The Republic of Kosovo, Europe’s youngest country, has an emerging market economy and an estimated population of 1.8 million. Following the economic rebound from COVID-19, Kosovo’s GDP grew at 3.5 percent in 2022, a rate driven primarily by exports and private consumption. Growth of Kosovo’s GDP is expected to remain steady with 2023 economic activity forecasted to grow at 3.5 by the IMF.
According to Kosovo Customs, Kosovo’s main trade partners are the EU countries (approximately 44 percent of imports and 30 percent of exports) and its Western Balkans neighbors, with which Kosovo trades tariff-free under the terms of the Central European Free Trade Agreement (CEFTA). CEFTA countries are the source of approximately 19 percent of imports, and the destination for 38 percent of exports. Kosovo maintains a large trade deficit, with exports covering only about 15.3 percent of imports in 2022. Kosovo’s economy benefits from its large diaspora population. In addition to remittances, which constitute nearly 15 percent of GDP, Kosovo’s economy is also boosted by diaspora tourism in the summer months. Remittances, however, are largely geared toward consumption and very little goes towards investment.
Since independence, Kosovo has made significant economic progress, yet several challenges remain, specifically a large informal economy, the heavy reliance on remittances, and high unemployment rates, especially among women, youth, and ethnic minorities. Limited regional economic integration and ongoing tensions with neighboring Serbia serve as the main barriers to attracting foreign direct investments (FDI). But capricious economic policies, political interference in the economy, and limited public-private dialogue also pose challenges for investors and work to limit the FDI crucial for economic development. In June 2023, the Kosovan government, citing security concerns, placed a ban on Serbian-origin goods that has caused significant confusion to importers and has had a negative impact on companies owned by foreign entities in Kosovo due to supply chain disruptions. Notwithstanding repeated requests, the Kosovan government has not provided any explanation of how this ban has mitigated security threats.
Kosovo’s unofficial employment data, estimated by the Kosovo Statistics Agency, shows a promising decrease from 25.9 percent in 2020 to 12.6 percent in 2022. The difficult labor market conditions affect youth and women disproportionately. According to data from the Kosovo Statistics Agency, only one in five women in Kosovo participate in the labor force, one of the lowest rates in the world. While progress has been made in addressing informality, a large informal economy still exists and may not be captured in official data, particularly in the agriculture sector.
Despite these challenges, Kosovo’s relatively young population, with over 50 percent under the age of 25, English language capacity, low labor costs, and abundant natural resources have attracted several significant investments, and several international firms and franchises are present in the market.
The Central Bank of Kosovo reports 2022 Net Foreign Direct Investment (FDI) at €732 million, a significant increase from €420 million in 2021. Germany, which brought €194.5 million to the country in 2022, was the largest investor in Kosovo. U.S. investment totaled €98 million in 2022 compared to €64 million in 2021. Foreign direct investment might increase if Kosovo begins benefiting from the ongoing ‘near shoring’ efforts of many European firms. Some beneficial characteristics of the market include:
Kosovo’s liberal trade regime, which enables duty-free exports for most Kosovan exports to the EU market. The Stabilization and Association Agreement (SAA) with the EU has further reinforced trade liberalization and removed many of the remaining trade and tariff barriers.
Kosovo’s location in the heart of the Balkans offers easy access to neighboring markets and CEFTA members, a market of approximately 28 million people.
Kosovo’s infrastructure has steadily improved in recent years, including the completion of modern highways to Albania and also to North Macedonia. Kosovo’s international airport has maintained an average passenger growth rate of 10 percent per year since privatization in 2013. Nearly three million passengers passed through the airport in 2022, an increase of 37 percent from the previous year. The airport authority is currently extending the runway and upgrading the landing systems, which should lower flight cancellations in the winter months and accommodate larger planes.
Kosovo’s young workforce is largely multilingual (often speaking English and/or German).
Kosovo labor costs and tax policies are competitive. The Kosovo Statistics Agency reports that Kosovo’s average pre-tax monthly salary for public and private sector workers is €521; the private sector-only average is €473. These wages are amongst the lowest in Europe, and the current tax regime is business-friendly with a flat 10 percent corporate income tax.
Kosovo bills itself as “the most pro-American country on Earth,” with American businesses viewed positively by the public and Kosovan consumers welcoming American goods.
As a member of the EU-funded Western Balkans 6 (WB6) core transportation network, which aims at improving regional connectivity, Kosovo plans to revitalize key highways and railway lines for both domestic transport and connections with neighboring countries, including via an EBRD-supported modernization project to connect Kosovo and Serbia by rail.
With U.S. government support, Kosovo’s Commercial Court began reviewing cases in August 2022 and aims to improve commercial dispute resolution, strengthen the enforcement of judgements, and create an enabling environment for investment and economic growth. Celebrating its first anniversary, the court has already demonstrated success in reducing case backlog and resolving complex commercial disputes in a timely and efficient manner.
Political Environment
For background information on the political and economic environment of the country, please click on the link to the U.S. Department of State Countries & Areas website.