OVERVIEW OF FISCAL DECENTRALISATION 

The government structure in Kosovo* is based on two levels: the central government and 38 municipalities.  

Legal acts governing fiscal decentralisation

The Law on Local Government Financing (LGF) sets the general principles ruling municipal financing, transfers from the central government and the participation of municipal budgets in the central government’s budget. 

Qualifying fiscal decentralisation

Over the last few years Kosovo has undertaken major changes in the way competences are assigned between different government levels and in the way these are financed. Local governments have been empowered with higher autonomy in spending, revenue collection and discretion over the delivery of public services.

In 2012, municipal revenues in Kosovo were composed as follows: operational grants for own competencies (including notably the health grant and education grant) accounted for 81% of municipal revenues, own revenues (property tax and municipal fees) accounted for 17%, and other revenues (including grants for enhanced competences, extraordinary grants and financial assistance from the Republic of Serbia) for the remaining 2%. A consistent part (99.8 million euros in 2012, or 44.1% of the total) of the operational grants for own competences is not earmarked for the fulfilment of specific tasks, and is therefore unconditional. This general grant, when added to own municipal resources, brings to 47% the share of total municipal revenues that local governments are able to spend freely in accordance with applicable national laws. 

Fiscal equalisation mechanisms

Fiscal equalisation across municipalities is carried out through targeted adjustments in the size of general grants. In principle, the overall size of the general grant is equal to 10% of the general government revenues; in order to account for the different revenue-generating capacities of municipalities, the grant is composed of an annual fixed amount of 140,000 euros, minus one euro per capita for the (vast majority) of municipalities with a population below 140,000 inhabitants. The variable part of the grant is calculated on a formula weighting different factors: population, which accounts for 89% of the variable part; number of minority communities (3%); municipalities in which the majority of the population is composed of an ethnic minority (2%); and area of the municipality (6%). 

Fiscal rules and borrowing capacity

Municipalities have access to debt markets to finance capital investments with authorisation of the municipal assembly and, ultimately, of the Ministry of Economy and Finance. Borrowing is nevertheless subjected to tight conditions: borrowing is only allowed on national capital markets with no exposure to foreign exchanges; total annual debt services should not exceed 15% of municipal own revenues from the past fiscal year; the total amount of municipal outstanding debt should not exceed 50% of municipal own revenues from the past fiscal year; and grace periods are not allowed.