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European Commission / World Bank

Chairmen's Conclusions

Representatives of 34 countries and 13 international organizations met in Brussels on November 5, 2002 to take stock of Kosovo's accomplishments during the past three years of post-conflict reconstruction and economic recovery, and discuss its medium-term economic prospects and priorities.

This donor coordination meeting was co-chaired by Messrs. Reinhard Priebe, Director, Western Balkans, European Commission and Christiaan Poortman, Country Director and Regional Coordinator for Southeast Europe, the World Bank. The delegation from Kosovo included Messrs. Michael Steiner, Special Representative of the Secretary General of the United Nations (SRSG), Bajram Rexhepi, Prime Minister of the Provisional Institutions of Self-Government, Andy Bearpark, Deputy SRSG, Ali Sadriu, Minister of Finance and Economy, and Milorad Todorovic, Interministerial Coordinator for Returns. The delegation also included other officials of the United Nations Interim Administration in Kosovo (UNMIK) and the Government.

Participants heard opening statements from Messrs. Steiner and Rexhepi. Mr. Steiner provided a political overview, and summarized the key priorities for the period ahead. These include: the acceleration of the sustainable return of internally displaced persons (IDPs) and refugees, the further strengthening of law and order, and the creation of a market-based economy. Mr. Steiner also recalled the benchmarks to be met by the Kosovar institutions before launching any discussions on final status. He emphasized the importance of continued partnership between the Kosovo authorities and the donor community. Mr. Rexhepi assessed the progress achieved in the past three years in economic development, and in the creation of local institutions consistent with UN Security Council Resolution 1244. He stressed the Government's commitment to implement practical solutions, enabling all citizens to have equal access to public services and supporting the return of IDPs and refugees. Mr. Rexhepi thanked donors for their continued generous support to Kosovo, and asked them to continue to stay engaged.

Retrospective Review of the Reconstruction and Recovery Program

Presentation by the representative of UNMIK described the progress achieved in economic management, in physical reconstruction, and in the creation of an institutional environment for economic development. Double-digit economic growth rates, increasing employment, slowing inflation, and a robust increase in domestic revenues have characterized the past three years. Reconstruction activities, the main source of economic growth, have been effective in mitigating the impact of the conflict. Over 40,000 houses have been rehabilitated or rebuilt with donor assistance. Key infrastructure has been repaired, and public utilities and services have been significantly enhanced. The conditions for education and health service delivery have improved. Interventions in agriculture and private sector development have resulted in the creation of many new jobs. Donors have lived up to their pledges: since 1999, donor commitments in the order of € 2.3 billion have been made, of which about € 2 billion is expected to be disbursed by end-year, well in line with the requirements of the medium-term Reconstruction and Recovery Program of November 1999.

Participants commended the progress made in Kosovo since the end of the conflict, and in particular, noted the authorities' efforts to reduce Kosovo's aid dependence by steadily increasing local revenues. Careful fiscal policy and management, a new framework for private sector development, and emphasis on institution building have been instrumental in moving towards sustainability of the Kosovo economy.

Participants agreed that Kosovo should cooperate closely with its neighbors and be harmoniously integrated in the region of which it is part. They called upon Kosovo's neighbors and relevant regional organizations to facilitate this neighborly cooperation and regional integration. They welcomed the intention of the European Commission to support Kosovo in the process of introducing EU compatible reforms by setting up a technical working group, which will help Kosovo be better linked in the Stabilisation and Association process. This mechanism will enable UNMIK, the Provisional Institutions of Self-Government and the European Commission to ensure that political, economic and sectoral reforms in Kosovo are on the right track as well as to focus assistance as needed.

Medium-Term Economic Prospects and Priorities

Notwithstanding the successes, participants also noted that Kosovo remains one of the poorest economies in the region. While the reconstruction phase is largely over, Kosovo's development needs are still significant. Poverty is widespread, the unemployment rate is extremely high and the dilapidated infrastructure continues to constrain economic growth. Thus a concerted effort by the authorities and continued donor commitment, and eventually access to international finance, will be necessary to maintain Kosovo's economy on a sustainable development path and alleviate poverty.

Participants heard presentations by representatives of the Kosovo authorities on the Government's program, the medium-term macroeconomic framework and public investment priorities, and the 2003 budget. In addition, statements were made by representatives of the International Monetary Fund (IMF) and the World Bank on economic prospects, policy priorities and medium-term public spending.

Participants endorsed the broad economic priorities outlined in the Government's program that include:

• fostering economic development and growth, and increasing employment, through creating the conditions for a market-based economy;

• improving the living standard of vulnerable groups, and enhancing the quality of and access to education and health;

• ensuring an efficient and transparent public administration; and

• providing equal opportunities for all citizens, and supporting the return of IDPs and refugees.

Participants urged the authorities to further improve the security environment, to strictly apply the rule of law and to ensure that all citizens have equal opportunities for jobs and access to public and social services. These are essential prerequisites for reducing tensions in Kosovo and for encouraging the return of refugees and displaced persons. Participants also noted the need to provide support to the authorities in these endeavors.

Participants welcomed the progress made by the authorities in defining a medium-term (2003-05) macroeconomic framework, in collaboration with the IMF. Participants stressed the need for decisive implementation of economic reforms to create the basis for increased private sector investment. Given the decline of donor grant resources, following the sizeable assistance provided in the post-conflict period, this is one of the principle preconditions for strong and sustainable economic growth. While acknowledging the current constraints, participants also recommended that Kosovo's access to financing by international financial institutions be explored.

Participants commended the authorities for embarking on a comprehensive exercise to establish a medium-term fiscal expenditure framework, in collaboration with the World Bank, and for preparing the 2003 budget in this context, which will enhance the integration of recurrent and capital expenditures. They underscored that following the impressive increases in domestic revenues during the past three years, the potential for further rapid revenue growth was more limited. It becomes, therefore, indispensable to contain the growth of public expenditures, especially recurrent expenditures.

Participants also pointed out the need for continued high, albeit declining, levels of public investment to meet remaining post-conflict and transition needs, make up for backlog of maintenance, and underpin a 5 percent annual economic growth rate. Public investment needs to remain higher than in other economies in the region, equivalent to around 10-15 percent of GDP. Participants also discussed the medium-term public investment priorities presented by the Kosovo authorities. These included: investments in the social sectors (education and health), in critical infrastructure (transport and energy), and in areas related to the rule of law (judiciary and police). As a cross-cutting theme, investments that support the sustainable return of refugees and displaced persons also enjoy very high priority. The authorities encouraged donors to direct their assistance to these priority areas. Participants were reassured by the authorities that following further vetting of specific investment proposals, a full-fledged public investment program would be finalized, together with the 2003 budget, by December this year.

While public investments are expected to be increasingly financed from local revenues, donor funding must continue to play an important role. In addition to the € 2.3 billion committed so far, donor commitments of about € 450 million would be required between 2003-05 to help finance Kosovo's public investment program and another € 50 million for general budget support. Even though the meeting did not aim at collecting donor pledges, donor plans of future financial assistance indicate that the external financing requirements of € 200 million for 2003 are likely to be met.