1 Copenhagen Economic Criteria What Kosovo needs to do?

Transcription

1 Policy brief #8 GAP Institute for Advanced Studies Copenhagen Economic Criteria What Kosovo needs to do? June Copenhagen Economic Criteria What Kosovo needs to do?

2 June 2009 The Institute for Advanced Studies GAP is a local think tank located in the down town core of Pristina. GAP works on a variety of issues of relevance to Kosovar society and prides itself on being politically neutral, providing independent and non-partisan analyses on a wide range of topics shaping the future of Kosovo. GAP's reports, policy briefs, and other publications carry significant weight and are frequently cited, locally and internationally, by sources in the media, the international and donor communities, as well as by government officials and other political actors. GAP seeks to inform the public and contribute to solutions in an effort to make Kosovo a better place through a professional environment of research and development. The Institute for Advanced Studies GAP Instituti për Studime të Avancuara GAP Rr: Nëna Terrezë 41/29, 10000, Prishtinë, KOSOVO All rights reserved. No part of this document may be reproduced, stored or distributed without the prior permission in writing from the Institute for Advanced Studies GAP. Use for academic or non-profit purposes is allowed freely provided that proper credit is given to the original document. 2 Copenhagen Economic Criteria What Kosovo needs to do?

3 Table of Contents 1. INTRODUCTION KOSOVO IN RELATIONS TO THE EUROPEAN UNION THE COPENHAGEN CRITERIA KOSOVO INSTITUTIONS COMMITMENT ON FULLFILLING THE ECONOMIC CRITERIA IMPLEMENTATION OF ACTION PLAN ON EUROPEAN PARTNERSHIP IMPLEMENTATION OF THE ASSEMBLY OF KOSOVA ACTION PLAN ON CHALLENGES OF EUROPEAN COMMISSION 2008 PROGESS REPORT CONCLUSIONS AND RECOMMENDATIONS Annex 1: Kosovo compared to other countries with regard to economic situation CPI Index Comparison Table for EU 27 & Balkan Countries Unemployment Rate (%) Comparison Table for EU 27 & Balkan Countries Real GDP Growth (%) Comparison Table for EU 27 & Balkan Countries Foreign Trade Comparison Table for EU 27 & Balkan Countries Copenhagen Economic Criteria What Kosovo needs to do?

4 1. INTRODUCTION Kosovo needs a model to follow to help the country and its leadership towards state building, particularly in its current stage of state building. For the developing countries, like those of the Western Balkans, EU integration became both a goal and motive to undertake internal reforms in order to fulfill the conditions that enable them to become members of the European club. The European Union is a political and economic union of 27 European countries, creating a structure of supranational institutions with the open opportunity for all European countries to join. Member States delegate a series of sovereign competences to the European Commission and to other supranational institutions that have exclusivity of intervention in certain fields. There are also areas where there is intervention opportunity in cooperation with Member States authorities. The EU is often described as being divided into three areas of responsibility, called Pillars. The first pillar consists of original European Community policies, while the second consists of Common Foreign and Security Policy. The third pillar originally dealt with Justice and Home Affairs, but due to changes in the Amsterdam and Nice treaties, this pillar covers the area related to Police and Judicial Co-operation in Criminal Matters. In short, the second and third pillar can be described as the intergovernmental pillars because the supranational institutions of the Commission, Parliament and the Court of Justice play less of a role or don t play any role at all, and are led by the intergovernmental Council of Ministers and the European Council. Most activities of the EU are associated to the first pillar, the Community pillar. This is mostly an economically oriented pillar and it constitutes the pillar where the supranational institutions have the most influence. In order to become an EU Member State, a country needs to fulfill a set of conditions. The accession of a country into the European Union is the most difficult process the country needs to undertake in order to join an international global or regional organization, from those existing international organizations. This is an analysis of the criteria which need to be fulfilled for EU membership with special focus on economic criteria. The purpose of this paper was to show what Kosovo specifically needs to do in order to achieve the Copenhagen Criteria. The list was long, the paper got boring, and the European prospects seemed minimal. Despite the 1502 actions identified in EPAP, the analyses showed that we could still be far from the criteria. This revealed to us systemic problems in the system which could be improved and would certainly lead to better outcomes. The magnitude of the tasks also revealed to us that it is time to move from cliché discussions of European Integration to real policy discussions and efforts that could really boost us in the right direction. While there are certainly problems in the formal contractual relations between the EU and Kosovo, there is nothing that stops us from working on the criteria. In any case, we get evaluations every year from the Commission, and achieving the standards would help us in the area of economy in general. 4 Copenhagen Economic Criteria What Kosovo needs to do?

5 The goal is to raise awareness and find ways to improve this process, widen the dialogue, improve policies, and improve implementation towards the goal of improved quality of life. In the long list of criteria, the economic ones are considered to be the most difficult to fulfill. They require serious commitment, resources, and efforts and take long time to complete. 2. KOSOVO IN RELATIONS TO THE EUROPEAN UNION In the European Council meeting of June 16, 2003 in Thessaloniki, which is also known as the Thessaloniki Agenda for Western Balkans, the Western Balkans countries were invited to join the European family by pursuing a systematic process of reforms. It was said that the Balkan states will be part of united Europe, when they fulfill the conditions recognized as the Copenhagen Criteria. Since 1999, Kosovo had a specific cooperation with the European Union. This is due to the fact that the EU has been and continues to be the greatest donor for Kosovo, and because the aid per capita to Kosovo from the EU is bigger than in other countries. To guarantee the success of this, the EU and Kosovo had special bilateral relations, different from those with Serbia and Montenegro since With the countries that have expressed their aspiration for membership, the European Union has signed Association Agreements in exchange for commitments to political, economic, trade and human rights reforms. In exchange, these countries are offered free access to some or to all EU markets (industrial goods, agricultural products, etc) and are offered financial or technical assistance. In November 2000, the Zagreb Summit brought the decision on the Stabilization and Association Process by gaining the region s compliance in establishing a framework of objectives and conditions. The Stabilization and Association Process is based on 3 main pillars: 1. Offering attractive economic and political incentives, including closer relations with the EU, and membership in a long term period; 2. The obligation of the Western Balkans to undertake comprehensive reforms; and 3. Emphasizing the need for intensive regional cooperation. As confirmed in the Thessaloniki Summit of June 2003, Kosovo is included in the framework of the Stabilization and Association Process. In April 20, 2005, the European Commission adopted a Communication on Kosovo called A European Future for Kosovo to reinforce the Commission s commitment on Kosovo. So far Kosovo doesn t have contractual agreement with the European Union as the other Western Balkans countries have. This will not happen until Kosovo is recognized by all EU Member States. Despite the political inability of Kosovo to make contractual agreement with the EU, Kosovo could and should work on the fulfillment of the Copenhagen criteria. 5 Copenhagen Economic Criteria What Kosovo needs to do?

6 In November 2002, the European Commission has initiated the so-called Stabilization and Association Tracking Mechanism (STM), as a process to promote the political dialogue between the EU and Kosovo authorities on the approximation issues. This mechanism would assure that Kosovo will not be isolated from the transition path for approximation of development of the South East Europe with EU. The Thessaloniki Agenda of June 2003 adopted a series of new instruments that would support the reform process in the Western Balkans and bring them closer to the EU. One of the most important instruments with a great impact is the European Partnership. The European Partnership aims at helping Western Balkans countries in reforms and preparations for future membership. The European Partnership document is published once in two years, and it lists all necessary tasks and priorities that each country in the region has to accomplish within well specified deadlines. The evaluation of the fulfillment of all obligations that derive from the European Partnership is done in the Annual Progress Reports of the European Commission. The European Commission compiles the Progress Reports for all Western Balkan countries and it reports regularly to the Council and Parliament on the achieved progress by these countries. These reports analyze the political situation in the field of democracy, rule of law, human rights, minority protection, and regional cooperation. In addition, these reports analyze the economic situation, the fulfillment of the sectoral criteria known as European standards and the approximation of the national legislation with the EU one (acquis communitarie). On July 17, 2006 the European Council adopted the Regulation (EC) Nr. 1085/2006, to establish the Instrument of Pre-Accession Assistance (IPA), which renews the framework for financial assistance to pre-accession countries. IPA provides the aspirant countries a rationalized assistance for joining the EU during period, based on lessons learned from previous instruments (PHARE, ISPA, SAPARD, Instrument of Pre- Accession for Turkey, CARDS etc). The purpose of IPA is to develop efficiency and assistance coherence through the means of a single framework. IPA projects fall under five categories: 1. The Transition Assistance and Institution Building 2. Regional and Cross-border Cooperation 3. Regional Development 4. Human Resource Development 5. Rural Development As a potential candidate country, Kosovo benefits only from the first two categories, whereas the other three are meant for candidate countries and are designed to mirror structural funds, thus necessitating the relevant management structures to be in place. The table below mirrors the amounts that were given to the Western Balkan countries one by one for the period. 6 Copenhagen Economic Criteria What Kosovo needs to do?

7 Tab. 1. EU Financial Assistance under IPA for potential candidate countries Total ALBANIA B&H MONTENEGRO SERBIA KOSOVO Total In 2008, the European Commission confirmed that it will conduct a feasibility study for Kosovo, although yet to be decided how the exact name will be. The outcome of this study is decisive for further steps towards signing the Stabilization and Association Agreement, the tool the EU uses to help Western Balkan countries to prepare for accession into the European Union. 3. THE COPENHAGEN CRITERIA EU Membership can be achieved only if the country fulfills the membership criteria known as Copenhagen Criteria, criteria which were decided by the European Council in Copenhagen in The Copenhagen Criteria are divided into three categories: political criteria, economic criteria and the candidate s ability to take on the obligations of membership, including adherence to the aims of political, economic and monetary union. Economic criteria include: a functioning market economy, as well as the capacity to cope with competitive pressure and market forces within the union. According to European Union principles, free trade implies the following features: General assessment of transitional process, including the privatization process and the redefining of the country s role on economy and economical structures; Price liberalization and foreign liberalization, which means elimination of trade barriers and the accomplishment of converting process of national currency to euro; Establishment of a sustainable legal system and institutional framework that guarantees the functioning of free trade, including the regulation of property rights, avoidance of various barriers that prevent market entry (establishment of new companies) and leaving the market (bankruptcy and liquidity) as well as open market competition; Macroeconomic stability (price stabilization, inflation reduction, GDP growth, direct foreign investments, foreign trade, financial sustainability, etc); Open consensus when it comes to establishment of economic policies and principles; 7 Copenhagen Economic Criteria What Kosovo needs to do?

8 A well developed financial sector which guides financial savings towards productive investments. The economic capacity that a country should have in order to compete with the trade power of other EU countries includes the fulfillment of the following conditions: Stable macroeconomic framework, which allows the economic agents to take decisions on a predictable climate; Sufficient physical and human capital, with sufficient funds for infrastructure purposes, educational system and science researches; A developed state of affairs where the government policies and the legislation in power have an impact through on competition through trade policies, competition policies, state support, support for small and medium enterprises, etc; A considerable participation of small enterprises in economy, since the small enterprises tend to benefit more by improving their criteria for entering the market, and partially because of the fact that big enterprises could face difficulties by trying to adjust to new rules; A fixed level of trade integration of a candidate country before its membership in EU, including the quantity and the type of goods which are being trade. An economy would be more capable to fulfill membership obligations according to the level of trade economy relations with other EU member countries; Public enterprises need to reconstruct themselves and companies should invest on efficiency improvement. Furthermore, more the companies have access on foreign capital and more successful they are in innovation and restructuring, they tend to be more likely to adopt the membership obligations; The European Partnership Document, every two years clarifies the goals that need to be achieved in order to fulfill the membership criteria, and the country s two year focus for fulfilling the economic criteria. European Partnership 2004 for Kosovo demanded from Kosovo to take the following actions in order to fulfill the economic criteria: 1. Defining the macroeconomic priorities of Kosovo in close cooperation with the IMF; 2. Revitalization of the privatization process to support economic development of the country as well as to attract local investments and to develop a comprehensive strategy for this purpose; 3. Developing technical supportive systems and procedures for reassuring transparency, efficiency and a good management of public expenditures; and 4. Establishment of effective procedures that would help to identify, handle and monitor any suspicious case of misconduct and other irregularities related to local and international funds. 8 Copenhagen Economic Criteria What Kosovo needs to do?

9 Whereas, the 2006 European Partnership for Kosovo required the following criteria in terms of economy: 1. To finalize the privatization process in accordance with the KTA plan; 2. To finalize the incorporation of public enterprises, such as the energy service, railways, local heating, water supply and waste management. To further enforce the public service regulations and enhance the administrative capabilities of independent regulators; 3. To strengthen the transparency and sustainability of public finances. Consistency insurance of 2006 budget with a consolidated framework of mid term expenditures; 4. To define and implement the macroeconomic and budget priorities in close cooperation with IMF; 5. To enhance the fiscal discipline and have a better control of public expenditures. Establishment of effective procedures for identifying and monitoring cases of misconduct and other irregularities related to national and international funds; 6. To continue the development of a legislative and policy framework related to trade policies, which will be in harmony with the EU and WTO. To pass and implement the law on foreign trade activities; 7. Quality improvement of primary, secondary and higher education and other educational trainings. The latest document on European Partnership for Kosovo is the February 2008 report, which requests the fulfillment of the following economic criteria: 1. To keep stable fiscal policies, particularly to ensure that social policies that address the poverty and social exclusion, are in harmony with long-term sustainable public finances 2. To determine annual goals on efficient collection of public services, definition and implementation of strategies on achievements of these goals; 3. To advance the privatization of former social enterprises in accordance with the terms determined by KTA; 4. To improve the governance, efficiency and financial sustainability of public enterprises. To further strengthen the operation and financial independence of regulatory authorities in order to increase the transparency and competition among relevant sectors 5. To develop and implement policies which make the transfer from the unregistered employment to registered employment easier, in order to create a functional and official employment market and to clarify the efficiency of labor market policies. As we can notice from the above mentioned points, some of the European Partnership points have been repeated frequently since One such example is privatization. Speeding the privatization process, revitalizing the process of privatization, supporting the economic development and implementation of privatization plan were the main repeated requests from the European Partnership in three reports since Implementation of macroeconomic policies and their definition in coordination with the IMF were also frequent requests from the European Partnership. Below, we will notice how the local institutions are treating these European Partnership requests in fulfilling the economic criteria. 9 Copenhagen Economic Criteria What Kosovo needs to do?

10 4. KOSOVO INSTITUTIONS COMMITMENT ON FULLFILLING THE ECONOMIC CRITERIA Kosovo institutions, the executive and the legislative have drafted action plans for addressing concrete issues on fulfillment of Copenhagen Criteria to address the challenges which emerge from the European Commission progress report. Two major plans of local institutions that recently are in power are: Action Plan on European Partnership and Action Plan of Kosovo Assembly on Challenges of Progress Report of European Commission for Therefore, the executive is devoted to fulfill the requests that emerge form the European Partnership, whereas the Assembly s priority is to solve the challenges that come out of 2008 Kosovo Progress report. 4.1 IMPLEMENTATION OF ACTION PLAN ON EUROPEAN PARTNERSHIP After the decision of EU Council of Ministers on February 18, 2008 on European Partnership for Kosovo (EPAP), the Government of Kosovo started the drafting of the Action Plan on European Partnership (EPAP) which was approved at the 29 th meeting on July 31, According to EPAP, the Government of Kosovo is required to prepare the report on implementation pace of EPAP in October and June. So far, two reports have been prepared: the report for the October 2007 June 2008 period and the June- October 2008 period. As for the October 2008 June 2009 period, the report is being drafted and it is expected to be released after June Among 1502 challenges that were addressed on EPAP, 50 of them deal with the economic criteria. Among these 50 economic criteria, most of them deal with improvement of legislation efficiency and fiscal policies. Below, we have listed these criteria: 1 To keep stable fiscal policies, particularly to ensure that social policies that address the poverty and social exclusion, are in harmony with long-term sustainable public finances Government s identified steps to address this Has it been done? problem (issue). 1 Review and update the Mid-term Expenditure Framework 10 Copenhagen Economic Criteria What Kosovo needs to do? Every year, the Government of Kosova updates the Mid-Term Expenditure Framework (MTEF). In April 2008, the Government has adopted the Mid-term Expenditure Framework and it has been discussed in the Assembly of Kosova in June. MTEF does not present an optimistic situation regarding economic development of Kosova in the next three years. MTEF forecasts decrease of remittances of 7% because of global financial crisis; economic growth of only %; budget deficit; decrease of capital investments as a result of IMF request to maintain the budget reserves of 200 million;

11 payment of quotas for membership to IMF and WB of 154 million, etc. 2 Draft and approve amendments for the 2008 budget, with the aim of ensuring long-term sustainability of public finances 3 Improve management of committed expenditures 4 Approve Draft Law on Consolidated Budget Comprehensive review of fiscal policies and legislation, with the possibility of amendments to comply to Acquis 6 Review tax legislation, especially excise, customs taxes, with the aim of creating better conditions for Foreign Direct Investments Amendments are made on July 30, 2008, one day before this EPAP is approved by Government. This step itself did not influence on solution of problems regarding long term sustainability of public finances. Committed expenditures, particularly those related to Capital Projects have been badly managed so far, resulting in low annual expenditures of funds designated for these projects. The same trend continued in 2008, except in the last three months when large amount of money was spent, hence, spending a considerable amount of budget which was not spent during nine months. The Draft Law and Law on Budget have been approved every year since Inclusion of this point to the action plan is not reasonable and is not a proper step toward solution of problems addressed to European Partnership Action plan for Kosovo. In 2008 the Kosovo Assembly has approved the following laws related to fiscal legislation: Law on public finance management and accountability, Law on Local Government Finance, Law on Central Bank of Kosova, Law on changing and amending the law on 2008 Kosovo Budget, Customs and excise Code of Kosovo, Law on alteration of Kosovo Tax Authority Law and procedures, Law on taxation of excise in Kosovo, Law on VAT, Law on Corporate incomes, Law on taxation of personal incomes (Salaries), Law on Kosovo Budget In addition, the Government has sent to the Assembly the new Law on VAT which will substitute the existing one. Regarding the legislation on excise and customs duties the following laws have been approved: Customs Code and Excise of Kosovo, Law on Amendment of Tax Administration of Kosovo and procedures, Law on Excise Tax Rate in Kosovo, Law on VAT, Law on Corporate Income, and Law on 11 Copenhagen Economic Criteria What Kosovo needs to do?

12 Personal Income Tax. However, there has not been an increase on Foreign Direct Investments even though amendments to the legislation. There have not been FDI in Kosova as proclaimed by the Government. 7 Draft and approve amendments to the Law on Public Finance Management and Accountability 2003/2. 8 Review tax exemptions and import tax exemptions 9 Analytical capacity building for the DPEF and municipalities in preparing budget 10 Capacity building for strategic planning at MEF and municipalities 11 Increase Public Awareness in relation to role and importance of fiscal policies, through transparency improvement 12 Analysis and comparison of the basket of goods to the level of social assistance. Public Finance Management Accountability Law was approved in March The Assembly has approved the Draft Law on Value Added Tax. This new draft differs from the previous and existing laws on VAT, which have regulated only the tax norm. The current Draft Law on VAT forecasts the exemption from tax of books, items used from religious organizations in Kosovo, etc. Additionally, the current Draft Law does not specify the tax payments from lotteries and insurance companies; also, it allows the MEF minister to decide who can be excluded from VAT. In a public hearing organized from the Parliamentary Committee for Budget and Finance, the content of the current Draft Law was criticized. While EU member states apply several tax rates, Kosovo has only one. There has been noticeable capacity building in MEF; yet, this has not been the case with the economics departments in other ministries and institutions and even less so in municipalities. The municipalities face countless problems regarding capacity building. There has not been any capacity building in municipalities with regard to strategic financial planning. The success rate of this objective is hard to measure. Citizens have little knowledge of fiscal policies. According to the White Paper (currently being drafted by the Government and yet to be published) and the plan of the Ministry of Labor and Social Welfare presented in the Midterm Expenditures Framework , the benefits from the Social Aid scheme also forecast inflation. 13 The Government decides on adapted family However, this is hard to accomplish 12 Copenhagen Economic Criteria What Kosovo needs to do?

13 food basket with the social assistance level 14 Identify categories not included in existing schemes. 15 Comprehensive analysis to review demand for amendments in legislative and financial terms (impact assessment analysis) with the aim of including identified categories 16 Decision on amending social and fiscal policies to include identified categories. 17 Approval of the Law on Material Support to families with custody over disabled children. considering that the Mid-term Expenditures Framework forecasts the benefits of the Social Assistance Scheme along with pension funds by taking inflation into account. This will result in an increase of 20 million to the budgetary cost, which will not be sustainable. The Law on the Amendment and Supplementation of the Law on Social Assistance Scheme was approved by Government in April This law identifies a few new categories to be included in the social assistance programme. These categories include: families with the right for inclusion in the social assistance scheme due to land quality re-assessment; families with a disability level of 60% (decreased from the so far 80%); families involved in blood feuds, families with female leaders that live in rural border regions; families with members who are drug-dependent or trafficked; outlying families with no integration in the education system, employment and other public services. The newly identified categories will probably not receive any welfare, because the MEF has opposed changes in the Law for Social Assistance Scheme. This would increase the budget expenditures for 3,3 m Euro (30.6 million Euros from the actual 27.3 million if changes were to be implemented). See above. This Law was approved on May 16, Establish annual targets for improved bill collection rates of public utilities and define and implement strategies to reach those targets. Government s identified steps to address this issue 18 Update business plans of publicly owned enterprises with the aim of providing annual objectives for an efficient bill collection Is it realized? Publicly owned enterprises (POEs) continue to face problems related to payments collection. There has been a noticeable improvement in KEK; according to reports from the Ministry of Energy and Mining 13 Copenhagen Economic Criteria What Kosovo needs to do?

14 (MEM), KEK increased its payments collection in 2008 for 18,26% compared with Draft a plan for achievement of these objectives Up to now, only KEK s plan to increase the bill collection has been made public. According to MEM, the Board of Director of KEK has approved a new collection scheme, which has been tried for the first time in the district of Ferizaj. Moreover, in accordance with this scheme, one team was appointed at each 10KV exit. Thus, one team will be responsible for the supplied power, reading of electric meters, issuance of invoices, and carrying out the disconnection of power lines per each exit. 20 Organization of awareness campaigns to improve bill collection Public Corporation entities have spent thousands of Euros to increase Public Awareness for paying off debts (energy, water, waste). For example, MEM has forecasted in its Short Term Expenditures to spend 100,000 Euro/year for Public Awareness Campaigns. During the period , 450,000 will be spent. 3. Significantly advance the privatization of former socially owned enterprises in accordance with the Kosovo Trust Agency schedule. Government s identified steps to address this issue 21 Review the KTA privatization schedule in order to accelerate the privatization process. Is it realized? From January 2008 until February 2009, 20 SOEs have been privatized. This is a small number compared with previous periods. Due to the status change of the KTA to KPA, three privatization waves have been annulled, which resulted in delays for the waves 31, 32 and Draft Action Plan to enhance the privatization process KPA has announced the fourth privatization wave and the Board of Directors have approved the 35 th and 36 th privatization waves. However, this process has not had an effect in economic growth during the previous years of privatization. 4. Improve the governance, efficiency and financial sustainability of publicly owned enterprises. Further strengthen the operational and financial independence of regulatory authorities with a view to enhancing transparency and competition in the respective sectors. Government s identified steps to address this issue. Is it realized? 23 Establish capacities in the field of financial It is not clear how much is being done in this 14 Copenhagen Economic Criteria What Kosovo needs to do?

15 management and internal audits 24 Approve the Draft Law on Mines and Minerals to supersede the UNMIK Regulation 2005/ 2 and /3. 25 Continued Geo-Chemical studies in 2008 and 2009 to complete one of technical components for a database for attracting investors to the mineral sector of Kosovo. 26 Undertaking of a Ultra-Violet Reflection Spectroscopic Study 27 Undertake necessary preparations (legal and financial) for a Geological Study of Kosovo 28 The Government undertakes proper preparations for a discussion on the EC Assessment Mission Report on Regulators in Kosovo with a view of undertaking necessary measures to ensure operational and financial independence of regulators 29 Establish a regulatory body of Kosovo Railways, operationally and financially independent. regard; yet, there are no visible results in relation to the financial management of POEs. Law on amendment of UNMIK regulation 2005/2 on the establishment of Independent Committee for Mines and Minerals in Kosovo was approved on June 13, 2008 before approval of EPAP. This Law does not substitute UNMIK regulation but it supplements the same. There is yet no concrete action taken in this aspect. This has not started yet and there is no plan on the starting date. This has not started yet according to the Independent Commission on Mines and Minerals. Regulators face various problems. For example, the Board of the Telecommunications Regulatory Authority operates with exceeded mandate since December 2008; the Kosovo Assembly does not bother to elect a new board. Also, the director and vice-director of the Water and Waste Regulatory Office have not been elected up to now. The Regulatory body of Kosovo Railways has not been established yet. However, MTPT has planned its establishment in MTEF Approve Law on Aviation. The Law on Civil Aviation was approved on March 13, Establish an Independent Civil Aviation Authority It has been established in accordance to Law on Civil Aviation. 32 Levying existing passenger fees, through an adequate legal instrument, in compliance with the Law on Civil Aviation, to enable financial self-sustainability of the ICAA in Kosovo 15 Copenhagen Economic Criteria What Kosovo needs to do? On January 1, 2009, the Regulation 2008/7 on the security tariff for passengers traveling via commercial flights from Kosovo entered into force. This regulation was signed from the Minister of Transport and Post- Telecommunications. The collected funds deriving from this tariff (2 Euro per passenger) are used to cover the operational

16 expenses of the Civil Aviation Authority. An identical tariff of 2 Euro was also applied for the financing of the former Regulatory Office for Civilian Aviation through the UNMIK Administrative Order 2006/2. 33 Approval of an adequate scheme of taxes and fees on licensing, certification and oversight activities undertaken by the CARO/CAA. 34 Establishment of a Supervisory Board for the CARO to secure operational independence of the CARO 35 Full implementation of the European Common Aviation Area Agreement and the EC Aviation Law 36 Analyze and identify possible collisions between the Law on Telecommunications and the Law on Public Finance Management and Accountability. 37 Draft and approve the amendments to the Law on Telecommunications The regulation for this purpose has not been released yet. A draft, which should be approved from the Ministry of Transport or the Government, has been compiled. This board has not been established yet. All necessary legal measures planned for the initial phase of the ECAA Agreement are being implemented in Kosovo. These laws have not changed after the approval of the Action Plan for European Partnership. There still has not been a law approved for the amendment and supplementation of the Law on Telecommunication. Such a thing is foreseen with the Legislative Strategy of the Government, where this draft law is being awaited for approval in October Transfer of the FMO to the TRA FMO has been a reserved power of SRSG and has now been transferred to TRA. 39 Harmonization of frequency allocation table in compliance to the Random European Table of allocation, and Decision 676/2002/EC. This has not been fulfilled up to the present; according to TRA, its accomplishment is expected during the last quarter of this year. 40 Draft Regulation on Range Tariffs The Regulation has been approved. 41 Provide electronic tools (advanced software for frequency range management) These tools have been secured. 42 Establishment of a fixed range monitoring station - Capacity building in range monitoring and measurement in a distance of broadcast parameters, keeping range, identification of broadcast and source location of harmful interference. It has not yet been established; expected during Approve the Draft Law on Water and Waste Such a draft law has not yet been approved. 16 Copenhagen Economic Criteria What Kosovo needs to do?

17 Regulatory Office (WWRO) 44 Prepare and publish Annual Performance Reports on operational and financial performance of water and waste collection service providers. 45 MEF coordinates options with WWRO to ensure financial independence Annual Performance Reports for 2006 and 2007 (but not for 2008) have been published in the official site of WWRO. In its Annual Report of for 2008, the WWRO complains to the Government due to the latter s hindrance in the financial sustainability of the regulator. WWRO claims to be able to have financial sustainability from the income of licenses; yet, this is not possible due to WWRO s classification like other budgetary organizations. Starting on January 1, 2009, WWRO has increased tariffs on the grounds of covering the expenses of the water and waste companies. 46 Capacity building for Regulators There is no report dealing with this issue. 47 Ensuring ERO financial independence, by observing legal provisions related to ERO budgeting In March 2009, the Government has sent the draft law on the amendment and supplementation of Law on the Energy Regulator to the Assembly of Kosova. This law has been rejected by the Assembly of Kosova since the Government foresaw to take competencies from the ERO and be given to MEM. Such competencies include: publication and management of tenders, building of new capacities etc. There is no any other change made regarding this issue. 5. Develop and implement policies facilitating the transfer from non registered to registered employment in order to create a functioning official labor market and to enhance the effectiveness of labor market polices. Government s identified steps to address this issue 48 Drafting of policies and recommendations that facilitate the transfer from non registered to registered employment. 49 Emitting policies and recommendations which eases the transfer from unregistered employment to a registered employment. Is it realized? Only a small percentage of the unemployed in Kosovo register with the Employment Unit. This is due to the lack of benefits from such registration, which results in mistrust towards registration. Therefore, the exact numbers of unemployed remain unknown. Ministry of Labor and Social Welfare has not taken any actions regarding this aspect. 50 Identifying responsible institutions for Ministry of Labor and Social Welfare has not 17 Copenhagen Economic Criteria What Kosovo needs to do?

18 implementation of the policies and recommendations as a result of the analysis of the informal labor market in Kosovo. taken any actions regarding this aspect. The basic laws regulating labor relations have not yet been approved. 4.2 IMPLEMENTATION OF THE ASSEMBLY OF KOSOVA ACTION PLAN ON CHALLENGES OF EUROPEAN COMMISSION 2008 PROGESS REPORT After the publication of the European Commission Progress Report of Kosovo in November 2008, the Assembly of Kosovo, the Commission for European Integration respectively, drafted an action plan to overcome the challenges mentioned in the Progress Report. The call for such an action came from the December 11, 2008 session, when the Assembly of Kosovo made the Commission for European Integration to draft an action plan, while requesting from all parliamentary committees to cooperate in implementing this action plan as well as requesting from the Commission for European Integration to report to the Assembly every three months on the implementation progress of the plan. The Kosovo Assembly Action Plan, together with the Resolution for Priorities and Strategies of Kosovo for Integration in European Commission, were approved in the plenary session of February 26, In this action plan 110 challenges were identified which have to be addressed from particular committees of the Assembly of Kosovo. From 110 challenges identified in the Assembly of Kosovo Action Plan, 8 of them have to do with fulfilling economic criteria. Below are presented those points of Assembly of Kosovo Action Plan that only have to do with economic criteria: Point on Action Plan P58 Challenge on 2008 Progress Report Overall, the budget is not an efficient instrument of fiscal policy and does not contribute to the predictability of economic developments. Instead, it just responds to ad-hoc spending pressures. Progress made For this purpose, the Parliamentary Committee on Budget and Finance has established that the first quarter report on budget expenditures for 2009 highlights a better performance of income and expenditure then what was planned. The same committee reports that during the evaluation of MTEF , the projections are good and that the global crisis has not impacted the projections. In reality, the opposite is true. The MTEF accepts that the financial crisis will cause a reduction in remittances of seven percent and annual growth of %. MTEF has been criticized from the members of parliament about the way 18 Copenhagen Economic Criteria What Kosovo needs to do?

19 P64 Limited progress can be noted with regard to the freedom to provide services. The legal framework for the freedom to provide services and the right of establishment is still very fragmentary. Alignment with European standards is limited. it was drafted and the language that was used No progress reported. P65 P66 P67 There are no developments to report in the area of company law. No progress took place concerning legislation on money laundering. Overall, the basic institutions that are in charge of money laundering co-operate with each other. The government launched an action plan on the fight against money laundering. However, the lack of expertise of the judiciary and law enforcement in investigating and judging complex economic crime remains problematic. The Kosovo Special Prosecution Office still lacks local and specialized prosecutors. The fight against money laundering remains a challenge. The capacity of the TAK remains weak. Its Management Information System is not yet operational. Major efforts are needed to 19 Copenhagen Economic Criteria What Kosovo needs to do? The Law on Public Enterprises has been approved in a fast track procedure during 2008, as a part of Ahtisari Package laws. The Government of Kosova has also issued an administrative instruction regarding the structure of Boards for Public Enterprises (PE) that offer services for two or more municipalities. In December 2008, the Government of Kosova has appointed candidates of 15 boards for PE. After critics from ICO that appointments were unprofessional and political, eight of them were changed in April. There is still no specific action taken regarding this issue. According to Government Legislative Strategy 2009, the Draft Law on Money Laundering is foreseen to be approved in June This request of 2008 Progress Report is the same with the presented request in European Partnership Action Plan for Kosovo. There is no capacity

20 P68 improve services to taxpayers. Kosovo's tax legislation is only partially aligned with European standards. Further alignment is needed, as well as significant efforts to ensure its effective enforcement. Tax collection remains extremely weak and the informal economy is widespread, as controls are limited. The Competition Commission (CC) is not yet operational. The assembly has yet to appoint the candidates selected for this commission. Kosovo needs to finalize the establishment of the CC, including the allocation of the necessary resources. The law on State aid, the purpose of which is to establish an Office for State Aid within the Ministry of Economy and Finance, has not yet been adopted. strengthening in TAK. The Government has approved the Draft Law on VAT, Draft Law on Personal Income Tax, etc. which draft laws are now found in the Assembly of Kosova. As mentioned in the EPAP table, the Draft Law on VAT is still incomplete and it s not expected that the Assembly will approve it. In March of this year, the Government of Kosova has decided that the fiscal machines should be installed by July 1, TAK has started the awareness campaign for fiscal machines, but not much has been seen publicly. The government has decided to introduce fiscal machines only partially and not in the whole territory of Kosovo. The fiscal machines alone cannot fight informal economy. The Assembly has appointed the candidates for this commission; however the commission is not yet operational. P69 The Public Procurement Law (PPL, amended in 2007) is the central piece of legislation in this area. It is broadly in line with European standards, although a number of provisions of the directives adopted in 2004 have not been implemented. The same applies to the more flexible regime devised for the utilities sector. Discrepancies between different language versions of the legislation The government of Kosovo is amending the Law on Public Procurement again, but only to change the provisions requested by the Ministry of Foreign Affairs to facilitate the procurement for Embassies of Kosovo abroad. 20 Copenhagen Economic Criteria What Kosovo needs to do?

21 have been reported, which must be corrected to ensure legal certainty. P70 Training and certification of procurement officers in contracting authorities has been suspended because of a lack of cooperation between the Kosovo Institute for Public Administration and the PPRC. This has not improved and remains a problem of communication between government institutions. The committee on European Integration has not yet reported to the Assembly on the implementation of the Action Plan of the Kosovo Assembly although in the plan it is foreseen that this happens every three months. Many points from the report were foreseen to be implemented in the first three months have not been implemented, and many other points from the second quarter have been postponed for the second half of the year. This was also due to the non-willingness of the executive to respond to the requests of the committee, and the non-willingness of some of the parliamentary committees to address challenges that have been given to them based on the Action Plan. 5. CONCLUSIONS AND RECOMMENDATIONS There are still a lot of things that Kosovo needs to achieve before it can seriously tackle the EU integration criteria on the economy. Every year, the European Commission prepares a progress report for all the countries of Western Balkans to report on the progress achieved towards European Integration. The most recent report done by the EC in 2008 reported little progress in achieving the criteria on the economy. The European Partnership Action Plan is there to translate the outcomes required in the Copenhagen Criteria to specific actions that should improve the situation. In addition, the Kosovo government should take the progress report and link these actions to the comments made in the progress report and adjust and analyze the actions so that there is progress from report to report. AS we can see from the information above, the Agency for European Integration is focusing on the EPAP that was prepared last year. The parliamentary Committee on the other side is focusing on the EC 2008 progress report and has prepared an action plan to address the challenges presented in the Progress Report. Although Kosovo does not have an official contractual relationship with the EU, there is nothing that stops Kosovo from achieving the integration criteria on economy. These criteria highlight the biggest problems that Kosovo has in general, and working on the criteria would significantly improve the potential that Kosovo has for economic development. 21 Copenhagen Economic Criteria What Kosovo needs to do?

22 In general, the research done for this report has shown that there is enough information in Kosovo about the steps that need to be taken in order to move closer to the criteria and in general make the reform process a little bit clearer. However we have noted several challenges. The Link between Actions/Policies and Criteria is Weak, both in terms of analyses and actual impact There is still no clear connection between the actions that the authorities are trying to achieve through EPAP and the outcomes that are required in the criteria. This can also be seen from limited progress in the report of While there is certainly improvement in several areas, there is no follow-up plan to analyze the impact of specific actions that are completed on achieving the Copenhagen criteria. Below we present some examples where we believe that follow-up would absolutely be necessary. a. The first area in the government action plan based on EPAP is to maintain stability of fiscal policies, and particularly ensure that social polices addressing the poverty and social dismissals are in accordance with long-term sustainability of public finance. One of the actions identified is the update and approval of MTEF. While MTEF is a very important tool to ensure longer term planning of the government, its update and approval do not guarantee getting closer to the criteria. This year s MTEF shows that social policies do actually represent a risk for longer term fiscal sustainability. In the 2008 progress report, Kosovo was criticized inconsistency and unreliable policies in the MTEF. The midyear review of the budget deviated from the MTEF. There is no action to follow up with analyses of the MTEF that would improve this aspect. b. Approving the 2009 budget is a process that should take place as per legislation. The approval of the budget does not ensure fiscal sustainability and macroeconomic stability that is required by the criteria. This is highlighted in the progress report. Therefore, it is surprising to see this as an action point in the EPAP. c. Kosovo has constantly been criticized for bad execution of the budget, especially in capital expenditures. While the government has taken significant steps to improve capital spending, there is little analysis in how the actions taken have improved the process. This is something that can easily be established. d. One of the requirements that was repeated over and over again is privatization. The issue of Privatization was mentioned in all the European Partnership reports for Kosovo since One of the main goals of privatization is to increase the efficiency of companies by transferring their management to the private sector. This is done to increase productivity, improve management, increase production and more resources for the government to deal with other governance issues. So far in Kosovo, 34 waves of privatization have taken place. Privatization in Kosovo has only meant transfer of property to private hands. Privatization has not had significant impact on unemployment reduction and increased growth. Many privatized enterprises have never 22 Copenhagen Economic Criteria What Kosovo needs to do?

23 been reactivated; some of them were retendered due to non-fulfilled commitments by investors etc. The measures taken by government have not made the process easier. e. One of the recommendations of the European Partnership for Kosovo was to ensure that social policies that address poverty and social exclusion are in harmony with the long term fiscal sustainability of the country. In the year 2008, the government of Kosovo has taken the decision to increase the salaries of the teachers. In January of 2009 the government has taken the decision to increase the salaries of civil servants by 10 percent and to increase pensions and social assistance by 5. This has burdened the Kosovo budget even further and has endangered the fiscal sustainability. According to MTEF it is very risky to increase salaries of civil servants in the next three years. According to the government white paper on social policies, indexation of pensions and social assistance is foreseen, and this is expected to increase the spending on these two policies by 20 million a year. The law on Police will require extra 10 million for implementation. In April of this year the government has sent to the Assembly the Draft Law on Changing the Social Assistance Scheme. This draft law was sent to the assembly even though MFE has been against its approval claiming additional costs of 3.3 million. All of these actions have endangered the fiscal sustainability of Kosovo. On the other side there are no clear signs that the revenues have increased to support these decisions to increase salaries. The actions undertaken in EPAP have actually achieved the contrary; the decisions to increase salaries, pensions, and social assistance have endangered the sustainability of public finances. This is also concluded in the Medium Term Expenditure Framework f. The other request of the European Partnership 2008 for Kosovo is the increase of collections in public services. One year after the publication of the report, billings and collection remains very low. One improvement was reported by KEK, in 2008 where income has increased by 18.26% compared to Taking into consideration that during 2007 and earlier, collections were really low, an increase of 18.26% will not result in financial sustainability of KEK. This is because of the fact that even during 2009, but also in 2010 and 2011, subsidies are foreseen for KEK. g. The collection problem in other public services has not shows signs of improvement. According to the Annual Report of the Waste and Water Regulator for 2007 all the regional water companies had problems with billings, even though there was slight improvement. The authorities should follow up on the completion of the actions from the action plan to see if their achievement has moved Kosovo closer to the realization of the criteria. Analyses of the actions should include the evaluation of the impact that the specific action has had. Coordination between different public institutions is weak 23 Copenhagen Economic Criteria What Kosovo needs to do?

24 As we saw above, public institutions in Kosovo have prepared action plans to address challenges that come out of the European Partnership for Kosovo and the Progress Report for Kosovo. The Copenhagen Economic Criteria include a wider field then what is included in the European Partnership and the Progress Report. The communication between the executive and the legislative is not very good to address the challenges in the EC reports. While the executive is working on its own EPAP agenda, the legislative has another plan to ask for accountability from the executive to deal with the challenges from the Progress Report. The report of 2008 has mobilized for the first time the Kosovo Assembly to seriously address the challenges that are mentioned every year in the EC reports. Such an initiative by the Assembly was not received well by the government. The government has asked the assembly to deal only with the challenges that are identified in EPAP. The Dialogue is narrow and the discussions are superficial The constant messages that we hear from politicians is that Kosovo is well on its way of Euro-Atlantic integration and that legislation is being passed to ensure conformity with standards. EU integration is much more than that. EU integration requires policy discussions and policy implementation. In order for these to be achieved the policy dialogue has to widen to include outside expertise. Kosovo has capacity within but also outside government to improve and enrich the dialogue on EU criteria and standards. These capacities have not been used to their full extent. Recommendations Improve analyses, improve links between actions/policies and criteria There is certainly a lot of space to improve the dialogue within Kosovo and the EC Kosovo dialogue in the context of the Copenhagen Economic Criteria. There is certainly much more information available then is currently being used in the process. This process cannot be seen in the narrow context of specific actions and whether they are achieved or not. The progress reports have shown that Kosovo has shown little progress despite EPAP actions being completed. This leads to the conclusion that more analyses is required that takes into consideration, Progress Reports, Government Policies and the Copenhagen criteria. Clear links have to be shown between government actions and wanted impacts which brings us closer to the European standards. If the government prepared a new MTEF, there needs to be clear analysis that shows that the MTEF policies are consistent are implemented in the long term and that budget is not changed due to ad-hoc pressures. If the analyses show that the impact is not what was desired and has not brought us closer to the standards, it should not be noted as an action, and should definitely be replaced. EPAP should be flexible enough to respond to constant changes in policies and environment. The key is in analyses that are done and actions that are taken year to year in the Progress Report. If Kosovo is really committed to EU integration, tough reforms need to be accomplished. The action plan needs to reflect these tough steps that need to be taken. 24 Copenhagen Economic Criteria What Kosovo needs to do?

25 Improve coordination between the executive and the legislative It is hard to understand that the government and the assembly are preparing two separate action plans to tackle the European Integration Process and the challenges identified in the years ahead. While it is a positive sign that these two branches of government have shown serious interest in the EU integration process, a better coordination process could be established. While the government has the executive duty to suggest policies and execute them, the assembly has the role of overseeing the executive. It is perfectly normal for the government to design action plans to deal with the EU integration standards, but it is also very normal for the Assembly to hold the government accountable for constant reports on the progress. Therefore a better line of communication should be established between the executive and the assembly, more specifically the Parliamentary Committee on European Integration which would significantly improve the integration process. Internal debate and dialogue is key to success. Widen the Debate, include stakeholders and improve the policy discussion Kosovo should use all of its capacities in the EU integration process. Everyone has a role to play including political actors within government and opposition, in the Assembly and in the Civil Society. These actors all have one goal in mind and that is the European Integration. In order to achieve EU integration as soon as possible, EU standards must become a part of daily policy and political language. This can only be done if the dialogue is widened to include different stakeholders that could significantly contribute to the process. It is time to move away from the cliché discussions of EU integration without discussing specific policies. Examples on how to widen the dialogue, include as many stakeholders as possible, and improve internal dialogue can be seen everywhere across the region, from Croatia to Macedonia. 25 Copenhagen Economic Criteria What Kosovo needs to do?

26 Annex 1: Kosovo compared to other countries with regard to economic situation Countries of the Western Balkans have different contractual relationship with the European Union. Some of them are in the eve of membership; some have signed the Stabilization and Association Agreement, while some others have just received the status of being a candidate. Kosovo has none of them. Due to the undefined political status till February 17, 2008, Kosovo had no right to sign the Stabilization and Association Agreement. Since the declaration of independence until now, one of the major problems in the EU-Kosovo relationship remains the unwillingness of five EU member states to recognize the state of Kosovo. These EU member states are: Spain, Slovakia, Cyprus, Greece and Rumania. Kosovo not only continues not to have any contractual relationship with EU, something that other countries in the region have, Kosovo remains far behind these countries also in terms of fulfilling the criteria for membership. Below you can see a comparison where Kosovo stands compared to other countries of the region and those of EU with regard to the price index, GDP growth, inflation, unemployment, etc. CPI Index Comparison Table for EU 27 & Balkan Countries 26 Copenhagen Economic Criteria What Kosovo needs to do?

27 *Source: EUROSTAT Statistical Data The ongoing global financial crises have caused a significant amount of distress to the global economy, which is noticeable in the latest economic indicators provided by various countries. One of the effects of these crises is also its impact on country CPI indexes worldwide. Based on our analysis of the EU 27 Countries, and countries of the Balkans region such as: Kosovo, Macedonia, Serbia, Montenegro, Bosnia & Herzegovina, Croatia and Turkey; we have noted significant changes with regards to the inflation rate. Our analysis indicate that by the end of 2008, Bulgaria had the lowest inflation rate of within the EU 27, whereas Latvia topped the chart with a CPI Index of From the Balkans region, Macedonia had the lowest inflation with a CPI index standing at 100.2, while Serbia and Turkey led the list as the countries with the highest inflationrate standing at and respectively. Kosovo marked a CPI index of for 27 Copenhagen Economic Criteria What Kosovo needs to do?

28 2008, which indicates a moderate inflation level slightly above the EU 27 average standing at Unemployment Rate (%) Comparison Table for EU 27 & Balkan Countries 28 Copenhagen Economic Criteria What Kosovo needs to do?

29 *Source: EUROSTAT Statistical Data Another important aspect of our research was analyzing the unemployment rate amongst the EU 27 and Balkan countries. Unemployment rate is one of the most important indicators to look at when analyzing the economy of particular country. The global financial crises had a devastating effect with regards to unemployment, as many companies were forced to lay off their employees in order to reduce costs and avoid potential bankruptcy. Netherlands marked the lowest unemployment rate of 2.7% within the EU 27, whereas Spain had a troubling year with unemployment rate reaching up to 14.7%. Whereas from the Balkan countries, Kosovo topped the chart with a 43.6% unemployment rate, 29 Copenhagen Economic Criteria What Kosovo needs to do?

30 followed by other Balkan countries which are also experienced growth in unemployment rate. It is important to note that all of the Balkans countries have marked a significantly higher unemployment rate for 2008 compared to the EU 27 average of 7.6%. This is especially a worrying factor for potential EU candidate countries such as Croatia, Macedonia and Albania. Real GDP Growth (%) Comparison Table for EU 27 & Balkan Countries 30 Copenhagen Economic Criteria What Kosovo needs to do?

31 *Source: EUROSTAT Statistical Data, IMF Official data Most countries in EU and Balkans region have suffered in terms of real GDP growth during 2008 as a result of the global financial crises and its impact in their economy. Based on official data from EUROSTAT and other official statistical sources of respective countries, we have seen that there was a significant drop in real GDP growth for most EU countries. Latvia had a negative GDP growth of -4.7% during 2008, this way marking the largest drop from EU 27 countries, whereas Romania marked a stable GDP growth of 7.1% leading within the EU 27. Balkans countries have surprisingly had a rather stable GDP growth during 2008, as most of them marked a higher-than-average GDP growth. Montenegro led the overall list with a GDP growth of 7.1%, while Kosovo stood at a stable GDP growth of 5.4% in 2008, an increase from 3.9% GDP growth in The relatively stable GDP growth of all Balkan countries in general could be attributed to the fact that these countries have more isolated economies and therefore they weren t so heavily affected by the global financial crises as other developed countries from the EU. 31 Copenhagen Economic Criteria What Kosovo needs to do?