Republic of Kosovo: Selected Issues

January2023 IMFCountryReportNo.23/55 REPUBLICOFKOSOVO SELECTEDISSUES ThisSelectedIssuespaperonKosovowaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonDecember20,2022. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.orgPrice:$18.00perprintedcopy InternationalMonetaryFundWashington,D.C. ©2023InternationalMonetaryFund December20,2022 REPUBLICOFKOSOVO SELECTEDISSUES PreparedByGabrielDiBella,AmandaEdwards,SiGuo,SabihaMohona,EzgiOzturk,andSelimThaci. ApprovedBy MarkAHorton CONTENTS KOSOVO'SELECTRICITYSECTOR:CHALLENGESANDOPPORTUNITIES3 A.Context:HigherEnergyPricesShockKosovo’sCurrentAccount3 B.Kosovo’sElectricitySupplyChainandLoad:Coal-BasedSupplyandHighlySeasonalDemand4 C.TheESC’sFinancialFlows:ChokePoints,LoadSheddingandFiscalCosts5 D.TheShort-TermOutlook:StressLikelytoContinue6 E.MediumTermChallenges:GreeningtheElectricityGenerationMatrix7 F.PolicyOptions:StylizedSuggestions8 References10 KOSOVO:TAXREVENUEGROWTHANDFORMALIZATION11 A.Introduction11 B.RecentDevelopmentsinTaxRevenues12 C.DisentanglingtheSourcesofTaxRevenueIncrease:TheRoleofFormalization12 D.ConclusionsandStylizedPolicyImplications16 TABLES 1a.Value-AddedTaxes:RevenueChangeandContributingFactors131b.PersonalIncomeTaxes:RevenueChangeandContributingFactors141c.CorporateIncomeTaxes:RevenueChangeandContributingFactors15 2.TotalTaxRevenueChangeandContributingFactors15 SURVIVINGLOWINTERESTRATES:CENTRALBANKSINKOSOVOANDOTHERWESTERNBALKANCOUNTRIES17 A.TheCentralBanks’FinancialSituation:AnOverview18 REPUBLICOFKOSOVO B.HowDidCentralBanksAbsorbtheShockofLowerInterestIncome?19 C.RisingInterestRatesin202220 D.PolicyImplications21References23 2INTERNATIONALMONETARYFUND KOSOVO'SELECTRICITYSECTOR:CHALLENGESANDOPPORTUNITIES1 A.Context:HigherEnergyPricesShockKosovo’sCurrentAccount EuropeanUnion:NaturalGasStorage (Millioncubicmeters/day) 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 2021 2022 Minimum Maximum Average 16111621263136414651 Weeks Sources:BruegelandIMFstaffcalculations. EuropeanUnion:RussianNaturalGasImports (ByRoute,millioncubicmeters/week) 4000 3500 3000 2500 2000 1500 1000 500 0 NordStreamYamal UkraineGasTransitTurkstream Jan-21May-21Sep-21Jan-22May-22Sep-22 Sources:BruegelandIMFstaffcalculations. 1.Energyprices,includingofelectricity,haveincreasedsharplyacrossEurope,andbecomemorevolatilesincethestartofthewarinUkraine.Russia’senergyexportstoEuropehavedecreasedquitesignificantly;fornaturalgas,Russia’sexportsthroughOctober2022were85percentbelowtheirlevelin2021.Sharplyhighernaturalgas-basedelectricitygenerationcosts(whichfrequentlyconstitutethemarginalsupplytechnology)ledtorecordhighEuropeanelectricitypriceslastAugustastheregionscrambledtofillnaturalgasstoragefacilitiesaheadofthewinter.Substitutioninelectricitygenerationalsodrovecoalpriceshigheracrossallenergycontentvarieties.Above-averagetemperaturesinthefall,importsofgasfromnon-Russiansuppliers,andfillingofnaturalgasstoragefacilitiesinEuropehaveledtolowernaturalgasandelectricitypricesinOctoberandNovember2022,butasthetemperaturebeginstocool,energypricesarelikelytoincreaseoncemoreduringthewinterseason. ElectricityPrices(Euro/MWh,HUPX)500 400 300 200 100 0 Jan-13Mar-15May-17Jul-19Sep-21 Sources:KosovoauthoritiesandIMFstaffcalculations. 2.EnergymarketpressuresinEuropearelikelytocontinuethroughout2023.Whilethereissignificantuncertaintyaboutglobalnaturalgassupplyanddemandforcesgoingforward,acontinuationofRussianexportstotheEuropeanUnion(EU)attheircurrentlevelwouldresultinasupplylossofabout100billioncubicmeters/year(25percentof2022EU’sdemand)thatwillneedtobereplacedbymoreexpensiveliquefiednaturalgas(LNG)imports.FutureLNGpricesarealsouncertain,buttheywilllikelyincreaseasinfrastructurebottlenecksconstraintheextenttowhichRussiacanredirectexportstoother 1ThisnotewaswrittenbySelimThaciandGabrielDiBella.SabihaMohonaprovidedresearchassistance. INTERNATIONALMONETARYFUND3 TotalSupply (Percentoftotal,2022) 8% 32% KOSAKOSB Renewables 60% Sources:KosovoauthoritiesandIMFstaffcalculations.Note:KOSAandKOSBrefertostate-ownedcoal-basedgenerationplants(“KosovaAandB”). markets,notablyChina.Inanyevent,naturalgasmarketdevelopmentswillspilloverintobothelectricityandcoalmarkets. TotalDemand (Percentoftotal,2022) 6% 5% 11% KESCOnet 5% Commerciallosses 73% TechnicalandNonTechnicalLossesNorth Deregulated Sources:KosovoauthoritiesandIMFstaffcalculations. 3.HigherenergypricesrepresentaheavyblowforKosovo’scurrentaccount.Despitehavingthe5thlargestglobalreservesoflignitecoal,lignite’slow-energycontentandKosovo’sinadequateinfrastructurehavepreventedexportsatameaningfulscale,alongwithactionsbyothercountriestoreducecarbonemissionsandmoveawayfromcoaluse.However,ligniteisusedtogeneratemorethan 90percento