Kosovo finds profitable niches to drive growth

Kosovo finds profitable niches to drive growth
Diaspora funding is largely channeled into the real estate sector, but Kosovo is also establishing itself as an exporter in a range of niches from IT to furniture to beverages. / Clare Nuttall
By Clare Nuttall in Pristina November 17, 2023

Construction activity across Kosovo’s major cities is the most visible evidence of the country’s growth, but the small country is also establishing itself as an exporter in a range of profitable niches from IT to furniture to beverages. All this helped Kosovo, despite being a small and open economy and thus vulnerable to shifts in the global economy, make it through the recent crises sparked by the pandemic and Russian war in Ukraine.

Diaspora-fuelled building boom 

The hills around the capital Pristina are bristling with cranes and half finished high-rises. The roads stretching out of Pristina and smaller cities are lined with huge out-of-town furniture stores, stonemasons, white goods vendors, bathroom and kitchen shops. The intense construction activity — and related growth in home decor sales — are largely related to investments by Kosovo’s large diaspora, funding the ongoing building boom. 

Kosovars working abroad sent back €1.2bn in 2022, an increase of 5.1% from a year earlier, and accounting for 14.1% of GDP, Bank of Kosovo data showed. Meanwhile, returnees who have made money abroad often opt to buy properties in their home country. 

Blendi Hasaj, executive director of Pristina-based think-tank GAP Institute says that there are many dimensions to the high level of construction, but one of the most important is the diaspora. 

“Diaspora ties with their home country remain very strong. They keep sending large amounts of money as remittances to relatives, keep buying properties. Investments in real estate are largest category of [foreign direct investment] FDI. This is one of the major reasons for the development of the construction sector,” Hasaj told bne IntelliNews in an interview in Pristina. 

There are, however, concerns about the focus of FDI on Kosovo’s rapidly growing real estate sector. “Kosovo’s FDI inflows have recently increased, but over-concentration on real estate activities — determined by diaspora demand for real estate investments in Kosovo — renders the impact of FDI on growth limited,” said the World Bank office in Kosovo in comments emailed to bne IntelliNews

Previously, FDI was concentrated on the financial sector and privatisation-related opportunities. “Kosovo needs investment which enhances private sector know how and has higher productivity spillovers. Such foreign investment is vital to enhancing the sustainability of Kosovo’s growth model, enabling integration into international value chains, and resulting with higher quality job creation and accelerated poverty reduction,” the World Bank said. 

Diversified investment 

However, economic activity is not solely concentrated in the real estate sector. Robust services exports in particular helped Kosovo to weather the crisis, with the service sector, notably retail and tourism, experiencing significant growth, again partly driven by increased diaspora inflows.

“Kosovo is one of the youngest countries in Europe and being close to major markets in Europe and having a young population give the country advantages for growth. Furthermore, low taxes and labour costs, a healthy financial sector, and strong ties with its diaspora add to the advantages,” said Anita Kovacic, CEO of Raiffeisen Bank Kosovo (RBK). 

“[The] IT sector is thriving recently, and many young people are involved in this sector. In recent years, the country has begun to shift its focus to a greener and more digital economy, therefore technology and renewables has high potential, but also tourism, agriculture, and manufacturing to move toward a more export-oriented economy.” 

The services sector was an important contributor to the overall 3.9% year-on-year GDP expansion in the first quarter of 2023. While growth slowed to just 2.0% in the second quarter, forecasts for the full year are in the range of 3.2% from the World Bank, 3.5% from the European Bank for Reconstruction and Development (EBRD) and 3.5-4% from the International Monetary Fund (IMF). International financial institutions (IFIs) do, however, warn that there are significant uncertainties due to global, regional and domestic tensions, not least the volatile situation in the north of Kosovo.

Booming ICT sector

Given the small size of the domestic market, Kosovo’s fast-growing ICT sector is mainly oriented to international markets. The latest Kosovo IT Barometer published by the Kosovo Association of Information and Communication Technology (STIKK) shows that 85% of companies in the sector export services and/or products, and among them 39% are focused exclusively on international markets.

Unlike the region’s bigger, more populous states such as Poland or Romania, where major international IT companies have set up their own centres employing hundreds or thousands of people, the Kosovan model is based on outsourcing — whether by a Kosovo-based company or by an individual freelancer providing their services to a foreign company. Again, diaspora investments are an important source of funding. 

Commenting on reasons for the success of the sector, bne IntelliNews' interviewees in Pristina invariably started with the young population — Kosovo boasts one of the youngest populations globally, with around 70% under the age of 35 — but they also cited the low taxes, ease of doing business, and language skills and cultural adaptability of young people. 

Unexpected success stories 

Outside of real estate and the ICT sector there are also a select number of niches where Kosovo has become an unexpected success story. 

“Since the pandemic-induced shock, exports of merchandise have experienced a spike, particularly in non-traditional sectors of manufactured goods and plastics, primarily from domestic companies which have penetrated new markets and have also utilised ties with Kosovo’s diaspora. Nonetheless, merchandise exports still account for roughly 1/10 of GDP,” according to the World Bank’s Kosovo office. 

Successful niches include furniture manufacture, food processing and beverage making including wine production. 

Mattress producer Ventius International is one of the biggest foam and mattress producers in the region, while there are numerous producers of doors, furniture and other wood products, despite Kosovo not being a major producer of wood.

“Producers in Kosovo are very innovative in producing furniture, which is exported to Switzerland and selected European countries,” says Zef Dedaj, acting general director of the Kosovo Investment and Enterprise Support Agency (KIESA), pointing out that it is a competitive market where companies need to “have the capacity to produce competitive or innovative products”. 

While not yet well known internationally as a winemaking destination, Kosovo has a positive trade balance in wine and exports other beverages too. Agriculture and food processing, tourism and manufacturing, including textiles and leather work, and construction also make up substantial shares of GDP.

Among the prominent companies are soft drinks producers Frutex, whose range includes the popular Golden Eagle energy drink, and Fluidi, which produces its own branded drinks as well as Royal Crown Cola International. Wineries include Bodrumi i Vjetër, Kosova Wine and Biopak. 

Attracting investment 

Regarding the investment climate, Dedaj says Kosovo stands out within the region due to positive developments in the regulatory framework and policy-making. The country experienced several years of political instability, but since the 2021 general election has had a stable government, under the leftwing Vetevendosje party. 

“Kosovo has good potential compared to countries in the region. It is still a developing country, and has a small population of 1.8mn, but I’m very confident when I say Kosovo is much more advanced in many dimensions,” says Dedaj. 

Going into more detail, Dedaj points to recent improvements in Kosovo’s position in several international reports and rankings. They include Transparency International’s annual Corruption Perceptions Index, and the 2023 World Justice Project’s rule of law ranking, both of which put Kosovo second among the Western Balkan countries (after Montenegro). Freedom House’s latest annual Nations in Transit report also noted positive changes. 

Dedaj says Kosovo has the “best tax system” in the region, notably with only 10% corporate tax. He adds that Kosovo has “improved legislation significantly in last years”, detailing changes such as the law on sustainable investments, the law on business organisations and the law on industrial parks and technology that has currently passed its first reading.

When it comes to international trade, Kosovo has been part of the Central European Free Trade Agreement (CEFTA) since 2006. Under the Stabilisation and Association Agreement with the EU, both sides have committed to gradually reducing and removing customs tariffs and quotas. Kosovo has separate agreements with non-EU countries like Turkey and the UK, and is currently negotiating with European Free Trade Association (EFTA) too. For countries where there is no such agreement, Kosovo charges customs duty of just 10%. 

Infrastructure bottlenecks 

On the other hand, while growth of the ICT sector was aided by good internet connectivity across the country, there are concerns about other types of infrastructure, especially energy, given the current reliance on ageing coal power plants that are among the worst polluters in Europe. The recent energy crisis also showed the risks this poses to the Kosovan economy. 

“Kosovo is a very small economy and we rely largely on imports,” says the GAP Institute’s Hasaj. “This means that if a major shock happens in large economies then we have some imported inflation in the country; if there is a major disruption in the supply chain it also affects us as a small economy. 

“With respect to the most recent crisis in the energy sector, even though Kosovo looks like it has sufficient production of energy, albeit based on coal, they [the power plants] are not operating at full scale. They were built decades ago, and go out of the system many times.” 

As the energy crisis eased, Kosovo’s inflation slowed this year. Meanwhile, the government responded to the crisis with measures such as subsidies for household electricity savings and the purchase of energy-efficient equipment.

However, for the longer term, investments in renewables capacity are seen as key for Kosovo to ensure a stable energy supply. Given the environmental concerns associated with lignite mining, there is a growing need for Kosovo to transition towards renewable energy sources. The country has untapped potential in solar and wind energy, and investing in these sectors can not only address environmental issues but also enhance energy security and create new economic opportunities.

In March, the government adopted its new 2022-2031 energy strategy, under which it aims to increase the share of electricity derived from renewable resources to 35% by 2031, from 6.3% currently. 

The World Bank office in Kosovo comments that aside from Pristina’s “new and ambitious energy strategy with a significant focus on reducing emissions”, there are other pressing infrastructure needs. Among them are investment into water and wastewater infrastructure, and road and rail transport.

Political headwinds 

Politically, the biggest problem facing Kosovo is the ongoing conflict with Serbia, from which it declared independence back in 2008. Serbia has never accepted Kosovo as an independent state, but the two countries are required to find a way to normalise their relations if either is to progress towards EU accession. At present, five of the EU member states do not recognise Kosovo as independent, meaning it has been unable to even secure candidate status. 

Meanwhile, the situation in northern Kosovo — populated mainly by ethnic Serbs — remains tense. Despite Belgrade and Pristina coming close to an agreement at the beginning of this year, it was not signed, and since then there have been sporadic outbreaks of violence. 

Moreover, Kosovo has been put under punitive measures by the EU and US for its failure to de-escalate tensions in the north of the country.

Hasaj notes that it’s hard to prove as yet whether the measures have had a direct negative impact on the economy, and points out that despite the measures IFIs continue to support the country.

The World Bank office in Kosovo made a similar point: “While it is difficult to establish a direct casual impact between recent developments in Kosovo’s northern municipalities and our growth projections for 2023, we do acknowledge that the instability caused by recent events is a source downside risk to our economic outlook.” 

While the immediate direct impact is limited, the World Bank warned that “if the measures are prolonged they could have a significant impact on Kosovo’s aspirations to structurally transform its economy”.

Despite this, Kosovo remains among the faster growing countries in emerging Europe, with IFIs expecting an acceleration in growth moving into 2024, though there are uncertainties that are mainly related to the political situation, both domestic and international. To date, however, despite its small size, the nation has demonstrated resilience, leveraging its openness to the world to navigate such uncertainties.