimulate companies involved in production to be more competitive

in the market; some of which are: removing barriers for fiscalistion of all businesses,

reduction of administrative proceedings (such as abolishing the requirement for having

export certificate), exemption from customs duty for Information Technology equipment (in

order to stimulate this sector and consequently other sectors as users of these equipment),

reduction of VAT threshold in order to expand the tax base for this type of tax, the VAT

differentiation (to lighten the tax burden on the products considered as basic for daily

consumption), providing tax holidays aiming to encourage investements of certain levels

which would employ a considerable number of workers, and expanding the list of products

exempted from customs duties.

Most of these changes started with implementation during the first half of 2015, and the

fiscal package will enter into force on 1st of September 2015. Consequently, the effects of

these changes are expected to manifest in 2016 and more so towards 2017 and 2018.

1 National Economic Reform Programme 2015 (https://mf.rks-gov.net/en-us/Reports/Reports-and-Publications/National-

Economic-Reform-Programme), originally drafted in English 2 Fore more details, Government Programme can be found at: http://www.kryeministri-

ks.net/repository/docs/Programi_i_Qeverise_2015-2018___10_mars.pdf

https://mf.rks-gov.net/en-us/Reports/Reports-and-Publications/National-Economic-Reform-Programme

https://mf.rks-gov.net/en-us/Reports/Reports-and-Publications/National-Economic-Reform-Programme

http://www.kryeministri-ks.net/repository/docs/Programi_i_Qeverise_2015-2018___10_mars.pdf

http://www.kryeministri-ks.net/repository/docs/Programi_i_Qeverise_2015-2018___10_mars.pdf


1. Economic developments

1.1. Real Sector

Economic activity in Kosovo started to recover following a sluggish growth in 2014.

Considering this, the year 2014 was characterised by developments which brought up a

general unwillingness of economic agents to invest and spend. The data for the first half of

2015 show signs of an accelerated pace of economic growth. Since data on national income

for the first half of 2015 are missing,

the assessment of economic activity is

based on the trend of several

indicators that influence the trend of

economic growth3.

The turnover of enterprises declared

during the first half of 2015 recorded

an increase of 6.6% compared with a

decrease of 0.8% over the same period

of 2014. The chart 1.1a shows that

during the first two months of the

year, growth was slow (this applies to most sectors of the economy), while other months of

this period recorded a significant increase. The sectors which contributed to this increase

were energy (energy production), trade, financial, and agriculture sector.

Import of goods grew by 4% during

this period. Data on the structure of

imports show an increase of 5.4% of

importing investment goods (chart

1.1b.), of which the main goods are

those used in the construction sector.

Specifically, the import of construction

materials contributed with 1.3

percentage points to the growth of

import of investment goods in general

representing 57% of imports for these

goods. Imports of goods used for investment represent around 30% of total imports.

A more accelerated pace of investments during the first half of 2015 is supported by the level

and structure of FDIs. Specifically, FDIs were over four times higher than the same period of

2014 which, translated into value, represents 130 million more. FDIs during this period were

concentrated in construction and immovable property, whilst there was significant increase

in the financial services and energy.

3The data for these indicators are obtained from the Tax Administration, Kosovo Statistics Agency, Kosovo Customs, Central

Bank of Kosovo, etc.


In addition to investment, consumption also affected the trend of economic activity during

the first half of the year. During this period, imports of intermediate and final consumer

goods increased by 3.1% contributing with 1.7 percentage points to the growth of total

imports. In addition to the full effect of the increase of salaries for civil servants, the trend in

consumption has been conditioned by an increase of 25% in remittances from the diaspora.

Furthermore, the significant increase of the turnover declared by the agriculture sector

(largely supported by the quadrupling of subsidies from the Government) shows an increase

in consumption, moreover, for the increase of import substitution for agricultural goods.

As other GDP components, the export of goods was characterised by an accelerated trend

where an increase of 14.5% was recorded. Export growth was mainly driven by export of

metal although there was also an increase in other categories of products. Increased import

of goods during this period to some extent was led by the growth of imports of services, in

particular those of transport. However, given that the increase of exports in services is

noticed during July and August, it is expected that by the end of the year the increase in

export of services counteracts with the negative effect of increasing imports.

When it comes to developments in the structure of enterprises, Table 1 shows the number of

new and terminated enterprises along the first half of 2015 by sectors4, covering the sectors

with the highest share in the total of new/terminated enterprises5. We noticed that more

new enterprises were recorded in trade and repair of motor vehicles, followed by

manufacturing, and accommodation and food service. In „transport and storage6‟ there is a

greater number of

enterprises terminated

compared to new ones,

but that in this sector the

basis of newly registered

businesses is lower than

in other sectors.

In general, the intensity of

recording and

termination of businesses

within the sector seems to

be almost reciprocal;

sectors where there are

more new businesses are those having large numbers of business terminated.

4 The comparison between the same periods of 2014 and 2015 is not possible because there are methodological changes;

while in 2014 there were 17 sectors, this year enterprises are divided into 21 sectors (with changes within their structure). However, the general trend persists (led by trade, hotels and Production), KSA 2015. 5The category ‘Other’ includes all other sectors, each with a share of below 5% of the total.

6 ‘Storage’according to NACE Rev 2. Eurostat classifications means storing, warehousing

Table 1 Enterprises January - June 2015

New Terminated

Number Share in

total Number Share in

total Agriculture, forestry, fishing

467 9% 59 6%

Manufacturing 537 11% 62 7%

Construction 430 8% 94 10% Trade and repair of motor vehicles

1535 30% 337 36%

Transport and storage

285 6% 102 11%

Accommodation and food services

516 10% 92 10%

Other 1299 26% 190 20%

Total 5069

936


1.1.1. The labour market

The Kosovo Statistical Agency has recently published the Labour Force Survey for 2014, in

wich the official unemployment rate in Kosovo for 2014 is recorded at 35.3% (176,743

unemployed people)7. In this report, the unemployment rate among females is estimated to

be 41.6%, while that of males 33.1%. Gender difference is more significant in youth

unemployment, where unemployment among young females is 71.1% while that of males

56.2% (around 15-24 years of age).

However, for current information regarding jobseekers in Kosovo we may refer to the

recording of jobseekers in employment centres within MLSW8. It is important to highlight

that the way data on jobseekers are handled were recently subject to reforms. According to

this institution, the number of unemployed in 2014 was 270 thousand, whereas until June9 of

2015 we have approximately 101 thousand jobseekers, as official reportable figures. From

Table 2 we may see that jobseekers are mostly unqualified

(or uneducated), followed by those with secondary and

primary education, and judging from the first half of 2015,

only around 4% of jobseekers have (at least) a university

degree10.

Furthermore, the number of jobseekers is divided almost

equally between the genders where out of the total

jobseekers over the years from 2012 to 2015 on average

around 45% are female. This percentage is also reflected in

the context of gender structure within the qualification,

with the exception of qualifications with „secondary school‟' and „college‟, where significant

number are male jobseekers. If we look into only the data from the first half of 2015,

jobseekers with a university degree 56% are females; the only category where (despite the

small difference) there are more female jobseekers. It is worth mentioning that while the

7 Results of labour force survey 2014 in Kosovo, June 2015, KSA

8 Analysis Sector in labour market

9 Data obtained on 19 June

10 2 jobseekers with PhD degree are listed in MLSW database in the first half of 2015

Table 2. Share in labour market in 2015, in %

Non-educated 62.6

Elementary school 15.1

Secondary school 17.9

College 0.4

University 3.7

Master 0.2

PhD 0.002 Source: MLSW/DLE, Analysis and Labour Market Sector

Box 1. The methodological changes in recording jobseekers

The year 2015 marks the entry into force of a new system of recording jobseekers, followed by changes in the methodology of recording jobseekers. Under the old method, jobseekers were recorded in regional employment centers every 3 months. Entrants were 'jobseekers' and 'unemployed', where, they had to check-in within 6 months or 1 year, after which period they were deleted. Whereas, under the new system of 2015, all persons recorded in the system should check-in at least once within 6 months, otherwise they are considered 'passive'.

This makes data on jobseekers up to 2014 not fully comparable with those of 2015 (and beyond). Furthermore, the breakdown by qualification has been changed (it is more specific). These changes result from the transition to a more modern data management system, and are made to reflect current legal definitions for the terms 'active' and 'passive' in employment.


unemployment rate is higher for females than for males (AFP 2014), there are fewer femaes

who enroll in the employment centres.

1.1.2. Prices

Globally, inflation in developed economies11 declined, reflecting a decline in fuel prices

(which began in October 2014), soft prices12 for some other goods, as well as weakening

demand in a number of countries already facing sub-target inflation, such as the Euro-zone

and Japan.

CPI 13 in Kosovo declined gradually

since the end of 2012, but at the end of

2014 and during the first half of the

2015, the chart 1.2 shows negative

numbers. The chart shows that after

increasing by 1.3% in September of

2014, prices declined during the

remainder of 2014 to around 2

percentage points to reach -0.6% in

January of 2015, which represents the

lowest point CPI, has reached in years.

The chart 1.3 shows that prices of

food (and non-alcoholic beverages)

increased by a rate of 1.4% on

average during the first months of

2015, following an increase in

September of previous year. It is

noticable that the decline to -20% in

January of 2015 of the fuel price

seems to have negligible impact on

the overall CPI. However,

developments in the fuel price

must be monitored carefully in the coming months as the fluctuations are considerable; only

from January to June of the 2015 we noticed an increase of around 10 percentage points.

Such a decline in the level of fuel prices, particularly during the first half of 2015, clearly

illustrates how the CPI in Kosovo is linked to (dependent on) the prices of food products.

11

Update of the IMF; “Recent Developments and Prospects” (published in April 2015). 12

These imply goods, whose prices show a gradual declining trend over time 13

Data on prices were obtained from KSA monthly reports.


1.1.3. Social welfare

In June of this year, 128 thousand beneficiaries of basic pension were recorded. Payment for

these pensions showed a trend of gradual increase to reach over 59 million euros in June

2015. Given that during the same period of 2014 these payments reached the amount of 49

million, it is estimated that the increase in 2015 came as a result of the entry into force of the

decision on the increase of pensions and salaries in the public sector in April 2014. The

number of beneficiaries of contribute-providers pensions reached 39 thousand in June 2015.

Payments for these pensions during the first half of the 2015 totalled over 33 million euros, a

slight increase compared with the same period of 2014 as a result of the increase in April

2014, similar to basic pensions.

The number of families receiving

social assistance during the first

half of 2015 is around 26 thousand

families. In the first half of 2015

compared with the same period of

2014, the number of families

receiving social assistance

declined by around 11%.

Regarding the first half of 2015,

compared with the same period of

the previous year, payments for

social assistance have declined by

around 10%. Therefore, this decline in the category of payments followed the decline in the

number of families receiving assistance. During the first half of 2015, social assistance

payments reached 12 million euros.

1.1.4. Business Climate

KCC‟s regular „IFO‟ survey produces three key indicators: assessment of the current

situation, expectations for the next six months, as well as the general indicator of the

business climate in Kosovo. Data from

this survey show that “... the

expectations are for the situation to

remain the same and the assessment of

the current situation is good”.

According to the methodology used,

the average of these two elements

gives the main trend of the business

climate (Chart 1.5.), which for this

period is positive14.

14

IFO survey is carried out every three months with over 400 businesses of different sectors. The regular report (available upon request) of KCC contains more information; the analysis in this bulletin will focus more on sectors.


These two components of the „climate‟ will be discussed in this section; the assessment of the

current situation and the expectations. The data were obtained from the KCC‟s study, but

they enter this bulletin in the context of overall economic developments during this period,

and will be visualized in a different way.

The balance is a measure of the IFO

indicator and is equal to the difference

between the number of businesses which

declared positively for the situation and

those which declared negatively (leaving

aside neutral declarations). The

horizontal axis in chart 1.6 provides

information on movement of the

balance in relation to the previous

period. It is shown that the position of

the construction sector is within the limits between quadrant of negative and the positive

climate. Given that construction is concentrated in the capital, the expectations of this sector

may be affected by the recent changes in

the procedures within the Municipality of

Pristina in terms of issuing construction

licenses, being in a period of adaptation to

the new procedures since the survey refers

to impressions of businesses.

Declarations of the wholesale sector are in

line with the growth of total imports in the

country, while production is in a good

position; expected behaviour considering

the stimulus provided to domestic producers (exemption from tax charges, subsidies etc.).

Graph 1.7 shows that all sectors are

positioned in the upper, right quadrant;

optimism prevails among all sectors in

terms of expectations for the next six

months. The service sector, although

found in the quadrant „positive but with

deterioration‟ 'in the assessment of the

current situation (chart 1.6.), is the most

optimistic sector in terms of

expectations. On the other hand, this

sector does not manifest the same level

of optimism with regard to employment expectations, which nonetheless are positive, as it

is for all other sectors. Chart 1.8 shows that employment expectations are broadly in line

with general expectations from the previous graph, all resulting in the positive quadrant,

from which the position of the production sector is particularly encouraging.


1.2. External Sector

The main challenge for Kosovo‟s

economy is the import structure

and the low level of export of

goods15. Specifically, the structure

of imports is dominated by imports

of consumer goods, reflecting the

low level of domestic production

while export of goods is mainly

concentrated in metals. The

accelerated growth of goods

exports conditioned the trend of

trade deficit in the first half of 2015 which recorded -1,037 million; a significant decline of 4%

compared with the same period of 2014 (see Chart 1.9.). The services account and the

primary income account16 have negatively affected the current account balance, whilst the

secondary income account, driven by increase of 25% in revenues from remittances,

contributed positively to the trend of the current account during this period. Consequently,

the current account deficit for this period amounted to 158.6 million euros. The financial

account, driven by a significant increase of FDI flow has improved substantially, amounting

to 93.4 million euros.

1.2.1. External demand and its structure

Export of goods in the first half of 2015 increased by 14.5% compared to the same period of

2014 reaching a value of 161.5 million euros. Basic metals, which continue to represent over

50% of total exports, were the main contributor to growth in exports even during this

period, recording an increase of 39.2% compared with the same period of 2014. It is worth

mentioning that the pace

of growth in this

category to a large extent

depends on the move-

ment of international

metal prices. Consequ-

ently, the increase in the

price of metals also

affected the growth rate

of exports for this

product from Kosovo.

15

Adoption of the Euro and anchoring local monetary policy with monetary policy of the euro zone, although helps maintaining macroeconomic stability, conditions enhancing the competitiveness only through relative prices, thus, lowering the cost of production. 16

Despite the increase in the value of income in the form of compensation of employees, the significant increase of the value of repatriated profits from foreign investments in Kosovo has led to the deterioration of primary income account.


Import of goods in the first half of 2015 increased by 4% mainly driven by the category

„machinery and equipment‟ (which increased by approximately 13.2%) and the category of

food products increased by around 6% compared with the same period 2014. This structure

provides information on contributors to the structure of economic activity in the country

during this period. Other categories such as basic metals declined by 7%. In imports, mineral

products (mainly fuel) and food comprised the lion share of total imports of goods.

During the first six months, the main destinations of Kosovo’s products were EU countries

(mainly Italy 17 and Germany), CEFTA countries (Albania and Macedonia), and other

countries like China and the USA. However, during this period there is a decline recorded in

the share of CEFTA as a potential region for export of goods from Kosovo to 30% compared

with the same period of 2014 when this share was 44%. Further on, there is a decrease of

exports‟ share towards EU countries, which during this period have recorded a reduced

share of 34% from 44% in the first half of 2014. On the other hand, the category of countries

under „Other‟ increased to 35.9% from 13% in the first half of 2014, an increase largely driven

by increased exports to Turkey with 77% and Switzerland at 37%. In the first six months of

2015, EU products continued to be the preferred imports for Kosovo‟s market, representing

around 40% of total imports, followed by CEFTA and countries under the category of

„Other‟, at a share of around 30% for both categories. Among EU countries, imports from

Germany continue to be among the major contributors to import, followed by Italy, while

from CEFTA imports from Serbia continue to contribute with approximately 16% in total

imports from CEFTA.

1.3. Banking Sector

The banking sector in Kosovo

continued to be profitable and

well capitalized. The data show

a continuous increase of the

total assets of commercial

banks, which in 2014 amounted

to 3,156 billion euros, the share

of assets made in this sector in

GDP reaches 57%.

Data for the first half of 2015

show that the total assets of

commercial banks amounted to 3,270 million euros; an increase of 2.6% compared to the end

of 2014. Loans, which constitute the main category of assets, totalled 2,005 million euros in

the first half of the 2015, marking an increase of 6.5% compared to the end of 2014. As a

percentage of GDP, loans amounted to 33.7% in 2014. On the other hand, deposits which in

2014 accounted for around 45% of GDP during the first half of 2015 amounted to 2,574.5

million euros, an increase of 1.5% compared to their value at the end of 2014. From the

investment point of view, in the first half of 2015 we saw that loans granted to non-financial

17

The products which are mainly exported to Italy are metals, while food products are mainly exported in Germany.


sectors have grown faster than deposits, 7.7% and 4% respectively. Giving a positive signal

regarding economic activity in the country during this period, this development led to the

increase of the ratio between loans and deposits at 78% compared with 74% in late 2014.

Furthermore, the ratio of liquid assets and total assets continued to remain the same with

36%. On the other hand, in line with the structure of the economy, in the first half of 2015,

the distribution of loans continued to be disproportionate within sectors, where the services

sector continues to have the highest share of lending by around 73% (dominated by the sub-

sector „trade‟), followed by industry and construction with approximately 23.2%, and

agriculture 3.8%. In the first half of 2015, new loans totalled 126.9 million euros recording an

average growth of 9.2%, a slowed down growth rate compared to previous periods.

1.3.1. The structure of deposits and loans

Deposits of households which comprise 74% of total banking sector deposits amounted to

1.807 million euros, an increase of 3.3% in the first half of 2015 compared with the end of

2014. On the other hand, loans granted to households totalled 661 million euros, an increase

of 4% compared to their value at the end of 2014. The increase of loans granted to this

category, in the first half of 2015 was slowed down compared to the first half of 2013 and

2014 which was around 5%. Deposits of non-financial corporations during the period of

2015 totalled 395.3 million euros or 1.9% more than they were at the end of 2014. Loans

granted to non-financial corporations amounted to 1,329 million euros from 1,232.7 million

euros as they were in the end of 2014. Regarding the structure of loans granted during this

period, loans to the services sector grew at an accelerated rhythm of 8.2% reaching 977.8

million euro. It is worth mentioning that the majority in the services sector is covered by

wholesale trade which indicates a low level of domestic production. Specifically, the

industrial sector and products were credited in the amount of 311.3 million euros, which

represents an increase of 7.4% compared to the value reached at the end of 2014. However,

the production sector increased its share in this category by 3 percentage points to 54% of

loans granted to the industrial and production sector. On the other hand, this increase may

have come as a result of the reduction in the construction sector and consequently reduction

of lending to this sector. Data for this period indicate that the effective interest rate on loans

continued to decline, making the cost of financing to be less expensive to previous periods.

Effective interest rates on loans up to June 2015 declined with 1.6 percentage points

compared with the end of 2014, reaching 7.6%. Interest rates on deposits also declined but at

a slower trend18, where in June 2015 in deposit rates were 0.8%, or 0.3 percentage points

lower compared with December 2014.

The banking sector continued to record a positive continuous growth of net profit. The data

show that up to June 2015, net profit was 46.2 million euros; an increase of 72%. This

increase in profitability is mainly attributed to the benefits from changes to interest rates,

namely the reduction of interest rates on deposits. Profitability indicators ROA and ROE

increased with 0.3% and 2% respectively.

18

Despite the slow decline of the deposits, the deposit base is much higher than that of loans therefore savings from the interest rate decline in spending is more apparent


2. Fiscal Developments

The first half of 2015 was characterized by fundamental changes in public finances. The

Government of Kosovo is facing a complex challenge, namely the adherence to the fiscal rule

and maintaining fiscal credibility on the one hand, and the need for major investments in

development projects on the other.

In June this year, the Government of Kosovo negotiated Stand-By Programme with the IMF,

which will be focused on strengthening public finances by adhering to fiscal rule, an

adequate level of bank balance and improving cost structure and creating fiscal space for

large development investments financed by International Financial Institutions. Since it is

estimated that the increase of salaries in the public sector worsened the country‟s

competitiveness, the Programme focuses on recovering this by linking the increase of

salaries for the public sector with macroeconomic indicators.

During the first quarter of 2015, the Government of Kosovo approved significant changes to

the tax system in Kosovo. Specifically, during the first six months, the Ministry of Finance

drafted new tax laws19 to reflect reforms to the tax system foreseen by the Government

Programme 2015-2018. Key reforms include the differentiation of VAT to a reduced rate of

8% and a standard rate of 18%, the exemption from VAT of production lines and inputs for

producers, reducing of VAT threshold and other changes aiming at easier implementation of

these laws.

Despite the increased economic activity that brought to increase of budget revenue, drafting

2015 budget on the basis of overestimated budget revenues led to the need for a budget

review. Consequently, current expenditures are reviewed for 47 million euors while capital

expenditures remained unchanged. Increasing the rate of excise dutieson certain products

softened to some extent the under-collection of revenues and budget cuts which would have

resulted from this under-collection.

19

Three laws of fiscal package enter into fore on 1 September 2015; the Law on VAT, the Law on Personal Income Tax and the Law on Corporate Income Tax.


Box 2. Stand-By Arrangement Programme (SBA) with the International Monetary Fund

In order to further strengthen the macroeconomic framework and accelerating planned

structural reforms, the Government of the Republic of Kosovo through the Ministry of Finance

held negotiations with the International Monetary Fund (IMF) during the first half of this year

on launching a new programme with this institution.

The purpose of these negotiations, and consequently this programme is to support fiscal

stability, preserve the low level of public debt, and improve the quality of public expenditures.

Further on, as a priority addressed by this programme it is to accommodate development needs

within the fiscal framework through public investment in major capital projects. The

programme also addresses maintaining an adequate level of bank balance as the Government of

the Republic of Kosovo considers that this element is of particular importance for the stability

of public finances.

In this context, the Government of the Republic of Kosovo when negotiating the programme

with the International Monetary Fund set the following objectives:

- Maintaining fiscal stability by maintaining the credibility of the fiscal rule and bank balance at

adequate levels. Consequently, the budget deficit does not exceed the rate of 2% and the bank

balance maintained at around 4.5% of GDP.

- As a developing economy with major needs for capital investment in addressing structural

challenges, the programme with the IMF has been negotiated in such a way as to allow a

considerable (albeit cautious) fiscal space in order to accommodate required projects of

developmental character. In its present form, with the legal provisions (the fiscal rule) does not

allow such a space for the planned investment. As a result, it is planned in cooperation with the

IMF to make the necessary legislative changes which would allow higher public spending (over

the fiscal rule) in development projects.

- To ensure the highest efficiency of public expenditures, the Government of the Republic of

Kosovo in cooperation with the IMF plans to build a special legal mechanism. This mechanism

would be based on rules and closely associated with a macroeconomic indicator of productivity

which will be used to limit the growth of salaries in the public sector. Consequently, this

mechanism will secure higher stability of the development of salaries invoice and also

contribute to improving the competitiveness in the labor market.

- Further on, in view of equal competitiveness, centralised procurement and e-procurement

priorities are part of the structural reforms. Such reform would allow greater transparency and

equal treatment for all economic agents who offer services to the public sector. Further on, the

form of e-procurement gradually will become mandatory for publicly owned enterprises.

Through this reform, centralised procurement and e-procurement will increase efficiency and

transparency, ensure equal treatment and will substantially reduce costs.

The agreement with the IMF is planned to last 22 months and will contain a financial package of

around 184 million euros.


2.1. Government Budget Revenues

During the first quarter of 2015,

Kosovo‟s economy was

characterized by a slowdown in

activity, which was reflected in the

quantity of imported goods and

therefore impacted the collection of

customs revenue. It was mentioned

at the beginning of this section that

“... drafting the 2015 budget (is done)

on the basis of overestimated budget

revenues”. This brought about the

need for a budget review, which was

carried through in June this year. Thus, a comparison between execution and planning

(both on revenues and expenditure) would not be relevant since the budget has already been

revised. The analysis in this section focuses on the actual collection of revenues and

expenditures and comparison to collection in the same period of the previous year.

The total budget revenues in the first half of the year increased by 7% compared to the same

period of 2014, driven mainly by higher domestic revenues, while negative contribution to

the growth of total revenues is attributed mainly to the low level of collection of the

municipalities‟ own source revenues. As a result, total revenues during this period

amounted to 646.1 million euros. Tax revenues account for around 90% of total revenues

while the tax revenue structure is still dominated by the revenues collected from customs

duties (Chart 2.1). However, during the first half of the year, domestic revenues have shown

a significant increase which is mainly attributed to measures taken by the Tax

Administration for narrowing the tax gap and facilitation through digitilization procedures

for tax declaration. The share of own source revenues of the central and municipal level in

total revenues has slightly decreased but was compensated by a significant increase in the

revenues collected at the country level.

2.1.1. Tax revenues from the border

Chart 2.2 shows that any fluctuation

of world goods prices that have great

weight in Kosovo imports will affect

the level of collection of revenues

from this source (under the

assumption that there tax rates

remain unchanged).


By the end of these six months, the

trend of revenue collection from the

border accelerated growing at a rate

of 7.0% (supported by the increase of

the quantity of imports and partly by

the increase in the rate of excise on

certain products applied since April

2015). Here, revenues from excise

duties have contributed most to the

growth of total revenues from the

border (3.3 percentage points).

The decline in international prices and as a result, the decline in the value of imports has

conditioned the trend of revenues from VAT and customs tax revenues which contributed to

lower growth of revenue collection at

the border. Revenues collected from

customs duties20, during the first half

of 2015, increased by a rate of 4.0%,

mainly due to the increase of imports

in recent months, both in quantity

and value (Chart 2.2). These

represent approximately 15% of total

revenues collected at the border.

Revenues collected from excise duties

constitute around 37% of total

revenues collected at the border.

During the first six months of 2015,

revenues from excise duties increased

at a rate of around 9.3% compared

with the same period of 2014. This

increase was supported by higher

rates of excise duties on tobacco and

liquor in April, although this has

contributed to the rapid growth of

the quantity of imported fuel. On the

other hand, the growth of this

revenue category was slowed due to

the decline by 18% in revenue from domestic excise duty as a result of reducing the number

of licenses for games of chance.

20

In early 2014 the Law on Customs Exemptions was approved, exempting from customs duties a certain number of machinery, raw materials, and machinery and raw materials used in agriculture


Collection of revenues from VAT has

been affected by the decline in

international prices which affected

the import value of goods as a basis

for calculation of VAT on imports.

This category continued to represent

the largest share of revenues from the

border (48.4%) even during this

period. Domestic revenues grew at a

rate of around 10% by increasing the

share in total revenues to around

30.0% from 28.3% as it was in 2014.

Increased revenue collection from VAT (3.9 percentage points) mainly contributed to the

growth in domestic revenues, followed by revenue from corporate tax. Efficiency-enhancing

measures by TAK are one reason, but this may have reflected in part also the economic

activity within the country, especially during the last quarter of 2014. Domestic revenues

were represented with 43.7% of revenues from VAT.

Withheld tax revenue represents the

second item by share in domestic

revenues. This category has shown a

slow growth during this period,

declining by 0.2% compared with the

same period of 2014. At the end of

the period, this category recorded

26.4 million euros. Revenues from

corporate income taxes are 35.8

million euros. Revenues from this tax

declined with 20.3% proving that one

of the main drivers of growth in

domestic revenues was this source of

income.

As shown in chart 2.8, the increase in

revenues was most expressed in

April of 2015 which is associated

with the tendency to increase the

quantity of import and that signals

the increased economic activity since

the beginning of this month.


2.2. Government Budget Expenditures

Total expenditures during the period January-June 2015 increased by a rate of 6.0%

compared to the same period of the previous year, mainly attributable to the effect of

increasing civil servants' salaries and pensions and other transfers funded by the state. The

highest contribution to the trend of costs is provided by expenditures on subsidies and

transfers, while the negative contribution to the growth of total expenditures is attributed to

capital expenditure and goods and services.

Expenditures on Wages and Salaries comprise around 38.7% of expenditure. During this

period, expenditures on wages and salaries recorded 258.5 million (see Chart 2.9b). It should

be noticed that the effect of increased salary expenditures during the first months of 2015 is

big (when compared to the same period of 2014) due to the entry into force of decision to

increase salaries on April.

Expenditures on Subsidies & Transfers increased their share in the total costs into 29.4%

from 26.1% as it was during the first half of 2014. This expenditure category increased by

19.5% compared with 2014, recording a value of 196.4 million euros. This significant increase

in this category is a result of increased pensions for contributing pensioners, the basic

pension and other transfers financed by the state to 25% in April 2014. Although capital

expenditures are usually higher in the second half of the year, a change of -15% compared

with 2014 results partly

from the last payment

Merdare - Morine highway

made in early 2014.

Consequently, total capital

expenditures during this

period amounted to 115.6

million euors, or 17.3% of

total expenditure for this

period.


Final remarks

The first half of 2015 was characterized by fundamental changes in public finance, where we

might mention the negotiation of Stand-By Programme with the International Monetary

Fund. This programme was negotiated by the Government in such a way as allows room for

large development projects, without prejudice to the fiscal rule in order to preserve fiscal

credibility.

Indicators such as the turnover of enterprises, the import of investment goods, FDI, and the

export of goods increased compared to the same period of the previous year, which

indicates an overall improvement of the economy, but what remains to be seen is how and

to what extent these will be affected by the tax changes that were initiated as a result of

policies derived from the Government. Implementation of changes to the tax system, that

are expected to begin in September of this year, is expected to stimulate in particular local

manufacturing, especially consdering the expectations of businesses from the production

sector, as per the feedback from the business climate survey. This is done in order to

stimulate import substitution in an effort to improve the trade deficit, which remains a

challenge for Kosovo. Efforts were focused in a way that the changes are planned to

complement each other as much as possible, as (among other things) VAT is differentiated,

production inputs are exempted from VAT, and Information Technology equipment are

exempted which apart being a field in itself, are also used extensively in many other

industries, thus expanding their influence in other sectors of the economy.

Considering the timeline of entry into force and the period of adaptation to new legislation

that economic agents require, it is expected that effects of these changes will begin to

manifest next year and more so going towards 2017 and 2018.


Note: Use of data from this publication is permitted only by quoting the source. The

Bulletin is published on mid-term basis, and any improvements therein shall be made in

the webpage

Government Building, XIII floor

Mother Theresa Boulevard, n.n.

10000 Prishtina


Published by the Ministry of Finance

August 2015

ECONOMIC BULLETIN - rks-gov.net

Documents

Transcript of ECONOMIC BULLETIN - rks-gov.net