The Road to Greater Prosperity
Keynote address by IMF Deputy Managing Director Tao Zhang at Central Bank of Kosovo 20th Anniversary Conference Pristina, Kosovo
November 19, 2019
Thank you, Governor Mehmeti, for the kind introduction. I would also like to thank you and the organizers for the invitation to participate in the celebration of the 20th anniversary of the Central Bank of Kosovo, or “CBK” as we all like to say.
I am delighted to be in Pristina again. In just 20 years, Kosovo’s financial sector has developed into an ecosystem of well-capitalized and profitable financial institutions. Commercial banks, pension funds, insurance companies, and micro-financial institutions are all providing a high level of services to companies and households here in Kosovo.
As the universal regulator and supervisor of the entire financial system, CBK’s policies have been instrumental in this success. This conference and the presence of distinguished regional partners and international donors bears witness to the progress made by the CBK.
In the remainder of my remarks, I will first review the global and regional economic environment that Kosovo is connected to. And, I will then describe what this means for Kosovo.
At the global end, the ongoing trade tensions and financial vulnerabilities are creating increasing uncertainty for the world economy. At the Fund, our latest forecasts are for global growth to be around 3 percent for 2019. This is its lowest level since 2008–09 and lower than what we expected in April. And while we expect global growth to pick up to 3.4 percent in 2020, downside risks suggest the pace may be subdued.
Growth in Europe has also slowed since 2018—especially in the advanced economies. Global financial markets have been affected by trade tensions and growing concerns about the global economic outlook. Weakening economic activity and increased downside risks have prompted a more dovish stance of monetary policy across the globe. Accommodative monetary policy is supporting the global economy in the near term. But easy financial conditions are encouraging financial risk-taking and are fueling a buildup of vulnerabilities in some sectors. Corporate and nonbank financial sector vulnerabilities are elevated and institutional investors’ search for yield could lead to exposures that may amplify shocks during market stress.
This picture creates challenges for Emerging Europe and the economies of the Western Balkans.
In the case of Kosovo, more subdued global economic prospects can adversely affect remittances, foreign direct investment, and exports, all of which are needed to finance Kosovo’s large current account deficit.
Continued implementation of prudent macro-fiscal policies will be essential. For Kosovo, the focus needs to remain on the continued implementation of the fiscal rule. This should help ensure that public debt remains on a sustainable footing. And, equally important, it should help ensure that increases in current public spending, including the wage bill, are contained. This will create room for investment in economic infrastructure, education, and health.
That said, any additional spending on education, health, the judiciary, active labor market policies, and infrastructure should be complemented by reforms to enhance efficiency. More efficient public spending, through stronger public procurement and public investment frameworks and public enterprise management, has positive effects on budget effectiveness, as well as on overall fiscal governance and transparency.
Kosovo’s Euroized economy raises the importance of adequately managing fiscal risks. Unilateral Euroization means that the CBK has limited tools to respond to growth and inflation shocks, making it essential to build fiscal buffers in good times, so there is room for a policy response in bad times. In this context, protecting the stability and resilience of the financial sector should be the CBK’s main objective.
I am pleased to see that Kosovo’s financial sector remains sound. However, in the face of double-digit credit growth, it is prudent to watch for possible pockets of risk. While credit growth is part of healthy financial deepening, at some point it may become excessive.
While it is catching up, credit depth in Kosovo remains lower than in the region. Against this backdrop, it is important to address structural impediments to lending—for example, by strengthening property rights and enforcement procedures, and by accelerating the resolution of commercial disputes.
Macroeconomic stability and resiliency are both needed to accelerate growth, but they are not enough. Kosovo’s growth rates have averaged between 3 to 4 percent in the last few years, which is quite high when compared with the growth rates across Emerging and Advanced Europe. But this has not been enough to spur job creation. Kosovo’s labor market continues to be characterized by high unemployment rates and relatively low participation rates, especially for women.
Moreover, although Kosovo’s income per capita has increased faster than its peers in Europe, its level is still lower than the regional average. This reflects a still-sizable competitiveness gap—where we see large trade deficits, large informality, reliance on remittances, and low foreign direct investment. Tackling these deep-rooted challenges through appropriate reforms should be at the forefront of the policy agenda.
Reforms in key areas include: improving the quality of health care, ensuring better access to education and training, reducing infrastructure bottlenecks, strengthening governance and the business environment, and furthering international integration. Importantly, policies need to be environmentally friendly, as draught-related water shortages and air pollution remind us. Once in place, these reforms will help spur competition, unleash entrepreneurship, create the jobs and growth needed to reduce unemployment and outward migration, and gradually close the income gap with the rest of Europe.
Continued efforts at implementing the “Sofia Declaration” agenda and the policies in the Stabilization and Association Agreement between the EU and Kosovo are essential to find solutions for disputes rooted in the legacy of the past. This is a vital step in laying the groundwork for Kosovo’s EU accession path.
Mr. President, Mr. Governor, I am glad to see that the IMF has accompanied, and will continue to accompany, the Central Bank and other Kosovar authorities along their journey the last two decades. We have provided technical assistance and policy advice, contributing to the development of the legal and institutional framework needed for a well-functioning market economy.
Some examples include:
- Helping set up payment and banking systems;
- Strengthening financial sector regulation and supervision, crisis preparedness and macroprudential policies; and
- Assisting in the design of the Central Bank Charter and the CBK’s organizational structure.
Most recently, the Fund and the CBK agreed on a roadmap for a joint work agenda over the next three years. This roadmap lays the basis for future collaboration in the areas of central bank governance, financial supervision and regulation, financial stability, and systemic risk monitoring. To support these efforts the IMF opened a local office in Pristina in 2002, and since 2019, a Regional Office for the Western Balkans in Vienna.
Mr. Governor, once again, let me congratulate you and CBK’s staff for the impressive progress of the past two decades. I look forward to the discussion of the very interesting conference panels and wish you and the distinguished conference participants the very best for a successful conference.
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