Hard times require good economics: The economic impact of COVID-19 in the Western Balkans

Like in other parts of the world, the Western Balkans are suffering a heavy blow as the novel coronavirus spreads. Governments are sending people home, and only a few businesses are allowed to operate. What began as a health shock has required a conscious—and necessary—temporary activity freeze to slow the spread of infection, leading to both, a lower demand for and supply of goods and services. As the pandemic continues to spread across the region, the Western Balkan countries are potentially facing the worst economic recession in decades.

The Western Balkans region is projected to enter a recession in 2020 whose magnitude depends on the duration of the COVID-19 outbreak in Europe. Under the assumption that the pandemic and required containment recede by the end of June for the region, the latest Regular Economic Report projects growth across the Western Balkans to fall between 3 and 5.6 percent in 2020. A particularly severe recession will affect Montenegro, Albania, and Kosovo because of their reliance on tourism: Their economies are projected to contract by about 5 percent in the baseline and by up to 11 percent in the downside scenario. Disruptions in global value chains and lower demand further depress export-oriented manufacturing industries which are larger in North Macedonia, Serbia, and Bosnia and Herzegovina. And liquidity constraints and acute uncertainty will stifle investment everywhere. While the economic impact of the ongoing pandemic in uncertain, there is little doubt that it is wreaking havoc on lives around the region—taxing health care systems, paralyzing economic activity, and undermining the well-being of people.

And it could get worse. A prolonged pandemic would make the unfolding economic crisis increasingly difficult to handle. Beyond increasing human and social costs, a longer pandemic would amplify the global spillovers from decreased trade, financial outflows, and commodity price declines. It would also intensify the risk aversion of investors and thus the costs of borrowing, raising debt service costs in the Western Balkans region, which is branded by high external debt-to-GDP ratios. Future waves of the COVID-19 outbreak requiring new lockdowns would further amplify economic uncertainty, as well as economic and social costs.

Economic policy has a critical role to mitigate the impact of the crisis on livelihoods. Quick and bold mitigation measures can limit the social and economic impact. Governments in all six countries have announced measures to support households and businesses during the emergency—ranging from 1 percent to 6.7 percent of GDP. Countries such as Serbia that entered the crisis with larger fiscal and external buffers have more space to finance larger support programs.

Table 1. All six countries have announced support for households and businesses during the emergency

Additional expenditures by Western Balkan Countries, € billion

Source: Ministries of finance, World Bank staff calculations.

Note: The estimates include budget support in 2020 but not guarantees, announced until April 22.

The announced measures are designed to preserve incomes and productive capacities in the first phase of this crisis while the containment restrictions to slow down the COVID-19 pandemic are still in place. For example, Western Balkan countries have introduced access to credit guarantees and subsidized credit for firms, tax and loan payment cuts or deferrals, and subsidies for wages to reduce layoffs. And all countries have temporarily increased social assistance for the poor.

These short-term measures are necessary and aligned with the policy responses of EU countries. However, more people in the Western Balkans rely on self-employment, part-time work, and incomes from informal activities. These groups are vulnerable to the crisis but difficult to track through these conventional measures. Therefore, country-specific policy design and additional support—fine-tuned to the local context—are necessary to support all vulnerable groups in the region. Some Western Balkan countries, for example, announced an expansion of the coverage of existing social transfer programs to support self-employed families and more vulnerable people.

And given the uncertain length of this crisis, policymakers everywhere face the same policy dilemma: using all available fiscal space to mitigate the immediate impact can backfire if the crisis endures and firms’ liquidity become solvency constraints. Policy responses should therefore be calibrated to mitigate the immediate effects, adjust to new realities that may emerge, and to leave space to prepare the economy for a recovery.

Quick, bold, and carefully designed policy measures matter—but they need to take into account country conditions and uncertainty about how long the crisis will last.