WESTERN BALKANS REGULAR ECONOMIC REPORT No.17 | Spring 2020 The Economic and Social Impact of COVID-19 WESTERN BALKANS OUTLOOK “You and me” by Tanja Burzanovic (Montenegro) The RER No. 17 is a collection of notes on the Economic and Social Impact of COVID-19 that will be published in two parts. This first part includes three Notes: “Setting the stage: Reviewing the state and vul- nerabilities of the Western Balkan Economies as they face COVID-19”; “Outlook: Hard Times Require Good Economics”; and the Western Balkan Country Notes. The second part discusses the impact of COVID-19 on specific economic areas, social sectors, and on poverty and income distribution in the region and will be published in a follow-up e-launch in May. THE ECONOMIC AND SOCIAL IMPACT OF COVID-19 Western Balkans Outlook: Hard Times Require Good Economics1 Like Europe and the rest of the world, the The Western Balkans region is Western Balkans are projected to endure projected to enter a recession in 2020 recessions in 2020, their extent depending whose magnitude vitally depends on the duration of the COVID-19 outbreak in on the duration of the COVID-19 pandemic. Europe This crisis is an unprecedented shock that has taken the world and its economy by surprise. In the baseline scenario, the recession As countries shift to stay-at-home mode to slow would be considerable, with growth in the and stop the spread of the virus, governments region contracting by about 3 percent but and societies are dealing with the high human, with substantial differences by country social, and economic costs. By April 27, there based on economic structure and pre-crisis were more than 3 million confirmed cases of vulnerabilities.4 Assuming the COVID-19 COVID-19 affecting at least 180 countries outbreak is largely contained by mid-2020— and putting more than 3 billion people in allowing economic activity to resume as lockdowns. 2,3 measures to contain the virus are lifted and financial market and supply-chain disruptions In this uncharted territory, economic ease—real GDP growth for the year would fall forecasting is particularly challenging by 3.1 percent. Because their economic structure because of high uncertainty arising from depends on service exports, Montenegro, extraneous factors, s uch as the scale and Albania, and Kosovo would be hit hard, with a impact of interventions like social isolation, drop of over 8 percentage points (pp) from pre- progress in developing a vaccine, the extent COVID-19 2020 projections (Figure 1). Their of supply disruptions, and changes in human economies are projected to contract by about behavior. The projections in this note are based 5 percent. BiH, Serbia, and North Macedonia on two scenarios for the COVID-19 outbreak are expected to experience only slightly less and containment measures. The baseline acute recessions, by 3.2, 2.5, and 1.4 percent scenario assumes that the outbreak in Europe compared to the pre-COVID-19 projections. begins to slow soon enough that containment measures can be lifted by the end of June and In all Western Balkan countries, the gradual recovery can start in the second half of recession will be driven by a plunge in both 2020. In the downside scenario, the outbreak domestic and foreign demand during the lingers so that containment measures cannot COVID-19 crisis. Global and national virus be lifted until late in August, with economic containment measures, from social distancing activity beginning to recover only in Q4. to business shutdowns, generate supply-side disruptions and reduce household incomes and 1 This note has been prepared by Natasha Rovo, Lazar Sestovic and Collette Mari Wheeler. The note benefited from comments from Marc Tobias Schiffbauer, Edith Kikoni, Enrique Blanco Armas, 4 Please see the “Heatmap for the relative COVID-19 vulnerabilities Jasmin Chakeri, Gallina Vincelette and Michael Lokshin. in the Western Balkans” in Figure 5 of the companion RER note 2 Update as of April 25; source: COVID-19 Tracker. “Reviewing the State of the Western Balkan Economies as they face 3 Source: http://dailym.ai/2UuMRCu COVID-19”. Western Balkans Outlook  |  1 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.17 WESTERN BALKANS OUTLOOK: HARD TIMES REQUIRE GOOD ECONOMICS consumption—a twin demand-supply shock. in tourism receipts for 2020, which subtracts Services may suffer a more protracted impact significantly from their 2020 GDP growth while travel restrictions and social distancing because for all three countries direct and indirect measures are in place, and they account for a tourism receipts are estimated to account for particularly high share of total employment 15 to more than 25 percent of GDP. Economic in the region—75 percent in Montenegro recovery in transport and tourism is also and about 50 percent in the other countries. expected to be more gradual, so that growth Household consumption will also be affected later in the year would not compensate for the by lower remittances: they are projected to summer season losses. Only Kosovo tourism drop by 10 pp year-on-year in the region, with may resume faster as travel bans ease as 80 Serbia and Montenegro likely to experience percent of its travel service exports are driven declines of almost 20 percent. Investment is by diaspora tourism. also expected to plunge in 2020 due to both liquidity constraints and acute uncertainty, Figure 1.  Real GDP Growth, Two Scenarios for with Kosovo hit hardest by a fall of 21.5 pp as 2020 delayed public investment and lower diaspora Real GDP growth, percentage points 6 investment in real estate exacerbate the drop 4 3.3 3.4 4.1 3.6 3.2 3.9 3.7 (Table A.1). In Albania, the potential erosion 2 0 of disposable income and consumption, -2 -1.4 especially consumption of durables, will delay -4 -3.2 -3.2 -2.5 -3.1 -4.2 -4.5 the reconstruction necessary because of the -6 -5.0 -5.6 -5.3 -5.7 -6.9 earthquake. Western Balkan exports of both -8 -8.9 -10 services and goods are also projected to go -12 -11.3 down—total export growth in 2020 would -14 ALB BIH KOS MKD MNE SRB WB6 range from -0.2 percent in North Macedonia J Pre COVID-19 J Baseline J Downside to -25 percent in Albania—because of less Source: World Bank staff calculations. Note: For the Western Balkans, real GDP growth is the weighted average. tourism and less demand for goods from the For Albania, the pre-COVID scenario includes the effects of the earthquake and reconstruction. See Table A.1 for a more detailed forecast of real GDP EU and other trading partners. Imports are also growth and its spending components. expected to decelerate considerably. Deeper integration in global value chains A particularly severe recession will affect and dependence on EU markets equates to Montenegro, Albania, and Kosovo because supply-side disruptions and a significant of their reliance on tourism. Globally, decline for export-oriented industry, according to the latest UNWTO assumption, especially for BiH, North Macedonia, and international tourist arrivals could fall by as Serbia. While sectors oriented to the domestic much as 30 percent, much higher than the market or connected to online services—such as global decline of 4 percent seen in 2009.5 In agriculture, information and communication, the baseline scenario, Albania, Kosovo, and and health—are less likely to be directly Montenegro experience a 20‒35 percent fall affected by the pandemic; manufacturing may see a deeper drop in 2020, from an estimated 5 UNWTO. 2020. International Tourism Arrivals Could Fall by 20- 6.5 percent in BiH up to 9 percent in Serbia. 30% in 2020. March 26th, 2020. https://www.unwto.org/news/ international-tourism-arrivals-could-fall-in-2020 Similarly, in Q2 in North Macedonia, 2  |  Western Balkans Outlook THE ECONOMIC AND SOCIAL IMPACT OF COVID-19 manufacturing, together with construction, contract more severely in 2020 at 2.8 percent, tourism, trade, and real estate, may contract by but investment may also shrink at 7.7 percent 11.5 percent. due to uncertainty, financing constraints, and limited fiscal space (Table A.1). Countries that Negative developments in the real sector rely heavily on foreign direct investment (FDI), will exacerbate existing fiscal and external like Albania, Montenegro, and Serbia, where imbalances, especially for countries FDI constitutes more than 7 percent of GDP, with limited fiscal space,  such as Kosovo, are at higher risk of a sudden FDI stop. Growth Montenegro, and to a lesser extent Albania. in firm productivity may be depressed for some In BiH fiscal balances are projected to turn time as previously productive firms are forced negative at -3.7 percent of GDP, after years to close, employer-employee networks are lost, of surpluses. Overall, fiscal deficits may reach and innovative but more risky investments values comparable to those in the post-global cannot be financed because banks become financial crisis, up to 4.7 percent in North more risk-averse and international investors flee Macedonia, 5.4 percent in Albania, and about to safety. The pressure on both the fiscal and 7 percent in Kosovo, Montenegro, and Serbia. external accounts would be further exacerbated. The total external debt-to-GDP ratio in the region is expected to peak at over 70 percent Over the medium term, growth is expected of GDP, but the high financing needs may be to rebound strongly in all Western Balkan mitigated by the international reserves, which countries as life and economic activity cover from 3 to 6 months of imports in all gradually go back to normal, although countries in the region. the speed of the recovery depends on the duration and intensity of the pandemic. In In the downside scenario, growth in the 2021, growth is expected to bounce back to pre- Western Balkans would plummet by about COVID-19 levels except in Albania, where it 5.7 percent in 2020, causing a more severe may spike to 8.8 percent, and Kosovo, rising to recession than the global financial crisis. If 5.2 percent. It is expected that both consumer containment measures are extended through and investor confidence will be restored and August, Albania, Kosovo, and Montenegro private consumption and investments will rise. would lose most of their 2020 tourism season. The recovery in investment and activity in vital This loss may amount to as much as half of sectors like services, tourism, construction, and expected tourism receipts, exacerbating the energy, will support job creation. In Albania, decline in growth. Projections for 2020 growth reconstruction will be crucial to stimulate the for these three countries are up to 15 pp less economy in 2021. For North Macedonia, than in the pre-COVID 19 scenario. its recent acceptance by NATO and the formal invitation of the EU Council to open A longer crisis may also translate into less negotiations for joining the EU (together with medium-term growth for the Western Balkans Albania) should help speed up recovery. Yet because of limited domestic and foreign the expected rebound of economic activity is investments. Given the protracted reduction subject to the assumption that the pandemic in business activity, employment, and income, effectively fades in the second half of 2020. not only may consumption in the region Western Balkans Outlook  |  3 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.17 WESTERN BALKANS OUTLOOK: HARD TIMES REQUIRE GOOD ECONOMICS A prolonged pandemic would make the exchange rate developments could further push unfolding economic crisis increasingly up debt service costs (Box 1). Future waves difficult to handle of the COVID-19 outbreak requiring new It could get worse. The main risk for the lockdowns would further amplify economic Western Balkans is that, together with a uncertainty, as well as economic and social challenging social and political environment, a costs. In addition to putting pressure on both prolonged pandemic combined with a deeper fiscal and external accounts, there is a risk that recession in the EU could make the unfolding the socioeconomic crisis responses will not be economic crisis increasingly difficult to handle. effective in the new context of social distancing, Beyond increasing human and social costs, imperfect penetration of online government a longer pandemic would amplify the global services, and disruptions in the functioning spillovers from trade, financial, and commodity of public administrations. North Macedonia channels. It would also intensify the risk and Serbia have postponed their Spring aversion of investors and thus the costs of parliamentary elections; in BiH, Kosovo, and borrowing, which would have significant fiscal Montenegro, political instability may add to costs for the Western Balkan countries that have already high uncertainty and weigh heavily on high external debt-to-GDP ratios. Unfavorable government ability to react. Box 1. Emerging Global Risks The global outlook is subject to considerable uncertainty and will depend heavily on when containment and mitigation measures can be lifted. Although initially the outbreak in Europe and Central Asia (ECA) was limited, the rapid rise of confirmed cases may force some countries to retain current mitigation measures for a considerable time. The inflection point for recovery will thus vary across the region. Mitigation measures to slow virus transmission have generated a sudden stop in activity in many economies, in ECA as elsewhere. Sectoral models suggest that the shutdown could shave as much as 2 pp off annual growth for each month the measures are in place. This approach, however, does not account for the global spillovers that are generated as external demand weakens because of containment measures in other economies; the impact is likely to be even greater in ECA given its openness to trade and financial flows. Financial markets have been roiled by the coronavirus pandemic, with emerging market and developing economies (EMDEs) suffering from flight-to-safety outflows. Global equity markets have sunk as the coronavirus pandemic has accelerated globally, with a wide array of companies downgrading earnings estimates because of both falling demand and supply chain disruptions. EMDE assets have come under significant pressure from capital outflows that exceed the worst period of the global financial crisis (Figure B.1.1)—though so far the decline in ECA has been less pronounced. Spreads on sovereign and corporate bonds have been rising, and most EMDEs have seen drastic drops in domestic stock market indexes and currency values. Markets remain unpredictable; in March on average the VIX volatility index tripled. Further tightening in global financing conditions could increase debt-servicing costs for EMDEs, especially those like Albania, Croatia, and Montenegro whose debt is high. In economies with high external imbalances, that could generate pressure on corporate balance sheets and increase rollover risks, which could trigger widespread defaults and 4  |  Western Balkans Outlook THE ECONOMIC AND SOCIAL IMPACT OF COVID-19 Box 1 continued the realization of contingent liabilities. A prolonged downturn would affect financial sectors in the Western Balkans by increasing nonperforming loans and undermining earnings and profitability, particularly for banks that are already undercapitalized. In turn that would constrain the ability of banks to lend and support real activity and would further dampen consumption and investment. The impact would be more severe for small and medium-sized enterprises whose access to credit is already minimal (Figure B.1.1D). Lastly, as a result of increasing financial linkages in the region, financial or banking stress in one economy could have serious repercussions elsewhere in the region. Figure B.1.1. Effects of the Pandemic Percent  hare of Countries with Mitigation Measures by A. S B. ECA Portfolio Flows Compared Type Percent US$ billions, accumulated weekly flows 50 0 40 30 -5 20 -10 10 0 School Internal Public event Workplace movement Public -15 closure cancellation closure transport restriction closure 0 2 4 6 8 10 12 14 16 Weeks J World J EMDEs Q ECA ▬ Global financial crisis ▬ COVID-19 Actual and Consensus Forecasts for Investment C.  D. Firms without Access to Credit, by Region Growth in ECA Percent Share of firms 14 100 12 80 10 8 60 6 40 4 20 2 0 0 Central South Eastern Central Western 2003–08 average 2013–18 average Asia Caucasus Europe Europe Balkans ▬ Current 10-year consensus forecast ▬ ECA average Source: European Centre for Disease Prevention and Control; Institute of International Finance; Consensus Economics, The World Bank. Notes: A. Data are as of March 31, 2020. B. The dates for the start of each episode: COVID-19, January 24, 2020; Global financial crisis, September 5, 2008. Sample for portfolio flows includes Hungary, Poland, Turkey, and Ukraine, for which data are available. Last observation: April 10, 2020. Prolonged deterioration in global investment sentiment could have material implications for EMDEs in ECA, especially if it triggers a sudden stop in capital flows. Severe erosion of confidence—triggered, for instance, by a worsening of the coronavirus pandemic—could amplify capital outflows from EMDEs and put the brakes on investment, particularly foreign direct investment. Depending on how long the pandemic lasts, in 2020 FDI could fall by 5 to 15 percent. Western Balkans Outlook  |  5 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.17 WESTERN BALKANS OUTLOOK: HARD TIMES REQUIRE GOOD ECONOMICS Box 1 continued EMDE investment prospects, which at the start of the year were already crumbling, will likely erode further as capital spending slows. The most vulnerable EMDEs are likely to be those suffering from more severe domestic outbreaks or supply chain disruptions, or that have a heavy presence in travel and transport industries and in such capital-intensive sectors as energy and high-value manufacturing. Many multinational enterprises have issued profit warnings, with average earnings being revised down by as much as 10 percent for firms that operate in ECA. This is expected to dampen reinvested earnings—an important source of FDI in ECA. The risk of a steep drop in remittances could intensify the economic downturn, particularly for EMDEs in Europe, where personal consumption heavily depends on this critical source of income. Remittances to EMDEs are likely to suffer in 2020 as mitigation measures to slow the spread of the virus generate job losses in host countries, with migrant workers idled or furloughed. Before the pandemic, remittances in 2020 were projected to grow 4.2 percent in a broad range of EMDEs (World Bank 2020). This now appears unlikely: containment measures have halted much economic activity in diaspora countries, leading to job losses and gutting disposable incomes, often with few social safety nets for migrant workers. Remittances are also likely to come under further pressure due to increased difficulty in accessing money transfer facilities; several operators in this sector have been temporarily shut down during the pandemic. Quick and bold mitigation measures Table 1. Budget Support Measures Adopted by can limit the social and economic Western Balkan Countries, € billion impact of this crisis, but policymakers Total Percent of GDP face critical tradeoffs Albania 0.4 2.4 While all countries have crisis response BiH 0.4 2.3 measures in place to cushion the demand Kosovo 0.2 2.8 effects on labor incomes and firm Montenegro 0.05 1.0 bankruptcies, countries like Serbia with North Macedonia 0.2 2.0 more fiscal buffers were able to finance larger Serbia 3.2 6.7 support programs. Since the outbreak of the Source: Ministries of Finance, World Bank staff calculations. COVID-19, many countries have declared Note: The estimates include budget support in 2020 but not guarantees, announced until April 22. states of emergency, including in the Western Balkans. In BiH, Kosovo, and Montenegro, although there has been no formal declaration Most of the measures introduced in the of a state of emergency, lockdowns and region so far focus on supporting the cash strict social distancing measures are in place. flows of businesses to reduce bankruptcies Moreover, all six governments have announced and thus protect jobs in the next few months fiscal and social measures to support households until COVID-19 containment restrictions and businesses during the emergency, the values can be lifted (see Table A.2). These measures ranging from 1 to 7 percent of GDP, including are designed to mitigate the immediate social budgetary support but not guarantees (Table as well as economic impact of the erosion in 1). economic demand and supply during the first phase of this crisis, while the containment restrictions to slow down the COVID-19 6  |  Western Balkans Outlook THE ECONOMIC AND SOCIAL IMPACT OF COVID-19 pandemic are still in place. Specifically, the these measures, they will primarily reach formal objective is to preserve incomes and the firms and workers. For example, wage subsidies productive capacity of the most affected for firms in Serbia, as in most EU countries, are parts of the economy because the temporary conditional on keeping registered employees. shutdown of businesses and travel and other But in the Western Balkans labor markets are restrictions jeopardize the viability of businesses different: employment rates are low, and self- in, e.g., hospitality and transport services, retail employment, part-time, and informal firms and other than food, pharmacies, several personal workers are more common. The incomes of far services, and durables manufacturing. For more of the vulnerable are drawn from informal example, Table A.2 shows that most Western activities; because so many of these people do Balkan countries have taken a combination of not have formal jobs and are not covered by such short-term crisis mitigation measures by social assistance programs targeting the poor, providing access to subsidized credit for firms, they may receive little support. These specific introducing for tax and loan payment cuts local labor market characteristics should be or deferrals, or subsidizing wages for affected considered when implementing crisis response firms to avoid high layoffs. Trade measures have measures and specifying eligibility criteria. mostly been designed to ban exports of medical equipment or food products. Although some The uncertain duration of the pandemic trade measures may ameliorate the impact of is a critical dilemma for policymakers: the the crisis, commitments to keep markets open optimal mitigation measures for a shorter for essential products could help avoid large crisis with a quick recovery can be inefficient price swings; export restrictions should be and costly if the crisis endures. The duration carefully designed to avoid unnecessary barriers of the crisis is determined by the evolution to trade and disruption of global supply chains. of the pandemic and thus uncertain. The Moreover, all countries have temporarily uncertainty about the length of the crisis increased social assistance for vulnerable generates critical tradeoffs in designing policy households and often also for pensioners. As responses. Short-term mitigation measures that containment measures are lifted, a second phase bridge the liquidity of affected firms can be of crisis mitigation will begin, and governments very effective to preserve incomes in the first will need to think of how to guarantee a safe few months of the crisis. But they are expensive and gradual re-opening of the economy and and may become unsustainable and ineffective support aggregate demand to ensure a swift and if the crisis endures, and firm liquidity becomes equitable recovery. a solvency constraint. The depletion of fiscal space would eventually require authorities to The crisis response measures adopted so limit their support, forcing assisted firms to far align with the policy responses of most close or lay off workers. And it would eat up EU countries, but initial conditions in the resources that could have been used for long- Western Balkans and therefore the policy term programs or economic stimuli in the tradeoffs are different. The support for firms recovery phase. Like most emerging market and thus jobs, as well as for the most vulnerable, economies, countries in the Western Balkans, is in line with the policy responses that most especially those with little fiscal space, need to EU countries have adopted. Given the nature of carefully weigh these tradeoffs. Western Balkans Outlook  |  7 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.17 WESTERN BALKANS OUTLOOK: HARD TIMES REQUIRE GOOD ECONOMICS To make economic recovery sustainable over the medium term, some countries in the region need to build into their economies more resilience to shocks; and all countries need to continue to pursue structural reforms to boost productivity growth. Several Western Balkan countries entered this crisis with high internal and external imbalances.6 In Albania and Montenegro the magnitude of public debt limits the fiscal space for responses to the crisis. And current account deficits are high in Albania, Kosovo, Montenegro, and Serbia, exposing their dependence on external financing. The COVID-19 crisis demonstrates once more that preserving macroeconomic and financial sector stability is essential to improving regional resilience to economic shocks; such stability is a necessary condition to sustain high growth over the medium term. Greater resilience to shocks also depends on boosting productivity growth. Medium- and long-term patterns of economic development in the region depend heavily on acceleration of structural reforms to boost productivity by, e.g., reinforcing the state institutions that protect the rule of law; safeguarding private sector competition; addressing skills mismatches; and improving public services to boost human capital. Such structural reforms in combination would help unlock stronger, more equitable, and more sustainable growth, and thus ensure faster convergence with EU income levels and more resilience to external shocks like the COVID-19 pandemic. 6 See the “Heatmap for the relative COVID-19 vulnerabilities in the Western Balkans” in Figure 5 of the companion RER note, “Reviewing the State of the Western Balkan Economies as They Face COVID-19.” 8  |  Western Balkans Outlook THE ECONOMIC AND SOCIAL IMPACT OF COVID-19 Table A.1. Real GDP Growth and Spending by Component in 2020, Two Scenarios Albania BiH Kosovo Pre- Baseline Downside Pre- Baseline Downside Pre Baseline Downside COVID-19 Scenario Scenario COVID-19 Scenario Scenario -COVID-19 Scenario Scenario Real GDP growth 3.3 -5 -6.9 3.4 -3.2 -4.2 4.1 -4.5 -11.3 Consumption 3.1 -1.6 -2.2 3.3 -2.7 -3.8 3.2 1.1 -0.6 Investment 7.7 1 0.8 1 -6.2 -7.1 3.8 -21.5 -28.5 Exports 2.7 -25 -30 3 -8.8 -10 4 -12.2 -25.5 Imports 4.6 -9.5 -10.6 5 -6.5 -7.5 2.2 -6.8 -8 Montenegro North Macedonia Serbia Pre- Baseline Downside Pre- Baseline Downside Pre- Baseline Downside COVID-19 Scenario Scenario COVID-19 Scenario Scenario COVID-19 Scenario Scenario Real GDP growth 3.2 -5.6 --8.9 3.6 -1.4 -3.2 3.9 -2.5 -5.3 Consumption 2.9 -3.6 -4.8 4.3 0.6 -0.3 5.7 -2.3 -3.5 Investment 0 -8.8 -13.7 8.0 -0.4 -2.7 5.3 -5.2 -7.7 Exports 4.1 -18.5 -27.8 7.4 -0.2 -2.9 4.9 -10.2 -18.5 Imports 1.9 -12.4 -17.7 9.4 1.9 0.1 7.6 -9.7 -15.1 Western Balkans Pre- Baseline Downside COVID-19 Scenario Scenario Real GDP growth 3.7 -3.1 -5.7 Consumption 4.4 -1.7 -2.8 Investment 4.8 -5.3 -7.7 Exports 4.5 -11.3 -17.6 Imports 6.3 -7.6 -10.9 Source: World Bank staff calculations. Note: For Albania, the Pre-COVID scenario includes the effects of the earthquake and the reconstruction. Western Balkans Outlook  |  9 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.17 WESTERN BALKANS OUTLOOK: HARD TIMES REQUIRE GOOD ECONOMICS Table A.2.  Short-term Measures to Mitigate the Social and Economic Impact of the COVID-19, Western Balkans7 Country Fiscal and Trade-related Monetary and financial Social ASSISTANCE Albania • Tax return submission • Credit guarantee scheme for • Budget increases for social deadline deferred from SMEs to pay wages transfers for the poor, March 31 to June 1 for • Banks allowed to defer small businesses, and the small businesses and loan repayments for those unemployed CIT payment for eligible affected by COVID-19, • Rescheduling of rental businesses rescheduled without regulatory penalties payments for affected • Waiver of interest on delayed • Reduction of the Central households and small payments Bank benchmark interest businesses • Budget increase for health rate to a record-low 0.5% ministry and the one-day lending rate to 0.9% • Injection of unlimited liquidity into the banking sector to ensure normal functioning of the electronic payments system BiH • Coordination bodies for • Moratorium on repayment • In the RS the government economic stabilization. of credits to investment decided to set up • Procedure for urgent development banks; compensation fund to cover procurements with • Canton Sarajevo reduced PIT and SSC for about streamlined process; rent by 50% for the property 40,000 workers in those it owns. sectors that are closed by • Deadlines for tax the government decision applications were extended • Guarantee funds for recovery for March, April and May. to 30 April (in RS and FBH); of economy FBiH; In FBiH the government and for entrepreneurs till 31 • Guarantee and credit fund decided to set up May (FBH). RS introduced for SMEs; stabilization fund to cover tax deferral (profit tax) to contributions on minimum 30 June; and subsequent • Development bank of FBIH to set up credit line for wage for those affected by installment payment till end COVID-19 2020. improvement of liquidity of companies which business • Fund for healthcare cost • Lump-sum tax payment is affected by the COVID-19; coverage in RS for the total income of micro entrepreneurs (1 or • Banking Agencies have • Fund for assistance to units 2 employees) reduced by announced a six-month of local self-governance in 60%. loan repayment moratorium RS for restructuring credit arrangements for individuals and legal entities which are found to have aggravated circumstances for loans repayments due to COVID-19. RS introduced a three-month moratorium on IDB loan repayments for legal entities and entrepreneurs • FBiH has adopted Law on negative economic consequence of pandemic • FBiH government has adopted budget rebalance 7 The Table includes measures announced until April 24, 2020. Specific health-related measures are not reported. 10  |  Western Balkans Outlook THE ECONOMIC AND SOCIAL IMPACT OF COVID-19 Table A.2. continued Country Fiscal and Trade-related Monetary and financial Social ASSISTANCE Kosovo • All direct and indirect tax • Late loan repayments not to • Suspension of all verification filing and payment deadlines be reflected by a downgrade procedures for pensions and postponed to April 30, with in credit rating in the Central social assistance benefits the possibility of a further Bank managed credit until further notice extension registry until April 30 • Early payment of pensions, • Postponement of financial • Interest penalties for late social benefits, and farming reporting requirements to payments to be suspended subsidies April 30 until April 30, subject to • Additional payment of €30 a • Lifting of the 100% tariff bank case-by-case reviews month for all beneficiaries of on raw materials from SRB • Financial support for social and pension schemes and BiH companies in financial below €100 (3 months); • VAT and customs duties on difficulties as a result of • Severance payments for wheat and flours removed the emergency situation employees who lost their (support for salary, jobs due to the outbreak • Salary supplement of €300 contributions, rent ensured for public sector payments) • Double payment of the employees in essential value of the social scheme sectors who are directly • Interest-free lending to (3 months) exposed to the risk of public enterprises ensured (repayment by the end of • Payment of €130 in infection (2 months) monthly assistance for 2020); • Additional payment of citizens with severe social €100 for employees of • Financial support for the conditions or declared grocery stores, bakeries, and Municipality of the Republic unemployed by a competent pharmacies (2 months) of Kosovo ensured institution, who are not • Increase of the budget for • Financial liquidity for eligible beneficiaries of any monthly grants and subsidies for micro-enterprises, the self- assistance (April, May, and the Ministry of Agriculture, employed, and commercial June) Forestry and Rural companies ensured • Supportive initiatives and Development and Ministry • Financial support available projects for improving the of Culture, Youth and Sports for companies that register lives of non-majority citizens • Support for exporters employees with employment contracts of at least one (1) year during the emergency public health situation, from €130 and up, for the two months after registration Western Balkans Outlook  |  11 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.17 WESTERN BALKANS OUTLOOK: HARD TIMES REQUIRE GOOD ECONOMICS Table A.2. continued Country Fiscal and Trade-related Monetary and financial Social ASSISTANCE Montenegro • Postponement of PIT • New IDF credit line of €120 • One-off support of €50 and social contribution million primarily targeting per person for pensioners, payments; tax debt MSMEs, 1.5% interest rate, vulnerable citizens, and obligations restructured for up to €3 million per loan, those unemployed 90 days for all firms. with 2 years grace period • Electricity subsidies for • 90-day postponement of and up to 8 years maturity. vulnerable households. rent payments for state- • Loan repayments deferred owned property for natural for 90 days. and business persons • Wage subsidies of 100% of the minimum wage for 2 months and complete exemption of taxes and contributions to the minimum wage for lockdown sectors • Wage subsidies of up to 50% of the minimum wage for other affected sectors • Wage subsidies of 75% of the minimum wage for 6 months for newly reported employees (to encourage formalization of labor) • Electricity subsidies for firms • Suspension of the variable part of earnings for central government employees • Support to agriculture sector • Increase in salaries for health workers 12  |  Western Balkans Outlook THE ECONOMIC AND SOCIAL IMPACT OF COVID-19 Table A.2. continued Country Fiscal and Trade-related Monetary and financial Social ASSISTANCE North • Reduction of interest and • Direct financial support • Subsidies for social Macedonia parafiscal charges for eligible MSMEs that contributions to eligible • Temporary suspension of become insolvent due to the companies in tourism, PIT payments and advance coronavirus crisis transport, catering, and CIT payments for taxpayers • Reduction of the base other affected companies who earn income from Central Bank (CB) interest for April, May, and June. self-employment for the rate from 2 to a historic low Up to 50 percent of the months of March, April, of 1.75 percent contributions of the average and May 2020, specifically salary paid in 2019 • Temporary changes to loan in catering, tourism, and terms • Exemption from rent for transport but also applicable the beneficiaries of social to other sectors affected • Reduction of the penalty housing interest rates for companies • Reduced interest rate on tax and individuals • Cash benefit for citizens who arrears and overpayments have lost their jobs (50% • Reintroduction of the of the average employee’s • Support to protect jobs: non-standard reserve direct cash transfers to salary) requirement companies that fulfill certain • Temporary relaxation of criteria, to be used to pay • Extended deadline for banks the criteria for applying for salaries and keep workers to submit their first internal social assistance employed Liquidity Assessment Reports • Temporary prohibition on initiating bankruptcy • Abolition of fees for proceedings withdrawing and returning cash to the CB central vault • Salary reduction for all elected and appointed • Temporary freeze on NPL officials, who will be paid reclassification. the minimum wage • Zero interest rate loans for • Abolition of remuneration SMEs provided through the for members of executive Development Bank. and supervisory boards and committees during crisis. Serbia • Moratorium on tax payments • Reduction of the CB policy • One-off payment in April to for financially stressed rate from 2.25% to 1.5% pensioners (about $40 per entities • The CB started regular person) • Price controls for some foreign exchange swap and • Cash transfer of €100 to all medical products and basic repo operations to provide citizens. food additional liquidity (in March • Ban on export of some they reached over €400 medicine and medical million, 0.9% of GDP) products and food and • Moratorium on debt agricultural products repayments for all • The fiscal stimulus plan businesses and individuals to offer about €5.2 billion • Support through the (of which €2.1 billion are Development Fund loan guarantees) in tax • Guarantees scheme for deferrals; cash subsidies loans provided by banks. and loans and guarantees to businesses • Moratorium on payment of dividends and loss of tax on • PIT and social security dividends deferrals delayed to 2021. • Cover for 3-month wages in micro and SMEs • Support to large enterprises: 50% of the minimum wage to all employees whose contract ended Western Balkans Outlook  |  13 Western Balkans Regular Economic Report No.17 | Spring 2020 Western Balkans Outlook View this report online: www.worldbank.org/eca/wbrer You and me by Tanja Burzanovic (Montenegro) Dr. Tatjana Burzanovic has a wide experience in the fields of graphic design, graphics in architecture, interior design. She has worked as an art editor, interior designer and graphic designer at various levels. Many of her art exhibitions have taken place at different places. She has received many awards for her arts and literary works. She has published a book with a title The Interrelation between Art Worlds, with the support from the Embassy of India for Austria and Montenegro in Vienna. Her artistic philosophy includes displaying of interrelationship between art worlds (spatial and temporal arts). The artist thus meditates between nature and the sprits and yet stems from the absolute idea and serves the goal of realization of absolute sprit. ‘Grasping the meaning through the form’ is a task of the art set by a contemporary thinker to demonstrate that building forms and creating sense are two simultaneous, intertwined, and absolutely inseparable processes in Arts. Without that recognition it is not possible to take any further step in investigating the nature of art and literature. She believes that art is a way to search the truth. Art is inseparable from searching the truth. People forge ideas, people mold dreams, and people create art. To connect local artists to a broader audience, the cover of this report and following editions will feature art from the Western Balkan countries.