Looming Recession in Western Balkans

The Western Balkans going to face a looming recession in as a result of the coronavirus pandemic, according to the World Bank’s latest Regular Economic Report.

WB forecasts a negative regional growth between -3% and -5.6%. With the high uncertainty brought about by the pandemic, the report uses a baseline scenario, that assumes preventative restrictions will be lifted by the end of June and the economy will begin to recover in the second half of the year, as well as a downside scenario, that assumes restrictions will be lifted by late August, with economic recovery beginning only in the final quarter of 2020.

The report predicts a drop in domestic and foreign demand, while limited liquidity and an atmosphere of uncertainty leads to a drop in foreign investments. Social distancing measures and travel restrictions will have a large impact in tourism, which accounts for 50% of employment in the region. The aftershocks of this negative impact on tourism are likely to be felt in the long-term, with changes in consumer behavior being liable to change following the pandemic. Albania, Kosovo, and Montenegro will be especially vulnerable in this aspect, due to their economies’ significant reliance on tourism. 

While Western Balkans governments have rolled out fiscal and social relief measures, a large part of the population in the region relies on self-employment, part-time jobs, and informal employment. These groups are difficult to support through conventional measures. Thus, extended financial support, designed to regional demographic specifics, may be necessary to aid these vulnerable groups. However, policymakers must walk a thin line between mitigating current impact and preparing for economic recovery.

Albania emerges as most vulnerable to economic recession in the heat-map drafted by the report. This comes mainly as a result of high rates of self-employment (34.7% of total employment) and informal employment (61% of total employment), as well as the large part the tourism industry takes up in its economy (48.2% of exports). The Albanian government has yet to provide a concrete financial relief plan for informal workers, but both its first and second financial relief packages have failed to comprehensively address the needs of tourism workers.

Positive effect to the economies of the WB countries could provide the EU Investment Plan for Western Balkan on a total amount of 3 billion Euros, which is expected to start to the end of 2020. All of WB countries, in exception of Serbia, congratulated the EU measures.

Serbia has to take loans because of the coronavirus crisis but the state has decided not to make use of any of the aid offered by the European Commission to the countries of the Western Balkans and has not applied for any of the 750 million Euros in loans under favorable conditions.

When the European Commission proposed a new three billion Euro package of macro-financial aid measures for the countries of the Western Balkans and other European Union partners late in April, Serbia crossed itself off the list.

Officials in Brussels said at the time that one of the criteria for countries to benefit from that package was to ask the IMF for emergency liquidity aid but Belgrade saw no need for that. Finance Minister Sinisa Mali also said that there is money enough in the budget to meet all obligations.

“At this moment, Serbia is completely stable, secure and we have no problem with our obligations. According to our projection that will remain the situation to the end of the year. We are following events in the world and we’ll see. Our projections and those of the national bank are always more conservative and we are completely prepared for an even worse scenario”, the minister said.

The national Fiscal Council said that the country should take loans from international institutions. “If there are loans from international institutions such as the European Union, that should be taken. We did not have that opportunity to date, that it is not easy to apply to the European Union if it wants you to prove that you are having balance of payments problems. Becoming indebted on the capital markets will certainly be a challenge, maybe that will have to be at some higher rates than in the past but unfortunately that is inevitable for Serbia and other countries”.

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