Republic of Kosovo Kosovo Public Finance Review
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Report No: ACS9351 . Republic of Kosovo Public Disclosure Authorized Kosovo Public Finance Review Fiscal Policies for a Young Nation June 2014 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Public Disclosure Authorized . Public Disclosure Authorized Public Disclosure Authorized Standard Disclaimer: . This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: . The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/ The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, http://www.copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail [email protected]. CURRENCY AND EQUIVALENT UNITS Currency Unit= Euro € 1.00 = US$ 1.37 (As of March 3, 2014) FISCAL YEAR January 1 – December 31 WEIGHTS AND MEASURES Metric System ACRONYMS AND ABBREVIATIONS BoP Balance of Payments MEST Ministry of Education Science and Technology CBK Central Bank of the Republic of Kosovo MIHIL Model of the Impact of Health Insurance Law CCS Carbon Capture and Storage MoF Ministry of Finance CIS Commonwealth of Independent States MoH Ministry of Health CIT Corporate Income tax MTEF Medium Term Expenditure Framework CPI Consumer Price Index MW Mega Watt DH District Heating NEEAP National Energy Efficiency Action Plan ECA Europe an Central Asia NGO Non-Government Organizations ECE Early Childhood Education NPISH Non-Profit institutions Serving Households EE Energy Efficiency NREAP National Renewable Energy Action Plan ELF Emergency Liquidity Fund OECD Organization for Economic Cooperation and Development EMIS Education Management Information OOP Out Of Pocket System ENS Energy Not Supplied OSR Own Source Revenues ERO Energy Regulatory Office PCF Per Capita Funding ESG Education Specific Grants PER Public Expenditure Review EU European Union PFR Public Finance Review FDI Foreign Direct Investments PHC Primary Health Care FYR Former Yugoslav Republic PISA Program for International Student Assessment GDP Gross Domestic Product PIT Personal Income Tax GER Gross Enrollment Rates PoTI Perceptions of Tax Law Implementation GoK Government of Kosovo PPP Purchasing Power Parity GPS Global Positioning System PTK Post and Telecommunications Company of Kosovo GWh Giga Watt hour PTR Pupil Teacher Ratio HBS Household Budget Survey RE Renewable Energy HIF Health Insurance Fund RfP Request for Proposals HIL Health Insurance Law SAA Stabilization Association Agreement HIV Human Immunodeficiency Virus SBA Stand-By Arrangement HPS Higher Pedagogical School SDR Standard Death Rate IBRD International Bank for Reconstruction SEE South East Europe and Development IED Integrated Education Database SFRJ Socialist Federal Republic of Yugoslavia IMF International Monetary Fund SME Small and Medium Enterprises IT Information Technology SMP Staff Monitored Program KAS Kosovo Agency of Statistics SOE Socially Owned Enterprise KEDS Kosovo Electricity Distribution and TAK Tax Administration of Kosovo Supply KEK Kosovo Electricity Corporation TB Tuberculosis KESIT Kosovo Energy Sector Impact Tool TPE Total Public Expenditure KFOS Kosovo Foundation for Open Society UCCK University Clinical Center of Kosovo KfW Kreditanstalt für Wiederaufbau UK United Kingdom KOSTT Kosovo Transmission, System and UN United Nations Market Operator KPC Kosovo Protection Corps UNICEF The United Nations Children’s Fund KPST Kosovo Pensions Savings Trust UNMIK United Nations Interim Administration Mission in Kosovo KRPP Kosova e Re Power Plant USAID United States Agency for International Development KWh Kilo Watt hour VAT Value Added Tax LFS Labor Force Survey WBI World Bank Institute LPFMA Law on Public Finance Management and WEO World Economic Outlook Accountability LTU Large Taxpayer Unit WHO World Health Organization Vice President: Laura Tuck, ECAVP Country Director: Ellen Goldstein, ECCU4 Acting Sector Director: Roumeen Islam, ECSPE Sector Manager: Satu Kahkonen, ECSPE Task Team Leaders: Agim Demukaj, ECSPE Simon Davies, ECSPE AKNOWLEDGMENTS This report was prepared by a World Bank team working in Kosovo during 2013. The principal authors were Agim Demukaj and Simon Davies, supported by a thematic team consisting of Munawer Khwaja and Sandeep Bhattacharya (revenue); Rhedon Begolli and Karuna Phillips (energy); Baher El-Hifnawi and Robin Carruthers (transport); Lucas Gortazar and Flora Kelmendi (education); Karen Stephanie Coulibaly, Aneesa Arur and Marvin Ploetz (health); Anita Schwarz and Aylin Isik-Dikmelik (social protection); and Agim Demukaj (Introduction, and Economic Context and the Fiscal Challenge). Kim Murrell’s editing helped greatly to produce a better report. The World Bank team is sincerely grateful to the Kosovo Government for its close collaboration during preparation of the report. In particular, thanks are due to senior officials in the Ministries of Finance; Ministry of Health, Education; Labor and Social Welfare, Infrastructure; and Energy Regulatory Office. Special thanks also go to Satu Kahkonen, Yvonne Tsikata, Abebe Adugna and Roumeen Islam of the World Bank, who provided continuous support, guidance, and technical advice. Useful comments were received in September 2013 at a day long workshop, jointly organized by the Ministry of Finance, Heath, Education, Labor and Social Welfare and the World Bank. The team would also like to thank the following reviewers for helpful comments and advice: Raymond Bourdeaux (Sector Leader, World Bank); William Dillinger (World Bank Consultant); Borko Handjinksi (Senior Economist, World Bank); Ranjit Lamech (Sector Manager, World Bank); Dino Merotto (Lead Economist, World Bank); Jacques Miniane (Kosovo Mission Chief, IMF); Valmira Rexhebeqaj (Director, Macroeconomic Policy and Management Unit of the Kosovo Ministry of Finance); Heather Worley (Senior Communications Officer, World Bank); Katelijn Van den Berg (Senior Environmental Specialist, World Bank); and UNICEF Kosovo. Finally, the team wishes to thank Ellen Goldstein, country director for Southeast Europe, and Jan-Peter Olters, country manager for Kosovo, for their valuable advice and guidance, and Mismake Galatis for their support in preparation of this report. CONTENTS EXECUTIVE SUMMARY ......................................................................................................................................... I A. CONTEXT ........................................................................................................................................................... I B. CHALLENGES .................................................................................................................................................... II Unemployment and Poverty................................................................................................................ ii A Young Demographic ...................................................................................................................... iii Revenue and Energy .......................................................................................................................... iii C. INCREASING THE EFFICIENCY OF PUBLIC SPENDING.......................................................................................... V D. IMPROVING PUBLIC EXPENDITURE ALLOCATIONS ........................................................................................... VI E. CONCLUSION ................................................................................................................................................... IX F. TABLE OF TOP THREE RECOMMENDATIONS BY SECTOR .................................................................................... XI CHAPTER 1. INTRODUCTION ......................................................................................................................... 1 A. CONTEXT ...........................................................................................................................................................1 B. KOSOVO’S CHALLENGES AND OBSTACLES TO GROWTH ......................................................................................1 Unemployment, Poverty and Shared Prosperity ................................................................................ 2 A Young Demographic ......................................................................................................................