Kosovo’s Economy: Analyzing Recent Inflation and Government Responses

Albian Krasniqi


Tales from the Region



It remains to be seen if the Government learned the lesson and if insights from experience will be reflected in the upcoming policies and the budget law. And, of course, dynamism in implementing projects and reforms is desperately needed.

Over the past decade, Kosovo has witnessed a sustained economic expansion, with significant advancements in critical economic indicators. This notable economic performance results from the confluence of several factors: the buoyancy of private consumption and investment, boosted by remittances, and substantial public investments in infrastructure. Notably, Kosovo's growth rates for 2021 and 2022 have surpassed other Western Balkan nations, as they have done in the past, registering at 10.7% and 5.2%, respectively.

During this period, the value of goods exports nearly doubled. However, it is disconcerting that the trade deficit has deteriorated, culminating in a negative current account equivalent to 10% of the Gross Domestic Product (GDP) by the close of 2022.

Foreign direct investment (FDI) has continued its upward trajectory this year, but one cannot notice any structural changes in the key players or the diversification of investments. The preponderance of our FDI is still dominated by investments of the diaspora in the real estate sector, and the recent upsurge in real estate prices may be the primary explanation for this overall improvement.

Affected by the intense migration trend, Kosovo’s labor market has experienced notable changes. The labor shortages are also present in a few sectors, especially construction, and hospitality. According to the latest data from the Kosovo Agency of Statistics (KAS), the unemployment rate in the final quarter of 2022 stands at 11.8%.

Notwithstanding the undeniable economic progress Kosovo has experienced, it is crucial to exercise caution when drawing conclusions solely based on official data, because certain anomalies are prevalent in recent statistical reports. As an illustrative example, the initial reported average GDP growth for 2022, as per quarterly reports, was 3.5%. However, after revisions and adjustments for seasonality by KAS, the growth rate inflated to 5.2%. Such a marked disparity usually raises concerns about either a technical error or external interference, as it deviates from best practices.

Anomalies also manifest in labor market data. In 2021, the unemployment rate was officially reported to be more than 20%. Yet, after an extended period without reporting, KAS indicated that unemployment had substantially declined by nearly 50%, equivalent to approximately nine percentage points.

If indeed there has been a substantial improvement in the labor market, one would anticipate such improvements to be reflected in the findings of the Public Pulse Survey, conducted by the United Nations Development Programme (UNDP). Contrary to logical expectations, the survey reveals that people still perceive unemployment as their foremost concern, followed closely by poverty and inflation. Moreover, the decline in youth unemployment poses an even greater enigma. In 2020, Kosovo had the highest youth unemployment rate among Western Balkan nations, reaching 49.1%.

Two years later, Kosovo has somehow achieved the lowest youth unemployment rate in the region, plummeting to a mere 15.1%. While migration patterns within this demographic group may partially account for this drop, scepticism regarding the accuracy of these figures is hard to ignore.

Inflation and Government Response

In the aftermath of the post-Covid era, the global economy has experienced pronounced price escalations, driven by supply-side disruptions, the energy crisis, and the ongoing conflict in Ukraine. Kosovo's economy has not been immune to these forces. By the end of 2022, food inflation had surged to approximately 20%. Simultaneously, prices have continued their growing trend, albeit at a somewhat slower rate throughout this year.

In other words, non-economists should understand that lower inflation rates are not associated with lower prices compared to previous years, but rather a slower trend in increase.

Source: pixabay.com

A recent survey conducted by the UNDP, involving 1,500 households, has brought to light that a majority of respondents have reported no change in their income, while prices continued their increasing trend. To explain, in 2021, 38.8% of households were spending 200 EUR or more on groceries. In 2023, this share has risen by a substantial 20.8 percentage points. Similar trends have manifested in utility, transportation, and healthcare expenditures. Approximately 44% of respondents have indicated buying fewer goods, while paying a higher price, underscoring their incapacity to replan their budgets in response to inflation. This challenge is particularly acute among marginalized segments of the population.

According to this study, 16% of respondents in 2023 now subsist below the poverty line, living at 1.85 EUR per day, up from 14.5% in 2021. In addition to the economic implications of inflation, a substantial 46% of respondents have reported experiencing heightened levels of stress and anxiety as a consequence of rising prices.

The social welfare program assists the most vulnerable groups, but the support they receive is not adjusted for inflation. The Government has failed to pass a bill in parliament, which involves a loan provided by the World Bank to reform social welfare programs. This initiative has faced criticism from some economists who argue that taking loans to finance social welfare programs is unprecedented and a typically incorrect approach to increasing the country's public debt. On the other hand, those supporting the Government claim that money is fungible, and during times of high inflation, taking loans with very low-interest rates is a favorable decision to expand the fiscal space.

While there is some truth in both arguments, it remains the Government's responsibility to act on these reforms to aid those in need. The lack of public funds is not a valid excuse. In other words, the Government has shown no dynamic in implementing new reforms despite opening various fronts – i.e. initiating major legal and economic reforms in the first part of the mandate –with no major reform being implemented.

Nevertheless, it is worth noting that the Government has undertaken several fiscal measures in response to the inflationary pressures. In April 2021, there was a temporary 30% increase in social welfare programs, and the minimum pension was elevated to a minimum of 100 EUR per month. In 2022, to mitigate the adverse effects of inflation, the Government allocated 100 EUR to all employees, students, and pensioners. While these direct, one-time disbursements deliver immediate relief to households' budgets, they hold the potential, in principle, to intensify inflation. The infusion of a substantial monetary volume into the economy may precipitate further price escalations, given the constraints on supply.

The survey also finds that a significant proportion of respondents resorted to credit cards as a coping mechanism in response to inflation. The Government introduced a fiscal measure entailing the subsidization of loans, equivalent to 10% of their principal, up to a ceiling of 300 EUR. However, this measure remained in effect for a few months despite the persistence of inflation for over two years.

What we have observed from the Government's fiscal measures in the last three years are either highly targeted fiscal measures or no targeting at all. Undoubtedly, these measures have helped many families alleviate the impact of inflation and supported businesses in overcoming the adverse effects of COVID-19. However, to enhance their effectiveness, the Government should plan their policies in advance rather than allocating them ad hoc.

Best budgeting practices dictate that Government plans should be announced at the beginning of the fiscal year, whereas in Kosovo, most fiscal measures have been implemented with short notice.

This has undermined the overall effectiveness of subsidies and transfers. For example, last year, when facing an energy crisis, the Government announced a subsidy for all households purchasing energy-efficient equipment. Given the limited supply, the shock in demand substantially increased prices, resulting in higher profits for the leading importing companies.

In conclusion, the Government has been experimenting with a considerable number of approaches to combat inflation. Increasing the minimum wage from 170 to 264 EUR and social schemes to a minimum of 100 EUR is a good start. However, during the hard times – when inflation persists – these policies should be adjusted for inflation.

It remains to be seen if the Government learned the lesson and if insights from experience will be reflected in the upcoming policies and the budget law. And, of course, dynamism in implementing projects and reforms is desperately needed.

The blog was created as part of the “Tales from the Region” initiative led by Res Publica and Institute of Communication Studies, in cooperation with partners from Montenegro (PCNEN), Kosovo (Sbunker), Serbia (Autonomija), Bosnia and Herzegovina (Analiziraj.ba), and Albania (Exit), within the project "Use of facts-based journalism to raise awareness of and counteract disinformation in the North Macedonia media space (Use Facts)" with the support of the British Embassy in Skopje.

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Albian Krasniqi

Albian Krasniqi completed his postgraduate studies in 'Development Economics' at the University of Sussex in Britain. He specializes in the field of economics. He is currently an Analyst and Budget Manager at the Ministry of Finance in Kosovo.