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In 2022, the six countries of the Western Balkans—Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia—saw the resilience of their economies tested by multiple shocks. To promote more inclusive, resilient, and sustainable growth in this time of elevated uncertainty, the region will need to rebuild fiscal buffers and undertake reforms, as we discuss in our latest economic update.
Buffeted by crises
After economic activity bounced back in 2021, the region’s economies were buffeted by a challenging external environment stemming from the fallout of Russia’s invasion of Ukraine, higher energy and food prices, unfavorable weather conditions, tightening financial conditions, and significant uncertainty.
Despite employment growth, job creation also lost strength across all Western Balkan countries in the second half of 2022. Youth unemployment rate fell to 27% in 2022, but the labor market remains characterized by high inactivity, persistent high levels of unemployment, a high share of informality, significant skills mismatches, and continued emigration.
Inflation also surged to a two-decade high in 2022 in almost all economies, with the consumer price inflation peaking in late 2022. While there are signs of easing, trends in core inflation suggest that price pressures remain broad-based and sticky. While central banks in Albania, North Macedonia, and Serbia have taken steps to tighten their monetary policy stance, conditions remain nevertheless accommodative, and real policy rates negative due to rising inflation and price expectations.
The poorest households have been hit hardest
Our analysis shows that the increases in the actual cost of living faced by the poorest households in the Western Balkans are much higher than official consumer price inflation figures suggest. The poorest households spend a much higher proportion of their income on food and energy, the two items in the consumption basket with the highest price increase in 2022. In North Macedonia this disparity is the highest in the region—the cost of living for the poorest there is seven percentage points higher than for the highest-income households.
Figure 1. Cost-of-living inflation varies among households
Cost-of-living annual inflation by decile across WB6
Note: This figure plots the cost-of-living annual inflation by decile for December 2022. The inflation by decile is expressed as a difference with respect to the average cost of living inflation.
Building a more resilient Western Balkans
While economic growth for the Western Balkans is expected to increase to 2.6% in 2023, an uncertain global growth environment and geopolitics will continue to test the resilience of the region’s economies. To build greater resilience to shocks and protect the most vulnerable, governments across the region should consider:
- Rethinking social assistance design: To alleviate the cost-of-living crisis, governments in the region should account for the different cost-of-living inflation faced by households when designing effective policies to protect the most vulnerable households and avoid further erosion of social assistance programs. Governments should also consider designing effective energy vulnerability programs that would address affordability for lower-income households.
- Protecting human capital: Given the learning losses accumulated during the Covid-19 lockdowns, it is an imperative to strengthen education budgets and outcomes. There also needs to be a focus on addressing youth unemployment to prevent outmigration, as well as employability and activation of social assistance beneficiaries to protect them from long-term unemployment and skills erosion.
- Transitioning to greener energy sources: The ongoing energy crisis has highlighted the need to accelerate the green transition across Europe, including in the Western Balkans. A key starting point in this regard is to accelerate the move toward carbon pricing and to increase the use of environmental fiscal measures that incentivize households and firms to shift toward lower carbon intensity with respect to economic activity.
- Boosting productivity: Accelerating regional integration, increasing levels of market competition, and addressing barriers that limit labor force participation – especially for women – will also help boost productivity.
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