The nations of the Western Balkans are dealing with a sequence of financial shocks all on the identical time. The area’s financial system was solely simply starting to bounce again from the COVID-19-induced recession, however now additionally must grapple with the fallout of the struggle in Ukraine, a resurgence in inflation, and a urgent power transition. Steering by these crises includes dangers and would require cautious selections.
All six of the Western Balkan economies—Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia—noticed a powerful financial restoration with 7.4 p.c development in 2021 because the area rebounded from the recession of 2020. In actual fact, the power of the restoration exceeded forecasts on account of a mixture of pent-up client demand, relaxed journey restrictions regardless of excessive an infection charges and low vaccination, and a rebound in funding and a surge in exports—all aided by continued fiscal help. A return to financial development noticed job creation, in flip serving to to scale back poverty throughout the area.
Tax revenues additionally bounced again in 2021 with the expansion restoration, decreasing price range deficits and public debt. Nevertheless, one 12 months of development is solely not sufficient time for any nation to rebuild fiscal and debt buffers for the following shock if it’s a massive one. Public debt fell to 57 p.c of GDP in 2021, about 4 proportion factors decrease than the 2020 peak, however nonetheless larger in comparison with the pre-COVID-19 50 p.c of 2019. Consequently, governments throughout the Western Balkans entered 2022 with restricted room for maneuver.
Even earlier than the outbreak of struggle between Russia and Ukraine, financial development within the Western Balkans was already slowing towards pre-crisis charges, and equally inflation was already rising as provide constraints and pent-up demand the world over pushed commodity costs larger. The struggle in Ukraine is exacerbating these two tendencies and pushing inflation sharply larger, as properly. It’s also denting enterprise and client confidence, impacting commerce and tourism, and inflicting extreme disruptions in meals and power provide chains. That is particularly the case in Serbia and Montenegro, that are the Western Balkan economies most uncovered to commerce with Russia and Ukraine.
Testing occasions forward
The Western Balkans now face an particularly unsure outlook. Along with the outbreak of struggle, COVID-19 has not gone away, and the power disruption attributable to the struggle in Ukraine has uncovered vulnerabilities related to the area’s nonetheless heavy reliance on fossil fuels. Whereas we have been anticipating a continued sturdy rebound in 2022 as most epidemiological measures have been lifted, and as pent-up demand drove consumption and funding development, the struggle has disrupted this trajectory. In our present baseline situation, we anticipate actual output to develop at 3.1 p.c in 2022—a downward revision by nearly 1 proportion level—and beneath the historic development charge. Furthermore, additional downgrades of development and better inflation forecasts are seemingly because the battle stretches into summer season 2022, sanctions intensify, and the EU’s development slows additional (Determine 1).
Not solely is the area dealing with a development slowdown, however rising meals and power costs imply that the poorest households that spend greater than 60 p.c of their budgets on meals and power are experiencing an particularly excessive charge of inflation (Determine 2). They usually lack the coping mechanisms to soak up the next price of residing.
Coverage trade-offs amid uncertainty
The economies of the Western Balkans weathered the COVID-19 shock comparatively properly as they rebounded sooner and stronger than anticipated, utilizing fiscal coverage to help weak households and companies. Nevertheless, assets have been depleted and a key problem now’s to reply to urgent wants right this moment, whereas additionally maintaining a tally of the reforms wanted to help equitable, greener, and sustainable development tomorrow. Governments must be frugal—rigorously utilizing their restricted fiscal assets to guard the poorest households that spend a bigger share of their revenue on meals and power. Coverage measures to reply to present, urgent wants ought to be timebound in order that governments can swap again to rebuilding buffers as pressures dissipate. Moreover, in an atmosphere of scarce assets, now’s the time for governments to step up efforts to enhance tax compliance, strengthen social help programs to guard the power poor, and reallocate assets towards power effectivity investments, in addition to allow personal investments into renewable power.
Lastly, governments shouldn’t lose sight of reforms uncared for since 2020 which are important for enhancing long-term potential development. Structural reforms to enhance human capital, help labor market participation (particularly for ladies and youth), and strengthen competitors would assist increase potential development that had been slowing even earlier than the present disaster. Moreover, attracting greener and better value-added international funding would require deeper efforts to streamline enterprise rules, and increase connectivity and digitalization.
