Republika e Kosovës Republika Kosova- Republic of Kosovo Qeveria- Vlada- Government

Ministria e Financave Ministarstvo za Finansije Ministry of Finance

Medium Term Expenditure Framework 2016-2018

April, 2015

List of abbreviations

PAK Kosovo Privatisation Agency KSA Kosovo Statistics Agency TAK Tax Administration of Kosovo GNIA Gross National Income Available EBRD European Bank for Reconstruction and Development PB Payment Balance GDP Gross Domestic Product CBK Central Bank of Kosovo ERS Energy Renewable Sources EPPD Economics and Public Policy Department EU European Union EULEX European Union Mission on Rule of Law KAF Kosovo Armed Forces FIFA Fédération Internationale de Football Association IMF International Monetary Fund KSF Kosovo Security Force CPI Consumer Price Index IFI International Financial Institutions FDI Foreign Direct Investments IPA Instrument for Pre-Accession Assistance IT Information Technology MTEF Medium Term Expenditures Framework KEK Kosovo Energy Corporation ODC Other Depositing Corporations LLGF Law on Local Governance Finance LPFMA Law on Public Finance Management and Accountability MEST Ministry of Education, Science and Technology MoF Ministry of Finance MLSW Ministry of Labour and Social Welfare SAA Stabilisation and Association Agreement SME Small and Medium Enterprises UN United Nations RTK Radio Television of Kosovo SDR Special Drawing Rights USA United States of America UCHSK University Clinical and Health Service of Kosovo VAT Value Added Tax UEFA Union of European Football Associations USAID United States Agency for International Development WEO World Economic Outlook

Content FIRST PART ...... 2 1. GOVERNMENT DECLARATION FOR MEDIUM -TERM PRIORITIES 2016 – 2018 ...... 2 1.1. Economic Development, Employment and Social Welfare ...... 3 1.2. Rule of Law ...... 6 1.3. European Agenda and Foreign Policy ...... 7 1.4. Education, Science, Culture, Youth and Sport ...... 8 1.5. Modern healthcare ...... 9 SECOND PART ...... 10 2. MACRO-FISCAL FRAMEWORK 2016-2018 ...... 10 2.1. International Economic Environment...... 10 2.2. Recent developments and macro-economic medium term scenario ...... 12 2.2.1. Real Sector ...... 12 2.2.1.1. Price fluctuation and projections for 2016-2018 ...... 14 2.2.2. Developments and projections of the external sector ...... 15 2.2.3. Financial Sector ...... 16 2.2.4. Fiscal Sector ...... 18 2.2.4.1. Projections of budget revenues 2016-2018 ...... 20 2.2.4.1.1. Revenues according to collection source ...... 21 2.2.4.2. Budget Spending Framework and Structure 2016-2018 ...... 23 2.2.4.3. Budget deficit and its financing ...... 26 2.2.4.3.1. Borrowings during 2016-2018 period ...... 26 2.3. Development Potentials and fiscal risks for the period 2016-2018 ...... 28 2.3.1. Development Potentials ...... 28 2.3.2. Fiscal Risks ...... 29 THIRD PART ...... 31 3. BUDGET EXPENDITURE FRAMEWORK 2016-2018 ...... 31 3.1. Framework And Structure Of Budget Expenditures 2016-2018 - Central Government ...... 32 3.1.1. Budget expenditures for 2016-2018 for the Central Level ...... 32 3.2 MUNICIPAL MEDIUM TERM EXPENDITURE FRAMEWORK 2016-2018...... 38 3.2.1 Municipal budget proposal for 2016-2018 ...... 38 3.2.2 General Grant for 2016 ...... 39 3.2.3 Specific grant for pre-university education for 2016 ...... 42 3.2.4 Specific grant for primary healthcare covering 2016 ...... 45 3.2.5 Financing of secondary healthcare for 2016 ...... 47 3.2.6 Financing of residential services ...... 47 3.2.7 Municipality‟s Own Source Revenues for 2016 and forecasts 2017-2018 ...... 47 Annexes ...... 49

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Introduction

The Medium Term Expenditure Framework (MTEF) 2016-20181 represents the main document based on which the draft annual budget is prepared. The main purpose of the MTEF is to provide an analysis based on the country‟s macroeconomic environment, thus establishing the basis for budget planning for coming years in line with the Government‟s strategic priorities.

Sustainable economic development is the Government's key goal. It will enable the creation of new jobs and enhance people‟s welfare. Despite the advantages Kosovo has in terms of young population and vast natural resources, economic development and reduced unemployment rate remains a challenge that the Government will face.

The Government of the Republic of Kosovo approved the Government Program 2016-2018 in the beginning of 2015, setting forth the policy priorities for the medium term. The main pillar of the Government's Program is economic development, employment and enhanced welfare for the citizens followed by other non-less important priorities, such as Rule of Law, Education, Health, and European Integration. To this end, MTEF 2016-2018 is an important tool for the Government in making the first steps towards achieving these objectives.

MTEF 2016-2018 is structured into three main parts. The first part provides offers a comprehensive overview of the Government‟s priorities in accordance with the Government Programme. Macro- fiscal projections based on general parameters of economic development are discussed in the second part of this document. Fiscal estimations made in this part define the spending ceilings within which the central and municipal budgets are prepared.

1 Please note that in case of discrepancies, the Albanian version prevails FIRST PART

1. GOVERNMENT DECLARATION FOR MEDIUM -TERM PRIORITIES 2016 – 2018

The Mid-Term Expenditure Framework (MTEF) outlines Government priorities with a coherent, coordinated approach and is functionally harmonised with the key strategic documents and programme of the Government. MTEF enables budgeting of these priorities for the mid-term period.

The Government of the Republic of Kosovo envisages the building of an effective, competent and accountable government as a primary goal towards achieving sustainable and inclusive growth and strengthening of social welfare.

The 2016-2018 mid-term priorities are based on the Government Programme 2015-2018, the National Economic Reform Programme 2015-2017 and requirements from European integration process, in particular the Stabilization and Association Agreement. Statement of mid-term Government Priorities is oriented towards economic, social and institutional development of the country.

Consequently, the Government of Kosovo, through this Statement, steers the budget development process for the period 2016-2018, which includes the funding of our key priorities through the available resources. In this context, MTEF is drafted in compliance with Government‟s commitments in relation to international institutions, within legal parameters of the Law on Public Financial Management and Accountability (LPFMA).

In the context of priorities set as part of the government commitment to ensure economic growth and generation of new jobs. During the mid-term period 2016-2018, The Government will continue to implement legal reforms of fiscal policy and fight against the informal economy, by ensuring a favourable business environment. On the other hand, the Government intends to continue the implementation of the collective bargaining agreement - through payment of work experience for employees who receive salaries from the Kosovo budget, payment of health insurance, strengthening the public order and safety, supporting the agricultural sector, continuation of funding the social and pension schemes, including schemes for former political prisoners and war veterans. The Government will continue with investments in road infrastructure, including the construction of Route 6 (Prishtina - Hani i Elezit). Also, the fulfilment of the government‟s priorities includes necessary reforming of certain sectors, such as: structural reforms in education, and the reform of public administration. All the above policies will be implemented in order to ensure a sustainable mid-term budgetary framework.

In this context, based on the Government Programme, the Government's medium term priorities are aggregated into five pillars as follows:

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 Economic Development, Employment and Social Welfare  Rule of Law;  Education, Science, Culture and Youth development;  European agenda and foreign policy;  Modern health.

All the above mentioned priorities will be financed while maintaining the macro-fiscal sustainability. The Government will continue to develop a simple and modern tax system, which will be focused on expanding the tax base. In the view of achieving this goal, the Government of Kosovo remains committed to further advance the fight against the informal economy and money laundering, through the implementation of the Action Plan of the Strategy on prevention and fighting of informal economy, money laundering, financing of terrorism and financial crimes 2014-2018. Successful prevention and fighting of informal economy will also ensure the maintenance of fiscal balance between the financing needs of public sector and the need for developing the private sector, by enabling equal conditions for private sector development.

1.1. Economic Development, Employment and Social Welfare

The Government of the Republic of Kosovo, during the next mid-term period, will focus particularly on economic development, employment and social welfare. The implementation of these priorities will constitute the largest share of budgetary framework, which the government will undertake to ensure economic growth and create new jobs. In order to achieve the above, the government will focus on enabling a more favourable fiscal environment, improving the trade policy and integration into the global economy, including the improvement of the business environment, the continuation of existing projects to modernize infrastructure, as well as the government's policies in the energy sector and continuous support to agriculture and rural development.

Appropriate tax system and business-friendly environment are the most important pillars for sustainable development of the private sector in the country. Therefore, the ongoing improvement of the tax system and tax compliance is the core priority of the Government. The Government hereby intends to achieve the expansion of the resource base in order to finance the economic development of Kosovo and social cohesion agenda, and same time to maintain competitiveness advantage of the country's business environment. In this regard, fiscal policy reforms include escalation of VAT, lowering the VAT threshold, VAT exemption for production lines and machinery, and functioning of industrial and technological parks for which it is foreseen provision of various tax incentives.

Openness and the market and integration into the global and regional economies constitute a high priority for the Government, which should be addressed during this medium-term period. In addition to the continuous objective for Kosovo's membership in regional and global institutions and mechanisms, the Government will be focused on achieving strategic agreements on economic and trade cooperation with the region and beyond. In this context, an inalienable aspect regarding the trade policy of the Republic of Kosovo is the implementation of the Stabilisation and Association

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Agreement, which will have an impact on a large part of government policy. Consequently, as part of competitive trade policy and for improving the business environment, the Government will work on reaching agreements with various countries for the elimination of double taxation, promotion of services trade, modernization of customs services, development of cadastral system and further improvement of the public procurement system

In order to support small and medium enterprises, as well as to attract investments, the Government will work on eliminating the legal barriers and reducing bureaucracy, subsidizing enterprises with potential for export, operationalizing the free trade zones, and fight against informal economy. The aim here is to develop policies that enable the growth of business investments, especially in manufacturing and value-added services. In order to strengthen the small and medium enterprises, the Government, in addition to current schemes, as grant program and Voucher scheme, with the support from development partners, will establish a Credit Guarantee Mechanism. Establishment of an Employment and Development Fund is a priority of the Government of Kosovo, which, as other policies, aims at contributing to the economic growth, creating new jobs, improving access to finance with favourable conditions for young and women entrepreneurs, small and medium enterprises, and corporations.

The Government will work on developing the energy and mining sector, applying international standards for environmental protection, as the basis for sustainable economic development of the country, and foreign investments. Quality power supply is one of the priorities of the Government. Development and exploitation of existing mines and the opening of new mines should be in line with country‟s development objectives, where during the next medium-term period, the Government will establish a strategic approach for the exploitation of mineral resources of Kosovo which will reflect economic and state interests of Kosovo, resulting in increase of investments and the creation of new jobs.

The development of energy infrastructure for ensuring a stable power supply will be treated with high priority within the Government Policy for this sector. In particular, the Government policies will be focused on building new capacities for energy production. Also, in context of aims to create a functioning energy market in Southeast Europe, regulatory and administrative measures will be undertaken, as well as it will be worked in finalizing ongoing projects for strengthening the transmission network infrastructure. By constructing the high interconnection line between Kosovo and Albania, may commence the development of a common energy market, which represents complementarities in terms of energy resources. Another option to ensure sufficient capacities to generate electricity is to enhance the use of renewable, solar, wind, hydro and biomass energy. In this regard is drafted the legal framework related to Renewable Energy Sources (RES) Targets 2020, which are in accordance with the requirements of the Energy Community. The implementation of measures and achievement of targets for energy efficiency also constitutes an important Government policy, which continues to obtain the development partners support.

Aiming the continuation of reforms and support to the agricultural sector, the Government of Kosovo, in cooperation with various development partners, will be strongly committed to promote

4 the production chain, from primary agricultural production to the processing, storage and marketing of agricultural products, as well as credit and subsidies incentive measures and improving public infrastructure. The Government will continue to support the agricultural sector, with priority in sectors with comparative and competitive advantages. In addition to other policies, the Government will also work on the implementation of Agriculture and Rural Development Plan 2014-20, which foresees a gradual increase of the fund for subsidies and grants for 5% each year; cooperation with development partners for the development of the agricultural sector (benefit through IPA II 2014-2- which envisaged 79.7 million euros financial assistance to the sector, as well as the implementation of the AGRO-USAID funded project 12 million US dollars).

The Government of Kosovo will continue the modernization of road and railway infrastructure to facilitate the regional trade and attract foreign direct investments. In particular, the Government will work on finalizing the highway Prishtina - Hani Elezit (Route 6) and policies to improve the Kosovo railway network. In addition to this, it will be worked also on finalizing the modernization of existing projects, including: expansion of the road N2 Prishtina - Mitrovica; expansion of the road N9 Prishtina - Peja, and other national roads.

The Government will promote tourism as a sector with high development potential. The development of tourism will have a direct impact in several areas, such as: production, income growth, development of economic activities, tourism, transport, trade, cultural institutions, etc., in increasing the employment, raising the living standard level, increasing investments, improving the balance of payments, the development of underdeveloped areas, etc. In this regard, the Government will work on the implementation of the Project for the Development of Tourist Centre Brezovica, which has already begun, and was classified as a project of national significance.

As regards to environmental policies and water management, in cooperation with donors currently supporting this sector, we will continue to build capacities for rehabilitation and expansion of potable water capacities, collection and treatment of wastewater, improving waste management, etc. With this, the Government aims to capitalize Kosovo water sector resources, through improvement of planning and usage of water as economic and social resource.

Within social policies, social welfare and cross-social solidarity, the Government is committed to strengthen the market economy and economic development as the main tool for reducing poverty and unemployment, also providing an cross-social solidarity through income redistributive economic policies. Social policies will ensure financial stability and sustainability of the mandatory pension contributions scheme and will promote voluntary savings schemes. In support to employment policies, we will continue to reform and modernize the public employment services, focusing on building capacities of state mechanisms, increasing active measures of the labour market, promoting the employment of young people, people with disabilities, long-term unemployed women and communities. The Government will also be committed in the decentralization of social services, as well as creating opportunities for social entrepreneurship development concept.

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1.2. Rule of Law

Strengthening of public order and safety, and functioning of the rule of law is vital for Kosovo. Good governance and the rule of law will be the main pillars to economic growth, through efficient justice, improving the public administration, implementation of anti-corruption policies, fight against organized crime, terrorism and activities related to the phenomenon of terrorism, economic crime, human trafficking and other types of crime. The Government of Kosovo will be committed in supporting the independent judicial institutions in handling the large number of backlog cases, improving and processing the data and case management. Also, a special dedication will be given to the rule of law in relation to the implementation of contracts, mainly since commercial disputes resolution in courts is very difficult.

In order to improve the situation in the justice system in general, the Government is committed to implement reforms necessary for the development of a judicial system that will be transparent, providing full functionality of judicial reform in accordance with applicable laws, create and improve the physical infrastructure of courts in order to meet the needs arising from the reform process. The Government of Kosovo is committed to support the independent judicial institutions in handling the large number of backlog cases, improving and processing the data and case management. The Government will cooperate with international institutions, in particular with the European Union Rule of Law mission in Kosovo, EULEX, and will also work on the adoption of legislation towards the international obligations for the establishment of the Special Court. In the context of the full functioning of the justice system in the entire territory of the Republic of Kosovo, an important priority is the implementation of the Justice agreement, for achieving a complete integration of northern municipalities in the justice system and the functioning of the justice institutions in north.

Fight against corruption constitutes an area of strategic importance for the Government of Kosovo, hence, the focus will be on improving and strengthening the legislative and institutional framework for fight against corruption. Aiming at addressing the challenges in this regard, the Government will increase efforts to investigate, prosecute and punish corruption-related cases, placing emphasis in strengthening of institutional cooperation.

Regarding the defence and security, the Government will implement the recommendations of the strategic review of the Security Sector, aiming at the establishment of Armed Forces of Kosovo and support in capacity building of security institutions. In this regard, it will be worked on the development and completion of legal basis and strategic policy framework for Armed Forces of Kosovo, as well as on establishing new training programs for further development of this institution. During the medium-term period and further, there will be efforts on recruiting the members and building of units of AFK, with the aim of achieving initial operational capacity, as well as addressing infrastructure needs.

In the context of fiscal framework, the Government will address the needs for capacity building of the institutions of public order and safety, including the advancement of the conditions of the Kosovo Police, and other law enforcement agencies. The government will work on its capacity

6 building to prevent radicalization, including the development of appropriate measures to address the phenomenon of fighters joining conflict outside the country. In this context, the Government will continue its commitment in the fight against terrorism through cooperation with strategic partners, as well as to improve national policies and legislation. The Government will also work towards enhancing bilateral cooperation with and integration in relevant regional and international organizations in the field of border issues and Integrated Border Management, the field of migration, protection of personal data, fight against organized crime, etc. Also, within the Brussels Dialogue, the Government will work on the implementation of agreements on Integrated Border Management and freedom of movement.

Modernization and Reform of Public Administration, built on European principles, as a key factor for the provision of services to citizens and increase of efficiency, is the main objective of the Government. In this regard, the Government will prepare a strategic framework to address the challenges in the development and coordination of policies, public finance management, and management of human resource and civil service development, administrative procedures, provision of administrative services, as well as the system accountability in the civil service. In order to address the challenges in this regard, the Government will work to implement legislation for providing a structured and standard-based public service, a non-political service based on fair and transparent recruitment, promotion based on merit and professional advancement. Also, the Government aims at building a unified system of wages in public administration and digitalization of the human resource management process. The Government will work to increase transparency and participation of citizens in decision-making and strengthening cooperation with the private sector and civil society organizations.

For continuous advancement of local governance, as well as for a quality service delivery, the Government will continue to implement strategic and legislative framework in the field of local governance. The mid-term period will consist of an increased commitment of the government in relation to the unification of local self-governance system in the country, namely the creation of political, administrative and institutional conditions for the integration of the northern municipalities in the local self-governance system of the Republic of Kosovo.

1.3. European Agenda and Foreign Policy

The achievement of Kosovo's European agenda is a priority to the Kosovo institutions. In this regard, as special priority during the mid-term period will be the SAA implementation, by coordinating the dialogue with all involved parties. In particular, efforts will be intensified in relation to visa liberalisation process, in particular in increasing administrative capacities to face the obligations arising from Stabilisation and Association Agreement, respectively approximation and harmonisation of legal framework with EU, as well as capacity building on implementation of the legal framework. Due to limited financial recourses and human capacities, the government aims at prioritisation of its objectives for the medium term period by harmonising them with the requirements of European agenda and at same time ensuring an integrated planning approach which ensures that financial and human resources of the government are oriented towards meeting the obligations under the

7 agreement and stated reforms under the government programme and in line with the expected national development strategic framework. The Government also recognizes the need for an integrated approach in the European agenda implementation for achieving these priorities. With such an approach, the Government will ensure the continued implementation of the reforms in different areas, which will enable proper implementation of SAA, whose implementation will be strongly supported by the Government. In the context of implementation of European integration requirements, the Government will maximise the use of EU funds as part of Instrument for Pre- accession Assistance and Western Balkan Investment Framework, as well as other development partners. The Government of Kosovo will undertake necessary reforms to ensure Kosovo‟s access to EU funds in the form of direct budget support.

In regards to foreign policy, the Government of the Republic of Kosovo, during this period, will increase efforts towards Kosovo's membership in international organizations, targeting specialized agencies within UN. In addition to this, the Government of the Republic of Kosovo, aiming at establishing contacts with countries that have not recognized Kosovo, will continue to strengthen and expand its presence in multilateral systems. Also, the Government will see opportunities to strengthen its presence in different regions of the world in order to be closer to states that have not recognized Kosovo. For achieving this, a rapid development of capacities of the diplomatic and consular service in the diplomatic missions of the Republic of Kosovo is needed.

1.4. Education, Science, Culture, Youth and Sport

Education is considered as one of the main determinants of long-term economic and social development and stability in Kosovo. In this regard, the Government, during the next period, will work on developing a new vision for education, whereby in 2016 will draft the next Education Strategy. At the same time we will work on improving the quality of education, such as: infrastructure improvement, with particular emphasis on areas with overcrowded schools, the intensification of activities for the further teachers development, as well as the e-Education system will be functionalised, which will greatly affect the more efficient management of this sector in order to increase the quality.

The Government of Kosovo is committed to promote the increase and expand of scientific and research activities. In this regard, the Government, during the mid-term, will work on improving the funding for this sub-sector and also the consolidation of mechanisms for effective management of the sector.

During the mid-term period we will be work on completing the legal infrastructure in culture, where as a priority will be the drafting of a Strategy for Culture and the Law on Sponsorship and Donations. Also, the existing laws will be reviewed, as well as the Law on Cinematography will be drafted, in order to be more applicable and to serve to the benefit of the development of cultural life in the country. Attention will be paid to the finding funding opportunities for expanding the presence of the Republic of Kosovo in important cultural events in the world. Also, it is important to work on the implementation of the Common Calendar of Cultural Activities with the Republic of Albania. A

8 special attention will be paid also to the preservation of cultural heritage, through the support of specialized institutions in this field.

Regarding Youth, the Government will continue the activities to strengthen and increase its participation in decision-making. Support to the youth organizations and creation of a special fund for entrepreneurship among young people will be the main priority. Also, the Government will work on creating a proper infrastructure for cultural activities.

Also, the Government will continue to intensify its work for supporting the sport in Kosovo in order to develop it, starting from the young ages, by promoting and expanding sports in schools and educational institutions. At the same time we will be work on the drafting and adoption of new laws on sport, then the law against hooliganism during sport events. Regarding the internationalization, the membership in International Olympic Committee has been essential to pave the way towards membership in various federations, where the most complex is the membership in the Federations such as UEFA and FIFA, which would finalize the long internationalization process. At the same time, the Government will continue to improve the sports infrastructure in Kosovo and to bring the sports halls in compliance with the requirements for holding international matches.

1.5. Modern healthcare

Reform of the health system represents a significant challenge for Kosovo. In addition to the creation of conditions for implementation of the law on health, and functioning of the health insurance fund, this reform aims at ensuring the universal access to quality health services for all citizens and residents of Kosovo. Increasing the quality of services has become a necessity; therefore, the primary goal of this reform will be the increase of the sector performance in the provision of services. This will be achieved through the establishment of a sustainable financing system for the health sector, which will result in a Public Health Insurance Fund. The supply with medicines is the most urgent priority, and in this regard the Government will work on compiling a list that is in line with relevant international standards, based on the real needs of Kosovo, and within available resources. A specific priority will be also the capacity building through programs for specialization, and citizens‟ awareness-raising in order to prevent various diseases.

However, for achieving a modern health system are needed strong institutions, which are able to cope with challenges, and to resolve issues that may arise. Therefore, reform of the Ministry of Health, in terms of strengthening the policy-making, regulatory, evaluator and monitoring role, as well as the establishment of a sector-wide approach in policy-making, including other institutions such as the Chambers of Professionals, Health Insurance Fund and HUCSK, will be issues that will have special attention during the next period.

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SECOND PART

2. MACRO-FISCAL FRAMEWORK 2016-2018

2.1. International Economic Environment

During 2014, the global economy was characterised by slow recovery, particularly in advanced economies which continue to suffer high levels of private and public debt. Although financial markets have been optimistic, investments, particularly in advanced economies, have not reached the expected levels. Economic projections and expectations were based on the assumption that global growth would be driven by advanced economies as a result of measures taken for fiscal consolidation and appropriate monetary policy. Despite the weakened activity, capital flows to emerging markets continues to be stable, where exchange rates have played a stabilising role in some cases.

Amongst advanced economies, EU States and Japan expect slower growth compared to USA, whilst among emerging economies slower growth is expected in China and Brazil. Moreover, geopolitical tensions (the situation between Russia and Ukraine and the conflict in the Middle East), although still active in the respective regions, are expected settle down this period. However they continue to be increasingly threatening the overall security and particularly leading to economic uncertainty.

Economic developments in the end of 2014 and the first half of 2015 made the economic agents to change their expectations on the global economy by reviewing their official projections on economic growth rates. The decline in oil prices (driven by supply) is expected to foster global growth over the next two years by increasing the purchasing power and private demand in oil importing countries. This is expected to be strongly manifested in advanced economies due to faster transmission of these lower prices‟ effect to the customers / end-users, whilst in emerging economies positive effects on economic growth is expected to be mainly manifested through public investments2. On the other hand, coping with lower rates of economic growth compared to expectations is, in many countries (except the USA), thought to be expected to fit the behaviour of economic agents, which will be manifested through the decline in investment. Such behaviour would counteract to the effect of lower oil prices. This would result in the fall in oil prices not being utilized in its full potential; therefore economic growth in many countries for the coming years is revised downwards in January 2015, except in the case of the US.

The following table presents the re-written growth rates according to the International Monetary Fund. This table shows review of the global growth rate of 3.5% (from3.8%) for 2015 and 3.8% (from 4%) in 2016

2 Consumption and production in developing countries are considered to be more dependent on use of energy. IMF highlights that the decline in oil prices in developing countries results in more windfall revenues (e.g. less subsidies for energy) creating thus the possibility to support public finances. Thus, the impact reaches the end user indirectly. 10

Table 2.1 Economic growth projections (in %) Description Projections October 2014 Reviewed 2015 2013 2014 2015 2016 2014 2015 2016

World GDP 3.3 3.3 3.8 4.0 3.4 3.5 3.8 Advanced economies 1.4 1.8 2.3 2.4 1.8 2.4 2.4 Euro zone -0.4 0.8 1.3 1.7 0.9 1.5 1.7 Germany 0.5 1.4 1.5 1.8 1.6 1.6 1.7 Developing economies 4.7 4.4 5.0 5.2 4.6 4.3 4.7 European developing economies 2.8 2.7 2.9 3.3 2.8 2.9 3.2 The Balkan Region Albania 0.4 2.1 3.3 4.2 2.1 3.0 4.0 Macedonia 2.9 3.4 3.6 3.9 3.8 3.8 3.9 Montenegro 3.5 2.3 3.4 3.3 1.1 4.7 3.5 Serbia 2.5 -0.5 1.0 1.5 -1.8 -0.5 1.5 Source: IMF WEO, published on 14 April 2015

In regard to Eurozone3, the estimates of the Directorate for Economic and Financial Affairs (DGECFIN) show a slow European growth, but the potential to growth in the next two years as a result of recent global developments. The fall in oil prices and other products represents the best chance for recovery of economic growth in fuel importing countries, such as the EU states.

According to European Commission estimates, the EU growth was mainly supported by private consumption, whilst investment levels remained weak throughout 2014. In addition to the decline in oil prices, the Euro has depreciated and the European Central Bank plans to expand its asset purchase. The EU's GDP is estimated to grow by 1.7% this year and 2.1% next year. In the Eurozone, GDP is estimated (unlike the IMF) to grow at the rate of 1.3% in 2015 and 1.9% in 2016. Inflation in the euro area is estimated to be -0.1% this year and 1.3% next year. In general, countries like Germany, whose export is more oriented towards commodity exporting countries (compared with exports of services), will face a decline in external demand (in the case of Germany, net exports are forecasted to reach negative values in 2016).

The Balkan region was characterised by slower recovery, where Albania gives the impression of the state with the most potential for growth over the next two years, whilst Serbia has much work ahead to restore growth to positive values.

Albania's economy was characterised by lower inflation than expected, which strengthened private consumption as a result of the fall in international oil price. In general, there are signs of recovery followed by improved fiscal balance.

Large investments in infrastructure projects in 2014 were the largest contributor to GDP growth in Macedonia. However, growth for the years 2015 and 2016 is expected to mainly occur from the increase in FDI reflected through increased domestic demand. The external balance continues to

3 Table 1 contains the most recent IMF information on all countries (for consistency). The discussion on economic projections for Europe and the Balkans is based on „European Economic Forecast 2015‟, an EC publication, because it provides more detailed information on Europe developments. 11 adversely affect the growth in Macedonia because, despite significant improvement in export of goods, the slow decrease of import remains a challenge.

Montenegro marked a slow growth during 2014 as a result of the decline in industrial production and export. Year 2015 will mark the start of the construction of a large motorway, which is expected to affect economic growth in the coming years. This initiative comes after a period of several years of budget cuts in capital investments.

Serbia had a difficult year, when economic growth decreased marginally by falling to around -2% in 2014 as a result of major floods during 2014 and weak external environment. The recovery is expected to be slow, where investments in particular, which have been performing poorly, are expected to reach their lowest level in 2015.

2.2. Recent developments and macro-economic medium term scenario

Year 2014 was particularly challenging for Kosovo as it was characterised by considerable lack of activity as a result of Government‟s delay in establishing government institutions after the elections of June 2014. It was understandable that such a situation would affect the behaviour of economic agents, who seemed to be waiting for the establishment of governmental institutions in order to avoid uncertainties.

Retaining macro-fiscal stability is a challenge at the time of an urgent need for economic development. There isn‟t too much room for cutting the expenditures, and for a transition country like Kosovo, the need for investment remains considerable.

Kosovo's economy continues to show resistance to turmoil in the European countries‟ economy. However, developments in the region should be carefully followed. This consistency is mainly due to the low rate of Kosovo's integration into global capital markets. Financial market in Kosovo reflects very few European or global financial developments (fluctuations). Other reasons are the high levels of capital expenditures, a characteristic of transition countries which usually suffer from lack of infrastructure. The impact of infrastructure investments on economic growth is intended to be replaced by increased private investment and growth in export. In this regard, competitiveness (particularly the regional one) continues to be a priority for Kosovo, emphasised through on-going Government‟s efforts towards continuous capital investments, improvement of the business environment and support to local production in various forms.

2.2.1. Real Sector

Consumption and private investments as well as exports, to a lower extent, are the categories expected to boost economic growth in Kosovo during the 2016 – 2018 medium term period. According to the Government Programme (recently adopted), changes4 have been made Kosovo's tax

4 See box 1 for more details regarding the last changes to the tax system. 12 system which are expected to foster the increase in investments (particularly in manufacturing) and private consumption. Although being in the short term, these measures may not have a major impact. In the longer run, they are expected to contribute to the substitution of imported goods with domestic products and to increased and diversified exports. Therefore, these tax changes (which are expected to be effective as of July 2015) present an opportunity to improve the foreign trade balance, which continues to be a challenge for Kosovo's economy. This is because Kosovo exports are dominated by exports in services, whilst when it comes to goods, export of metal products plays a dominant role. Therefore, there is considerable room for improvement regarding further diversification of exports. The need for the latter has prompted the Kosovo Government to take measures aimed at supporting domestic manufacturers so that Kosovo products would replace a significant portion of imports be launched to regional and global markets in the future.

Economy was estimated to grow at 3.3% in 2014, whilst considering the global economic developments, in particular those in the Eurozone, economic growth for 2015 is projected to be 3.8%, to be then stabilised at 4.4% on average over the 2016- 2018 medium term period (chart 1)

The chart shows that during 2014 Graph 2.1. Real GDP growth and its components consumption was the largest 8% contributor to economic growth. 6% 4.5% 4.5% Although the full effect of the increase 3.8% 4.1% 4% 2.8% 3.4% 3.3% in public sector wages and pensions will be manifested after spring 2015 2% (since it began to be implemented from 0% April 2014), this change is estimated to -2% boost the real disposable incomes of a -4% considerable portion citizens, thus -6% contributing to the growth of private 2012 2013 2014 2015 2016 2017 2018 consumption. It should be emphasized Consumption Investment Export Import Real GDP that a large part of the consumption Source: SAK and Macro Unit calculations originates from imports, which explains the considerable share of this category in the 2014 economic growth.

In 2014, exports contribution to economic growth has increased compared with 2012 and 2013. This is mainly attributed to the fact that Kosovo's exports have begun to signal for diversification. Such a phenomenon has been observed over the past years, where, despite the increase in the goods exports value, exports of metals have decreased being replaced with wooden, plastic and food products. However, the exports contribution to economic growth is less negligible due to the low base total exports continue to have. As a result of the country‟s political situation in 2014, the economy slowed down and many expectations did not materialise, which largely explains the general lack of investments during most of 2014.

The 2016-2018 forecasts scenario estimates that the economy will start recovering from the challenges faced in 2014. Year 2015 will be a period of stabilisation to precede a medium-term period of more stable macroeconomic environment and more favourable environment for doing

13 business. Effective tax changes are also expected to contribute to this. The Government‟s Program is based on the past and current challenges and has put particular emphasis on economic development by stimulating local production. These fiscal changes include the production line in different sectors, including the agricultural one, which is being subsidised by government from some time now.

Regardless of the fact that consumption is expected to decline in relation to GDP, graph 2.1 indicates that consumption growth will continue to be largest contributor to the Kosovo GDP growth in the 2016-2018 medium-term, supported by remittances among others. It also indicates that this period is expected to be characterised by significant improvement in investments. Although the European recovery remains slow (uncertainty in the Eurozone was diminished less than expected), the overall perspective is positive. Therefore no drastic decline in migrants transfers, whether remittances or real estate investments, are expected.

Although there are signs of improvement in the exports category, the level of Kosovo exports remains low. As a result, Kosovo Government has considered exports to have the potential to contribute to the growth in GDP. Therefore, considering the challenges faced by producers, Kosovo Government has made tax changes that facilitate the existing burden of Kosovo businesses in manufacturing. Thus, Kosovo's products will begin to gradually replace imported ones and will have easier access to international markets. Application of these changes as of July of this year will allow the effects of these changes to be manifested in early 2016-2018 medium term. This is also reflected in the increased share of exports in GDP over this period (see Chart 2.1). Moreover, the Government‟s Programme is focused on different sectors aiming to support Kosovo‟s exports diversification. This enhances the stability of this category contribution to the growth of GDP.

In general, the 2016 - 2018 period will not bring any drastic changes in the structure of the contributors in Kosovo GDP growth. Expectations mostly lean towards the gradual improvement of each category. It should be noted that the beginning of the period will consist in the overall economic „recovery‟ and stabilisation after the stagnation in 2014.

2.2.1.1. Price fluctuation and projections for 2016-2018

The trend of slow growth in the price level, measured by the annual change in consumer price index (CPI), has continued in 2014 as well.

Graph 2.2: Price forecast Similar to last year, food and transport 5% prices have fall slightly, thus reflecting the fall in global prices of food and oil, 0% 2013 2014 2015 2016 2017 2018 whilst other components such as -5% tobacco, alcohol and services have increased. As predicted the increase of -10% salaries in the public sector seems to -15% have had an impact on the increase in prices. -20% CPI GDP deflator World food prices

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Consumer prices are expected to remain low in the medium term period, 0.2% in 2015, averaging 0.5% in the 2016-2017 period. Low inflation rates are expected as a result of stabilisation/lower prices of the two components - food and transportation - with greater weight in the CPI as a result of further decrease of food and oil prices in global markets, whilst other groups of products and services are projected to continue to offset some of this decline.

The GDP deflator, as a measure of the level of prices of all new, domestically produced, final goods and services in an economy, is estimated to be 1.4%, and is projected to remain above the CPI; on an average of 0.9% in the coming years.

2.2.2. Developments and projections of the external sector

External position of Kosovo's economy continues to be determined by developments in the global economy and European Union in particular. This is because the bulk of Kosovo exports are oriented towards the EU countries, whilst Germany and Switzerland are the main source of remittances and foreign direct investment in Kosovo. The fall in international prices of food and oil products is expected to be reflected in the decline of imports value, whilst the projected increase in international prices of metals associated with new measures taken by the Government to stimulate the production is expected to stimulate the export of goods. The current account deficit is expected to improve slightly over the forecasted period, reaching 7.4% of GDP at the end of the period out of 7.9% as projected in 2014.

The trade balance during 2014 Graph 2.3: The structure of the current account, as % of GDP resulted in an increase 30 (improvement) of 0.7 percentage 20 points in relation to GDP compared 10 to 2013, thus reaching -36.8%. This 0 improvement was mainly driven by -10 the rapid growth of exports of -20 goods and the slowdown of -30 imports‟ growth due to the pressure -40 of falling international prices. -50 2013 2014 2015 2016 2017 2018 Trade Balance Services balance This trend is expected to continue Net income Net transfers Current account balance during the forecasted period, with imports expected to continue to grow at a slow pace (average 4.7% in nominal terms), partially influenced by falling prices and to a greater extent by the substitution of imported goods with local products. Export of goods (projected to grow at an average of 9.6% per year) are expected to mainly contribute to the improvement of the trade balance, which is driven Kosovo Government‟s measures taken to stimulate production and investment in the private sector. Therefore, the trade balance, mainly supported by government initiatives to promote production, is expected to improve by about 2 percentage points reaching -34.6% of GDP at the end of the forecasted period. 15

The services account was closed with a positive balance of about 6% of GDP in 2014. Based on the background of growth of this item, the services account is expected to continue providing a positive contribution to the current account. Consequently, the share of services balance is expected to grow by 0.3 percentage points over the forecasted period, reaching 6.3% of GDP (see Chart 2.3). This growth is expected to continue to be supported by travel services, although an accelerated growth is envisaged in transport services as well as information technology and communication services.

Net income account is expected to worsen from 1.9% of GDP in 2004 to 2.4% of GDP in 2018. Despite expectations for a significant increase in revenues from the remuneration of employees, increased outflow in the form dividends and return on foreign investments in Kosovo is expected to slow down the growth in revenues account. This will be highly contributed by the envisaged decline in revenues from the interest of local financial institutions‟ investments abroad as a result of low and near-zero interest rates and reduction of these investments.

Notwithstanding expectations for an increase in remittances, transfers account is expected to worsen to 2.3 percentage points during 2016 - 2018 period, therefore reaching 18.6% of GDP. This decline is expected to be affected by the projected decline in official transfers.

At the end of the forecasted period, the capital and financial account is expected to represent approximately 6.4% of GDP. This growth is expected to occur by increasing the flow of foreign direct investments, which are expected to account for about 3.1% of GDP from 2.8% in 2014. The portfolio investment outflow are expected to decline over years 2016-2018 under the assumption that local financial institutions will reduce investments and that these investments will be channelled in the country's economy through lending and investment in Government securities.

Errors and mistakes are expected to fall in relation to GDP although their value remains high and positive. It is assumed that this item of the balance of payments (BOP) consists of revenues not recorded as remittances, foreign direct investments or unregistered export of goods or services. In 2014, this category of BOP has represented 5% of GDP (corresponding to 274.8 million euros) from the 3% of GDP it was in 2013. The Central Bank of the Republic of Kosovo, as the designer of these statistics, makes constant changes in the reporting of revenues and expenditures in order to identify unrecorded revenues. Changes are reflected in the annual review of all items of the balance of payments which are then reflected in the national accounts and the GDP nominal value.

2.2.3. Financial Sector

Kosovo's financial sector remains well-capitalized, liquid and profitable and characterised by positive trends of growth in deposits and crediting. The banking sector continues to retain its dominant role in the financial system in terms of both lending and the payments system.

The banking sector has continued to be stable and profitable despite the inconsistencies that covered the international financial markets in recent years, where limited integration with international

16 financial markets were the key factors that contributed to banking stability. The structure of the banking market continued to remain the same when it comes to the share, where international banks continue to play a dominant role in. However, during the last two years competitive inter-bank activities have increased mainly in improving services to clients as well as providing different products to respond to market demands.

During 2014, lending in the Kosovo Graph 2.4: Growth of deposits, loans and nominal economy has been increasing. Loans GDP, in % amounted to 1,882.3 million euros with an 20% increase of 4.2% compared to 2013. 18% 16% Similarly, deposits grew by 3.6%, thus 14% reaching the amount of 2,538 million 12% euros. During the 2010-2014 period, the 10% 8% average loans increased by 8% whilst 6% average deposits increased by 7.8%, 4% which correspond to the growing nominal 2% GDP. Graph 2.4 illustrates the trends of 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP nominal growth rates, loans and Deposits Loans Nominal GDP deposits. Evaluation of the parameters listed in the table was based of 2010. The chart shows that the three indicators have positive correlations and forecasts indicate a positive move amongst them over 2015-2018.

Loans are anticipated to grow at an average rate of 4.3% during 2015 - 2018, whilst deposits at an average rate of 3.3%, which is expected to support medium-term economic growth at a projected nominal rate of approximately 5.2%

From the crediting cost perspective, the Graph 2.5: Effective interest rates on deposits and loans, in percent effective interest rates on loans have 16% continuously declined over the past four 14% years. During 2014, the average 12% effective interest rate on loans was 10% 9.2%, declining to 1.8 percentage points 8% from the level of 2013. On the other 6% 4% hand, the average interest rate on 2% deposits was 1.1% during 2014, 0% declining by 1.3 points percentage 2010 2011 2012 2013 2014 2015 2016 2017 2018 compared to 2013 Interest rates on deposits Interest rates on loans

As shown in Graph 2.5, the average interest rate on loans in 2015 is foreseen to slightly decline, whilst in the following years it is expected to fall to an average of 8.5%. This decline in interest rates is expected to materialize as a result of falling interest rates in international financial markets and continuous improvement of the country security. Recent initiatives by international organizations in Kosovo, supported by the Government, to start the process of establishing the fund for loans

17 warranties will also play a very special role in this downward trend. This fund will initially support the SME sector and agriculture, with the possibility to expand in other competitive sectors in Kosovo. The purpose of this measure is to expand lending to those sectors where current funding remains a barrier to the business and to decrease the interest rates on loans through loan warranties. Consequently, based on historical trends and the impact of the above-mentioned measures, loan interest rates are expected to fall over the period of observation.

2.2.4. Fiscal Sector

In the lack of monetary policy instruments, fiscal policy remains the only means available to the Kosovo Government for promoting investments in the private sector. Therefore, sound and prudent fiscal policies is key to maintaining macroeconomic stability, particularly when considering that fiscal policy is the main instrument of economic policy in Kosovo.

The tax system in Kosovo is recognised as a relatively simple system with low tax rates. In this regard, the Government of the Republic of Kosovo will continue to implement and retain the tax simplicity by focusing on the design of fiscal policies oriented towards the promotion of investments and domestic productions and by creating an attractive environment for foreign investment (see box 1 for recent changes in tax policy). The Government is, at the same time, focused on retaining macro- fiscal sustainability and increasing the efficiency of public spending measured with the planning of social demands, public sector wages and spending on goods and services.

Box 1. Main changes in tax policies

In absence of monetary policy as a result of using the euro as official currency, fiscal policies remain the only means available to policy makers to create investments incentives in private sector. In this context, the process of tax changes in accordance with the governing programme, the Government of the Republic of Kosovo will continue implementing and maintaining the tax simplicity, focusing on the design of fiscal policies oriented towards promoting investment and domestic production and also towards creating an attractive environment for foreign investments.

The primary objective of changes within fiscal policy is to ensure macro-fiscal stability and at the same time within this space create support and incentives for activities of private sector. Further on, in this process of drafting the changes in the tax system we secured that Kosovo‟s tax system is competitive with tax systems of regional and other countries. Last but not least, taking into account the existing social situation in the country, tax rates are changed under special attention to ensure that these changes reflect the increase of income available and thus improve social welfare

Among the major fiscal reforms is to increase the formalisation of local businesses. This measure intends to conclude the fiscalisation process of all businesses which will allow creating more equitable environment for all businesses operating in the Republic of Kosovo:  Removing barriers for fiscalisation of all businesses by amending Administrative

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instruction no.15 / 2010 for fiscal devices with the aim of liberalising the market for these devices. This measure will create prerequisites for entry into the market of a greater number of providers of these devices, which will have an impact on reducing the cost of devices as well as maintenance of these devices for businesses

 Together with the liberalisation of the market for fiscal devices, the Ministry of Finance designed additional measures to stimulate consumers collecting fiscal receipts and raising awareness about the importance of formalising the business. This measure is regulated through Administrative Instruction on fiscal electronic devices. These measures are intended to reduce tax evasion and prevent unequal competition and at the same time protect consumers. More specifically, the incentive measures for collecting fiscal receipts foresee that consumers who collect  envelopes with more than 30 receipts from €250 to €500 will be refunded with €10;  envelopes with more than 40 receipts from €01 to €800 will be refunded with €15;  envelopes with more than 50 receipts over €800 will be refunded the value of €20.

Key pillar of the government‟s programme is to promote sustainable economic development which allows creating new jobs and its materialisation in increasing social welfare. The Ministry of Finance amended tax legislation, namely the Law on VAT, the Law on Corporate Income Tax and the Law on Personal Income. More specifically, the amendments to the Law on Value Added Tax as a legislative part reflecting greater fiscal reform in relation to other regulatory legislation, taxation, contains:  Reducing the threshold for VAT registration from 50,000 euros to 30,000 euros. This measure is expected to affect the involvement of a significant number of businesses which already operate with a turnover between these intervals. Including a larger number as VAT declarers, this measure intends to create more competitive market in the country, expansion of the VAT chain and providing opportunities for these businesses to reimburse VAT on their inputs. Further on, this measure will help mitigate the VAT system in Kosovo with the regional countries and finally, lowering the threshold would secure an incentive for improving accounting standards, which is not only useful for Tax Administration, but also for the overall corporate governance and easier access to finances.

 Fiscal reform includes breaking down VAT. Breaking down VAT rate by setting a reduced rate for basic products in rate of 8%, is intended for more equal distribution of incomes. Given the high rate of unemployment and the fact that most of the population spends around 45% of their income on food then reducing the VAT rate on basic products will increase the welfare in the country, particularly that of people with lower incomes. List of products with reduced VAT rate includes bread and bread products, cereals and products consisting of grains, dairy, oil, eggs, water supply, electricity and other utilities etc. At the same time, 0% of VAT rate is held on agricultural products in order to strengthen the sector and larger feeding-up of the domestic market with local agricultural products

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 In order to reduce administrative barriers and as a result of equipping with identical fiscal number for all businesses, administrative procedures are shortened where necessary and possible. Measures for eliminating certain administrative procedures are undertaken with the aim of reducing costs and time for the opening and operation of businesses in the country

Among the most significant steps reflected in the Law on VAT on fiscal reform, despite breaking down of VAT, is the exemption of production lines and machinery related to that product from VAT. This measure is expected to improve the liquidity of local manufacturing businesses, which is of particular importance considering the difficulties and high costs of enterprises when accessing to finances. Furthermore, it is expected that these measures in the medium term will serve as an additional incentive to increase private investment and as a result increasing domestic production and creating new jobs. Furthermore, these measures in the long-term perspective are expected to enable gradual increase of Kosovo business competitiveness within international markets.

Information Technology sector is considered as a sector having high potential of development in Kosovo. Amendments to fiscal policies have foreseen exemption from customs of Information Technology equipment in order to provide incentives to this sector and other sectors which use these devices.

Together with changes in the Law on VAT which allow exemption from VAT for production lines and machinery related to the production, the second phase of incentives for domestic producers consists in exemption from customs duties for production activities which will be in function of promoting domestic production and consequently substitution of import. Despite budget constraints (the impact of these measures on reduction of budget revenues) and as a result of the government‟s programme, orientated towards economic development, undertaking these measures is considered vital to unlock the economic potential of the private sector.

2.2.4.1. Projections of budget revenues 2016-2018

Revenue projections for the period 2016-2018 were made on the basis of the macroeconomic scenario based on expectations for economic recovery and growth. This projection takes also into account the assumption of continuous improvement of the efficiency of the agencies responsible for collecting revenues, implementing new tax policies and delivering capital projects including the Pristina-Skopje motorway project. In addition, the revenues collection growing pace is expected to be supported by implementing the actions envisaged in the strategy for preventing and fighting the informal economy to narrow the tax gap in the direct and indirect tax base. On the other hand, the projection has also taken into account the negative impact that the entry into force of Free Trade Agreements with the EU5 and Turkey as of 1 January 2016 will have on budget revenues.

As a result of the above developments, the total revenues over the 2016-2018 period is expected to grow at an average annual rate of about 1%. Lower forecasting of tax revenues during the years

5 Stabilisation and Association Agreement (SAA) 20

2016-2018 compared to 2015 is due to the overestimation of these revenues in 2015. Tax revenues or revenues collected within the country are expected to be the largest contributors to the increase in revenues, whilst the increase in total revenues is expected to refrain from off revenues which are expected to gradually decrease over the 2016-2018 period of MTEF and the effect of the implementation of free trade agreements.

Table 2.2: budget revenues and their share in GDP, in million euros 2015 2016 2017 2018 Description 2013 2014 Budget Proj. Proj. Proj. Total revenues 1,329 1,345 1,587 1,588 1,607 1,625 as % of GDP 24.9 24.1 27.1 25.9 24.9 23.8 Tax revenues 1,105 1,141 1,397 1,263 1,289 1,318 as % of GDP 20.7 20.5 23.8 20.6 20.0 19.4 Non-tax revenues and OSR 168.4 176.7 195.0 206.8 209.8 213.2 as % of GDP 3.2 3.2 3.3 3.4 3.3 3.1 One-off revenues and donors support 43.0 15.0 30.6 105.8 95.6 80.6 as % of GDP 0.8 0.3 0.5 1.7 1.5 1.2 Source: MF, Treasury and Macroeconomic Unit projections

During the 2016-2018 period, the cumulative revenues collection is expected to reach 4.8 billion euros or 1.6 billion euros on average per year. In relation to GDP, revenues are expected to reach approximately 25%, out of which tax revenues are expected to represent about 20% of GDP. The projection on a gradual fall in tax revenues as a percentage of GDP is as a result of the starting the implementation of Free Trade Agreements with Turkey and EU countries

2.2.4.1.1. Revenues according to collection source

The 2016-2018 Medium Term Macro-Fiscal Framework foresees a slight change to the structure of income, although revenues collected at border continue to occupy the largest share. Revenues collected on behalf of VAT are expected to represent the bulk of tax revenues, whilst revenues from corporate income tax and withhold tax are expected to grow at an accelerated rate. Recent changes in the excise tax rate are expected to generate higher revenues, whilst revenues from customs duties are expected to decrease gradually. Consequently, at the end of the forecasted period, while revenues collected within the country are expected to reach 5.7% of GDP at the end of 2018, revenues collected at the border are expected to be reduced for 2 percentage points compared to the GDP ratio, 14.4% of GDP.

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At the end of the forecast period, Graph 2.6: Domestic tax revenues as % of GDP domestic revenues are expected to 8.0% reach the value of 384.6 million 7.0% euros out of 345.6 million euros 6.0% planned for 2015 (excluding 5.0% projections for debt collection). 4.0% This growth is expected to be 3.0% initially supported by the increased 2.0% revenues from VAT as a result of Domestic tax revenues 1.0% recent changes in VAT rate and Linear (Domestic tax revenues) 0.0% threshold and by forecasts the 2010 2011 2012 2013 2014 2015 2016 2017 2018 increase in consume over this Note: the 2015 revenues exclude income from the debt collection period. Revenues from corporate income tax and withhold tax are expected to grow at an accelerated pace.

The Government of Kosovo has recently proposed the fiscal reform which provides various incentives for the private sector, particularly the manufacturing one. This reform, associated with increased credit activity, is expected to have a positive impact on the economic activity and consequently manifest its indirect effects on the regular tax revenues. Moreover, revenues collected within the country are expected to be supported by measures taken to narrow the tax gap by implementing the actions envisaged in the strategy for preventing and fighting the informal economy. Changes to the Administrative Guidance for Fiscal Electronic Devices, which in principle aim at closing the fiscalisation process through market liberalisation of fiscal devices and providing various incentives to customers who collect tax coupons, are expected to have an important role in this.

The projections for domestic revenues collection has also taken into consideration the collection of debts from 2009 until now as a result of the Government's decision no. 03/16 for approving the Commission‟s proposal to forgive debts up to 2009. This measure is expected to begin to be implemented after the law on debt forgiveness is approved whilst most of these debts are foreseen to be collected during 2015 and 2016. A gradual reduction in these revenues is expected over the other years.

Customs revenues are expected to amount to 976 million euros at the end of the forecasted period. Customs revenues are expected to primarily rely on increased demand for imports although once the free trade agreements begin implementing the effect of increased imports on the revenues collected from this source will be reduced. Exemption of production lines and machinery from VAT stipulated by the recent amendments to the law on VAT will also have a negative impact on revenues.

These direct negative impacts are expected to partially offset the additional net revenues of breaking down VAT. Therefore, VAT revenues are expected to prevail over customs revenues, whilst revenues from customs duties during the period are expected to gradually decline in the period of observation.

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Revenues collected from excise tax are important source of customs revenues. They are expected to continue growing as a result of increased imports of goods subject to this tax as well as the recently raised rates for some products for which excise tax applies.

Non-tax, own source, and other Graph 2.7: Border tax revenues and imports of goods revenues, although having a large 3,000 Border tax revenues potential to grow, particularly at Imports of goods 2,500 the municipal level, are projected to remain constant in relation to 2,000 GDP. It is worth mentioning that the increase in nominal value of 1,500 this income category is supported 1,000 by municipal own source revenues, euros In of millions which are expected to grow at a 500 higher rate due to tax on land implementation. The direct 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 budgetary support from the European Commission, revenues from grants and revenues from the program G2G (Government to Government) supported by USAID are foreseen as additional revenue in this category. Revenues from royalties reflect forecasts for exploitation of coal and other mining license holders and do not reflect the change in royalty rate. Moreover, the dividend from POEs in the amount of 30 million euros is also foreseen as additional revenues.

2.2.4.2. Budget Spending Framework and Structure 2016-2018

Government‟s overheads represent public expenditures for providing goods and services to citizens. Like revenues, expenditures are also quite sensitive to the country‟s general economic developments. As such, they serve as a fiscal policy tool to influence overall economic activity. Historically, the Kosovo Government‟s fiscal policies have been largely of expansive character.

Overheads and Medium Term Expenditure Framework are prepared by following parameters allowed by the Law on Public Financial Management and Accountability for the overall budget deficit. As a result of starting with implementation of the fiscal rule from 2014 onwards, the total budget expenditures over the medium term period will have a slower increase compared with the previous period, as a result of prudent planning and compliance with legal provisions. Therefore, based on forecasts for the trend of total budget revenues, total expenditures are planned to increase at an average rate of around 1.2% over the medium term. However, the level and structure of expenditures may vary depending on the approval and implementation of new legal initiatives, capital projects and collection of total budget revenues over the medium term period

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Table 2.3: Structure of expenditures as GDP % Description 2013 2014 2015 2016 2017 2018 2016-2018 as GDP % Average Total expenditures 27.8 26.4 29.0 28.2 27.0 25.7 27.0 Current 17.8 18.9 20.9 20.4 19.4 18.5 19.4 Wages and Salaries 7.8 8.7 9.6 9.2 8.8 8.4 8.7 Goods and Services 4.0 3.7 3.8 3.6 3.4 3.3 3.3 Subsidies and Transfers 5.9 6.5 7.5 7.7 7.4 7.0 7.4 Capital expenditures 9.9 7.4 7.8 7.6 7.3 7.0 7.3 Initial deficit -2.8 -2.3 -1.8 -2.3 -2.1 -1.9 -2.1 Total deficit (by fiscal rule) -3.1 -2.2 -1.9 -2.0 -2.0 -2.0 -2.0 Source: MF, Treasury and Macroeconomic Unit projections

As shown in the table above, all expenditure categories have increased in nominal terms but have decreased as a percentage of GDP. This is as a result of the Government‟s approach to reduce public sector‟s participation in the economy and increase the presence of private sector

Wages and salaries - As presented in the table above, the category of expenditure on wages and salaries represents the lion share of current expenditures during the planning period. However, as planned under expenditure framework over the next three years, this category as a percentage of GDP has a declining trend, where in the planning for the 2018 budget, this category is planned to decline by around 1.2 percentage points. Significant increase in this category occurred in 2014, as a result of the Government‟s decision to increase the salaries of civil servants at a level of 25%. Furthermore, the allocation of funds for implementing health insurance scheme, as well as the implementation of the part of the collective agreement related to work experience caused an increase for this expenditure category for around 15% in 2015 in relation to expenditures of this category during 2014. As a result of budget constraints and maintaining high level of spending on other economic categories and developing projects which have a high economic return, expenditures in this category are planned to have an annual increase not higher than 0.4% over the medium term period. The Government is committed to define a legal framework (Law on salaries) which will govern the level of wages, salaries and allowances for all employees in the public sector. As a result, budget expenditures for this category are planned to be around 562.3 million euros in 2016 (see Table 2.4)

Goods and services - In order to implement government‟s policy on savings and the need for setting the standards for spending on goods and services, as well as the inclusion of new initiatives which in themselves bear additional costs to the budget and the purpose of orienting government expenditures in productive projects, the decision of the Government to significantly reduce costs for the category of Goods and Services is planned to continue over the planning period. As a result, the costs for this category are expected to decline as share within current expenditures by 23% in 2013 to 17% during 2016-2018. However, the budget for these categories will focus on maintaining and enhancing the quality of public services, reducing the budget for non-productive expenditure categories

Subsidies and Transfers – Together with the decision to increase salaries within public sector, the Government of the Republic of Kosovo decided to increase pensions and benefits of other social categories, which decisions increased expenditures for this category up to 21.5% in 2015 compared with 2014. In addition, this category of expenditure reflects the natural increase of the beneficiaries

24 of pension schemes. This category also includes the implementation of the Law on War Veterans and Law on Former politically persecuted individuals. Furthermore, this expenditure category includes subsidies for agricultural sector, and reflects the cost of amendments to the law on pensions. Consequently, the costs for this category are planned to reach 470.6 million in 2016, a figure which represents an increase of around 7.3% compared with 2015, while in 2017 and 2018 by around 0.8% and 1.1% respectively. Furthermore, in line with Government‟s objectives for privatisation and stabilising the operation of publicly owned enterprises, subsidies to publicly owned enterprises are projected to continuously decline, therefore during this planning period, expenditures on subsidies and publicly owned enterprises are planned to be reduced for more than half as budgeted in 2015. Starting from 2015, KEK will start returning the loans taken earlier in accordance with the decision of the Government taken during March 2015 for restructuring previous loans. From next year (2016) MTEF foresees that RTK will secure other non-budget financing, in accordance with the Law on RTK.

Capital expenditures – are planned to present a substantial portion of total government expenditures during the medium term. Following the finalisation of motorway Ibrahim Rugova in early 2014, works have started at the end of the year on a new motorway Prishtina- Hani i Elezit which is budgeted for the medium term. Consequently, capital expenditures over the medium term are expected to represent approximately 27% of total expenditures, or around 7.3% of GDP on average for the period 2016-2018. Further on, this category of expenditure is planned to have an average annual growth of around 2% over the medium term. To the extent that budget space is created within budget constraints over the medium term, the Government will implement capital projects based on a priority list, taking into account the effect of these investments in the economy and employment, based on a feasibility study for projects.

Table 2.4 Structure of expenditures 2016-2018, in million euro 2015 2016 2017 2018 Description 2013 2014 Budget Proj. Proj. Proj. In million euro Total expenditures 1,480 1,475 1,693 1,726 1,741 1,757 Out of which PAK 5.8 5.4 10.2 7.0 7.0 7.0 Current 945.5 1,052 1,220 1,248 1,254 1,262 Wages and Salaries 417.1 485.2 560.1 562.3 566.7 570.7 Goods and Services 215.5 205.8 221.6 2193 219.2 223.8 Subsidies and Transfers 312.9 361.2 438.7 470.6 474.6 479.6 Social Transfers 288.3 339.8 417.0 461.6 465.6 470.6 Subsidies to POEs 24.6 21.4 21.7 9.0 9.0 9.0 Capital expenditures 529.2 411.4 457.0 464.5 473.9 479.7 Reserves 0.0 0.0 5.0 5.0 5.0 5.0 Initial Balance -151.1 -130.1 -106.5 -138.6 -134.9 -132.5 Interest payments -11.5 -12.5 -17.4 -21.6 -23.1 -23.1 Total Balance (by fiscal rule) -162.5 -122.5 -113.9 -138.1 -135.9 -133.5 Total Balance -142.5 -124.0 -160.2 -158.0 -155.6 Source: MF, Treasury and Macroeconomic Unit projections

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2.2.4.3. Budget deficit and its financing

Macro-fiscal framework 2016-2017 is built upon the principle of following the fiscal rule which limits the overall budget deficit to 2% of GDP and which for the first time started being implemented in 2014. Mid-term overall budget deficit, as foreseen within the fiscal framework, is planned to be financed from domestic and external borrowing, bank accumulated balance and revenues from free funds of liquidation process.

External borrowing, mainly relates to already planned projects within the budget framework. This item is expected to include the funding of projects outlined in the Government Programme 2015- 2018, recently approved by the Government. This also includes the sub-borrowing projects for non- budget public organisations, for which the Government acts as guarantor. During the period 2016- 2018, the cumulative value of borrowing is expected to reach 499 million while payments of principal amount to 144.8 million euros. High amount of repaying principal during this period is mainly related to repaying debt of loan previously withdrawn from the IMF.

Financing of deficit is also expected to be made from revenues expected to be collected from free funds accumulated from SOEs liquidation process. The Government of Kosovo is committed to maintain the reserve for fiscal stability at a level considered to be sufficient for managing liquidity risk and ensure proper management of budget cash flow. Consequently, by the end of the planning period, the bank balance is estimated to reach 192 million euros or 2.8% of GDP.

2.2.4.3.1. Borrowings during 2016-2018 period

The lion share of gross financing during 2016-2017 period will be for servicing/ re-financing debt which is maturing, and financing capital projects foreseen by the governing programme. The need to finance the bank balance will be smaller compared to the first two.

Servicing/ re-financing of maturing debt, the lion share consists of re-financing of short-term bonds which mostly mature within one year, while the rest of the service/re-financing of loans from the IMF and the IBRD, respectively.

If we exclude re-financing from calculations and consider new financing only, the Ministry of Finance will be concentrated to meet financing needs which primarily relate to financing capital projects, through international debt – loans, IFIs more specifically.

The following shows potential financing sources where the Government of the Republic of Kosovo has access to:

- Domestic Debt - Treasury Bonds 3- 12 months, and - Government Bonds 2 - 10 years

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- International Debt - International Monetary Fund (IMF), - World Bank - International Development Agency (IDA), - European Bank for Reconstruction and Development (EBRD), - European Investment Bank (EIB), - Council of Europe Development Bank (CEB), - German Agency for Reconstruction (KfW), - The Federal Republic of Austria, - Islamic Development Bank (IsDB), - Saudi Fund for Development (SFD), - OPEC Fund for Development (OFID), - And other creditors with which who can open cooperation in the future.

Borrowing during the period 2016-2018 will be made for the following purposes, listed as per priority: (i) the service/re-financing of existing debt which matures in this period, (ii) financing of Government‟s development projects, and (iii) financing bank balance. The following we have broken down the borrowing strategy for each destination.

- Servicing/re-financing of existing debt

Domestic Debt – Domestic Debt Servicing which matures is planned to be done through re- financing with similar or longer maturity instruments - which will allow further extension of Average Time up to maturity of the portfolio and consequently reduce the risk of re-financing.

International Debt – the lion share of debt servicing within International Debt consist from the two loans, one of the IBRD on behalf of Consolidated Credit C (“CCC”), and denominated in the EUR currency, and the other from IMF on behalf the Available Credit Arrangements (ACA6), denominated in the SDR currency. The Ministry of Finance foresees re-financing of international debt which matures, where CCC will be re-financed by emission of domestic debt with maturity longer than 2 years, while ACA is aimed to be re-financed through a new IMF programme.

- Financing of Government’s Capital Projects

Government of the Republic of Kosovo, for the period 2016-2018 under the government program foresees to start implementing a number of capital projects in various fields, which are to be funded from borrowing. Since the return on investment of most of these projects requires a relatively long time, the Government of Kosovo through the Ministry of Finance will concentrate financing these projects through International Debt, i.e. through loans from International Financial Institutions, which offer long periods of amortisation and affordable financial costs.

In order to avoid a risk of currency exchange, when selecting a borrower, priority will be given to borrowers who finance in the currency EUR. This therefore limits us to European IFIs among others those part of EBRD, EIB, and CEB; as well as bilateral agreements with European countries.

6 Programme with IMF: Stand-By-Arrangement (‟SBA‟) 27

However, not limited to just these opportunities, lenders offering financing in currencies other than EUR will be reviewed if the cost of financing is expedient and repayment terms are convenient, provided that the risk of currency exchange is covered by keeping the same amount as reserve in bank balance.

2.3. Development Potentials and fiscal risks for the period 2016-2018

2.3.1. Development Potentials

For purposes of prudent fiscal planning, this MTEF does not include many projects and initiatives with high potential development, which have an impact on space for revenue collection and allowing public expenditures. Depending on the dynamics of execution, the effect of implementing these initiatives should be included when developing annual budgets.

Development of New Energy Production Capacities- Over the period projected by this MTEF, implementation of energy capacity building projects is expected to start, both efficient use of coal and alternative sources. These investments are expected to have a total value of around 20% -25% of the annual average GDP during 2016-2018. Depending on the set of implementation dynamics, only direct effects on investment is expected to freeze share of investment in GDP by around 5 to 10 percentage points, and the acceleration of the GDP growth rate by around 1 to 2 percentage points, on current projections. Furthermore, over the period of this MTEF, indirect effects of such an investment are expected to be high, followed by significant impacts on the labour market and the balance of payments. This at the same time increases the potential for collection of budget revenues, at least on the level of accelerated economic growth. The effect of this initiative will be incorporated within the revenue projections for annual budgets upon effective entering into contractual relations with investors.

Development of Brezovica Tourist resort - fiscal impact of Brezovica tourist-resort development project is simplified in drafting of revenue projections for the period covered by this framework. During 2016-2018, this project foresees increasing private investment by around 3.5% above the projected level under macroeconomic scenario. The direct impact is expected to give an increase impulse of 0.5% on current projections of GDP growth. Besides the direct effect deriving from implementing investment plans, long-term indirect effects from increased volume of tourists and improving expectations of other potential investors, which is expected to result in substantially positive changes to the labour market, and increase of tax base based on which revenues are projected in the medium term period.

Competitiveness Enhancing Measures – Further on, due to more prudent planning, both possible effects of a series of measures designed to enhance competiveness of agricultural and livestock sector in high potential areas and supporting the facilitation of strategic investments in general are not included in this MTEF. These measures led by the Ministry of Trade and Industry are expected to have a comprehensive effect on the economy, enhancing local competitiveness, improve the balance of payments, and thus expanding the tax base. 28

2.3.2. Fiscal Risks

Fiscal program based on which Medium Term Expenditure Framework 2016-2018 document is built upon based on a macroeconomic scenario which defines the space for collection of revenues, and thus defines the general conditions for executing budget expenditures.

Macroeconomic scenario is built upon a balance between the prudency which should be shown against fiscal risks, on one hand, and the need for expenditures as a result of Kosovo's development gap on the other hand. However, it should be noticed that when preparing annual budgets which are redesigned considering the Medium-Term Framework, fiscal risks should be well-defined, and in the event that the likelihood of these risks occurrence increases, fiscal policy should be adopted for their management.

- Systematic (macroeconomic) Risk

Dependence from Remittances: Macroeconomic scenario supporting assumptions for collection of tax revenues is based on further increasing of support to Kosovo‟s economy from remittances. Significant macroeconomic shock in countries where Diaspora is concentrated mainly in Germany and Switzerland, can be transferred to the Kosovo‟s economy by reducing the level of remittances, which directly affect the level of consumption and investment in Kosovo (and therefore the level of tax revenues collected), and also at the level of Kosovo‟s exports of goods and services. During 2009-2014, it was determined that a significant setback in the economies in which Diaspora is concentrated has no effect on the trend of remittances.

Price fluctuations - MTEF macroeconomic scenario is built upon assumptions of low inflationary pressures over the projected period. These assumptions are based mainly on IMF projections for international prices of goods (4.5% decline for 2015) and derivatives (19.5% decline in 2015)7. However, in case of further fall of inflation rate, or in case of a scroll in deflation (as a result of falling international prices, or as a result of limitations of aggregate demand) fiscal policy should be adjusted because it may affect in declining of tax revenues and consequently the potential for budget spending.

- Specific Risk (policies)

Free Trade Agreements - Entry into force of the Stabilisation and Association Agreement, namely exemption from customs duties of a wide range of imported goods, is considered as a key element when forecasting budget revenues for period projected under this MTEF. However, as any other forecast, anticipated impact of this agreement on revenue carries in itself assumptions on share of goods from the EU in total goods imported. This especially applies to the first three years of implementation of the agreement. If changes in the trade trends are greater than foreseen, interim

7 http:/www.imf.org/external/pubs/ft/weo/2015/update/01/pdf/0115.pdf 29 losses from implementation of the agreement may be higher, for which the likelihood must be assessed when preparing annual budgets.

Narrowing the tax gap - taking into account the level of development of Kosovo, revenue estimates are based not only on increasing revenues as a result of macroeconomic developments, but also in narrowing the tax gap through the Strategy for Combating Informal Economy. However, the implementation of such a strategy depends not only from the Government, but from a wide range of institutions as well.

Tax Incentives – The Government of the Republic of Kosovo plans that within the period foreseen by this MTEF to provide tax incentives in form of tax exemptions to support rapid development of the private sector. The main element in this incentive package will be in form of exemption from tax liabilities for inputs and production machinery. This policy is expected to be neutral in budgetary terms, where exemptions are expected to be compensated through regular revenues as a result of expanding the tax base. However, there is a possibility that the compensation speed from expanded base may be slower than expected. In case likelihood of such a development increases, annual budgets should be adjusted to include the budgetary impact of this time discrepancy.

Policy Administration at additional costs - Over the period projected by this MTEF, we expect full implementation of a number of policies with additional costs – both budgetary and economic policies. Although these policies are accounted for before being included in the MTEF, costing of variable or unknown elements when initiating these policies requires special attention in the administration phase to avoid the risk of exceeding spending obligations over the value foreseen by the MTEF.

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THIRD PART

3. BUDGET EXPENDITURE FRAMEWORK 2016-2018

Although the MTEF process is intended to handle comprehensive policy priorities, fiscal intergovernmental relations play an important role in meeting the Government‟s objectives, particularly when it comes to important sectors such as Education, Health and Road Infrastructure.

The third part of 2016-2018 MTEF summarises budget expenditures allocated to central and municipal levels. The Government of the Republic of Kosovo is focused on creating policies to support sustainable economic growth led by the private sector, improving competitiveness and job creation thereof. Consequently, the 2016-2018 MTEF focuses on relating the Government's budget planning and policies with Kosovo‟s economic and social needs. This part embeds the appropriation of budget ceilings for the policies defined in the Government‟s Program.

The strict control over Public Sector‟s expenditures on Wages and Salaries and Goods and Services is a key factor that will affect the budget spending structure. The government plans to adopt the Law on Salaries, which will harmonize salaries in the public sector by establishing a regulatory framework whereon salaries for all public sector employees will be determined. Changes foreseen in the structure of expenditures over the 2016-2018 period, are mainly as a result of new policies explained in the following sections and do not reflect an increase in the costs of existing policies. The government intends to retain an adequate level of capital expenditures in order to fund the improvement and upgrading of the country‟s physical infrastructure as well as other priorities determined in the Government‟s Program. Ultimately, the Government is oriented towards reducing non-productive expenditures and orientating them towards the establishment of conditions for sustainable economic development and enhanced people‟s welfare.

This part of the MTEF is structured into two main sections. The first section provides an overview of the budget ceilings for the central level broken down by economic categories, while the second section describes the budget ceilings and appropriations for the municipal level.

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3.1. Framework And Structure Of Budget Expenditures 2016-2018 - Central Government

Medium Term Expenditure Framework defines the Government‟s statement of priorities and macro- fiscal framework through which determine the total revenues and total expenditures of the Government for the period 2016-2018.

The Ministry of Finance, is responsible for drafting the MTEF, as a document linking the formulation of policies for the annual planning and budgeting based on the priorities of the Government and macro-fiscal projections.

The expenditures for the central level as well as overheads are prepared by following parameters allowed by the Law on Public Financial Management and Accountability for the overall budget deficit. As a result of commencing with implementation of the fiscal rule from 2014 onwards, budget expenditures in the medium term period will increase slowly compared with the previous period, as a result of prudent planning and following legal provisions.

Based on the forecast for the trend of total budget revenues, total expenditures are planned to increase at an average rate of around 1.2% over the medium term, whilst the central level they increased by 2.1%. However, the level and structure of expenditures may vary depending on the approval and implementation of new legal initiatives, capital projects and collection of total budget revenues over the medium term period.

Same as revenues, expenditures are quite sensitive to overall economic developments in the country, they serve as a fiscal policy tool to have an impact on overall economic activity.

3.1.1. Budget expenditures for 2016-2018 for the Central Level

The expenditures of central during the projected period 2016-2018 is expected to constantly increase with an annual average of around 1.7% compared with 2015, amounting to 1,272 million euros in 2016 (Table 3.1). Out of them, current expenditures projected for 2016-2018, compared with 2015 are expected to increase at an annual average of 3.1%, while capital expenditures are expected to have a slight decline at an annual average of around 2.3%.

Slight increase in expenditures of central level follows a moderate increase in the regular budget revenues, based on the principle of holding a balanced budget between regular budget revenues and expenditures.

General characteristic of the budget expenditures for 2016-2018 is that most of the foreseen budget expenditures have already been committed to coming expenditures including not only current expenditures but capital expenditure as well. This is because in two last years, there was considerable increase of flowing expenditures and also many capital projects have also started with a very small initial budget (and often even without official funds committed in the budget framework). In these

32 circumstances, budget expenditures for 2016-2018 have a very low flexibility because most of the expenditures will cover only the continuous expenditures and some of new Government proclaimed policies which are expected to begin implemented across 2015 or are expected to begin implemented at full capacities in 2016, such as:  implementation of the Law on Health Insurance,  working experience for public servants,  reform within Security sector,  expansion of pension policies etc. in order to create budget space for covering additional expenditures and start with some important priority projects for the Government, during the budget planning process will pay more attention to proper employment management, full control of current expenditures and detailed analysis for each capital project started earlier and those which will start.

Table 3.1 Expenditures of Central Level as per economic categories 2014-2018, in euro

2014 2015 2016 2017 2018 Description Expenditure Budget Assessment Assessment Assessment

Total Expenditures 1,057,009,351 1,261,220,507 1,272,019,912 1,282,229,912 1,292,879,912 Current 756,902,852 924,229,503 948,019,912 953,429,912 957,699,912 Wages and Salaries 253,184,747 314,667,355 306,808,044 308,134,723 311,099,171 Goods and Services 144,288,892 161,168,605 160,759,233 160,787,964 161,040,376 Utilities 13,295,441 14,949,486 15,152,635 15,207,225 15,260,365 Subsidies and Transfers 346,133,772 428,444,057 460,300,000 464,300,000 465,300,000 Reserves - 5,000,000 5,000,000 5,000,000 5,000,000 Capital expenditures 300,106,499 336,991,004 324,000,000 328,800,000 335,180,000

Graph 3.1: Expenditures of Central Government as per economic categories for 2014 - 2018, in millions of euros 500 450 2016 Actual 400 350 2017 Budget 300 250 2017 Proj. 200 150 2018 Proj. 100 50 2019 Proj. - Wages and Goods and Utilities Subsidies and Reserve Capital Salaries Services Transfers expenditures

Wages and Salaries - Category of wages and salaries for 2016-2018 compared with 2015 is expected to have an average annual increase of 1.9% mainly as a result of the rationalisation of

33 expenditures on wages and salaries. Share of this category of total expenditures of central level for 2016 is expected achieve around 24.1% and to remain as such through the period of 2017- 2018. Starting from this year, expenditures from this category will be executed in very careful way and this is expected to be supported also with the entering into the force of the new Law on Salaries (for all employees receiving salaries from the Kosovo budget).

For the medium term 2016 - 2018, the level of the salaries will be determined mainly frome the effect of the Government‟s Decision 2014 for salary increase of all categories for civil servants. In this expenditure category are included also expenditures for implementation of the Health Insurance Scheme, full implementation of the part of the collective agreement which relates to work experience and supporting security sector as a result of the transformation of the Ministry for Kosovo Security Force in the Ministry of Defence.

In support of such a policy of spending for this category, employment in the public sector will be controlled for the medium term 2016-2018 and in principle new employment will be allowed only with a detailed justification which will be approved by the government excluding supporting transformation of the Kosovo Security Force into the Armed Forces of Kosovo. All Budget organizations will plan their employment only in line with the planned budget appropriations for the medium-term.

Graph 3.2: Expenditures for wages and Salaries throughout 2014-2018 period, in millions of euros 350.0

300.0

250.0

200.0

150.0

100.0

50.0

0.0 2016 Actual 2017 Budget 2017 Proj. 2018 Proj. 2019 Proj.

Goods and Services - category of Goods and Services for 2016-2018 compared with 2015 is expected to have a slight annual decline of 0.19%. A share in this category of total expenditures for central level for 2016 is expected to be around 12.6%, and the same participation is expected to continue also during the period 2017-2018.

In order to implement the Government‟s policy on savings, need of setting standards for spending on goods and services, inclusion of new initiatives which in themselves bear additional costs to the budget as well as the purpose of orienting Government‟s expenditures on productive

34 projects, the Government will reduce costs for the category of Goods and Services in those categories which does not impact on the quality of the public services.

As a result, the costs for this category are expected to decline in terms of share in current expenditures. However, from the Government attention will be paid that some subcategories are not reduced, such as expenditures for maintenance of roads, provision of essential drugs, support for transformation of the Kosovo Security Forces into Kosovo Armed Forces.

Graph 3.3: Expenditures for Goods and Services throughout 2014-2018 period, in millions of euros 165.0

160.0

155.0

150.0

145.0

140.0

135.0 2016 Actual 2017 Budget 2017 Proj. 2018 Proj. 2019 Proj.

Utilities - Category of Utilities for 2016-2018 compared with 2015 is expected to have a slight annual increase of around 1.7%. A share in this category as a percentage of total expenditures of central level for 2016 is expected to be around 1.2%, to remain approximately at the same level also though period of 2017-2018. This increase is a result of increased expenditures for new government buildings.

Graph 3.4: Utilities throughout 2014-2018 period, nin millions of euros 15.5 15.0 14.5 14.0 13.5 13.0 12.5 12.0 2016 Actual 2017 Budget 2017 Proj. 2018 Proj. 2019 Proj.

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Subsidies and Transfers - category of subsidies and transfers for 2016-2018 compared with 2015 is expected to have an average annual increase of around 14.8%. For the medium term, the category of subsidies and transfers is expected to have the highest share in the total expenditure of the central level, which for 2016 is expected to be around 36.2%. This participation also for 2017-2018 is expected to be at approximately the same level.

Such an increase is a result of the impact having the decision of the Government to increase pensions and benefits of other social categories, including an increase of the budget for Trepca pensions and other costs arising from Law on pensions. Furthermore, this category will continue implementing the Law on War Veterans and the Law on political persecuted individuals, also including the natural increase of the beneficiaries of pension schemes.

The Government will continue to support the agriculture sector through this category with around 53 million Euros per year to show budget support for this important sector of economic development. These appropriations will allow the sector to have greater support from the EC through IPA Instrument and other donors supporting this sector.

In line with Government‟s objectives for privatisation and stabilising the operation of publicly owned enterprises, subsidies to publicly owned enterprises are projected to continuously decline, therefore during the mentioned planning period, expenditures on subsidies and publicly owned enterprises are planned to be reduced for more than half as budgeted in 2015. This is due to the fact that the financing of Radio Television Kosovo is expected to leave this category from 2016.

Graph 3.5: Expenditures for Subsidies and Transfers throughout 2014-2018 period, in millions of euros 500 450 400 350 300 250 200 150 100 50 - 2016 Actual 2017 Budget 2017 Proj. 2018 Proj. 2019 Proj.

Capital Expenditures - Capital expenditure category for 2016-2018 compared with 2015, it is expected to have an annual average decline of 2.3% from this category. A share in this category as a percentage of total central level expenditures for 2016 is expected to be around 25.5%. This percentage for 2017-2018 is expected to slightly increase.

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Most of these expenditures will have to cover the financing of the projects started in 2015 (and earlier) as financing for roads Prishtina - Mitrovica and Prishtina - Peja, the continuation of projects in the Health Sector, continuing with projects having an impact on improvement of the Environment Sector, continuing with construction of schools, continuing with construction of Government buildings, and other infrastructure projects, the Government in the medium term plans to boost financing of the Route 6 (highway Prishtina - Skopje).

To the extent that budget space is created over the medium term, the Government by developing a budget process for implementing new capital projects based on the priorities, taking into account a transparent and competitive process between projects submitted, and taking into account the effect of these investments in the economy and employment, based on a feasibility study. New projects foreseen by the Government Programme such as: irrigation systems, health equipment, IT equipment for schools and laboratories are expected to enhance the quality of services provided through these important sectors.

Graph 3.6: Capital Expenditures throughout 2014-2018 period, in millions of euros 340

330

320

310

300

290

280 2016 Actual 2017 Budget 2017 Proj. 2018 Proj. 2019 Proj.

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3.2 MUNICIPAL MEDIUM TERM EXPENDITURE FRAMEWORK 2016- 2018

Municipal MTEF provides a strategic approach of the Government in the field of intergovernmental fiscal relations and presents aggregate amounts of government grants for financing Municipalities covering fiscal year 2016 and medium-term forecast for 2017 and 2018.

Principles, criteria and basic formulas applied for appropriation of Government grants for financing Municipalities covering 2016, as well as the share of the municipal budget to the Budget of the Republic of Kosovo is thereof defined by the Law on Local Government Finance (LLGF) and macro-fiscal projections, following the budget calendar in line with the Law on Public Financial Management and Accountability (LPFMA).

In accordance with LLGF and budget calendar specified in LPFMA, on 10th of April 2015 first informational meeting with the Grants Commission was held, where it was discussed:

a) the role and responsibilities of the Grants Commission, and b) the principles, criteria and formulas applied for appropriation of Government grants for financing Municipalities covering 2016 and forecasts for 2017-2018.

Following these discussions, the Grants Commission approved general grant to Municipalities and own source revenues projections by Municipalities in the medium term, based on the macro- fiscal 2016-2018 table, as well as specific grants for Education and Health for 2016 taking into account the following aspects:

- Following and applying general principles set out in LLGF, - Sectoral analysis provided by the ministries responsible for education and health, - State formulas for pre-university education and primary health care, allocation of specific grants in education and health by Municipalities, - Budget ceilings given in first assessment of Table 1 of MTEF 2016-2018 and Government priorities. In the other Grants Commission meeting, held on 23rd of April 2015, all government grants were approved and the respective allocations were made throughout municipalities based on the criteria set out in the la and administrative instructions which regulate municipal financing.

3.2.1 Municipal budget proposal for 2016-2018

In line with the principles and ceilings set forth above, the structure of municipal financing includes:  general grant,  specific grant for education  specific grant for health,  financing of secondary health,  grants for enhanced and delegated competences,  own source revenue projections by Municipalities,  Contingency grants,

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 Financial aid from abroad. While, municipal borrowing will be a possible option of financing which is foreseen by the legal framework and within the fiscal rule set out in LPFMA.

Tabela 3.2: Mid-term municipal financing framework 2014-2018, millions of euros 2014 2015 2016 2017 2018 Description Budget Proj. Proj. Proj. 1. Governement grants 319.52 339.17 338.32 340.90 343.97 General Grant 137.57 145.76 134.91 137.49 140.56 Base general Grant 127.80 Impact from the census 2011, as per article 35 of LFPL 9.77 Specific Grant for Health 39.39 42.08 42.08 42.08 42.08 Specific Grant for Education 142.56 151.33 161.33 161.33 161.33 Base financing 142.22 143.89 150.08 150.08 150.08 New policies in continuation: 0.34 0.34 Excelency center 0.34 0.34 Contigency ffrom Central Budget for financing of salary increase 25% 10.00 Amendment from KBF (transfer from Municialiies and MEST-professional schools) -2.90 Work experience 6.00 6.00 6.00 Health Insurances 5.25 5.25 5.25 2. Grants for additional competences 1.85 2.60 2.60 2.60 2.60 Secondary health care 1.85 2.60 2.60 2.60 2.60 3.Transferof Residential services from MWSW in Skenderaj and Graçanica 0.24 0.24 0.24 0.24 0.24 Residential Services 0.24 0.24 0.24 0.24 0.24 4. Municipal own source revenues 67.23 74.24 80.00 82.00 84.00 5. TOTAL MUNICIPAL FINANCING 388.60 416.01 421.16 425.74 430.81

3.2.2 General Grant for 2016

Municipalities will receive the general grant, which is a grant of a closed system, and they will use it for exercising the certain municipal competencies in accordance with the legal framework. The general grant allows a reasonable rate of sustainability in the municipal budget, it is also an adequate tool to settle reconciliation among municipalities, and it allows adequate allocation of sources to the minorities‟ community in the respective municipalities.

Based on LLGF, the amount of the general grant is ten per cent (10%) of total budgeted revenues of the central government, excluding the revenues from the sale of assets, other special revenues, dedicated own source revenues and revenues from borrowing.

General Grant for 2016 will be in the amount of 134,910,000 euros based on real incomes from the macro-fiscal 2016-2018 table by applying the principles, criteria and formulas defined in LLGF.

From this amount, the purpose of levelling the budget between municipalities, each municipality receives a total of fixed (random) amount of €140,000 €1 per capita, or €0 for municipalities with populations equal to or greater than 140,000 inhabitants.

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Basic criteria of formula for allocation of general grant in municipalities are:  Number of population is estimated at eighty-nine per cent (89%);  Geographic size of the municipality to six per cent (6%);  Number of minority population in the municipality (3%);  Municipalities where the majority of the population consists of ethnic minorities at two per cent (2%). Financing the staff providing social services as a competency transferred from MLSW to Municipalities through Memorandums of Understanding is included in the general grant of the municipality.

The employees in the Administration of the Municipal Directories of Pre-university Education in line with the principles and criteria set forth under LLGF are financed by the General Grant in Municipalities.

The employees in the Administration of Municipal Directories for Primary Health and Secondary Health (Graçanica, Shtërpce and North Mitrovica), in line with the principles and criteria set forth under LLGF are financed by the General Grant.

In order to implement article 35 of the Law no. 03/L-049 on Local Government Finance, based on the census dated 2011 and officially published by KSA in December 2012, including the assessment of the Kosovo Statistics Agency (KSA) for four minority municipalities which did not take part in the census process, such as: Leposaviq, Zubin Potok, Zveçan and North Mitrovica, the Government of the Republic of Kosovo under the Decision no. 09/121 dated 27.03.2013 approved the amendment to Annex 1 of LLGF for the new number of population.

Table 3.3: Structure of General Grant for 2014-2018 period (mil. Euro) 2014 2015 2016 2017 2018 factors Actual Budget Val. Val. Val Budget revenues (mil euro) 1,278.0 1,457.6 1,349.1 1,374.9 1,405.6 10% of budget revenues (mil euro) 127.80 145.76 134.91 137.49 140.56

Impact from census 2011, as per article 35 of LFPL Additional costs from Central Level 9.77 Apropritaion as per criterias

Fis Sum (mil.) 3.63 3.63 3.63 3.63 3.63 Population (residents) 1,780,021 1,780,021 1,780,021 1,780,021 1,780,021 89% of agregate sum (mil.) 110.5 118.06 116.83 119.13 121.86 Municipal zone (km2) 10,901 10,901 10,901 10,901 10,901 6% of agregate sum (mil.) 7.45 7.9 7.87 8.03 8.21 Majority communities in municipality 107,926 107,926 107,926 107,926 107,926 3% of agregate sum (mil.) 3.7 3.9 3.93 4.01 4.1 Population of minority municipalities (residents) 62,031 62,031 62,031 62,031 62,031 2% of agregate sum (mil) 2.4 2.6 2.62 2.67 2.74

Total general grant 137.57 145.76 134.91 137.49 140.56

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Formulas for General Grant appropriations for 2016-2018 (in mil. €) Year Criterias Year 2016 Year 2017 Year 2018 Year 2016 Year 2018 2017

Budgeted revenues in Kosovo Budget (m€) 1,349.1 1,374.9 1,405.6 1,588.0 1,607.0 1,625.0 general revenues (as per Makro)

Ggeneral Grant (10%) 10% 134,910,000 137,490,000 140,560,000 (121.0) (124.0) (126.0) Own source revenues (Municipal and Central level) Fix Sum 140,000 3,636,657 3,636,657 3,636,657 (20.8) (20.6) (20.6) Budget support from donors Total 131,273,343 133,853,343 136,923,343 (55.0) (45.0) (30.0) One time support Popullation 89% 116,833,275 119,129,475 121,861,775 (30.0) (30.0) (30.0) Dividends Geograpical length 6% 7,876,401 8,031,201 8,215,401 (12.1) (12.5) (12.8) Donor designated grants Majnority population 3% 3,938,200 4,015,600 4,107,700 1,349.1 1,374.9 1,405.6 Municipalities with min.popu. 2% 2,625,467 2,677,067 2,738,467 Total 131,273,343 133,853,343 136,923,343

Criterias for appropriation of the General grants (as per LFPL) General Grant for Yearn 2016 General Grant for Yearn 2017 General Grant for Yearn 2018

Municiplaities with Population Geog. Length Manority population Amount for Amount for Amount for Amount for Amount for Amount for minority ppopulation Amount for Amount for Amount for Municipalities Fix Sum Amount for minority municip.wit Fix Sum minority minority Fix Sum Amount for minority minority Municipali geog. Total General Amount for geog. Total General geog. Total General Minority (140,000- population popu. In h minority (140,000- popu. In popu. In (140,000- population popu. In popu. In Population Geographical ties with Length Grant 2016 popul. (89%) Length Grant 2017 Length Grant 2018 89% 6% population in 3% 2% 1€) (89%) municipaliti popul. 1€) municipaliti municipalit 1€) (89%) municipaliti municipaliti sia Length minority (6%) (6%) (6%) municilaities es (3%) (2%) es (3%) ies (2%) es (3%) es (2%) population 1 Deçan 40,019 2.25% 297 2.73% 551 0.51% 0.00% 99,981 2,626,683 214,693 20,106 - 2,961,462 99,981 2,678,307 218,912 20,501 - 3,017,701 99,981 2,739,735 223,933 20,971 - 3,084,621 2 Dragash 33,997 1.91% 430 3.95% 13,559 12.56% 0.00% 106,003 2,231,424 310,834 494,765 - 3,143,027 106,003 2,275,279 316,943 504,489 - 3,202,715 106,003 2,327,464 324,213 516,060 - 3,273,740 3 Ferizaj 108,610 6.10% 345 3.17% 4,193 3.89% 0.00% 31,390 7,128,715 249,390 153,002 - 7,562,497 31,390 7,268,820 254,292 156,009 - 7,710,511 31,390 7,435,534 260,124 159,587 - 7,886,636 4 Fushë Kosovë 34,827 1.96% 83 0.76% 4,511 4.18% 0.00% 105,173 2,285,901 59,998 164,606 - 2,615,678 105,173 2,330,828 61,177 167,841 - 2,665,019 105,173 2,384,287 62,581 171,690 - 2,723,730 5 Gjakovë 94,556 5.31% 587 5.39% 6,679 6.19% 0.00% 45,444 6,206,268 424,325 243,716 - 6,919,753 45,444 6,328,244 432,665 248,505 - 7,054,858 45,444 6,473,385 442,588 254,205 - 7,215,623 6 Gjilan 90,178 5.07% 392 3.60% 2,264 2.10% 0.00% 49,822 5,918,914 283,365 82,613 - 6,334,714 49,822 6,035,242 288,935 84,237 - 6,458,235 49,822 6,173,664 295,561 86,169 - 6,605,216 7 Gllogoc 58,531 3.29% 276 2.53% 45 0.04% 0.00% 81,469 3,841,735 199,512 1,642 - 4,124,358 81,469 3,917,239 203,433 1,674 - 4,203,816 81,469 4,007,083 208,099 1,713 - 4,298,364 8 Hani i Elezit 9,403 0.53% 83 0.76% 44 0.04% 0.00% 130,597 617,174 59,998 1,606 - 809,375 130,597 629,304 61,177 1,637 - 822,716 130,597 643,738 62,581 1,675 - 838,590 9 Istog 39,289 2.21% 454 4.17% 3,085 2.86% 0.00% 100,711 2,578,769 328,183 112,571 - 3,120,234 100,711 2,629,451 334,633 114,784 - 3,179,579 100,711 2,689,759 342,308 117,416 - 3,250,194 10 Junik 6,084 0.34% 74 0.68% 4 0.00% 0.00% 133,916 399,329 53,492 146 - 586,883 133,916 407,177 54,544 149 - 595,786 133,916 416,516 55,795 152 - 606,379 11 Kaçanik 33,409 1.88% 211 1.94% 36 0.03% 0.00% 106,591 2,192,830 152,526 1,314 - 2,453,260 106,591 2,235,927 155,523 1,339 - 2,499,381 106,591 2,287,209 159,090 1,370 - 2,554,261 12 Kamenicë 36,085 2.03% 424 3.89% 1,864 1.73% 0.00% 103,915 2,368,471 306,497 68,017 - 2,846,901 103,915 2,415,020 312,521 69,354 - 2,900,810 103,915 2,470,410 319,689 70,944 - 2,964,959 13 Klinë 38,496 2.16% 309 2.84% 1,241 1.15% 0.00% 101,504 2,526,719 223,367 45,284 - 2,896,874 101,504 2,576,379 227,757 46,174 - 2,951,814 101,504 2,635,469 232,981 47,233 - 3,017,187 14 Leposaviq 13,773 0.77% 539 4.95% 323 0.30% 13,773 22.20% 126,227 904,003 389,627 11,786 582,943 2,014,587 126,227 921,770 397,285 12,018 594,400 2,051,700 126,227 942,911 406,397 12,293 608,033 2,095,862 15 Lipjan 57,605 3.24% 338 3.10% 3,107 2.88% 0.00% 82,395 3,780,956 244,330 113,374 - 4,221,055 82,395 3,855,265 249,132 115,602 - 4,302,395 82,395 3,943,688 254,846 118,253 - 4,399,183 16 Malishevë 54,613 3.07% 306 2.81% 54 0.05% 0.00% 85,387 3,584,573 221,198 1,970 - 3,893,129 85,387 3,655,023 225,546 2,009 - 3,967,965 85,387 3,738,853 230,719 2,055 - 4,057,014 17 Mamusha 5,507 0.31% 32 0.29% 379 0.35% 5,507 8.88% 134,493 361,457 23,132 13,830 233,084 765,996 134,493 368,561 23,586 14,101 237,665 778,407 134,493 377,014 24,127 14,425 243,116 793,175 18 Mitrovicë 71,909 4.04% 331 3.04% 2,199 2.04% 0.00% 68,091 4,719,812 239,270 80,241 - 5,107,414 68,091 4,812,573 243,973 81,818 - 5,206,455 68,091 4,922,952 249,568 83,695 - 5,324,306 19 Novo Bërdë 6,729 0.38% 204 1.87% 3,202 2.97% 0.00% 133,271 441,664 147,466 116,840 - 839,241 133,271 450,344 150,364 119,137 - 853,116 133,271 460,673 153,813 121,869 - 869,626 20 Obiliq 21,549 1.21% 105 0.96% 1,655 1.53% 0.00% 118,451 1,414,388 75,901 60,391 - 1,669,131 118,451 1,442,186 77,393 61,578 - 1,699,608 118,451 1,475,263 79,168 62,990 - 1,735,872 21 Pejë 96,450 5.42% 603 5.53% 8,334 7.72% 0.00% 43,550 6,330,582 435,891 304,106 - 7,114,130 43,550 6,455,001 444,458 310,083 - 7,253,092 43,550 6,603,050 454,652 317,195 - 7,418,447 22 Podujevë 88,499 4.97% 633 5.81% 849 0.79% 0.00% 51,501 5,808,711 457,577 30,980 - 6,348,769 51,501 5,922,874 466,570 31,589 - 6,472,534 51,501 6,058,718 477,271 32,313 - 6,619,804 23 Prishtinë 198,897 11.17% 514 4.72% 4,146 3.84% 0.00% 13,054,783 371,556 151,287 - 13,577,625 13,311,357 378,858 154,260 - 13,844,475 13,616,660 387,547 157,798 - 14,162,006 24 Prizren 177,781 9.99% 603 5.53% 31,682 29.36% 0.00% 11,668,815 435,891 1,156,070 - 13,260,777 11,898,150 444,458 1,178,791 - 13,521,400 12,171,041 454,652 1,205,828 - 13,831,520 25 Rahovec 56,208 3.16% 278 2.55% 944 0.87% 0.00% 83,792 3,689,263 200,958 34,446 - 4,008,459 83,792 3,761,770 204,908 35,123 - 4,085,593 83,792 3,848,048 209,607 35,929 - 4,177,377 26 Shtërpcë 6,949 0.39% 248 2.28% 3,182 2.95% 0.00% 133,051 456,104 179,272 116,111 - 884,537 133,051 465,068 182,795 118,393 - 899,307 133,051 475,735 186,988 121,108 - 916,881 27 Shtime 27,324 1.54% 134 1.23% 858 0.79% 0.00% 112,676 1,793,435 96,865 31,308 - 2,034,284 112,676 1,828,683 98,768 31,924 - 2,072,051 112,676 1,870,625 101,034 32,656 - 2,116,990 28 Skenderaj 50,858 2.86% 374 3.43% 109 0.10% 0.00% 89,142 3,338,110 270,354 3,977 - 3,701,584 89,142 3,403,717 275,667 4,056 - 3,772,581 89,142 3,481,783 281,990 4,149 - 3,857,063 29 Suharekë 59,722 3.36% 361 3.31% 575 0.53% 0.00% 80,278 3,919,907 260,956 20,982 - 4,282,123 80,278 3,996,948 266,085 21,394 - 4,364,705 80,278 4,088,620 272,188 21,885 - 4,462,970 30 Year 46,987 2.64% 270 2.48% 258 0.24% 0.00% 93,013 3,084,034 195,175 9,414 - 3,381,636 93,013 3,144,646 199,011 9,599 - 3,446,270 93,013 3,216,771 203,575 9,820 - 3,523,179 31 Vushtrri 69,870 3.93% 345 3.17% 960 0.89% 0.00% 70,130 4,585,980 249,390 35,030 - 4,940,531 70,130 4,676,111 254,292 35,719 - 5,036,252 70,130 4,783,361 260,124 36,538 - 5,150,153 32 Zubin Potok 6,616 0.37% 333 3.06% 995 0.92% 6,616 10.67% 133,384 434,247 240,716 36,307 280,023 1,124,677 133,384 442,782 245,447 37,021 285,526 1,144,160 133,384 452,937 251,076 37,870 292,075 1,167,342 33 Zveçan 7,481 0.42% 123 1.13% 386 0.36% 7,481 12.06% 132,519 491,022 88,913 14,085 316,634 1,043,173 132,519 500,673 90,661 14,362 322,857 1,061,071 132,519 512,156 92,740 14,691 330,262 1,082,368 34 Gracanicë 10,675 0.60% 131 1.20% 3,423 3.17% 10,675 17.21% 129,325 700,663 94,696 124,905 451,820 1,501,409 129,325 714,434 96,557 127,359 460,700 1,528,376 129,325 730,820 98,772 130,281 471,267 1,560,464 35 Kllokot 2,556 0.14% 23 0.21% 1,193 1.11% 0.00% 137,444 167,765 16,626 43,532 - 365,368 137,444 171,063 16,953 44,388 - 369,847 137,444 174,986 17,342 45,406 - 375,178 36 Mitrovica veriore 12,326 0.69% 5 0.05% 867 0.80% 12,326 19.87% 127,674 809,028 3,614 31,637 521,699 1,493,652 127,674 824,928 3,685 32,258 531,952 1,520,498 127,674 843,849 3,770 32,998 544,153 1,552,444 37 Partesh 1,787 0.10% 29 0.27% 2 0.00% 1,787 2.88% 138,213 117,291 20,963 73 75,635 352,175 138,213 119,597 21,375 74 77,121 356,381 138,213 122,340 21,866 76 78,890 361,384 38 Ranillug 3,866 0.22% 69 0.63% 168 0.16% 3,866 6.23% 136,134 253,748 49,878 6,130 163,629 609,520 136,134 258,735 50,858 6,251 166,845 618,823 136,134 264,670 52,025 6,394 170,671 629,894 TOTAL 1,780,021 100% 10,896 100% 107,926 100% 62,031 100% 3,636,657 116,833,275 7,876,401 3,938,200 2,625,467 134,910,000 3,636,657 119,129,475 8,031,201 4,015,600 2,677,067 137,490,000 3,636,657 121,861,775 8,215,401 4,107,700 2,738,467 140,560,000

3.2.3 Specific grant for pre-university education for 2016

Specific grant for education in accordance with the LFPL is based on the approach to the open financing system, having into consideration base statistics and by applying criterias and parameters in the formula for specific grant appropriation for pre-univeristy education for 2016 is approvd in amount of 161,332,014 euro. In the fram of the specific grant for education, it is casted cost for health insurance as well as the costs for working experience from 0.5% for working year.

Specific grant for education is based on the parameters/criterias as they follow: a) Number of sturendts reprted from MEST in the first meeting of the Grant Commission held on the 10th of April 2015; b) Report pupil-teacher for primary and secondary education for pupils of majorty 1:21.3; c) Report pupil-teacher for perimary and secondary education for pupils of minority 1:14.2; d) Other criterias for acomodation of education policies for 2016 (paiment for working experience, health insurance); e) Report pupil-teacher for pre-school education 1:12; f) Report pupil-teacher for mid professional education for pupils of majority 1:17.2, and for pupils of minoities 1:11.5; g) Report pupil-teacher for montan zones 1:14.2; h) Calculation for teaching staff for english language for I and II class i) Calculation for technical administrative staff for 630 pupils, 1 staff for pre-primary and primary education (based on the administrative instruction no.18/2009 of MEST) ; j) Calculation for technical administrative staff for 470 pupils, 1 staff for secondary education (based on the administrative instruction no.18/2009 of MEST); k) Calculation for supporting staff for 170 pupils 1 staff (clenaning staff) as well as 1 staff for ons schol (security) based on the administrative instruction no.18/2009 of MEST; l) Professional services (pedagogue) from 4 for 7 major municipalities and 2 for all other municipalities (based on the previous decisions of the Grant Commission).

Number of pupils Teaching Staff Professional admin and supporting staff Teach Admin No. Teachers ers in Teachers Teachers in Teachers Admin staff Total Number of Pupisl Total in Profess Number pre- in pre in pre- Total Maternity staff number Profession No Municipalities pre-and seconda munber Teachers secondary English ional of primar primary decuation professio staff leave and number Secondar al admin primary ry of pupils in special education teachers Service supporti and y educatio and primary nal teachers sick leave Primary y education educati 2016 eucation (gimnasiu s ng staff supporting educat n education education education educatio on m) staff

ion n

a b c = a + b d e f g g j h=d+e+f+g+g j i = h * 3 % j k l m n=j+k+l+m TOTAL 321,586 90,160 411,746 76 2,897 15,074 17,971 2,035 2,795 305 23,182 695 1,250 361 80 3,747 5,438 1 Deçan 5,144 1,518 6,662 1 54 212 266 47 30 6 349 10 26 6 2 62 97 2 Dragash 5,098 0 5,098 0 8 352 360 0 0 7 367 11 18 2 2 66 88 3 Ferizaj 21,346 6,090 27,436 11 219 1,021 1,240 113 214 18 1,596 48 73 22 2 225 322 4 Fushë Kosovë 6,262 1,416 7,678 0 31 290 321 34 40 5 399 12 21 6 2 65 94 5 Gjakovë 16,149 4,565 20,714 9 131 696 827 101 141 15 1,092 33 68 19 2 192 280 6 Gjilan 16,408 5,569 21,977 7 165 800 966 120 181 16 1,290 39 59 23 4 194 280 7 Gllogoc 11,181 2,822 14,003 2 113 559 672 70 78 10 831 25 48 8 2 120 178 8 Hani i Elezit 1,671 373 2,044 0 16 71 86 18 0 1 105 3 6 2 2 21 30 9 Istog 7,005 1,910 8,915 2 72 334 406 49 50 6 514 15 27 7 2 86 123 10 Junik 698 229 927 1 7 28 36 11 0 1 48 1 3 1 2 7 14 11 Kaçanik 5,697 1,412 7,109 2 32 264 295 38 35 6 376 11 22 7 2 70 101 12 Kamenicë 4,635 1,555 6,190 2 39 214 253 50 33 7 345 10 29 8 2 83 123 13 Klinë 7,405 1,750 9,155 2 47 354 401 43 49 7 502 15 28 6 2 83 118 14 Leposaviq 1,894 451 2,345 1 43 65 108 4 21 2 137 4 10 6 2 42 60 15 Lipjan 11,630 2,704 14,334 2 107 557 664 77 62 11 816 24 44 12 2 145 203 16 Malishevë 12,615 3,104 15,719 2 121 591 713 84 77 12 887 27 56 10 2 135 203 17 Mamusha 829 205 1,034 1 6 52 58 14 0 1 74 2 3 1 2 9 16 18 Mitrovicë 13,685 4,277 17,962 2 124 624 749 82 148 12 992 30 52 16 4 152 223 19 NovoBërdë 1,156 188 1,344 0 9 70 80 0 16 3 98 3 9 3 2 33 47 20 Obiliq 4,559 781 5,340 4 45 206 251 13 33 4 305 9 19 4 2 54 79 21 Pejë 16,015 4,936 20,951 2 157 692 849 87 187 14 1,139 34 57 18 2 177 254 22 Podujevë 17,394 3,979 21,373 3 143 823 966 74 139 15 1,198 36 68 13 2 192 275 23 Prishtinë 36,679 11,350 48,029 5 413 1,552 1,965 278 319 29 2,595 78 109 36 4 364 513 24 Prizren 27,284 7,730 35,014 4 165 1,353 1,517 182 253 28 1,983 60 89 29 4 293 416 25 Rahovec 10,178 2,426 12,604 2 86 480 566 93 27 10 697 21 43 9 2 114 168 26 Shtërpcë 1,936 712 2,648 0 17 113 130 37 0 4 171 5 9 4 2 31 45 27 Shtime 5,530 1,409 6,939 1 46 274 320 38 35 5 399 12 17 4 2 63 86 28 Skenderaj 9,943 2,577 12,520 3 86 517 603 45 94 9 754 23 45 10 2 121 178 29 Suharekë 10,912 2,900 13,812 2 82 573 655 65 88 10 820 25 49 8 2 127 187 30 Viti 8,480 2,398 10,878 2 64 376 440 73 49 9 573 17 32 10 2 106 151 31 Vushtrri 12,954 3,449 16,403 1 84 612 696 69 118 12 896 27 56 11 2 150 219 32 Zubin Potok 1,012 270 1,282 0 1 50 51 0 16 1 68 2 6 4 2 15 26 33 Zveçan 897 254 1,151 0 2 42 44 0 15 1 60 2 4 2 2 13 21 34 Kllokot 508 151 659 0 4 25 29 0 9 1 39 1 4 1 2 9 16 35 Mitrovica veriore 2,728 2,311 5,039 0 69 89 158 14 117 3 293 9 16 12 0 49 77 36 Partesh 479 331 810 0 5 20 25 3 16 1 44 1 4 5 0 13 21 37 Ranillug 966 380 1,346 0 32 27 59 0 22 1 83 2 5 3 2 19 28 38 Graçanicë 2,627 1,678 4,305 3 54 92 146 9 87 4 249 7 16 13 2 46 77

Wages and salaries Woring Total Specific Salaries for Salaries for Salaries for Salaries for Total wages Health Salaries for Salaries for Salaries for experience Grant for teachers on teachers on pre- teachers on English Salaries for and salaries insurance maternity and Professional supporting (0.5%*8 education for special and primary secodary languageTeach admin staff 2016 (3.5%) sick leave Education staff vite) 2016 education education education ers nj o p q r rr s sh t=nj+o+p+q+r+rr+s+sh x y z = t + x + y 425,104 95,217,481 27,490,356 3,693,988 1,473,444 455,294 7,719,873 13,600,752 150,076,292 6,003,052 5,252,670 161,332,014 2,815 1,404,411 438,397 55,369 28,001.23 11,382 155,256 225,732 2,321,364 92,855 81,248 2,495,467 - 1,934,713 - 58,041 31,863.47 11,382 96,368 239,520 2,371,888 94,876 83,016 2,549,780 60,810 6,559,284 1,861,687 254,453 86,900.36 11,382 454,528 818,106 10,107,151 404,286 353,750 10,865,188 - 1,709,256 422,417 63,950 22,207.87 11,382 129,169 236,526 2,594,909 103,796 90,822 2,789,527 48,422 4,384,042 1,373,733 174,186 70,485.85 11,382 413,815 696,344 7,172,410 286,896 251,034 7,710,341 37,724 5,111,241 1,716,199 205,955 76,279.21 22,765 392,481 705,178 8,267,822 330,713 289,374 8,887,908 10,135 3,560,474 838,914 132,286 47,312.42 11,382 267,190 436,903 5,304,597 212,184 185,661 5,702,442 - 456,526 99,662 16,686 5,793.36 11,382 35,687 76,315 702,052 28,082 24,572 754,706 11,824 2,148,640 564,918 81,761 29,932.35 11,382 163,820 313,748 3,326,026 133,041 116,411 3,575,478 3,378 188,334 61,187 7,587 3,862.24 11,382 22,019 27,042 324,791 12,992 11,368 349,151 11,261 1,573,681 415,680 60,019 27,035.67 11,382 139,210 253,420 2,491,688 99,668 87,209 2,678,565 12,387 1,341,608 475,993 54,900 31,863.47 11,382 180,114 302,768 2,411,016 96,441 84,386 2,591,842 12,950 2,134,561 520,830 80,050 33,794.59 11,382 160,442 300,735 3,254,745 130,190 113,916 3,498,851 7,883 557,810 143,941 21,289 10,621.16 11,382 76,297 151,702 980,926 39,237 34,332 1,054,495 11,824 3,518,904 789,997 129,622 54,071.34 11,382 269,127 527,471 5,312,399 212,496 185,934 5,710,828 12,387 3,774,089 913,497 140,999 56,002.46 11,382 314,523 491,691 5,714,571 228,583 200,010 6,143,164 3,378 308,339 82,161 11,816 3,862.24 11,382 22,320 32,972 476,231 19,049 16,668 511,948 9,009 3,965,074 1,306,848 158,428 56,002.46 22,765 325,044 550,487 6,393,657 255,746 223,778 6,873,181 - 424,361 88,610 15,389 12,552.27 11,382 58,635 119,434 730,364 29,215 25,563 785,141 22,522 1,328,497 260,775 48,354 19,311.19 11,382 109,739 197,495 1,998,076 79,923 69,933 2,147,932 9,009 4,489,124 1,558,399 181,696 69,520.29 11,382 359,038 643,329 7,321,496 292,860 256,252 7,870,608 16,329 5,124,658 1,215,948 190,708 73,382.53 11,382 388,561 695,912 7,716,881 308,675 270,091 8,295,647 27,026 10,361,994 3,394,044 413,492 140,006.14 22,765 696,643 1,319,485 16,375,456 655,018 573,141 17,603,615 19,707 8,080,783 2,475,932 317,293 133,247.22 22,765 568,302 1,063,386 12,681,415 507,257 443,850 13,632,521 9,572 3,000,988 681,302 110,756 48,277.98 11,382 250,732 414,297 4,527,307 181,092 158,456 4,866,855 - 688,423 212,551 27,029 19,311.19 11,382 60,275 110,985 1,129,956 45,198 39,548 1,214,703 3,941 1,698,807 414,305 63,512 24,138.99 11,382 99,570 228,017 2,543,673 101,747 89,029 2,734,449 18,018 3,200,325 791,540 120,296 44,415.74 11,382 264,863 437,917 4,888,757 195,550 171,107 5,255,414 8,446 3,481,879 870,900 130,837 49,243.54 11,382 275,481 461,868 5,290,037 211,601 185,151 5,686,790 9,572 2,336,380 694,225 91,205 41,519.06 11,382 203,979 384,699 3,772,961 150,918 132,054 4,055,934 7,320 3,702,827 1,061,855 143,160 58,899.14 11,382 320,619 546,222 5,852,285 234,091 204,830 6,291,206 - 272,195 89,338 10,846 5,793.36 11,382 44,000 52,781 486,335 19,453 17,022 522,810 - 235,841 84,044 9,597 4,827.80 11,382 28,584 46,354 420,630 16,825 14,722 452,177 - 155,476 49,963 6,163 3,862.24 11,382 24,571 32,209 283,627 11,345 9,927 304,899 - 815,229 746,071 46,839 16,414.51 - 135,376 176,555 1,936,485 77,459 67,777 2,081,721 - 130,190 105,573 7,073 5,793.36 - 40,567 46,333 335,529 13,421 11,744 360,694 - 302,343 125,735 12,842 5,793.36 11,382 35,188 68,671 561,956 22,478 19,668 604,102 17,455 756,175 543,183 39,504 21,242.31 11,382 137,738 168,142 1,694,822 67,793 59,319 1,821,933

44

3.2.4 Specific grant for primary healthcare covering 2016

Specific grant for Healthcare and definition of the amount of this grant is based on an open system approach of funding in accordance with LLFG. The specific grant for primary healthcare covering 2016 will be in the amount of 42,085,037 euros. Distribution of specific grant is based on a formula which takes into account the number of visits per capita multiplied by the average cost per visit, and the number of services multiplied by the average cost for services.

The cost for health insurance and work experience is calculated within specific grant for health for 2016 and it will be presented in the 2016/01 budget circular for municipalities.

The criteria applied for allocation of specific grant for health covering 2016 are as follows:

- 2.5 visits per capita at a cost of €4 per visit, and - 3.5 services per capita at a cost of €3.89 per service.

Tabela 3.4: Speific grant for Health for 2016 and projetctions for 2017-2018 Year 2016 No. Visits No. Of Services No. Municipalities Popullation 3.5 Total 2016 2.5 visits 4 euro for 3.89 euro for services per per capita visit services capita a b=a*2.5 c=b*4€ d=a*3.5 e=d*3.89 f=c+e 1 Deçan 40,019 100,048 400,190 140,067 545,979 946,169 2 Dragash 33,997 84,993 339,970 118,990 463,821 803,791 3 Ferizaj 1 0 8 , 6 1 0 271,525 1,086,100 380,135 1,481,766 2,567,866 4 Fushë Kosovë 34,827 87,068 348,270 121,895 475,145 823,415 5 Gjakovë 94,556 236,390 945,560 330,946 1,290,028 2,235,588 6 Gjilan 90,178 225,445 901,780 315,623 1,230,298 2,132,078 7 Gllogovc 58,531 146,328 585,310 204,859 798,538 1,383,848 8 Hani i Elezit 9,403 23,508 94,030 32,911 128,285 222,315 9 Istog 39,289 98,223 392,890 137,512 536,020 928,910 10 Junik 6,084 15,210 60,840 21,294 83,004 143,844 11 Kaçanik 33,409 83,523 334,090 116,932 455,799 789,889 12 Kamenicë 36,085 90,213 360,850 126,298 492,308 853,158 13 Klinë 38,496 96,240 384,960 134,736 525,201 910,161 14 Leposavic 13,773 34,433 137,730 48,206 187,905 325,635 15 Lipjan 57,605 144,013 576,050 201,618 785,905 1,361,955 16 Malishevë 54,613 136,533 546,130 191,146 745,085 1,291,215 17 Mamushë 5,507 13,768 55,070 19,275 75,132 130,202 18 Mitrovicë 71,909 179,773 719,090 251,682 981,054 1,700,144 19 Novobërdë 6,729 16,823 67,290 23,552 91,804 159,094 20 Obiliq 21,549 53,873 215,490 75,422 293,993 509,483 21 Pejë 96,450 241,125 964,500 337,575 1,315,867 2,280,367 22 Podujevë 88,499 221,248 884,990 309,747 1,207,392 2,092,382 23 Prishtinë 1 9 8 , 8 9 7 497,243 1,988,970 696,140 2,713,552 4,702,522 24 Prizren 1 7 7 , 7 8 1 444,453 1,777,810 622,234 2,425,466 4,203,276 25 Rahovec 56,208 140,520 562,080 196,728 766,846 1,328,926 26 Shtërpcë 6,949 17,373 69,490 24,322 94,805 164,295 27 Shtime 27,324 68,310 273,240 95,634 372,781 646,021 28 Skenderaj 50,858 127,145 508,580 178,003 693,856 1,202,436 29 Suharekë 59,722 149,305 597,220 209,027 814,787 1,412,007 30 Viti 46,987 117,468 469,870 164,455 641,044 1,110,914 31 Vushtrri 69,870 174,675 698,700 244,545 953,236 1,651,936 32 Zubin Potok 6,616 16,540 66,160 23,156 90,262 156,422 33 Zveçan 7,481 18,703 74,810 26,184 102,063 176,873 34 Graçanicë 10,675 26,688 106,750 37,363 145,639 252,389 35 Kllokot 2,556 6,390 25,560 8,946 34,872 60,432 36 MitrovicaVeriore 12,326 30,815 123,260 43,141 168,164 291,424 37 Partesh 1,787 4,468 17,870 6,255 24,380 42,250 38 Ranillug 3,866 9,665 38,660 13,531 52,744 91,404 Total 1,780,021 4,450,053 17,800,210 6,230,074 24,284,827 42,085,037

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3.2.5 Financing of secondary healthcare for 2016

Financing for secondary healthcare covering 2016 will be in the amount of 2,603,077 euros, for three minority municipalities: - The municipality of Strpce, financing of 522,371 euros - The municipality of North Mitrovica, financing of 989,935 euros, and - The municipality of Gracanica, financing of 1,090,771 euros.

3.2.6 Financing of residential services

Financing of residential services for two community houses in the Municipalities of Skenderaj and Gracanica, as follows:

Table 3.5: Financing for 2016 Wages Goods Municipalities Staff and and Utilities Subsidies Capitals Total

Salaries Services

Skenderaj 13 60,000 50,000 10,000 3,000 10,000 133,000

Graçanica 11 50,000 40,000 8,000 2,000 10,000 110,000

3.2.7 Municipality’s Own Source Revenues for 2016 and forecasts 2017-2018

Projections of Municipality‟s own source revenues for 2016 in the amount of 80 million euros will be incorporated as part of the Municipal MTEF 2016-2018, as a source of municipal financing based on the Law on Local Government Finance. In this sum is included also collection from traffic finds.

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Tabela 3.6: Municipalities’ own revenues for 2016 and projections for 2017-2018 Projections 2016-2018 Realisation Plan of OSR No. Municipalities Projections Projections Projections of OSR 2014 2015 2016 2017 2018 1 Deçan 434,348.01 636,892 642,835 655,692 662,839 2 Dragash 374,716.30 487,030 400,000 415,000 430,000 3 Ferizaj 3,575,463.14 4,204,689 4,160,320 4,161,000 4,172,530 4 Fushë Kosovë 2,288,351.37 1,822,756 2,350,000 2,360,000 2,370,000 5 Gjakovë 2,731,334.44 3,026,311 3,030,300 3,035,911 3,040,500 6 Gjilan 3,698,329.51 3,859,953 4,000,000 4,100,000 4,200,000 7 Gllogoc 1,412,710.22 1,200,874 1,500,000 1,520,000 1,590,000 8 Hani i Elezit 277,233.12 256,258 280,000 290,000 300,000 9 Istog 936,048.18 1,014,149 1,020,000 1,023,000 1,024,651 10 Junik 83,864.98 91,567 91,000 91,500 92,000 11 Kaçanik 533,685.08 695,757 709,672 723,865 738,342 12 Kamenicë 749,986.30 986,433 850,000 875,000 885,000 13 Klinë 916,415.43 857,767 1,028,000 1,030,000 1,050,000 14 Leposaviq 14,764.00 42,888 50,000 60,000 70,000 15 Lipjan 1,623,309.86 1,342,336 1,850,000 1,870,000 1,890,000 16 Malishevë 969,804.29 755,908 1,010,000 1,020,000 1,050,000 17 Mamusha 62,498.35 64,869 64,900 65,900 66,700 18 Mitrovicë 1,645,634.27 2,117,292 2,267,582 2,358,772 2,375,283 19 Novobërdë 166,321.03 204,672 190,000 200,000 210,000 20 Obiliq 1,045,795.52 811,716 900,000 920,000 950,000 21 Pejë 3,271,418.11 3,394,551 3,452,687 3,553,918 3,654,914 22 Podujevë 1,199,576.30 1,597,592 1,710,000 1,810,000 1,910,000 23 Prishtinë 19,904,415.42 27,162,609 30,000,000 31,122,387 32,289,607 24 Prizren 5,353,482.44 8,275,080 9,280,000 9,290,000 9,310,000 25 Rahovec 1,017,554.62 1,099,014 1,158,014 1,207,014 1,255,500 26 Shtërpcë 259,586.90 336,282 337,500 339,500 342,000 27 Shtime 350,677.12 445,503 451,788 459,224 460,500 28 Skenderaj 848,565.68 748,155 955,000 1,010,000 1,020,000 29 Suharekë 1,632,167.66 2,117,200 1,917,000 1,967,500 2,017,000 30 Viti 876,595.32 1,008,847 939,500 959,500 984,500 31 Vushtrri 1,369,707.57 1,675,327 1,703,418 1,703,418 1,730,000 32 Zubin Potok 8,680.00 42,888 50,000 60,000 70,000 33 Zveçan 16,454.10 42,888 50,000 60,000 70,000 34 Gracanicë 1,033,848.71 1,501,093 1,200,000 1,210,000 1,220,000 35 Kllokot 116,031.74 86,849 120,000 130,000 140,000 36 MitrovicaVeriore 20,532.00 90,066 114,100 164,650 170,000 37 Partesh 30,654.61 46,384 46,384 47,249 48,134 38 Ranillug 115,973.09 92,768 120,000 130,000 140,000 Total 60,966,535 74,243,213 80,000,000 82,000,000 84,000,000

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Annexes:

Table 1. Key Macroeconomic aggregates 2014 2015 2016 2017 2018 Description 2013 Value Proj. Proj. Proj. Proj. Real growth norms (percentage) GDP 3.4% 3.3% 3.8% 4.1% 4.5% 4.4% GDP per capita 1.9% 1.7% 2.2% 2.5% 2.9% 2.8% Consumption 2.2% 4.0% 2.6% 3.3% 3.6% 4.2% Investments -0.3% 0.2% 6.8% 6.8% 7.5% 5.7% Export 2.5% 16.4% 6.6% 3.0% 4.1% 4.2% Import -1.5% 7.7% 4.0% 3.5% 4.0% 4.7%

Price fluctuations (percentage) PCI 1.8% 0.4% 0.2% 0.5% 0.3% 0.6% Deflator 1.9% 1.4% 1.0% 0.7% 0.7% 1.5% Import Prices -0.2% -0.6% -0.4% 0.3% 0.1% 0.5%

Government Budget (in percentage of GDP) Revenues 24.9% 24.1% 27.1% 25.9% 24.9% 23.8% Out of which : tax revenues 20.7% 20.5% 23.1% 20.6% 20.0% 19.3% Primary expenditures 27.8% 26.4% 29.0% 28.2% 27.0% 25.7% Out of which: capital expenditures 9.9% 7.4% 7.8% 7.5% 7.3% 7.0% Current Balance 7.2% 5.2% 6.3% 5.5% 5.5% 5.3% Primary Balance -2.8% -2.3% -1.8% -2.3% -2.1% -1.9% Payment of interest -0.2% -0.2% -0.3% -0.4% -0.4% -0.3%

Balance of saving/investments (in % of GDP) Domestic savings -3.9% -3.7% -2.5% -1.6% -0.4% 0.7% Remittances from diaspora 12.4% 12.9% 12.5% 12.0% 11.8% 11.9% Revenues from abroad, net 1.9% 2.2% 2.3% 2.4% 2.4% 2.5% National savings 10.5% 11.4% 12.2% 12.8% 13.8% 15.0% Investments 26.6% 27.1% 27.6% 28.2% 29.0% 28.9% Current account -7.9% -6.7% -7.1% -7.1% -7.5% -7.2%

Key aggregates (in millions of euros) GDP 5,327 5,579 5,849 6,132 6,450 6,834 GDP per capita (in euro) 2,865 2,955 3,050 3,148 3,261 3,402 GNIA per capita (in euro) 3,264 3,379 3,510 3,613 3,732 3,884 Remittances from diaspora, net 621 694 752 764 775 805 Population (in thousands) 1,859 1,888 1,918 1,948 1,978 2,009

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Table 2 GDP Components 2014 2015 2016 2017 2018 Description 2013 Value Proj. Proj. Proj. Proj. In millions of euro Consumption 5,539 5,809 6,002 6,235 6,481 6,795 Private Consumption 4,652 4,894 5,007 5,253 5,505 5,817 Public consumption 864 890 971 957 950 950 General Government 659 691 782 778 780 782 Out of which: wages and salaries 417 485 560 562 564 566 Goods and services 215 206 222 216 215 215 Donors sector 205 199 189 180 171 169 NPISH 1/ 23 25 25 25 26 27

Investments 1,471 1,486 1,587 1,694 1,818 1,984 Private investments 942 1,074 1,151 1,255 1,369 1,507 Public Investments 2/ 529 411 436 439 449 477

- - - - - Net exports of goods and services -1,944 1,684 1,715 1,741 1,797 1,848 Exports 927 1,091 1,176 1,240 1,324 1,399 Exports of goods 292 321 352 384 417 457 Exports of services 622 771 824 857 907 943 Import 2,611 2,807 2,917 3,038 3,173 3,344 Imports of goods 2,287 2,372 2,464 2,566 2,680 2,825 Imports of services 314 435 453 472 492 519

GDP 5,327 5,579 5,849 6,132 6,450 6,834 Remittances from diaspora, net 621 694 752 764 775 805 Revenues from abroad, net 122 106 129 141 156 162

GNIA 6,069 6,379 6,730 7,036 7,381 7,801 Other indicators: Private sector available revenues (in million of euros) 5,434 5,702 6,056 6,340 6,635 7,002

Private consumption per capita (in euro) 2,503 2,592 2,611 2,697 2,783 2,896 Private consumption in relation to GDP 87% 88% 86% 86% 85% 85% Private investments in relation to GDP 18% 19% 20% 20% 21% 22% Exports in relation to GDP 17% 20% 20% 20% 21% 20% Imports in relation to GDP 49% 50% 50% 50% 49% 49% 1/Non-profitable institutions serving to households 2/ For projection purposes, capital investments are supposed to be executed in rate of 96%

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Table 3: General Revenues and Expenditures 2015 2016 2017 2018 Description 2013 2014 Budget Proj. Proj. Proj. In milions of euros 1. Total revenues 1,329 1,345 1,587 1,588 1,607 1,625 Tax revenues 1,105 1,141 1,350 1,263 1,289 1,318 Domestic tax revenues 305.4 303.7 392.6 362.5 373.4 384.6 Border tax revenues 837.3 871.0 962.2 942.6 958.3 976.5 Refunds -37.9 -33.5 -41.3 -42.3 -43.0 -43.0 One off revenues from PAK 37.0 One off revenues 55.0 45.0 30.0 Non tax revenues and OSR 168.4 176.7 195.0 206.8 209.8 213.2 Non-tax revenues 46.7 47.4 48.8 49.8 49.8 51.2 Own source revenues 95.0 97.4 114.2 121.0 124.0 126.0 Municipal level 55.9 61.0 74.2 80.0 82.0 84.0 Central level 39.1 36.5 40.0 41.0 42.0 42.0 Concessional fee 2.0 5.3 10.0 12.0 12.0 12.0 Royalties 24.7 26.5 22.0 24.0 24.0 24.0 Dividends 43.0 15.0 30.0 30.0 30.0 30.0 Budget Support 0.0 0.0 0.6 20.8 20.6 20.6 USAID-G2G 0.0 0.0 0.6 0.8 0.6 0.6 EU 0.0 0.0 0.0 20.0 20.0 20.0 Donor designated grants 12.6 12.1 11.1 12.1 12.5 12.8 2. Total expenditures 1,480 1,475 1,693 1,726 1,741 1,757 Of which: PAK related spending 5.8 5.4 10.2 7.0 7.0 7.0 Expenditures from the carry foreward 15.2 15.0 15.0 15.0 OSR Recurrent 945.5 1,052 1,220 1,252 1,261 1,274 Wages and Salaries 417.1 485.2 560.1 562.3 566.7 570.7 of which: related to health insurance 10.0 19.0 19.0 19.1 Goods and Services 215.5 205.8 221.6 219.3 219.2 223.8 Subsidies and Transfers 312.9 361.2 438.7 470.6 474.6 479.6 Social transfers 288.3 339.8 417.0 461.6 465.6 470.6 Subsidies to POEs 24.6 21.4 21.7 9.0 9.0 9.0 Reserve 0.0 0.0 5.0 5.0 5.0 5.0 Net lending -6.0 0.0 0.0 -7.7 -10.5 -14.4 Of which: loans to POEs 0.0 0.0 0.0 0.0 0.0 0.0 of which: Repayments by POEs -6.0 0.0 0.0 -7.7 -10.5 -14.4 Capital Expenditures 529.2 411.4 457.0 464.5 473.9 479.7 Expenditures of donor designated 11.2 11.5 11.0 12.2 12.5 12.9 grants 3. Primary balance -151.1 -130.1 -106.5 -138.6 -134.9 -132.5 Interest payments -11.5 -12.5 -17.4 -21.6 -23.1 -23.1 4. Overall balance (as per fiscal rule) -162.5 -122.5 -113.9 -138.1 -135.9 -133.5 5. Overall balance -142.5 -124.0 -160.2 -158.0 -155.6 6. Financing -162.5 -142.5 -124.0 -160.2 -158.0 -155.6 Financing from borrowing 83.8 112.1 184.6 194.2 169.4 135.8 Debt principal repayment -14.0 -22.0 -27.2 -65.8 -59.7 -19.4 One off financing 26.3 2.3 0.0 80.0 80.0 80.0 Change in other financial assets -0.6 -3.3 -40.3 -31.5 -14.7 0.0 Change is stock of OSR 9.7 -4.3 10.2 4.1 4.1 5.1 Change in Bank Balances 57.3 57.8 -3.3 -20.8 -21.0 -45.9 6. Balance of KCF 158.8 101.0 104.3 125.1 146.2 192.1 of which: ELA 46.0 46.0 46.0 46.0 46.0 46.0

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