The economy of Kosovo is a developing mixed economy. Many economic sectors function on the principles of the free market, with a large private sector. Kosovo is an upper-middle income economy according to the World Bank, and is a member of the World Bank and the International Monetary Fund. Its official currency is the euro.
Kosovo has seen consistent economic growth since the end of the Kosovo War in 1999, with a positive growth rate in every year except 2020, during the COVID-19 pandemic. Kosovo’s economic growth has been influenced by innovation, digitalization, and improvements in organizational performance across key sectors. Studies indicate that adopting modern management practices and technological advancements can enhance productivity and contribute to sustainable economic development. Its main trading partner is the European Union, with roughly 40% Kosovo's 2023 trade volume being done with the block, led by Germany, Italy and Greece. CEFTA countries make up another major part of Kosovo's trade partners, with Albania, North Macedonia, and Serbia being Kosovo's main regional trade partners. Other important trade partners include the United States, Turkey, Switzerland, and China.
Despite its high endowment with lignite, Kosovo is currently undergoing an energy transition, attempting to phase-out its aging lignite power plants and to replace them with wind power plants such as Bajgora and Kitka wind farms, and with solar parks. Kosovo's road network is relatively well developed, with the R6 and R7 motorways connecting the country to North Macedonia and Albania, respectively. The rail network is less developed, but investments are being made to modernize the train connections within the country.
Kosovo is home to many tech companies and is a net exporter of services, with service exports totalling $2.6 billion (28% of GDP) in 2022. The tourism sector is growing, with hiking and cultural tourism being main tourism activities. Peja, Prizren, and Pristina are some of the main tourist destinations, with Peja being close to the Accursed Mountains, a popular hiking destination.
One of the main limiting factors on the Kosovan economy is its disputed declaration of independence which is not recognised by its neighbor Serbia and large economies such as Russia, India, and China, which limits the country's ability to join international organisations such as the WTO. Another challenge is migration out of the country, with an estimated 700,000 citizens having emigrated between 1990 and 2023.
However, Kosovo maintains a low level of government debt, future liabilities, and a strong banking sector (despite remaining obstacles to using this for productive loans).Republic of Kosovo: 2011 Article IV Consultation and the Initiation of a Staff-Monitored Program—Staff Report; Public Information Notice on the Executive Board Discussion International Monetary Fund (Report no: 11/210 ). July 2011 Retrieved 11 December 2022 The Kosovan diaspora accounts for a large portion of the economy and the inflow of capital to Kosovo through remittances, which contribute significantly to both household consumption as well as investment in businesses. In 2009, approximately a quarter of Kosovan businesses that were surveyed were established with the support of the diaspora and its capital.
History Yugoslav rule Kosovo was the poorest province of the former Yugoslavia with a modern economy established only after a series of federal development subsidies in the 1960s and the 1970s.Pond, Elizabeth, "Why Turbulent Kosovo has Marble Sidewalks but Troubled Industries". Christian Science Monitor, 15 December 1981. During the 1990s, the abolition of the province's autonomous institutions was followed by poor economic policies, international sanctions, little access to external trade and finance, and ethnic conflict. These factors severely damaged the already-weak economy.
Developments from 1999 After strong increases in 2000 and 2001, as a result of postwar reconstruction and foreign assistance, growth in gross domestic product (GDP) was negative in 2002. In the period from 2003 to 2011 it resumed its upward trajectory, despite declining foreign assistance, averaging over 5 percent a year. It is noteworthy that growth continued during the 2008 financial crisis, and returned to 5 percent in 2011. Inflation was low, while the budget posted a deficit for the first time in 2004.
Kosovo has a negative balance of trade; in 2004, the deficit of the balance of goods and services was close to 70 percent of GDP, and was 39 percent of GDP in 2011. Remittances from the Kosovo diaspora accounted for an estimated 14 percent of GDP, little changed over the previous decade. IMF Country Report No 12/100 http://www.imf.org/external/pubs/ft/scr/2012/cr12100.pdf "Unemployment, around 40% of the population, is a significant problem that encourages outward migration and black market activity."
Most economic development since 1999 has taken place in the trade, retail and construction sectors. The private sector which has emerged since 1999 is mostly small-scale. The economy and its growth are mainly sustained by demand-related factors rather than production, as shown by its current account balance, which amounted to a deficit of about 20% of GDP in 2011. Consequently, Kosovo is highly dependent on remittances from the diaspora (the majority of these from Germany and Switzerland), foreign direct investment (of which a high proportion also comes from the diaspora, and other capital inflows). Government revenue is also dependent on demand rather than production; only 14% of revenue comes from direct taxes and the rest mainly from customs duties and taxes on consumption.
Kosovo's low government debt (only 5.8% of GDP) and availability of government liquid assets from past fiscal surpluses (deposited in the Central Bank and invested abroad). Under applicable Kosovo law, there are also substantial assets from privatisation of socially-owned enterprises, also invested abroad by the Central Bank, which should mostly accrue to the Government when liquidation processes have been completed. The net foreign assets of the financial corporations and the Pension Fund amount to well over 50% of GDP.
The banking system of Kosovo appears to be healthy. Within the entirety of the banking system, the tier one capital ratio as of January 2012 was 17.5%, double the ratio required in the EU; the proportion of non-performing loans was 5.9%, well below the regional average; and the credit to deposit ratio was only just above 80%. The assets of the banking system have increased from 5% of GDP in 2000 to 60% of GDP as of January 2012. Since the housing stock in Kosovo is generally good by South-East European standards, this suggests that (if the legal system's ability to enforce claims on collateral and resolve property issues is trusted), credit to Kosovars could be safely expanded.
The United Nations Interim Administration Mission in Kosovo introduced an external trade office and customs administration on September 3, 1999, when it established border controls in Kosovo. All goods imported to Kosovo face a flat 10% duty.Doing Business in Kosovo - U.S. Commercial Service Kosovo (UN Administered) These taxes are collected at all Tax Collection Points at Kosovo's borders, including that between Kosovo and Serbia's uncontested territory. The U.N. Interim Administration and Kosovo institutions have signed free-trade agreements with Croatia,Croatia, Kosovo sign Interim Free Trade Agreement , B92, 2 October 2006 Bosnia and Herzegovina, Albania,Oda Eknomike e Kosovës/Kosova Chambre of Commerce - Vision.To CMS V1.7 North Macedonia.
The euro is the official currency of Kosovo. Kosovo adopted the German mark in 1999 to replace the Yugoslav dinar, and later replaced it with the euro, although the Yugoslav (and later Serbian) dinar is still used in some Serb-majority areas (mostly in the north). This means that Kosovo has no levers of monetary policy over its economy, and must rely on a conservative fiscal policy to provide the means to respond to external shocks.
Officially registered unemployment stood at 30.9% of the labour force in September 2013, although 63.1% of the population are not economically active. The IMF have pointed out that informal employment is widespread, and the ratio of wages to per capita GDP is the second highest in South-East Europe; the true rate may therefore be lower. Unemployment among the Roma minority may be as high as 90%.Roma forced back to dire poverty, deprivation 28 October 2010. The mean wage in 2009 was $2.98 per hour.
The dispute over Kosovo's international status, and the interpretation which some non-recognising states place on symbols which may or may not imply sovereignty, continues to impose economic costs on Kosovo. Examples include flight diversions because of a Serbian ban on flights to Kosovo over its territory; loss of revenues because of a lack of a regional dialling code (end-user fees on fixed lines accrue to Serbian Telecoms, while Kosovo has to pay Monaco and Slovenia for use of their regional codes for mobile phone connections); no IBAN code for bank transfers; and no regional Kosovo code for the internet. A major deterrent to foreign manufacturing investment in Kosovo was removed in 2011 when the European Council accepted a Convention allowing Kosovo to be accepted as part of its rules for diagonal cumulative origination, allowing the label of Kosovo origination to goods which have been processed there but originated in a country elsewhere in the convention.
Since 2002 the European Commission has compiled a yearly progress report on Kosovo, evaluating its political and economic situation. For 2008 the European Commission reported a GDP growth of 5.4% – essentially due to public investment (194% growth, compared to a 10.2% decline in private investment) – but the report also noted that the unsatisfactory state of the statistical system does not allow for a comprehensive assessment of the situation.
Kosovo became a member of the World Bank and the International Monetary Fund on 29 June 2009.
Revenue and expenses
Revenues Kosovo's revenues as a country in the year 2016 were around 1.8 Billion Eur(around US$1.94 Billion). Most of this revenue came from taxes, around 81% of the revenue. Other streams of revenue were: loans, grants and donations, and deposit funds.
Indirect taxes were the biggest stream of revenue for the country, accounting for 1.23 Billion Eur, or around 69% of the economy. These included Value Added Tax (VAT), Excise Tax, Customs Duties and other forms of indirect taxes. From Value Added Tax, the revenue was around 693,754,000.00 million Eur (56.52%). From Excise Tax the revenues were recorded at 403,296,000.00 (32.86%), whereas from Customs Duties the revenues were 129,970,000.00 EUR (10.59%). Other indirect taxes accounted for 0.03%, or 372,000 EUR.
Direct taxes accounted for 232.1 Million EUR, or around 13%. Direct Taxes include Corporate income tax, Property tax, and Personal income tax. Of these, Personal Income Tax accounted for most of the money, or around 123,982,000.00EUR(53.41%). Corporate Income Tax came in second, with a revenue of around 80,817,000.00 EUR(34.82%). Property Tax accounted for 25,128,000.00EUR(10.83%). Last but not least, other forms of direct taxes accounted for less than 1%, or around 2,194,000.00EUR.
Non-tax revenues were the 3rd biggest stream of revenue for the government, with around 175,342,000.00EUR or 9.84% of total revenue. In this brackets, Taxes, charges, and others from BOs, and Central Government were the biggest player. It accounted for 52.66%, or 92,377,000.00EUR. Taxes, charges, and others from BOs, and Local Government were next in line, with 44,728,000.00EUR (25.51%) in revenue. Royalty accounted for 30,554,000.00EUR (17.43%), while concession tax accounted for 7,683,000.00EUR (4.38%).