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The countries of the Western Balkans are facing a series of economic shocks at the same time. The region’s economy had just begun to recover from the recession caused by the Covid-19 pandemic, but now it also has to face the consequences of the war in Ukraine, a sharp rise in inflation and an urgent transition in the energy sector.
Moving forward through these crises involves risks, and will require careful choices. The six Western Balkan economies – Albania, Bosnia and Herzegovina, Kosovo, Montenegro, Northern Macedonia and Serbia – experienced a major economic recovery of 7.4 percent growth in 2021 as the region began to emerge from recession. in 2020.
In fact, the recovery rate exceeded forecasts, due to a combination of rising consumer demand, eased travel restrictions despite high rates of infection and low vaccination rate, and a return on investment and increased exports. – that all this assisted by continued fiscal support from the governments of the region.
So we had a return to economic growth, with the creation of new jobs, which helped reduce poverty throughout the region. Tax revenues also increased over the past year, reducing budget deficits and public debt.
However, one year of growth is not enough time for each country to rejuvenate–building the economy and preparing for the coming crisis. Public debt fell to 57 percent of GDP in 2021, about 4 per cent percent lower than the peak of 2020, but still 50 percent higher compared to the period before Covid-19 of 2019.
As a result, governments across the Western Balkans entered this year with a more limited room for maneuver. Even before the outbreak of war between Russia and Ukraine, economic growth in the Western Balkans was already slowing towards pre-crisis rates. yes as inflation was rising as supply constraints and suppressed demand around the world led to rising prices.
The war in Ukraine is exacerbating these two trends, and is continuing to drive up inflation more and more. It is also undermining business and consumer confidence, affecting trade and tourism, and causing serious disruptions in the food and energy supply chains.
This is especially true for Serbia and Montenegro, which are the Western Balkan economies most exposed to trade with Russia and Ukraine. The Western Balkans are currently facing a particularly precarious perspective.
Aside from the outbreak of war in Ukraine, Covid-19 has not disappeared, and the power outage caused by the war in Ukraine has highlighted weaknesses associated with the region’s still strong support for fossil fuels.
While we expected a strong and sustained return to economic growth in 2022 after most epidemiological measures were lifted, and as a still timid demand boosted consumption and investment, the war has broken this trajectory.
Under the baseline scenario, we expect real output to grow by 3.1 percent in 2022 – a revision down almost 1 per cent percent – and below the historical growth rate for the region. Moreover, the continuing economic downturn and forecasts for higher inflation could occur if the Ukraine-Russia conflict continues into the summer of this year, if sanctions are intensified and if EU economic growth is further slowed. of.
The region is currently facing not only a slowdown in economic growth, but rising food and energy prices mean that poorer households spending more than 60 percent of their food and energy budgets are experiencing a particularly high rate. high inflation.
They often lack the mechanisms to cope with a higher cost of living. The economies of the Western Balkans withstood the onslaught of the Covid-19 pandemic relatively well, as they recovered faster and stronger than expected, using fiscal policy to support the most vulnerable families and companies.
However, resources have been depleted, and now the main challenge is how to respond to the most urgent needs, while keeping in mind the reforms needed to support a more equitable, greener and greener economic growth.estable tomorrow.
Governments will need to be frugal, carefully using their limited fiscal resources to protect the poorest families, who spend a good chunk of their income on food and energy.
Political measures to respond to current and emergency needs must be limited in time so that governments can return to rebuilding defense mechanisms as pressures begin to ease.
Finally, governments must not forget the neglected reforms since 2020, which are vital to strengthening potential long-term economic growth. Structural reforms to improve human capital, support labor market participation (especially for women and youth), and strengthen competitiveness would help boost potential growth that had slowed even before the current crisis.
Moreover, attracting more environmentally friendly and higher value-added foreign investment would require greater efforts to improve business regulations and promote connectivity and digitalisation./bota.al
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