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Kosovo

Executive Summary

Already one of Europe’s poorest countries, Kosovo was hit hard by the COVID-19 pandemic but recovered quickly. Although economic growth estimates for 2021 differ significantly between the Central Bank of Kosovo’s 9.9 percent estimate and the International Monetary Fund’s (IMF) 7.5 percent estimate, both point to a robust economic recovery and faster growth rates than initially forecast. A large inflow of remittances and diaspora tourism combined with increased exports contributed to this growth. Although many international financial institutions remain cautious in forecasting economic growth for 2022 given the unpredictability of the pandemic and global supply chain shocks, most expect Kosovo’s GDP to grow between 3.8 and 4 percent.

The pandemic has not led to permanent changes in Kosovo’s investment policies. The government enacted several relief measures that are all temporary and focused on maintaining employment levels and helping businesses preserve liquidity. As such, Kosovo’s COVID-19 relief measures did not significantly affect its broader investment policy environment.

Kosovo has potential to attract foreign direct investment (FDI), but that potential is constrained by its failure to address several serious structural issues, including limited regional and global economic integration; political interference in the economy; corruption; an unreliable energy supply; a large informal sector; difficulty establishing property rights; and tenuous rule of law, including a glaring lack of contract enforcement. The country’s ability to sustain growth relies significantly on international financial support and remittances. Its ongoing dispute with Serbia and lack of formal recognition by many countries and international organizations, including the lack of membership in the United Nations, also create obstacles to doing business.

Increased energy prices throughout Europe, particularly in the last quarter of 2021 through the first quarter of 2022 exposed Kosovo’s vulnerability to energy price shocks and its serious issues with energy reliability. By January 2022, the Kosovo government had to subsidize the energy sector in the amount of €90 million (about 1.3 percent of GDP) and increase energy tariffs to cover the cost of increased energy imports. Kosovo also faced blackouts due to maintenance issues at its two dilapidated coal-fired power plants. The Energy Regulatory Office in February 2022 instituted block tariffs for residential consumers but did not change electricity prices for businesses.

In 2021, the net flow of FDI in Kosovo was estimated at $466 million, a significant increase over the 2020 amount of $382 million. Real estate and leasing activities are the largest beneficiaries of FDI, followed by financial services and energy. The food, IT, infrastructure, and energy sectors are growing and are likely to attract new FDI.

One key sector of the economy that has sustained strong growth is the wood processing sector. Companies producing kitchens, baths, doors, upholstered furniture, and combined wood, metal and glass have seen increased investment since 2017. The sector is maturing and receiving support in business development services and access to finance. Kosovo is also addressing its energy security by increasing its renewable energy capacity and facilitating more bankable renewable projects. Kosovo has also rapidly increased the exports of bedding, mattresses, and cushions, but this development has mainly been concentrated within a few companies.

Kosovo’s laws and regulations are consistent with international benchmarks for supporting and protecting investment, though justice sector enforcement remains weak. Kosovo has a flat corporate income tax of 10 percent. In 2016, the government partnered with the United States Agency for International Development (USAID) and other international donors to launch the Kosovo Credit Guarantee Fund, which improves access to credit. With USAID assistance, Kosovo passed legislation to establish a Commercial Court, which aims to handle business disputes fairly, efficiently, and predictably and is expected to improve the business enabling environment by reducing opportunities for corruption and building investor and private sector trust in the judiciary.

Property rights and interests are enforced, but legal system weaknesses and difficulties associated with establishing title to real estate, in part due to competing claims arising from the history of conflict with Serbia, make enforcement difficult. Kosovo has a legal framework for protecting intellectual property rights (IPR), but enforcement remains weak, largely due to a lack of resources. While IPR theft occurs in Kosovo, there is insufficient data on how widespread the issue is. The issue does not get attention in the media, and the U.S. Embassy in Pristina has not had significant complaints of IPR theft in Kosovo from U.S. companies. Anecdotally, the IPR theft that occurs tends to be mostly in lower-value items that likely do not garner significant attention.

All legal, regulatory, and accounting systems in Kosovo are modeled on EU standards and international best practices. All large companies are required to comply with international accounting standards. Investors should note that despite regulatory requirements for public consultation and the establishment of an online platform for public comments ( http://konsultimet.rks-gov.net ), some business groups complain that regulations are passed with little substantive discussion or stakeholder input.

In Kosovo’s recent history, the political environment has been characterized by short electoral cycles and prolonged periods of caretaker governments. However, the current governing coalition has an overwhelming majority, and all indications point to the likelihood that it will remain in place for much, if not all, of its four-year term. In addition, there have been few substantive changes in legislation and regulations on foreign investment and the general business environment despite previously short electoral cycles. To date, the U.S. Embassy in Pristina is not aware of any damage to commercial projects or installations. The government, which took office March 2021, ran on an anti-corruption platform and has a strong electoral mandate to enact positive change.

The public consistently ranks Kosovo’s high unemployment rate (officially 25.9 percent in 2021) as among its greatest concerns. Unemployment levels for first-time job seekers and women are considerably higher than the official rate. Many experts cite a skills gap and high reservation wage as significant contributing factors.

Despite the challenges, Kosovo has attracted a number of significant investors, including several international firms and U.S. franchises. Some investors are attracted by Kosovo’s relatively young population, low labor costs, relative proximity to the EU market, and natural resources. Global supply disruptions brought on by the COVID-19 pandemic have sparked greater interest recently from some businesses to utilize Kosovo as a base for near-shoring production destined for the EU market. Kosovo does provide preferential access for products to enter the EU market through a Stabilization and Association Agreement (SAA).

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 87 of 180 http://www.transparency.org/research/cpi/overview
Global Innovation Index 2020 N/A https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2020 USD 283 Million  http://data.imf.org/CDIS
World Bank GNI per capita 2020 USD 4,480 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

Kosovo has 63 state-owned enterprises (SOEs), 44 of which are municipality managed. These enterprises are typically utilities, such as water treatment and supply, waste management, energy generation and transmission, but also include SOEs involved in telecommunications, mining, and transportation. SOEs are generally governed by government-appointed boards. The Ministry of Economy monitors SOE operations with a light hand.

Private companies can compete with SOEs in terms of market share and other incentives in relevant sectors. State-owned enterprises are subject to the same tax laws as private companies. There are no state-owned banks, development banks, or sovereign funds in Kosovo.

The majority of Kosovo’s SOEs are either regulated or operate in the free market but incur losses and depend on government subsidies for their survival. SOEs do not receive a larger percentage of government contracts in sectors that are open to foreign competition. However, the government interprets procurement law in a way that considers SOEs to be public authorities and prevents contracting authorities from procuring goods from other sources if SOEs offer such goods and/or services. SOEs purchase goods and services from the private sector, including international firms.

8. Responsible Business Conduct

Spurred in large part by the growing number of foreign investors, the topic of responsible business conduct (RBC) has begun to surface in public discussions. The American Chamber of Commerce, Kosovo Corporate Social Responsibility (CSR) Network, and other entities engaged in RBC are able to advocate and monitor freely. The government does not actively promote or encourage RBC and does not factor RBC principles into procurement decisions. In most cases, tenders are awarded to the economic operator with the lowest price offer and highest technical score.

There have not been any major cases of negative corporate impact on human rights in Kosovo. There are occasional complaints and media reports that the health of citizens in the area near the power plant in Obiliq/Obilič is endangered due to high levels of lignite coal pollution. As a result of those concerns, the Kosovo Assembly approved a 2016 Law on Environmentally Endangered Zone of Obiliq/Obilič and its Surroundings, which mandates a return of 20 percent of royalties collected in the area to the municipality. However, many provisions of that law remain unimplemented. There have been reports and allegations of child and forced labor in Kosovo, but they are relatively uncommon and typically engaged in the informal economy or family-run agricultural businesses.

Companies are not required to make a public disclosure of policies, procedures, or practices unless registered as a joint stock company, in which case there are added disclosure responsibilities related to financial reporting and auditing.

Implementation of the Law on Consumer Protection is limited. The government has not undertaken any significant action to raise awareness of consumer rights. The government does not promote the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. Kosovo does not participate in the Extractive Industries Transparency Initiative (EITI). There are no domestic transparency measures requiring the disclosure of payments made to governments for projects related to the commercial development of oil, natural gas, or minerals. Kosovo is not a signatory of The Montreux Document on Private Military and Security Companies, nor a participant in the International Code of Conduct for Private Security Service Providers’ Association.

9. Corruption

Opinion polls attest to the public perception that corruption is widespread in public procurement and local and international businesses regularly cite corruption, especially in the form of political interference, as one of Kosovo’s largest obstacles to attracting investment. Kosovo has enacted strong legislation to combat corruption, but the government has thus far been unsuccessful in efforts to investigate, prosecute, jail, and confiscate the assets of corrupt individuals. The government has enacted other measures to address corruption, including a requirement to conduct all public procurement electronically and to publish the names of contract winners. The Anti-Corruption Agency and the Office of Auditor General are the government agencies mandated to fight corruption.

The Law on Prevention of Conflict of Interest and Discharge in Public Function as well as the Law on Declaration, Origin, and Control of Property of Public Officials are intended to combat nepotism. They require senior public officials and their family members to disclose their property and its origins. The Criminal Code also punishes bribery and corruption.

The U.S. Embassy in Pristina is unaware of any government activity to encourage private companies to establish internal codes of conduct, or off local industry or non-profit groups that offer services for vetting potential local investment partners.

In 2016, the Kosovo Assembly approved amendments to the Law on Anti-Money Laundering. The EU-compliant law supported Kosovo’s membership in the Egmont Group, a network of 152 Financial Intelligence Units (FIU) where the members exchange expertise to combat money laundering and terrorist financing. Money laundering is believed to be most common in the real estate and construction sectors. Kosovo’s FIU is an independent governmental agency that leads Kosovo’s efforts to investigate economic crimes.

U.S. companies operating in Kosovo must adhere to Foreign Corrupt Practices Act (FCPA) requirements. Kosovo participated in 2013 as an observer member in the anti-corruption conference organized by the United Nations Convention Against Corruption (UNCAC) and has attended several international conferences on anti-corruption with the support of the Council of Europe and UNDP. Kosovo’s laws protect NGOs that investigate corruption.

10. Political and Security Environment

In recent history, the political environment has been characterized by short electoral cycles and prolonged periods of caretaker governments. Despite the political instability, there have not been substantial legislative and regulative changes, especially regarding investments and business environment. There have been no reports of any damage to commercial projects or installations.

Kosovo held national assembly elections on February 14, 2021, after the Constitutional Court ruled in December 2020 that a convicted Member of Parliament’s (MP) decisive 61st vote to form the government was not valid. For the first time in the last 20 years, the elections produced an overwhelmingly clear victor, the Levizja Vetevendosje (“Self-Determination Movement”) led by Albin Kurti, which formed a government in March 2021 with the help of only a few minority MPs. This was unusual as Kosovo’s proportional electoral system typically favors coalitions and partnerships. The new government has restored perceptions of political stability and is likely to provide a break from Kosovo’s short electoral cycles.

The current administration’s electoral victory centered mainly on anti-corruption promises. While the administration has produced some results in fighting corruption, balancing the budget, and reforming the public administration, it has been relatively slow in introducing new laws and regulations as well as drafting strategies that would guide economic policymaking.

Kosovo is not a member of the United Nations and regional neighbors Serbia and Bosnia and Herzegovina are among the countries that do not recognize its statehood. In November 2018, Kosovo imposed a 100 percent tariff on all goods from Serbia and Bosnia and Herzegovina but in April 2020 dropped the 100 percent tariff in favor of “reciprocal measures.” The previous administration dropped these “reciprocal measures” temporarily in June 2020 to give way for negotiations on “economic normalization” with Serbia. Despite a White House-brokered set of commitments signed on September 4, 2020, in Washington, DC, by Kosovo’s then-Prime Minister Avdullah Hoti and Serbian President Aleksandar Vucic, there are numerous issues remaining that might lead to trade and investment barriers between the two countries. In addition, the lack of recognition also exposes Kosovo to subtle technical difficulties in carrying on day-to-day business activities. For example, Kosovo is not listed in the ISO 3166 list of countries, which results in numerous companies and services not listing Kosovo in the drop-down menu of countries and forces businesses in Kosovo to either register and divert their business through a third country or renders them unable to use such services. Due to Kosovo’s lack of Country Code Top-Level Domain (ccTLD), it is more difficult to track cyberattacks.

11. Labor Policies and Practices

According to the Kosovo Statistical Agency, almost two thirds of Kosovo’s population of 1.8 million is of working age (15-64). The official unemployment rate is 25.8 percent. Youth unemployment is estimated at 48.6 percent. There are no reliable statistics on Kosovo’s informal economy, but a 2017 EU-commissioned report estimated the informal and black market at 32 percent of GDP. Informal businesses dominate in the agriculture, construction, and retail sectors. Because of pervasive informality and the slow pace of courts, informal and verbal agreements often carry more significance than formal agreements and contracts. Private-sector employers make a practice of not providing contracts to their employees and paying them in cash. In the public sector, employers sometime hire employees as contract workers and enroll them in the regular payroll when the budget for salaries becomes available.

Kosovo’s Labor Law requires employers to observe employee protections, including a 40-hour work week, payment of overtime, adherence to occupational health and safety standards, respect for annual leave benefits, and up to a year of maternity leave (six months of employer paid leave at a reduced rate, followed by three months of government paid leave and three months of unpaid leave). The Labor Law distinguishes between layoffs and firings, and mandates severance pay only for laid off workers (when at least 10 percent of employees are dismissed collectively).

The law also establishes a monthly minimum wage, which the government set in 2011 at €130 ($146) for employees under 35 and €170 ($191) for those over 35 years of age. Kosovo has no unemployment insurance or any other safety net programs for workers laid off for economic reasons. It is estimated that about one third of employees are employed in the public sector and SOEs. Although the country’s average monthly salary amounts to nearly €416 ($457) in take-home pay, there are stark differences between the private sector average of €342 ($376), the public administration average of €552 ($607), and the SOE average of €680 ($748).

The Labor Law has no nationality requirement and is not waived for investment purposes. There are no additional or different labor laws for special economic zones or free zones.

Labor unions are independent by law, but in practice, many of them are closely associated with political parties. The government, labor unions, and private sector representatives signed a collective bargaining agreement in 2014, which has been partially implemented. Kosovo’s Statistical Agency and the Ministry of Economy do not collect specific data on implementation. Public-sector employees – including doctors, teachers, and judges – sporadically go on strike to demand implementation of the entire agreement, better working conditions, or higher wages. In January 2019, education and health workers went on a month-long strike demanding higher wages, only stopping the strike after the Kosovo Assembly approve the Law on Wages, which granted some of their demands. Strikes and protests in the private sector are almost nonexistent. Local courts formally adjudicate labor disputes.

The Ministry of Finance, Labor, and Transfers established a compliance office with the authority to inspect employer adherence to labor laws. The International Labor Organization office in the country is project-focused and does not serve as a government advisor on labor legislation or international labor standards. The government plans to reform inspectorates, labor inspectorate included, and has already increased the labor inspectorate’s number of inspectors from 38 to 90. The Inspectorate issues fines and penalties depending on the extent of the violation of labor legislation. The Labor Inspectorate and the judicial system investigate and prosecute labor practice violations. Municipal social work centers at the Ministry of Finance, Labor, and Transfers investigate and report on child labor issues, while the Labor Inspectorate inspects violations of child labor practices for children aged 15-18 years.

Kosovo’s education system has been criticized for not sufficiently linking its curriculum to the needs of Kosovo’s business community. Kosovo’s large, young labor force often remains idle due to mismatches between applicant skills and employer needs.

14. Contact for More Information

Dren Pozhegu Senior Economic Advisor
U.S. Embassy Pristina
Rr. 4 Korriku Nr.25
Pristina, Kosovo
+383 38 5959 3183
PozheguDM@state.gov 

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The Lessons of 1989: Freedom and Our Future