The declining value of the euro may benefit Kosovo and help it to attract much-needed FDI. The country adopted the euro as its de facto currency in 2002, although it is still not a member of the eurozone. The euro’s depreciation has proved favourable for outside investors, who can now secure Kosovo’s products and services for less. However, there are still internal challenges that Kosovo has to overcome in order to improve its investment environment.
“The majority of FDI inflows into Kosovo come from countries that do not use the euro, such as Switzerland, Turkey, the US and the UK. Therefore, the euro’s drop may encourage an increase in investment in Kosovo, especially from Switzerland and the US. Their currency is now more valuable in Kosovo compared to the past few years,” said Agon Dula, director of the private sector promotion directorate at the Kosovo Investment and Enterprise Support Agency.
“This momentum may encourage US companies to invest in eurozone countries, as well as Kosovo, which is an attractive place for US investors for several reasons, such as low operating costs, strategic location, great opportunities in IT, energy and mining sectors, etc,” said Mr Dula.
Nathaniel H Hartley, chief investment officer at London-based fund manager Advance Global Capital said: “Dollar-based investors may now find it even more attractive to invest in Kosovo than it was before because it will be cheaper to do so". But, he added that he does not see investments coming from eurozone member countries. “Some of the largest providers of FDI, including Germany, Slovenia, Austria and the Netherlands, already use the euro. So we don’t believe that the currency depreciation itself will have a significant impact on FDI from Europe,” he said.
Mr Dula said that political tensions with Russia may benefit Kosovo's investment attractiveness. “This is a great chance for Kosovo to increase FDI inflows from EU and US companies, especially now, when many EU factories and plants in Russia are [at risk] because of sanctions relating to Moscow's role in the Ukraine crisis. This has worsened relations between Russian and EU-based companies. Hence, there is a good momentum to attract FDI from EU countries to Kosovo,” he said.
Kosovo's government is also expressing optimism about the country's ability to bring in foreign investments, following a period of declining FDI flows. At a meeting with the Commission for Economic Development, Infrastructure, Trade and Industry in February, trade minister, Hykmete Bajrami, was reported by the local media as saying that FDI reached €121.7m during the first three quarters of 2014, compared to the €258m recorded in the whole of 2013. He added that administrative barriers and its perceived unfriendly business environment keep investors away from Kosovo.
Lucia Klapáčová, an analyst at Slovakia-based think tank Mesa10, said that there are different challenges that investors face when investing in Kosovo. “The most serious challenges have to do with the rule of law. There are laws in Kosovo, which in most cases are newly made and compatible with European laws. However, law enforcement is [largely lacking] as the courts in Kosovo are weak, slow and unreliable, so basically for the investor there is hardly any legal protection present if things turn wrong,” she said.
Ms Klapáčová listed other factors that negatively impact FDI, such as political instability in the whole region of the western Balkans, the preferential treatment of companies from particular countries, such as Turkey and US, the lack of understanding and support at the local political level for FDI projects, as well as the country's unreliable energy supply.
“Another very important aspect is the lack of infrastructure for greenfield or brownfield projects. Electricity and water supplies in some regions of Kosovo are unreliable, transport infrastructure has been improving in recent years, though only roads, not train transport yet, and there is development of new airport on the way,” Ms Klapáčová added.
Valmira Rexhëbeqaj, executive director at Albania consultancy, UBO Consulting, said that Kosovo's key challenges are related to its slow judiciary, the high level of perceived corruption, weak protection of intellectual property rights, competition from informal economy and issues related to public procurement processes.
The euro remains central to Kosovo's economic fate. “Historically, the ECB has turned a blind eye to small, non-EU states using the euro. Typically these states had links to the French franc or German mark prior to unilaterally adopting the euro,” said Mr Hartley.
After the break up of Yugoslavia, some countries, such as Kosovo, started using foreign currencies in an attempt to control inflation and maintain macroeconomic stability. When the euro started to circulate among eurozone countries in 2002, it became necessary to replace Deutsche marks in Kosovo. “The Banking and Payments Authority of Kosovo, which is the predecessor of the Central Bank of Kosovo, was entrusted to take the lead on this project, with the aim to ensure a smooth and safe changeover to the euro, at the lowest cost possible. United Nations Interim Administration Mission in Kosovo and EU provided the necessary help in changing and approving the essential legislation,” said Mr Dula.