Macro Economic Framework for Economic Growth Renzo Daviddi European Commission Liaison Office to Kosovo 8 June 2010 Outline Introduction Macro economic framework The role of the European Commission Additional observations Conclusion Introduction Sources of financing for economic growth; is there enough money in Kosovo? Access to finance – one of the main barriers for Kosovo’s private sector Precondition: stable macro economic environment – lower risk for banks and investors Economic challenges Fiscal sustainability: Highway spending leads to deficits Without counterbalancing measures: - 3.4% of GDP in 2010 - 5.5% in 2011 Therefore: Fiscal discipline Extra measures on revenue side IMF program Economic challenges External Inbalance: Current account balance (incl. officials tranfers): – 18.5% GDP No exchange rate policy, therefore: Structural reform necessary to increase competitiveness Economic challenges Structural reform: Energy sector – power cuts make firms less competitive and deters investment - increase collection & billing, privatisation KEK likely to help Economic challenges Structural reform: Increase product quality - reforms necessary on internal market issues: standardisation, accreditation, industrial property rights, etc. Guarantee free competition - leads to lower prices and higher competitiveness - relevant for energy and telecom sectors - Competition Commission & new state aid law Economic Challenges Structural Reform: Taxation: - Tax reform for fiscal stabilisation - Combat large informal sector and increase collection by: * introduction fiscal numbers and cashiers * new IT system facilitating electronic filing * better cooperation tax administration with police and courts The European Commission’s role Assistance: Projects, amongst others in: - public finance management, leading to a less ad hoc budget process - energy sector – support to MEM, ERO - privatisation of socially owned enterprises - industrial property rights - tax administration: technical assistance and new IT system The European Commission’s role Assistance: Macro Financial Assistance: - 50 million euro - Conditions: * Satisfactory implementation IMF program * Improvement in public finance management The European Commission’s role Fiscal Surveillance Mechanism (FSM): Bi-annual consultations with Government Prepares for integration into existing EU economic and fiscal monitoring structure (stability pact) If progress, Kosovo to submit annual medium term economic and fiscal program, as other (potential) candidate member states The European Commission’s role Kosovo – EU Trade Agreement: EC’s proposal adopted by European Council December 2009 Free access for Kosovo for all products to a market of 500 million consumers Reforms necessary in internal market issues (product quality, IPR, public procurement, competition, etc). 6-7 July DG TRADE fact finding mission EC to support Kosovo in reforms Additional Observations Question Workshop: Is there enough money in Kosovo? Answer: yes, good deposit base of banks But; cost of financing high due to high risk perceived by banks Ways to bring down risk: * better enforcement of contracts (rule of law issue) * better internal/external financial documentation of businesses – audited financial statements * real estate property to be documented better (building permits) * in time; introduction of country rating Conclusion Stable macro-economic environment is necessary for attracting financing and stimulating economic growth In itself however not sufficient; integrated approach, incl. structural reform is needed EC is here to support this process Thanks for your attention!