World Bank Western Balkans Regular Economic Report: Fall 2021

In 2021, the Western Balkans region is seeing a faster-than-expected recovery from the COVID-19-induced recession that all six economies experienced in 2020. GDP growth for the region is 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, and expected to resume its pre-crisis path.

This rebound is due to a combination of domestic reopening and favorable external conditions for the region’s exports. Falling infection rates and loosened mobility restrictions allowed for a sharp rebound in domestic consumption and tourism arrivals. A strong recovery in advanced economies also provided a boost to demand for the region’s exports.

The poverty rate for the region is projected to resume its pre-pandemic downward trend in 2021 and fall by around 1 percentage point to 20.3 percent, close to its 2019 level. The 2020 recession saw a reversal of reduction in the poverty levels in the Western Balkans.

However, the recovery remains fragile. Early warning signals from the labor market call for close policy attention. The unemployment rate increased in the first half of 2021 in most countries, although the employment support programs in response to the pandemic helped blunt its negative impact. 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.

The region’s positive outlook is marred by risks. While fiscal balances have started to improve as a result of stronger economic performance, depleted fiscal space and high debt levels will continue to weigh on the region. In line with global conditions, inflationary pressures in the Western Balkans are on an upward trajectory. While the pace of vaccinations has picked up, the Western Balkans still lags more developed European neighbors, leaving the region less prepared to withstand new pandemic flare-ups and resulting impact of domestic or international movement restrictions.

The policy focus needs to shift back toward addressing the key structural constraints to job creation and economic transformation, including weak firm-level productivity, lack of market competition, limited regional economic integration, and weak institutions. These constraints have become even more apparent with the stresses that COVID-19 has placed on the region.

The Western Balkan economies now find themselves at a key decision point regarding the impending green transition. Global strides toward climate action are causing fundamental changes everywhere. Consumer choices and investor behavior are shifting toward green technologies and new business models, and green policies are reshaping economic landscapes. Greening a country’s economy is becoming a decisive factor in international competitiveness and the ability to attract international finance and investments. However, the region’s economies are 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. This edition puts a spotlight on ‘green transition’ in the Western Balkans—it explores what shifting to greener economy will require and lays out some key policy trade-offs.