Economics and business
According to COUNTRYAAH, Kosovo is one of Europe’s poorest countries. This is despite the fact that the country has plenty of natural resources, especially minerals but also fertile land. War and ethnic conflicts, especially during the 1990s and the years that followed, seriously damaged an already weak economy. The recovery and the transition from the planning economy of the Yugoslavian era to a market economy has been slow. The country’s economy still has not reached the 1990 level. A very big problem is the extremely high unemployment rate.
The mining and metal industry has long been the basis of the economy and this has been strengthened since the end of the 1990s. The manufacturing industry as a whole decreased its share of GDP during the period 2001–09, while construction increased. Agricultural production has declined significantly, but self-employed agriculture still provides employment for a large part of the population.
Before independence. Kosovo’s role when the area was part of the Yugoslav state of Serbia was to provide the base metals needed in the Union, mainly in Serbia. Other industries were very small and apart from the manufacture of vehicle components, it was aimed at the local market. The population was the poorest of Yugoslavia and the vast majority were Kosovo Albanians.
After the disintegration of Yugoslavia and since Slobodan Milošević became Serbia’s president in 1989, the situation of Kosovo Albanians was deteriorating (see Population and Social Conditions). Many emigrated, a large part of the business community collapsed and the infrastructure collapsed. The 1998-99 war further worsened conditions. The reconstruction then proceeded slowly and was entirely dependent on international aid. The transition to market economy was delayed, as there were no buyers for the large state companies.
Problems and opportunities for the new country. Kosovo is heavily dependent on foreign aid and money transfers, while business has little connection to other countries. Foreign trade represents a smaller share of GDP than in other countries. The weak link with other countries’ economies has meant that Kosovo has been relatively little affected by the international economic crises of recent years. Every year since independence in 2008, GDP has increased, on average, by about 5 percent. Since 2002, the euro has been used as currency, but only in 2012 was Kosovo granted status as a candidate country for accession negotiations with the EU.
Foreign trade is completely imbalanced. For several years, exports accounted for only 10-12 percent of imports. This exceptional deficit has been reduced by a constant inflow of money from Kosovo Albanians and Kosovo Serbs who emigrated during the 1990s and 2000s, respectively (see Social conditions). In addition, in recent years there has been a small but growing contribution in the form of foreign direct investment.
Since the end of the war in 1999, Kosovo has received a lot of international development assistance. During the first years it was mainly about building housing and replacing other destroyed infrastructure. In recent years, much of it has been used to modernize and expand the transport networks. Around 2010, Kosovo was the world’s largest recipient of EU aid per capita. In addition to reconstruction and economic development, assistance has gone into building democratic institutions and strengthening the rule of law.
The privatization of business has been slow. Foreign investors have shown weak interest in this country with unclear political status, at least in the northern part, and with a shortage of qualified labor, insecure electricity supply and weaknesses in transport systems. A large internationally funded project has become controversial, as it means that the country is fully investing in lignite for the future, the most polluting energy raw material (see Energy). Kosovo has a few large factories, but they are old and therefore polluting air and water to a large extent.
The state has small incomes. No taxes come from the informal sector, and inefficient administration and widespread corruption also reduce tax revenues. This means, among other things, that there is no means to expand social insurance and allocate funds to improve health care and schooling. In several respects, Kosovo has developed ambitious plans and new laws regarding, for example, the environment and labor law, but the changes are going very slowly.
60% of Kosovo’s population still lives in rural areas and more than half of all households in the country live on agriculture. A large part of them mainly run self-sufficiency and they are included in the informal economy. Agriculture’s share of the country’s business sector is therefore difficult to assess. Agricultural products account for between 15 and 18 percent of the total export value; the proportion is mainly due to how other product groups’ production varies between years.
Agricultural land makes up 53 percent of the land area. It is relatively fertile and the climate is suitable for agriculture, except that drying some years can reduce the harvest. Over the past decades, agricultural production has gradually declined. Productivity is low and Kosovo now has to import 2/3 of all food, mostly from neighboring countries.
More than half of the agricultural land is arable land, where cereals are grown, especially wheat and maize. Potatoes, melons and vegetables such as peppers and tomatoes and berries are products that many small farmers sell in the local market. Just over one third of the agricultural land is pasture, a few percent is fruit and vineyards and close to a tenth is in the trough each year. Most of agriculture is not market oriented; even in larger farms you consume half the harvest yourself. Area yield is significantly lower than in neighboring Albania and Northern Macedonia but higher than in Serbia.
The agricultural land is extremely fragmented. Two-thirds of all farms are less than 3 hectares, only 1.4 percent are larger than 10 hectares. Small farming is very common in the Balkan Peninsula, but the land in Kosovo is more fragmented than elsewhere. During the Yugoslav era, the state owned some land that was run as state-owned large farms, but there were also a large amount of privately owned small farms. Now almost 90 percent of the agricultural land is privately owned.
Agriculture was severely affected by contradictions and wars in the 1990s and by the political and economic instability that followed. Irrigation systems have been poorly maintained and have expired, and only 17 percent of all agricultural land is irrigated. Mistreatment with the soil also makes erosion more common. Lack of capital and unclear ownership conditions mean that it is very slow to rehabilitate agriculture, and it is also a business that does not interest foreign investors.
Fruit and vegetable growers could compete with organically grown goods, since the agriculture in Kosovo uses very little of chemical products. But at the same time, soil and water are becoming increasingly degraded by pollution from coal-fired power plants and from the mines’ slag piles.
Livestock management has shown significantly better results since the mid-00s. It is stimulated by the fact that domestic demand for meat and dairy products is significantly higher than production. However, there is a limitation in the food industry being insufficient. During the Yugoslav era, agricultural products were taken care of by large state food industries, but they were closed down. Instead, there are several private companies, usually with small capacity and in some cases with inadequate management, production and distribution.
Kosovo’s agricultural policy is aimed at promoting the cultivation of vegetables and fruits by small farmers for export. Increased milk production and breeding of chickens are also included. But the market organization is weak and it is rare to offer advice to small farmers regarding modern farming methods and quality requirements. The state’s investments in rural areas are very limited and they are mainly directed to infrastructure, such as irrigation facilities.
More than 40 percent of the country is covered by forest. Of this, nine-tenths are deciduous forest, mainly beech and oak. One third belongs to small private forest owners while two thirds are owned by the state. The quality of forest and forestry is not good. During the 1990s, the forests deteriorated seriously and it has continued thereafter. Only one third of the forest area is now classified as ecologically healthy and economically productive. This is a result of many years of abuses and lack of funds for investment. A lot of fuel is still being extracted from the forest and this is counteracting deliberate forestry. Above all, clearing and thinning are required to obtain a productive forest.
Funds are also lacking for effective control in the forest areas. In many cases, ownership conditions are unclear and spiteful ownership is common. Illegal logging is a recurring problem and occurs in just over a third of forest land. This is especially the case in the border areas, where it also takes place in organized form and linked to smuggling.
The poor state of the forest means that it is not the resource base that gives the impression of area. The forest industry cannot compete internationally when the quality of timber is low. The situation is considerably worse than in most surrounding countries where many of the forests have been certified and can show responsible forest management. In Kosovo, environmental considerations and sustainable forestry are something unknown or low priority, even though they are expressed in the Forest Act.
Investors do not see forestry in Kosovo as a profitable industry. To change this, the government has decided on duty-free import of forestry and forestry equipment.
The mining and metal industry is the basis for the country’s economy. In 2011, metals and metal products accounted for 61 percent of the total export value, and also included ore and limestone and other industrial minerals, the proportion was 74 percent. It had then increased for several years as a result of both increased production and rising world market prices. Lead and zinc concentrates are important export goods and the assets of lead, zinc and silver are considered to be very large.
The longest tradition has been the extraction of lead and zinc, metals that were used in the area already during Roman times. They are mined in northern Kosovo, in the area that was the focus of the war between Serbs and Kosovo Albans in the late 1990s. During the Yugoslavian era, mining in the mines of the Trepca Valley and east of Pristina accounted for 70 percent of Kosovo’s GDP, but most of the mining stopped during the war. The state-owned company Trepca resumed operations in 2005 and production then increased until 2011, after which it stagnated.
Continued contradictions between Kosovo Albanians and Kosovo Serbs, as well as the area’s uncertain political status, have so far failed to find investors to resume a large-scale mining. This entails major costs for modernizing mines, enrichment plants and, not least, smelters, especially as they are heavily environmentally polluting activities. Furthermore, a large part of the population in the area believes that privatization would mean losing control of a natural resource that could then gain foreign owners. Only one mine in the north and two in the east are active. In both areas, Trepca also has enrichment plants, while the company’s lead smelter and zinc refinery are located at Kosovska Mitrovica/Mitrovicë, in an area where ethnic contradictions sometimes paralyze the business.
Nickel was mined by the state-owned company Ferronikeli until the end of the 1990s in several mines in central Kosovo. In a smelter, ferro-nickel was produced for export. Production ceased largely in 1998 and the plants were bombed by NATO in 1999. Subsequently, operations ceased entirely for environmental reasons and pending privatization. Two of the mines and associated smelters in Drenas were purchased in 2006 by a multinational company that modernized the facilities. It is now one of Kosovo’s largest companies with more than 1,000 employees and exports of iron nickel alloys account for an increasing share of the country’s exports. The operations are severely disruptive to the environment, as toxic metals are released into the air and water, and there are no regulations governing such emissions. Nickel mining increased sharply until 2011, but then stagnated.
Kosovo also has other minerals worth mining. In the past, chromium, bauxite and magnesium were recovered, but failure to maintain the out-of-date facilities and also theft of equipment caused the mining to cease. At present, there are no resources to resume operations. Adjacent to one of the closed lead and zinc mines in the north are large deposits of high-grade halloysite, a rare mineral used in the manufacture of porcelain.
The energy supply is met to just over 60 percent with lignite and 30 percent with imported oil. Most of the remainder consists of firewood and a small part of water energy.
Kosovo has, after Germany, Poland and Serbia, the largest lignite assets in Europe. They are found in several areas and are of good quality with low sulfur content. In recent years, lignite has been mined in only two quarries located near Pristina. However, the assets there are dwindling, and a new, larger open pit is now being established in Sibovc, a little further west.
Electricity comes to 97 percent from two coal-fired thermal power plants, while the remainder is water energy. The coal-fired power plants produce less than half the energy they could deliver. They still use old-fashioned technology and in addition, a lot of electricity in the transmission network disappears, including through thefts. The state-owned energy company KEK cannot guarantee a secure electricity supply around the clock around the country and has large debts. The company’s investments are not enough to ensure a long-term and secure electricity supply. Demand for electricity is growing every year and this has meant that more electricity is being imported every year.
Oil and oil products are also being imported at increasingly high costs. In 2010, they accounted for just over 15 percent of the total import value.
There are far-reaching plans to demolish the worst power plant, thoroughly modernize the other and build a much larger and less environmentally disruptive coal power plant. In order to ensure the availability of lignite then the nearby new open pit in Sibovc is absolutely necessary. All in all, this is a gigantic economic project for the very poor Kosovo, and the funding will come from the World Bank, the US and the European Development Bank EBRD. Such a massive investment in lignite, which is the most polluting of fossil fuels, has become increasingly controversial in recent years, both nationally and internationally. However, financiers still believe in 2013 that in the short term it is the only solution to the energy problems there, problems that need to be resolved as soon as Kosovo is to start a stable economic growth.
Industry and service
You can only get a vague picture of the various industries’ production and employment, and the same goes for the service industries. Many businesses exist in the informal sector and are lacking in official statistics. The total data is therefore estimated.
The important industrial sectors in the early 2010s are mining, production of building materials and base metals, as well as the food, machinery, tools, furniture, leather and textile industries. The vast majority of companies produce only for the domestic market.
The manufacturing industry fell sharply during the 1990s when state-owned companies collapsed, and the decline continued with an annual decrease in production value of almost 2 percent during the period 2001–09. There followed an increase, but still in 2013, the manufacturing industry has not returned to the 1990 level of production.
For many decades, the mining and metal industries have been the most important industrial industries. The large plants now are a lead smelter, a zinc refinery and a nickel smelter. In the last decade, the construction sector has expanded, mainly because foreign aid has made it possible to build housing, roads and other infrastructure. As a result, the production of various building materials has increased significantly.
The industry that has the most employment is the food industry, which encompasses a number of small businesses (see Agriculture). The forest industry consists mainly of small sawmills that use simple technology. Their activities are limited by the fact that rural infrastructure is poorly developed. A furniture industry has started to emerge, which benefits from the fact that there is a large, young workforce and that the wage situation is very low in Kosovo.
Prior to the disintegration of Yugoslavia in 1991, the textile industry was the second most important industry after the mining industry in Kosovo and then had its market throughout Yugoslavia. That activity reached its peak in 1990 when the 15 state-owned factories employed more than a thousand textile workers. None of these factories and companies are now left. Kosovo’s textile industry in 2010 comprised approximately 450 private companies, most of them small and almost all focused on clothing. A few sewing clothes for foreign clothing companies, among them Kosovatex in Pristina, which makes jeans. Also export-oriented is Ramatex, which produces yarns in acrylic and wool.
Reliable statistics are also missing regarding the size of various service sectors. Around 2010, it was estimated that about 18 percent of employment in the country was in commerce and personal services and 16 percent in teaching and professions with long education. Finance and insurance services and real estate agencies are still very small industries. The overall picture shows that Kosovo has a long way to go before the country has a modern, service-oriented business.
- The capital city of Kosovo is Prishtina with a population of 210,000 residents (2015). Other major cities include Prizren, Ferizaj / Uroševac, Peja / Peć, Mitrovica.
Since independence in 2008, Kosovo’s foreign trade has grown steadily, but from a very low level. The current account deficit grows every year. In 2017, the value of imports amounted to US $ 3,223 million, while exports yielded only 428 million.
Exports to an even higher extent than previous products from the mining and metal industry, and production problems in that sector are immediately reflected in increased foreign trade deficits. In 2011, metals and minerals accounted for about 3/4 of export earnings. Furthermore, agricultural raw materials and, but to a lesser extent, machinery and electrical equipment, rubber and plastic products and textile and clothing products are exported. Imports have a wider composition. There, the most important commodity groups are fossil fuels and base metals, food, machinery and transport, electricity and pharmaceuticals and other chemical products.
Kosovo’s trading partners are mainly located within the EU and CEFTA, the Central European Free Trade Association. In 2011, about 45 percent of exports went to countries within the EU, and from that came about 40 percent of imports. The most prominent countries there are Italy and Germany, and mainly the import of machinery, transport equipment and refined oil. To the CEFTA area, 24 percent of exports went in 2011 and from that came 37 percent of imports. In addition to Kosovo, CEFTA covers six other countries in southeastern Europe, and among them Kosovo trades primarily in Albania, Northern Macedonia and Serbia. In recent years, India has emerged as a trading partner and trade with Turkey has also increased. At the same time, the role of CEFTA has been reduced.