Economic, political, and social uncertainties pose challenges to fiscal sustainability

• Pages: 92-94

Page 92

Kosovo, a province of Serbia in the Federal Republic of Yugoslavia, is rebuilding from the conflict of March-June 1999 under the provisional authority of the United Nations (UN) Mission in Kosovo (UNMIK). In a recent IMF publication, Kosovo: Macroeconomic Issues and Fiscal Sustainability, Robert Corker (of the IMF's European I Department), Dawn Rehm (Fiscal Affairs Department), and Kristina Kostial (formerly in the European I Department and now in the African Department) review aspects of this rebuilding. The authors argue that establishing a sound tax base, as well as properly controlled and targeted public spending, is crucial to the sustainability of economic recovery.

Economic and political developments

The conflict set back an economy already in serious decline. Kosovo had not yet started the transition to a market economy; per capita GDP was low even for southeastern Europe; banks were essentially insolvent; and infrastructure was neglected. During hostilities, housing, utilities, and industry suffered extensive damage, and population flight disrupted commerce and created a severe shortage of experienced workers.

Postconflict, the provisional authority is empowered by a UN Security Council resolution to pass regulations that override Yugoslav law; there is no recognized indigenous government, and Kosovo's political status is in limbo.

Recovery, say the authors, is well under way, spurred by a donor-financed reconstruction boom.

But just how much has the economy rallied? Preliminary IMF estimates place the per capita GDP level for 2000 in the $650-$850 range-below the level in other regional postconflict countries (in Albania, per capita GDP is about $1,000; in Bosnia and Herzegovina, it is about $1,100). Income levels exceed GDP, but only because of sizable humanitarian aid and private remittances.

The economic recovery program has several important dimensions other than merely repairing the infrastructure. Foremost, it is essential that basic institutions and regulations be put in place to foster private sector development. The adoption of the deutsche mark and regulations to reestablish a payments system and properly regulated banks were important early steps in this regard. But the public sector also has a vital role to play as provider of essential services, such as health care, education, policing, and a welfare net.

Accordingly, the authors stress, a priority for Kosovo is to develop tax and expenditure policies to ensure that public services are comprehensive, efficiently provided, and financed mainly from locally generated resources. However, as long as Kosovo's political status remains unresolved...