IMF Agrees $141 Million New Loan for Kosovo

The International Monetary Fund approved a $140.8 million (106.6 million euro) loan for Kosovo Friday, after cutting off funding last year in a dispute over pay raises for civil servants.

The new 20 month stand-by arrangement will back a program to ease the country's fiscal pressures and help the government shore up its cash buffer.

But the Washington-based lender warned that Kosovo, having tied itself to the eurozone, faced the risk of external pressures if it did not strengthen its finances quickly.

The IMF said the government needs to crunch its fiscal gap by another 1.5 percent of GDP in order to get back on a sustainable footing.

The new program comes a year after the Kosovar government's unilateral increase of public sector wages sparked objections in the IMF and led to it cutting short its previous 109 million euro program set in July 2010, with only 22 million euros disbursed.

"Determined program implementation, backed by broad political support, will be crucial to build confidence and credibility in the policy framework," the IMF said in a statement.

"A sustainable fiscal stance should be restored by 2014, through restraint on current spending and growth-friendly revenue measures."

It warned that Kosovo's having unilaterally adopted the euro as its currency "places a premium not only on fiscal discipline, but also on labor market flexibility, wage restraint, and structural reforms that enhance the economy's competitiveness."

It suggested that, since the country's tie to the euro gives it no monetary policy of its own, it should create legal parameters for fiscal policy to safeguard stability.

"A level of government cash buffers needs to be reestablished that is sufficient to insure the economy against fiscal and financial shocks," the fund added.