Economy in focus: Kosovo

Central to Kosovo’s economic future is its ongoing dispute with Serbia, which restricts access to international markets and impedes foreign investment, crucial for its economic expansion.

Europe’s youngest country, Kosovo declared independence from Serbia in 2008, since when it has been on a journey to build its economy amidst numerous challenges, including a lack of universal recognition which directly impacts its economic relations and development opportunities.

The economy of Kosovo is characterised by its small size, limited industrial base, and a high dependence on remittances from the diaspora, which significantly contribute to household incomes. Although the share of remittances in the country’s GDP is currently decreasing (having peaked at 21.1 per cent in 2009), money sent home by Kosovans living and working abroad still totalled more than 17 per cent of GDP in 2022, according to the World Bank.

In recent years, Kosovo has made some progress in terms of economic growth, driven by sectors such as energy, mining, and a burgeoning although still small tech industry.

The country has seen investments in infrastructure, and there is a clear push towards leveraging its young, tech-savvy population to foster innovation. However, unemployment remains high, at over 12 per cent, according to the Vienna Institute for International Economic Studies (wiiw).

Unemployment is disproportionate among young people and women—more than 20 per cent are out of work.

According to the Bertelsmann Transformation Index (BTI), a measure of the development status and governance of political and economic transformation processes in developing and transition countries around the world, over 17 per cent of the Kosovo population lives below the official poverty line, and approximately 4.2 per cent are extremely poor, surviving on less than 3.65 US dollars per day.

Growth since the Covid-19 pandemic has been steady although far from stellar. GDP growth is expected to accelerate to 3.7 per cent in 2024 (the highest level of growth in the Western Balkans), supported by continued stabilisation of international prices and later to pick up towards Kosovo’s potential of around four per cent, driven by continued resilient diaspora inflows and a gradual pickup in investment.

Nevertheless, reforms are crucial to invigorate Kosovo’s economic growth further, believes the World Bank.

“The outlook is positive, but uncertainties associated to both geopolitical tensions and domestic politics, and a further slowdown in the EU entail significant risks,” says Massimiliano Paolucci, World Bank Country Manager for Kosovo and North Macedonia.

“To accelerate the economic convergence with the EU, reforms in the fiscal, governance, education, and energy sectors need to be made a priority,” he adds.

A key area ripe for reform is market competition, which operates within a weak institutional framework in Kosovo, where rules lack consistency for all participants and the informal sector holds significant importance. This, suggests the BTI, is why Kosovo has yet to achieve the status of a fully functioning market economy.

The presence of a large informal economy, a sluggish and inefficient judiciary system, pervasive corruption and a weak rule of law also hamper the growth of the private sector.

Serbia dispute

However, at the heart of Kosovo’s struggle for economic prosperity lies its unresolved dispute with Serbia, which continues to consider the country part of its territory.

This ongoing conflict casts a long shadow, not only affecting diplomatic relations but directly influencing economic opportunities. The lack of normalisation in relations with Serbia inhibits Kosovo’s access to international markets, complicates trade routes, and raises the perceived (if not real) risk for potential investors worried about regional stability.

Trade between Kosovo and Serbia is fraught with complications, including tariffs and periodic disruptions at border crossings, each acting as a brake on economic potential.

Moreover, the political instability that flares up with tensions between the two countries serves as a deterrent to the foreign direct investment that is vital for Kosovo’s economic expansion.

Negotiations to normalise the relationship between the two countries have been frozen for some time, with both sides trading blame. Prishtina has refused to implement an Association of Serb Municipalities, tasked with representing Serb-majority communities in Kosovo, which was agreed in 2013. Kosovo’s Prime Minister Albin Kurti opposes the idea, insisting Serbia formalise its recognition of Kosovo first.

“We don’t want the northern part of our country to be transformed into a kind of Republika Srpska,” Kurti has said, referring to the autonomous Serbian entity in Bosnia and Herzegovina.

Belgrade meanwhile has continued to oppose not just formal recognition, but also Kosovo’s membership of international organisations. On April 23, in an effort to restart the process, the European Union told Belgrade that either it stop obstructing Kosovo’s entry into key international organisations or risk seeing its own EU aspirations.

Resolution is essential

For Kosovo to step into a future of economic prosperity, resolving the dispute with Serbia is not just beneficial—it is essential. A resolution would likely catalyse a cascade of positive developments, starting with enhanced international recognition.

Such recognition is crucial as it would likely facilitate Kosovo’s membership in global organiaations like the United Nations and the European Union, integrating it more deeply into the global economy.

A normalised relationship with Serbia would also open numerous economic doors. It would likely improve trade conditions and stimulate investment between the two countries, potentially extending to broader regional economic integration.

This could significantly benefit Kosovo by opening up new markets for its products and making the region more attractive to international investors.

Furthermore, an agreement with Serbia could spur more regional cooperation throughout the Western Balkans, enhancing economic ties, expanding energy connectivity, and promoting infrastructural projects that would benefit not only Kosovo and Serbia but their neighbours as well.

Photo by Besart Ademi on Unsplash.

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