Growth in Kosovo is being primarily driven diaspora-related travel services, as well as ICT services.
Kosovo’s macroeconomic conditions remained favourable during the first half of 2023, despite persistent external volatility and a slowdown in growth in the second quarter, according to a major new report from the World Bank.
During the second quarter of the year, real economic activity reached two per cent year-on-year, bringing growth in the first half of the year to 2.9 per cent. Growth was primarily driven by a 5.9 per cent real increase in exports thanks to record growth in the export of services (13.6 per cent); mostly in diaspora-related travel services, as well as ICT services.
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The findings of the report confirm Emerging Europe’s assessment of the country’s ICT sector.
In the latest edition of the IT Competitiveness Index, published earlier this year as part of a wider report looking at the sector across the region, Kosovo was ranked in 11th place among the region’s 23 countries, well ahead of every other country in the Western Balkans.
Kosovo scored particularly well in the talent and IT infrastructure components.
A positive outlook
In Kosovo, as elsewhere in the Western Balkans, amidst challenging external conditions, real GDP growth remains positive. Economic activity is expected to expand by 3.2 per cent during 2023. Inflation has been steadily decreasing from its peak of 14.2 per cent in July 2022, but price pressures remain heightened.
The medium-term outlook remains positive within a context of high uncertainty. The contribution of investment to growth is expected to pick up in 2024–25, supported by increased investment in public infrastructure, including through the support of external financing, and higher public and private investments in energy supply and efficiency.
“For Kosovo, timely and effective implementation of the new energy strategy while safeguarding fiscal adequacy is imperative, alongside the need to reduce other infrastructure gaps in water, waste, and connectivity,” says Massimiliano Paolucci, World Bank Country Manager for Kosovo and North Macedonia.
“Scaling up human capital investments and greater inclusion of inactive women into the labor market, by reducing barriers to participation, also by scaling up access to childcare services, are a precondition to unlock higher potential economic growth,” he adds.
Strengthening labour markets
In 2023, the Western Balkans’ labour market continued to strengthen, against all odds. The average employment rate in the region reached a new historic high at almost 48 per cent with additional 103,000 jobs created between mid-2022 and mid-2023. Albania, Bosnia and Herzegovina, and Montenegro showed the strongest gains.
In Kosovo, formal employment increased by 2.8 per cent between August 2022 and August 2023. The latest Labour Force Survey revealed that the working age population shrank during 2022, possibly
due to migration, while the employment-to-population ratio experienced an increase, from 31.1 per cent in 2021 to 33.8 per cent in 2022.
Notably, however, the unemployment rate has been on a downward trajectory, plummeting to 12.6 per cent in 2022, although inactivity rates remain high.
At the same time, labour shortages continue to be among the top concerns raised by businesses across the Western Balkans. Despite recent momentum in the post-pandemic years, labour force participation remains low and, coupled with significant gender gaps, is constraining further poverty reduction.
Accelerating convergence
The region needs to not only address barriers to greater labour force participation but also accelerate economic convergence with more advanced economies of Europe, according to the World Bank. These efforts need to be complemented with accelerated green transition and more investments to boost resilience to natural disasters, including in agriculture.
“Agriculture is one of the sectors most impacted by droughts, shortened seasons, and unpredictable weather patterns. Protecting agriculture against natural hazards and making it more sustainable could allow Western Balkan economies to continue rising agricultural productivity against the climate change’s headwinds and be able to sustainably produce more high-quality food for domestic purposes, but also for exports, including to the EU”, says Natasha Rovo, World Bank Senior Economist.
“This requires improving public policies and investments to enhance a wide adoption of climate-smart technologies and practices by farmers supported by stronger public institutions critical for sustainable agricultural growth.”.
While the size of the agriculture sector in the region is shrinking, it remains highly relevant, for example by employing from seven to 35 per cent of the population across the six countries. Greening agriculture offers therefore an opportunity to boost productivity, competitiveness, and resilience of the sector, by making effective use of available funds, according to the report.
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