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COUNTRY CONTEXT

Kosovo is a parliamentary republic. It declared independence on February 17, 2008, and is recognized as an independent country by more than 100 United Nations members. It joined the ÐÓ°ÉÂÛ̳ Group¡¯s institutions in 2009, and became an official donor to the International Development Association (IDA) in 2025. Kosovo is also a potential candidate for EU membership and signed a Stabilization Association Agreement with the EU that has been in force since April 2016.

Kosovo has experienced steady economic progress since independence, with a nearly 50% increase in per-capita income and a 35% reduction in the poverty rate. It has successfully transitioned away from a growth model based on high dependence on foreign aid inflows, outperforming peer countries of similar per-capita income. This is thanks to a steady expansion in consumption and investment, with a strong impetus from diaspora inflows, public investment in infrastructure, and financial deepening, amid a stable fiscal stance and an environment of low inflation.

To continue to grow, Kosovo needs to unleash productivity gains and create more quality jobs. This will require addressing infrastructure bottlenecks, prioritizing human capital investment, and creating an environment more conducive to private sector development. Further actions are also needed to promote environmental sustainability, including the fulfillment of the EU¡¯s environmental acquis.

Last Updated: May 05, 2025

Strategy

The (CPF) for Kosovo for FY2023-2027 aims to support the country in accelerating its competitiveness for higher job creation and living standards. It outlines priorities for the ÐÓ°ÉÂÛ̳ Group¡¯s  engagement in the country, which will contribute to greater public service efficiency and quality, more formal private sector jobs, and increased environmental resilience. The CPF aims at delivering a comprehensive ÐÓ°ÉÂÛ̳ Group program of lending operations and advisory services and analytics.

The most recent IDA projects in Kosovo will support investments that facilitate trade and more efficient transport and support financial stability and inclusion. The active IDA and Trust Fund-financed projects total around $402 million.

11 Active Lending Projects ($376.5 million):

Last Updated: May 05, 2025

Recent Economic Developments

Real GDP growth remained robust in 2024, averaging 4.4% supported by declining inflation and higher wages. Private consumption continued to sustain growth, alongside a pickup in gross capital formation. Exports of goods and services continued to increase. On the supply side, manufacturing and construction activity growth remained strong. After averaging 1.6% in 2024, consumer inflation reached 1.7% by February 2025. However, domestic price pressures continued to persist, as reflected in the increase in the production and construction cost index during 2024. Formal employment increased by 2.4% between January and September 2024.

The current account deficit increased, reaching 9% of GDP in 2024, driven by a deterioration of the goods balance. Remittances inflow growth was modest (1.4%), reflecting weaker activity in origin countries. Robust tax revenue growth (9.3%), particularly from indirect taxes (10.6%), combined with rising, but still under-executed capital expenditures (16.7%) contributed to this outcome. The financial sector remains stable and financial deepening continues. In 2024, the average (YoY) increase of new loans was 22%. Bank asset quality remains satisfactory, with non-performing loans remaining stable at 2%by September 2024. Poverty reduction is projected to have continued, with a decline of 3 percentage points in 2024 due to higher growth.

Economic Outlook

GDP growth is expected to reach 3.8% in 2025 and 2026, driven by consumption and investment activity. Higher wages, credit growth and a high level of public transfers are expected to support consumption. An increase in social spending and wages, and increased execution of public investment is expected to drive the fiscal deficit to 1% of GDP in 2025. A further slowdown in EU activity, as well as heightened trade uncertainty, has the potential to negatively affect growth through reduced demand of goods and services exports and decreased inward investment flows. Geopolitical uncertainty, and that associated with the domestic political context, also entails risk. Kosovo has a lower elasticity of poverty reduction in response to economic growth compared to its peers. Therefore, further progress in reducing poverty will depend on the ability to sustain higher growth rates in the future. The decline in population, partly due to outmigration, could be offset by increasing female labor force participation, currently constrained by factors such as lack of childcare services. Expanding childcare services would improve labor market opportunities for women and enhance children's school readiness through better early childhood education, while also creating additional job opportunities.

Last Updated: May 05, 2025