Analysts see "an enormous and unprecedented threat" to financial stability and prospects for investment.
By Muhamet Brajshori for Southeast European Times in Pristina -- 10/06/11
The interrupted stand-by arrangement comes just two years after Kosovo joined the IMF and less than a year after the SBA was concluded. [Reuters]
"A financial crisis is very possible because the government will not have the budget to finance planned projects and the wages," said the executive director of the Balkan Policy Institute, Seb Bytyci. He estimates the country will face a 5% budget deficit this year.
Lumir Abdixhiku, executive director of Riinvest Institute, agrees that the risk is high.
"Kosovo will end up with less money in the treasury than a commercial bank. For financial stability [it] is an enormous and unprecedented threat," he said.
Saying the country's finances were severely off track, the IMF announced at the start of June that it was interrupting its 18-month SBA with Kosovo. Officials at the Fund and other international financial institutions were reportedly shocked by hefty increases in the wages of Kosovo public sector workers, as well as ambitious spending on housing construction and infrastructure.
The interruption comes just two years after Kosovo joined the IMF and less than a year after the stand-by deal was concluded. Isa Mustafa, leader of the Democratic League of Kosovo, says the ramifications are grave.
"This decision makes it impossible to use about 110m euros from the IMF, about 50m euros from the European Commission and about 20 m euros from World Bank," he told reporters at a press conference.
Aside from the direct blow to the budget and economy, analysts say the move could take a toll on the country's international image, especially in the eyes of potential investors. It could have a negative impact on Kosovo's efforts to join the European Bank for Reconstruction and Development (EBRD), and may factor into the EU's next progress report, due in October.
"The non-availability of a formal agreement with the IMF for any potential investor is a signal that the country has serious problems with financial stability and this fact naturally increases the risk," Abdixhiku says. "The new agreement is the removal of Kosovo from all international institutions, of which the most important for me is the EBRD, which finances development projects. The progress report will highlight a new arrangement as a regression."
According to Bytyci, the Kosovo government also risks losing trust at home.
"The trigger for the suspension -- promising higher wages to public sector employees -- was accompanied by double-digit inflationary pressures. That could well mean a loss of credibility among Kosovars," he said. "The citizens are aware of the international isolation of the government; its irresponsibility will not be easily ignored."