Economic Growth

Background

The population of Kosovo is estimated to be 2.1 million, with perhaps another 400,000 living abroad. The Diaspora sends remittance home equal to as much as 30% of GDP, making it an important social ‘shock absorber’ for the fledgling Kosovo economy.

Kosovo adopted the Euro as its national currency in 2002. The currency has set price stability; however the Government has no control over the money supply and no method of setting a national interest rate. As a result, the Government must rely solely upon fiscal policy to control the economy.

The Kosovo economy is characterized by several unsustainable imbalances; the country consumes much more than it produces, generating an unfavorable balance of trade equal to 40% of GDP. Unemployment is estimated to be as much as 40%, the highest in the Balkans, while the public sector contributes an estimated 55% to the official economy, a very unfavorable balance. The Government has no source of finance other than its own tax and non-tax revenues. There is no external borrowing.

The business framework in Kosovo is reasonably supportive. Tax rates on corporate and personal incomes are among the lowest in Europe, with a 10% top rate. VAT is regionally competitive at 16%, and there is a modern commercial law framework in place. That said, economic growth suffers from poor infrastructure, particularly inadequate electric power, lack of clean water, and a deteriorated road network. Commercial laws, while reflective of international best practice, are poorly understood and implemented. The growth rate (5% in 2008) is too low to counter the high unemployment rate and absorb the estimated 30,000 new job market entrants each year.

USAID’s overall goal in Economic Growth is to build a market-based economy capable of creating jobs and attracting investment. Significant efforts have contributed to the establishment of economic policies, laws, and institutions. As these institutions develop the sophistication and capacity to function independently, USAID is shifting emphasis to helping the private sector grow.


Current activities

Economic Policies and Institutions
USAID has undertaken several initiatives to assist Kosovo in building economic institutions capable of addressing these economic problems.
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Private Sector Development
Since 1999, USAID has worked to develop the private sector with the aim of increasing sales and employment for the long-term growth of enterprises; reducing reliance on imports, especially agricultural products, by promoting increased competitiveness within specific clusters; and, developing an improved business operating environment.
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Energy
USAID is supporting privatization of KEK’s distribution (network and supply) functions. Its successful privatization must be coordinated with other privatization processes in the sector.
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Rebuilding Infrastructure
Since 1999, USAID has spent approximately $26 million on Kosovo’s infrastructure, including electrical overhead lines, school, library and cultural center rehabilitation, water and sanitation projects, road repairs and health centers. Today, USAID is focusing on two areas where infrastructure improvements are needed – schools and water/sanitation.
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