After a year in office, what impact has the current government had on the economy?
In an Assembly session held on Sept. 9, 2017 — three months after June’s elections and two after its results were certified — Ramush Haradinaj managed to secure enough votes from the newly elected deputies to become Prime Minister. After a round of applause, Haradinaj addressed the deputies, announcing the names of his cabinet members. But his first speech as the new prime minister did not reveal any details of his program, or how he would lead Kosovo.
However, Haradinaj was more vocal about how he would govern the state during the election campaign in late May and early June 2017. Chosen by the Democratic Party of Kosovo (PDK), the Alliance for the Future of Kosovo (AAK) and the Social Democratic Initiative (then NISMA) as the candidate for prime minister for the ‘PAN’ coalition, he touched on many issues, including the economy. The former soldier considered the country to be in a “state of war,” telling the people that “we fight for economic development.”
At the time, Haradinaj made a number of promises in order to develop Kosovo’s economy. On the one hand he promised a fivefold increase in the rate of exports of goods, and a decrease in the rate of imports. He also hoped to transform Kosovo into an energy powerhouse and the Trepça mining complex in Mitrovica into an economic giant, bringing jobs and prosperity. Haradinaj also felt that visa liberalization would help develop the economy, and promised that the process would be complete within 90 days.
On the other hand Haradinaj also pledged to put money directly into citizens’ pockets, promising to increase public sector wages by 30 percent and pensions by 25 percent, as well as a raising of the minimum wage, which has remained at the same rate since 2011. He also wanted money to stop seeping out of the economy illegally, pledging to fight crime and corruption.
Looking back at these promises, progress towards these goals seems meagre. In regard to exports, during the first and second quarters of 2018, the most recent data available, exports were down on the same periods in 2017, 4 percent in the first quarter, and 7.2 percent in the second. Imports meanwhile have increased, up over 12 percent in the second quarter of 2018 compared to the same period in 2017.
In regard to becoming an “energy powerhouse,” the government’s main action was to sign a contract with ContourGlobal, an international power generation company, for the construction of a new power plant, foreseen to start in December.
The GAP Institute’s political analyst Agron Demi argues that the government’s deal with ContourGlobal over a new power plant is only likely to increase energy prices, negatively impacting on the economy. Photo: Atdhe Mulla / K2.0.
For the GAP institute’s political analyst, Agron Demi, this investment will not bring economic development. On the contrary, it will only increase the price of energy by up to 40 percent. In a recent interview, Prime Minister Haradinaj conceded that energy prices would “probably increase, but not within the year.”
In a survey of 84 local companies conducted by the GAP Institute, every one of them responded that the dismissal of workers would be one of the measures that may need to be taken in order to meet increasing energy prices. Demi also criticizes the fact that the Government of Kosovo will then buy all the energy produced by the plant for the first 20 years from ContourGlobal, and that at 80 euros per megawatt, it will be the most expensive in the Balkans.
In regard to Trepça, the proposed ‘economic giant,’ the company’s Acting Treasurer, Miftar Hyseni said in May that there has been drop in production at the mining complex this year, as there has been every year since 2014. For their part, the government is still yet to implement the Law on Trepça which aims to open the road to investment and was adopted in 2016.
This is largely due to politicized and incomplete appointments leading to the failure to finalize the formation of two boards, the Supervisory Board and the Management Board, without which the Law on Trepça can not be implemented. Director of Trepça Ahmet Tmava, has said it is vital to form the boards, as without them Trepça can not be developed.
In terms of increasing income for the public, the only public sector workers to receive a raise were high level state officials.
Even the Minister of Economic Development, Valdrin Lluka has admitted that Trepça is in big trouble and faces difficulties in production. “Trepça is currently undergoing a difficult period,” the minister told Telegrafi earlier this month.
Meanwhile, visa liberalisation did not happen in 90 days, though a key step was taken in July this year, when the final criteria were fulfilled. The final criterion was improving the government’s record against organized crime and corruption, though ministers indicted by the Special Prosecution on corruption charges have remained in Haradinaj’s government, including Minister of Infrastructure Pal Lekaj, who was indicted in April.
In terms of increasing income for the public, the only public sector workers to receive a raise were high level state officials, including the prime minister himself, his deputies and officials from his office, as well as the president. The sheer size of the government has also raised alarm, with upwards of 80 deputy ministers all taking home large salaries, the worth of which to the government’s work has been questioned by many commentators.
While neither the minimum wage, nor pensions have been raised, a scandal has also erupted over investigations into social assistance received by war veterans. Prosecutor Elez Blakaj has claimed that government officials, including Prime Minister Haradinaj hampered his work while he looked into claims that up to 19,000 people are falsely claiming state money, sparking protests.
While the Prime Minister has seemingly struggled with his campaign promises, some critics point to the nature of the government also causing issues in reviving the economy. To form the coalition government, the parties that made up the PAN coalition also formed a partnership with the New Kosovo Alliance (AKR) and Srpska Lista, who later quit the government.
The new government eventually released its vision for its mandate in a program titled the New Beginning, which Demi feels was made hastily, and with a “reckless” approach towards the economy.
Agron Demi believes that the Haradinaj government is now comprised of parties that have nothing in common with one another, a fact he feels was made clear by the coalition not running with a common political program in the election.
PAN announced their decision to run together on the last day for registering pre-election coalitions at the Central Election Commission (KQZ). Before that, the three biggest parties of the coalition had separate programs, and for Demi, none of them provided details on how to revive the economy.
He highlights the Social Democratic Initiative’s campaign promise to employ 25,000 people in 2 years, with the main criteria being for these people to have no immediate members of the family in employment. Demi labels this promise as damaging to the economy, as he feels employment should be based on qualifications.
The new government eventually released its vision for its mandate in a program titled the New Beginning, which Demi feels was made hastily, and with a “reckless” approach towards the economy. The economist feels that this shaky foundation has led to the government failing to take decisions which can lead to economic development.
Demi describes the government’s actions and decisions as being conducted ad hoc, and believes that they are not implementing the National Strategy for the Economy, which was approved in 2015. He especially highlights the education sector, which is seen as a crucial element for economic development in the economic strategy, as a key failing.
The current government’s handling of education has been characterized by scandals, including the Kosovo Accreditation Agency, which ensures quality in higher education, losing its membership in the European Quality Assurance Register. This came as a result of a perceived lack of independence after its board and acting director were dismissed by the Ministry of Science, Education and Technology.
Creating jobs through growth
For most citizens, the main requirement from the economy is to create more jobs and tackle the country’s high unemployment levels. In a UNDP report published in November last year, 40 percent of respondents identified unemployment as Kosovo’s biggest problem.
President of the Assembly and head of PDK Kadri Veseli spoke of the importance of creating new jobs during the election campaign in 2017, promising 60,000 new positions. Speaking to K2.0, the Prime Minister’s Economic Adviser, Gazmend Abrashi, pledged that the government would create even more jobs than Veseli’s ambitious total.
The economic adviser believes that this government is “the most proactive since the liberation of the country,” adding that with this intensity, they can achieve their goal. He also goes on to link efforts for creating jobs to the number of people that are expected to retire soon. However, when asked whether this creates new jobs or simply substitutes current jobs, Abrashi had no answer.
Economist Florin Aliu warns that employment levels can only be raised by reaching an eight or nine percent growth in the economy. Photo: Atdhe Mulla / K2.0.
According to data provided by the World Bank, Kosovo can expect a 4.2 percent increase in economic growth in 2018, similar to levels of growth in recent years. A seemingly positive sign, but Florin Aliu, an economic researcher at the Tomas Bata University in the Czech Republic states that “this level of growth cannot generate more jobs than in the past.”
According to Aliu, only when Kosovo’s economy grows by 8 or 9 percent can we start to talk about economic development and increasing employment levels. It seems that Kadri Veseli shares this forecast, as during the election campaign, he also promised the country an 8 percent increase in economic growth.
Is infrastructure the answer?
But with all Haradinaj’s failing promises, how are the government attempting to provide this economic boost? According to adviser Abrashi, the government will develop the economy through the following principles: investments in infrastructure, foreign investments and the integrated management of borders.
The adviser insists that the Haradinaj government has a different approach towards economic development compared to previous governments, but when prompted to elaborate on how their approach is different when foreign investments and investments in infrastructure were also mentioned in the past, Abrashi does not provide further details, saying “this would mean speaking badly about other governments, and we do not want to do this.”
However, he does reveal that it is investments in infrastructure that he believes to be the key to economic development, and that it is the manner in which they will be made that will distinguish the current government.
It seems that local devolution will also be a cornerstone of their approach, as Abrashi highlights a meeting between Prime Minister Haradinaj and the Mayor of Prishtina, Shpend Ahmeti, as well as the approval of the new law regulating the capital which was adopted in May as successes. “Forty percent of residents live in Prishtina, so the capital will benefit from investments, something that it has not done in the last two decades,” Abrashi states.
He points to ongoing projects financed by the government through the European Bank for Reconstruction and Development, and proposed and managed by the Municipality of Prishtina that he feels will positively influence the economy and improve the country’s image. These projects include the reconstruction of the Palace of Youth and Sports and the development of an outer ring road for the city. Abrashi hopes that this relationship can be replicated in 11 other municipalities, with highways especially being a priority.
The Prime Minister’s economic adviser Gazmend Abrashi argues that infrastructure projects can help improve Kosovo’s economy. Photo: Atdhe Mulla / K2.0.
The construction of roads seems to be a major focus point for the government, with Abrashi also promoting the building of the Prishtina-Skopje highway as crucial, as it will facilitate the transportation of people and goods. In general, he says that by improving the system of roads, “we will enable Kosovar products to enter the European Union market.”
Abrashi also highlights investments in railways, saying that in 36 months, Kosovo will have a “modern railway system,” and that this will decrease the two percent loss in gross local production that are caused as a result of border delays — as estimated by the World Bank.
Using infrastructure projects to encourage economic growth is not exactly a new phenomenon in Kosovo, with many previous projects being undertaken including the Ibrahim Rugova Highway that connects Kosovo with Albania and was completed in 2009. Despite this, the growth in Kosovo’s economy has always remained steady, with the construction of the road seemingly having little impact.
Agron Demi believes that a focus on investment in infrastructure will not bring about the level of economic development that is being claimed by government. He justifies his claim by highlighting cases of budget mismanagement and misapplication, citing the example of the Prishtina-Skopje highway and the government’s decision to pay 53 million euros in damages to the construction company building the road, Bechtel Enka.
According to Demi, the Minister of Infrastructure Pal Lekaj made a rash and suspicious decision when he paid the debts that the company claimed, severely damaging the state budget. “With that money we could finance 70 percent of the Prishtina-Peja road which will cost around 80 million euros,” he says. For Demi, it is strange how government officials spun the decision as a success, stating that they saved 10 million euros by decreasing the payment from 63 million to 53 million euros.
Gazmend Abrashi does not agree, saying that the payment is yet to be made, and that the government “could have faced international arbitration and risked losing even more money” had it not made this decision. However, Prime Minister Haradinaj recently contradicted this claim, saying in an interview that the sum would be paid because “the road has to be finished.”
Money in the right places
Florin Aliu is also not convinced by the government’s record on the economy. He says that in the last year he has not seen any actions which would “restructure the economy and stimulate local businesses.”
Aliu believes that solutions lie not in infrastructure but in the management of the country’s capital and that the government should utilize the privatization fund and remittances sent by Kosovars who live in different countries around the world. He adds that any other course of action will only bring about similar economic growth levels that we have seen in the recent past, which are not enough to increase employment levels significantly.
Remittances sent to Kosovo by Kosovars who live abroad are estimated to add up to over 650 million euros per year. The Central Bank of Kosovo stated last month that members of the diaspora have expressed their interest in investing in the financial sector so as to facilitate economic development.
For Aliu, the local economy is sorely in need of an injection of this type financial capital. He describes the financial system as failed, “because it has not managed to provide access to finances for all businesses.” According to him, it would be wise to provide access to financial capital for small and medium-sized businesses so that they could expand their activities, creating new jobs.
Officials from the Central Bank of Kosovo have expressed their concerns about the depletion of Kosovo’s financial capital. Between January and May 2018, over 111 million euros were moved out of the country.
Officials from the Central Bank of Kosovo have also expressed their concerns about the depletion of Kosovo’s financial capital. Between January and May 2018, over 111 million euros were moved out of the country, though this figure is a slight reduction on the same period in 2017.
Linked to the investments in infrastructure, Abrashi also highlights the construction of economic zones which according to him will be connected to “roads and the railway system,” creating improved opportunities for exporting goods that are produced in Kosovo.
Agron Demi argues that the government uses these economic zones strategically, placing them in areas with a high concentration of supporters for the governing parties. He takes the example of the Malisheva economic zone designated by former minister Bajram Hasani, a member of the Social Democratic Initiative, which counts Malisheva as its stronghold.
Abrashi rejects this, stating that “Prishtina and Prizren are the two centers that will benefit the most, and we know who leads them,” alluding to mayors Shpend Ahmeti from the Social Democratic Party in Prishtina, and Mytaher Haskuka from Vetëvendosje in Prizren.
Demi also argues that a GAP Institute report about economic zones in 2012 showed that state institutions have not conducted any feasibility study outlining the benefits of economic zones, how they would be used and what their economic effects would be.
But Abrashi believes that economic zones will be beneficial for foreign investments. According to him, these zones are destined to attract investments from international companies. “All these steps [roads, railways, economic zones] will be accompanied by integrated border management, so foreign businesses will profit from investing in Kosovo,” he argues.
While Abrashi may be convinced of his arguments, the government’s impact on the economy in its first year seem questionable. The benefits of nearly all its major projects have been contested, with the new power plant having been accused of being likely to increase the price of energy and construction of the highway being followed by scandals and seemingly following the same failed path to economic resurgence as previous governments.
Campaign promises are seemingly going in the other direction, while experts argue that other alternatives for economic development have not been taken into account by the Haradinaj government. On top of this budget spending on social schemes and salary increases for senior state officials have often been labelled as mismanagement.
This has all happened against a backdrop in which unemployment continues to be high. A recent UNDP survey shows that 60 percent of young people want to leave the country due to socio-economic conditions. Solutions need to be found quickly. K