Political instability, corruption and the large informal sector are the main obstacles to Kosovo’s economic development, according to the US Department of State’s annual report on the investment climate in Kosovo. This is exacerbated by limited regional and global economic integration of the country.
While it notes the positive economic growth rate of four percent during the last decade, the report lists a number of issues hampering foreign investment in the country.
“Kosovo has potential to attract foreign direct investment, but that potential is constrained by failure to address several serious structural issues including: limited regional and global economic integration; political instability and interference in the economy; corruption; an unreliable energy supply; a large informal sector; difficulty establishing property rights, and tenuous rule of law, including a glaring lack of contract enforcement,” it’s stated in the report.
Kosovo’s ability to sustain growth relies significantly on international financial support and remittances. A GITOC report found that diaspora remittances amount to €1.5 billion annually, which is equivalent to around 70% of state revenue.
The report highlighted the unsuccessful fight against corruption by the Kurti government due to its short tenure.
“The Kurti government, which started its mandate in February 2020, but fell in March 2020 and as of May 2020 was in caretaker status, took a number of concrete steps to combat corruption and political interference, but given its short tenure was not able to institutionalize all of its measures and change the perception of political interference in public administration and the judicial system.”
The government was toppled following pressure by the US administration regarding Kosovo’s relations with Serbia. In a recent development, US envoy Richard Grenell accused Kurti of anti-Americanism this week.
The report also notes that the same government was unable to implement economic measures taken during the pandemic because it was ousted.
Foreign direct investment (FDI) in Kosovo in 2019 was estimated at USD 292 million, close to the 10-year annual average of USD 296 million.
The stock of portfolio investment in 2019 totaled USD 2.05 billion, with equity securities of USD 1.67 billion, and debt securities of USD 385 million.
Real estate and leasing activities are the largest beneficiaries of FDI, followed by financial services and energy. The food, IT, infrastructure, and energy sectors are growing and are likely to attract new FDI.
Many international financial institutions have forecasted economic growth rates in Kosovo to fall from a pre-pandemic projection of four percent positive growth to a post-pandemic contraction of up to five percent. This includes the IMF (-5 percent), World Bank (-4.5 percent) and European Bank for Reconstruction and Development (-4.5 percent).
Kosovo’s laws and regulations are consistent with international benchmarks for supporting and protecting investment but the justice sector remains weak in implementation.
In the 2020 Doing Business Report, Kosovo ranked 57 out of 190 economies surveyed and was recognized as one of the top 20 most improved economies in the world.
Weaknesses in the legal system and difficulties arising from the history of conflict with Serbia can make enforcement of property rights difficult.
Kosovo has a good legal framework for protecting intellectual property rights, but enforcement remains weak, largely due to lack of resources. While IPR theft occurs in Kosovo, it is not widespread.
The report notes the recent short electoral cycles and prolonged periods of caretaker governments in the country, and highlights the example of the Kurti government. The latter collapsed due to Kurti’s reluctance to comply on time with how Grenell wanted Kosovo’s tariffs on Serbian goods removed.
The public consistently ranks Kosovo’s high unemployment rate (officially 25.7 percent in 2019) as among its greatest concerns. Unemployment levels for first-time job seekers and women are considerably higher than the official rate. Many experts cite a skills gap and high reservation wage as significant contributing factors.