Macro Economic Framework for Economic Growth Renzo Daviddi European Commission Liaison Office to Kosovo 8 June 2010

Outline  Introduction  Macro economic framework  The role of the European Commission  Additional observations  Conclusion

Introduction Sources 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 challenges Fiscal sustainability:  Highway spending leads to deficits Without counterbalancing measures: - 3.4% of GDP in % in 2011  Therefore:  Fiscal discipline  Extra measures on revenue side  IMF program

Economic challenges External Inbalance:  Current account balance (incl. officials tranfers): – 18.5% GDP  No exchange rate policy, therefore:  Structural reform necessary to increase competitiveness

Economic challenges Structural reform:  Energy sector – power cuts make firms less competitive and deters investment - increase collection & billing, privatisation KEK likely to help

Economic challenges Structural 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 Challenges Structural 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!