Since the last donor conference of mid-July, UNMIK has taken great strides in shaping the economic policy framework and starting to build key institutions – these have been described well in the written statement circulated by Joly Dixon for UNMIK and the Kosovar representatives have alluded to some of these commendable developments. The World Bank has prepared an interim report on these matters intended to provide policy advice to UNMIK and information to donors, entitled Kosovo: Building Peace Through Sustained Growth. This report will be deepened in the coming months with additional research and analysis and intensive consultation with Kosovar experts, and a fuller version will be presented to donors in the spring.

At this stage, I would like to highlight some of the key policy and implementation challenges that lie ahead.

The task of transition in Kosovo is made difficult by the constitutional peculiarities and uncertainties. This factor will hamper investment, domestic and foreign. No elected representative institutions exist today; yet, successful transition requires local consent and whole-hearted participation. UNMIK has taken measures to involve local experts in a consultative capacity and in helping to implement decisions and run new institutions. But there is a long way to go before local opinion moves away from a simple wish to re-create economic life as it existed before the abrogation of Kosovo’s autonomy towards modern economic and social policies, with high governance standards. There is particular need to work at the municipal level, where much of social service delivery will take place.

The building up of fiscal systems and the fiscal base is encouraging: my IMF colleague will comment in some detail. Budget systems that have been put in place will ensure the integrity and accountability of expenditures within the unified central fiscal agency. An UNMIK budget off-shore bank account has been established and is ready to receive donor funds. But the final link of the expenditure chain – the actual delivery of cash to the final recipient (teachers, nurses) --is still being developed and should be in place shortly. The financing requirement for the budget is estimated at DM86 million or US$48 million for 1999. The estimates for 2000 presented in our report of about DM142 million or US$ 80 million exclude defense related spending; this factor and some more recent developments are now being worked on by UNMIK and the Bank, but the underlying fiscal strategy and assumptions stand. We think it urgent that donors provide budget support funds for this year as there is still an unfunded gap and that they make commitments in adequate amounts for 2000 today and make the necessary arrangements for early disbursements with UNMIK.

The fiscal base will be bolstered by covering locally produced goods within the sales and excise tax regimes as capacity is built up in 2000. It is vital to make progress on this and it is also vital to plug the gaps in customs and tax administration. This implies tax points established at crossings with Montenegro in particular, where there are reports of large evasion. It will be desirable to have a uniform tariff covering all goods regardless of origin or a uniform equivalent tax.

After a decade of exclusion from the formal education and health systems, the restart of the public system, catching up with skills, and making up for lost investment and maintenance are key challenges. The school system was substantially restarted in September. The collapse of the primary health care system in the post-conflict period is a major concern; addressing this will mean tilting wages towards this sub-sector and shifting spending to district, especially rural, health infrastructure. Social assistance is relying greatly today on humanitarian aid in kind; over time the budget will have to cover this in a structured manner.

Finally, a comment on two critical aspects of the architecture required for a market economy. The banking sector is weak to the point of non-existence. UNMIK has moved with commendable speed with new regulations and a joint banking supervision and internal payments operation institution that will have to be made to work smoothly. It is not likely, though, that depositor confidence will be quick to return. Intermediation will require donor provided credit lines for small and medium private enterprises for re-tooling, re-stocking and recovery.

The revival of private enterprise will require work on laws protecting property, companies, competition and so on. This task is delicate and is ongoing. Unlocking the potential for strategic investment in the economy in parts of the state enterprises or in small and medium enterprises generally will require a clarification and settlement of property ownership questions and status of previous concessions or rights awarded. We hope UNMIK will undertake this task on a case by case basis as a programme of selective sales or concessions in enterprises cannot be considered nor a pilot privatisation programme devised until this task is accomplished. Clearly, this is an issue that has to be addressed with care but also with speed, given the pressing need to stimulate activity and employment.