Executive Summary

The Republic of Kosovo is Europe’s youngest country – and one of its poorest – but it has managed to record positive economic growth rates, 3.8 percent on average during the last 10 years. Kosovo declared independence on 17 February 2008 and has been recognized by more than 100 UN Member States.

Kosovo has a flat corporate tax of 10 percent. In 2016, Kosovo ratified a strategic investment law intended to ease market access for investors in key sectors, and partnered with international donors to launch the Credit Guarantee Fund, which improves access to credit. With USAID assistance, the Ministry of Trade and Industry has made strides on efforts to enhance its rankings in the World Bank’s Doing Business Index. All legal, regulatory, and accounting systems in Kosovo attempt to align with EU standards and international best practices. Publicly listed companies comply with international accounting standards. In an attempt to improve commercial legislation, the Assembly approved a new Law on Bankruptcy in July 2016.

Kosovo’s economy has many challenges, such as: limited regional or global economic integration; political instability; corruption; unreliable energy supply; a large informal economy estimated at 32 percent of GDP; and a tenuous rule of law, including a lack of contract enforcement. It continues to rely on significant international financial support and remittances. Kosovo’s official unemployment rate was 32.9 percent in 2015, although some estimates are as high as 40 percent. Unemployment levels for youth and first-time job seekers are considerably higher than the official rate.

Resolution of residential, agricultural, and commercial property claims remains a serious and contentious issue in Kosovo. Most property records were destroyed or removed to Serbia by the Serbian government during the 1998-1999 conflict, making determination of rightful ownership for the majority of properties complex. Cases of multiple ownership claims on a single property with each claimant presenting a variety of ownership documents as proof are common. The EU-facilitated Kosovo-Serbia dialogue process is helping address the cadastral records taken from Kosovo.

Despite the challenges, Kosovo’s relatively young population, low labor costs, and natural resources have attracted some foreign investment, with several international firms and franchises already present in the market. Additionally, its significant diaspora community in foreign labor markets provides a steady stream of remittances back to the economy.

In 2017, net flow of Foreign Direct Investment (FDI) in Kosovo was estimated at EUR 287.8 million, up from EUR 220 million in 2016. The stock of portfolio investment in 2017 totaled EUR 1.904 billion, with equity securities of EUR 1.483 billion and debt securities of EUR 421 million. These totals compared to EUR 1.307 billion in equity securities and EUR 481 million in debt securities in 2016. Real estate and leasing activities have received the most FDI, followed by financial services and construction. The food, IT, infrastructure, and energy sectors are growing and hold the most potential to attract new FDI.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2017 85 of 180 http://www.transparency.org/
World Bank’s Doing Business Report “Ease of Doing Business” 2018 40 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2017 NA https://www.globalinnovationindex.org/
U.S. FDI in partner country (M USD , stock positions) 2016 USD 119 http://www.bea.gov/
World Bank GNI per capita 2016 USD 3,850 http://data.worldbank.org/

6. Financial Sector

Capital Markets and Portfolio Investment

Kosovo has an open-market economy, and the market determines interest rates. Individual banks implementing risk-profile analysis conduct credit allocation by financial institutions. Foreign and domestic investors can get credit on the local market. Access to credit for the private sector is improving, although still limited. The Credit Guarantee Fund established in 2016 is enhancing access to credit for micro- and SMEs in Kosovo. Interest rates imposed by commercial banks and micro-financial institutions have slowly declined but remain high compared to most developed banking sectors.

The country generally has a positive attitude towards foreign portfolio investment. Kosovo does not have its own stock exchange. The regulatory system is in line with EU directives and international standards. There are no restrictions beyond normal regulatory requirements related to capital sourcing, fit, and properness of the investors. The CBK has taken all required measures to improve policies for the free flow of financial resources. Requirements under the SAA with the EU oblige the free flow of capital. The government respects the IMF’s Article VIII.

Money and Banking System

As of the beginning of February 2018, Kosovo has 10 commercial banks (of which 8 are foreign capital), 18 micro-financial institutions (of which 13 are foreign capital) and 15 licensed insurance companies (of which 8 are foreign capital). The official currency of Kosovo is the euro even though the country is not a member of the eurozone. In the absence of an independent monetary policy, prices are highly responsive to market trends in the larger eurozone.

The Central Bank of Kosovo (CBK) was established in 2008, although its predecessor, the Banking and Payments Authority of Kosovo, served a similar function from 1999 to 2008. It is an independent government body responsible for fostering the development of competitive, sound, and transparent practices in the banking and financial sectors. It supervises and regulates Kosovo’s banking sector, insurance industry, pension funds, and micro-finance institutions. The CBK also performs other standard central bank tasks, including cash management, transfers, clearing, management of funds deposited by the Ministry of Finance and other public institutions, collection of financial data, and management of a credit register.

Foreign banks and branches are allowed to establish operations in the country. They are subject to the same licensing requirements and regulations as local banks. The country has not lost any correspondent banking relationships in the past three years and no such relationship is currently in jeopardy. There are no restrictions for foreigners to open bank accounts, and they can do so upon submission of valid identification documentation.

Kosovo’s private banking sector remains well-capitalized and profitable. Difficult economic conditions, weak contract enforcement, and a risk-averse posture have limited banks’ lending activities, although marked improvement occurred in the past two years. By February 2018, the rate of non-performing loans decreased to 3.1 percent, the lowest rate in the last ten years. The three largest banks own about 61 percent of the total 3.9 billion euro assets of the entire banking sector. Despite positive trends, relatively little lending is directed toward long-term investment activities. Interest rates have dropped significantly in the recent years, from about 12.7 percent in 2012 to 6.8 percent in 2018. Slower lending is notable in the northern part of Kosovo due to a weak judiciary, informal business activities, and fewer qualified borrowers.

The Central Bank of Kosovo has created a permanent body for assessing and addressing challenges related to blockchain technologies in its banking transactions. So far, however, it has not made any decision related to blockchain technologies and their usage in Kosovo.

Kosovo is a signatory country to the United States’ Foreign Account Tax Compliance Act (FATCA), aimed at addressing tax evasion by U.S. citizens or permanent residents with foreign bank accounts. For more information, visit the FATCA website: https://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-FATCA .

Foreign Exchange and Remittances

Foreign Exchange Policies

The Foreign Investment Law guarantees unrestricted use of income from foreign investment following payment of taxes and other liabilities. This guarantee includes rights for transfers to other foreign markets or foreign-currency conversions, which must be processed in accordance with EU banking procedures. Conversions are made at the market rate of exchange. Foreign investors are permitted to open bank accounts in any currency. Kosovo adopted the euro in 2002; however, it is not an official Eurozone member. The CBK administers euro exchange rates on a daily basis as referenced by the European Central Bank.

Remittance Policies

Remittances are an important source of income for Kosovo’s population, representing over 11 percent of GDP (or over EUR 760 million) in 2017. The majority of remittances come from Kosovo’s diaspora in European countries, particularly Germany and Switzerland. The Central Bank reports remittances are mainly used for personal consumption, not for investment purposes.

Kosovo does not apply any type of capital controls or limitations on international capital flows. As such, access to foreign exchange for investment remittances is fully liberalized.

Sovereign Wealth Funds

Kosovo does not have any sovereign wealth funds.

11. Labor Policies and Practices

According to the Kosovo Statistical Agency, almost two thirds of Kosovo’s 1.8 million population is of working age (15-64). The official unemployment rate is 30.5 percent, with youth unemployment as high as 52.7 percent. There are no reliable statistics on Kosovo’s informal economy, but a recent EU commissioned study showed the informal and black economy to be around 31 percent of GDP. Informality dominates the agriculture, construction, and retail sectors.

A labor market agreement with neighboring Albania was implemented in March 2015.

Kosovo’s Law on Labor requires employers to observe all applicable employee protections, including a 40-hour full-time work week, payment of overtime, adherence to occupational health and safety standards, respect for annual leave benefits, and up to 12 months of maternity leave (six months of paid leave at a reduced rate, followed by six months of unpaid leave). The Labor Law distinguishes between layoffs and firings, and mandates severance payments only for laid off workers (when at least 10 percent of employees are dismissed collectively). The government is in the process of changing the Law on Labor to make it more business friendly and discourage gender discrimination.

The law also establishes a monthly minimum wage, which the government set in 2011 at EUR 130 for employees under 35 and EUR 170 for those over 35 years of age. Kosovo has no unemployment insurance or any other safety net programs for workers laid off for economic reasons.

Private-sector employers often do not provide contracts to their employees and pay them in cash. In the public sector, employers sometime hire employees as contract workers and enroll them in the regular payroll when the budget for salaries becomes available.

The Labor Law does not require the hiring of Kosovo nationals. Labor laws are not waived for investment purposes. There are no additional or different labor laws for special economic zones or free zones.

Labor unions are independent by law, but not in practice, as many of them are divided and cannot survive without political/government support. A collective bargaining agreement between the government, labor unions, and private sector representatives was signed in 2014 and has been partially implemented. Kosovo’s Statistical Agency and the Ministry of Labor and Social Welfare do not collect specific data on implementation. Public-sector employees – including doctors, teachers, and judges – sporadically go on strike to demand implementation of the entire agreement and better working conditions. Labor disputes are formally adjudicated in local courts, but access to the courts and the unpredictability of judicial decisions create significant risks to investors.

The Ministry of Labor and Social Welfare established a compliance office with the authority to inspect employer adherence to labor laws. The International Labor Organization office in the country is project-focused and does not serve as a government advisor on labor legislation or international labor standards. The Labor Inspectorate suffers from inadequate staffing and a limited budget. With 50 inspectors conducting inspections in 38 municipalities, the Inspectorate cannot meet all the inspection needs of the labor market. The Inspectorate issues fines and penalties depending on the extent of the violation of labor legislation. Investigation and prosecution of labor practice violations is conducted and executed by the Labor Inspectorate and the judicial system. Child labor occurrences are investigated and reported by municipal social work centers to the Ministry of Labor and Social Welfare, while the Labor Inspectorate inspects violations of child labor practices for children aged 15-18 years. The Labor Law is in the process of being amended.

Kosovo’s education system has been criticized for not sufficiently linking its curriculum to the needs of Kosovo’s business community. Kosovo’s large, young labor force often remains idle due to mismatches between applicant skills and employer needs.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source USG or International Statistical Source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) 2016 USD 7,430 2016 USD 6,650 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (M USD, stock positions) 2017 USD 139.7 2016 USD 119 IMF
Host country’s FDI in the United States (M USD, stock positions) 2017 USD 12.1 2016 USD 12 IMF
Total inbound stock of FDI as % host GDP 2017 59% 2016 55% IMF

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 3,590 100% Total Outward 275 100%
Turkey 419 11.7% Albania 66 23.9%
Germany 336 9.4% Germany 31 11.1%
Switzerland 319 8.9% Macedonia, FYR 21 7.7%
Slovenia 229 6.4% Cyprus 21 7.5%
Austria 202 5.6% Turkey 16 5.8%
“0” reflects amounts rounded to +/- USD 500,000.

Data from the CBK are generally consistent with the IMF data in terms of ranking of the top five partners in each column of the table, but amounts for each country in both categories differ slightly. According to the CBK, total inward direct investment was USD 3,520 million and total outward direct investment was USD 299 million in 2017.

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 1,919 100% All Countries 1,378 100% All Countries 540 100%
Luxembourg 810 42.2% Luxembourg 759 55.1% Italy 211 39%
Ireland 563 29.4% Ireland 563 40.9% Germany 65 12%
Italy 211 11% France 53 3.9% Netherlands 57 10.5%
France 71 3.7% United States 3 0.2% Luxembourg 51 9.4%
Germany 65 3.4% Austria 47 8.7%

Data from the CBK are consistent with the IMF data in terms of ranking of the top five partners in each column of the table, but amounts for each country in each category differ. According to the CBK, total portfolio investment assets for 2017 were EUR 1.904 billion, with total equity securities EUR 1.483 billion, and total debt securities of EUR 421 million. There are no tax havens in portfolio investment.

Investment Climate Statements
Edit Your Custom Report

01 / Select a Year

02 / Select Sections

03 / Select Countries You can add more than one country or area.

U.S. Department of State

The Lessons of 1989: Freedom and Our Future