Macro Economic Framework for Economic Growth

Renzo DaviddiEuropean Commission Liaison Office to Kosovo

8 June 2010

Outline

Introduction

Macro economic framework The role of the European Commission Additional observations

Conclusion

IntroductionSources of financing for economic growth; is there enough money in Kosovo?

Access to finance – one of the main barriers for Kosovo’s private sector

Precondition: stable macro economic environment – lower risk for banks and investors

Economic challengesFiscal sustainability:

Highway spending leads to deficitsWithout counterbalancing measures:

- 3.4% of GDP in 2010- 5.5% in 2011

Therefore: Fiscal discipline Extra measures on revenue side

IMF program

Economic challengesExternal Inbalance:

Current account balance (incl. officials tranfers): – 18.5% GDP

No exchange rate policy, therefore:

Structural reform necessary to increase competitiveness

Economic challengesStructural reform:

Energy sector – power cuts make firms less

competitive and deters investment- increase collection & billing,

privatisation KEK likely to help

Economic challengesStructural reform:

Increase product quality- reforms necessary on internal market issues: standardisation, accreditation, industrial property rights, etc.

Guarantee free competition- leads to lower prices and higher competitiveness- relevant for energy and telecom sectors- Competition Commission & new state aid law

Economic ChallengesStructural Reform:

Taxation:

- Tax reform for fiscal stabilisation- Combat large informal sector and increase

collection by:* introduction fiscal numbers and cashiers* new IT system facilitating electronic filing* better cooperation tax administration with police and courts

The European Commission’s role Assistance:

Projects, amongst others in:- public finance management, leading to a less ad

hoc budget process- energy sector – support to MEM, ERO - privatisation of socially owned enterprises- industrial property rights- tax administration: technical assistance and new IT system

The European Commission’s role Assistance:

Macro Financial Assistance:

- 50 million euro- Conditions:

* Satisfactory implementation IMF program* Improvement in public finance

management

The European Commission’s role Fiscal Surveillance Mechanism (FSM):

Bi-annual consultations with Government

Prepares for integration into existing EU economic and fiscal monitoring structure (stability pact)

If progress, Kosovo to submit annual medium term economic and fiscal program, as other (potential) candidate member states

The European Commission’s role Kosovo – EU Trade Agreement:

EC’s proposal adopted by European Council December 2009

Free access for Kosovo for all products to a market of 500 million consumers

Reforms necessary in internal market issues (product quality, IPR, public procurement, competition, etc).

6-7 July DG TRADE fact finding mission EC to support Kosovo in reforms

Additional Observations Question Workshop: Is there enough money in Kosovo?

Answer: yes, good deposit base of banks

But; cost of financing high due to high risk perceived by banks

Ways to bring down risk:* better enforcement of contracts (rule of law issue)* better internal/external financial documentation of businesses – audited financial statements* real estate property to be documented better (building permits)* in time; introduction of country rating

Conclusion Stable macro-economic environment

is necessary for attracting financing and stimulating economic growth

In itself however not sufficient; integrated approach, incl. structural reform is needed

EC is here to support this process

Thanks for your attention!