39402 The World Bank Kosovo Monthly Economic Briefing July 2006 Kosovo Joins CEFTA Negotiations. Over the last several years economies of South Eastern Europe (SEE) have been engaged in signing bilateral Free Trade Agreements (FTA) under the auspices of the Stability Pact Trade Working Group. UNMIK and the Provisional Institutions of Self-Government (PISG) have also shown their strong commitment to becoming part of a regional free trade zone by initially acceding to the Memorandum of Understanding on Trade Liberalization and Facilitation. Currently Kosovo has a bilateral FTA with Albania and Macedonia, while discussions with Bosnia-Herzegovina (BH), Croatia and Moldova are still ongoing. While the discussions for signing bilateral FTAs are continuing, attention is gradually shifting to converting the network of bilateral FTAs of SEE into a single regional FTA through the simultaneous enlargement and amendment of the Central European Free Trade Agreement (CEFTA). This agreement between Romania, Bulgaria, Croatia and Macedonia promotes trade liberalization among the member countries covering a wide range of trade-related cooperation on the basis of the EU acquis and international rules. CEFTA will be expanded to cover the rest of the Balkan states, such as Albania, BH, Serbia, Montenegro, UNMIK/Kosovo and Moldova and incorporate the existing 31 SEE FTA's into a single treaty. UNMIK/ Kosovo participated in the first two rounds of negotiations on an enlarged and amended CEFTA, held on June 29 and July 25/26, 2006. With a general tariff rate of 10% for imports and 0% for exports, Kosovo has already established a liberal trade regime. Yet, given it's a relatively small market, deeper economic integration and enhanced FDI can have crucial impacts on Kosovo's economic growth. Thus the successful conclusion of an enlarged and amended CEFTA would further boost Kosovo's capacity to fully integrate into a regional free trade zone on an equal footing, creating a safer investment environment, and preparing for eventual accession into the EU. UNMIK studies the impact of its downsizing on Kosovo economy. The Economic Policy Office of UNMIK EU Pillar has published a study that estimates the overall impact of UNMIK's spending on Kosovo economy in the period 1999-2006 and the likely effects of the mission's downsizing. The study estimates that since its establishment, UNMIK has spent about 2.6bn on personnel, goods and services, with 602 million or about 23% of its total expenditures having been directly injected into the Kosovo economy. The report estimates that when taking into account the multiplier effect of further spending of incomes, the real contribution of UNMIK spending to GDP growth was around 6.5% over the period from 2003-2006. In analyzing the potential consequences of UNMIK's downsizing on the economy of Kosovo, the report assumes two scenarios: 1) full withdrawal of UNMIK with no replacement for this mission and 2) replacement of UNMIK by another mission of 1/3 of its current size. The first scenario estimates that due to the layoff of all local and international staff (6,228 in total), around 73 million of direct injections together with additional multiplier effects will be lost. The second scenario will result in the loss of 4,200 jobs which will reduce spending and have a relatively lower negative impact on GDP.At the same time, according to the report, UNMIK's downsizing might also lead to some positive indirect effects on the economy. The reduction in demand for services is likely to put downward pressure on prices and wages, thus making Kosovo's economy more competitive. The report makes a series of recommendations for easing some of the negative impacts arising from UNMIK's downsizing. It recommends that donors concentrate their support on capital investment projects and general budget support, due to the relatively higher impact of these instruments in fostering economic growth. The Government of Kosovo is advised to follow a prudent economic and fiscal policy to reduce budget deficits and ensure continuous donor support in the short-term. Nevertheless, while the effects of UNMIK's downsizing, as presented by the report, are obviously worrisome, the counter-effects arising from the removal of political risks and uncertainties could increase investor confidence and potentially mitigate some of the negative impacts described above. Key Statistics - at a glance Potential losses from UNMIK downsizing 2006 2002 2003 2004 2005 Mar Apr May Scenario 1 Scenario 2 GDP (% change) -2.4 -0.1 4 -0.2 .. .. .. Reg. unemployment 282.3 282.3 302 319.7 323.4 324.1 324.5 Staff laid off 6,228 4,200 CPI (SOK) .. 1.6 -2.5 2.6 1.8 2.5 2.8 Fiscal balance ( mn) 106.4 62.6 -134.3 -67.8 .. .. Direct injections Exports (mn) 27.6 35.6 56.5 48.9 7.2 8 8 Imports (mn) 854.8 973.1 1,063.2 1,180 99.3 109.7 117.6 lost (in 000 ) 72,962 48,884 Note: Monthly fiscal balance, export and import figures are non-cumulative. SOK (CPI) is % change year-on-year (e.g. Oct 2004 is change from Oct 2003 to Oct 2004). Registered unemployment in thousands. Source: BPK, SoK, MFE, Kosovo Employment Office and IMF staff estimates www.worldbank.org/kosovo Kosovo Monthly Economic Briefing July2006 The World Bank The Kosovo Cadastral System In most countries land and real estate represent a substantial portion of the national wealth. A well functioning property market ­ supported by secure property rights, enforceable contracts and a trusted court system - is a key characteristic of a successful market economy. The land administration system (cadastre and registration) provides the infrastructure necessary for a property market to function by identifying the physical location of the properties, the owner, and other rights and encumbrances on that property. An effective and transparent land administration system, and registration in particular, has substantial economic and social benefits, including ensuring security of ownership, improving access to credit, reducing land disputes, ensuring a sustainable use of natural resources, and encouraging more orderly development of cities and per-urban areas. Consequently, a well functioning property and mortgage market also promotes economic growth and job creation. The legal framework is in place in Kosovo for an efficient and secure real property registration system, but significant challenges still remain including a fully functioning land market and protection of property rights. Furthermore, in Kosovo like across Europe and the world, there is a single agency system that combines the cadastre (physical location of the property) with the registration of rights (ownership of the property, rights and encumbrances). The Kosovo Cadastre Agency, under the Ministry of Public Services, was created in 2000 with the mandate to build and upgrade the cadastre system and put in place a new title registration system for immoveable property. By contrast, many of Kosovo's neighbors are struggling with an historic legacy of court-based land book systems, often with substantial backlogs and an institutional division between the cadastre and registration of rights. The Kosovo Cadastre Agency has technical oversight for the cadastre and immovable property registration functions carried out by the 27 operating Municipal Cadastre Offices (MCOs). However the MCOs are under the municipal governments, which pay their salaries and appoint the Directors. The new Immovable Property Rights Registration (IPRR) system is a Kosovo-wide system for registration of property rights. Despite evident achievements toward building requisite institutional capacity, there is a strong consensus that unreliable immovable property records continue to constrain the investment climate in Kosovo. In rural areas farmers hold their lands under "possession lists" which have been compiled for 55 percent of the estimated 2.5 million parcels in Kosovo, but the records do not necessarily match the situation in the field. This unreliability comes about because of unofficial subdivisions, unrecorded sales, lost records due to the 1999 conflict, out of date official cadastre maps dating back to the 1960s. Currently, potential buyers, lessees, renters, and banks are hesitant to collateralize or acquire the ownership or use of properties since often they are unable to identify true owners or use-right holders. Though the new laws establish a 15-day processing period for transactions by the MCOs, significant delays are still the norm (the average processing time is 30-50 days when no special dispute is present). In addition, "customer service" areas are generally non-existent. The unfinished policy and institutional agenda in the area of immovable property registration is therefore substantial. The critical areas where further donor support is necessary were identified in the "Proposed Program for Development of Land Administration in Kosovo" and grouped in five intervention areas: (i) institutional strengthening; (ii) cadastre maintenance and immovable property rights registration; (iii) cadastre and land information system development; (iv) geoinformation/spatial data infrastructure development; and (v) education, continuous professional development and training. The importance of a functioning property market for Kosovo cannot be underestimated. Kosovo should capitalize upon the strengths of the institutional set-up, but ensure that the above-mentioned problems ­ particularly in immoveable property rights are overcome. This takes the concerted effort of the Kosovar Authorities, municipalities and the international community. Additional information is available on request. For more information, please contact Shpend Ahmeti (sahmeti@worldbank.org), Vito Intini (vintini@worldbank.org) or Edon Vrenezi (Evrenezi@worldbank.org) at the World Bank Office in Kosovo on (381-38) 249-459. The findings, interpretations, and conclusions expressed in this briefing are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent.