Economic context and the SME sector in the Western Balkans and Turkey

The COVID-19 crisis significantly impacted the Western Balkans and Turkey (WBT), as the lockdown measures adopted to contain the pandemic severely disrupted economic activity across the region.

In 2020, the Western Balkans’ gross domestic product (GDP) contracted by 3.3% on the back of falling domestic demand, investment and exports. Higher consumption by the region’s public sector and lower imports partially offset the output losses, preventing a larger economic contraction (European Commission, 2021[1]). However, the degree to which each economy has been affected by the COVID-19 crisis has depended on key economic fundamentals, the strength of the fiscal response, as well as the relative strength of the pandemic wave (OECD, 2021[2]). Montenegro was by far the most badly affected economy in the region due to its high dependence on tourism and its limited fiscal scope for stronger support measures in light of its high level of public debt. As a result, Montenegro’s annual GDP declined by 15.2% in 2020 (Figure 1). Turkey, on the other hand, recorded a GDP growth of 1.8%, primarily driven by a sizeable policy stimulus focused on lending. Annual credit growth accelerated significantly to 35.4% in 2020, from 24% in 2019 (European Commission, 2021[1]). This growth, however, increased inflation, widened the current account deficit and created concerns about fiscal sustainability (OECD, 2021[3]).

In 2021, following the relaxation of COVID-19 containment measures, the Western Balkans and Turkey had recorded solid economic performance, underpinned by strong external and domestic demand. The Western Balkans’ GDP expanded by 7.6%, boosting employment growth and narrowing current account deficits. The current account deficit in the Western Balkans stood at 4.8% of GDP in 2021, the lowest level in the last ten years. The average rate of employment growth was 1.2%, compared to a decline of 1.5% in 2020 (European Commission, 2022[4]).

A similar performance was also observed in Turkey. The Turkish economy grew by 11% in 2021, boosted by strong exports and high consumer spending. Exports of goods reached a record high in 2021, with Turkey benefiting from supply-chain disruption in Asia and the lira depreciation. Domestic demand has been continuously supported by strong credit growth and facilitated by expansionary monetary policy despite high inflation. Employment has recovered to pre-pandemic levels, helped by the rebound in economic activity (OECD, 2022[5]).

After a strong recovery in 2021, growth is expected to moderate in the Western Balkans and Turkey as a result of the Russian invasion of Ukraine. Despite the uncertainty concerning the duration of the conflict and evolving political developments, the region is poised to experience negative economic implications from the war and of the sanctions imposed on the Russian Federation (hereafter “Russia”), threatening the momentum of continued economic recovery from the pandemic.

The Western Balkan economies are particularly vulnerable to the war’s economic impact due to their relatively small size, openness and dependence on imports. The increased commodity prices will squeeze household budgets, lowering consumption. Amid the uncertain global economic outlook, investment and capital flows to the region are expected to reduce in the short term. Trade disruptions will negatively affect business activity, particularly in sectors more closely integrated in the global value chains (GVCs), such as automotive. Moreover, tourism revenues for Albania and Montenegro may dwindle as there will be a drop in Russian and Ukrainian tourists and potentially less global travel. All these factors will put downward pressure on the region’s economic growth.

In Turkey, increased commodity prices will also lead to high inflation, limiting consumer spending. At the time of writing, with 72%, Turkey had the highest inflation projection for 2022 among OECD countries. Investment will be held back by uncertainty about geopolitical factors and financial conditions. Moreover, Turkey is likely to experience a drop in the number of Russian and Ukrainian tourists, which account for about 15% of its overall tourism revenues (OECD, 2021[3]).

In 2020, small and medium-sized enterprises (SMEs) made up 99.7% of all enterprises in the WBT region, with microenterprises accounting for the vast majority (90.1%).

There is a trend of increasing SMEs per inhabitant, with an average increase of 13.1% in the WBT region since 2017 (Table 1). This potentially points to an improved business environment, most notably to simplified procedures for starting a business and measures tackling informality, as well as to a maturing entrepreneurial culture. However, some caution is warranted in interpreting the data, as the scale of permanent business closures due to the COVID-19 crisis may yet to be fully reflected in official statistics. There is, however, some preliminary evidence that government measures across the region may have prevented a massive wave of business closures. However, as support will be phased out, businesses that have hung on may eventually collapse on the back of increasing debt.

Montenegro has the largest number of SMEs per inhabitant, followed by Serbia and Turkey. Montenegro’s SME landscape is dominated by a large number of microenterprises in services, commensurate with the large contributions of the tourism sector to the economy.

Moreover, there is some evidence indicating increased productivity of the WBT region’s SMEs since 2017, as their share of total value added increased, whereas their share in total business employment decreased. They accounted for an average of 71.9% of business employment, a slight decrease of 1.3 percentage points since 2017. However, 65% of the business sector’s value added in 2020 was up by 0.6 percentage points over 2017.

Nevertheless, SMEs’ contributions to employment and value added vary heavily between economies, with spreads of 18.5 percentage points and 24.2 percentage points respectively. SMEs in Bosnia and Herzegovina contribute the least to overall business employment, at approximately 63.1% of total business employment. This attests to the over-presence of large state-owned enterprises, which employ approximately 80 000 people and account for an estimated 11% of national employment in Bosnia and Herzegovina. By contrast, Albania’s SMEs account for 81.6% of the economy’s total business employment. On average, an Albanian SME, excluding entrepreneurs, employs 5.5 persons, the highest in the WBT region, which raises concerns about the SMEs’ productivity.

Meanwhile, the value added of SMEs in Turkey only accounts for 52.8% of GDP, down from 54.1% in 2017, highlighting the pandemic’s disproportionately negative impact on SMEs. Amongst the WBT economies, only SMEs in Turkey had a lower share in value added than the EU average of 53.0% (European Commission, 2021[6]). By contrast, Montenegro’s SMEs contribute 77% of value added to GDP, up by 6.5 percentage points in the same period.

SMEs’ share of exports in the WBT region experienced a sharp decline of 8.4% during the assessment period, pointing to SMEs’ difficulties in exporting goods during the COVID-19 pandemic (see Dimension 10. Internationalisation of SMEs). This is partially expected, as there is an above average representation of SMEs in sectors hit hardest by the COVID-19 crisis (e.g. manufacturing, wholesale and retail trade), while SMEs in the most affected sectors are relatively likelier to export than larger firms (OECD, 2020[7]). In the Western Balkans and Turkey, SMEs’ limited adoption of digital technologies may have further hindered their capacity to diversify export markets.

Across the region, the only exception is Albania, where SMEs have increased their export share by 4.5%. The economy’s large clothing and footwear exports, mostly by SMEs, have remained relatively resilient during the pandemic, potentially benefitting from supply-chain disruptions in Asia. Moreover, out of all WBT economies, Albanian SMEs enjoyed the highest share of exports, amounting to 64% in 2020.

Table 2 provides detailed data on the characteristics of the SME sector in the WBT region.

The WBT region’s enterprises remain oriented towards services, with SMEs’ sectoral distribution strongly clustered in wholesale, transportation, accommodation and food, and real estate (Table 3). Manufacturing SMEs make up close to 13% of all enterprises in the entire region, with North Macedonia having the highest share (24.7%).

In 2020, sudden loss of demand and revenue induced by the COVID-19 containment measures hit enterprises in the WBT region hard. The situation was more severe for SMEs than for larger enterprises, as they traditionally have limited financial resources to withstand a long-lasting crisis. To address SMEs’ cash-flow problems and prevent them from going bankrupt, the six Western Balkan economies and Turkey introduced financial instruments to contribute to covering enterprises’ operations costs, such as staff salaries and rents, during the pandemic. They also introduced measures to defer various payments, such as income tax or value-added tax, which eased SMEs’ liquidity constraints (OECD, 2020[9]).

SMEs across the region also had a lower capacity to shift to teleworking and digital work processes. They were thus more likely to experience shortages in labour and to face difficulties in ensuring operational continuity in the context of movement restrictions. In fact, about half of enterprises in the Western Balkans had to temporarily discontinue their business activity due to COVID-19.1 The pandemic brought about the need for SMEs to embrace digital technologies, which triggered a digitalisation push in the Western Balkans and Turkey. The region’s governments introduced various measures to help SMEs tap into the economic benefits of digital transformation and strengthen their resilience against future shocks (Box 1).

In addition to the massive drop in turnovers and labour shortages, SMEs that were dependent on imported components and raw materials to produce final products also encountered supply-chain disruptions, further aggravating their challenges. This particularly affected SMEs with high levels of exposure within GVCs. Companies in North Macedonia and Serbia, particularly those operating in the automotive and machinery sectors, have the highest level of integration across sectors. Conversely, enterprises in Albania and Bosnia and Herzegovina remain without a strong link to GVCs (World Bank, 2020[20]).

With the relaxation of COVID-19 containment measures, the demand for products and services rebounded in the WBT economies, supporting SMEs’ recovery from the pandemic. However, the Russian invasion of Ukraine and the sanctions imposed on Russia will create new challenges for enterprises.

Most crucially, surging prices of key commodities will increase the operational costs and negatively affect the liquidity of businesses, exacerbating their financial challenges. With their limited scope to rely on self-financing and difficulties in accessing traditional bank finance, SMEs will be particularly hard hit by the war’s inflation shock. Securing additional financing to avoid cash-flow problems comes at a difficult time for the region’s SMEs. Due to the pandemic, the debt burden of businesses has already been on the rise across the region. In 2020 alone, domestic credit to the private sector, as a percentage of GDP, increased, on average, by close to 5.5 percentage points (OECD, forthcoming).2

The war’s economic impact on rising oil and gas prices poses a particular risk for businesses in energy-intensive sectors (e.g. automotive, chemicals and metals) and for which transport costs constitute a high share of their total operating costs. With one-third of all SMEs operating in the manufacturing and transportation sectors, surging energy prices will be more challenging for SMEs in North Macedonia and Turkey (Table 3)

Given price increases of energy and other key inputs, increased implementation of resource efficiency and conservation, and more broadly of sustainable operations, will become key to enterprises’ competitiveness in the Western Balkans and Turkey. The region’s governments’ recent initiatives, broadly grouped under their “Green Deal” strategies, are a good step in the right direction to strengthen SMEs’ resilience against future external shocks (Box 2).


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[3] OECD (2021), OECD Economic Outlook, Volume 2021 Issue 2, OECD Publishing, Paris, (accessed on 9 June 2022).

[10] OECD (2021), OECD Entrepreneurship Papers: SME Digitalisation to “Build Back Better”,;jsessionid=6ERNTSPdSIcslTA7o0cKrxpY.ip-10-240-5-148.

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[19] TUIK (2022), Enterprises which have website or home page by economic activity and size group,,-Technology-and-Information-Society-102 (accessed on 3 May 2022).

[20] World Bank (2020), The Western Balkans should leverage Foreign Direct Investment to integrate in global value chains,


← 1. The data comes from a business survey conducted in the Western Balkans in 2020 by the OECD.

← 2. Domestic credit to private sector data was retrieved from on 30 May 2022. The data includes the six Western Balkan economies and Turkey.

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