February 13, 2026Kosovo: Staff Concluding Statement for the 2026 Article IV Consultation Mission

February 13, 2026

Pristina, Kosovo. The formation of a new parliament and government provides an opportunity to invigorate reform momentum and accelerate growth, supporting faster convergence with the EU. While the economy showed resilience to protracted political stalemate, growth is estimated to have moderated in 2025, while inflation accelerated and the external current account deficit widened. The political impasse constrained progress on implementing the EU Growth Plan reform agenda and access to external financing. Although the outlook is positive, downside risks remain. Fiscal policy recalibration in 2026 is needed to reduce the fiscal impulse and address macroeconomic imbalances. Over the medium term, fiscal policy should be anchored in a rules-based framework, balancing macroeconomic stability and development objectives while building fiscal buffers. The financial sector is sound but strong credit growth in recent years calls for close monitoring of financial sector risks. Building on recent reforms, further efforts to enhance systemic resilience, alongside strengthened oversight are needed. Structural reforms, anchored by the EU Growth Plan, will yield growth dividends and unlock substantial external financial support over the medium term.

Recent Developments

The protracted political impasse weighed on growth in 2025. Growth slowed to 3½ percent (y/y) by end-Q3 2025 from 4¾ percent a year earlier, as private consumption and investment weakened amid a slowdown in credit and real income growth. A rise in goods imports-particularly energy products-led to a deterioration of the trade balance, widening the external current account deficit to 9.6 percent of GDP from 8.4 percent in 2024. This external drag on growth was partly offset by stronger government consumption and public investment, supported by improved budget execution Inflation accelerated to 5¼ percent (y/y) through December, up from 1.1 percent a year earlier, driven by higher food prices. Formal employment continued to expand, although real wage growth stalled and unemployment remained high (10 percent). This, together with persistently low labor force participation-especially among women, points to remaining labor market slack.

These less favorable developments in 2025 followed a period of above-trend growth and disinflation. This progress was supported by the successful implementation of the IMF-supported Stand-By Arrangement (SBA), which helped rein in post-pandemic inflation, sustain growth, rebuild buffers, and advance key reforms.

Outlook and Risks

With resolution of the political impasse, the outlook for 2026 should improve, although risks remain tilted to the downside. Growth is projected to rebound to 3.8 percent in 2026 and converge toward its potential rate of about 4 percent over the medium term supported by resumption of structural reforms-including implementation of the EU Growth Plan-and improved access to external financing. Inflation is projected to decline and converge toward 2 percent over the medium term. The external current account deficit is expected to rise in 2026 with higher energy imports and then narrow gradually over the medium term. Downside risks to growth stem from possible political uncertainty, tensions in northern Kosovo, and unfavorable external conditions (e.g., global trade tensions, escalation of conflicts). Conversely, swift and effective implementation of the EU Growth Plan could lift growth beyond current expectations.

Fiscal Policy-Supporting Macro Stability and Medium-term Growth

Fiscal policy turned expansionary in 2025. The headline deficit widened to ¾ percent of GDP from an average of ¼ percent of GDP in 2023-24. Lower deficits had been supported by strong revenue performance, flat real current spending, and higher capital expenditures. The wider deficit in 2025-driven by higher household transfers-was smaller than projected and helped sustain economic activity amid heightened political uncertainty. However, the more expansionary stance, at a time when the economy was operating near potential, may have fueled inflationary pressures and the widening of external imbalances.

On current policies, the fiscal deficit is expected to widen further in 2026, calling for a recalibration of policies. Based on the draft budget approved in October 2025 and recent executive decisions, the headline deficit is projected to increase to 2 percent of GDP in 2026, reflecting the full-year impact of higher pensions, expanded child and maternity allowances, and new wage-related measures, including introduction of a 13th salary for public employees. The resulting fiscal impulse should be avoided as it may add to domestic price pressures, exacerbate external imbalances, and erode Treasury buffers. Given Euroization, a more prudent fiscal position is warranted targeting a deficit of about 1 percent of GDP. Revenue and expenditure measures, such as reducing tax exemptions, aligning public wage coefficients with inflation rather than introducing new structural changes to compensation policy, and identifying savings in goods and services, will help reduce the fiscal impulse. Moderating public wage growth would not only support prudent fiscal policies but also limit spillovers to rapidly rising private wages-outpacing productivity growth-helping safeguard competitiveness. Fiscal discipline also requires strict adherence to the rules-based framework and avoidance of ad hoc measures. Given elevated downside risks, rebuilding and maintaining adequate Treasury buffers is a priority.

For 2027 onward, fiscal policy should balance macro stability and development goals, improve spending composition, and prioritize key fiscal structural reforms. Fiscal policy should support growth by facilitating scaling-up of high-quality public investment, financed through the EU Growth Plan and by other international partners. Containing current spending and strengthening public financial management are needed to avoid a rapid debt build-up, support external position, and preserve adequate buffers. Progress should continue on revenue administration, enhancing efficiency and equity of social spending, raising effectiveness of health and education outlays, strengthening public investment and fiscal risk management, and greater fiscal transparency.

Updating Kosovo's fiscal framework would better align fiscal policy with evolving priorities while strengthening transparency and credibility. Introduced over a decade ago, the current framework has served Kosovo well by supporting macroeconomic stability and prudent fiscal management. Planned reforms provide an opportunity to modernize the legal framework, creating space for growth-enhancing public investment while limiting discretion and strengthening transparency and compliance. In this context, the deficit rule should be streamlined by removing adjustors and aligning it with the EU's Stability and Growth Pact, while maintaining the current debt ceiling. Establishing an independent fiscal council would further enhance accountability by more closely monitoring compliance and assessing the quality of fiscal policy.

Financial Policies-Strengthening Oversight and Crisis Preparedness

Elevated credit growth calls for strengthened prudential oversight. Bank-led financial deepening has been substantial, with the bank credit-to-GDP ratio nearly doubling over the past decade to reach 60 percent in 2025-among the highest levels in emerging Europe. Despite this balance sheet expansion, the banking sector remains sound, with solid profitability, low nonperforming loans, and ample liquidity buffers. Still, the pace of credit expansion warrants close monitoring, particularly given easing lending standards and banks' exposure to the real estate sector. If credit growth re-accelerates, targeted borrower-based macroprudential measures should be considered to safeguard borrower debt-servicing capacity, complementing the implementation of countercyclical capital buffers in 2025. The resumption of legislative activity presents an opportunity to advance amendments to the Central Bank of Kosovo (CBK) law in line with IMF recommendations.

The CBK should build on progress in strengthening financial oversight. A larger and more complex financial sector warrants further strengthening of regulatory and supervisory frameworks. With IMF support, the CBK is enhancing risk-based supervision, including phased implementation of a modern Supervisory Review and Evaluation Process (SREP), aimed at improving supervisory effectiveness and bank resilience. Successful implementation will require better supervisory data, stronger technical capacity, well-trained staff, and adjustments to supervisory culture and practices. Measures are also needed to reinforce oversight of nonbank financial institutions (including legal amendments and crypto-asset activities), safeguard financial integrity, protect consumers, and align with international best practices.

Heightened risks underscore the importance of enhancing systemic resilience and crisis preparedness. While the banking sector exhibits strong capacity to absorb systemic liquidity shocks, this hinges on continued maintenance of adequate high-quality liquidity buffers, sufficient international reserves, and operational readiness to respond to stress. Policy priorities should include continued reserve accumulation, safeguarding bank liquid assets, and further developing, operationalizing, and testing the crisis management framework, with IMF support and adjustments as needed. Given euroization, continued access to ECB liquidity via a repo line would support the system's capacity to cope with stress. Following adoption of the Law on Banks, efforts should also focus on operationalizing the bank resolution framework.

Concerted efforts are needed to support the CBK's efforts for Kosovo's integration into the Single Euro Payments Area (SEPA). SEPA membership would standardize cross-border payments with 41 participating jurisdictions, making transactions faster, safer, and more efficient, while facilitating deeper financial integration with Europe. Following pre-application in 2024, successful accession will depend on timely adoption of the required legal framework, underscoring the need for close coordination across all stakeholders in Kosovo. In parallel, steadfast implementation of the project to deploy a TIPS-clone platform would further modernize the domestic payments infrastructure.

Structural Reforms-Addressing Deep-Rooted Challenges

The political normalization should be leveraged to advance progress toward EU membership. While Kosovo was among early adopters of the EU Growth Plan Reform Agenda, implementation in 2025 was constrained by the absence of the legislature. Resumption of the legislative process will provide an opportunity to ratify international agreements and accelerate reforms, helping narrow structural gaps with the EU and generate growth dividends. Full and timely implementation of the Reform Agenda will also allow Kosovo to access EU financing of 8 percent of GDP-highest allocation in the Western Balkans.

Comprehensive labor market reform will help remove constraints on growth. Minimum wage policy should balance productivity and cost-of-living considerations to safeguard competitiveness, especially given euroization. With one of the lowest labor participation rates in Europe, particularly among women, and persistently high unemployment, reforms should prioritize addressing skills mismatches, reducing informality, expanding access to affordable childcare, and enhanced parental leave.

Energy reforms should be reinvigorated to expand generation capacity-including through renewables, improve efficiency, and better align prices with market conditions. Accelerating implementation of renewables projects will add capacity to the generation mix over the medium term, helping meet rising demand while reducing reliance on coal. Continued investment in generation capacity is critical to ensure a stable supply and enhance competitiveness; measures to improve energy efficiency will help households and businesses lower costs. Electricity market liberalization should advance to foster competition, attract private investment, and strengthen sectoral liquidity, while minimizing disruptions and consumer financial strain.

Building on a strong long-standing partnership, the IMF will continue to support Kosovo in safeguarding macro-financial stability and advancing key reforms. Since joining the IMF in 2009, Kosovo has benefited from IMF-supported programs, surveillance, and capacity development (CD). The most recent IMF arrangements-a Stand-By Arrangement (SBA) and Resilience and Sustainability Facility (RSF)-concluded in May 2025. The SBA and RSF supported efforts to rein in inflation, sustain robust growth, rebuild policy buffers, and advance structural reforms, including the green transition. Going forward, the IMF will continue to provide policy advice and maintain CD support, including through the forthcoming Southeast Europe Regional Technical Assistance Center (SEETAC).

* * * * *

The mission thanks the Kosovo authorities and other counterparts for their hospitality and candid and constructive discussions.

IMF Communications Department

MEDIA RELATIONS

PRESS OFFICER: Camila Perez

Phone: +1 202 623-7100Email: [email protected]

@IMFSpokesperson