Republika e Kosovës Republika Kosova-Republic of Kosovo Qeveria Vlada Government. Input for Progress Report. January 2012 PRISTINA

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1 Republika e Kosovës Republika KosovaRepublic of Kosovo Qeveria Vlada Government Input for Progress Report January 2012 PRISTINA

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3 CONTENTS LIST OF ABBREVIATIONS AND ACRONYMS INTRODUCTION POLITICAL CRITERIA DEMOCRACY AND RULE OF LAW Institutions Parliament / Elections Public Administration Judicial system AntiCorruption Policies HUMAN RIGHTS AND MINORITY PROTECTION HUMAN RIGHTS AND MINORITY PROTECTION Minority rights, cultural rights and minority protection REGIONAL AFFAIRS AND INTERNATIONAL OBLIGATIONS ECONOMIC CRITERIA FUNCTIONING OF TRADE ECONOMY Reporting in relation to recent economic development Report on fiscal and monetary policies during reporting period Functioning of product markets Financial sector CAPACITYTO COPEWITH PRESSURE OF COMPETITION AND MARKET FORCESWITHINTHE UNION Human and physical capital Reform and liberalization of network industries Structural displacements in economy Interventions of Government in economy Trade integration EUROPEAN STANDARDS INTERNAL MARKET Free Movement of Goods Free Movement of Capital Custums and Taxes...29 a.customs b.tax Administration of Kosovo (TAK) Competition Public Procurement Intellectual Property Rights and Copyrights Employment and Social Policies Education and Research SECTIONAL POLICES Industry and SMEs Agriculture and fishing Environment Transport Policies Energy Information Society and Media Financial Control Statistics JUSTICE, FREEDOM AND SECURITY Visa, Borders, asylum and migration Money Laundering Police and Fighting Organized Crime Protection of personal data ANNEX I Laws approved by the government and assembly ANNEX II:TABLES Table 1: Key developments in external sector, in million euros and as % në GDP...45 Graph : Annual change in CPI and in base CPI (Core Inflation)...45 Table 2: Budget Revenues and Expenditures of local and central level January November, Table 3: Distribution of e FDI into sectors, as percentage in total FDI...46 Table 4: Indicators of banking sector...45 Table 5: Data on exportimport...47 Table 6: FDI participation in GDP and cumulative value of FDI from

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5 LIST OF ABBREVIATIONS AND ACRONYMS ACA ACSAP AGE AI AIGK AMPM CBK CBP CCMP CEC CECS CEFTA CLM CMIS CPC CPI DCSA DMPAR EC ECAA EPAP ERO ESPSM ETF EU EULEX FADN FIU FMC FMN FVA GDDS GDP GGO GPC HHI HIS IBM ICMM ICP IDP IFS IJPC IJPC ILCD ILEP IMCPAR IMGD IOD IOM IOO IPA IPAK KACC KAD KBA AntiCorruption Agency AntiCorruption Strategy and Action Plan Agency for Gender Equality Administrative Instruction Association of Independent Journalists of Kosovo Antemortum Postmortum Central Bank of Kosovo Cross border point Central Committee on Missing Persons Central Election Commission Central Election Commission Secretariat Central European Free Trade Agreement Child Labor Monitoring Case Management Information System Corruption Prevention Committee Consumer Price Index Department of Civil Service Administration Department for Management of Public Administration Reform European Commission European Common Aviation Area European Partnership Action Plan Energy Regulatory Office Electronic System for Pharmaceutical Stock Management European Training Foundation European Union European Union Rule of Law Mission in Kosovo Farm Accountancy Data Network Financial Intelligence Unit Financial Management Control International Monetary Fund Food and Veterinary Agency General Data Dissemination Standard Gross Domestic Product Good Governance Office Government Privatization Committee Herfindalh Hirchman Index Health Information System Integrated Border Management Independent Commission for Mines and Minerals Institute of Construction Products Internally Displaced Persons International Financial Institutions Independent Judicial and Prosecutorial Committee Independent Judicial and Prosecutorial Council International Legal Cooperation Division Initial Legal Education Program Interministerial Commission for Public Administration Reform Interministerial Group on Decentralization Intellectual Property Department International Organization for Migration Industrial Ownership Office Instrument for Preaccession Assistance Investment Promotion Agency of Kosovo Kosovo American Chamber of Commerce Kosovo Accreditation Directorate Kosovo Business Alliance 5

6 KBRA KC KCC KCDSEE KCF KCS KEK KESP KFA KGAWP KIPA KJC KJI KOSTT KP KPC KPS KSA LM MA MAFRD MCR MCYS MED MEI MESP MEST MF MFA MH MHRU MI MIA MKSF MLPA MLSW MoJ MoU MPA MTI NGO NQA OAG OCA OCR OLEP OPM OSCE PAK PAR PIA POE PPA PPRC PRB PTK QMS RAE Project Kosovo Business Registration Agency Kosovo Customs Kosovo Chamber of Commerce Kosovo Company for Distribution and Supply of Electric Energy Kosovo Curriculum Framework Kosovo Correctional Service Kosovo Energy Corporation Kosovo Education Strategic Plan Kosovo Forest Agency Kosovo Government Annual Work Plan Kosovo Institute of Public Administration Kosovo Judicial Council Kosovo Judicial Institute Electricity Transmission System and Market Operator of Kosovo Kosovo Police Kosovo Procurement Council Kosovo Police Service Kosovo Standards Agency Line Ministries Municipal Assembly/ies Ministry of Agriculture, Forestry and Rural Development Ministry for Communities and Return Ministry of Culture, Youth and Sport Ministry of Economic Development Ministry of European Integration Ministry of Environment and Spatial Planning Ministry of Education, Science and Technology Ministry of Finances Ministry of Foreign Affairs Ministry of Health Municipal Human Rights Units Ministry of Infrastructure Ministry of Internal Affairs Ministry for the Kosovo Security Force Ministry of Local Power Administration Ministry of Labor and Social Welfare Ministry of Justice Memorandum of Understanding Ministry of Public Administration Ministry of Trade and Industry NonGovernmental Organizations National Qualifications Authority Office of Auditor General Office for Community Affairs Office for Communities and Return Ongoing Legal Education Program Prime Minister's Office Organization for Security and Cooperation in Europe Privatization Agency of Kosovo Public Administration Reform Prishtina International Airport Publicly Owned Enterprise Public Procurement Agency Public Procurement Regulatory Commission Procurement Review Body Post and Telecomm of Kosovo Quality Monitoring System Project for Roma, Ashkali and Egyptians 6

7 RTK SCAAK SEB SEECEL SME SMESA SMP SOE SOK SOP SPO TAIEX TAK TBP TRA UNDP UNHCR USAID VAPU VAT VET VTC WB WG WWRO Kosovo Radio and Television Society of Certified Accountants and Auditors of Kosovo Standard Evaluation Body South East European Centre for Entrepreneurial Learning Small and Medium Enterprises Small and Medium Enterprise Support Agency Staff Monitored Program Socially Owned Enterprise Statistical Office of Kosovo Standard Operation Procedures State Prosecution Office Technical Assistance and Information Exchange Tax Administration of Kosovo Tam/Bas Project Telecommunication Regulatory Authority United Nations Development Program Office of the United Nations High Commissioner for Refugees United States Agency for International Development Victim Assistance and Protection Unit Value Added Tax Vocational and Education Training Vocational Training Centre World Bank Working Group Water and Waste Regulatory Office 7

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9 INTRODUCTION The report contains key developments in Kosovo as of 1st of September 2011 until 31st of December 2011, respectively fourth quarter of Government of the Republic of Kosovo expressed its readiness to submit additional data for this quarterly period for Kosovo Progress Report for European Commission, which will be published in autumn of the next year. Data presented in this report focus on the progress made towards: implementation of reforms; development of legislative and administrative capacities; identified challenges in European Commission Progress Report for 2011, and implementation of European Partnership priorities, through EPAP; Data structure corresponds to European Commission Progress Report by providing information in three following fields: Political Criteria, Economic Criteria and European Standards. INTRODUCTION 9

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11 1. POLITICAL CRITERIA 1.1. DEMOCRACY AND RULE OF LAW INSTITUTIONS During reporting period, the Assembly has reviewed 8 reports of independent institutions, and has drafted reports on monitoring of 8 laws, which later on were approved by functional committees. In order to increase capacities of the Assembly 7 trainings for 114 officials were delivered. Fields of trainings were as following: drafting of legislation, new law on civil service and sublegal acts, law on civil servants salaries, practices based on regulation practices of European Union (EU), international standards on human rights, management of written and electronic documents. 1. POLITICAL CRITERIA On 21 December 2011, the Government has approved European Partnership Action Plan Furthermore on the Government has approved Government Annual Work Plan (GAWP) for 2012 (including as annexes the government legislative programme and the plan of strategic documents), and on 1 February 2012 the Government has approved the structure of Executive Committees for European Integration. As regards to decentralization, following sublegal acts have been drafted: amendment of the Administrative Instruction 2011/1 on Establishment of Municipal Human Rights Units, Guideline on Increasing Quality of Municipal Acts, Sample Regulation for Consultative Committees and Sample Regulation on Cooperation between Municipality andvillages, as well as with urban neighbourhoods. The system based on indicators for performance appraisal of municipalities is developed in all municipalities, except three municipalities in the north part. During 2011 review of measurement indicators in the installed system has been carried out. In cooperation with USAID and Municipalities, out 232 indicators 126 of them were set in system PARLIAMENT / ELECTIONS Central Election Commission (CEC) following the analysis of past election processes has drafted recommendations in relation to amendment of the Law on Elections, which were then sent to Election ReformWorking Group. During reporting period, 15 CECS officials in total have been trained on the topics such as Voter registration and creation ofvoting List", and "Official Management in Institutions" PUBLIC ADMINISTRATION As regards to public administration reform, InterMinisterial Commission for Public Administration Reform (IMCPAR) during the meeting held on has approved Strategic Development Plans for the Office of Prime Minister (OPM), Ministry of Economic Development (MED), Ministry of Justice (MoJ) and Ministry of Culture, Youth and Sports (MCYS). Furthermore, during the same meeting IMCPAR took the decision that the Department for Management of Public Administration Reform (DMPAR) monitors all Strategic Development Plans, and it was decided that the Ministry of European Integration (MEI) assists DMPAR with its one representative. Furthermore, the proposal for enlargement and change of organizational structure of the Ministry of Kosovo Security Force (MKSF) was approved whereby the Liaison and Representation Sector will be established within the Department for Security and Cooperation. During the meeting held on , the Government approved Strategic Development Plans for OPM, MED and MCYS. Government has also approved the Strategic Development Plan for Ministry of Finance (MF) during the meeting held on , while on was approved the Strategic Development Plan of MoJ Whilst, in the meeting held on the Government of the Republic of Kosovo has approved the document on internal organization and systematization of job positions in the Ministry of Agriculture, Forestry and Rural Development (MAFRD). 11

12 Some responsibilities of information system of payment of budget organisation have been decentralised (which include payroll, financial report, payment order, and financial report according to budget organization structure). In addition to capacity advancement to use computer software, 79 trainings have been organized in total for budget organizations, where 82 officials in total have attended these trainings. Furthermore, the manual on planning human resources in Kosovo civil service and manual on institutional organization were drafted. During the reporting period, Kosovo Institute for Public Administration (KIPA) has organized 33 training courses in the following fields: management and general administration, human resources, procurement, EU, municipal affairs. Trainings with high priority were trainings on support of Law on Civil Service and sublegal acts, trainings on public procurement, modules on advanced certificate according to the Law on Public Procurement, municipality support trainings, and EU related trainings. During this period 1053 officials in total have been trained JUDICIAL SYSTEM As a part of implementation of the Law on Criminal Sanction Execution no. 03/L191, AI on serving in special premises of correctional institution; AI on hygienic and food packages; and AI on official management of Kosovo Correctional Service (KCS) have been approved and have been published on Working group on drafting rules for court restructuring, according to Law on Courts, has approved regulation and Plan for implementation of the Law on Courts. This plan, as it is determined by Law on Courts was approved and posted on Kosovo Judicial Council (KJC) webpage on On , Memorandum of Cooperation between MoJ and State Prosecution on transferring of Victim Assistance and Protection Unit (VAPU) from MoJ to State Prosecution was signed. On , Memorandum of Cooperation between MoJ and KJC on transferring of Judicial Integration Unit was signed. During this period, based on total number of vacant positions for judges (112), 26 positions were announced for nonalbanians communities. During this process five (5) judges of Supreme Court have been appointed: three (3) Albanians, one (1) Serb and one (1) Turk. In addition, six (6) judges were decreed by the President of Kosovo, two (2) are for Economic Court, while four (4) for Special Chamber of Supreme Court as well as it was made the decision on announcement of five (5) more new positions for Special Chamber. Furthermore, on , 87 first mediators of the Republic of Kosovo were licensed. As regards to institutional capacity increase, during the period September December 2011 on Ongoing Legal Education Program (OLEP) 31 trainings have been organized in different fields. The number of candidates that have graduated during this period after they completed trainings on Initial Legal Education Program (ILEP) is 32. Moreover, Kosovo Judicial Institute (KJI) has organized 8 specialized trainings whereby 126 officials were trained, out of them 103 judges, 10 prosecutors and 13 others. KJC has organized trainings on implementation of manual on court management where the leadership of all courts was involved. In total, 53 Presidents of the Courts and 53 Court Administrators have been trained. Nine (9) employees of Independent Judicial and Prosecutorial Council (IJPC) were transferred to KJC Appointment Office. Kosovo Prosecutorial Council (KPC) has approved the implementation plan of the Law for State Procurement, which has been announced on State Prosecution's web site. KPC has adopted the Regulation on the organizational structure and administrative support function to the state Prosecution's office. On KPC has appointed the general director of the Secretariat of KPC and director of Performance Assessment Unit of Prosecutors. During 2011, KPC has appointed 13 candidates for prosecutors. 8 of them have been decreed by the President, and other 5 are in the process of decreeing. KPC and State Prosecution have almost completed the supporting staff of Prosecution. 12

13 The Unit for Performance Assessment of Prosecutors has installed the application of database in all Kosovo Prosecution offices, except in Mitrovica. KPC has established the office for trainings, as part of the Unit of Performance Assessment of Prosecutors. In addition, two trainings for total 16 officials of International Legal Cooperation Department (ILCD) were organized in the field of international legal cooperation. During reporting period, ILCD has preceded about 1700 cases received by foreign countries, with exception of those countries that hesitate to cooperate with Kosovo's MoJ. With regards on functionalizing the notary system in Kosovo, on , MoJ has approved two administrative instructions: AI on Competition Procedure and Selection of Notary Offices; and AI on the Number and Location of Offices, necessary premises and equipment for Notary. With these two instructions the legal base to apply for notary system was completed. In the light of establishment of a more favourable environment for business, on the second group of 38 notaries of the Republic of Kosovo was certified ANTICORRUPTION POLICIES In light of improvement of anticorruption legal framework application, Anticorruption Agency (ACA), during October has drafted one report on implementation evaluation of Anticorruption Strategy and Action Plan (ACSAP) , which was integral part of Anticorruption Strategy proposal ACSAP was approved by Government on As regards to asset disclosures of senior public officials, during reporting period, in ACA were submitted 123 asset disclosures in total. Out of 1830 officials that have made regular annual reporting of assets, 20% of them have gone through complete check. Special attention was paid to activities on raising public awareness in the field of anticorruption policies. ACA in cooperation with Tax Administration of Kosovo (TAK) through Office of Professional Standards has organized the training for ACA officials. Also, during this period were organized presentations in Regional Offices in Mitrovica, Peja, and Gjakova whereby around 100 TAK officials were trained. ACA together with UNDP and Association of Professional Journalists of Kosovo (APJK) on , on international day against corruption have given the awards for anticorruption journalism, which have now become traditional. ACA also in cooperation with Good Governance Office (GGO) (inside OPM) on the same day has organized a roundtable to mark international day against corruption HUMAN RIGHTS AND MINORITY PROTECTION HUMAN RIGHTS AND MINORITY PROTECTION In the field of human rights, the Assembly has completed the selection procedure for filling in 5 positions for Deputy Ombudspersons. Their appointment was made following recommendations made to Ombudsperson. Furthermore, Deputy Prime Minister was assigned to supervise the review process of institutions that deal with human rights and protection of minorities. Government signed the decision on As regards to addressing the issue of missing persons, the Assembly of the Republic of Kosovo, on 31 August has approved the draft law on missing persons, which was decreed on the same day by the President of Kosovo (decree number: DL ). During this reporting period works in 13 locations have been completed, while mortal remains of 27 identified persons during this time were handed over to their families at that time. In addition, during October 2011, the entire staff of Governmental Committee on Missing Persons (GCMP) is trained on functioning of database AMPM (antemortempostmortem), by International Committee of the Red Cross. 13

14 In the field of Freedom of Association, the Assembly has approved supplementamendment of the Law on Freedom of Association in NonGovernmental Organizations and was decreed by the President of Kosovo on (decree number: DL ). Annual reports (2011) have been drafted in the field of human rights and the same are published and disseminated to all relevant stakeholders, and they are as the following: Report on implementation of Strategy and Action Plan on Human Rights; Report on implementation of National Plan of Action on Persons with Disabilities; Report on implementation of Strategy and Action Plan for Child Rights; Report on implementation of National Plan of Action for Roma, Ashkali, and Egyptians communities. In order to increase capacities on Monitoring Child Labour (MCL) at local level, during reporting period, MLSWDIPS held trainings with members of Local Committees of Action on Monitoring Child Labour in order to realize the action plan to spread the process of MCL in the entire territory of Kosovo. The trainings have been conducted in 31 municipalities of Kosovo, where 500 participants have been trained. Child Labour Monitoring Structures have been established in all Kosovo municipalities during this period, except the northern part of Mitrovica. Furthermore, on by Decision no. 04/36 National Council on Persons with Disabilities was established, as well the matrix on implementation of European Commission (EC) recommendations on RAE Communities issues was finalized. On , Government of Kosovo appointed chief of the Agency for Gender Equality. In this period regional conference: Empowering of women in decisionmaking Kosovo towards accession to EU was organized on September. Also, on the occasion of international day for elimination of violation against woman, Kosovo Program against Domestic Violation was promoted on 25 November. Two roundtables have been organized: Implementation of Resolution November 'Women, Peace and Safety' and gender equality from the perspective of Prishtina University Students' Parliament. Terms of References for research Women and Property Rights in the land the Role of Women in the use of land and property in Kosovo have been prepared. In the light of strengthening property rights, Kosovo Commission on Property during two sessions has placed at first instance 4091 filed claims. Whilst, from Kosovo Supreme Court panel, as second instance, 37 claims have been placed, out of them 6 appeals have been admitted/decision of Commission was changed, 30 appeals were rejected/decision of Commission was confirmed. The total number of implemented decisions by Kosovo Property Agency (KPA) during reporting period, by including here all forms of implementation (repossession, administration, closure by request of party, etc) is claims. During this reporting period 232 physical expels from properties have taken place MINORITY RIGHTS, CULTURAL RIGHTS AND MINORITY PROTECTION In the field of cultural rights, during this year the phase of preventive/emergency measures works in the process of restoration and conservation of Prizren Fortress was completed. Interministerial group for PAR has approved Strategic Development Plan of MCYS for the period List of Cultural Heritage undertemporary Protection with one year validity was approved on 30 September As regards the implementation of the legislation on application of official languages, a study Language policies in Kosovo has been publicised. In this reporting period the Commission has received and reviewed 6 appeals filed by respective entities. To strengthen the Language Commission, with the Government Decision nr.09/47 dating , Government Working Group was established to reform the Language Commission and to design policies on language use in Republic of Kosovo. This working group is in the process of drafting a regulation which will regulate (reform) the composition and competencies of the Commission, later on this regulation will be handed to Government for approval. Visits meetings have been made in central institutions with representatives of Ombudsperson's Office where there was cooperation in the field of proceedings of appeals filed in relation to use of languages. 14

15 The number of nonmajority members employed in central level institutions is 2504 or 9.5%, while in local level institutions is 4909 employed or 13.35%. As regards to RAE community, first stage of project for sheltering of residents of neighbourhood "Ali Ibra " of RAE community, was completed and in total 29 families were placed in new houses. Regarding the returnees, during the reporting period 124 families have returned. In relation to number of activities `go see` in total 9 visits with Internally Displaced Persons (IDPs) were conducted in 9 municipalities of Kosovo. Following completion of project in Pogragje, during September 13 houses have been handed over to the returned families of Serb community and dissemination of food packages and household furniture was conducted. Through direct investment in Shterpce municipality 8 houses have been built for IDPs of Serb community, which were handed over. Also 51 houses have been constructed for all communities in all Kosovo regions. With the aim of integrating communities, several infrastructure project have been finalized with their activities such as: paving the road Tropikane Preoce; building the craft centre in Lower Gushterica; rebuilding of TV Gracanica building, building of water system in Osjan in Istog Municipality; building the road around Sv Petke in Berevce, Stepce Municipality, construction of access road to a place called Livade, Shterpce Municipality; building the road Sveti Stefan in Shterpce Municipality; building of the reservoir for neighbourhood in Merxhice, Shterpce Municipality; building the bridge in Livade, Shterpce Municipality; supply with sand for paving the read in village Vitomirice in Peja Municipality, renovation of public lightening in the village of Celine in Rahovec Municipality; fencing the cemetery in the village of Celina, Rahovec Municipality; supply with sand for paving roads in village Jashince, Shterpce Municipality. Furthermore, RRK II project has been completed through which 214 houses have been constructed for all internally and externally displaced persons in four municipalities of the project: Klina, Ferizaj, Obiliq and Rahovec, and it were also made the division of aid harmonized packages (humanitarian assistance) on the occasion of DPs (food, inventory, equipment, fuel and grants). During this period 43 NGO projects of minority communities have been financed, which aim is to develop and integrate minority communities in Kosovo. The value of projects reaches the amount of 213, euro. Also in order to support the sustainable development and reintegration of minority communities as well as their economic development and it was made dissemination of these materials: Construction material at the amount of 1,900,251.97; 300 food packages; Fuel (wood) of 565 m³. 1.3 REGIONAL AFFAIRS AND INTERNATIONAL OBLIGATIONS According to obligation of fulfilling annual contribution of Kosovo Government in Regional Cooperation Council, the Republic of Kosovo has fulfilled its financial obligation towards RCC (decision on payment of 40 was made on ). During October 2011, having into consideration intergovernmental enforcement, the new National Coordinator for coordination of all initiatives of regional mechanisms was appointed. MED has participated in regular meetings within TKE, Ministerial Council (October 2011), Permanent high level Forum (October, December 2011); Task Force for Environment (October 2011); Task Force for EE (November 2011); Task Force for BRE (December2011); Task Force for Regional Strategy of Energy (December 2011). During this reporting period the meeting of Working Group for Trade on Services in Prishtina, and the workshop organized on Protection Measures were held.while during November, in Paris was held Joint Committee meeting and CEFTA week. In December, during the eighth round of technical dialogue with EU mediation, the agreement for Integrated Border Management (IBM) Kosovo Serbia was reached. In order to implement this 8 15

16 agreement an implementation three party group chaired by EU will be established, which foresees signing oftechnical Protocol where will be foreseen all technical details. BNK Program Kosovo Montenegro is approved by EC in December 2011, while the one in Kosovo Albania is signed in September Also Joint Monitoring Committees on programs BNK Kosovo Macedonia and Kosovo Albania are established. 16

17 2. ECONOMIC CRITERIA 2.1. FUNCTIONING OFTRADE ECONOMY During October, the budget for 2012 is reconciled completely with International Monetary Fund's (IMF) recommendations specified as one of the structural criteria for the end of Budget 2012 is approved in Kosovo Assembly on In compliance with requirements from European Commission, in October 2011, the meeting of Mechanism of Fiscal Supervision took place where it has been reported on the recent economic development as well as drafting of 2012 budget. 2. ECONOMIC CRITERIA During this period IMF has also made first evaluation of the SMP (Staff Monitored Program) for the period June September All quantitative criteria determined for the end of September 2011 are fulfilled with exception of accumulation of unpaid debts of Government towards suppliers, which are accumulated at a low value. In compliance with these developments, the IMF has issued positive evaluation on macroeconomic performance of Kosovo within SMP program for this period. In compliance with positive evaluation of macroeconomic performance by IMF, the World Bank (WB) in December has disbursed funds at the amount of 20 million as direct budget assistance within 2011 in support of sustainable employment program REPORTING IN RELATIONTO RECENT ECONOMIC DEVELOPMENT As regards to economic growth for 2011, the current data on trends of key sectors suggest that Kosovo's economy is evaluated to have marked an increase of 5.3% during It is estimated that mainly the consumption and investments make the most part of this increase. Furthermore, the consumption is estimated to have contributed with 5% in the real growth of GDP, while investments with around 2.0%. Despite considerable increase of export, net export remains again negative contributor to real increase, which is estimated to have contributed negatively with 1.7% in the real growth of GDP during Negative contribution in the real growth of economy is estimated to have given also the reduction of donor presence in Kosovo. More precisely, based on import data and crediting by financial sector, private investments are estimated to have been increased for 11.1% during 2011, with balanced contribution between public and private investments. The total consumption, on the other hand, is estimated to have marked an increase of 11.4% where in parallel of private consume increase, the increase of salaries of certain civil servants category is also evaluated to have given important contribution to increase of total consumption. Furthermore, nominal growth of GDP components during 2011 can be attributed also to the increase of price level although the data on quantity of imported goods, which are mainly used for consumption and investments, indicate for a considerable increase of these components also in the real value. As regards to external sector, during 2011 the trade deficit is estimated to be increased for about 0.3% in relation to GDP compared to 2010, where it is marked an improvement in comparison to As far as 2011 is concerned, the goods export is estimated to mark an increase of 7%, while the import of goods is estimated to be increased for 11%. These developments indicate that despite the fact that exports have marked considerable increase during the last years, due to the low basis and due to the major investing projects, which also stimulate considerably the import, it cannot be expected to have any considerable improvement in the balance of current account. Based on fact that Kosovo economy is a small open economy, the impact of movements in world markets is unavoidable. In this context, the increase of international process, mainly of food and fuel, is reflected almost directly also in Consumer Price Index (CPI) in Kosovo. Moreover, CPI during 2011 has marked an average annual increase from 7.4% impacted mainly by the increase of bread and fuel price, especially during first six months of this year

18 Table : Nominal GDP and its real growth Description Consumption Investments Net exports GDP GDP real growth in % ICK, in % Currrent Currrent Currrent Currrent Prediction In million Euros, unless is specified otherwise 3, ,309 3, % 4.5% 4,345 1,094 1,587 3,851 6,9% 9.2% 4,280 1,166 1,534 3, % 2.4% 4,531 1,369 1,710 4, % 3.5% 5,0.36 1,521 1,902 4, % 7.4% Methodology used for calculation of real growth is changed in compliance with methodology used by Kosovo Statistical Office (KSO). Growth for years is calculated by KSO, by presenting real growth in comparison with nominal value of previous year. With the same methodology was also done the evaluation of real growth for 2011 and the following years by MF. Prediction was updated based on last data published by KSO and Kosovo Central Bank (KCB). Developments in the payment balance As regards to external sector developments all assessments suggest that the end of 2011 will be characterized with improvement of capital and financial account. Estimated expansion of nominal value of current account during 2011 is expected to increase even more goods import and to deepen even more the trade deficit. More precisely, predictions for 2011 show that trade balance will reach the amount of 1,988 million and which corresponds with an annual increase of 11.9% compared to As result, current account deficit is expected to get worse during 2011, which in relation to GDP is estimated to mark an increase of 1.6% by representing 19.1% of GDP. More precisely, the data on trade with foreign countries for ten months of 2011 indicate that exports have continued to grow for 10.8% in comparison with the same period of 2010 by reaching the amount of 268,8 million. On the other hand, imports have increased for 14.7% by reaching the amount of 2,006 million. This relation of development in the key components of trade balance made this balance to get worse for 15.3% during this period, different from the same period of Until the end of the year, export is foreseen to reach the value of 325 million, whilst imports are expected to reach the amount of 2,313 million. Direct foreign investments, which contain around 8.6% of GDP during 2010 are expected to reach the amount of 385 million at the end of 2011 by marking an increase of 6.4% compared to 2010 (For further details of FDI dissemination in sectors see annex table). The remittances, which comprise around 10% of GDP, according to preliminary data, are expected to mark an increase of 5.3% in 2011, with the difference in nominal values of 22 million from However, even though the economy crisis of some Eurozone countries can impact on remittance trends during 2011, estimations on this category of incomes are very conservative and can reach the predicted amount. Trends in employment Source: SOK and Macroeconomy Department predictions, MF Based on registered data by Ministry of Labour and Social Welfare (MLSW) on the number of unemployed, cumulative number of registered as unemployed at the end of October 2011 was 334,559, marking a slight decrease of 0.3%, compared to number of registered at the same period of On the other hand, the number of employed through offices for employment until the end of October 2011 reached 6,517 persons. Only during October ,523 persons have been registered as unemployed, while 740 persons got employed. 18

19 Inflation trend indexes (possibly HICP) (base inflation) In 2011 there was a considerable increase of total level of prices compared to a stability of prices during 2010 (where inflation at the end of 2010 was 3.5%). As regards to 2011, inflation pressures were more distinguished in the first half of the year, where CPI for the first six months of the year was at the average of 9.6%, whilst CPI for the same period of previous year was 1.4%. The second half of the year 2011 indicated an ongoing decrease in total prices, where more distinguished decrease was marked during October and November where CPI marked 4.7% and 4.2% respectively. Based on the offered data from KSO it is noticed that CPI for the period of January November was averagely 7.7%. During the first part of 2011, the inflation was led mainly by increase of bread and wheat price. The increase of fuel price has contributed also to increase of inflation. At the end of November 2011, bread and grain prices marked an annual increase of 6.2%, fat and oils marked an increase of 5.7%, while fuel and petrol marked an annual average increase of 15.9%, whilst a decrease of prices was noticed in vegetable products. If we look CPI excluding fuel and food prices (graphically presented in annex), we see that CMI marked an average of 2% for the period January June and 1.5% for the period August November. Moreover, if we exclude from this index only the fuel prices, it comes out that CPI in the period January June was 9% and 4.9% for August November. These data give an indication that general level of prices is impacted, in particular from food prices and partially from fuel prices REPORT ON FISCAL AND MONETARY POLICIES DURING REPORTING PERIOD Evolution of monetary policy framework Exchange rate framework: Kosovo uses Euro therefore exchange nominal rate is determined by Euro movements towards other currencies in international markets. As regards to real effective exchange rate, these are calculated having taken into consideration the consumption prices of countries which have high participation in trade with Kosovo. As it can be seen in Table 2, the total of Real Exchange Effective Rate (REER) after a considerable estimation of first part of 2011 having made domestic products less competitive, started to get depreciated in the second part of the year in order to improve competitive position towards trade partners. This estimation trend during the first part of the year and depreciation in the second part of the year is similar both for trade partners inside EU as well as for partners inside CEFTA. Table 2: Effective exchange rates, nominal and real INDEX 2011 Description January Feb Mar April May Jun July Augu Sept Oct NEER REER (Total) REER (CEFTA) REER (EU) Evolution of fiscal policies Source: Kosovo Central Bank With 2011 budget have been determined expenditures of 1,434 million, while the planned incomes reach the amount of 1,261 million. Assuming on complete realization of planned expenditures, then it is expected that the primary deficit in 2011 will be 173 million, while total deficit (which includes the payment of interest and loan issuance for publicly owned enterprises) results in 227 million. In compliance with determined criteria on SMP agreement with IMF, Kosovo Government has managed to make execution of expenditures within determined ceilings by this agreement. In compliance with this agreement, as result of Post and Telecom of Kosovo (PTK) and its delayed 19

20 privatization with the purpose to preserve the satisfactorily level of banking balance, MF has not allocated a fund of 60 million from 2011 budget. This fund is allocated by: capital expenditures excluding highway expenses ( 30 million), lending for publicly owned enterprises ( 15 million) and from goods and services ( 7 million). Furthermore, the Government is committed to follow quarterly criteria for fulfilling fiscal objectives, criteria that will be reviewed at the same period of time by IMF staff. Based on the SMP agreement, the ceiling of primary expenditures until December 2011 is 1,433 million. For 2011, from TAK was planned to be collected 261 million. Until the end of November 2011, TAK managed to collect million, or 92% of the annual planned value. Whilst, compared to the same period of 2010, where the accumulated revenues were at the amount of 203 million, is noticed an increase of 19%. Border revenues, planned to be collected with 2011 budget reach the amount of 831 million. Customs authorities, till the end of November 2011, have managed to collect million, or 90% of annual planned value. Compared to the collected amount during the same period of 2010, is noticed an increase of 18% at the amount of collected revenues. Whilst, tax free revenues and own revenues (municipal and central) for 2011 are planned at the amount of 159 million. From these taxfree revenues are predicted 45 million out of which until November were collected 41.6 million or 92% of plan. While own revenues (municipal and central) are predicted at the amount of 113 million, out of which until November have been collected 99.2 million or about 89 % of annual plan. Also during this period 15 million additional dividends have been collected from what was planned at the beginning of the year, resulting with the total collected amount of dividends in 60 million. During January November, 1, million have been spent, or about 77% of the budgeted amount. This level of expenditures is for 12% higher than the level of registered expenditures for the same period of Until this period, 79% of planned expenditures are made by the central Government, while local government made 74% of their planned expenditure. At central level, capital expenses were made at the rate of 69% during period January November 2011, while at municipal level these expenditures were made at 65%. In total, during the reported period, million have been spent in capital expenditures, while 688 million have been spent in current expenditures (from both Governmental levels). Also, during this period 29.0 million were disbursed to Kosovo Energy Corporation (KEK) in form of loan. Table 4 in annex presents expenditures according to subcategories for central and local government. Having taken into consideration the level of revenues and expenditures until the end of November 2011, budget of the Republic of Kosovo has resulted with a deficit at the amount of 15.8 million. This has also increased the total level of bank balance for million during this period. MF in November 2011 has drafted the new fiscal package, based on suggestions of different stakeholders, such as Kosovo Chamber of Commerce (KCC), American Chamber of Commerce (ACC), Kosovo Alliance of Business (KAB) as well as Line Ministries (LM). Focus of this new fiscal package is making Kosovo an attractive environment for business work and possible fewer distortions. This package contains several scenarios, which would favour new businesses as well as exiting ones. IMF has given their suggestions and critics on this issue. Some of proposals of this package have started implementation in fourth quarter of this year, such as: Application of lower interest rates for tax delays ; Changes to excise by extending the statute of limitation and increasing of excise rates according to power of engine and vehicle age; Application of excise in lotteries; Total debt of Government: Public debt of the Republic of Kosovo includes means (lending) offered by international agencies. Public debt is mainly comprised of soft loans where 22 million are loans from IMF, which were obtained during SBA agreement in 2010 and other part are obligations towards WB in relation to inherited debt from the period of former Yugoslavia as well as other soft loans issued by WB 20

21 and KFW, which are concentrated on improvement of public administration and infrastructure, especially of energy and supply with water. Until now, stock of Kosovo public debt reaches million or around 5.34% of GDP, a lower percentage of debt if we refer to Maastricht Treaty, which defines the limit of financing with debt for state, which is up to 60% of GDP. The total paid amount for servicing of debt up to the end of November 2011 was million, out of which 6.8 million were for payment of usury money and 4.5 million for payment of interest FUNCTIONING OF PRODUCT MARKETS Liberalization of prices; Size of private sector During this period, private consumption did not mark any distinguished movement remaining in this way at the average of 91.5% of GDP, whilst, private investments were estimated to have been decreased slightly in 2011 as GDP percentage.this is a result of fast increase of other GDP components, in this case more accelerated increase of capital investments during 2011 compared to However, it is worth mentioning that private investments in nominal value during 2011 have marked increase compared to Table 3: Participation of private sector in GDP Description Private consumption Private investments % 91.2% 91.5% 19.6% 21.8% 21.6% Privatization During the reporting period, 1,137 employees in total from 12 Socially Owned Enterprises (SOEs) have benefited from early distribution of 20% of available proceeds from the sale of respective enterprise, in total amount of Business startup and closure During the reporting period September December 2011 in KBRA are registered 2,373 new businesses, whilst changes into existing businesses were made in 1,367 businesses and 311 businesses ceased. During this period in Mortgage Office are registered 10,964 mortgages. Business environment, judicial system and administrative capacities On , have also been licensed 87 first mediators of the Republic of Kosovo FINANCIAL SECTOR The total value of assets till September 2011 was 3.4 billion. Banking sector will continue to have the highest participation in financial sector (77.1% of assets). Pension funds managed with 16% of assets, while the remaining part of assets were divided between microfinance institutions (3.7% of assets), insurance companies (3.1% of assets) and financial auxiliaries (0.1% of assets). In relation to the number of Kosovo financial institutions, year 2010 was not characterized with any substantial change. The number of commercial banks and pension funds remained the same as in previous year, until one financial institution decided to stop operation in market. The structure of Kosovo banking sector ownership has not changed since 2008 it has been composed of 6 banks under international ownership and two others under local ownership. The sector remains dominated by international banks, which manage around 90% of bank assets. Furthermore, the banking system is characterized with a relatively high scale of concentration. This occurs as a result of three biggest banks managing around 70% of bank assets (until September 2011). However, during previous years, the scale of concentration marked a decrease continuously. Scale of concentration expressed through HerfindahlHirschman (HHI) Index for assets decreased to 2,109 points (September 2011), compared to 2,380 points (September 2010). 21

22 Until September 2011, the total value amount of loans was 1.66 billion (around 35% of GDP). Also until September 2011, the lending activity of banks marked a significant increase of annual rate from 16.8%, compared to 10.9% as it was in September The highest rate of increase in 2011 was registered in loans for enterprises 16.4% (4.0% in September 2010), which indicates an increase of faith for banking system towards businesses. Loans for family economies continued to increase with a slow growing trend of 18.1% (28.3% in September 2010). The structure of loans in 2011 was dominated by loans issued to enterprises, which comprised around 69.9%, whilst the remaining part of 30.1% was issued to family economies. The low level of production economy in Kosovo and its high dependence from import was also reflected in sector distribution of loans issued to private enterprises. The biggest part of loans was absorbed by service sector (72.1%), followed by industry loans (24.2%), agriculture (3.5%) etc. Net profit of banking sector until September 2011 was 24.6 million or 8.4% less than in the same period of previous year. The decrease of the profit during 2011 was mainly caused by faster increase of bank costs compared with increase of bank revenues. However, all banks that operate in Kosovo are well capitalized and continuously keep Capital Adequate Rate (CAR) above the criteria of 12% determined by KCB. CAR indicator in September 2011 remained 17.1%. During this period, the participation of nonperforming loans increased to 6.0% (4.6% in September 2010). However, nonperforming loans continue to be well covered by provisions for losses (117.2%). The year 2011 was characterized with lower rates of loans and interest deposits. Average rate of loan until September 2011 was 14.3% (14.7% in September 2010) and the average rate of deposit was 3.5% (3.7% in September 2010). Portfolio Investments outside the country marked a significant decrease until September 2011, reaching 80.4 million ( million till September 2010). Developments in global financial market can be considered as one of the contributors to decrease of portfolio investments. Out of million portfolio investments, 75% are investment of pension funds, while 25% are investments of commercial banks of Kosovo. The majority of portfolio investments outside the country were comprised of market financial instruments and investments to capital market CAPACITYTO COPEWITH PRESSURE OF COMPETITION AND MARKET FORCESWITHINTHE UNION HUMAN AND PHYSICAL CAPITAL Human capital: In the interest of better functioning of labour market and better harmonization of supply and demand to soften structural unemployment in Kosovo, Division of Labour and Employment during the period of September December 2011, through Public Services of Employment has mediated in employment of around 274 jobseekers from all minorities, including Roma, Ashkali and Egyptians (RAE). During this period of time the Employment Public Services have registered 3051 new jobseekers, from them 1529 female, 371 minorities and 17 persons with disabilities, as well as there was mediation for employment of 1499 jobseekers, out of whom 340 were female. The abovementioned data refer only to September and October since the information of labour market for the last two months gets published in January of the upcoming year. In order to improve work conditions in employment public services three municipal employment offices were established (in Malisheva, Viti dhe Obiliq) and it was made the renovation of the building for employment office in Istog during the period of September December Within the project 'Beautiful Kosovo' till the end of November 2011 have been implemented 7 out of 19 selected projects. Out of 7 projects implemented until now 163 jobseekers have been employed. Out of this number, 55 are from marginalized groups (young 40, women 1, disabled persons 11, from minority 3). For the period September November 2011 in 8 Vocational Training Centres (VTC) and their 6 mobile units have gone through training and 382 candidates are certified. Through the schemes 'Direct Training in Company and Institutions, jobseekers are included in the following projects: 22