The Executive Board of the International Monetary Fund (IMF) today approved a 20-month Stand-By Arrangement (SBA) for Kosovo in a total amount equivalent to SDR 90.968 million (€ 106.6 million or US$140.8 million) in support of the government’s economic program for 2012-13. The Board’s decision immediately enables the initial disbursement of an amount equivalent to SDR 4.251 million (about € 5 million or US$6.6 million). The approval of the SBA follows the successful completion of a Staff-Monitored Program between June-December 2011.
Following the Executive Board discussion on Kosovo, Ms. Shafik, Deputy Managing Director and Acting Chair, said:
“The Fund-supported program comprehensively addresses Kosovo’s macroeconomic challenges through policies and reforms to restore fiscal sustainability, re-build government cash buffers, strengthen the fiscal framework, and preserve financial stability. Determined program implementation, backed by broad political support, will be crucial to build confidence and credibility in the policy framework. In this regard, the strong track record of policy implementation under the staff-monitored program in 2011 is encouraging.
“Fiscal policy is the main instrument to safeguard macroeconomic stability. A sustainable fiscal stance should be restored by 2014, through restraint on current spending and growth- friendly revenue measures. However, priority capital and social spending should be protected. Careful prioritization, design, and costing of spending initiatives are pivotal to support this effort. Kosovo’s policy framework could be usefully complemented by a legally- binding fiscal rule to anchor fiscal policy.
“To safeguard financial stability, the central bank needs the full toolkit of legal, regulatory, and financial instruments and the ability to use these instruments without interference. Important steps have been taken, including the upgrading of the legal framework for banking regulation and supervision.
“To strengthen external competitiveness and boost economic growth, further reforms are needed to enhance the business climate, preserve labor market flexibility, develop the traded sectors of the economy, and upgrade public infrastructure.”
Background and Program Summary
In the past 10 months, the conduct of macroeconomic policy in Kosovo has improved significantly. Following the deterioration in the fiscal stance after independence and policy slippages, fiscal adjustment of 1½ percentage points of GDP was achieved under the 2011 Staff-Monitored Program. Progress has also been made with respect to the design and costing of spending initiatives, while important steps have been taken to strengthen the resilience of the financial sector.
However, the return to sustainable policies is not yet complete. To fully restore sustainability of the fiscal stance, structural adjustment of another 1½ percent of GDP is required that should be implemented through a mix of restraint on current spending and growth-friendly revenue measures, while protecting priority capital and social spending. Further, a level of government cash buffers needs to be reestablished that is sufficient to insure the economy against fiscal and financial shocks.
The program’s key policy objective is to make further decisive steps toward restoring fiscal sustainability and to anchor fiscal policy. With no monetary policy, fiscal policy is the main tool to safeguard macroeconomic stability. A sound policy stance would be complemented with appropriate structural fiscal reforms, as well as steps to enhance the financial system’s resilience. Bank balances are expected to recover during the course of 2013 when PTK privatization is expected to be finalized. The SBA-supported program is also expected to facilitate donor support.
Kosovo’s unilateral adoption of the euro places a premium not only on fiscal discipline, but also on labor market flexibility, wage restraint, and structural reforms that enhance the economy’s competitiveness. Recent measures to improve the business climate and improve Kosovo’s rank in the World Bank’s “doing business” survey are welcome steps in the right direction. However, Kosovo’s legal and institutional framework will require significant further strengthening to attract domestic and international investors.
The authorities’ program is designed to address Kosovo’s macroeconomic challenges in a comprehensive manner. Restoring and anchoring fiscal sustainability while fostering financial stability are the key objectives of the Stand-By Arrangement.