Country Responses To The Financial Crisis Kosovo

Economic and Financial Developments in Kosovo and the global crisis

Behxhet Brajshori Deputy Minister in the Ministry of the Kosovo Security Force (Miami,18-22.May 2009)

Agenda  Kosovo Declaration of Independence  Establishment of the financial system  Economic financial sustainability  Remittances  Reforms in fiscal policies  Banking System  Kosovo Consolidated Budget  PEFA Assessment 2008  Recession in developed market economies and its

possible impact in Kosovo  Measures and Challenges

Key Events Serbia refused president Ahtisari

plan,which proposed that Kosovo be Independent. On 17 February the Kosovo Assembly declared Kosovo an independent state. Untill now Kosovo has been recognized by 58 different countries from around the world. Donor Conference held in July 2008,awarded a fund n euro of 1.2 billion for development of Kosovo. In December 2008 in Kosovo was established the mission of Europian Union “EULEX”to assist the courts and Kosovo

Establishment of Financial Institutions  Kosovo emerged from war with a severely damaged

financial infrastructure, and it was presented the need of establishing a new system of fiscal management.  UNMIK crated the Central Fiscal Authority (CFA) to perform basic activities in public finance management.  CFA consisted of 4 units (Tax, Customs, Budget, Treasury and Internal Audit.  Today the Ministry of Economy and Finance is responsible for coordination and financial management of the Kosovo Budget.  The system of financial management in Kosovo is quite advanced and integrated.

Financial Economic Sustainability 2005

2006

2007

2008

Real GDP growth(%)

3.9

4.0

3.9

5.4

Prices (annual aver.%)

-1.4

0.6

4.4

9.3

0.7

1.1

10.5

0.5

Real Sector

Prices (Year/year%) Fiscal Sector

(mil. euro)

Revenues

638.4

712.0

896.4

941.5

Expenditures

696.1

635.5

662.7

943.8

Budget Balance

-57.7

76.5

233.7

-2.3

Financial Sector (mil.euro) Net claims on ext. sect. 827.3

1,173.6 1,621.7 1,593.1

Net claims on fisc.sect. -230.2

-480.3 -856.8 -877.2

Net claims on real sect. -429.1

-429.3 -445.0 -343.6

Ext. sector (in mil. euro) Current Balance

-410.3

-444.2 -558.9 -727.8(p)

Goods

-1,043.7 -1,142.1-1.341.1 -1,648.0(p) 5

Remittances (inflow)

418.0

467.1

521.7

535.8(p)

Foreign Dire.Inve. (inflow ) 80.0

248.7

421.2

357.4(p)

Registered unemployment

-

-

Registered unemployment Jan. 2009

334.595 335.697 337.017

Source: Central Bank of the Republic of Kosovo, Monthly Statistics Report, Table 1.February 2009

Burimi: MFE, Departamenti I Makroekonomisë

6

2007 rate  Consumption (mil. euro) 9.5%  Investment (mil. euro) 27.8%  Total Exports (mil. euro) 19.7%  Total Imports (mil. euro) 20,0%  Coverage Imo/Exp (%)

3,810 967,0 343,0

2008 4,171 1,236 410,0

1,720

2,064

19.94

19.86

Source: MEF, Department of macroeconomic policies, Central Bank of the Republic of Kosovo. Monthly statistics Bulletin,

Remittances Remittances have increased from 2005

until 2008 to 27.99%. However, due to global crisis in countries whrw migrants from Kosovo work they will decrease in 2009 approximately to 370,0 mil. euro or 30% compared to 2008. Participation of remittancesin GDP ranges around 15%.

Reforms in Fiscal Policies  Since 1 January 2009,Kosovo,s government has begun

applyingthe new tax rates Description Approved rates Tax Income 0,4,8,10

Current rates 0,5,10,20%

Tax on Corporations 10%

20%

VAT 16%

15%

Excise on Tobacco euro/kg Customs TAX

17euro/kg 10%

Source: Ministry of Economy and Finance

21 10%

Financial system (deposits, loans)  The banking system in Kosovo overseen and regulated

by the Central Bank of Kosovo.  This system currently consists of 8 banks,6 of them owned by foreign and 2 local.  Deposits and loans over the years have increased significantly. Description 2008

2005

2006

2007

Deposits ( mil. euro) 844.7 1448.8

924.4

1,151.8

Loans (mil.euro) 902.4

490.5

387.9

Source: Central Bank OF the Republic of Kosovo

690.6

ODC effective interest rates(averaging) % 2007



2008

January 2009  Deposit interest rates

3.11

4.13

4.25 -Nonfinancial corporations

4.23

4.51

3.31

4.34

4.88 -Households 3.94

 Loan interest rates

14.68

13.08

14.00 -Nonfinancial corporations

14.41

13.93

13.41

12.79

15.78 -House holds 12.57

Source: CBRK,Monthly Statistics Bulletin,Table17,february 2009

 Despite the difficulties in the international financial

market Kosovo financial system continued its normal operations although the Kosovo Pension Savings Trust (KPST) decline in the value of its assets that were invested in stock markets abroad (about euro 91.0 mil.).  Banking sector which represents the largest share of the financial market in Kosovo was characterized with a significant growth in terms of financial intermediation.  By the end of the September 2008,loans extended by the banking sector reached euro 1.1 billion representing a yearly growth of 37,0%,wich is highest growth rate since 2003.

The structure of loans issued by the

banking sector remained broadly the same with the largest share extended to the trading sector. Regarding the maturity ,longer term loans continue to increase their share to total loans. A significant growth is noticed also in deposits reaching at euro 1.4 billion and representing a yearly growth of 32.1%. The main source of deposits remain households ,while in terms of maturity, short –term deposits continue to dominate the deposits structure.

 Kosovo banking sector continues to be profitable,

liquid and solvent.  The good liquidity and solvency position is shown also through results derived using the Stress-Test Model-wich tests the banking sector sensitivity to various potential shocks.  Positive performance is noticed also in other sectors of the financial market.  Insurance industry has shown that it is attractive sector for new investments since another insurance company joined the market during 2008.During 2008 the insurance industry upgraded services by providing life insurance services.

Insurance companies operating in Kosovo

continue to be profitable and well capitalized. Micro-finance institutions continue to support the domestic economy through their lending activity. Loans issued by micro –finance institutions euro 89.1 million a yearly increase of 26.3%.  Source :CBRK

The financial sector in Kosovo continues to

growth, increasing its contribution to the economic development as well as the range and quality of products offered to clients. In September 2008 total assets of the financial sector reached euro 2.2billion,wich represents an annual growth of 25.2%.This growth is mainly attributed to the banking sector with its assets growing by 30.9% yo-y.

 The financial sector in Kosovo is largely dominated

by commercial banks, whose assets represented 79.2% of the total assets in September 2008.The remainder consists of pensions funds(12,7%),microfinance institutions (4.5%),insurance companies(3.4%) and others (0.2%).  The financial sector in Kosovo characterized with a large presence of foreign capital. This is mainly prevalent in the banking and insurance market where 91,0% and 72,1% of total assets are managed by foreign companies respectively.  The presence of foreign financial institutions in Kosovo has contributed in the modernization of the financial system by bringing more advanced practices in finance and stimulating competition.

 Net Foreign Assets (NFA) of Kosovo financial sector

(including CBK) continued to growth in 2008.  In September 2008 ,NFA amounted euro 1.8 billion which represents an annual growth 10.8%.  Claims on nonresidents recorded an annual growth of 13.1% amounting euro 1.9 billion. Claims on nonresidents are mainly represented by deposits accounting for 65.9% of total assets or 6.6pp higher compared to the previous year.  This is a result of the orientation of investments toward deposits, which are considered to be safer, compared to shares and securities which are experiencing a considerable decline in their value due to the global financial crisis.

Liabilities to nonresidents marked an

annual increase of 60.3% ,which represents a higher growth rate compared to previous periods. In September 2008 liabilities to nonresidents amounted euro 128,0 mil ,and despite the recorded growth, remain lower compare to claims on nonresidents. Liabilities to nonresidents are mainly composed of credit lines from the external sector(69.4% of total liabilities) and deposits of nonresidents (30.6% of total liabilities).

 In September 2008 financial sector liabilities to the

government amounted euro 998.3 million (euro 850.2 million in September 2007),comprised mainly from government deposits at the CBK, while financial sector continues having no claims to the government.  In September 2008,financial sector claims to other sectors (mainly private corporations and house holds) amounted euro 1.2 billion and are mainly composed of loans extended by financial institutions. Meanwhile, liabilities to the real sector reached euro 1.6 billion (euro 1.3 billion in September 2007),composed manly from the real sector deposits in commercial banks.  Source: CBRK-Financial Sector Bulletin, February 2009.

Structure of the banking sector  During the second half of 2007 the banking sector of the

Republic of Kosovo was characterized with new entries. In third quarter of 2007,the license for operating in the Kosovo banking market was granted to Banka Kombëtare Tregtare(TNB)from Albania and Komercijalna Banka from Serbia.  At the end of 2007,Turk Ekonomi Bankasi(TEB) joined the Kosovo banking system and in January 2008 started operations.  Also NLB Prishtina wich took over and merged Kasabank (KSB) and New Bank of Kosovo (NB) started in January 2008.  As we mentioned before, in September 2008, Kosovo banking sector consisted of eight commercial Banks, of which six on foreign ownership and the remaining two in domestic ownership.  The dominance of banks with foreign ownership is shown through the share of foreign bank assets comprising

 The market structure of the Kosovo banking system

is highly concentrated.  In September 2008,three largest banks represented 86.3% of total assets an increase of 2.1pp compared to the previous year.  Three largest banks attain a similar share in loan and deposits market representing 88.0% and 88.5% of total respectively.  The new entries in the banking market positively affected the competition in this sector which may be noticed by the sharp increase on loan and deposit volume ,as well as by the decrease in the interest rate spread (difference between interest rates on loans and deposits )and new products for clients.

Financial intermediation of the banking sector  In September 2008 banking sector assets reached

euro 1.7 billion representing an annual growth of 30,9%.  In relation to GDP Banking sector assets accounted for 45.7% of GDP compared to 39.0% in the previous year the growth of the banking sector assets is mainly generated by the growth in loans extended by the banking sector.  In September 2008 the level of financial intermediation of Kosovo banking sector expressed as ratio of loans to GDP was 29.5% compared to 24,1 % in the previous year. In September2008, loans amounted to euro 1.1 billion(sep.2008) an annual increase of 37.0%.  The credit growth was an outcome of the expansion of the economic activity which is of high importance for the Kosovo economy especially in this period when the financial crisis is being reflected in credit contraction.

 The credit growth is supported by the increase in

banking sector deposits to a large extent reaching euro 1.4 billion in September 2008(36.7% of GDP) or 32.1% higher than in the same period last year.  The growth rate of deposits registered during this period represents the highest annual growth rate since 2003.  To some extent ,this reflects the increase of competition in Kosovo banking sector, which stimulated the increase of interest rates on deposits and encouraged banks to be more active in providing new products in the market. Source: CBRK ,Financial Sector Bulletin, February 2009.

Interest Rates* During the period January –September

2008 ,effective interest rates for deposits averaged at 4.13% compared to 3.11% compared in the same period JanuarySeptember 2007. Loans interest rates averaged at 13.80%(jan-sep.2008) compared to 14.68% (jan-sep.2007). *Weighted average interest rates of different products and maturities. Source :CBRK. Financial Sector Bulletin. February 2009.

Banking sector performance indicators % Dec.2005 Dec.2007 Dec.2008*  ROAA 2.5  ROAE 22.2  NIM 7.3  Inefficiency indicator

Dec.2006

1.5

1.9

2.6

20.1

22.4

26.2

6.7

6.4

7.1

5.5

5.1

5.4

5.1 *Annualized data Source: CBRK, Financial Sector Bulletin, February 2009

 In September 2008,Return on Average Assets (ROAA)

remained at around 2.5%,  Return on Average Equity (ROAE) marked an annual decrease of 4.0pp ,standing at 22.2% ,mainly attributed to the faster increase in the shareholders capital in the banking sector.

 The inefficiency indicator which shows the share of general and

administrative expenditures to average assets declined from 5.4%in December 2007 to 5.1% in September 2008 suggesting a slight improvement in the efficiency of the banking sector.

Kosovo consolidated budget (Cumulative with the calendar year in millions euro)

Tax Revenues

2007

2008

712.3

804.5

Border taxes

531.8

604.2

Domestic taxes

180.5

200.3

Non tax revenues of which: Interest Local government revenues Total Revenue 941.5

154. 8

94.3

9.5

16.4

29.3

42.8

896.4

Wages and salaries

208.5

227.1

Goods and services

145.2

158.5

Subsidies and transfers

153.0

209.8

Capital Outlays

155.3

348.5

Total Expenditures Balance (REV-EXP).

662.7 233.7

943.8 -2.3

Source: Ministry of Economy and Finance, Government of the Republic of Kosovo

Public Expenditure and Financial Accountability Main Indicators based on PEFA assesment report

INDICATOR

2008

Budget Credibility

29

1

Aggregate Expenditure Outturn compared to approved budget

(C)

2

Composition of expend. outturn compared to approved budget

(A)

3

Aggregate revenue outturn compared to approved budget

A

4

Stock and monitoring of expenditure payment arrears

B

PEFA Indicators Transparency and Comprehensiveness 5

Classification of the budget

A

6

Comprehensiveness of information in budget documentation

B

7

Extent of unreported government operations incl. donor funds

A

8

Transparency of Intergovernmental Fiscal Relations

B+

9

Oversight of aggregate fiscal risk

C+

10

Public access to key fiscal information

B Policy-based Budgeting

30

11

Orderliness and participation in the annual budget process

B+

12

Multi-year perspective in fiscal policy, planning, & budgeting

B

PEFA Indicators Predictability and Control in Budget execution 13

Transparency of taxpayer obligations and liabilities

B+

14

Effectiveness of taxpayer registration and tax assessment

D+

15

Effectiveness in collection of tax payments

B

16 17 18 19

Effectiveness of cash floë planning, mgt. & monitoring. Recording & management of cash balances, debt and guarantees Effectiveness of payroll controls Competition, value for money and controls in procurement

A (A) D

B

20

Effectiveness of internal controls.

B

21

Effectiveness of internal audit

C+

31

PEFA Indicators Accounting, Recording and Reporting 22

Timeliness and regularity of accounts reconciliation

B+

23

Availability of resource info received by service delivery units

D

24

Timeliness, quality and dissemination of in-year exec. reports.

A

25

Timeliness of audited financial statements submitted to the legislature.

A

External Scrutiny and Audit 26

The scope, nature and folloë up of external audit reports.

B

27

Legislative scrutiny of the annual budget laë

B+

28

32

Legislative scrutiny of external audit reports.

C+

Recession in developed market economies and its possible impact in Kosovo  The recent financial crisis in the international financial market

is having impact also in the real sector in economies more exposed to the crisis.  Due to the high level of economic integration it is expected

that the impact of the recession will be evident also in economies not directly affected by the financial crisis.  Kosovo economy as open economy may absorb some impacts

of the potential recession in the region and EU.  Nevertheless the IMF and Ministry if Economy and Finance

projections for 2008 suggest a real economic growth of 6.6% and 5.2% respectively. In addition there has been no revision to these projections ,while revised projections in some countries in the region suggest a lower economic growth than initially projected.  An initial impact of the financial crisis in the real sector was

through the decline in aggregate demand (mainly domestic consumption and exports).

 Regarding Kosovo economy there is no evidence that the crisis

has had an impact on the level of exports given that until September 2008 the recorded level of exports was higher than in the previous year.  Moreover ,even in case of a drop in exports the impacts for the

economy would not be large given that the level of exports is low anyway.  The recession in other countries may be transmitted in the

Kosovo economy through its impact on remittances ,which represents an important source of finance for the economy.  The level of remittances was not affected during the year

2008,with preliminary estimates suggesting an increase compared to the previous year.  However having into consideration that the recession in EU is

becoming deeper, reflected is considerable job cuts it may be expected that this will be reflected in the level of remittances in 2009.

 The possible decline in remittances would negatively affect

consumption and investments .  In this context continuous increase in lending by banking

sector aligned with a proper risk management is a very important factor in supporting economic activity.  A very important instrument for stimulating the consumption

and investments in Kosovo is prudent fiscal expansion. For 2009 ,government increased the planed budget to euro 1.4 billion while from January 2009 the cut in personal income and profit tax rates are implementing. This will stimulate consumption-though some off setting effect will have the increase in VAT-as well as investments including foreign direct investments (FDI) as a key component for the economic activity.

 The FDI level is directly related to economic developments n

the external sector,i.e., its level in Kosovo might drop as a result of the recession in countries affected by the financial crisis.  Level of FDI in Kosovo highly depends on structural reforms of

the economy such as the privatization process which so far has attracted considerable amount of FDI.  Privatization of Public Enterprises ,may increase substantially

FDI in Kosovo as well as tax cuts as attracting element for investments .

Measures  Budget reserve increase -200.mill euro for 2009.  Fiscal policies reform (cut in personal income tax ,profit tax

rates ect,).  Strengthening transparency and accountability in using the

public revenues.  Enhancing sound regulations,  Promoting integrity in financial market.  Strengthening the regional cooperation and development of

trade market.  Through privatization, increasing the investments especially

FDI and than consumption.  The credit lines for sound economy.

Challenges Economic development Unemployment Investment growth Europiane integration.

THANK YOU FOR YOUR ATTENTION.