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Kosovo
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| Objective |
SO Number |
FY 2004 |
FY 2005 |
FY 2006 |
| Economic Policy and Institutions |
167-0120 |
7,660 |
6,490 |
6,230 |
| Private Sector Growth |
167-0130 |
4,750 |
5,500 |
6,289 |
| Accountable and Transparent Governance |
167-0210 |
7,250 |
8,000 |
7,680 |
| Democratic Institutions |
167-0220 |
5,490 |
5,776 |
5,550 |
| Social stabilization through special initiatives |
167-0410 |
1,816 |
2,323 |
800 |
| Cross-Cutting Programs |
167-0420 |
4,314 |
3,011 |
3,307 |
| Transfers |
|
47,254 |
43,900 |
42,144 |
| Total (in thousands of dollars) |
78,534 |
75,000 |
72,000 |
|
The Development Challenge:
Kosovo faces three major near term challenges. First is the creation and/or strengthening of newly-formed economic and democratic institutions and procedures. Paramount among these are fiscal and budget institutions, a fair and transparent justice system, central and municipal government organizations functioning openly in response to society's needs and aspirations, and a body of laws and procedures permitting social and commercial life to function smoothly. Second is stimulating the private sector to create jobs and generate profits to feed growth, to produce tax revenues, to finance service delivery and development, and to provide employment. Third is preparing Kosovo for integration into Europe, the logical center of Kosovo's economic and political future. Integration will stimulate economic activity and assure a better life for all of Kosovo's population.
Over the last five years, the combination of accelerated institution building and sound economic policies has resulted in many impressive accomplishments in the economic sphere. Kosovo is moving deliberately from a command to a market economy, adopting new systems and values in the process. Gross domestic product (GDP) has risen over 40% since 2000, although much of this growth can be attributed to the presence of the international community and its impact on the consumer economy. Total deposits in the banking system have increased by 24% during 2004 and the loan-to-deposit ratio increased from 42% at the end of 2003 to its current level of around 57%. A sound tax system now finances all expenditures in the Kosovo Central Budget from domestically collected revenues. A modern pension system has been installed. The budget process and Treasury systems compare favorably with others in the Balkans, and Kosovo is progressing well in meeting the set of Economy Standards. Inflation, as in the broader Euro Zone, is around 2%. Nonetheless, while functioning at an adequate level, economic structures are weak and capabilities thin. Analyses reveal weaknesses that over the medium-term make the economy vulnerable. The economy continues to absorb expenditures at a level much larger than GDP. Private remittances plus donor inflows at levels not sustainable finance this huge imbalance. More recently, there are signs that the economy has stabilized and that growth has slowed. Most of Kosovo's neighbors are now growing faster than Kosovo, which still has the lowest GDP per capita in the region at $1,280. It also has the largest percentage of population living at a subsistence level, with 47% of the populace living on under $2 per day. Both foreign and domestic investment are constrained by uncertainty associated with Kosovo's future status. The private sector accounts for only around 35% of the official economy with the public sector being the driving force. Unemployment, which many estimates place at 50% - 55% is arguably the key social and economic problem for Kosovo. Twenty-five thousand new individuals join the labor force annually.
Kosovo's political structures are maturing. Assembly elections were held in October, and were considered to have been free and fair, despite a boycott by the Kosovo Serb population. No single party won a clear majority, leading President Rugova's party and Ramush Haradinaj's party to form a new coalition government with several other smaller Kosovo Albanian and non-Serb minority parties. Additionally, a true opposition emerged for the first time from these elections. Civil society was active in the elections, running a "get out the vote" campaign which helped encourage all communities to vote. Unfortunately, most Kosovo Serbs did not participate in the election due to mixed signals from Belgrade about participation and local dissatisfaction with the state of affairs in Kosovo (less than 1,000 out of 130,000 Kosovo Serb eligible voters participated in the elections). Regardless, Kosovo Serbs will retain 10 set-aside seats in the Assembly and several positions within the government. International advisors and assistance will continue to be needed in the Assembly to help make this body a responsive part of the provisional government.
The tragic events of March 2004 in Kosovo, when ethnic tensions flared up into violence leading to loss of life and property damage, are a reminder of the fragility of the ethnic relations in Kosovo and the importance of efforts to address issues facing all of Kosovo's communities. Kosovo is making progress on implementing the "Standards for Kosovo," and in mid-2005 the Contact Group (Britain, France, Germany, the United States, Russia and Italy) will formally assess Kosovo's progress in achieving these standards. If the international community decides after the formal review that Kosovo has made sufficient progress on the standards, a political process to determine Kosovo's future status will begin.
The USAID Program:
USAID's strategy concentrates on two broad areas, economic development, and democracy and governance.
USAID's two economic growth objectives focus on building human and industrial capacity and the legal, policy, and regulatory frameworks necessary to support economic growth and investment. A major element in this sector is USAID's provision of technical assistance to the Ministry of Economy and Finance, the Banking and Payments Authority, the Assembly of Kosovo, and the Kosovo Trust Agency. With USAID assistance, these institutions are developing sound economic, budget, and tax systems including a medium-term expenditure framework, an improved financial regulatory system and legal environment, and the privatization of former state-owned enterprises. The development of competitive industries is key not only to growth, but to the problem of unemployment, so USAID supports an initiative to build successful business clusters in construction materials, dairy/meat/poultry, and fruits and vegetables. As loan capital is critical to growing an enterprise, USAID is exploring steps needed for Kosovo to become eligible for Development Credit Authority to provide partial loan or bond guarantees to banks as an incentive to increase loans to the businesses in these clusters.
The democracy objectives support the strengthening of the rule of law, civil society, political parties, independent media, and local governance. USAID is working with Pillar I (Police and Justice) of the United Nations Interim Administration Mission in Kosovo (UNMIK) in helping build greater local capacity to assume more responsibilities in the judiciary. Civil society, including political parties, is active in Kosovo, but lacks organizational and financial capacity. To help keep the emerging governmental institutions in check, both an effective civil society and an independent media are critical, and USAID's assistance works to ensure both. USAID's new local government initiative has placed resident advisors in six of Kosovo's municipalities to help authorities more efficiently manage their resources and meet their citizens' needs. In addition, the program is helping develop the legal framework to devolve governmental authorities to the local level.
Special initiatives support an anti-trafficking program, literacy classes for poor women, targeted assistance to the health sector through prenatal care and tuberculosis control programs, and assistance for effective management of Kosovo's electric company to ensure energy for homes and businesses. USAID continues to support the restructuring and revitalization of the Kosovo Electric Company (KEK) and works synergistically with the new Irish management team responsible for KEK's operations. In FY 2005 a Global Development Alliance partnership will be explored with potential U.S. partners in the energy field.
Other Program Elements:
Strengthening local democracy: Regional (Kosovo-Macedonia) activities are building cooperation and reconciliation through regional committee-implemented collaborative projects.
Other Donors:
Donors are rethinking their role and presence in Kosovo. Both the European Union (EU) and the United Nations Development Program (UNDP) have opened offices and UNMIK is downsizing as competencies are transferred to the Provisional Institutions of Self-Government. The EU, through the European Agency for Reconstruction and its support for UNMIK's Pillar IV (Economic Restructuring), has been and remains the largest donor, with activities in public administration reform, decentralization, judiciary, customs and taxation, energy, environmental management, economic development, minority return, rural development, civil society, and university education. Other major donors and their principal areas of focus include: Germany (energy, water, transport, private sector development); Sweden (agriculture, returnees, youth, anti-trafficking, energy, civil society); the United Kingdom (civil society, access to justice, customs, health, social policy, public administration); Switzerland (business development, agricultural, environmental protection, vocational education); and the UNDP (security, job creation and minority programming, local development). Although there are few formal mechanisms for donor coordination, donor collaboration increased this past year, most significantly in support to the central and municipal assemblies, legal reform, judicial reform, and media. UNMIK is identifying and categorizing capacity building efforts of the donor community by ministry, a significant step forward in donor coordination. The World Bank, International Monetary Fund, European Bank for Reconstruction and Development, and the EU all maintain a presence in Kosovo.
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