Information about Europe Europa
Journal Issue
Share
Article

Republic of Kosovo: First Review Under the Stand-By Arrangement, and Request for Modification of Performance Criteria

Author(s):
International Monetary Fund
Published Date:
July 2012
Share
  • ShareShare
Information about Europe Europa
Show Summary Details

I. Introduction and Summary

1. Macroeconomic and financial policies are broadly on-track (Letter of Intent, Table 1).

Table 1.Kosovo: Main Indicators, 2008–17(Percent, unless otherwise indicated)
2008200920102011201220132014201520162017
Est.Projections
Real growth rates
GDP6.92.93.95.03.84.13.25.05.04.6
GDP per capita5.61.42.43.42.22.61.73.43.43.1
Consumption4.31.02.92.92.52.73.43.33.33.0
Investment18.111.78.87.66.09.11.410.69.39.4
Exports4.77.824.213.66.45.46.77.39.26.6
Imports5.95.311.95.63.75.03.86.46.66.0
Official unemployment (percent of workforce)47.545.445.1
Price changes
CPI, period average9.4−2.43.57.30.61.21.41.41.21.3
CPI, end of period0.50.16.63.61.01.91.01.70.81.7
Import prices11.8−4.93.27.7−2.1−1.0−1.4−1.2−0.8−0.6
GDP deflator6.2−1.33.74.82.12.41.91.91.91.9
Real effective exch. rate (average; −=depreciation)3.2−1.0−0.73.5
Real effective exch. rate (end of period; -=depreciation)0.2−1.00.80.7
General government budget (percent of GDP)
Revenues, incl. interest income 1/24.529.327.628.128.027.127.727.928.328.5
Primary expenditures24.729.930.029.830.630.228.628.729.129.3
Of which
Wages and salaries5.96.87.48.38.48.38.38.28.28.2
Subsidies and transfers7.17.36.45.86.16.16.26.26.26.2
Capital and net lending, incl. highway project7.611.611.911.912.211.89.910.010.210.4
Capital expenditures on highway project 2/2.95.66.05.60.00.00.00.0
Overall balance−0.2−0.7−2.6−1.9−2.8−3.4−1.3−1.2−1.2−1.3
Debt financing, net0.0−0.20.3−0.12.02.51.41.81.92.0
Privatization0.00.00.00.00.65.90.20.20.20.3
Stock of government bank balances10.88.75.83.53.88.98.78.57.97.8
Recommended minimum bank balances 3/5.75.86.16.26.77.27.67.8
Financing gap0.00.00.00.01.80.30.00.00.00.0
Savings-investment balances (percent of GDP) 4/
Domestic savings−12.6−7.4−6.7−7.9−5.3−2.7−2.3−0.32.14.2
Transfers excluding general government (net)14.011.912.512.211.911.812.011.711.411.0
Net factor income4.32.12.12.62.42.52.52.52.52.5
National savings5.86.68.07.09.011.612.214.016.017.7
Investment28.632.333.933.232.733.731.732.333.134.1
Current account, excl. official transfers−22.8−25.7−25.9−26.2−23.7−22.0−19.5−18.3−17.1−16.4
Current account balance, incl. official transfers−15.3−15.4−17.4−20.3−18.3−18.2−16.0−15.0−14.1−13.8
Of which: official transfers 5/7.510.38.65.95.43.93.53.23.12.6
Net foreign direct investment8.97.18.58.08.612.07.37.47.67.8
Portfolio investment, net1.7−1.4−5.5−2.3−3.2−1.5−2.6−1.6−0.8−0.1
Bank credit to the private sector32.78.912.614.77.7
Deposits of the private sector25.822.223.111.48.6
Non-performing loans (percent of total loans)3.34.35.25.86.0 6/
GDP (millions of euros)3,8513,9124,2164,6374,9115,2345,5085,8956,3106,726
GDP per capita (euros)2,3232,3252,4682,6742,7902,9303,0383,2033,3783,548
GNDI per capita (euros)2,7492,6502,8293,0713,1893,3483,4803,6613,8484,027
Population (thousands) 7/1,6581,6831,7081,7341,7601,7861,8131,8401,8681,896
Sources: Kosovo authorities; and IMF staff estimates and projections.

Projections assume a grant from IDA in 2012.

Based on World Bank estimates.

Temporary deviations from the recommendation may be warranted in case of (i) large anticipated payments, for example on infrastructure, or (ii) large receipts, for example from privatizations.

Savings-investment balance of entire economy, including donor sector.

Total foreign assistance excluding capital transfers.

April 2012.

Series updated with the 2011 census.

Sources: Kosovo authorities; and IMF staff estimates and projections.

Projections assume a grant from IDA in 2012.

Based on World Bank estimates.

Temporary deviations from the recommendation may be warranted in case of (i) large anticipated payments, for example on infrastructure, or (ii) large receipts, for example from privatizations.

Savings-investment balance of entire economy, including donor sector.

Total foreign assistance excluding capital transfers.

April 2012.

Series updated with the 2011 census.

  • All end-April and continuous quantitative performance criteria under the Stand-By Arrangement (SBA) were met with comfortable margins, as a modest shortfall in revenue collection was overcompensated by under-execution of spending.
  • Most structural benchmarks through end-June were also met. The exceptions are: (i) the end-May structural benchmark on submitting a revised Deposit Insurance Law to the Assembly, which was met with a delay of three weeks, as consultations with stakeholders took longer than originally envisaged; and (ii) a continuous structural benchmark on including an agreed cost control clause into benefit creating laws, as the Assembly removed the clause from a draft law on one occasion (pensions of the Kosovo Security Force). Corrective action has been taken (LOI ¶14).
  • The indicative targets on the nonaccumulation of domestic arrears by the central and the general government were missed by small margins, reflecting weaknesses in the monitoring of payments obligations. The authorities are developing measures, in close cooperation with an IMF technical assistance mission, to address these shortcomings.

2. Kosovo’s economy has remained largely shielded from the euro area crisis, but there are risks. Growth appears to be slowing modestly but is still robust, as anticipated under the program baseline (¶4). Direct financial or trade linkages to crisis countries are small. The economy remains vulnerable, however, to a possible deterioration in labor markets conditions in host countries of the Kosovar diaspora, which could trigger a drop in remittances and capital inflows, with negative repercussions for growth, the fiscal position, and financial stability.

3. Against this backdrop, the program’s key objectives remain restoring a sustainable fiscal position and sufficient government cash buffers, anchoring fiscal policy through the introduction of a fiscal rule, and enhancing the resilience of the financial system.

  • Structural fiscal adjustment. Structural adjustment of 1.1 percent of GDP is being implemented in 2012 (¶8). The authorities and staff reached understandings on the broad parameters of the 2013 budget, including further structural adjustment of 0.6 percent of GDP, which would bring Kosovo’s fiscal position close to a fully sustainable stance (¶10).
  • Cash buffers. Preparations for the privatization of the telecommunications company PTK are advancing (¶11). The receipts from PTK privatization—expected to be transferred to the treasury in 2013—would help restore an adequate level of government bank balances, thus strengthening the authorities’ capacity to absorb fiscal and financial shocks.
  • Fiscal rule. An IMF technical assistance (TA) mission visited Pristina in late June to discuss options for a legally binding fiscal rule that would anchor fiscal policy in the medium term (¶12). Enactment of the fiscal rule is envisaged for the first half of 2013.
  • Financial system. After the purchase that becomes available with the completion of this review, the authorities intend to fund the central bank’s special reserve fund (SRF) for emergency liquidity assistance (¶16). An upgraded Banking and Microfinance Law (BML) strengthens the central bank’s ability to resolve troubled financial institutions. A revised Deposit Insurance Law consistent with the BML was submitted to the Assembly in June (¶15).

II. Recent Developments

4. Recent data point to a modest slowing in economic growth, as anticipated under the program baseline. (Tables 13, Figure 1). While there are only limited high frequency activity indicators, private sector credit growth moderated to 11 percent (y-o-y) in April, some 4½ percentage points less than six months earlier. Deposit growth has slowed even more from the high pace of recent years, which reflected in part monetization of the economy. Imports dropped sharply in February due to unusually harsh weather conditions, but have normalized since. Consumer price inflation was marginally higher than expected in April at 1.2 percent (y-o-y), reflecting higher prices for imported fuel and an increase in tobacco excise rates.

Table 2.Kosovo: Real Growth, 2007–17(Percent, unless otherwise indicated)
20072008200920102011201220132014201520162017
Est.Projections
(Real growth, percent)
Consumption5.34.31.02.92.92.52.73.43.33.33.0
Private8.06.40.43.83.02.63.23.23.23.12.9
Public−5.4−5.93.9−1.52.31.5−0.34.34.04.43.6
General government−2.3−0.215.97.18.56.95.05.76.16.65.3
Donor sector 1/−8.7−12.2−11.4−16.0−10.9−12.2−17.1−1.0−5.0−6.1−5.9
Investment15.218.111.78.87.66.09.11.410.69.39.4
Private21.60.64.87.07.23.213.38.012.210.010.2
Public−9.7109.229.012.68.411.51.7−11.66.57.67.5
General government−8.7153.635.113.89.412.22.0−11.77.08.17.9
Donor sector 1/−12.3−18.6−26.0−7.3−11.1−5.1−5.6−5.8−10.1−9.9−9.8
Exports 2/13.44.77.824.213.66.45.46.77.39.26.6
Imports11.05.95.311.95.63.75.03.86.46.66.0
GDP6.36.92.93.95.03.84.13.25.05.04.6
Memorandum item:
GDP (millions of euros)3,3943,8513,9124,2164,6374,9115,2345,5085,8956,3106,726
Sources: Kosovo authorities; and IMF staff estimates and projections.

Donor sector includes UNMIK, EULEX, KFOR, and other donor spending.

Including service receipts comprising donor sector consumption.

Sources: Kosovo authorities; and IMF staff estimates and projections.

Donor sector includes UNMIK, EULEX, KFOR, and other donor spending.

Including service receipts comprising donor sector consumption.

Table 3.Kosovo: Balance of Payments, 2009–17 1/(Millions of euros, unless otherwise indicated)
200920102011201220132014201520162017
Projections
Goods and services balance−1,553−1,710−1,904−1,866−1,901−1,875−1,920−1,958−2,015
Goods−1,673−1,776−2,090−2,087−2,161−2,188−2,294−2,406−2,517
Exports177305322355391438481539599
Imports−1,851−2,081−2,412−2,442−2,552−2,626−2,775−2,946−3,116
Services12166186221260314374448502
Receipts429476608654699748815903969
Payments−308−410−422−433−439−434−441−455−467
Income8389121118130139150160170
Compensation of employees (net)169172178186193201209217226
Investment income−86−82−57−67−63−62−59−57−56
Interest payments on public debt−1−9−9−13−11−11−10−10−9
Transfers866889839848819857884911918
Official transfers401361273265202194191194178
Other transfers (net)465528566583617663693717740
Of which: inflows of remittances506512548553569592619648674
Current account−604−732−943−899−952−879−887−888−928
Capital and financial account543553743613737679687688728
Capital account108256222222
Of which: WB Trust Fund8905000000
Financial account, incl. CBK435527737610735677685686726
Foreign direct investment, net277358371423629400434482522
Commercial banks, excl. FDI−98−10125−76−8−381165109
General government−13221−42245−22−57−113−83
Disbursements, incl. past IMF purchases022834590000
Repayments−132−11−12−11−14−22−38−62−47
Prepayment of debt−132−11−12−11−14−22−38−62−47
Other repayments000000000
Other0100000000
Other sectors, excl. FDI 2/366284334285367372345273232
Central Bank of Kosovo22−3511−44−298−36−47−23−54
Reserve assets94−4760−44−298−36−47−23−54
Government balances (program definition)−1723673−27−278−17−224−26
Other reserve assets, incl. SDRs111−283−14−17−20−19−25−27−27
Non-reserves assets−13212−46000000
Liabilities 3/600−3000000
Net errors and omissions 4/61180200200200200200200200
Financing gap00087150000
Memorandum items:
Current account, excl. official transfers−1,005−1,093−1,216−1,164−1,154−1,073−1,078−1,081−1,106
(in percent of GDP)−25.7−25.9−26.2−23.7−22.0−19.5−18.3−17.1−16.4
Current account, incl. official transfers−604−732−943−899−952−879−887−888−928
(in percent of GDP)−15.4−17.4−20.3−18.3−18.2−16.0−15.0−14.1−13.8
Trade Balance (percent of GDP)−39.7−40.6−41.1−38.0−36.3−34.0−32.6−31.0−30.0
Debt service to export ratio (percent)21.92.62.22.42.32.83.75.03.6
Net foreign assets of commercial banks444545519596604642631589503
Net foreign assets of CBK1,0881,1081,0971,1411,4391,4751,5221,5451,599
Gross international reserves of the CBK6256866266709681,0041,0529811,035
Sources: Kosovo authorities; and IMF staff estimates and projections.

The authorities are in the process of revising the balance of payments statistics, based in part on recommedations by a recent STA TA mission.

Including trading companies, insurance companies, and pension funds.

Includes SDR allocations and IMF account at historical value.

Projections of errors include unidentified private remittances and other capital flows based on average historical levels.

Sources: Kosovo authorities; and IMF staff estimates and projections.

The authorities are in the process of revising the balance of payments statistics, based in part on recommedations by a recent STA TA mission.

Including trading companies, insurance companies, and pension funds.

Includes SDR allocations and IMF account at historical value.

Projections of errors include unidentified private remittances and other capital flows based on average historical levels.

Private Sector Credit and Deposit Growth

(yoy, percent)

5. The banking sector remains well-capitalized, liquid, and profitable (Tables 4, 5, Figure 2). Average capital adequacy stood at 18 percent at end-April, compared to the regulatory minimum of 12 percent, while the share of nonperforming loans was 6 percent—both largely unchanged from end-2011. Prudent loan-to-deposit ratios averaging about 80 percent across the banking sector give rise to substantial excess liquidity. A small domestic bank was recapitalized by its owners in February after its capital adequacy ratio had dropped below the regulatory minimum in 2011, reflecting an increase in provisions needed to comply with central bank regulations.

Table 4.Kosovo: Consolidated Government Budget, 2011–14 1/(Excluding donor designated grants; millions of euros; cumulative from the beginning of the year)
2011201220132014
Apr.Aug.Dec
Est.Prog.Est.Prog.Revised Prog.Prog.RevisedProg.Proj.
Total primary revenue and grants1,3033783578738861,3811,3761,4171,520
Total primary revenue1,2773773568418531,3471,3421,4151,520
Taxes1,0723222987357351,1451,1451,2531,348
Direct taxes1516860129129168168186211
Indirect taxes9492642486256251,0121,0121,1051,177
Tax refunds−28−11−11−19−19−35−35−38−40
Nontax revenues2055658106118202197161172
Of which:
Dividends60015015454500
PAK-related receipts00305000
Grants26113333343430
Budget support19013030303000
Trust fund at the World Bank400000000
Project grants310334430
Primary expenditure1,3824003539149161,4991,5031,5811,578
Of which:
PAK-related expenditures11355888
Primary expenditure excluding PAK3523529119111,4941,4941,5731,569
Current expenditure8322432365365428969059661,031
Wages and salaries385102101238240407410433458
Goods and services1775858120124188193208229
Subsidies and transfers2708477178178297298321341
Pension and social assistance1786459130130196196216226
Other transfers and subsidies 2/9220184848101102105114
Reserve000004444
Capital expenditure and net lending550156117377374603598615546
Capital expenditure520145118366363592587605541
Highway project 3/259104762142132962942930
Other capital spending2614241152150296293312541
Net lending3011−111111111105
Primary balance−79−214−41−30−119−127−164−58
Primary balance net of PAK−205−38−26−119−119−155−50
Interest income, net−7−6−5−6−6−12−12−14−14
Overall balance−86−27−1−46−36−130−138−178−72
Financing862210−10445217181
Foreign financing23−11515222245−22
Drawings, incl. official financing814521213434590
Amortization−12−6−6−6−6−11−11−14−22
Trust fund at the World Bank500000000
Prospective repurchases000000000
Domestic financing85192−15−252130126103
Domestic borrowing (net)03030505074748598
Privatization revenues00001303131010
o/w PAK privatization133100
Quotas of international institutions000000000
Other financial assets, net0−50−10−10−20−20−30
Own-source revenue (− = increase)00−80−8−5−2833
o/w PAK related−8−2288
Bank balance (prog.; − = increase)84−6−20−55−70−27−27−278−17
Financing gap00046468787150
Memorandum items:
Bank balance of the general government160166180215230187187465482
Of which: ELA000464646464646
Sources: Kosovo authorities; and IMF staff estimates and projections.

Does not yet reflect the GFSM 2001 methodology to ensure consistency within a program context.

Including capital transfers to public enterprises.

Based on the WB estimates.

Sources: Kosovo authorities; and IMF staff estimates and projections.

Does not yet reflect the GFSM 2001 methodology to ensure consistency within a program context.

Including capital transfers to public enterprises.

Based on the WB estimates.

Table 5.Kosovo: Consolidated Government Budget, 2011–17(Excluding donor designated grants; percent of GDP)
2011201220132014201520162017
Est.Revised Prog.Projections
Total primary revenue and grants28.128.027.127.627.828.228.4
Total primary revenue27.527.327.027.627.828.228.4
Taxes23.123.323.924.524.725.025.3
Direct taxes3.33.43.63.84.14.54.8
Indirect taxes20.520.621.121.421.221.321.2
Tax refunds−0.6−0.7−0.7−0.7−0.7−0.7−0.7
Nontax revenues4.44.03.13.13.23.13.1
Interest income0.00.00.00.00.00.00.0
Fees and other charges0.90.91.01.00.90.90.9
Municipal own revenues0.80.80.80.80.80.80.8
Telecom licenses0.00.00.00.00.00.00.0
Other1.41.41.41.41.41.41.4
Of which:
Dividends1.30.90.00.00.00.00.0
PAK-related receipts0.00.00.00.00.00.00.0
Grants0.60.70.10.00.00.00.0
Budget support0.40.60.00.00.00.00.0
Trust fund at the World Bank0.10.00.00.00.00.00.0
Project grants0.10.10.10.00.00.00.0
Primary expenditure29.830.630.228.628.729.129.3
Of which:
PAK-related expenditures0.20.20.20.00.00.0
Primary expenditure excluding PAK30.430.028.50.00.00.0
Current expenditure17.918.418.518.718.818.918.9
Wages and salaries8.38.48.38.38.28.28.2
Goods and services3.83.94.04.24.34.44.4
Subsidies and transfers5.86.16.16.26.26.26.2
Pension and social assistance3.84.04.14.14.14.14.1
Other transfers and subsidies 1/2.02.12.02.12.12.12.1
Reserve0.00.10.10.10.10.10.1
Capital expenditure and net lending11.912.211.89.910.010.210.4
Capital expenditure11.211.911.69.810.010.210.4
Highway project 2/5.66.05.60.00.00.00.0
Other capital spending5.66.06.09.810.010.210.4
Net lending0.60.20.20.10.00.00.0
Primary balance−1.7−2.6−3.1−1.1−0.9−0.9−0.9
Primary balance net of PAK0.0−2.4−3.0−0.9−0.9−0.9−0.9
Interest income, net−0.2−0.2−0.3−0.3−0.3−0.3−0.4
Overall balance−1.9−2.8−3.4−1.3−1.2−1.2−1.3
Financing1.91.13.11.31.21.21.3
Foreign financing0.00.50.9−0.4−0.7−1.0−0.7
Drawings, incl. official financing0.20.71.10.00.00.00.0
Amortization−0.3−0.2−0.3−0.4−0.3−0.2−0.2
Trust fund at the World Bank0.10.00.00.00.00.00.0
Prospective repurchases0.00.00.00.0−0.3−0.8−0.5
Domestic financing1.80.62.31.71.82.22.0
Domestic borrowing (net)0.01.51.61.82.12.12.2
Drawings0.03.37.44.74.36.16.9
Amortization0.0−1.8−5.8−2.9−2.2−4.0−4.8
Privatization revenues0.00.65.90.20.20.20.3
o/w PAK privatization0.00.60.00.00.00.00.0
WB subscription0.00.00.00.00.00.00.0
Other financial assets (net)0.0−0.4−0.10.00.00.00.0
Own-source revenue (− = increase)0.0−0.60.10.1−0.1−0.1−0.1
o/w PAK related0.0−0.50.20.20.00.00.0
Bank balance (prog.; − = increase)1.8−0.6−5.3−0.3−0.40.1−0.4
Financing gap0.01.80.30.00.00.00.0
Memorandum items:
Bank balance of the general government3.53.88.98.78.57.97.8
Of which: ELA0.00.90.90.80.80.70.7
Nominal GDP (millions of euros)4,6374,9115,2345,5085,8956,3106,726
Sources: Kosovo authorities; and IMF staff estimates and projections.

Including capital transfers to public enterprises.

Based on World Bank estimates.

Sources: Kosovo authorities; and IMF staff estimates and projections.

Including capital transfers to public enterprises.

Based on World Bank estimates.

III. Economic Outlook and Risks

6. The economic outlook is unchanged from the time of the SBA’s approval (LOI ¶6).

  • Outlook. Staff projects real GDP growth of 3.8 percent in 2012, down from 5 percent in 2011. Robust domestic demand is funded by transfers and capital inflows that originate, to a large extent, with the Kosovar diaspora. These inflows finance a wide trade deficit, projected at almost 40 percent of GDP. Consumer price inflation is expected to average less than one percent in 2012, reflecting disinflation for imported commodities.
  • Risks. Direct contagion from turbulence in the euro area is likely to remain limited, owing to the small size of Kosovo’s export sector and its low level of integration into cross-border financial markets. While most banks are foreign owned—with parent institutions in Germany, Austria, Slovenia, Turkey, and Albania—they are deposit funded and do not depend on financing from their parents. Moreover, stringent prudential regulations are in place that would prevent an excessive withdrawal of liquidity from Kosovar subsidiaries by their parents (¶15). However, an intensification of the euro area crisis could affect Kosovo if labor market conditions in host countries of the Kosovar diaspora deteriorate. This could depress remittances and FDI, with negative repercussions for growth—by depressing domestic demand—tax revenues—by reducing border taxes—and financial stability—as funds from the diaspora finance both deposits and the repayment of loans.

IV. Policy Discussions

A. Fiscal Policy

7. Strengthening fiscal sustainability and restoring adequate government bank balances remain at the core of the SBA-supported program (LOI ¶7).

  • Fiscal adjustment started in 2011 in the context of Kosovo’s Staff-Monitored Program, when an adjustment need of 3 percent of GDP was identified. The SBA-supported program aims at restoring a sustainable fiscal stance by 2014 that would stabilize the ratio of public debt over GDP at less than 30 percent of GDP in the long run. The 2011 and 2012 budgets include 1.8 percent of GDP in structural fiscal adjustment. The remaining effort of 1.2 percent of GDP is envisaged for 2013 and 2014.
  • Restoration of an adequate level of government bank balances is targeted for 2013. In view of Kosovo’s unilateral euroization and limited access to debt markets, cash buffers are required both to satisfy the government’s liquidity needs and to make resources available to the central bank for the provision of emergency liquidity assistance to banks if needed.

Fiscal Policy in 2012

8. Budget implementation in the early months of 2012 was in line with the program (Tables 6, 7, Figure 3, LOI ¶¶8, 10).

Table 6.Kosovo: Central Bank and Commercial Bank Survey, 2008–14(Millions of euros, unless otherwise indicated)
Projections
2008200920102011201220132014
Central Bank
Net foreign assets1,1111,0881,1081,0971,1411,4411,477
Foreign assets1,1111,1981,2471,2331,2771,5751,611
Of which: Securities54152919925456585
Deposits5295228541,0591,0831,3611,377
Foreign liabilities0110139136136136136
Net domestic assets−1,111−1,088−1,108−1,097−1,141−1,441−1,477
Net claims on the central government−870−681−813−797−824−1,102−1,119
Liabilities−870−681−813−797−824−1,102−1,119
Of which: Government balances (program definition)−414−178−233−160−187−465−482
Commercial banks−137−233−204−210−223−239−254
Other institutions−64−131−46−39−39−39−39
Other items, net−39−43−46−51−55−61−65
Commercial banks
Net foreign assets325444545519596604642
Assets401584710676766789842
Liabilites76140165156170185200
Net domestic assets8159491,1691,3891,4771,6201,717
Credit to private sector1,1831,2891,4511,6641,7931,9442,048
Claims on the CBK137233203220223239254
Net claims on the central government−1−165−12−1305065
Net claims on other public entities−264−123−120−127−135−145−154
Other items, net−240−285−354−367−433−467−495
Liabilities to the private sector1,1401,3931,7141,9082,0732,2242,359
Demand deposits384441545598659716768
Time deposits7569511,1691,3111,4131,5081,591
Memorandum item:
Gross international reserves6706256866266709681,004
(12-month percent change)
Liabilities to private sector25.822.223.111.48.67.36.1
Loans to the private sector32.78.912.614.77.78.45.4
(Percent of GDP)
Total private sector deposits29.635.640.741.242.242.542.8
Credit to the private sector30.732.934.435.936.537.137.2
Sources: Central Bank of the Republic of Kosovo; and IMF staff estimates and projections.
Sources: Central Bank of the Republic of Kosovo; and IMF staff estimates and projections.
Table 7.Kosovo: Selected Financial Soundness Indicators, 2007–12(Percent)
200720082009201020112012
AprilDec.April
Capital adequacy
Regulatory capital/risk weighted assets17.416.517.918.817.917.517.4
Tier 1 capital/risk weighted assets16.415.315.115.815.014.714.6
Asset quality
NPL ratio 1/4.13.34.35.26.25.86.0
NPL net of provisions/capital2.62.82.33.75.24.63.8
Sectoral breakdown of loans
Agriculture3.23.23.02.62.52.42.4
Manufacturing10.68.011.510.99.79.99.7
Trade49.644.543.237.138.637.137.3
Other services8.415.18.812.112.213.713.0
Construction5.65.56.97.57.56.87.4
Households22.523.726.729.829.430.130.3
Liquidity
Liquid assets/total assets 2/33.230.037.336.834.032.330.3
Deposits/loans128.1122.0138.6126.1125.2125.2120.9
Liquid assets to short-term liabilities 2/47.842.147.046.243.239.637.9
Profitability
Return on assets2.92.61.41.81.11.51.2
Return on equity27.124.721.418.810.514.911.6
Interest margin to gross income 3/58.460.355.355.657.157.057.0
Non-interest expense to gross income 4/12.611.216.316.623.718.020.7
Market risk
Net open currency position/tier 1 capital17.88.918.8−0.12.5
Source: Central Bank of the Republic of Kosovo.

NPL ratio includes the loans which are classified as doubtful loans and bad loans.

Liquid assets are cash, balances with CBK and commercial banks, and securities.

Interest income minus interest expenditures. Gross income taken from income statement. Quarterly value.

Includes fees, commissons, provisions for loan and other asset losses, and depreciation of fixed assets.

Source: Central Bank of the Republic of Kosovo.

NPL ratio includes the loans which are classified as doubtful loans and bad loans.

Liquid assets are cash, balances with CBK and commercial banks, and securities.

Interest income minus interest expenditures. Gross income taken from income statement. Quarterly value.

Includes fees, commissons, provisions for loan and other asset losses, and depreciation of fixed assets.

  • The cumulative primary balance at end-April exceeded the program floor by €25 million (about ½ percent of annual GDP), as a modest shortfall in revenue collection (excluding dividends) was overcompensated by under-execution of spending—notably on capital projects—and the earlier-than-expected receipt of dividends from the telecommunications company PTK. The revenue shortfall owed in part to severe winter weather in February that temporarily depressed trade and receipts from taxes collected at the border. Preliminary data for May point to an improvement in revenue collection.
  • Budgetary financing is also on target. The government issued—a first in Kosovo’s history—three-month treasury bills, raising €30 million thus far at an annual yield of 3–4 percent. Auctions for six-month bills are planned for the second half of the year. In June, the government received a World Bank budget grant in the context of the Bank’s Sustainable Employment Development Policy Program, as anticipated.

Monthly Revenues 1/

(millions of euros)

Source: Country authorities; and IMF staff calculations.

1/ Revenues excluding grants and dividends.

2/ May 2012 values are preliminary

9. The authorities and staff agreed that the 2012 fiscal targets remain achievable and appropriate. Small changes in fiscal projections related to the government’s Mid-Year Budget Review (MYBR) and the activities of the Kosovo Privatization Agency (PAK) have no material impact on program targets (LOI ¶9).

  • In the MYBR, scheduled to be passed by the Assembly in July, a small amount (€5 million, 0.1 percent of GDP) will be re-allocated from capital to current spending; mostly related to higher maintenance expenditures reflecting the severe weather early in the year.1
  • PAK is charged with the privatization and liquidation of formerly socially owned enterprises (Box 1). Until last year, PAK’s activities were funded mostly by donor grants, and its operations were overseen by the International Civilian Office. However, as part of Kosovo’s transition from supervised to full independence, PAK has now been integrated into the general government budget. Staff and the authorities agreed to exclude PAK-related spending from the program targets, as PAK is self-financed and determines its expenditures autonomously.2 PAK’s projected spending in 2012 was revised upward in the context of the MYBR (from €5 to €8 million).
Kosovo: Revisions in Fiscal Projections, 2012(Excluding donor designated grants; millions of euros)
Source of Changes
Orig. ProgramRevised Reclassification of PAK fundingMid-Year Budget ReviewRevised Progrm
PAK relatedOther
Total revenue and grants1381−5001376
of which: Nontax revenues202−500197
Primary expenditure14990301503
Of which: PAK-related expenditures50308
Current expenditure896035905
o/w wages and salaries407021410
o/w goods and services188014193
Capital expenditure and net lending60300−5598
Capital expenditure59200−5587
Highway29600−2294
Nonhighway29600−3293
Net lending1100011
Primary balance−119−5−30−127
Primary balance net of PAK−119000−119
Financing4453052
Of which:
Privatization revenues0526031
Change in unspent own source revenues (− = increase)−50−220−28
Memorandum item:
Projected Bank balance187000187
Sources: Kosovo authorities; and IMF staff estimates and projections.
Sources: Kosovo authorities; and IMF staff estimates and projections.

Fiscal Policy in 2013

10. The authorities and staff initiated discussions on the 2013 budget (LOI ¶11). There was agreement that the primary deficit (excluding PAK) should not exceed €155 million (3.1 percent of GDP), requiring structural fiscal adjustment of at least €31 million (0.6 percent of GDP).3 To this end, the government has already increased royalties on lignite, effective from January 2013, which is expected to raise an additional €22 million. Options for the remaining adjustment include wage restraint and further growth-friendly revenue measures, oriented on the recommendations of an IMF technical assistance mission from November 2011.4 A forthcoming mining tax TA mission, scheduled for September, may identify further alternatives. The authorities and staff envisage reaching understandings on the 2013 budget prior to the completion of the second review under the SBA.

11. Restoration of government bank balances in 2013 to a fully adequate level will depend on securing sizeable one-off financing, including from the privatization of PTK (LOI ¶12).5 Following extensive preparatory work—including stripping the postal service out of PTK—the launch of the tender offer is planned for end-August (structural benchmark). An upside risk to financing is the possibility that PAK would start transferring privatization and liquidation receipts to the budget in 2013.6 To continue developing the nascent government securities market, the government aims at extending t-bill maturities to 12 months in 2013.

Structural Fiscal Reforms

12. The introduction of a rules-based fiscal policy framework is in preparation (LOI ¶13). An IMF TA mission to develop a fiscal rule visited Pristina in late June; its report is expected to be transmitted to the government in August. Staff and the authorities will discuss the TA mission’s recommendations during the second review mission in October. The TA mission also analyzed shortcomings in the recording and monitoring of domestic payments obligations, with a view to preventing the accumulation of domestic payments arrears.

13. Careful preparation, costing and phasing of spending initiatives remain at the core of the program, to prevent that unfunded spending commitments would put fiscal sustainability at risk (LOI ¶15).

  • As regards the government’s ambitious highway construction program, it was agreed that the ongoing construction of highway R7 to Albania requires tight cost control as the project nears completion in 2013. There was also agreement that the government should enter into contractual obligations with respect to the planned highway R6 to Macedonia only once the privatization receipts for PTK had been received and the final costs for highway R7 were known, to be able to assess the space available for fitting R6 into a sustainable fiscal framework. Competitive bidding and a positive assessment by the World Bank of the project’s viability are additional requirements.
  • Health care reform, the expansion of pensioner and war veteran benefits, and civil service reform (Box 2) are further spending initiatives that require careful preparation and often phased implementation, in close consultation with the World Bank. In cases where these initiatives involve the extension of benefits to recipients whose number is unknown—such as war veterans, or retirees forcibly removed from their workplace in the 1990s—an assessment of the number of eligible beneficiaries is a prerequisite for a fiscal impact assessment, in line with the program’s corresponding continuous structural benchmark.

14. The authorities and staff discussed steps to advance fiscal decentralization (LOI ¶16), oriented on the recommendations of a recent IMF TA mission. Objectives include (i) increasing the efficiency of spending allocations at the municipal level; and (ii) giving municipalities more incentives to raise own-source revenues. The circulars for the 2013 budget grant municipalities, for the first time, autonomy to allocate own-source revenues freely across spending categories except wages, in line with the corresponding end-May structural benchmark. The authorities consented that from 2014 this flexibility should be extended to all municipal spending, including expenditures financed with the general grant from the central government. In return, the general grant could gradually be reduced, thus contributing to fiscal adjustment.

B. Monetary and Financial Policies

15. The upgrade of Kosovo’s legal and regulatory framework for financial supervision is near-complete (LOI ¶¶18, 19).

  • A revised Deposit Insurance Law (DIL) was submitted to the Assembly on June 22, i.e. with a slight delay relative to the end-May structural benchmark. The additional time was needed to complete consultations with stakeholders, including KfW of Germany—that co-funds the seed capital of the Deposit Insurance Fund (DIF)—and IMF staff. The revised DIL permits the use of the DIF for purchase and assumption transactions, and clarifies the responsibilities of the central bank and the DIF in bank resolution. The DIF’s mandate is limited to administrating payments of insured depositors.
  • The DIL follows the passage of the revised Banking and Microfinance Law (BML) in April, and of an upgraded Central Bank Law in 2010. The BML enhances the central bank’s ability to resolve troubled financial institutions, and introduces tighter prudential requirements, including on banks’ exposures to their parent banks and to single borrowers. As the next step, the authorities are revising prudential regulations to bring them in line with the BML and with Basel core principles, including on liquidity and consolidated supervision.

16. The central bank’s capacity to provide emergency liquidity assistance (ELA) to banks will be fully established with the completion of this review (LOI ¶¶3, 19). After the purchase of about €46 million upon completion of this review becomes available, the authorities intend to fund the central bank’s special reserve fund (SRF) for ELA. The revised Law on Public Financial Management and Accountability (LPFMA) passed on June 14 includes a new article that grants the central bank exclusive control over the SRF, in line with the structural benchmark for mid-June.7

17. A joint IMF/World Bank mission under the Financial Sector Assessment Program (FSAP) scheduled for September may identify further reform priorities. The FSAP mission will, among other things, conduct a comprehensive review of the regulatory framework for both banks and insurance companies, discuss crisis preparedness, analyze the vulnerability of Kosovo’s financial system to shocks, including through links between subsidiaries operating in Kosovo and their parent banks, and assess the appropriateness of the deposit insurance scheme.

C. Competitiveness and Private Sector Development

18. The authorities are pursuing further initiatives to strengthen competitiveness and promote the development of a tradable sector.

  • Before the end of the year, enactment of a package of twelve laws is expected to streamline business registration and improve Kosovo’s ranking in the Doing Business Survey of the World Bank (LOI ¶21).
  • A joint project with Austrian Development Agency and Swiss Cooperation Office aims at improving access to financing for small and medium-sized enterprises.
  • To safeguard labor market flexibility and employability of women, the government has prepared a preliminary report on implementation of the Labor Law, with an emphasis on the Law’s maternity leave provisions that may induce discrimination against women in the labor market. The authorities plan to make amendments to the Labor Law as needed once the report is finalized (LOI ¶22).
  • Energy sector reforms are advancing: the auction for the privatization of energy distribution has been completed and the winner has been announced, while the privatization of mining and energy generation is in preparation (LOI ¶23, Box 3).

V. Program Modalities

19. The attached Letter of Intent describes the authorities’ progress in implementing their economic program and sets out performance criteria and structural conditionality through December 2012. The following modifications to program conditionality are proposed (Box 4, Tables 810, LOI ¶¶ 4, 12, 14, LOI Tables 2, 3, and TMU ¶¶ 6, 9):

  • The performance criteria on the primary fiscal balance and the bank balance of the general government for end-August would be revised upward, reflecting the early receipt of dividends from PTK in April that had originally been expected for October.
  • The program definitions of primary expenditures and the primary fiscal balance would be revised to exclude spending related to the activities of the Kosovo Privatization Agency (PAK). The ceiling for primary expenditures would be adjusted downward by the amount of PAK-related spending.
  • The continuous structural benchmark on including a paragraph into all new benefit creating laws and amendment to such laws that allows for benefit cuts in case of insufficient budgetary funds would be dropped from program conditionality. The LPFMA, which has legal precedence over individual benefit creating laws, contains a similar, although somewhat more restrictively defined adjustment clause.8 As a result, this benchmark becomes redundant.
  • A structural benchmark would be introduced on the launch of the tender offer for the privatization of the telecommunications company PTK, with a target date of end-August.
Table 8.a.Kosovo: Gross Financing Requirements, 2011–13(Millions of euros)
201120122013
Gross Financing Requirements955910966
Current account deficit943899952
Amortization of medium and long term public debt121114
Sources of Financing955824951
Capital account (net)622
Foreign direct investment (net)371423629
Net bank financing25−76−8
Government loans83459
Net Foreign assets of the Central Bank of Kosovo11−44−298
Other financing inc. net erros and omissions534485567
Financing Need8715
IMF 1/8715
in percent of quota12522
Memorandum items:
Kosovo IMF quota (SDR millions)595959
Kosovo IMF quota (Euro millions)696969
Source: IMF staff estimates and projections.
Source: IMF staff estimates and projections.
Table 8.b.Kosovo: Gross Financing Requirements, 2011–13(Percent of GDP)
201120122013
Gross Financing Requirements20.618.518.5
Current account deficit20.318.318.2
Amortization of medium and long term public debt0.30.20.3
Sources of Financing20.616.818.2
Capital account (net)0.10.00.0
Foreign direct investment (net)8.08.612.0
Net bank financing0.5−1.5−0.2
Government loans0.20.71.1
Net Foreign assets of the Central Bank of Kosovo0.2−0.9−5.7
Other financing inc. net erros and omissions11.59.910.8
Financing Need1.80.3
IMF 1/1.80.3
Source: IMF staff estimates and projections.

The purchase of €5.02 million that became available upon program approval is included under government loans in "sources of financing".

Source: IMF staff estimates and projections.

The purchase of €5.02 million that became available upon program approval is included under government loans in "sources of financing".

Table 9.Kosovo: Indicators of Capacity to Repay the Fund, 2012–18 1/
2012201320142015201620172018
Fund obligations based on prospective purchases (millions of SDR)
Principal0.00.00.09.839.433.64.0
Charges and interest0.50.91.01.00.80.30.0
Fund obligations based on existing and prospective purchases (millions of SDR)
Principal0.02.49.417.941.534.64.0
Charges and interest0.71.21.21.10.80.30.0
Total obligations based on existing and prospective purchases
SDR millions0.73.510.619.042.335.04.0
Euro millions0.84.112.422.349.841.14.7
Percent of exports of goods and services0.10.41.01.73.42.60.3
Percent of debt service3.216.638.145.969.673.010.9
Percent of GDP0.00.10.20.40.80.60.1
Percent of government revenue0.10.30.81.42.82.10.2
Percent of quota1.15.917.932.171.759.36.8
Outstanding Fund credit
SDR millions97.0107.498.080.138.64.00.0
Euro millions114.1126.3115.394.345.44.70.0
Percent of exports of goods and services11.311.69.77.33.10.30.0
Percent of debt service473.3506.5353.4194.163.68.30.0
Percent of GDP2.32.42.11.60.70.10.0
Percent of government revenue8.58.97.65.72.50.20.0
Percent of quota164.4182.0166.1135.865.56.80.0
Net use of Fund credit (millions of SDR)78.210.4−9.4−17.9−41.5−34.6−4.0
Purchases78.212.80.00.00.00.00.0
Repurchases0.02.49.417.941.534.64.0
Memorandum items:
Exports of goods and services (millions of euros)1,0091,0891,1851,2971,4431,5681,704
External debt service (millions of euros)224.124.932.648.671.556.343.6
Nominal GDP (millions of euros)4,9115,2345,5085,8956,3106,7267,169
Government revenue (millions of euros)1,3431,4171,5241,6471,7841,9172,057
Quota (millions of SDR)59.059.059.059.059.059.059.0
Sources: IMF staff estimates and projections.

Assumes prospective SBA disbursements in 2012 and 2013.

Total debt service includes IMF repurchases and interest charges.

Sources: IMF staff estimates and projections.

Assumes prospective SBA disbursements in 2012 and 2013.

Total debt service includes IMF repurchases and interest charges.

Table 10.Kosovo: Schedule of Purchases Under the Stand-By Arrangement, 2012–13
AmountPercent of QuotaDate AvailableConditions Necessary for Purchase
SDR 4.251 million7April 27, 2012Purchase made
SDR 39.108 million66June 30, 2012Observance of the continuous performance criteria and of the performance criteria for April 30, 2012; and completion of the first SBA review.
SDR 34.857 million59December 20, 2012Observance of the continuous performance criteria and of the performance criteria for August 31, 2012; and completion of the second SBA review.
SDR 3.188 million5February 28, 2013Observance of the continuous performance criteria and of the performance criteria for December 31, 2012; and completion of the third SBA review.
SDR 3.188 million5May 31, 2013Observance of the continuous performance criteria and of the performance criteria for March 31, 2013; and completion of the fourth SBA review.
SDR 3.188 million5August 31, 2013Observance of the continuous performance criteria and of the performance criteria for June 30, 2013; and completion of the fifth SBA review.
SDR 3.188 million5November 30, 2013Observance of the continuous performance criteria and of the performance criteria for September 30, 2013; and completion of the sixth SBA review.
Total: SDR 90.968 million (154 percent of quota)

20. An updated safeguards assessment of the central bank has been completed. Most recommendations made in the context of the safeguards assessment for the 2010 Stand-By Arrangement have been implemented. In particular, audit committee oversight has been strengthened, and the internal audit department has taken key steps toward full compliance with international standards. Going forward, the department should be subject to an external quality review. To safeguard IMF purchases used for budgetary financing, the authorities have committed to continue (i) using the central bank as the sole investment manager; and (ii) holding all government accounts at the central bank (LOI ¶20).

VI. Staff Appraisal

21. Macroeconomic and financial policies are broadly on-track. All end-April and continuous quantitative performance criteria were met, as a revenue shortfall recorded early in the year owing mostly to temporary factors was overcompensated by under-execution of spending. Revenue collection has recovered subsequently. Four out of six applicable structural benchmarks were also met, one was met with a slight delay, and appropriate corrective action has been taken in the case of the missed structural benchmark.

22. The economic outlook has remained stable, but there are downside risks. While Kosovo has remained shielded from the euro area crisis due to limited financial and export linkages, a deterioration in labor market conditions in host countries of the Kosovar diaspora could depress growth and tax revenue, as well as affect financial stability. Against this backdrop, key objectives under the program remain to restore a fully sustainable fiscal stance and an appropriate level government bank balances, anchoring fiscal policy, and reinforcing the resilience of the financial system.

23. Fiscal targets for 2012 remain achievable and appropriate, but require vigilant spending discipline and a sustained effort to meet revenue collection targets. The government should stand ready to take additional savings measures as needed in case revenue collection shortfalls reappear, including by using another part of the contingency reserve inscribed into the 2012 budget law that allows the government to leave up to €60 million from the budget unallocated.

24. The 2013 budget should continue the process of fiscal consolidation through restraint on current spending and growth-friendly revenue measures. Restoring an adequate level of government bank balances in 2013 will depend on securing sizeable one-off financing, including from the privatization of PTK and the transfer of privatization and liquidation receipts from PAK. No major new spending initiatives should be advanced as long as bank balances are below the desired minimum targeted under the program (€325 million for 2013). As regards PTK, careful preparation of the privatization in line with the authorities’ revised strategy is being called for to maximize the transaction’s chances for success, and avoid a repeat of the last year’s experience when the auction had to be called off for a lack of bidders. As for PAK, no funds—beyond those earmarked for covering PAK’s operational expenditures—should be transferred to the government budget before clarity has been established that these funds are free of claims from creditors and other stakeholders. For the period after 2013, the envisaged fiscal rule will be critical to anchor fiscal policy.

25. Thorough prioritization, preparation and costing of spending initiatives remain pivotal to avoid unfunded expenditure commitments that could put fiscal sustainability at risk. This will require resisting temptations to address social spending pressures in an ad-hoc, haphazard fashion. Kosovo’s ambitious highway construction program needs especially careful management, in view of its high budgetary cost and corresponding fiscal risks that depend—as the experience with highway R7 to Albania has illustrated—in part on the design of the construction contract. To allow the integration of the planned highway R6 to Macedonia into a sustainable budgetary framework, the government should enter into contractual commitments only once the ongoing work on highway R7 is near completion, and the PTK privatization receipts have been received.

26. Kosovo’s upgraded legal and regulatory framework for financial supervision provides the central bank with a comprehensive toolkit to safeguard the resilience of the financial system. A critical component is the central bank’s capacity to provide ELA that will be fully established after the completion of this review. The framework needs to be complemented by a practice of financial supervision that continues to vigilantly enforce prudential rules and safeguard high standards of corporate governance in Kosovo’s financial system.

27. The policies under the program provide the best safeguard to steer Kosovo’s economy through the period ahead, establish confidence in Kosovo’s macroeconomic management, and lay the foundations for robust and balanced growth. Steadfast commitment to policy discipline by all stakeholders, and strong support for the program’s objectives across the political spectrum will be needed to render its implementation a success, and avoid a repeat of the unfavorable experience with Kosovo’s first SBA of July 2010.

28. Staff supports the authorities’ request for completion of the first review. Staff also supports the requested modifications of program conditionality that are fully consistent with the program’s objectives.

Box 1.The Kosovo Privatization Agency (PAK)

PAK was established in 2008 as an independent public body to ensure proper administration, privatization and liquidation of formerly Socially Owned Enterprises (SOEs). By May 2012, PAK had privatized about 60 percent of 600 SOEs, raising €567 million in the process. However, not all creditor claims against that these companies have already been settled. The sale of assets of companies that could not be sold as a whole has been less successful, as only €53 million in proceeds have been raised to date. Further, Kosovo’s transition from supervised to full sovereignty has resulted in a discontinuation of grants to fund PAK’s activities as of 2012.

To address these challenges, a revised PAK law was passed by the Assembly in 2011, aiming at (i) speeding up liquidation and expediting the distribution of privatization and liquidation proceeds to SOE stakeholders; and (ii) establishing a new framework for the financing of PAK’s activities.

  • i. PAK contracted Deloitte Central Europe to speed up the settlement of claims. The interim target is to settle all claims against 179 SOEs by mid-2013. The finalization of privatization and liquidation, and the dissolution of PAK, is envisaged for 2016.
  • ii. As for financing, 5 percent of PAK’s total trust funds are scheduled to be transferred to the treasury, and are earmarked to finance PAK’s operational and other expenses (for a period of up to 5 years). 20 percent of trust funds are set aside for SOE employees that are entitled to a share of sales proceeds on a priority basis. The remainder of the trust fund (75 percent) is used to satisfy creditor claims. Any residual funds would eventually also be transferred to the treasury.

As a result, the government expects to receive €30.5 million in PAK trust funds this year earmarked for PAK-related spending. PAK-related spending in 2012 is projected at €8.1 million and includes fees for Deloitte. The excess in transferred trust funds over 2012 PAK-related spending will be saved as own-source revenue and fund PAK’s activities in future years.

Box 2.Reforming Kosovo’s Civil Service

Kosovo continues to lack a professional civil service, which is an impediment to administrative capacity. The public administration was established gradually from 2003 with the transfer of functions from the temporary UNMIK administration to the Provisional Institutions of Self Government. Until 2010, the legal framework for Kosovo’s civil service was based on UNMIK regulations, but had important flaws: (i) all public employees were defined as ‘civil servants’, with no distinction between administrative, professional and auxiliary staff; (ii) no transparent grading or pay structure existed; and (iii) there were no open-ended contracts nor transparent criteria for the renewal of public sector employment.

To address these deficits, two Laws on Civil Servants and on Salaries of Civil Servants were drafted with support from the World Bank, and passed by the Assembly in June 2010.1 The laws define the rights and obligations of civil servants, and establish a uniform pay and grading structure. However, they have not yet been implemented, as the transition to the new structure requires substantial advance preparation, and out of concern about the reform’s budgetary impact. A fiscal impact assessment in 2009 put the cost of civil service reform at €9.1 million in the first year. Several developments since then suggest that this estimate is now too low, and tightly written secondary legislation is critical to keep a lid on cost.

  • The determination of the number of civil servants covered by the law needs to be re-established, as since 2009 the number of public employees has increased (notably support staff in schools, and staff for new ministries and municipalities).
  • Over-grading and overly rapid promotions are upside risks to cost. Over-grading should be limited by adherence to the Law on Public Administration that requires a standard organic structure for ministries, agencies, and municipalities. As for promotions, annual progression to a higher salary grade should be limited to at most 10 percent of staff from the current limit of 50 percent, and the cost of progression could be contained by inscribing modest differentials between salary steps into secondary legislation.
  • Over-staffing at the municipal level is another cost factor. As of December 2011, total public employment stood at 75,000, with 33,000 public employees working for the central government and 42,000 for municipalities. A recent World Bank analysis suggests that municipal staffing levels are 13 percent too high.
  • Limits on overtime pay were part of the original draft Law on Civil Servants, but were removed during deliberations in the Assembly. Secondary legislation should introduce a limit for paid overtime to no more than 10 percent of the base salary.
1 For more detail see World Bank’s December 2009 Public Sector Modernization Project report, #51060-XK

Box 3.Reforming the Energy Sector

Kosovo’s energy sector is not only a fiscal burden, but a detriment to the private sector development and an environmental hazard. The state-owned energy company (KEK) operates two coal-fired plants (Kosova A and B) and imports electricity. Key problems include:

  • 1. Commercial inefficiency. In 2010, only 69 percent of the energy supplied was paid by customers, due to theft of electricity and payment delinquencies.
  • 2. Technical inefficiency. About 17 percent of the energy in the network is lost, owing to years of under-investment and inadequacy of the voltage standard.
  • 3. Inadequate generation capacity. Electricity supply is unstable. Power cuts result from insufficient generation capacity, notably in peak hours, and from technical failures of aging and poorly-maintained generators.
  • 4. Environmental inadequacy. The power plants are highly polluting, especially the 35-year old Kosova A plant, which is among the largest single-point sources of pollution in the Balkans. EU Directives prescribe that Kosovo A be decommissioned by 2017. Kosovo B can operate until 2030 but must be refurbished.

In the 2000s, KEK absorbed substantial transfers from the budget to subsidize electricity imports and fund investments. The situation has improved recently, however. Revenue collection strengthened from 54 percent of the energy supplied in 2007 to an estimated 73 percent in 2011, reflecting managerial changes in KEK and support from the police in disconnecting illegal cables. These efforts have allowed cutting subsidies for KEK without raising tariffs, and thus contributed to fiscal adjustment.

Kosovo: Transfers to KEK, 2009–12(Percent of GDP)
2009201020112012*
Total3.72.11.20.6
Subsidies1.60.70.60.4
Loans2.01.40.60.2

Projection

Projection

Going forward, upgrading technical and environmental standards to European levels requires investments at a scale surpassing the government’s financial capacity. The authorities therefore intend to privatize energy distribution as well as mining and electricity generation.

  • On distribution, the winning bid was announced in June 2012. The private distributor will be in charge of improving commercial efficiency.
  • On mining and generation, a request for proposals was issued in March 2012. The winning company will rehabilitate Kosova B and is expected, with assistance of the World Bank, to build a new power plant that will eventually replace Kosova A and enhance generation capacity.

Box 4.Stand-By Arrangement

Key objectives: (i) restoration of a sustainable fiscal stance and an adequate level of government cash buffers; (ii) introduction of a legally binding fiscal rule; (iii) better design and costing of spending initiatives; (iv) enhancing the efficacy of fiscal decentralization; (v) strengthening the legal framework for financial regulation and supervision; and (vi) equipping the central bank with the funds needed for emergency liquidity assistance.

Program Modalities:

  • Access: SDR 90.968 million (154 percent of quota)
  • Length: 20 months (through December 26, 2013)
  • Phasing: SDR 4.251 million was made available after Board approval on April 27, 2012. The second purchase, subject to completion of the first review, amounts to SDR 39.108 million. Subsequent purchases are contingent on the completion of further reviews.

Conditionality:

  • Quantitative performance criteria
    • Floor on the bank balance of the general government
    • Floor on the primary fiscal balance of the general government
    • Ceiling on primary expenditures of the general government
    • Ceiling on the net contracting of nonconcessional debt by the general government
    • Ceiling on guaranteeing nonconcessional debt by the general government
    • Ceiling on the accumulation of external payment arrears of the general government
  • Quantitative indicative targets
    • Ceiling on the stock of domestic payment arrears of the central government
    • Ceiling on the stock of domestic payments arrears of the general government
  • Structural benchmarks
    • Launch of the tender offer for PTK. By end-August 2012.
    • Submission of a 2013 budget to the Assembly that is consistent with the objectives of the program. By end-October 2012.
    • Monthly meetings of the Program Monitoring Committee and transmission of the meetings’ minutes to the IMF Resident Representative. Continuous.
    • Fiscal impact assessments evaluating the budgetary impact of all new benefit creating laws, amendments to laws or regulations over a period of at least five years. Continuous.

Figure 1.Kosovo: Recent Economic Developments

Source: National authorities; and IMF staff estimates and projections.

Figure 2.Kosovo: Selected Banking Sector Indicators

Sources: Cental Bank of Kosovo; IMF staff estimates.

1/ Liquid assets are cash, balances with CBK and commercial banks, and securities.

Figure 3.Kosovo: Recent Fiscal Developments

Source: Country authorities; and IMF staff calculations.

1/ Primary balance excluding highway (R7) expenditures, grants, and dividends. The 2011 outcome exceeded the program target under the SMP by a large margin.

2/ Total revenues excluding grants and dividends.

Attachment I. Letter of Intent

REPUBLIC OF KOSOVO

Letter of Intent

Ms. Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C., 20431

U.S.A.

Pristina, June 27, 2012

Dear Ms. Lagarde:

1. Kosovo’s economy has continued to perform well in a difficult international environment. Robust current and capital inflows and solid lending by a well-capitalized and liquid banking system have supported growth, while contagion from the financial crisis in the euro area has remained subdued, owing to a small export base and limited financial linkages. However, downside risks remain, as foreign direct investment and remittances from the Kosovar diaspora could be affected in case of a deterioration of labor market conditions in host countries. Steadfast commitment to disciplined fiscal management, the restoration of a sufficient level of government bank balances, the further strengthening of the legal and regulatory framework of Kosovo’s financial system, vigilant financial supervision, and progress with structural reforms to boost competitiveness provide the best safeguard to steer Kosovo’s economy through the period ahead, and to establish the fundaments for robust and balanced growth.

2. Implementation of our economic program has been broadly consistent with commitments under the Stand-By Arrangement (Tables 1 and 2):

  • all quantitative performance criteria for end-April were met. The primary fiscal balance and government bank balances were stronger than programmed, despite a modest shortfall in revenue, as spending was under-executed and dividend payments from the state-owned telecommunications company (PTK) were advanced.
  • most structural benchmarks were also met.
    • (i) on May 10, we published the first 2013 budget circulars for municipalities. The circulars contain no limits on spending allocations from own-source revenues across nonwage categories, in line with the corresponding end-May structural benchmark;
    • (ii) on June 14, the Assembly amended the Law on Public Financial Management and Accountability (LPFMA) with a provision specifying that only the central bank can authorize the withdrawal of funds from the special reserves fund (SRF) for emergency liquidity assistance (ELA), consistent with the corresponding structural benchmark;
    • (iii) also respected were the continuous structural benchmarks on monthly meetings of the Program Monitoring Committee, and on fiscal impact assessments evaluating the budgetary impact of all new benefit creating laws and amendments to such laws over a period of at least 5 years;
    • (iv) on June 22, we submitted a revised Deposit Insurance Fund Law to the Assembly in a form consistent with the new Banking and Microfinance Law. While the submission occurred somewhat later than originally specified under the structural benchmark (end-May), the delay was needed to complete discussions with stakeholders;
    • (v) on one occasion the continuous structural benchmark on including an article into all new benefit creating laws and amendment to such laws that allows for benefit cuts in case of insufficient budgetary funds was violated, as the law on pensions for the Kosovo Security Force was passed on May 3 without such a clause. The LPFMA contains a similar adjustment clause, however, for all budgetary allocations granted in the annual budget law. The amendment of the LPFMA passed on June 14 contains a provision emphasizing that the LPFMA’s legal precedence over individual benefit creating laws extends to this adjustment clause (see also ¶14).
Table 1.Kosovo: Program Monitoring
April 2012
Performance criteria
Floor on the bank balance of the general governmentMet
Floor on the primary fiscal balance of the general governmentMet
Ceiling on primary expenditures of the general governmentMet
Ceiling on the net contracting of nonconcessional debt by the general governmentMet
Indicative targets
Ceiling on the stock of domestic payment arrears of the central governmentNot met
Ceiling on the stock of domestic payment arrears of the general governmentNot met
Prior actions for SBA approval
Passage of the Pension Fund Law in a version that limits (i) exposure of the pillar II pension fund to the government to 30 percent of the fund’s assets and (ii) annual investments of the fund in government paper to 50 percent of inflows into the fund in the previous calendar yearMet
Passage of the revised Banking and Microfinance Law in a version consistent with the recommendations of IMF technical assistanceMet
Issuance of a government decision that specifies spending cuts of €20 million across expenditure categories relative to the approved 2012 budgetMet
Structural benchmarks
Publication of budget circulars for municipalities that contain no limits on spending allocations across non-wage categories (by end-May, 2012)Met
Submission of a revised Deposit Insurance Fund Las to the Assembly that is consistent with the new Banking and Microfinance Law (by end-May, 2012)Met with delay
Amendment of the Law on Public Financial Management and Accountability by a provision that specifies that only the central bank can dispose over the funds in the Special Reserves Fund designated for Emergency Liquidity Assistance (by June 15, 2012)Met
Continuous structural benchmarks
Monthly meetings of the Program Monitoring Committee and transmission of meetings’ minutes to the IMFMet
Inclusion of a paragraph into all new benefit creating laws, amendment to laws or regulations that allows cutting benefits if budgetary funds are unavailableNot met
Fiscal impact assessments evaluating the budgetary impact of all new benefit creating laws, amendments to such laws or regulations over a period of at least 5 yearsMet
Table 2.Kosovo: Quantitative Performance Criteria and Indicative Targets, SBA 2012–2013(Millions of euros; flows cumulative from beginning of the year)
20122013
End-Apr.End-Aug.End-Dec.End-Mar.End-Jun.
Prog.ActualProg.Rev. Progr.Prog.Rev. Progr.Proj.Proj.
Performance Criteria 1/
Floor on the bank balance of the general government166180215230187187164173
Floor on the primary fiscal balance of the general government 2/−214−41−26−119−119−7−26
Ceiling on primary expenditures of the general government 2/3993539149111,4991,494288655
Ceiling on the net contracting of nonconcessional debt by the general government 2/15030150150150150250250
Ceiling on guaranteeing nonconcessional debt by the general government 2/00000000
Ceiling on the accumulation of external payments arrears of the general government 3/00000000
Indicative Targets
Ceiling on the stock of domestic payment arrears of the central government02000000
Ceiling on the stock of domestic payment arrears of the general government02000000
Memorandum items:
Program assumptions
Repayment of policy loans extended to public corporations444400
Non-project grants413030303000
Budget support loans00000000
Project grants10334412
Project loans00667713
PAK-related spending355814
Sources: Kosovo authorities; and IMF staff estimates and projections.

Adjusted according to the Technical Memorandum of Understanding. Numbers are indicative targets for 2013.

Excluding PAK related spending from August 2012.

Continuous ceiling on the gross flow of new accumulation.

Sources: Kosovo authorities; and IMF staff estimates and projections.

Adjusted according to the Technical Memorandum of Understanding. Numbers are indicative targets for 2013.

Excluding PAK related spending from August 2012.

Continuous ceiling on the gross flow of new accumulation.

3. Based on this performance, we request completion of the first review under the Stand-By Arrangement. We also request a purchase of SDR 39.108 million following completion of the first review. We intend to deposit the purchase in the SRF designated for ELA.

4. We request two modifications of performance criteria:

  • increase the floors for the primary fiscal balance and the bank balance of the general government for end-August 2012 by €15 million, reflecting the early receipt of dividends from PTK in April that had originally been expected for October;
  • lower the ceiling on primary expenditures by the projected spending of the Kosovar Privatization Agency, and exclude PAK-related spending from the program definitions of primary expenditures and the primary balance. Before 2012, PAK-related spending—both PAK’s operational budget, and fees PAK pays to corporations charged with the liquidation of socially owned enterprises (SOEs)—were funded by donor grants. From this year, and in the context of Kosovo’s transition from supervised to full independence, PAK pays for its expenditures from its own funds, consisting mostly of receipts from SOE privatization that will eventually be distributed among claimants, the residual claimant being the government. In the original 2012 budget, we recorded PAK’s spending as primary expenditure and the use of PAK’s funds as nontax revenue. We have now modified the recording and will register the use of PAK’s funds as financing, in line with the definition in the Technical Memorandum of Understanding. The changes in program definitions avoid an unintended deterioration in the government’s reported primary balance that would result otherwise from this recording change.

Quantitative performance criteria through end-2012 and indicative targets through end-June 2013 are set out in Table 2 and in the Technical Memorandum of Understanding, both attached to this letter.

5. We believe that the policies set forth in the letter of April 12, 2012 and in this letter are adequate for successful implementation of the program. However, the government stands ready to take additional measures as appropriate to ensure achievement of the program’s objectives. As is standard under all IMF arrangements, we will consult with the IMF before modifying measures contained in this letter or before the adoption of new measures that would deviate from the goals of the program, in accordance with the Fund’s policies on such consultations, and provide IMF staff with the necessary information for program monitoring. The second review is expected to be completed after December 20, 2012, the third review after February 28, 2013, and the program is expected to be monitored by quarterly reviews thereafter. The understandings between us and the IMF regarding performance criteria and structural measures described in this letter are further specified in the attached Technical Memorandum of Understanding. We authorize the IMF to publish this letter and the associated staff report.

I. Macroeconomic Outlook

6. The outlook remains broadly unchanged from the April Letter of Intent. The macroeconomic framework underpinning our program is based on purposely cautious assumptions, with a view to minimizing the risk of downward revisions during the program period.

  • a. We maintain a forecast for real GDP growth of 3.8 percent in 2012, driven primarily by robust private consumption and investment. The resilience of private sector demand is expected to continue in 2013.
  • b. Consumer price inflation is expected to remain subdued at around 1 percent, owing primarily to disinflation for import prices, notwithstanding prospective tariff increases in the context of a revamped electricity regulation.
  • c. The external trade deficit for goods and services is expected to narrow to 38 percent of GDP, from more than 40 percent in 2011. The deficit will continue to be financed by non debt-creating flows such as FDI, remittances, and other current transfers.

II. Fiscal Policy

A. Implementation of the 2012 budget

7. Fiscal policy remains anchored by the objectives of restoring a sustainable fiscal stance and maintaining an acceptable level of government bank balances. To this end, the 2012 budget contains structural adjustment measures of ¾ percent of GDP. In addition to these measures, we are in the process of introducing environmental taxes and fees that are expected to raise at least €10 million in 2012 (0.2 percent of GDP), with a full-year impact of 0.4 percent of GDP. Further, we have also left €20 million in expenditures from the 2012 budget unallocated, and we have specified these across spending categories (€10.1 million in goods and services, €7.5 million in non-highway capital spending, and €2.4 million in subsidies).

8. In the first four months of 2012, budget implementation has been broadly in line with our program. Revenues excluding dividends were €36 million (0.7 percent of annual GDP) lower than expected, owing mostly to temporary factors such as unusually severe winter weather that depressed trade and border tax receipts. The shortfall in revenue collection was overcompensated by advancing dividend payments from PTK (€15 million, out of a total €45 million in PTK dividends for the year) and by exercising spending restraint—primary expenditure was €45 million below the program ceiling, owing in part to under-execution of capital spending by €27 million.

9. In the months ahead, we expect both revenue collection and expenditure execution to catch up with original program projections—we have already registered an improvement in revenue collection in May. As a result, we see no need to revise our projections for tax revenue or expenditures for end-August and end-December, and request to increase the program floor on the primary balance at end-August by €15 million, reflecting the PTK dividend received in April (instead of October as originally projected). Moreover, in the mid-year budget review we will keep the overall spending envelope for 2012 constant, notwithstanding a modest shift from capital spending to spending on goods and services that became necessary due to in part to higher maintenance needs caused by the severe weather in January and February. We stand ready, however, to take additional revenue or expenditure measures in case revenue collection fails to catch up with program projections going forward. We will decide on the need for such measures the latest on the basis of end-August data.

10. We have conducted five consecutive successful 3-month treasury-bill auctions this year, raising €30 million (net) at an average annual yield of between 3–4 percent. To lay the foundations for self-sustained budget financing we intend, as the next step, to issue bills with a maturity of 6 months in the second half of this year, and of 12 months in 2013, although variations to this schedule are possible depending on the absorptive capacity of the market.

B. Medium-Term Fiscal Issues and Structural Fiscal Reforms

11. For our 2013 budget, we will target a primary deficit of no more than €155 million (excluding possible budget support grants; structural benchmark for end-October). Structural fiscal adjustment of at least €31 million (0.6 percent of GDP) will be needed to achieve this objective. Part of the adjustment will come from an increase in lignite royalties that the Assembly approved in early June. The remaining adjustment measures will be specified in full during the budget preparation process; options include restraint on current spending, notably wages and salaries, and growth friendly revenue measures, consistent with the recommendations of the IMF technical assistance mission on tax policy from November 2011. A technical assistance mission analyzing Kosovo’s mining tax regime, scheduled for September of this year, may also identify options for adjustment.

12. Restoring an adequate level of bank balances in 2013 as envisaged will in part depend on the successful privatization of the telecommunications operator PTK. The privatization process has made significant progress in recent months. A new transaction advisor was hired in April, and road shows in London and Istanbul in May generated substantial investor interest. We began with the prequalification of bidders in June, and by July will present separate balance sheets for PTK and the postal service that has been split from PTK earlier this year. Thereafter we will launch the tender offer (new structural benchmark for end-August). The winner of the bidding process is expected to be announced toward the end of this year.

13. We are preparing the introduction of a legally binding, rules based fiscal framework. An IMF technical assistance mission is visiting Kosovo in late June. We will discuss the TA mission’s recommendations changes with the IMF mission for the 2nd review under the SBA, scheduled for early October. We intend to enact the necessary legislation in early 2013, i.e., during the early stages of the 2014 budget preparations. The technical assistance mission in June will also develop proposals to improve the recording and monitoring of payment obligations, with a view to preventing the accumulation of domestic payments arrears.

14. We intend to maintain a flexible structure of our budget to preserve options for adjustment, should the need arise. To this end, the Assembly passed on June 14 an amendment to the Law on Public Financial Management and Accountability (LPFMA) that emphasizes that the LPFMA’s legal precedence over individual benefit creating laws extends to an adjustment clause allowing the government to reduce budgetary allocations in case of (i) a macroeconomic shock reducing fiscal revenue or financing, (ii) natural disasters, or (iii) the suspension or cancellation of a program or project to which the allocation relates. This provision renders redundant the continuous structural benchmark of including a corresponding adjustment clause into any new benefit creating or amending law. We therefore request to drop that benchmark. Further, with a view to upholding principles of sound fiscal management and costing, we will maintain the requirements that (i) new laws, amendments to laws or regulations that create benefits will grant only cash benefits, with no link to the minimum wage; and (ii) any such law, amendment to a law or regulation will be preceded by a thorough fiscal impact assessment covering a period of at least 5 years (continuous structural benchmark).

15. Careful planning of spending initiatives remains at the core of efforts to improve public financial management.

  • a. Highway R7 to Albania. The ongoing construction of highway R7 to Albania requires close cost control as the project nears completion in 2013, especially with regard to variation cost.
  • b. Highway R6 to Macedonia. The analysis of design and financing options for R6 is ongoing. We will move beyond the preparation stage only once (i) R6 can be integrated into a sustainable budgetary framework, and (ii) World Bank staff confirms that the highway’s design is economically viable. Bidding for the highway project will be competitive and transparent, and we will consult with IMF staff prior to entering into any contractual obligations. In case we were to decide to finance R6 fully out of the budget, prerequisites for entering into contractual obligations are the completion of the privatization of PTK and the near-completion of highway R7, to have sufficient clarity about the available budgetary space.
  • c. Health care reform. We submitted a proposal of a new Health Law to the Assembly that will allow the Ministry of Health to contract services from hospitals based on the services’ quantity and quality. The contracting of services will only start after the costs have been assessed and budgeted.
  • d. Civil Service Reform. We are in the process of finalizing the terms of reference for the activities of a company that will assist the Ministry of Public Administration in establishing a grading system and a unified pay structure for civil servants. Thereafter we will, with assistance from the World Bank, re-assess the civil service reform’s fiscal impact, and include cost control measures into secondary legislation as needed to keep the budgetary impact manageable. We will move forward with implementation of the reform only once its medium-term fiscal implications are fully understood.
  • e. Pension reform. A revised Pillar I Pension Law is in preparation. Legislation for the pensions for workers forcibly removed from their workplace in the 1990s will only be developed after a fiscal impact assessment has been conducted.
  • f. War veteran pensions. A working group under the supervision of the Prime Minister’s Office is preparing a fiscal impact assessment for a possible war veteran pension, starting with an assessment of eligible beneficiaries. To move the work forward, we are considering hiring an international consultant to assist the working group.

16. We have enhanced the budgetary autonomy of municipalities by refraining from specifying municipal spending limits for all expenditure categories except wages from own-source revenues in the first budget circular for 2013, in line the end-May structural benchmark. In early 2013, we intend to revise the Law on Local Government Finance to (i) implement in a gradual manner the revised grant allocation in line with the 2011 census results (scheduled to be published in September); (ii) reduce gradually the size of the general grant. Going forward, we intend to allow municipalities to shift expenditures across all spending categories except wages for both own sources revenues and revenues from the general grant.

III. Financial Sector Policies

17. The financial system has remained well-capitalized, liquid, and profitable. Capital adequacy stood at 17.4 percent at end-April, while the share of nonperforming loans in total loans has continued to hover around 6 percent. Credit to private sector grew by about 11 percent in the 12 months to April. A domestic bank whose capital adequacy ratio fell below the regulatory minimum of 12 percent last year has been recapitalized by its owners, and its board and senior management have been replaced.

18. We have submitted a revised Deposit Insurance Law (DIL) consistent with the new Banking and Microfinance Law (BML) to the Assembly on June 22, i.e., with a small delay compared to the corresponding structural benchmark of end-May. The extra time was needed to complete discussions with stakeholders, including KfW of Germany and the IMF. The revised DIL streamlines procedures to deal with troubled banks, including by allowing the use of resources from the deposit insurance fund for purchase and assumption transactions. Further, the revised law limits the deposit insurance fund’s mandate to administrating payments of insured depositors, while issues related to bank resolution remain primarily the responsibility of the central bank.

19. The completion of the framework for deposit insurance is part of a larger effort to upgrade our prudential policies, with a view to safeguarding the stability and health of the banking sector in an uncertain external environment.

  • The SRF for ELA establishes the central bank’s capacity to combat liquidity strains in the banking sector if needed.
  • The revised BML (passed in April) contains tight prudential requirements, such as limits on banks’ exposures to their foreign controlling institutions of 20 percent of Tier 1 capital—containing the risk that liquidity strains in controlling institutions would spread to their Kosovar affiliates—and exposure limits to single borrowers of 15 percent of Tier 1 capital.
  • Other rules and regulations, including on liquidity requirements and consolidated supervision, are currently being revised to bring them in line with the BML and Basel core principles, with an expected completion date of end-October.
  • The central bank is committed to maintaining prudent loan-to-deposit ratios of around 80 percent, and to maintain high standards of corporate governance within the banking system.
  • We cooperate closely with the home supervisors of Kosovar banking subsidiaries and have signed MoUs with all but one home supervisors (the remaining MoU is expected to be completed in due course).

We are confident that these measures provide strong support for our financial system to withstand strains, but are prepared to take additional measures as needed, such as requesting banks to temporarily suspend dividends payments to increase capital buffers. Further priorities may emerge from our discussions with the joint IMF/World Bank mission under the Financial Sector Assessment Program (FSAP), scheduled for September.

20. In line with the recommendation from the IMF’s safeguard assessment, the CBK will continue to act as the sole investment manager for the government, and the government will continue holding all its deposits at the central bank.

IV. Competitiveness and Private Sector Development

21. To further strengthen the business climate and promote competitiveness of the economy, we have prepared a package of twelve laws to reduce costs of setting up business, unify business registries and simplify the licensing system. Eleven laws have been passed (including on business organization, cadastre, reporting and auditing, establishment of immovable property right registers, external trade, management and control of state borders, construction, and the customs code). The remaining law (on execution procedure) has been drafted and sent to the Assembly for approval, enactment is expected before end-year. To foster the development of telecommunication and mining sectors, we are preparing two additional laws that remove entry barriers and ensure equal treatment among investors. While the law regulating the mining sector is still being drafted, the law concerning the telecommunication sector is expected to be approved in the coming months. Further, we are planning to launch a joint project on promoting the development of SMEs with Austrian Development Agency and the Swiss Cooperation Office.

22. We are finalizing the analysis on the implementation of the Labor Law with an emphasis on maternity leave provisions, notably whether the length of maternity leave provokes employment discrimination against women. The final report will be ready by the end-June 2012. Thereafter we will initiate preparatory work for the amendment of the Labor Law if necessary.

23. The reform of the energy sector is advancing. In May, the bids for the privatization of the distribution and supply division of the electricity company (KEK) were received, and the winner was announced in June. This result comes on the back of important gains in KEK’s revenue collection capacity and the revision of electricity price regulation, to enhance the sector’s attractiveness for private investors.

Sincerely yours,

/sgd/

Hashim Thaçi Prime Minister

/sgd/

Bedri Hamza

Minister of Finance

/sgd/

Gani Gërguri

Governor Central Bank of the Republic of Kosovo

Table 3:Structural Conditionality
ActionsTypeTiming
Launch of the tender offer for PTKStructural benchmarkEnd-August 2012
Submission of a 2013 budget consistent with the objectives of the program to the AssemblyStructural benchmarkEnd-October 2012
Monthly meetings of the Program Monitoring Committee and transmission of the meetings’ minutes to the IMF Resident RepresentativeStructural benchmarkContinuous
Fiscal impact assessments evaluating the budgetary impact of all new benefit creating laws, amendments to such laws or regulations over a period of at least 5 yearsStructural benchmarkContinuous
Attachment II. Technical Memorandum of Understanding Definitions and Data Reporting Requirements under the 2012–13 Stand-By Arrangement

1. This Technical Memorandum of Understanding (TMU) sets out the understandings between the Kosovo authorities and the IMF staff regarding the definition of quantitative performance criteria and indicative targets, and reporting requirements for the Stand-By Arrangement (“SBA”) requested in April 2012.

I. Performance Criteria and Indicative Targets

A. Coverage

2. For the purpose of this memorandum, the central government is composed of the Executive, the Legislative, and Judiciary branches of the Government, and any other public authorities except municipalities that receive direct budgetary appropriations. The general government includes the central government and municipalities. Both the central and the general government exclude publicly owned enterprises and socially owned enterprises.

3. Performance Criteria and Indicative Targets. The performance criteria, indicative targets, and their respective test dates are set in Table 2 of the Letter of Intent (LOI).

B. Bank Balances of the General Government

4. Bank balances are funds usable and readily available (i.e., liquid or marketable, and free of any pledges or encumbrances), held and controlled by the general government for the purposes of making payments and transfers. Bank balances include Undistributed Funds of the Government of Kosovo plus funds specifically reserved for policy purposes including emergency liquidity assistance but do not include the balance of unspent Own Source Revenues (OSR) carried forward, or funds encumbered or pledged as Donor Designated Funds and funds relative to on lending operations. Bank balances do not include investments made and managed by an outside Investment Manager assigned by the Minister pursuant to Kosovo’s Law on Public Financial Management Article 7.1.(iii). Bank balances may be held in the form of gold, holdings of foreign exchange and traveler’s checks, demand and short-term deposits at the Central Bank of the Republic of Kosovo (CBK), long-term deposits abroad that can be liquidated without penalty, and any holdings of investment-grade securities held directly by the general government. Bank balances at December 31, 2011, were € 159.986 million.

  • The floor on the bank balance set in Table 2 will be raised by
    • the excess of budget grants and loans relative to program assumptions

5. Reporting requirements. A table on bank balances will be transmitted by the Treasury with a maximum delay of five weeks after the end of each month. In addition, the CBK will submit twice a month, with a delay of 1 day, the Report of Positions of Treasury Accounts. Within 45 days after each test date, the CBK will submit to the IMF the independent audit of the reconciliation of government accounts.

C. Primary Expenditures of the General Government

6. Primary expenditures are measured on a cash basis cumulatively from the beginning of the calendar year. Expenditures of the Privatization Agency of Kosovo (PAK) are excluded. Primary expenditures include current expenditures (wages and salaries, goods and services, subsidies and transfers, reserves), capital expenditures, and net lending. They do not include interest payments or receipts or expenditures designated by donors financed with grants (“donor designated grants”). Net lending comprises loans granted by the general government except that it does not include onlending such as funds borrowed from KfW, which is instead included as a domestic financing item (“below the line”). All expenditures and net lending financed with loans to be serviced by the general government are in the program’s concept of expenditures and net lending, even if the cash did not transit through the Treasury.

  • The ceiling on primary expenditures set in Table 2 will be raised by the excess of project grants and loans relative to program assumptions.
  • The ceiling on primary expenditures set in Table 2 will be lowered by
    • the shortfall of project grants and loans relative to program assumptions.
    • the repayment of loans extended to public corporations in excess of program assumptions.

7. For the purposes of this memorandum, proceeds of privatizations will be understood to mean all monies received by the government from the sale of a publicly owned company, organization, or facility to a private company or companies, organization(s), or individual(s), as well as any proceeds generated from the sale of government nonfinancial assets and from the liquidation of the assets of the Privatization Agency of Kosovo (PAK). Proceeds of privatizations are not part of revenues. Instead, these are recorded as a domestic financing (Net acquisition of financial assets).

8. Reporting requirements. Data on the monthly execution, budget appropriations, and budget allocations of revenues and expenditures will be provided monthly no later than five weeks after the end of each month, including (i) government domestic revenue detailing by components direct taxes, indirect taxes, and nontax revenues; (ii) external budget support grants; (iii) primary recurrent expenditure, (iv) domestic and external interest payments and receipts, (v) capital expenditure detailing all those related to the construction of Route 7 and including domestically and budget support financed capital expenditure and externally project financed capital expenditure; (vi) the gross payment and gross accumulation of domestic payments arrears; (vii) external loan receipts and principal payments; (viii) external arrears payments and accumulation; (ix) bank and nonbank financing; (x) privatization and receipts of the sales of nonfinancial assets; and (xi) any other revenue, expenditure, or financing not included above.

D. Primary Fiscal Balance of the General Government

9. Primary fiscal balance of the general government is defined as revenues and grants minus primary expenditures cumulatively since the beginning of the calendar year. Expenditures of the Privatization Agency of Kosovo (PAK) are excluded. Revenues do not include privatization receipts.

  • The floor on the primary fiscal balance set in Table 2 will be lowered by the excess in project loans relative to program assumptions.
  • The floor on the primary fiscal balance set in Table 2 will be raised by
    • the shortfall in project loans relative to program assumptions
    • the excess in budget grants relative to program assumptions.

E. Contracting and Guaranteeing Nonconcessional Debt by the General Government

10. Nonconcessional debt is defined as debt contracted or guaranteed by the general government with a grant element of less than 35 percent. The grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. The discount rates used for this purpose are the using currency-specific commercial interest reference rates (CIRRs) published by the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD). For debt with a maturity of at least 15 years, the ten-year-average CIRR will be used to calculate the PV of debt and, hence, its grant element. For debt with a maturity of less than 15 years, the six-month average CIRR will be used. To both the ten-year and six-month averages, the same margins for differing repayment periods as those used by the OECD need to be added (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more).

11. The ceilings on contracting and on guaranteeing nonconcessional debt cover both domestic and external debt, but exclude purchases from the IMF and the sale of the SDR holdings allocated to Kosovo. Debt rescheduling and debt reorganization of debts contracted before the approval of the SBA are excluded from the limits on nonconcessional debt. The quantitative performance criteria apply not only to debt as defined below but also to commitments contracted or guaranteed for which value has not been received. The contracting or guaranteeing nonconcessional debt by the general government will be assessed at each test date.

12. The government of Kosovo will consult with Fund staff before contracting or guaranteeing any new debts in circumstances where they are uncertain whether the instrument in question is covered under the quantitative performance criterion.

13. Definition of debt. The definition of debt is set out in Executive Board Decision No. 12274-(00/85), Paragraph 9, as amended on August 31, 2009 (Decision No. 14416-(09/91)):

  • “(a) For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:
    • “(i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);
    • “(ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and
    • “(iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.
  • “(b) Under the definition of debt set out in this paragraph, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.”

14. Reporting requirements. Details of all new debt taken or guaranteed, indicating terms of debt and creditors, will be provided on a quarterly basis within five weeks of the end of each quarter.

F. Domestic Payments Arrears

15. A domestic payment obligation to suppliers or creditors is deemed to be in arrears if: (a) goods and services have been received; (b) they have been certified to conform to the order of the contract; and (c) the obligation has remained unpaid for more than 60 days after the invoice was received. A payment obligation is defined to be domestic if the creditor is resident in Kosovo.

16. Reporting requirements. The Ministry of Finance will submit a monthly table with the stock of domestic payments arrears and not in arrears. The data are to be provided within five weeks after the end of the month.

G. External Payments Arrears

17. External arrears are defined as total external debt service obligations of the government that have not been paid by the time they are due (after the expiration of the relevant grace period). External arrears exclude external debt service obligations subject to ongoing good faith negotiations of debt-rescheduling agreements. A debt service obligation is defined to be external if the creditor is not resident in Kosovo.

18. Reporting requirements. The Ministry of Finance will inform the Fund staff immediately of any accumulation of external arrears. Data on (i) debt-service payments; and (ii) external arrears accumulation and payments will be transmitted on a quarterly basis by the Ministry of Finance within five weeks of the end of each quarter.

II. Other Data Requirements

19. The monthly monetary statistics (including balance sheets and monetary surveys) of the CBK, the consolidated commercial banks and revisions to historical data (if any) will be transmitted on a monthly basis with a maximum delay of five weeks

20. Data on exports and imports, including volume and prices and compiled by the Statistical Office of Kosovo (SOK), will be transmitted on a quarterly basis within forty-five days after the end of each quarter.

21. A preliminary quarterly balance of payments, compiled by the CBK, will be forwarded within three months after the end of each quarter.

22. The table of Financial Soundness Indicators and the regulatory capital and liquidity ratios of individual banks will be transmitted by the CBK to the IMF on a monthly basis within six weeks after the end of each month.

23. A monthly report on the number of employees will be transmitted to the IMF by the Treasury Department of the Ministry of Finance within two weeks after the end of each month.

Annex: Debt Sustainability Analysis

Table A1.Kosovo: External Debt Sustainability Framework, Baseline Scenario, 2009–2032 1/(In percent of GDP, unless otherwise indicated)
ActualHistorical 6/ AverageStandard 6/ DeviationProjections
2009201020112012201320142015201620172012–2017 Average202220322018–2032 Average
External debt (nominal) 1/17.616.615.016.416.915.814.212.310.914.415.419.716.7
o/w public and publicly guaranteed (PPG)17.616.615.016.416.915.814.212.310.915.419.7
Change in external debt−3.7−1.0−1.61.40.5−1.1−1.6−1.8−1.40.70.3
Identified net debt-creating flows8.58.411.910.26.59.17.86.56.25.38.7
Non-interest current account deficit15.317.220.211.35.118.017.915.714.813.813.615.612.416.113.6
Deficit in balance of goods and services39.740.641.138.036.334.032.631.030.033.727.527.027.4
Exports15.518.520.020.620.821.522.022.923.320.520.0
Imports55.259.161.158.557.155.654.653.953.348.047.0
Net current transfers (negative = inflow)−22.1−21.1−18.1−21.91.9−17.3−15.6−15.6−15.0−14.4−13.6−15.3−13.3−11.0−12.6
o/w official−10.3−8.6−5.9−5.4−3.9−3.5−3.2−3.1−2.6−1.7−0.6
Other current account flows (negative = net inflow)−2.3−2.3−2.8−2.7−2.8−2.8−2.8−2.8−2.7−1.80.1
Net FDI (negative = inflow)-6.6-7.7-6.9-4.93.3-7.6-11.1-6.4-6.5-6.9-7.0-7.6-7.0-7.0-7.0
Endogenous debt dynamics 2/-0.2-1.1-1.3-0.3-0.3-0.2-0.5-0.4-0.4-0.3-0.1-0.3-0.2
Contribution from nominal interest rate0.20.20.20.30.30.30.30.20.20.50.5
Contribution from real GDP growth−0.6−0.6−0.7−0.5−0.6−0.5−0.7−0.7−0.5−0.6−0.8
Contribution from price and exchange rate changes0.3−0.6−0.8
Residual, including assets, errors, and omissions (3–4) 3/-12.2-9.4-13.5-8.8-6.0-10.2-9.4-8.4-7.7-8.4-4.6-8.4-5.8
o/w exceptional financing0.00.00.00.00.00.00.00.00.00.00.0
PV of external debt 4/13.414.915.314.513.311.810.613.416.2
In percent of exports66.872.573.467.360.451.545.665.181.2
PV of PPG external debt13.414.915.314.513.311.810.613.416.2
In percent of exports66.872.573.467.360.451.545.665.181.2
In percent of government revenues48.554.556.452.447.541.637.247.557.8
Debt service-to-exports ratio (in percent)2.52.52.29.716.615.713.815.415.034.8139.0
PPG debt service-to-exports ratio (in percent)2.52.52.22.42.73.22.75.14.610.011.5
PPG debt service-to-revenue ratio (in percent)1.31.81.61.82.12.52.14.13.87.38.2
Total gross financing need (billions of euros)0.40.40.60.60.50.70.70.70.71.16.5
Non-interest current account deficit that stabilizes debt ratio19.018.221.816.717.416.816.415.715.011.715.8
Key macroeconomic assumptions
Real GDP growth (in percent)2.93.95.04.51.53.84.13.25.05.04.64.34.44.64.5
GDP deflator in euro terms (change in percent)−1.33.74.81.13.42.12.41.91.91.91.92.02.02.02.0
Effective interest rate (percent) 5/0.81.21.20.40.61.92.01.81.81.71.51.83.82.93.5
Growth of exports of G&S (euro terms, in percent)6.428.819.121.731.38.67.98.89.411.38.79.15.36.75.5
Growth of imports of G&S (euro terms, in percent)0.115.413.710.47.41.54.02.35.15.75.44.05.56.75.7
Grant element of new public sector borrowing (in percent)10.027.111.511.511.511.513.811.511.512.0
Government revenues (excluding grants, in percent of GDP)29.326.427.627.327.127.727.928.328.528.128.128.2
Aid flows (in billions of euros) 7/0.00.00.00.00.00.00.00.00.00.00.0
o/w Grants0.00.00.00.0340.0030.00.00.00.00.00.0
o/w Concessional loans0.00.00.00.00.00.00.00.00.00.00.0
Grant-equivalent financing (in percent of GDP) 8/0.90.50.00.00.00.00.40.40.4
Grant-equivalent financing (in percent of external financing) 8/29.829.211.511.511.511.511.511.512.0
Memorandum items:
Nominal GDP (billions of euros)3.94.24.64.95.25.55.96.36.79.117.5
Nominal dollar GDP growth1.67.810.05.96.65.27.07.06.66.46.56.76.6
PV of PPG external debt (in billions of euros)0.60.70.80.80.80.70.71.22.8
(PVt-PVt-1)/GDPt-1 (in percent)2.41.40.0−0.3−0.7−0.50.41.31.31.3
PV of PPG external debt (in percent of GDP)13.414.915.314.513.311.810.613.416.2
PV of PPG external debt (in percent of exports)66.872.573.467.360.451.545.665.181.2
Debt service of PPG external debt (in percent of exports)2.22.42.73.22.75.14.610.011.5
Sources: Country authorities; and staff estimates and projections.

Data on private external debt is unavailable.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in euro terms.

Includes exceptional financing; changes in gross foreign assets; errors and omissions, and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Sources: Country authorities; and staff estimates and projections.

Data on private external debt is unavailable.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in euro terms.

Includes exceptional financing; changes in gross foreign assets; errors and omissions, and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table A2.Kosovo: Public Sector Debt Sustainability Framework, Baseline Scenario, 2009–2032(In percent of GDP, unless otherwise indicated)
ActualEstimateProjections
200920102011Average 5/Standard 5/ Deviation2012201320142015201620172012–17 Average202220322018–32 Average
Public sector debt 1/17.616.615.017.919.920.420.720.520.724.830.6
Change in public sector debt−3.7−1.0−1.62.92.00.50.2−0.20.30.80.5
Identified debt-creating flows0.51.60.31.4−3.50.2−0.2−0.2−0.20.40.0
Primary deficit0.72.71.7−0.23.62.63.11.00.80.80.81.50.90.90.9
Revenue, grants, and interest income29.327.328.128.027.127.727.928.328.527.928.128.128.2
of which: grants0.00.90.60.70.10.00.00.00.00.00.0
Primary (noninterest) expenditure29.930.029.830.630.228.628.729.129.329.429.029.029.0
Automatic debt dynamics−0.2−1.1−1.3−0.6−0.7−0.6−0.9−0.8−0.7−0.7−0.5−0.9−0.6
Contribution from interest rate/growth differential−0.7−0.6−0.8−0.6−0.6−0.6−0.9−0.8−0.7−0.5−0.9
of which: contribution from average real interest rate−0.10.00.00.00.10.10.10.10.20.50.5
of which: contribution from real GDP growth−0.6−0.7−0.8−0.5−0.7−0.6−1.0−1.0−0.9−1.0−1.3
Contribution from real exchange rate depreciation0.5−0.4−0.50.0−0.10.00.00.00.0
Other identified debt-creating flows0.00.00.0−0.6−5.9−0.2−0.2−0.2−0.30.00.0
Privatization receipts (negative)0.00.00.0−0.6−5.9−0.2−0.2−0.2−0.30.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes−4.2−2.6−1.91.55.60.20.50.00.51.40.50.50.4
Other Sustainability Indicators
PV of public sector debt13.416.418.319.119.819.920.422.727.1
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/1.03.12.13.15.24.73.86.37.09.110.2
PV of public sector debt-to-revenue and grants ratio (in percent)485868697170728196
PV of public sector debt-to-revenue ratio (in percent)496068697170728196
Debt service-to-revenue and grants ratio (in percent) 4/1.31.71.61.87.713.510.719.521.829.133.4
Debt service-to-revenue ratio (in percent) 4/1.31.81.61.87.713.510.719.521.829.133.4
Primary deficit that stabilizes the debt-to-GDP ratio4.43.73.3−0.31.00.50.61.00.50.50.00.40.2
Key macroeconomic and fiscal assumptions
Nominal GDP (local currency)3.94.24.64.95.25.55.96.36.79.117.5
Real GDP growth (in percent)2.93.95.04.51.53.84.13.25.05.04.64.34.44.64.5
Average nominal interest rate on forex debt (in percent)0.81.21.20.40.61.92.01.81.81.71.51.83.82.93.5
Interest on domestic debt (percentage of previous year stock, in percent)7.35.05.05.05.05.55.05.05.0
Average real interest rate (in percent)−0.40.3−0.3−1.81.3−0.10.40.40.60.70.90.52.21.62.0
Real exchange rate depreciation (in percent, + indicates depreciation)2.5−2.6−3.11.33.8−0.1
Inflation rate (GDP deflator, in percent)−1.33.74.81.13.42.12.41.91.91.91.92.02.02.02.0
Growth of real primary spending (deflated by GDP deflator, in percent)24.84.14.33.88.16.52.8−2.15.36.25.54.04.34.64.4
Grant element of new external borrowing (in percent)10.027.111.511.511.511.513.811.511.512.0
Sources: Country authorities; and staff estimates and projections.

Covers general government. Gross debt concept is used.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Country authorities; and staff estimates and projections.

Covers general government. Gross debt concept is used.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Figure A1.Kosovo: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2012–2032 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in 2022. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a Exports shock

2/ The magnitude of the export shock reflects the variability of prices of metals, which represented 76 percent of Kosovo’s exports in 2010.

Figure A2.Kosovo: Indicators of Public Debt Under Alternative Scenarios, 2012–2032 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in 2022.

2/ Revenues are defined inclusive of grants.

1Further, the municipal wage bill was raised by a minuscule amount (€1 million), reflecting staffing needs of newly established communities in Kosovo’s North. The spending cuts affect, in roughly equal parts, expropriations for highway construction that have advanced less rapidly than anticipated, and non-highway capital spending.
2The authorities originally recorded PAK’s financing from own-source revenues as nontax revenue. The recording has now been changed to financing, in line with the Technical Memorandum of Understanding.
3The primary deficit is projected to widen in 2013 due to a drop in dividend receipts (as PTK is expected to be privatized) and budget grants (as no further disbursements are foreseen from the World Bank). These factors overcompensate for the impact of structural fiscal adjustment on the headline deficit.
4See Box 5 of the Staff Report for the Request of the Stand-By Arrangement, IMF Country Report No. 12/100.
5For the computation of bank balance adequacy, see Box 2 of IMF Country Report No. 12/100.
6Due to uncertainty about the amount and timing of transfers from PAK, these are currently not included in the fiscal projections.
7Technically the SRF is an account of the treasury with the central bank.
8The LFMPA allows the government to cut expenditures in case of (i) a macroeconomic shock reducing fiscal revenue or financing, (ii) natural disasters, or (iii) the suspension or cancellation of a program or project to which the spending allocation relates. It does not, however, authorize the government to cut entitlements in other cases of budgetary shortfalls, for example structural underperformance in tax collection.

Other Resources Citing This Publication