In-depth | Inflacioni

Another expensive year

By - 27.01.2022

Many causes of inflation, few opportunities to intervene.

Genita Ukaj, a 26-year-old journalist, spends her monthly salary on transportation, food and rent. Two weeks out of the month her work shift ends at midnight and she has to take a taxi to her rented apartment, where she lives with two friends. So every month she spends around 70 to 80 euros just on taxis.

Meanwhile, to travel to her family in Peja and then back to Prishtina on weekends, she used to pay 6 euros for the bus ticket. Besides transportation costs, during the day she spends around 5 euros, without including food, which she tries to cook for herself.

Despite all the expenses, Ukaj has managed to somehow save around 40 to 50 euros from her salary every month for seven years now. But with prices increasing and services costing more, she had to give up on her savings plan.

Now, for a one-way bus ticket to Peja she has to pay 4 euros, instead of the 3 euros she used to pay before. The illegal taxis in Prishtina that used to cost 50 cents now cost 70 cents.

Not only was she forced to cancel her savings plan due to rising prices, she also had to reorganize her budget. Though data is limited, the average salary of a journalist in Kosovo ranges roughly from 200 to 400 euros.

“Maybe when you look at each of the prices individually the increase may not seem that big, but bread costs 10 cents more, taxis costs 20 cents more, and when you look at them in total, you notice that it has affected the state of your wallet,” said Ukaj. “If earlier I could have bought something with 2 to 3 euros, now I cannot buy the things that I usually eat without spending 5 euros,” she said, adding that her friends are doing the same reorganization of their budgets.

Like Ukaj, many are having to pay more for the same products, compared to 2020. This is a result of global inflation, which is affecting Kosovo as well.

The Kosovo Agency of Statistics (KAS)’s publication of the inflation rate in Kosovo during July, August and September 2021— brought attention back to the global inflation that came after two years of the pandemic, regardless of the fact that rising prices, above normal inflation, had already started in June 2021.

Increasing prices on the global market has a direct impact in Kosovo because the country’s markets have a high dependence on imports from other countries.

To better understand the impact of global inflation on domestic inflation, in the following video K2.0 explained how the long journey between the land where a product is produced and the market shelves in Kosovo affects the final price of that product.

Along with global inflation came an increase of imports during 2021. In November 2021 Kosovo imported 38.9% more goods than in November last year, which is in line with the increase in global demand for products after the lifting of anti-COVID-19 measures began.

Import and regional inflation

In Kosovo, the value of exports is only 16.4% of the value of imports. Kosovo imports 44% of total imports from EU countries, 19.7% from CEFTA countries and 36.6% from other countries around the world.

In the Eurozone, the inflation rate reached 5% during December 2021, marking the highest increase since 1991. Meanwhile in the region, the inflation rate for December 2021 reached 4.9% for North Macedonia, 7.9% for Serbia and 3.7% for Albania. While for Bosnia and Herzegovina and Montenegro, there is only data for November 2021, when the inflation rate was 5.5% and 4.4% respectively.

Along with the rise of food prices, Kosovo’s residents may soon have less purchasing power due to the energy crisis in Kosovo that led to the revision of electricity tariffs. New energy tariffs may lead to people having to pay up to 40% more for electricity.

With all these developments weakening people’s purchasing power, another expensive year seems to be ahead.

But what is inflation?

Every product on the market has a price, expressed in the form of money. The price of a product may change over time when demand changes (how much is demanded by consumers), or when supply changes (how much is produced by manufacturers). For example, if a piece of land has a successful harvest, the supply of wheat in the market may increase and exceed demand. In such a situation the price may decrease. But if the harvest is unsuccessful, the supply of wheat will be low, the demand would remain the same or increase and consequently the price would rise. Between these two scenarios, even if enough wheat is harvested but production and transportation costs increase, the price rises.

Inflation refers to the increase in the total price of goods and services usually bought by consumers — known as the consumer basket. In Kosovo, this is calculated as the change in the Harmonized Price Index (HIC) and is measured by the KAS on a monthly basis by comparing it to the corresponding month of the previous year.

A bit too theoretical, isn’t it? Let’s break it down into simple terms. Let’s suppose that your monthly salary is 100 euros and you spend 50 euros on food, while the remaining 50 euros goes for other needs. If each product you buy costs 1 euro, you can afford 50 products. But if inflation causes each product you buy to increase by 20 cents, then you can only afford 41 products. Consequently, inflation weakens your purchasing power — you have less money.

But inflation is not unusual. Prices tend to increase. A rate of up to 2% of annual inflation is considered normal and in fact good for the economy. Inflation keeps businesses profitable and makes consumers spend and not wait until prices drop. The goal is to maintain price stability, where neither high nor very low inflation occurs. Because both can signal a crisis.

High inflation — hyperinflation — has caused numerous riots around the world over the years. For example, from 1992 to 1994 the Federal Republic of Yugoslavia had the second highest rate of inflation in history, reaching a monthly rate of 313 million percent. Consumers had to use up their savings, they could not afford to buy food, and survived either by waiting in long queues at state-owned stores for poor quality food rations or by relying on their relatives.

But rapid price decreases and “negative” inflation are no better. Deflation damages the economy because when consumers wait for the prices to drop, they delay their purchases. When everyone does this, businesses are unable to sell and can lay off their employees. When consumers lose their jobs, they spend even less.

Let’s return to the above example of your salary of 100 euros. In case of hyperinflation, if the price of a one-euro product increases by 1000%, you would have to spend all your salary on only one product, which after hyperinflation would cost 100 euros. Meanwhile, in case of deflation, if the prices of all products drop from one euro to 20 cents, with 100 euros you can afford 500 products.

Therefore, stable prices are ideal for the economy.

The inflation that Kosovo went through in December 2021 is the second highest increase since the country declared independence in 2008. In 2011 — as a result of the global financial crisis of 2008 — inflation during the summer months hit a rate of 10%, which is eight percentage points more than normal.

With low wages in both the public and private sectors, inflation in Kosovo is felt more harshly. During 2020, the average net salary in Kosovo — 416 euros — decreased by 14 euros compared to the previous year. This regression in wages is explained by looking at the economic slowdown during 2020 due to COVID-19.

An analysis recently published by GAP Institute on inflation and possible measures to mitigate it, shows that from 2012 to 2020 the level of average net wages in all sectors was higher than that of prices over the years. Accordingly, the analysis concludes that consumer purchasing power has increased over the years. However, this analysis does not include data from 2021 that could alter results due to the changes that occurred in the most recent year.

Meanwhile, the lack of updated and detailed data on the living standards of people in Kosovo makes it difficult to measure the real impact of inflation. The latest data dates back to 2017 and significant changes have taken place since then. The complete lockdown of the country in response to the COVID-19 pandemic caused the economy to decline, many jobs to be lost and the number of families on social assistance to increase.

Standard of living

In the third quarter of 2021, close to 26,000 households — over 100,000 people — received social assistance on a monthly basis. Households with one member receive 60 euros, while those with 15 members receive up to 180 euros. This number of recipients is about one thousand more families compared to the same period during 2019 and 2020.

In 2017, about 23% of Kosovars lived in poverty, with 2 euros per day, while about 5% of them lived in extreme poverty with only 1.5 euros per day.

The latest survey conducted with households in 2017 suggests that consumers in Kosovo are estimated to spend the largest part of the budget on food (40%) and housing (29%). The most consumed products are meat, milk, cheese, eggs, bread and grains, which account for more than half of the spending on food.

All of these products are now more expensive.

Who can intervene?

Consumers have called on the government to intervene and help them face rising prices. To some extent, a kind of expectation has been created for the government to intervene directly in prices. Although at the end of October 2021 the Government of Kosovo announced a package of measures, to date few additional funds have been allocated to social scheme beneficiaries and pensioners.

However, given that Kosovo has a free-market economy and prices are set on a market basis, there is little room for maneuver.

Various proposals have been put forward in the media and social networks, such as using fiscal policy (potentially reducing VAT on basic products), increasing wages, applying monetary policy, issuing food vouchers, freezing prices, etc.

As for the reduction of VAT on basic products, according to Florin Aliu, professor of economics at UBT College, Kosovo’s market is organized such that a lower VAT does not necessarily reduce prices.

“The reduction of VAT on basic products is a big mistake,” Aliu said. “In 2016, the government of Kosovo reduced VAT from 16% to 8% for basic products, but prices did not decrease but rather increased. So at that time the reduction of 50% of VAT (from 16% to 8%) did not go to the consumers but to the food markets.”

He added, “If the government puts pressure on food markets to lower product prices when VAT goes to zero, it will create more problems than benefits.”

Meanwhile, a wage increase is not considered a good move by Berat Rukiqi, president of the Kosovo Chamber of Commerce, a professional organization that promotes local and international business interests.

In a discussion with the Institute for Development Policy, Rukiqi said that putting more money in the system would further increase consumption, which does not negatively affect inflation. In fact, one of the methods to stabilize prices is to motivate consumers to save money. Here the Central Bank of the Republic of Kosovo (CBK) would have a role to play.

The CBK is an independent constitutional public institution and one of its objectives is to achieve and maintain local price stability. The policy through which Central Banks can intervene is known as monetary policy, which includes interest rate control. Through the latter, Central Banks motivate consumers to save by raising interest rates. With less money, consumers spend less, the economy slows down and inflation drops.

Central banks challenge inflation

To help curb inflation, central banks around the world are using their monetary policy to raise interest rates to motivate consumers to save. The European Central Bank, despite pressures, is keeping interest rates very low, although it has decided to withdraw some of the stimulus for 2022.

In December 2021, the Bank of England became the first central bank to raise interest rates since the pandemic began, while the US Federal Reserve is tightening lending and raising interest rates from March this year since inflation has reached its highest level in 40 years.

But, the CBK does not have an independent monetary policy because even though it uses the euro, Kosovo is not integrated into the Eurozone. Since monetary policy is determined by the decision-making body of the European Central Bank, which Kosovo is not part of, Kosovo is implementing a policy which it cannot influence in any way.

Agron Demi, a policy analyst at GAP institute, is also against broad salary increases. Despite the reduction of public sector wages in the last two years, Demi, in an article, argued that from 2012 to 2019, net wages in the public and private sector increased by about 20%, widening the gap with the minimum wage, which has not changed since 2011. Raising the minimum wage would, according to Demi, be the best move by the government.

In a recently published analysis, GAP Institute recommended increasing the minimum wage. However, they suggest that raising the minimum wage may have an effect on further price increases, as it would increase income and therefore, demand. Their analysis recommends implementing already on-the-books legislation that would lead to yearly increases in the minimum wage based on cost of living expenses, the unemployment rate, the labor market situation and the level of competition and productivity in the country.

To better understand the minimum wage, you can watch the video-explainer of K2.0 below.

GAP Institute also recommends increasing payments to beneficiaries of the social assistance scheme, which fails to cover basic life necessities for its recipients.

Another measure being talked about is issuing food vouchers, which would be provided by the government as a crisis relief measure and enable the purchase of certain products, which, along with the amount, are determined by the relevant government institution. For example, with a 50 euro food voucher, consumers would only be able to buy specific foods, such as oil, eggs, bread and more. Food vouchers would be paid for by the government, ultimately covered by consumer taxes.

Another potential measure to respond to inflation is the freezing of key prices, which has been implemented by some countries in the region, such as North Macedonia and Serbia. In early December 2021, North Macedonia decided to freeze prices for 60 days of basic products bread, sugar, flour, oil, milk, meat, cheese, cottage cheese, rice, eggs, pasta at the price level they were at on December 1. Serbia did the same a month earlier.

In addition to the impact of global inflation on Kosovo’s domestic inflation, the media have also reported on secret agreements between industry associations, known as cartels, to raise prices, for example agreements between hairdressers or bakeries. In Kosovo, these agreements are prevented by the Kosovo Competition Authority (KCA), a public, independent institution. KCA has the power to override agreements between enterprises regarding goods and/or services that affect a market within Kosovo.

But currently this authority is non-functional since from June 9, 2021 it has no chairman and the mandate of the Commission has expired and as such it cannot investigate any suspicion of secret agreements. For the authority to function, the prime minister must propose names for the mandate and the Assembly must approve them.

The International Monetary Fund expects inflationary pressures to remain stable until mid-2022 and gradually ease thereafter, but with the pandemic becoming intense again due to the Omicron variant and new restrictive measures in the world, forecasts are uncertain.

With monthly bills growing day by day, this year seems to be one of the hardest to manage from month to month.

Feature Image: Ferdi Limani / K2.0

 

 

 

 

This publication was published with the financial support of the European Union as part of the project “Citizens Engage”, implemented by K2.0 in partnership with GAP Institute. Its contents are the sole responsibility of Kosovo 2.0 and GAP Institute and do not necessarily reflect the views of the European Union.

  • 13 Feb 2022 - 19:48 | Arta:

    Very useful information and review of the overall economic situation in Kosovo. Thank you for the initiative and this very informative research and video :D

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