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Western Balkans face new economic headwinds despite strong post-pandemic recovery

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The six countries of the Western Balkans region are facing a new set of economic challenges, despite a better-than-expected rebound from the recession caused by the COVID-19 pandemic, according to the latest report. Regular economic report on the Western Balkans (#21 in the series).

GDP growth in the region reached 7.4% in 2021, following a contraction of 3.2% in 2020. This return to growth has led to significant job creation, with employment demand helping to reduce the poverty in the six Western Balkan economies. In 2021, the employment rate in the Western Balkans reached a historic high of 45.8 percent, mainly due to the recovery of employment in Serbia and Kosovo.

Growth was driven by an exceptionally strong rebound in consumption, helped by both fiscal stimulus and pent-up demand, as well as an easing of movement and travel restrictions.

However, the post-pandemic recovery has been interrupted, as the war in Ukraine sends shockwaves throughout the region. Growth in the Western Balkans is now forecast at 3.1% in 2022.

“Despite a strong rebound from the pandemic, the Western Balkans now face a new set of challenges, compounded by the war in Ukraine, including rising energy and food prices, high inflation and a slowdown in trade and investment,” said Linda Van Gelder, World Bank Country Director for the Western Balkans. “Prudent political support will be needed to enable the Western Balkans to weather these crises and protect the important gains made in 2021, including poverty reduction. »

The downside risks to the region’s economic outlook are daunting. An expanded conflict or protracted war in Ukraine could trigger further disruptions to global trade and energy and food prices. Refinancing risks could arise if external financial market conditions continue to tighten. Debt sustainability could become a concern if limited fiscal space is eroded by policy responses to rising energy and food prices amid rising refinancing costs.

“In such an environment, government policy must focus on building resilience and implementing structural reforms to support growth and weather crises. » said Sanja Madzarevic-Sujster, senior economist at the World Bank and one of the lead authors of the report. “With limited fiscal space, countries will need to carefully weigh the costs and benefits of new spending commitments in response to rising energy and food prices, prioritizing the most vulnerable households. »

In the context of the energy crisis in Europe, the report also provides an assessment of the vulnerability of Western Balkan countries to energy price shocks, the measures adopted by governments to mitigate the impacts, and how the crisis can affect the ongoing green energy transition. Before.

“In responding to the current energy crisis and ensuring the protection of the most vulnerable households and businesses, the Western Balkans should also not lose sight of its long-term objectives of ensuring energy security and resilience within the framework of of the green reform program,” he adds. Richard Record, senior economist at the World Bank and one of the lead authors of the report.

The report argues that sustainable growth cannot take place without structural reforms aimed at boosting productivity, increasing competition, investing in human capital and strengthening governance. Measures to reduce the costs of business regulation, increase market competition, support labor market participation and strengthen the independence of public institutions would all support growth in an uncertain environment.

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