2017 Economic Reform Programmes of Albania, the former Yugoslav Republic of Macedonia

168 Pages·2017·1.88 MB·English

by  European Commission Economic

ISSN 2443-8014 (online)
2017 Economic Reform
Programmes of Albania,
the former Yugoslav
Republic of Macedonia,
Montenegro, Serbia,
Turkey, Bosnia and
Herzegovina and Kosovo*
The Commission’s Overview
and Country Assessments
INSTITUTIONAL PAPER 055 | JUNE 2017
EUROPEAN ECONOMY
Economic and
Financial Affairs
Neighbourhood
and Enlargement
Negotiations
Employment, Social
Affairs and Inclusion
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Luxembourg: Publications Office of the European Union, 2017

KC-BC-17-055-EN-N (online) KC-BC-17-055-EN-C (print)
ISBN 978-92-79-64694-2 (online) ISBN 978-92-79-64693-5 (print)
doi:10.2765/795229 (online) doi:10.2765/15536 (print)

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European Commission
Directorate-General for Economic and Financial Affairs
Directorate-General for Neighbourhood and Enlargement Negotiations
Directorate-General for Employment, Social Affairs and Inclusion

2017 Economic Reform Programmes
of Albania, The former Yugoslav Republic
of Macedonia, Montenegro, Serbia, Turkey,
Bosnia and Herzegovina and Kosovo*:
The Commission's Overview and Country Assessments

*This designation is without prejudice to positions on status, and is in line with UNSCR 1244/1999 and the
ICJ Opinion on the Kosovo declaration of independence.

EUROPEAN ECONOMY Institutional Paper 055

CONTENTS
Introduction 1
Part I: Overview 3
1. Overview of the 2017 programmes 4
1.1. Economic outlook and context 4
1.2. Main challenges 5
1.3. Implementation of the policy guidance adopted in 2016 9
Box: Measuring the implementation of the country-specific policy guidance
adopted in 2016 10
Part II: Country analysis 15
1. Albania 16
1.1. Executive summary 16
1.2. Economic outlook and risks 18
1.3. Public finance 21
1.4. Structural reforms 25
1.5. Implementation of the policy guidance adopted at the Economic and
Financial Dialogue in 2016 32
1.6. The 2017 policy guidance 35
Annex: Compliance with programme requirements 36
2. The former Yugoslav Republic of Macedonia 38
2.1. Executive summary 38
2.2. Economic outlook and risks 40
2.3. Public finance 43
2.4. Structural reforms 47
2.5. Implementation of the policy guidance adopted at the Economic and
Financial Dialogue in 2016 54
2.6. The 2017 policy guidance 56
Annex: Compliance with programme requirements 57
3. Montenegro 59
3.1. Executive summary 59
3.2. Economic outlook and risks 61
3.3. Public finance 63
3.4. Structural reforms 68
3.5. Implementation of the policy guidance adopted at the Economic and
Financial Dialogue in 2016 75
3.6. The 2017 policy guidance 77
Annex: Compliance with programme requirements 78
4. Serbia 80
4.1. Executive summary 80
4.2. Economic outlook and risks 82
4.3. Public finance 85
4.4. Structural reforms 88
v
4.5. Implementation of the policy guidance adopted at the Economic and
Financial Dialogue in 2016 95
4.6. The 2017 policy guidance 97
Annex: Compliance with programme requirements 98

5. Turkey 99
5.1. Executive summary 99
5.2. Economic outlook and risks 101
5.3. Public finance 104
5.4. Structural reforms 107
5.5. Implementation of the policy guidance adopted at the Economic and
Financial Dialogue in 2016 114
5.6. The 2017 policy guidance 115
Annex: Compliance with programme requirements 116

6. Bosnia and Herzegovina 118
6.1. Executive summary 118
6.2. Economic outlook and risks 120
6.3. Public finance 123
6.4. Structural reforms 127
6.5. Implementation of the policy guidance adopted at the Economic and
Financial Dialogue in 2016 133
6.6. The 2017 policy guidance 135
Annex: Compliance with programme requirements 136

7. Kosovo* 138
7.1. Executive summary 138
7.2. Economic outlook and Risks 140
7.3. Public finance 143
7.4. Structural reforms 147
7.5. Implementation of the policy guidance adopted at the Economic and
Financial Dialogue in 2016 154
7.6. The 2017 policy guidance 156
Annex: Compliance with Programme Requirements 157

vi
INTRODUCTION
Economic governance has become one of the three key aspects of the EU enlargement process over recent
years, mirroring moves in the EU to strengthen economic policy coordination and multilateral
surveillance under the European Semester. In its 2013 and 2014 enlargement strategies the Commission
outlined a new approach to economic governance. It involved clearer guidance on the reforms needed to
foster macroeconomic stability, deliver fiscal sustainability and support long-term growth and
competitiveness. In the same vein, the Economic and Financial Dialogue between the EU and the Western
Balkans and Turkey has provided targeted policy guidance for each enlargement country since 2015.
This dialogue is based on medium-term Economic Reform Programmes (ERP) submitted annually by
enlargement countries. The ERPs include a macroeconomic and fiscal policy framework as well as
structural reform plans to boost competitiveness and long-term growth. The ERP exercise also aims to
help enlargement countries develop their institutional and analytical capacities and to prepare them for
participation in the EU’s multilateral surveillance and economic policy coordination procedures once they
become Member States of the EU.
In 2017, enlargement countries submitted their third annual Economic Reform Programmes covering the
period 2017-20191. They have been assessed by the European Commission and the European Central
Bank. Based on these assessments, Joint Conclusions with country-specific policy guidance2 were agreed
and adopted at the Economic and Financial Dialogue between the EU and the Western Balkans and
Turkey. The dialogue was held in the margins of the Economic and Financial Affairs Council meeting of
23 May 2017.
This paper contains the Commission staff’s assessment of the ERPs for 2017-2019 submitted by Albania,
Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Kosovo*, Montenegro, Serbia and
Turkey. The assessment also takes stock of the implementation of the country-specific policy guidance
adopted last year. The cut-off date for the assessment was 12 April 2017.
The assessment reflects joint work by Commission staff from several Directorates-General. In particular,
DG ECFIN analysed the macroeconomic and fiscal frameworks; DG NEAR was responsible for assessing
structural reforms; while DG EMPL covered employment and social policy-related aspects.
Comments would be gratefully received and should be sent to:
Directorate-General for Economic and Financial Affairs
Economies of candidate and pre-candidate countries
European Commission
B-1049 Brussels
or by e-mail to [email protected]

1 Albania: http://www.ekonomia.gov.al/files/userfiles/ERP_2017-2019_en.pdf;
Bosnia and Herzegovina: http://www.dep.gov.ba/naslovna/?id=1810;
Kosovo: http://mf.rks-gov.net/desk/inc/media/57179C7A-9531-4E3D-AEDE-ECC703B75D55.pdf;
the former Yugoslav Republic of Macedonia: http://www.finance.gov.mk/en/node/4832;
Montenegro: http://www.gov.me/ResourceManager/FileDownload.aspx?rId=264373&rType=2;
Serbia: http://www.mfin.gov.rs/UserFiles/File/strategije/ERP%202017%20-%202019%20final_Eng.pdf;
Turkey: http://www.mod.gov.tr/Lists/RecentPublications/Attachments/127/Pre-
Accession%20Economic%20Reform%20Programme%202017.pdf
2 This paper includes at the end of each country assessment the country-specific policy guidance adopted in May 2017.
* This designation is without prejudice to positions on status, and is in line with UNSCR 1244/1999 and the ICJ Opinion on the
Kosovo declaration of independence.

1

Part I
Overview

3
1.
Overview of the 2017 programmes
1.1. ECONOMIC OUTLOOK AND CONTEXT
The Western Balkan countries and Turkey are benefiting from the global economic upturn and the
economic opportunities their proximity to the EU offers. The continuing economic recovery in the EU
will especially benefit these ‘enlargement countries’, given that the EU is their main trading and
investment partner. In addition to absorbing about half of their exports, the EU also offers these countries
the best opportunity to integrate into global value chains. Most of the trade involving international
production chains in the Western Balkans and Turkey is with the EU. GDP per capita in these countries,
adjusted for purchasing power differences, ranged from one quarter (Kosovo) to slightly more than half
(Turkey) of the EU average in 2015, which means that the potential for catch-up growth is significant.
However, convergence has ground to a halt since the onset of the global financial crisis1. The improving
external environment now creates better conditions for renewed convergence towards EU living
standards, but how quickly this will happen ultimately depends on how these countries implement wide-
ranging reforms domestically.

Economic growth is expected to strengthen in the Western Balkans and Turkey, offering
opportunities to advance much-needed reforms while times are good. All Western Balkan countries
expect to improve their economic performance in the 2017-2019 period, compared to 2014-2016 (see
chart 1). Private consumption and investment have been driving economic activity in the last three years
and are forecast to contribute most to the acceleration of growth2, although with some differences
between countries. Net exports are expected to be a drag on GDP growth in 2017-2019 in all but two
countries: Serbia, which has recently expanded its export capacities thanks to foreign direct investment
(FDI) inflows into the tradable sector; and Montenegro, where the economic reform programme (ERP)

1 In the five Western Balkan countries excluding Kosovo (for which data are less readily available) average GDP per capita in
purchasing power standards (PPS) was 27 % of the EU-28 average in 2004. It rose to 33 % of the EU-28 average in 2009, but
remained virtually the same in 2015 (34 %). In Turkey, convergence was rapid between 2004 and 2011 (with GDP per capita in
PPS increasing from 39 % to 53 % of the EU-28 average) but then stopped (the figure was 52 % in 2015). The figures for
Turkey come from the national accounts data published before the change in methodology.
2 Investment is expected to contribute 1.5 percentage points (pps) annually to GDP growth across the six Western Balkan
countries from 2017 to 2019 (up from 0.8 pps annually from 2014 to 2016); private consumption is also forecast to strengthen
on the back of rising employment and income (1.9 pps growth contribution annually from 2017 to 2019, compared to 1.2 pps
from 2014 to 2016).

4