Kosovo Country Partnership Framework FY17 - 21 · Growth in Kosovo has been positive and above...

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Kosovo Country Partnership Framework FY17 - 21 Public Consultations October 21, 2016

Transcript of Kosovo Country Partnership Framework FY17 - 21 · Growth in Kosovo has been positive and above...

KosovoCountry Partnership Framework FY17 - 21Public Consultations

October 21, 2016

Contents

• Country Context and Development Challenges

• Designing the New CPF

• SCD Priorities

• Government Agenda

• Lessons Learned from Previous Engagement

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COUNTRY CONTEXT AND DEVELOPMENT CHALLENGES

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Kosovo: Fragile post-conflict state aspiring to EU

• Kosovo declared independence in February 2008, after being UN protectorate since 1999.

• Incomplete diplomatic recognition remains a key obstacle. Kosovo is recognized as

independent by 109 out of 193 UN member countries, and 23 out of 28 EU member states.

• Other causes of fragility: weak rule of law; lack of interethnic cohesion; traditionally close

network of personal ties and loyalties dominate business relations; high youth unemployment

and risks of radicalization; poor governance and accountability; challenges with including

minorities and integrating returnees and IDPs; and lagging regions.

• Kosovo is potential candidate for EU membership. In recent years, the country has

accelerated its EU integration process, including through: (i) signing the Stabilization and

Association Agreement (SAA) with the EU in October 2015 which came into effect on April 1,

2016; and (ii) deepening coordination with the EC on economic policies and governance issues.

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Growth in Kosovo has been positive and above Western Balkans average

Real GDP Growth, 2008-2016

Source: World Bank staff calculations based on data from national statistical offices.

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-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2008 2009 2010 2011 2012 2013 2014 2015 2016

Kosovo SEE6

(Est.)

Growth is driven mainly by consumption fueled by remittances and ODA

17.2

9.4 11.2

4.17.6 8.4

10.5

2.93

1.9

2.3 2.2

Net ODA percent of GDP (2009-12)

Personal Remittances percent of GDP (2009-12)

Kosovo decomposition of real GDP

growth, 2011-2016Kosovo remittances and ODA, percent

GDP, 2009-2012

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4.4%

2.8%3.4%

1.2%

3.9%3.6%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2011 2012 2013 2014 2015 2016

Consumption Investments Net exports Real GDP growth

(Est.)

Limited role of exports that remain unsophisticated and poorly diversified

18.4

32.929.6

49.6

39.134.3

Kosovo Albania BiH FYR Macedonia Montenegro Serbia

Export, percent of GDP 2009-13

44%

6%

15%13%

4%

16%

Base metals52%

Mineral products

Agriproduce13%

Light mnfg9%

Chemicals6%

Machinery4%

Other 10%39%

51%

Italy15%Other European

Western Balkans39%

China & india22%

Export Composition by Country

2005 (inner circle) vs 2014 (outer circle)

Export Composition by Product Groups

2005 (inner circle) vs 2014 (outer circle)

7

-10

0

10

20

30

40

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

FDI, net inflows (% GDP)

KSV ALB BIH HRV

MKD MNE SRB SVN

0

2,000

4,000

6,000

8,000

KSV BIH MKD ALB SVN SRB HRV MNE

FDI, net inflows per capita (US$)

2004-2009 2010-2015

0

1,000

2,000

3,000

4,000

Jobs Created by FDI Projects in Kosovo

Source: WB WDI

Source: FDI Markets

FDI Performance is weak and new FDI jobs were in non-tradable sectors

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Infrastructure Bottlenecks are among the Top Constraints for

Private Sector Growth….

50

29

22

10

7 6

18

23

54 4 5

2

9

0

20

40

60

KSV MCD ALB BiH SRB MNE ECA

Infrastructure challenges

Percent of firms identifying electricity as a majorconstraint

Source: BEEPS 2013 and EBRD

…. Investment Climate Reform Agenda Is Yet To Be Completed….

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66

47

136

124

32 28

5767 71

48

163

0

40

80

120

160

200

Doing Business Rank, 2016

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2014 14

6 8

45

1912

22

7 4

62

8

29

17

510

0

20

40

60

80

Kosovo Macedonia BiH Serbia Albania Montenegro

Percent of firms identifying A2F a major constraint for growth%

Small (5-19) Medium (20-99) Large (100+)

…. and Financial Intermediation Remains Low and Access to Finance Problematic

17 15

2823

42 41

52

34 35

4451

54 55

65

0

10

20

30

40

50

60

70

KSV ALB SRB MKD BIH SVN HRV

Domestic credit to private sector, % of GDP

2005 2015

7181

6281

55 56

0

25

50

75

100

Kosovo Albania BiH Macedonia Montenegro Serbia

Sources of financing of investment by private firms, %

Internal Resources Banks Supplier Credit Stock Market Other

299276

255 243

190

150

0

100

200

300

Kosovo Macedonia Albania Montenegro BiH Serbia

Value of collateral needed for a loan % of the loan amount

Source: BEEPS 2013Source: WB WDI

Source: BEEPS 2013Source: BEEPS 2013

Kosovo has the potential to achieve exceptional growth performance if it utilizes its demographic dividend…

Population Pyramid: Kosovo vs BiH comparison

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Bosnia and Herzegovina

…but it continues to face high structural unemployment, low labor force participation rates, and ...

Sources: World Bank staff calculations based on national statistical offices.

Note: The regional total excludes Kosovo.

Kosovo unemployment rate, percent of LF,

2015

Sources: National statistical offices and Eurostat 2015 data.

Note: Kosovo data is for population aged 15-64.

Activity rates as percent of population

over 15 years of age, 2015

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0

10

20

30

40

50

60

70

80

ALB BiH KSV MKD MNE SRB SEE6 EU28

Largest gender gap in Western Balkans

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

KSV BiH MKD SRB MNE ALB

long term other

... a large reliance on non-wage income in households …

Kosovo: Income shares by source and consumption decile

Source: HBS, Kosovo Agency of Statistics13

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10

Shar

e o

f to

tal H

H in

com

e

Decile

2015

Other

Net income from own business

Domestic remittances

Foreign remittances

Pensions

Social welfare receipts

Rent, dividends and interest

Per diem work

Wages and salaries

Kosovo in a self-perpetuating cycle…

Remittances/

Aid Fuelling domestic demand

Tradeables: Large imports of goods/small exports

performance

Non Tradables: sector expansion or price

pressures

Limiting business expansion/investment

opportunities in tradeables

Lack of Job

Creation

Migration

Limited competitiveness

/productivity

Narrow production base and low productivity

Large Appeal for Public Sector Employment/

Increase in Reservation Wages

Large Under- employment in Agriculture and low

labor force participation

Inadequate human capital

base

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…leading to declining productivity

50

100

150

200

250

300

2003Q4 2004Q4 2005Q4 2006Q4 2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4

Average Wage Public Average Wage private

Average Wage GDP per worker(constant LCU)

Wages and Productivity in Kosovo

Source: Ministry of Finance data.

Note 100= 2003Q4 15

Sources: World Bank staff calculations based on national statistical offices.

Note: The regional total excludes Kosovo.

Poverty headcount in Kosovo, 2000-

2013

Despite progress in poverty reduction, Kosovo remains one of the poorest country in Europe

0

10

20

30

40

50

60

2000 2002/03 2003/04 2004/05 2005/06 2009 2010 2011 2012 2013

Percent of population

Old seriesNew series

Real GDP per capita, percentage of EU

average income per capita

15

20

25

30

35

40

45

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

ALB BIH KSV MKD MNE SRB SEESource: World Bank staff analysis of Kosovo Household

Budget Surveys

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Need to rebalance growth towards higher productivity and greater competitiveness

Declining marginal benefits: shrinking ODA by reduced security concerns; slowing pace of public investment by past reconstruction efforts; dynamism of the non-tradable sector aconstrained by the small internal market.

Mounting social pressure: protracted low job creation, demographic pressures, and emigration.

EU accession: structural transformation and heightened productivity to cope with competitive market forces and provide opportunities for income catch up.

Reforms to support rebalancing of growth towards higher

productivity and greater competitiveness:

While preserving fiscal discipline, reprioritize public

expenditures and reorient taxation

Improve energy security via affordable and

comprehensive energy strategy

Enhance the infrastructure networks and environment for

business expansion in tradable sectors to reap the

benefits of European integration.

Strengthen inclusion by building human capital and

providing equal opportunities to tap into

unemployed/underemployed resources.

Improve stewardship of Kosovo’s environment and natural

resources. 17

Maintaining macroeconomic stability while

reprioritizing public expenditure

Reducing infrastructure

bottlenecks and creating a more

attractive business environment for

private investment and expansion of tradable

sectors

Better stewardship and greater

productivity of natural resources

Greater inclusion by building

human capital and providing equal opportunities

Rebalancing growth towards higher productivity and greater competitiveness

Key Priorities

Refocusing Kosovo’s growth agenda requires retaining several features of its economy as a foundation, while increasingly tapping into production factors—natural and human resources—that are either chronically underused or not used at all. This will help expand opportunities for the poor to sustainably improve their welfare, reduce poverty, and promote shared prosperity. To broaden the economy’s narrow production base, boost job creation, and reduce the heavy dependence on imports, Kosovo’s current growth strategy needs to be amended across the board through

new governance, macroeconomic, structural, and social policies.18

Detailed Priorities

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Align the budget more closely with development needs and improve the allocation and efficiency of public spending: As the economy

becomes euroized and given the benefits of structural reform and the changes in income policies, the scope for macroeconomic policy is limited

by the availability of fiscal buffers and external financial support. Proper balance between stabilization and development objectives needs to be

achieved. Kosovo is sensitive to political business cycles and prone to election-related episodes of fiscal largesse. There has also been a

tendency to overinvest in physical infrastructure, particularly roads. It is expected that, soon, the combination of these factors will either cause

the deficit to surge or crowd out priority development-focused spending. Serious trade-offs will be needed, particularly if new power generation

facilities require public resources. Regardless of the magnitude of public spending in the energy sector, reprioritizing expenditures across sectors

would contribute more to addressing the poverty and unemployment challenges and would provide more value for money.

Shift to direct taxation and strengthen tax administration: Meeting all fiscal needs will be more difficult if, as expected, border revenues,

which make up over 70 percent of total revenues, decline as EU integration and free trade agreements advance. A gradual shift to domestic

revenue and direct taxation is necessary and feasible. Tax policy also needs to reflect the degree of compliance, the size of the shadow

economy (which is estimated at 27–35 percent of gross domestic product), and the capacity of the tax administration to adopt appropriate

international best practice.

Maintaining macroeconomic stability while

reprioritizing public expenditure

Detailed Priorities

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Capitalize on comparative advantages: Kosovo already has comparative advantages in several goods (garments, textiles, and food) and services (travel and

communications). Manufacturing has the potential not only to spur income and exports, but also to generate employment among skilled and unskilled workers. Given

their direct impact on other sectors and on human capital formation, modern services, which are already a major source of income, have the potential to transform

Kosovo’s economy. However, manufacturing and modern services have been held back by large regulatory and infrastructure gaps.

Ensure good governance and reinforce the rule of law: Good governance is an element of the soft infrastructure that is necessary for a well-functioning, competitive,

and innovative market economy that has discarded the socialist legacy. The inadequate development and performance of governance institutions, particularly the

shortcomings of the judicial system, are a major obstacle to business success. Because they raise the costs and risks associated with doing business, they encourage

the offering, giving, receiving, and soliciting of bribes. Addressing gaps in soft infrastructure would also help strengthen social cohesion.

Enhance the business environment. The establishment of an effective legal, regulatory, and administrative framework to govern trade and investment would help

enhance the capacity of businesses to withstand competitive pressures and connect with global value chains, thereby generating jobs and spurring competition,

innovation, and productivity increases. A number of policies that support trade and investment need more work, including in strengthening property rights; reforming and

streamlining licensing; reforming inspections; implementing customs and trade regulations; streamlining standardization, accreditation, and certification systems;

enhancing foreign direct investment and export promotion; clarifying competencies on competition; and tightening the arrangements for corporate governance, financial

reporting, and auditing. Secure property rights: develop the land market, and coordinate the use of national geographical data.

Ensure reliable and affordable energy: Energy insecurity has heavy costs for businesses and is the largest obstacle to attracting high-quality FDI to Kosovo. Relying

on external suppliers is not realistic from either a supply security or a cost perspective. Short-term energy deficit problems can be addressed partly by regional

interconnectivity. In the long run, though, even taking into account the costs of managing environmental and social externalities, the best value-for-money option is an

energy strategy that incorporates renewable energy, energy efficiency measures, and a new power plant.

Increase connectivity. In a small and landlocked economy, connectivity is critical to successful integration with regional and global markets. Kosovo has invested

heavily in new physical capital, but the investment in new highways risk squeezing out other public investments. Also strategic for Kosovo’s competitiveness is

addressing infrastructure bottlenecks in broadband digital communications, which can pave the way for income growth and job creation.

Reducing infrastructure bottlenecks and

create a more attractive business environment

Detailed Priorities

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Counter the effects of decades of neglect and war: Given the country’s abundance of natural resources and its fertile land, greater productivity and sustainability in

agriculture and mining—where Kosovo benefits from comparative advantages—are critical to exports and to import substitution because they can generate resources for

development. Modernizing agriculture and mining, building up institutions and policies, and setting technical standards and regulations will be critical to addressing

environmental and health risks and to aligning with EU norms. Consideration should also be given to the impact of trade agreements.

Increase productivity in agriculture. Agriculture accounts for about 12 percent of GDP and 25–35 percent of total employment. In Kosovo, it is also a safety net. About

60 percent of the population own land for cultivation, and 30 percent own livestock. About 60 percent of the poor live in rural areas and, to a large degree, depend

directly or indirectly on agriculture for their livelihoods. However, there are structural and interrelated challenges to agriculture’s competitive and growth potential,

including insufficient scale, financing, integration, and market links. Alignment with EU and international standards and technical regulations needs to be ensured. The

sector will need to adapt to the drought and flood threats of climate change, which will affect Kosovo’s limited water resources.

Manage natural resources sustainably. Kosovo has large reserves of lignite, lead, zinc, silver, nickel, cobalt, copper, iron, and bauxite, and high-quality construction

minerals such as andesite, basalt, diabase, gabbro, granite, limestone, and marble. Mining, which was a mainstay of the economy of the former Yugoslavia, has the

potential to generate exports, growth, and resources for development. It is estimated that Kosovo’s mineral endowment is sufficient to offset the start-up costs necessary

for major upgrades. The principal challenge to relaunching Kosovo’s mining industry is attracting private investment, considering that sectoral governance is weak and

Kosovo’s status is unresolved. Reforms to improve the rule of law and minimize discretionary decision making are necessary; but so, too, is addressing a legacy of

unresolved labor, social, and environmental issues that affect workers and communities. Remedying environmental legacies related to mining will be vital to relieving

health impacts, bringing degraded land back into productive use, and reducing public opposition to production.

Better stewardship and greater productivity

of natural resources

Detailed Priorities

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More jobs and more productive workers are vital to building the critical human capital that is necessary to ensure that low-income

households participate in and benefit from economic growth. Kosovo has a young population and a potentially large demographic dividend,

which makes the jobs agenda all the more critical. Improving the quality and relevance of education at all levels and ensuring equitable access

to educational opportunities at early ages is a first step that needs to be complemented by more opportunities to acquire the skills that private

employers are seeking. The development of these skills opens up wage employment opportunities, but it may also stimulate greater self-

employment and entrepreneurship in such areas as agribusiness, information and communication technology (ICT)–enabled jobs, and other

emerging sectors. Given Kosovo’s extremely low labor force participation, improved opportunities are needed for women and minorities.

For greater social inclusion and cohesion, policies are needed to enhance the opportunities of all wealth groups, ethnicities, and regions to

access health care, education, and social protection equitably. A large share of the population is vulnerable to income shocks and falling back

into poverty, and the social safety net has major gaps. Building up institutions, improving targeting, and making public spending more efficient in

health care, education, employment services, and last-resort social assistance would promote equal opportunity and short-term protection.

Given Kosovo’s history, better targeting and coverage in social protection is paramount, and budgetary support should be directed to the poor

rather than special interest groups. Shortcomings in the inclusion and participation of women at all levels of society are a major concern. Health

outcomes could be enhanced by shifting the focus from hospitals to primary care, water, and sanitation to meet basic needs.

Greater inclusion by building human capital and

providing equal opportunities

Detailed Priorities

Improve the allocation and efficiency of public expenditure

Strengthening tax policy and administration

Deepen and widen financial intermediation

Improve governance, rule of law and business climate

Reduce energy bottlenecks

Increase productivity in agriculture

Ensure sustainable management of natural resources

Reduce transport bottlenecks

Maintaining macroeconomic stability

Reducing infrastructure bottlenecks and create a more attractive

business environment

Better stewardship and greater productivity of natural resources

Increase employment and labor productivity through education

Increase quality and equality of opportunity through labor policies

Increase quality and equality of opportunity through social

protection

Building human capital and providing equal opportunities

Reduce ICT bottlenecks

Increase the quality and equality of opportunity

through health

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THANK YOU!

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