[Document Announcement] THE COVID-19 CRISIS IN THE WESTERN BALKANS: Economic impact, policy responses, and short-term sustainable solutions

The COVID-19 pandemic hit the six Western Balkans1(WB6) amidst a reacceleration of economic activity and promising economic outlook for 2020 (EC, 2020). With the rapid spreading of the coronavirus in the Western Balkans, governments introduced measures to protect their fragile health systems by purchasing medical equipment and medicine, converting medical centres to specialised COVID-19 centres and concert and sport arenas to temporary field hospitals, increasing the salaries of medical staff, and changing the work hours to safeguard the medical staff. In addition, governments responded with lockdowns and partial shutdowns in the second half of March, resulting in the closure of airports and borders, educational institutions, restaurants and shops, bans on large gatherings, restrictions on domestic travel, and the instatement of curfews. These containment measures and external shock are expected to result in a notable contraction across the region. The Western Balkan economies are particularly affected through several channels.

  • The containment measures unequivocally have an impact on domestic demand and supply, significantly decreasing economic activity. Supportive macroeconomic policies can partially aid the recovery of demand but cannot completely offset the economic consequences of enforced shutdowns.
  • Exports across the region are affected by depressed demand, as well as disruptions in value chains. Those economies in the region, which have manufacturing sectors that are comparatively more integrated into global supply chains (Serbia and North Macedonia) and have higher contributions in terms of value-added and employment would likely bear the greatest cost of the pandemic in the short term
  • A deceleration of both public and private investmentcan be expected, which will further inhibit economic growth. A reduction in foreign direct investment (FDI) to the Western Balkan economies would also negatively affect job creation and technological progress.
  • The COVID-19 crisis has already curtailed global international travel demand and will lead to a collapse in tourismahead of the summer season. Albania and Montenegro will be hit particularly hard, as tourism revenues exceed 20% of GDP in both economies (EBRD, 2020)
  • The Western Balkans rely heavily on the steady inflow of remittances, financing domestic demand and investment. Remittances, which constitute 10% of the GDP in the Western Balkans, are likely to diminish due to travel restrictions and increased unemployment, linked to the anticipated economic contraction in the EU – the main source of remittances for the Western Balkans.

The Western Balkan governments responded with immediate monetary policy tools and fiscal stimulus packages to counteract the economic downturn

  • The central banks across the region reacted by cutting their key policy rates and providing liquidity to banks and non-bank financial institutions, which in turn, ease the burden on companies and individuals affected by sharp disruptions.
  • All Western Balkan economies have introduced fiscal stimulus packages, to support firms by temporarily subsidising salaries of employees. Governments have expanded their support packages to provide social assistance to unemployed persons and the most vulnerable households. Immediate financial support was given to the health sector to purchase medical equipment and to support medical staff.
  • These support packages will inevitably lead to fiscal deficit and accumulation of debt in the Western Balkans, which have been rising in recent years. Their GDP to debt ratios (albeit varying across the region, ranging from 81% in Montenegro to 18% in Kosovo) are still comparatively lower than the EU-27 average of 80% (Figure 1). Despite the existence of a relatively larger fiscal space, spending will still need to carefully prioritize the most urgent needs in order not to jeopardize debt sustainability.

The way forward in the short-term

Cross-border and domestic activities are likely to be remain restricted in the months to come, despite expected gradual relaxation. During the period of restrictions, economic support packages will be deployed across the region to limit layoffs and insolvencies and to bolster incomes of households. During this time, governments in the Western Balkans could take immediate actions to mitigate short-term challenges and to enable sustainable solutions for structural constraints:

  • SMEs: Supporting SMEs in response to COVID-19 requires fast and well co-ordinated support that combines financial measures to address their short-term cash-flow problems. Addressing structural problems by stepping-up the efforts on SMEs digital transformation and by leveraging innovative start-ups in the fight against COVID-19. Encourage SMEs uptake of e-commerce to facilitate their entry into new markets.
  • Tourism: Ensure efficient co-operation mechanisms between the government and tourism sector actors to introduce sound and sustainable tourism recovery measures. Develop health and safety guidelines in the hospitality sector and promote domestic tourism.
  • Employment: Policies should aim both to protect workers from exposure to the disease at workplace, while at the same time ensuring workers’ access to income support. Further facilitate the transition towards teleworking through free and rapid access to communication tools. Secure jobs and the economic viability of firms through specific support measures.
  • Education: Promote remote learning and the use of online school learning platforms and continue supporting students to gain access to the necessary equipment for remote learning. Provide teachers with digital learning opportunities on how to teach online, to share their resources and give and receive peer feedback.
  • Digitalisation: Promote the effective and widespread transition of many activities onto digital platforms. Take measures to avoid online congestion by reducing temporarily mobile network congestion and by upgrading interconnection capacity of network operators.
  • Trade: Keep supply chains going by ensuring the flow of goods and services within and outside the region. Continue the effective regional cooperation to keep food supply chains flowing to ensure the food delivery and to reduce the risk of food loss. Avoid export restrictions on essential goods, such as medical equipment and food products.
  • Investment: The region’s governments can encourage and support businesses that can shift their production toward essential healthcare goods and services. Economies in the region should keep paying attention to protect sensitive assets in strategic sectors, while continuing to promote market openness and responsible investment policy
  • Environment: The pandemic has called for an all-inclusive approach to human health by also considering environmental health, especially in relation to air quality, water and sanitation, waste management and biodiversity preservation. Thus support measures should not derail the efforts to tackle the ongoing environmental challenges.
  • Gender Equality: Governments should continue adopting emergency measures to support women and parents with caring responsibilities, and to offer public childcare options to working parents in essential services such as health care. All policy responses to the crisis must embed a gender lens and account for women’s unique needs, and responsibilities
Geographical focus
  • WBC
Scientifc field / Thematic focus
  • Cross-thematic/Interdisciplinary
  • General

Entry created by Admin WBC-RTI.info on June 7, 2020
Modified on June 7, 2020