The Western Balkans region is rebounding from the COVID-19-induced recession of 2020, thanks to a faster-than-expected recovery in 2021, says the latest edition of the Western Balkans Regular Economic Report, Greening the Recovery.
The outlook for the region has improved significantly, with GDP growth now projected to reach 5.9 percent in 2021, after a 3.1 percent contraction in 2020. Growth in the region is projected at 4.1 percent in 2022 and 3.8 percent in 2023.
Driven by a rapid recovery in tourism, Montenegro’s economy is projected to rebound strongly by an estimated 10.8 percent in 2021, the highest rate among the six Western Balkan countries. Strong peak summer season has supported a rebound in tourism revenues, which are likely to reach close to 75 percent of their 2019 levels, from 55 percent previously estimated.
The rebound of economic activity has boosted government revenues, which coupled with careful fiscal management have led to a reduction in fiscal deficit from 11 percent of GDP in 2020 to an estimated 4 percent in 2021. Maintaining fiscal prudence in the medium term will be critical, as uncertainties loom.
“The economic crisis brought on by the COVID-19 pandemic continues to be a source of uncertainty, but also presents an opportunity for Montenegro to ensure a resilient, inclusive, and green post-pandemic recovery,” says Christopher Sheldon, World Bank Country Manager for Bosnia and Herzegovina and Montenegro. “The World Bank is committed to helping Montenegro implement reforms that can help ensure macroeconomic stability, create economic opportunities, and spur strong private-sector led growth”.
The report finds that unemployment in Montenegro remains high as the recovery has not ignited the labor market yet, which limits the pace of resumed poverty reduction. Poverty is projected to decline slowly in 2021, but it remains higher than its 2019 level.
The poverty rate for the region is projected to resume its pre-pandemic downward trend and fall by around 1 percentage point to 20.3 percent, close to its 2019 level.
The regionwide recovery is due to strength in both domestic and external demand. A sharp rebound in domestic consumption and in travel across Europe helped boost remittances as well as tourism inflows during the 2021 peak summer season. A strong recovery in advanced economies also provided a boost to demand for the region’s exports.
However, the recovery remains fragile. Early warning signals from the labor market call for close policy attention. Job losses from the recession and its aftermath have disproportionately affected women and youth, which may set back efforts to raise the region’s perennially low rates of labor force participation. Youth unemployment rose to 37.7 percent in 2021, up 5.4 percentage points from June 2020, further worsening youth employment prospects.
“As the Western Balkans countries look to a post-pandemic future, their policy approach will need to focus on addressing key impediments to job creation and economic transformation, including green transition,” said Linda Van Gelder, World Bank Country Director for the Western Balkans. “All six countries would benefit from reforms in the business environment, governance, and digitalization, which would contribute to growth and close the gap with EU countries.”
The report also looks at the macro-fiscal challenges and drivers of greening the region’s growth. The Western Balkans now find themselves at a key decision point regarding the impending green transition.
Global strides toward climate action are causing fundamental changes in society. Consumer and investor preferences are shifting, green technologies and new business models are disrupting more markets, and green policies are reshaping economic landscapes. As such, greening a country’s economy is becoming a decisive factor in international competitiveness and the ability to attract international finance and investments.
The Western Balkans are no exception. Still characterized by a development model tilted toward familiar brown industries, moving toward a green growth pathway is far from easy, especially in the short term. Yet, the green transition offers significant opportunities for the Western Balkans – including closer integration into Euro-centric global value chains and access to significant EU resources to help fund a green transition.
Effectively managing this green transition, including the many policy tradeoffs, will need to be a core focus of policy attention for the Western Balkans in the years ahead.