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Kosovo: Economy Overview

08 February 2010
by Ina Dimireva -- last modified 25 January 2017

Kosovo's economy has shown progress in transitioning to a market-based system and maintaining macroeconomic stability, but it is still highly dependent on the international community and the diaspora for financial and technical assistance.


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Kosovo's economy has shown progress in transitioning to a market-based system and maintaining macroeconomic stability, but it is still highly dependent on the international community and the diaspora for financial and technical assistance. Remittances from the diaspora - located mainly in Germany, Switzerland, and the Nordic countries - are estimated to account for about 15% of GDP and international donor assistance accounts for approximately 10% of GDP. With international assistance, Kosovo has been able to privatize a majority of its state-owned enterprises.

Kosovo's citizens are the poorest in Europe with a per capita GDP (PPP) of $8,000 in 2014. An unemployment rate of 31%, and a youth unemployment rate near 60%, in a country where the average age is 26, encourages emigration and fuels a significant informal, unreported economy. Most of Kosovo's population lives in rural towns outside of the capital, Pristina. Inefficient, near-subsistence farming is common - the result of small plots, limited mechanization, and a lack of technical expertise. Kosovo enjoys lower labor costs than the rest of the region. However, high levels of corruption, little contract enforcement, and unreliable electricity supply have discouraged potential investors.

Minerals and metals production - including lignite, lead, zinc, nickel, chrome, aluminum, magnesium, and a wide variety of construction materials - once the backbone of industry, has declined because of ageing equipment and insufficient investment. A limited and unreliable electricity supply is a major impediment to economic development, but Kosovo has received technical assistance to help improve the sector's performance. In 2012, Kosovo privatized its electricity supply and distribution network. The US Government is cooperating with the Ministry of Economic Development (MED) and the World Bank to conclude a commercial tender for the construction of a new power plant, Kosovo C. MED also has plans for the rehabilitation of an older coal power plant, Kosovo B, and the development of a coal mine that could supply both plants.

In June 2009, Kosovo joined the World Bank and International Monetary Fund, and began servicing its share of the former Yugoslavia's debt. In order to help integrate Kosovo into regional economic structures, UNMIK signed (on behalf of Kosovo) its accession to the Central Europe Free Trade Area (CEFTA) in 2006. Serbia and Bosnia previously had refused to recognize Kosovo's customs stamp or extend reduced tariff privileges for Kosovo products under CEFTA, but both countries resumed trade with Kosovo in 2011. Kosovo joined the European Bank for Reconstruction and Development in 2012 and the Council of Europe Development Bank in 2013. In 2014, Kosovo concluded the Stabilization and Association Agreement negotiations (SAA) with the EU, focused on trade liberalization, and signed it into law in 2015. In 2015, Kosovo negotiated a $185 million Stand-by Arrangement (SBA) with the IMF following the conclusion of its previous SBA in 2014. The official currency of Kosovo is the euro, but the Serbian dinar is also used illegally in Serb majority communities. Kosovo's tie to the euro has helped keep core inflation low.

Kosovo experienced its first federal budget deficit in 2012, when government expenditures climbed sharply. In May 2014, the government introduced a 25% salary increase for public sector employees and an equal increase in certain social benefits. Central revenues could not sustain these increases, and the government was forced to reduce its planned capital investments. The government, led by Prime Minister MUSTAFA - a trained economist - recently made several changes to its fiscal policy, expanding the list of duty-free imports, decreasing the Value Added Tax (VAT) for basic food items and public utilities, and increasing the VAT for all other goods. In August 2015, as part of its EU-facilitated normalization process with Serbia, Kosovo signed agreements on telecommunications and energy distribution, but disagreements over who owns economic assets within Kosovo continue.

Source: CIA - The World Factbook

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