October 5 (SeeNews) - Western Balkans countries should soon return focus to fiscal consolidation, as the massive government response to the Covid-19 pandemic is causing a serious rise in public debt, a lead economist at the European Bank for Reconstruction and Development (EBRD) told SeeNews.
"There has been a large-scale fiscal response to the crisis in the Western Balkans, reaching e.g. over 10% of gross domestic product (GDP) in Serbia. Increased fiscal deficits and falling GDP will raise public debt in all countries significantly by the end of the year," the Regional Lead Economist at the Economics, Policy and Governance for EBRD, Peter Tabak, told SeeNews in a recent interview.
The swift actions by the European Union (EU), the International Monetary Fund (IMF) and international financial institutions across the Western Balkans, as well as market financing in Albania, North Macedonia and Serbia have provided the money needed to cover the enlarged deficits in 2020, Tabak noted.
"Nevertheless, focus on fiscal consolidation should return as the economic situation improves to ensure long-term fiscal sustainability, especially in countries with high indebtedness (Albania, Montenegro)," he said.
In the latest edition of its Regional Economic Prospects report published last week, the EBRD said the large fiscal stimulus packages across the regions it covers helped cushion the impact of the Covid-19 crisis on individuals and firms, but are expected to cause a robust increase of public debt as a share of GDP.
Fiscal stimulus accounts for about a third of the projected increase in debt-to-GDP ratios while the rest is largely due to sharp contractions in GDP. Currency depreciations may also contribute to higher debt-to-GDP ratios in economies where significant shares of government debt are denominated in foreign currency, the EBRD said.
The Regional Economic Prospects report also envisages that the GDP of the region of Western Balkans, which comprises Albania, Bosnia and Herzegovina, Kosovo, North Macedonia, Montenegro and Serbia, will contract 5.1% in 2020 before expanding 3.4% in 2021. In May, the EBRD forecast that the region's economy will decline by 4.8% this year.
"The situation has rather worsened somewhat with the return of the epidemic and we see the rebound slower as the rebound of the main export markets in Western Europe may also be more sluggish," Tabak said.
Although governments in the Western Balkans were fast to react to the crisis by adopting economic packages aimed at keeping employment at businesses and supporting vulnerable groups, helping to mitigate the negative economic effect of the crisis, the crisis is still not over as the epidemic has returned in many countries and some sectors and social groups might be strongly affected, he noted.
"Tourism and certain personal services were hard hit by containment measures. Those working in the grey economy that has a larger share in GDP in the region than in many other countries in Europe have had higher chances to lose their work and less opportunities to get social support. Also, lower remittance inflows might have decreased the income of large groups," Tabak explained.
The Western Balkans still have some clear advantages to attract more manufacturing foreign direct investments (FDI) from Western Europe, as the region is geographically close to the EU with relatively good transport connections, and its economies have Stabilisation and Association Agreements with the EU allowing tariff-free access for most goods, Tabak opined.
"Some countries (especially Bosnia and Herzegovina, North Macedonia and Serbia) have a strong manufacturing heritage with skilled labour force available and they are also offering support for investors through financial and in-kind packages."
Further business environment reforms, reducing the administrative burden, improving public services and competition as well as commercialising state-owned enterprises in order to raise their service quality would be important to compete with Central Eastern Europe and capture the investment that may relocate closer to the Western European manufacturers, Tabak added.
The EBRD Regional Director, Western Balkans and Head of Serbia, Zsuzsanna Hargitai, said earlier on Monday the bank hopes that new financing commitments in the Western Balkans will reach a total of 1.5 billion euro ($1.8 billion) by the end of 2020, focusing on the support for small and medium-sized enterprises (SMEs). The EBRD has so far committed to new financing worth 830 million euro for the entire Western Balkans, she added.
The EU neighbourhood and enlargement commissioner Oliver Varhelyi said last week the European Commission plans to adopt on October 6 an еconomic and investment plan for the Western Balkans focusing on connectivity within the region. The implementation of the plan will be financed by a combination of EU grants and loans from international financial institutions, including the European Investment Bank (EIB) and the EBRD.
($ = 0.85029 euro)