Self-Sustenance of Kosovo - Reality or Utopia?

Pristina Feb 5, 2001

AIM Pristina, January 25, 2001

As of year 2004, Kosovo should support itself by its own means and work. At least, that should happen according to forecasts. In three years time, Kosovo should be taken off the list of priorities for assistance and financial intervention. True, Kosovo will still be assisted, but according to the criteria applied to all other countries in transition. According to the plan, granting of donations and all other forms of aid for utilities, including power-generation & distribution corporation, will be suspended in 2003 and the Kosovars will have to secure budget funds by themselves.

With such an economy will Kosovars be able to fulfill their obligations and earn their own up-keep? This is a vital political question for everyone. The reply requires detailed analyses of the existing situation and possible trends over the next three years, not only concerning economic development, but also in relation to the change of people's mentality regarding the fulfillment of their obligations to society.

The problem lies in the payment of taxes, electricity, water and other bills which is a worldwide recognised practice for financing the common needs of any state and society. As an example, let us mention that only 40 percent of Kosovars pay their electricity bills, while only 10 percent of them pay for the water. Although there are no precise data, there are nevertheless indications about serious problems encountered in the collection of taxes and dues on various types of business activities.

According to UNMIK estimates, in comparison to 11 other countries in transition, only 7 percent of the annual gross national product of Kosovo is paid to society in the form of taxes. In other countries in transition, charges range between 18 and 40 percent. The low level of charges is partially a consequence of the low tax rates on business operations and services in Kosovo.

However, this should be considered more as a consequence of tax evasion, i.e. their non-payment. When budget earnings from taxes and excise tax have to be lowered as a result of efforts exerted at developing an open economy with neighbours and the world at large, it will be impossible to secure funds for the Kosovo budget, let alone other social needs, with such low charges on gross national product.

The extent to which the business will be able to develop in the next three years is of vital importance. In the first place, it should secure budget financing, as well as provide enough space for stable and continuous development. According to the current situation and prospects that can be predicted, such expectations are not realistic. Economic structure of Kosovo is far from being dynamic and stable.

There are some 31 thousand registered active business firms in Kosovo, which is much more than in previous years. But, it is only the matter of quantity. No qualitative changes can be observed towards the establishment of such business structure that could ensure dynamic development of Kosovo and its strong links with economies of other countries, which should also rank high on the Kosovo list of priorities. These are mostly trade, family business and non-profitable investments.

When it comes to business, it could be rather said that Kosovo is in a state of expectation what will happen next. There is no legal infrastructure which is why it is impossible to give either predictions or provide development incentives. Also, actual trends do not indicate easy and quick achievement of the objective - self-sustaining Kosovo. This the aim all Kosovars aspire after. But, when it comes to the problems of economy, it is very important to make a distinction between wishes and possibilities. This difference is a precondition for avoiding the well-known voluntarism from the socialist period. Experiences gained in the last 18 months, from the arrival of KFOR and the establishment of UNMIK administration, are not promising nor indicating a radical turnaround.

In the last 18 months, on the basis of commercial interests Kosovars participated with 30 percent in the general structure of investments. These were mostly channeled to civil engineering, transportation and trade where investments in trade in oil and oil derivatives were predominant. In other words, most investments were made in branches that bring fast and large profits. Because of system's shortcomings and economic chaos, business in Kosovo is, in a way, oriented towards survival and extracting the largest possible profits. Such a structure cannot serve as an admission ticket to or stable support for an economy with development prospects which would, at the same time, be oriented to long-term gain.

The international factors and Kosovars agree that Kosovo will embark on a way of sound economic development and of overcoming the inherited backwardness once private business starts dominating the economic activities.

However, this orientation cannot materialise without the mobilisation of large capital, both foreign and domestic, on commercial basis. That is the only way to impose general rational principles and behaviour in business operations, full engagement at work and economising of all factors of production process. In contrast to humanitarian aid, the capital invested on commercial basis has its price in the form of interest, share in profit and ownership and, naturally, management.

In the total amount of investments made in the second half of 1999 and first ten months of 2000, which according to calculations of the Chamber of Economy of Kosovo amounted to DM 743 million, commercial credits accounted for only five percent. This fact illustrates best that the main source of sound economic development is still beyond Kosovo's reach. Finally, Kosovo doesn't have a banking system, regular channels of financial flows, laws regulating the essential economic trends nor a policy of economic development. And not only it lacks development policy, but there are indications that the policy which is called here development policy can be considered quite wrong from many points of view. It is assumed that mistakes and obstacles Kosovo economy is faced with are a consequence of exaggerated politicisation and diplomatic meddling.

First and foremost, Kosovo and Kosovars do not have their own capital. When these 5 percent of investments, as well as 30 percent of funds from Kosovo sources are excluded, it turns out that the major share of investments, i.e. some 65 percent, were secured from humanitarian sources and mostly used for the re-establishment of various services and infrastructure. In contrast to humanitarian funds, only first steps have been made in the sphere of private capital mobilisation. Until November 2000 commercial credits were granted here by the only registered bank in Kosovo - MEB (Micro Enterprise Bank) which is a private bank with several international founders and German capital.

As of November, the Joint Crediting Unit (NJPB) also started approving credits. It is not a bank, but rather a financial institution which operates with funds secured by the World Bank and European Reconstruction Agency.

Both MEB and NJPB approve only commercial credits, which means that they are supporting the development of a sector which is vital for the progress of the Kosovo economy. However, they are investing in order to turn a profit for both their founders and their shareholders. Under a slogan - low placement, lower risk - MEB has approved several hundred loans in the total amount of DM 9 million.

The maximum amount of credit was DM 20 thousand, and the average credits granted reached DM 13 thousand. Credits were extended with three-year repayment period with the annual interest rate of 24 percent. The Joint Crediting Unit also grants credits in the average amount of DM 100 to 3000 thousand and three-year repayment period. The annual interest is 15 percent and is gradually lowered at the end of the first repayment year. It is estimated that the stock of loan capital of the Joint Crediting Unit amounts to USD 8 million. However, so far NJPB has approved only one credit.

The Albanian experts and businessmen think that interest rates are too high. They say that even the trade sector cannot pay them, not to mention production. They also add that the planned credit amounts are just a drop in the ocean for the needs of Kosovo. Creditors respond that they have to cover costs and turn a profit, as well as that they are granting credits on a very unstable territory where there are no guarantees for their repayment. Also, this is business not charity. Business and charity do not go together.

AIM Pristina

Fehim REXHEPI