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Western Balkans Regular Economic Report: Fall 2020

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A semi-annual report on recent economic developments and economic policies in the Western Balkans (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia). The report analyzes the economic performance and outlook for the Western Balkans and specific factors that affect the region’s development. This edition looks at the economic and social impact of COVID-19 on the region and the prospects for recovery amid uncertainty.

As elsewhere in the world, the COVID-19 pandemic has plunged countries in the Western Balkans into a deep recession. While the outlook remains uncertain, economic activity in the region is projected to contract by 4.8 percent in 2020.

The primary causes are the drop in both domestic and foreign demand, and disruptions in supply chains due to imposed containment measures, such as lockdowns. A second wave of the pandemic in the Western Balkans since mid-June and political uncertainty about elections in some countries have further impeded economic recovery.

The recession has worsened labor market conditions and interrupted welfare improvements, although government response measures cushioned the blow. Prior to the pandemic outbreak, most of the countries in the Western Balkans had made progress in reducing poverty and boosting household incomes. The crisis interrupted, and in some cases reversed, this process. By June, the unemployment rate in the region rose by 0.5 pp, and 139,000 jobs were lost. Government measures contained the labor market fallout and helped prevent larger spikes in poverty. In Albania, Kosovo, Montenegro, and Serbia, the COVID-19 crisis is estimated to have pushed over 300,000 people into poverty—a significant number, but less than half of what it would have been without the response measures.

Policy efforts in the region need to remain focused on fighting the pandemic, limiting the economic damage, and facilitating recovery. Going forward, all countries should ensure that their health care systems are adequately resourced. Where infections surge and lockdowns are required, economic policy should continue to cushion household income losses with well targeted measures, as well as provide support to firms suffering the consequences of mandated restrictions on activity.

Rebuilding fiscal sustainability will be a high priority throughout the region as the recovery takes hold. Falling revenues and rising spending needs together have put heavy stress on fiscal balances. Western Balkan countries have already put forward massive economic packages in 2020—deficits will increase from 4 to 10 percent of GDP for most countries.

Across the Western Balkans, resilient recovery will depend on strengthening the fundamentals. By 2022, the total output loss due to the crisis is projected to be fully recovered. But the crisis also offers the opportunity to make growth more resilient in the future by implementing key structural reforms. These include more effective public spending and better management of public investments; rebuilding fiscal space by heightening tax compliance, greater efficiency in spending, and new fiscal instruments, such as green taxes and digital taxation; building strong, independent, and accountable institutions; and committed adherence to the rule of law.

The extent of the recovery is far from risk-free. In the short term, the speed of the recovery will depend on how the pandemic evolves, while a delayed recovery in the region’s main trading partner—the EU, could slow economic normalization by diminishing trade and remittance flows.

The COVID-19 crisis has caused businesses in the Western Balkans region to suffer substantial revenue losses. Based on data collected during the crisis, at least 50 percent of firms surveyed in each country have been forced to close at least partly, and business was minimal for those that remained open. Micro and small firms suffered more than medium and large firms. Across the region, disappearing market demand was reported and firms faced liquidity constraints.

Firms in the region must now adapt their business models to the new post-COVID-19 normal, while also overcoming structural barriers to competitiveness and innovation. Firms should prioritize restructuring their operations and logistics chains to make them more resilient to future shocks; accelerating digitalization throughout value generation chains; increasing the efficiency of investment and operational costs; and speeding up development of new products and services to respond to the rapid changes in demand from their clients.

But regulatory obstacles in the region make it difficult to set up investment mechanisms in support of firms, such as private equity and debt instruments, venture capital, crowdfunding platforms, or business angel groups. There is little support for firms seeking much-needed soft investments – in areas such as improving investment readiness, upgrading processes, managerial innovation, export readiness, acquiring licenses, and adopting digital solutions, all of which are critical for firms to adapt to post-COVID realities and to compete domestically and internationally.

To support firms, Western Balkan governments need to crowd in private financing (debt or equity) to facilitate hard investments by firms; and shift the focus of scarce government resources more towards facilitating soft investments. 

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