 30 April 1999
TEXT: IMF, WORLD BANK REPORT - ECONOMIC CONSEQUENCES OF KOSOVO
(Preliminary assessment of external financing needs) (3620)
Washington - The International Monetary Fund and the World Bank issued
a joint report April 28 titled "The Economic Consequences of the
Kosovo Crisis."
The report discusses the need for external financing to cover the
costs of refugee relief and repair damage to regional economies.
Assessments were made under two scenarios: one in which the NATO
military campaign against the Federal Republic of Yugoslavia is
prolonged, and one in which the crisis is resolved quickly.
Following is a text of the IMF-World Bank report:
(Begin text)
INTERNATIONAL MONETARY FUND AND WORLD BANK
April 28, 1999
The Economic Consequences of the Kosovo Crisis: A Preliminary
Assessment of External Financing Needs and the Role of the Fund and
the World Bank in the International Response
Prepared jointly by the staffs of the International Monetary Fund and
the World Bank
April 16, 1999
Contents Page
I. Introduction ...........................................2
II. The Regional Economic Impact of the Crisis ............2
A. The Economic Effects of the Crisis .....................2
B. Estimated Financing Needs ..............................4
III. Coordinating the International Response ..............5
IV. Modalities of Use of Fund Resources ...................6
V. Modalities of World Bank Assistance ....................7
Tables
1. Six Most Affected Countries: Projected Average Number of Refugees
from the Kosovo Crisis, 1999 Q2-Q4 ...................9
2. Six Most Affected Countries: Additional External Financing Needs in
1999
Arising from the Kosovo Crisis .......................10
I. INTRODUCTION
1. The Kosovo/1 crisis is a humanitarian tragedy that necessitates a
coordinated economic and financial response from the international
community on two fronts: providing immediate aid to relieve the
suffering of a large number of refugees; and ensuring that the
countries neighboring the FR Yugoslavia have access to adequate
external financing to help them deal with the adverse macroeconomic
consequences of the crisis. Of the neighboring countries, the ones
most affected are, in the first instance, Albania and the former
Yugoslav Republic of Macedonia (FYR Macedonia), in the second, Bosnia
and Herzegovina, Bulgaria, Croatia, and, to a lesser extent Romania.
Even if the crisis were to be resolved quickly, some of these
countries would face sizable extra-budgetary and balance of payments
gaps at least through end-1999.
2. This paper provides a highly preliminary quantitative assessment of
the possible regional economic costs of the crisis and suggests a
framework for coordinating external financing, including from Fund and
Bank resources./2 Already the international community, including the
European Union (EU) and bilateral donors, have signaled their
intentions to provide assistance, and humanitarian aid has begun to
flow. Coordination of the assistance efforts will be important if
countries are to receive sufficient aid and external financing on a
timely basis and on appropriate terms. This paper is being circulated
simultaneously to the Executive Boards of the Fund and the Bank, which
will hold meetings next week with a view to obtaining endorsement for
the proposed approach to coordination. The Board meetings will also
provide guidance ahead of the Spring meetings, where the response to
the Kosovo crisis will be discussed. Fund and Bank staff will continue
to be actively engaged in devising, with the relevant national
authorities, appropriate policies to cope with the changed economic
circumstances.
II. THE REGIONAL ECONOMIC IMPACT OF THE CRISIS
A. The Economic Effects of the Crisis
3. The Kosovo crisis affects the economies of countries in the
vicinity of FR Yugoslavia through a number of channels. Most vividly,
the displacement of large numbers of refugees puts strains on the
social and economic infrastructures of these countries. As the
refugees have, by and large, been stripped of their possessions and
savings, they are reliant on others --humanitarian organizations,
local residents, recipient country governments -- to
____________
1 Kosovo is a region within the Federal Republic of Yugoslavia (FR
Yugoslavia) which comprises the republics of Serbia and Montenegro. FR
Yugoslavia is not a member of the IMF or the World Bank.
2 The Fund and the Bank played similar analytical and coordinating
roles during the 1990-91 Gulf crisis and in assessing the impact of
earlier UN sanctions on FR Yugoslavia.
_____________
provide for their basic needs. The countries most affected by the
presence of large numbers of refugees are Albania and FYR Macedonia,
both poor (ESAF and IDA eligible) countries./3
4. At the same time, all economies in the neighborhood of FR
Yugoslavia are impacted to a greater or lesser degree by disruptions
to their trade. Whilst the military conflict is underway, and perhaps
even for some time afterwards, trade with FR Yugoslavia will remain
suspended. In any event, damage to transport and storage
infrastructure in FR Yugoslavia will mean that a sizable portion of
transit trade through FR Yugoslavia will have to be rerouted for an
extended period. FYR Macedonia and Bosnia and Herzegovina are
particularly hurt, as FR Yugoslavia is a major export market for these
countries, but Bulgaria and Romania are affected by the need to find
alternative and more costly transit routes around FR Yugoslavia.
5. The uncertainty engendered by the crisis adversely affects the
confidence of both local and foreign investors and of consumers, with
effects on spending and on the external current and capital accounts.
All neighboring countries -- and especially those bordering Kosovo --
can be expected to experience a reduction in inward foreign direct
investment. Some countries (notably Croatia) may be hurt by a loss of
tourism receipts. Croatia and other countries (including Bulgaria and
Romania) may also pay a higher country risk premium on borrowings from
international capital markets, and private financing may become more
difficult to obtain.
6. Finally, the crisis could lead to the postponement of structural
reforms, which will hamper longer-term development goals. Postponing
privatization because of a lack of foreign investor interest, or lower
prices, is one obvious possibility. And governments could choose to
deal with the resulting strains on particular sectors of the economy
by allowing quasi-fiscal deficits, in the form of wage and enterprise
arrears or non-performing loans, to increase.
7. On balance, while there would be some offsetting impact of lower
domestic real incomes and expenditures on imports in the affected
countries, it is clear that for all of them lost export earnings,
trade diversion, weaker capital accounts, and potentially higher debt
service costs will create balance of payments gaps in 1999 and,
probably, beyond. Budgetary gaps will also arise from lost revenues --
as a result of both lower incomes and disruptions to customs
collections -- and from expenditures related to the refugees that are
not covered by humanitarian aid, as well as increased spending for
defense and public order. Such gaps will arise even if the
international community fully provides for the basic needs of the
refugees. In the absence of external financing, adjustment could
require additional compression of domestic demand and imports as well
as cuts in essential social expenditures.
_____________________
3 Montenegro has also received a large number of displaced persons.
_____________________
B. Estimated Financing Needs
8. Based on UNHCR average refugee cost estimates, and the Fund and
Bank staffs' assumptions about the proportions of refugees living with
local residents and those housed in refugee centers, the two staffs
have made preliminary projections of the costs of humanitarian
assistance. They have also projected the size of the incremental
budgetary and balance of payments gaps that are likely to arise in
1999 as a result of the Kosovo crisis. As the nature and duration of
the crisis are impossible to predict, two scenarios have been examined
in order to provide an indicative range of possible financing needs.
The estimates take into account the specific situation in each of the
six most affected countries neighboring FR Yugoslavia, including its
trade structure and likely vulnerability to confidence effects, as
well as the projected duration and country distribution of refugees.
9. It must be emphasized, though, that even these scenarios may not
provide a realistic guide to the full range of costs expected to be
caused by the crisis. Not only is the current situation still evolving
in a highly uncertain manner, but the economic responses to the crisis
are themselves difficult to predict and quantify with any precision.
Refugees are still fleeing Kosovo in large numbers and the total
number could considerably exceed the projected numbers in either
scenario. And owing to the scale of the problem for some countries,
there are major risks of a deterioration in governance, with
unpredictable economic consequences. The estimated cost of
humanitarian aid in the six countries covered in the scenarios does
not include aid destined for displaced persons in Kosovo itself that
might be recorded as aid to these neighboring countries. Nor does it
include any subsequent costs of repatriating refugees. For all these
reasons, even the high estimate of the range of costs may prove to be
conservative. Moreover, even without a prolongation of the crisis into
2000, additional costs related to the crisis will occur in later
years.
10. The first scenario (Scenario A) assumes that the military campaign
is prolonged and the refugee crisis lasts throughout 1999. All
official trade with FR Yugoslavia is assumed to be suspended, although
limited transit trade to third countries (at 25 percent of the
pre-crisis level, and at a higher cost) resumes in the second half of
1999. It is assumed that the total number of refugees sheltered in the
neighboring countries peaks in the second quarter of 1999 at about 3/4
[three-quarters] million, and declines only modestly in the remainder
of the year as a result of some relocation of refugees to other
countries (Table 1). The basic needs of the refugees are assumed to be
financed by humanitarian assistance. The preliminary estimate of the
required humanitarian assistance for the six most affected neighboring
countries under this scenario amounts to more than US$300 million in
1999.
11. In addition to the direct cost of humanitarian aid, the combined
balance of payments gap under Scenario A is projected at US$1.5
billion for 1999./4 While it is premature to present gaps for
individual countries, it can be expected that the gaps in FYR
Macedonia and
________________________
4 The staff is still in the process of refining its projections, which
have not yet been fully discussed with country authorities.
_____________________
Bosnia and Herzegovina are likely to be the largest relative to their
GDPs, perhaps on the order of 7-8 percent, owing to these countries'
trade dependence on FR Yugoslavia. However, the balance of payments
gaps for other countries are also likely to be large. The aggregate
budgetary gap for the region is projected to amount to about US$650
million (Table 2). In relation to GDP, the biggest budgetary gaps (on
the order of 3 percent) would occur in Albania, Bosnia and
Herzegovina, and FYR Macedonia.
12. The second, more optimistic, scenario (Scenario B) assumes that
the crisis is resolved quickly. In the second half of 1999, official
trade with FR Yugoslavia is assumed to return to 75 percent of its
pre-crisis level and transit trade through FR Yugoslavia to 50 percent
of its pre-crisis level. About three quarters of the refugees are
assumed to return home in the third quarter of 1999 and all have
returned by year end. In this more optimistic scenario the estimated
bill for humanitarian aid is about one half that in Scenario A, but
still about US$150 million./5 The balance of payments gap for the six
most affected countries is estimated at over US$650 million and their
combined budgetary gap is estimated at about US$300 million.
13. The estimates for each scenario are, of course, highly sensitive
to the assumptions. Furthermore, as noted earlier, the Scenario A
estimate for the incremental external financing requirement arising
from the Kosovo crisis in 1999 does not represent an upper bound, but
rather an attempt at a reasonable estimate of the consequences of a
protracted crisis; the estimate could prove conservative. It might be
added that the countries affected by the crisis are currently
projecting that their incremental balance of payments financing gaps
will be considerably larger than those estimated here.
III. COORDINATING THE INTERNATIONAL RESPONSE
14. The Fund and Bank can play a coordinating role in the financial
response of the international community to the Kosovo crisis. The two
institutions are collaborating closely with other international
financial institutions (IFIs), the donor community, and the affected
countries to refine the estimates of regional and country-specific
financing needs and to assess the availability of external financing.
A number of initiatives are already underway to coordinate assistance.
On April 2, the World Bank sponsored an emergency Informal Donors'
Meeting on the Kosovo Crisis where IFIs and bilateral participants,
including representatives from the affected countries, exchanged views
on the immediate impact of the Kosovo crisis on affected countries and
on ongoing and planned donor support programs. A coordination meeting
for the relevant IFIs will be held in London on April 18. The regional
economic impact of the Kosovo crisis will be discussed during the
Spring meetings.
15. The coordination of assistance could benefit from the
establishment of a regional donor group under the guidance of
high-level political leadership. Individual country needs
____________________
5 The estimate does not include repatriation costs, which could be
significant in 1999 in this scenario.
_____________________
will also be taken up in country-specific donor meetings. Preparations
for donor meetings organized by the World Bank and EU on Bulgaria, FYR
Macedonia, and Bosnia and Herzegovina are already well advanced. The
World Bank and the EU are also considering holding a donors' meeting
for Albania.
16. The Fund and Bank staffs have the following views on the
principles for the provision of external financing:
-- All costs directly related to supporting the basic needs of the
refugees should be financed by grants from bilateral donors and the
relevant international agencies.
-- In the main, the balance of payments gaps for 1999 arising as a
direct consequence of the macroeconomic effects of the crisis should
be closed by increased bilateral donor assistance and official
external financing on appropriate terms and conditions. However,
domestic adjustment and use of international reserves would also be
appropriate.
-- External financing to ESAF-eligible countries (Albania, Bosnia and
Herzegovina, and FYR Macedonia) should be provided on highly
concessional terms. For other countries, the form of external
financing will depend on their individual circumstances.
-- For some countries, notably FYR Macedonia, the case for official
debt relief should be explored.
IV. MODALITIES OF USE OF FUND RESOURCES
17. The Fund can play a direct role in helping countries affected by
the Kosovo crisis through its policy advice and through the provision
of Fund financial resources. Fund support will need to be geared to
the specific circumstances of each of the affected countries. In this
regard, a distinction can be drawn between those countries which are
already implementing Fund-supported adjustment programs that are
broadly on track and those countries which are either without programs
or for which programs would require significant modification in light
of changed circumstances.
-- For those countries with programs that are broadly on track, the
Fund staff believes the preferable approach would be to rephase and
augment access under existing Fund arrangements, assuming the broad
program goals -- including, for example, key structural reforms -- can
be maintained in the face of the Kosovo crisis shock.
-- For other countries, a new program may be required. In the main, a
stand-by arrangement would probably be appropriate.
-- Recourse to the Compensatory and Contingency Financing Facility
(CCFF) may also be considered.
-- A member may always request the use of Fund resources on an
emergency basis and it would be up to the Executive Board to respond
to such a request, with due regard to the principle of uniformity of
treatment.
V. MODALITIES OF WORLD BANK ASSISTANCE
18. The World Bank is planning to provide emergency financing
assistance to the affected countries to help close balance of payments
and budgetary gaps. World Bank financial assistance will also be
geared to the particular circumstances of each affected country. In
addition, depending on the duration of the crisis, the World Bank will
look closely at the prospects for restructuring/re-orienting already
existing investment operations to make them more responsive to the
needs arising out of the crisis in the affected countries.
19. So far, the following emergency assistance plans are formulated:
-- In Albania: Two separate US$l million post-conflict grants have
been approved to provide institutional support to assist refugees
arriving at the border area from Kosovo. Bank staff are currently in
Albania preparing an emergency budget support operation ("Public
Expenditure Support Program") on an accelerated basis. This assistance
is in addition to the Structural Adjustment Credit that was under
preparation prior to the outbreak of the Kosovo crisis.
-- In FYR Macedonia: Bank staff are currently in FYR Macedonia
preparing an emergency rehabilitation credit to finance a positive
list of critical imports. A post-conflict grant is also under
preparation.
-- In Bosnia and Herzegovina: The Bank intends to increase the amount
of the already planned Public Finance Structural Adjustment Credit II
in part to respond to additional budgetary needs of the two entities
in the wake of reduced tax revenues and trade flows stemming from the
crisis.
-- In other affected countries: The Bank has also initiated
discussions with officials of Croatia, Bulgaria, and Romania to
determine the modalities of Bank support in response to the crisis.
20. Any balance of payments or budgetary assistance in these countries
would also be prepared in close collaboration with Fund programs.
21. Bank staff are aware that the implications of this crisis for the
social sectors and physical infrastructure could be significant,
especially if the crisis persists for an extended period. In addition
to the plight of refugees, the decline in economic growth could
potentially slow or reverse progress on poverty reduction. Damage to
infrastructure and increased demand on alternative transport
infrastructure will also increase the need for investment in transport
in some affected countries. Bank staff will examine the implications
of the Kosovo crisis for the design and implementation of existing and
proposed lending operations.
_____________________
The following additional information on the impact of the Kosovo
crisis was prepared by the staffs of the Fund and Bank subsequent to
the internal issuance of the paper:
1. Humanitarian aid to refugees. The line entitled "refugee costs" in
Table 2 of the paper includes only the projected costs of humanitarian
relief provided directly by foreign agencies. It does not include the
direct incremental budgetary costs borne by the neighboring countries
for providing humanitarian assistance. The staffs of the Fund and Bank
have now been able to produce an initial estimate of this component of
the overall budget gap reported in Table 2 of EBS/99/59. For the six
most affected countries, the direct, host country budgetary cost of
humanitarian assistance is estimated at US$118 million under Scenario
A and US$52 million under Scenario B. This implies that the total
direct refugee costs borne by both humanitarian aid agencies and the
domestic budgets of these countries in 1999 amounts to US$429 million
and US$191 million in the respective scenarios. Recent discussions
with country officials and relief organizations suggest that these
figures probably underestimate the budget costs in host countries,
implying that budgetary and associated balance of payments gaps for
countries sheltering large numbers of refugees -- Albania, FYR
Macedonia, and, to a lesser extent, Bosnia and Herzegovina -- could
also be significantly underestimated at this stage. The risk that the
large number of displaced persons still in Kosovo could swell the tide
of refugees well beyond the levels assumed even in Scenario A provides
a further source of potential underestimation.
2. Impact on economic activity. As emphasized in the paper, the
economic effects of the Kosovo crisis vary widely across countries
depending on the numbers of refugees present, the means used to
shelter them, and the relative importance of different macroeconomic
linkages. For the six most affected countries taken as a group the
crisis is projected to have a significant overall impact on economic
growth, even assuming that adequate external financing is made
available. On a weighted average basis, the crisis is projected to
knock nearly 5 percentage points off growth in the most affected
countries (excluding Romania) in 1999 under Scenario A and 2
percentage points under Scenario B. Those countries with the strongest
trade links to the Federal Republic of Yugoslavia, particularly Bosnia
and Herzegovina and FYR Macedonia, suffer the largest declines,
although growth is also reduced significantly in Bulgaria and Croatia.
_____________________
Table 1. Six Most Affected Countries: Projected Average Number
of Refugees from the Kosovo Crisis, 1999 Q2-Q4
(In thousands)
Scenario A Scenario B
"Prolonged Military Campaign" "Crisis Quickly Resolved"
Albania 417 168
Bosnia and Herzegovina 33 14
Bulgaria 4 2
Croatia 7 3
Former Yugoslav Republic
of Macedonia 182 74
Romania 6 2
Total for 6 countries above 649 262
Other countries and regions 276 91
Of which: Montenegro 79 33
TOTAL 925 354
Sources: UNHCR; World Bank and IMF staff estimates.
_____________________
Table 2. Six Most Affected Countries: Additional External Financing
Needs in 1999 Arising from the Kosovo Crisis 1/
(In millions of U.S. Dollars)
Scenario A Scenario B
"Prolonged Military Campaign" "Crisis Quickly Resolved"
Refugee cost 2/ 311 139
BOP gap 1,515 668
Total financing need 1,826 807
In percent of GDP 2.5 1.1
Memorandum item:
Budgetary gap 652 308
In percent of GDP 0.9 0.4
Source: IMF and World Bank staff estimates.
__________
1/ Albania, Bosnia and Herzegovina, Bulgaria, Croatia, former Yugoslav
Republic of Macedonia (FYRM), and Romania.
2/ Additional cost for displaced persons in Montenegro estimated at
US$43 million under scenario A and US$22 million under scenario B.
(End text)
|
Document compiled by Dr S D Stein