Macro Economic Framework for Economic Growth

1. Macro Economic Framework for Economic Growth Renzo DaviddiEuropean Commission Liaison Office to Kosovo 8 June 2010

2. Outline • Introduction • Macro economic framework • The role of the European Commission • Additional observations • Conclusion

3. 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

4. Economic challenges Fiscal sustainability: • Highway spending leads to deficits Without counterbalancing measures: - 3.4% of GDP in 2010 - 5.5% in 2011 • Therefore: • Fiscal discipline • Extra measures on revenue side • IMF program

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

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

7. 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

8. 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

9. 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

10. The European Commission’s role Assistance: • Macro Financial Assistance: - 50 million euro - Conditions: * Satisfactory implementation IMF program * Improvement in public finance management

11. 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

12. 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

13. 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

14. 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

15. Thanks for your attention!