Already one of Europe’s poorest countries, Kosovo was hit hard by the COVID-19 pandemic but recovered quickly. Although economic growth estimates for 2021 differ significantly between the Central Bank of Kosovo’s 9.9 percent estimate and the International Monetary Fund’s (IMF) 7.5 percent estimate, both point to a robust economic recovery and faster growth rates than initially forecast. A large inflow of remittances and diaspora tourism combined with increased exports contributed to this growth. Although many international financial institutions remain cautious in forecasting economic growth for 2022 given the unpredictability of the pandemic and global supply chain shocks, most expect Kosovo’s GDP to grow between 3.8 and 4 percent.
The pandemic has not led to permanent changes in Kosovo’s investment policies. The government enacted several relief measures that are all temporary and focused on maintaining employment levels and helping businesses preserve liquidity. As such, Kosovo’s COVID-19 relief measures did not significantly affect its broader investment policy environment.
Kosovo has potential to attract foreign direct investment (FDI), but that potential is constrained by its failure to address several serious structural issues, including limited regional and global economic integration; political interference in the economy; corruption; an unreliable energy supply; a large informal sector; difficulty establishing property rights; and tenuous rule of law, including a glaring lack of contract enforcement. The country’s ability to sustain growth relies significantly on international financial support and remittances. Its ongoing dispute with Serbia and lack of formal recognition by many countries and international organizations, including the lack of membership in the United Nations, also create obstacles to doing business.
Increased energy prices throughout Europe, particularly in the last quarter of 2021 through the first quarter of 2022 exposed Kosovo’s vulnerability to energy price shocks and its serious issues with energy reliability. By January 2022, the Kosovo government had to subsidize the energy sector in the amount of €90 million (about 1.3 percent of GDP) and increase energy tariffs to cover the cost of increased energy imports. Kosovo also faced blackouts due to maintenance issues at its two dilapidated coal-fired power plants. The Energy Regulatory Office in February 2022 instituted block tariffs for residential consumers but did not change electricity prices for businesses.
In 2021, the net flow of FDI in Kosovo was estimated at $466 million, a significant increase over the 2020 amount of $382 million. Real estate and leasing activities are the largest beneficiaries of FDI, followed by financial services and energy. The food, IT, infrastructure, and energy sectors are growing and are likely to attract new FDI.
One key sector of the economy that has sustained strong growth is the wood processing sector. Companies producing kitchens, baths, doors, upholstered furniture, and combined wood, metal and glass have seen increased investment since 2017. The sector is maturing and receiving support in business development services and access to finance. Kosovo is also addressing its energy security by increasing its renewable energy capacity and facilitating more bankable renewable projects. Kosovo has also rapidly increased the exports of bedding, mattresses, and cushions, but this development has mainly been concentrated within a few companies.
Kosovo’s laws and regulations are consistent with international benchmarks for supporting and protecting investment, though justice sector enforcement remains weak. Kosovo has a flat corporate income tax of 10 percent. In 2016, the government partnered with the United States Agency for International Development (USAID) and other international donors to launch the Kosovo Credit Guarantee Fund, which improves access to credit. With USAID assistance, Kosovo passed legislation to establish a Commercial Court, which aims to handle business disputes fairly, efficiently, and predictably and is expected to improve the business enabling environment by reducing opportunities for corruption and building investor and private sector trust in the judiciary.
Property rights and interests are enforced, but legal system weaknesses and difficulties associated with establishing title to real estate, in part due to competing claims arising from the history of conflict with Serbia, make enforcement difficult. Kosovo has a legal framework for protecting intellectual property rights (IPR), but enforcement remains weak, largely due to a lack of resources. While IPR theft occurs in Kosovo, there is insufficient data on how widespread the issue is. The issue does not get attention in the media, and the U.S. Embassy in Pristina has not had significant complaints of IPR theft in Kosovo from U.S. companies. Anecdotally, the IPR theft that occurs tends to be mostly in lower-value items that likely do not garner significant attention.
All legal, regulatory, and accounting systems in Kosovo are modeled on EU standards and international best practices. All large companies are required to comply with international accounting standards. Investors should note that despite regulatory requirements for public consultation and the establishment of an online platform for public comments ( ), some business groups complain that regulations are passed with little substantive discussion or stakeholder input.
In Kosovo’s recent history, the political environment has been characterized by short electoral cycles and prolonged periods of caretaker governments. However, the current governing coalition has an overwhelming majority, and all indications point to the likelihood that it will remain in place for much, if not all, of its four-year term. In addition, there have been few substantive changes in legislation and regulations on foreign investment and the general business environment despite previously short electoral cycles. To date, the U.S. Embassy in Pristina is not aware of any damage to commercial projects or installations. The government, which took office March 2021, ran on an anti-corruption platform and has a strong electoral mandate to enact positive change.
The public consistently ranks Kosovo’s high unemployment rate (officially 25.9 percent in 2021) as among its greatest concerns. Unemployment levels for first-time job seekers and women are considerably higher than the official rate. Many experts cite a skills gap and high reservation wage as significant contributing factors.
Despite the challenges, Kosovo has attracted a number of significant investors, including several international firms and U.S. franchises. Some investors are attracted by Kosovo’s relatively young population, low labor costs, relative proximity to the EU market, and natural resources. Global supply disruptions brought on by the COVID-19 pandemic have sparked greater interest recently from some businesses to utilize Kosovo as a base for near-shoring production destined for the EU market. Kosovo does provide preferential access for products to enter the EU market through a Stabilization and Association Agreement (SAA).
|TI Corruption Perceptions Index||2021||87 of 180||http://www.transparency.org/research/cpi/overview|
|Global Innovation Index||2020||N/A||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2020||USD 283 Million||http://data.imf.org/CDIS|
|World Bank GNI per capita||2020||USD 4,480||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|