Public spending to the agriculture sector in Kosovo is crucial for farmer’s incomes and significant in volume. Direct payments play a dominant role in overall agriculture support but do little to strengthen competitiveness and improve agricultural productivity.
Public spending to the agriculture sector in Kosovo is crucial for farmer’s incomes and significant in volume. Direct payments play a dominant role in overall agriculture support but do little to strengthen competitiveness and improve agricultural productivity. With Kosovo on the path to EU accession, the agricultural subsidy architecture will also have to undergo a paradigm shift, as to include EU food safety, animal welfare, and environmental standards as a precondition for financial support under the EU Common Agricultural Policy (CAP). The Ministry of Agriculture, Forestry and Rural Development (MAFRD) has yet to reap the benefits of leveraging direct payments to prepare farmers for the standards imposed by the EU.
Agriculture is vital to Kosovo’s economy
The role of agriculture in Kosovo is more than feeding the population and providing livelihoods in rural areas. 105,000 farmers manage nearly 50% of Kosovo’s territory. The primary sector employed over 23% of the country’s labour force and accounted for 7.2% of Kosovo’s GDP in 2023. Nonetheless, Kosovo imports significantly more agri-food products than it exports. This makes the agricultural sector one of the main contributors to the country’s goods trade deficit, despite impressive growth in agricultural exports in recent years.
During the last decade, the production value of Kosovo’s agricultural sector increased by 28% in nominal terms, mainly driven by increases in the value of crop production. However, several constraints hold back further growth in agriculture. Agricultural productivity is lagging the EU average and labour productivity in Kosovo’s agriculture is almost half that of regional peers.
Public spending in agriculture is significant
Kosovo spends more on agriculture than other countries at the same level of development. Over the last 5 years, the Government of Kosovo spent on average 0.84% of GDP on agriculture, which is significantly higher than the EU-27 average (0.36%) or the amount spent on average by regional peers like Albania (0.19%), Bosnia and Herzegovina (0.27%), Montenegro (0.29%), Serbia (0.36%), and Northern Macedonia (0.56%).
Direct payments account for the lion’s share of agricultural spending. The share of this recurrent expenditure in the agricultural budget is steadily growing at the expense of the share of capital expenditure (investment grants). In 2023, Kosovo allocated EUR 86 m to the agriculture sector (2.5% of total governmental outlays), of which 71% was spent on direct payments. While this share is in line with the EU CAP, other countries undergoing structural transformation, such as Moldova, follow the objective of focusing mainly on capital formation by supporting investment in physical assets in agriculture.
Direct payments favour lower value crops
The crop sector is the main beneficiary of direct payments. In 2022, 55% of total direct payments were used to subsidize the production of lower value crops, such as wheat and maize. Producers of higher value crops, such as fruits and vegetables, or wine, received on average 24% of total direct payments during the last 5 years. Conversely, direct payments to the livestock sector have been decreased from 38% of total direct payments in 2018 to only 26% in 2022.
Direct payments increasingly burden the budget
As recently demonstrated by the COVID-19 pandemic, the agricultural support programme transfers market risks from producers and consumers to the budget of the Kosovar government. Direct payments have created a secure and profitable environment for producers. As a significant part of farmers’ income comes from direct payments, the current public support programme creates a growing dependency on direct payments. Most direct payments (e.g. for wheat and maize) are paid based on production quantity. Therefore, increases in production put additional pressure on the budget on the state budget. The bottom line is that the current direct payment architecture effectively shields farmers from market risks, while exposing the government to budgetary risks.
Direct payments lack effectiveness
The Strategy on Agriculture and Rural Development (SARD) 2022-2028 aims to improve competitiveness, sustainability, and rural livelihoods. Policy priorities include the promotion of sustainable agriculture as well as climate change adaptation and mitigation. However, budget allocations to achieve these objectives represent only 0.7% of total agricultural spending. The greening trend within the EU CAP seems to bypass Kosovo’s agricultural policy. 98% of the budget allocations are focused on strengthening competitiveness but fail to incentivize the convergence to standards that will need to be met to take on the fierce competition on the EU single market.
Distribution of direct payments favours larger farms
While the distribution of direct payments in Kosovo is more equitable than in the new EU member states, 21% of Kosovo’s largest farms received 77% of total direct payments in 2017. Direct payments are mainly distributed among farms that already benefit from economies of scale, while smaller farms reveal a higher production efficiency. In fact, although the smallest farm-size category (<2 ha) produces the highest standard output (EUR 5.941 per ha) in Kosovo, they benefit under proportionately from direct income support.
A paradigm-shift in agriculture support is needed
Kosovo’s agriculture policy needs a paradigm shift to achieve the strategic objectives of the SARD 2022-2028. The current subsidy architecture does not comply with the Agreement on Agriculture of the WTO and does not contribute to structural transformation. Modelling Kosovo’s agricultural support on the EU CAP could help achieve the strategic objectives of the SARD. Above all, introducing direct payments that are “decoupled” from type and amount of production while incentivizing to provide public goods, such as food safety, animal welfare, and environmental sustainability is of paramount importance. Irrespective of the timeline for EU accession, the institutional and policy requirements of the EU CAP would provide a good guideline for Kosovo and would result in positive spillovers for the economy.
Based on the experience of other EU member states or candidate countries, Kosovo should follow a set of priority actions. These policy actions are prioritized by considering the following key determinants: (i) the time needed for their implementation, (ii) their relevance for securing absorption of EU funds, (iii) the likelihood of stable EU requirements, and (iv) their impact on the agricultural performance and its administration.
Recommended priorities for CAP implementation
Source: Own design, 2024