IMF approves agreement with Kosovo
The Executive Board of the International Monetary Fund (IMF) approved a 24-month precautionary Stand-By Arrangement (SBA) of SDR 80.12 million and an arrangement under the Resilience and Sustainability Facility (RSF) of SDR 61.95 million.
The SBA is expected to be precautionary and will provide liquidity in case downside risks materialize, including Russia’s war in Ukraine.
The RSF will provide affordable financing to support Kosovo’s climate change mitigation and adaptation efforts, including through greener electricity production and more efficient energy use, and is expected to catalyze another climate financing.
Kosovo is the first European country to access the RSF. Washington, DC: The Executive Board of the IMF approved a 24-month precautionary SBA in the amount of SDR 80.12 million (around €100 million, 97 percent of quota) and an RSF in the amount of SDR 61.95 million (around €78 million, 75 percent of quota) to support Kosovo’s economic policies. Kosovo is the first country in Europe to receive financing under the RSF.
Following a strong recovery from the COVID-19 pandemic, growth moderated in 2022 and inflation accelerated to double-digit levels due mainly to the increase in international commodity prices brought on by Russia’s war in Ukraine. The negative terms-of-trade shock adversely impacted households’ disposable income and business profitability. Low public investment absorption and tighter financial conditions also contributed to weaker growth.
The authorities appropriately cushioned the shock, while rebuilding fiscal and international reserve buffers. The financial sector has weathered back-to-back shocks well and non-performing loans remain low.
Addressing long-standing structural issues, such as closing infrastructure and governance gaps, reducing Kosovo’s dependence on coal, and promoting energy efficiency, remain crucial for making medium-term growth higher and greener, and for reducing Kosovo’s reliance on diaspora flows.
The IMF-supported program under the precautionary SBA will mitigate the materialization of downside risks and support structural reforms to strengthen fiscal and financial governance and enhance growth. The RSF arrangement will expand Kosovo’s fiscal space for climate change mitigation and adaptation efforts, exploit synergies with other official support, and help catalyze private investment in green energy.
Following the Executive Board’s discussion, Gita Gopinath, First Deputy Managing Director and Acting Chair of the Board issued the following statement:
“I am pleased that the IMF’s Executive Board has approved two new Fund arrangements for Kosovo, including a Stand-by Agreement and an arrangement under the Resilience and Sustainability Facility—the first in Europe.
After successfully overcoming the challenges posed by the COVID-19 pandemic, Kosovo’s growth in 2022 was tempered by the fallout from Russia’s war in Ukraine. Higher and more volatile commodity prices fueled inflation, and the negative terms-of-trade shock adversely impacted disposable incomes.
The authorities’ prudent fiscal policies and broadly targeted support framework helped rebuild fiscal space while mitigating the impact of the cost-of-living crisis. A strong policy mix is now needed to sustain the recovery and achieve reform objectives. Abiding by the fiscal rule deficit ceiling will provide a moderate impulse to activity in 2023, helping the economy soft land, while contributing to the anchoring of public debt in the medium term. In addition, budgetary spending should strike a better balance between social transfers and promoting economic transformation, the size of blanket allocations should be reduced, and public investment absorption should be increased, while strengthening public investment management. Enhancing financial sector governance will require strengthening central bank governance and bolstering the central bank’s capacity for financial sector surveillance.
Increasing medium-term growth prospects and reducing the country’s dependence on diaspora flows will require advancing the structural reform agenda and closing infrastructure and governance gaps. Moreover, making growth greener requires reducing Kosovo’s dependence on coal and increasing energy efficiency. Against this backdrop, the IMF-supported program under the SBA—which the authorities intend to treat as precautionary given the absence of a balance of payments needed in the baseline—will mitigate the materialization of downside risks, while policy actions will improve fiscal and financial governance and enhance growth. In turn, the RSF will support climate-change mitigation and adaptation actions, exploit synergies with other official support, and help catalyze private investment in green energy. The RSF aligns closely with Kosovo’s new Energy Strategy for 2023–32, which was approved by Parliament earlier in 2023.”