faces up to the challenges of the future

Co Administration of Kosovo - Resurrecting the Economy - Building the Future -
Order & Legislation in the Banking and Insurance
- The roads to Europe -
The Backbone of the new economy - Kosovo's gold - Telecomunications - Privatization


Aside from monitoring and assisting Kosovar leaders in their new democratic representative roles, UNMIK´s second most important administration duty is the restructuring and reactivation of the economy through the creation of a legislative framework based on free market fundamentals. During the last two years and in order to manage successful co-administration of Kosovo, UNMIK has been busy assisting in the establishing of many institutions, agencies and bureaus together with local Kosovar leaders, representatives and administrators but only on a consultation level. One would think that it would be Albanian leaders only needing to consult UNMIK officials, but it is rather the opposite. These conditions established that the competencies on the most decisive issues UNMIK has secured for itself, as it is states in Resolution 1244. This is one of the main complaints expressed by the managers of most Socially Owned Enterprises. They argue that UNMIK'S policies, such as the reestablishment of workers councils, has kept their hands tied for the last two years, creating all sorts of barriers for vital decision making and management of the enterprises. This situation has prolonged itself and does nothing but decrease the value of the few valuable assets these enterprises might retain.

For the last two years Kosovo´s economy has been under the direct supervision and control of the Interim administrators of the United Nations with the assistance of the EU. UNMIK officials feel developments are on the right track and quickly disregard these claims. Mr. Andy Bearpark DSRSG, head of pillar IV of the EU and the top authority in Kosovo´s economic Recovery Reconstruction and Development is confident that, " the EU will ensure that Kosovo has the right legal framework for all investments and all investment necessities. The challenge is, accelerating that process and putting in place a complete legal framework". Mr. Bearpark also feels that, "the economy of Kosovo is booming at the moment". But he admits that: "The fact of the matter is that the current economic activity is essentially based on the reconstruction frenzy. What you got is infrastructure work going on and in addition to that you have got quite a lot of trading activity. What you haven't got yet is sustainable economic development, and you don't have sustainable job creation ". Everyone points out and agrees that the main engine for growth in Kosovo has to be the private sector, but there is very little being done to stimulate its involvement or to bring Kosovo´s public and social enterprises closer to the hands of private investors. Legislation is almost non-existent to regulate most entrepreneurship activities and in most cases it is poorly enforced. In regards to the attractions of foreign private investors it is also non existent.

Furthermore, participation and licensing of new banks has been limited to six institutions, which added to the infancy of the financial sector and the lack of diverse and alternative methods of financing. This has limited growth and restricted it to trade, retail and construction. There are only 4-year repayment loans available and these are only given without a grace period, in addition to having exorbitant interest rates. High interest rates discourage production activities of the medium and small enterprises. Loan terms for agriculture are not treated any differently, further aggravating the lack of better credit conditions for such a vital sector in Kosovo´s backward economy . Current annual interest rates for average loans are approximately 18% of the principal.

There are about 861 enterprises that make up the backbone of Kosovo´s economy. According to a study by ICG (International Crisis Group) of these about 243 enterprises are in the industrial sector, agriculture accounts for 193, trading 108, construction 84, financial services 54, communication and transportation 46, hotel and tourism 35, artisan/craft 27, forestry 26 and hydro economy 9. Some 330 enterprises have been assessed and labeled as viable by UNMIK experts. "The companies will be divided into three groups: the first group-the companies that will become private, that are doing good, healthy and functioning. In the second group we will include the companies that need to be put on their legs first and privatized after. In the third group we will include the companies that do not have a chance for transformation. They will be declared insolvent, no mater how big they are, we are not going to save them because of some nostalgic feelings", says Mr. Ali Jakupi, Minister of Trade and Industry.

Numerous challenges ahead remain. The war in Kosovo devastated not only its social fiber and disabled its economic structure, but it also starved the gasping remaining sources of sustainable economic growth and employment that the SOE represented. The industrial infrastructure establish after the second World War was reduced to ruins by the 79 days of NATO bombings, not withstanding that it already had suffered ten years of pillage, mismanagement and been the victim of political squabbles from both Serbians and Albanians alternatively. Milosevic's political maneuvering also sought to control the most politically vital and valuable enterprises by removing any traces of Albanian management and replacing them with individuals close to his regime, all just to fit his political objectives with complete disregard to the damage that these policies would inflict on the enterprises. As a result, during the 1990´s the appointees of Belgrade poorly managed most enterprises, and at most saw to it that they be stripped from any valuable capital equipment and left them in ruins after their displacement by the NATO campaign. For the last ten years Kosovo´s dwindling economy has been maintained mainly by the prevailing black market, reminances from the large Kosovar Diaspora across the world, intensive regional trade, and some very basic subsistence level agricultural activities. The gray economy developed during the repressive years 1989 to 1998.

Of the many issues that currently preoccupy the economy of Kosovo, perhaps the most challenging and urgent is the removal of the deeply rooted social structure of its main industries; as well as the interest and implementation of a wider diversification of the economy that would in turn have a bigger and more dynamically involved private sector.
As Mr. Michael Steiner explains the biggest obstacle is perhaps the fact that the "current economic framework is based on the old socialist system of Tito´s time, where you have socially owned companies and state owned companies but you don't have private property on land. The economic framework needs not only to be modernized but also recreated". There are all sorts of opinions in what direction should the economy be stirred towards. The former social structure of most enterprises poses the same problem of ownership of the real state of the enterprises. Solving the ownership issue, or avoiding it rather, is indeed the most challenging task in Mr. Bearpark´s agenda. "The current managers, the former managers, the creditors, the government of Kosova as well as the government of Serbia and a number of foreign investors all have totally different objectives of what they want to see, so can I please them all at the same time? That is unlikely," says Mr. Bearpark.

In addition Kosovar businesses, manufacturers and exporters have to deal with many other diverse disadvantages. The current President of Kosovo, Mr. Ibrahim Rugova has been one of the most prominent defenders of Kosovo´s right for self-determination. The issue of status has to be the one factor that most seriously hinders economic activity. As Mr. Rugova points out: "Travel Documents issued by UNMIK as the substitute to passports are not fully recognized yet by all countries. Once this problem is solved it will help us build closer ties with the international community. The solution to this is closely connected with the question of the nation status of Kosovo that we expect to solve very soon". Lack of status is also the reason why car registration and plates with the lettering KS are not accepted outside Kosovo, except in Albania, Montenegro and Croatia. Therefore car travel with private vehicles or even public transportation services cannot be offered for travel outside Kosovo. The region is neither recognized nor accepted by most of its neighbors. All these factors are hindering on the private investment and entrepreneurship of Kosovo. Businessmen are most of the time forced to travel outside of Kosovo to obtain contacts, but visas are required almost everywhere which ads cost and increases Kosovo´s isolation.

Fiscal Policy has been a challenging task for the new Ministry of Finance and Economy, but still there are many sources of income being created for the budget needs of the new government and institutions. "We applied customs-duty taxes in border points, we also applied presumptive tax, and we are now working on the introduction of three new taxes we are expecting to apply them in approximately two months period. The profit tax will replace the presumptive tax. We also work on import taxes since at the moment goods that come from Serbia pay no customs at all, those that come from Macedonia pay only 1% and goods entering from other countries pay 10% customs. Our aim is to have only one import tax scheme for all. At the moment we are facing the falsification of documents stating false origins of goods. In addition to applying the profit tax, we are going to apply the income tax from the beginning of June, and we will also introduce the property tax, a tax that will be dedicated to the municipality budgets." Says Mr. Ali Sadriu new Minister of Finance and Economy. The reconstruction and revitalization of the heavily damaged and very antiquated industrial sector will surely require a financial effort on behalf of all Kosovar businesses and individuals. In terms of stimulation of industry and exports, fiscal policy cannot be said to have been all encouraging in most respects, especially where the manufacturing sector is concerned. The lack of stimulation is especially noticed in the segments Assumed tax 3% horizontal tax on every amount of income for every business. There is a"O" tariff Custom tax for machinery, equipment, raw material and repro material, plus the absence of tariffs for some imports added to the lack of differentiating custom tax for some imports. This in turn leaves many Kosovar producers with major disadvantages. Revenues collected from the paid customs taxes in imports of agricultural products will be designated for the stimulation and subvention in agriculture. Also the limit for value added tax in 100 thousand Euros is high. Critics within the private industrial sector describe this fiscal policy as discouraging production and exports.

Kosovo has a huge trade deficit with a disproportionate amount of imports in relation to its almost insignificant exports. The actual deficit is estimated to be around 80-90%. Currently Kosovo is filled with massive imported amounts of consumer items, only 10-20% local demand is satisfied by local supply. Kosovo´s economy has been maintained by intense small scale trade activities, as well as incomes and reminances from the large number of Kosovo Albanians living and working abroad who send generous amounts of money to their families back home.

The lack of a consistent and permanent regulatory legal framework disables the normal economic functioning and attraction of investors from the Diasporas as well as other countries. There are also no industrial zones being created, where production activities of (NVM) could rent lots equipped with the proper infrastructure, as well as offering lower leasing prices than urban centers. Electricity supply is unreliable and its price tends to fluctuate as much as the voltage of its current. Regardless of the potential for foreign direct investment that Kosovo may have, the infancy of the legislative and institutional structure that UNMIK has been able to provide might not be convincing enough for investors and most will turn their backs on the region with the conviction that, in Kosovo there is no environment or security for investments until its political status is defined. How long will this situation prolong is very difficult to foretell, but it will heavily depend in the fructiferous relations between the new parliament and governing structures of UNMIK, and the smooth transition of powers from the later to the former.

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© World INvestment NEws, 2002.
This is the electronic edition of the special country report on Kosovo published in Far Eastern Economic REVIEW. September, 2002 Issue. Developed by AgenciaE.Tv