According to IMF last report in February 2021, Kosovo has been hit hard by the COVID-19 pandemic. Despite policy support, economic activity is estimated to have fallen 6 percent in 2020 on account of the combined effect of strict domestic containment measures and international travel restrictions.
The fiscal deficit increased to 7.7 percent of GDP, given the large fall in tax revenues and the implementation of mitigation and recovery measures of 4.2 percent of GDP. The current account deficit is estimated to have increased to 7.5 percent of GDP mainly due to a large decline in diaspora-related inflows, most notably in tourism.
Banks have weathered the recession well to date, and the high pre-COVID19 liquidity levels and ample capital buffers bode well for the system’s stability.
Economic activity is forecast to rebound by 4.5 percent in 2021 supported by continued fiscal stimulus, and the projected gradual relaxation of containment measures. The outlook remains subject to large uncertainty, and depends on the evolution of the pandemic, the speed of vaccinations, and political developments.
Fiscal policy needs to continue to cushion income losses for households and firms, but strengthening the design, targeting, and transparency of measures remains essential. While the suspension of the fiscal rule over 2020–21 is warranted, it needs to be combined with a clearly communicated commitment for its gradual reinstatement when the economic recovery is entrenched. Financial policies should continue mitigating the shock to incomes without endangering banking sector stability. Bank capital standards should not be weakened but the Central Bank should exercise flexibility to allow banks more time to reconstitute capital buffers.
The pandemic is expected to leave long-lasting scars. While nominal GDP is projected to return to pre-crisis levels by 2022, it will remain below the pre-crisis trend for a protracted period. A stronger implementation of structural reforms could mitigate these longer-term effects.