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Growing Competitiveness: How Sustainable Agriculture Strengthens EU-Western Balkans Economic Integration

Perspectives from the Portfolio Manager

Agriculture provides a strategic opportunity for rural employment and economic growth in the Western Balkans

As the European Union sharpens its focus on food security and resilient value chains, the Western Balkans’ agricultural sector is emerging as both a strategic opportunity and a structural bottleneck to deeper economic integration.

Over the past two decades, notable social and economic progress has been made in the region: GDP per capita and employment have risen, poverty has generally declined, and economies have slowly diversified, supported by EU integration process, even as major convergence gaps persist. Agriculture remains a cornerstone of food security, rural employment, and economic prosperity, contributing between 3% (Serbia) and 15% (Albania) to the region’s GDP (vs. 1.6% in the EU) and employing 17% of the workforce, on average.¹ The region’s varied continental, Mediterranean, and mountainous agroclimatic conditions have contributed to the development of a relatively diversified agricultural base, including, niche, export-oriented products (e.g. medicinal and aromatic plants in Albania).²

The agricultural landscape is ripe with opportunity for more inclusive, competitive, and sustainable growth, but faces major challenges. Addressing them by mobilizing the needed investment is key to helping the region realize its potential and fully benefit from the EU integration momentum.

Existing bottlenecks limit growth and productivity

Despite the central role of agriculture, the current agricultural model faces structural constraints. Local farmers face major obstacles to growth and productivity: small and fragmented holdings (from <2 ha in Albania to 6.4 ha in Serbia (vs. 18 ha in the EU)) - limit scale, investment, and efficiency, and keep costs high.³ Production remains largely conventional, with limited access to quality inputs and modern and digital technologies, resulting in persistent productivity gaps and volatile yields.⁴ In parallel, limited post-harvest, processing, and marketing capacity constrain value addition, while gaps in EU standards alignment restrict competitiveness, exports, and value chain integration.⁵

Structural gaps are compounded by rising climate risks, with farms exposed to droughts and floods that weaken yields, product quality, and regional stability.⁶ While local farms have lower carbon footprint than the EU peers due to a less intensive production approach (including, low mechanization), pressures on land (e.g. fertilizer-driven soil degradation in Serbia), water, and forests weaken sustainability.⁷ Lastly, demographic shifts reshape the sector: outmigration and an aging farmer base constrain labor availability, yet the potential of women and young farmers remains largely underutilized.

Sustainable agriculture unlocks opportunities

Addressing these constraints requires a transition toward a more sustainable and market-oriented agricultural system. According to the UN Food and Agriculture Organization (FAO), sustainable agriculture must meet the needs of present and future generations, while ensuring profitability, environmental health, and social and economic equity. While no unified classification of sustainable agricultural practices exists, sustainable agriculture generally seeks to strengthen long-term farm productivity and incomes, despite the upfront required investments. It also strengthens climate resilience, adaptability and supports environmental protection.⁸

This transition is underway across the Western Balkans, but it is slow and uneven. As farming systems gradually shift away from semi subsistence production, the adoption of modern, efficient practices also grows. A meaningful portion of EFSE surveyed farmers report implementing some sustainable measures, driven mainly by higher yields and cost saving, with young farmers showing greater interest in innovation and modern technology. This momentum translates into concrete opportunities: in Serbia, investments in efficient irrigation, fertigation, and water storage expand. In North Macedonia, farmers scale modern greenhouse production, with strong gains in high value crops. This shift also serves as an EU gateway: export oriented Albanian producers invest in certification and traceability (e.g. GlobalG.A.P.), enabling access to higher value EU markets.

The EU-Western Balkans agri food trade has expanded significantly in the past two decades, creating private sector jobs and development.⁹ However, the EU remains a net agri food exporter to the region, and the Western Balkans exports are still concentrated in raw products, with value-added processing (e.g. preserved fruit in Serbia, confectionary in Bosnia and Herzegovina) only beginning to scale.

EU integration is shaping the policy landscape as the region aligns with the EU acquis (including, the Common Agricultural Policy (CAP)), the EU Green Deal, and the Green Agenda for the Western Balkans. Pre accession instruments, particularly the Instrument for Pre-Accession Assistance for Rural Development (IPARD), play a catalytic role in this process, yet gaps persist in enforcement and monitoring. Further, government support for agriculture, while increasing, remains limited, often prioritizes production over sustainability considerations, and can be less accessible to smaller farms.¹⁰ As the post 2027 CAP shifts more toward performance and climate linked support, a transition towards more investment driven, standards compliant agriculture is anticipated in the Western Balkans too.

Amid rising geopolitical and trade uncertainty, the EU is stepping up its focus on food security and supply chain resilience, reinforcing the importance of more stable and integrated regional value chains, and elevating the strategic role of the Western Balkans as a reliable partner. Realizing this potential will require robust private sector participation and sustained access to finance.

Accessing finance is essential, but remains constrained

The Western Balkans agriculture remains structurally underfunded, with around 2% of the total banking assets allocated to the sector, on average.¹¹ Investment levels remain low, especially among small farms, with net capital stock per hectare of arable land standing at 30% of the EU levels. This gap limits scale, productivity and slows convergence with EU peers.¹²

The primary constraint is not a lack of demand, but a mismatch between sector characteristics and financial system: farmers face limited access to adequate finance (e.g. pricing, maturities, collateral), while banks still perceive agriculture as high-risk, operationally complex, and costly to serve at scale. Non bank lenders, such as microfinance institutions (MFIs) help bridge the gap but remain insufficient despite rural reach and lower collateral lending. This is reflected in the results of EFSE’s market analyses implemented over the past three years through its Development Facility, including farmer surveys and interviews across Albania, Bosnia and Herzegovina, Kosovo, North Macedonia, and Serbia. These targeted assessments highlight rising climate pressures, a growing focus on sustainability, and persistent financing constraints.

This financing gap reinforces a negative cycle: underinvestment constrains productivity, resilience, and competitiveness, entrenching risk perceptions and limiting access to finance. While public support and EU pre accession funds play a critical role, they are not sufficient to unlock systemic change. Risk management instruments for banks to ease collateral barriers are also nascent (e.g. credit guarantees in Kosovo), and agri-insurance uptake is low.

There is a growing regional offer of green loans, typically backed by IFI/DFI credit lines, in the region, but they commonly focus on energy efficiency and renewable energy, leaving broader sustainability themes (e.g. digital tools, regenerative farming, animal welfare) underfunded. Expanding into sustainable agri-finance, in turn, brings clear commercial opportunities for banks (e.g. strong, diversified portfolios, lower NPLs, distinct positioning, lending at scale), but unlocking these requires effective financing solutions, such as blended finance.¹³

Blended finance as a key lever for scaling access to finance

Blended finance plays a critical role in mobilizing private investment in emerging economies, yet only a small share of total funds mobilized globally are allocated to the agricultural sector in the Western Balkans.¹⁴ Through investments, credit enhancement (e.g. guarantees) and technical assistance, blended finance enables financial institutions to expand into segments that would otherwise stay underserved. Global evidence is promising: blended schemes unlock commercial lending to underserved agricultural enterprises (e.g. those led by women) and long-term loans for sustainable measures (e.g. agroforestry), and ease liquidity amid low NPLs.¹⁵

Evidence also shows that EU blending, e.g. Western Balkans Investment Framework, has broadened access to finance. Supporting a resilient and competitive agricultural sector is one of the key priorities for the EU and the Western Balkans Investment Framework, as this strategically important region advances in its EU integration process. Blended finance provides a critical push and market multiplier effect; nonetheless, banks often continue to favor established SMEs.¹⁶ Maximizing its impact and expanding access will require a more deliberate targeting of underserved, high impact segments, such as sustainable agriculture.¹⁷

EFSE’s sustainable agri-finance supports resilience, food security, and EU convergence

Within this context, EFSE is scaling a targeted approach to sustainable agricultural finance.
As a pioneering blended finance fund, EFSE has mobilized significant public and private capital since inception. This has enabled 1.37 million sub-loans to MSMEs and households across Southeast Europe and the Caucasus, with 73% of these sub-loans extended in rural areas. The EU partnership with EFSE has been instrumental in channeling funding and technical assistance toward inclusive, private sector led development in the region. By working through local financial institutions, EFSE builds capacity within the financial sector to deliver sustained, scalable financing to MSMEs, including in agriculture. Further deepening cooperation, including, through a stronger focus on sustainable agriculture, reinforces critical value chains and food security, delivering tangible benefits to both the region and the EU.

To put this strategy into practice, EFSE has introduced tailored eligibility criteria for sustainable agriculture. These criteria are anchored in market analysis, local regulations, and farmer needs, and cover regenerative agriculture, resource efficiency, circularity, animal welfare, and other sustainability themes. Guided by these criteria, EFSE has invested about EUR 100 million across 10 partner banks, MFIs, and specialized agri lenders in Albania, BiH, Kosovo, North Macedonia, and Serbia since 2023, dedicating a third of these funds to farmers engaged in sustainable agriculture. Through its Development Facility – with the European Commission being the largest donor to EFSE’s TA operations in the Western Balkans - EFSE has also trained hundreds of farmers, helped design targeted loan products, and deployed small incentives for early adopters. As a result, EFSE’s partner institutions channel funding to farms of all sizes for a broad range of sustainable investments - from soil health and drip irrigation to livestock upgrades. Demand remains strong, driven by rising climate risks, growing awareness, and EU standards alignment. Yet, persistent barriers (e.g. high upfront costs, limited bank capacity) underscore the need for continued technical support and risk-sharing. Looking ahead, EFSE aims to strategically deepen its sustainable agriculture portfolio, and to extend its approach beyond primary production to other key agricultural value chain segments (e.g. food processing, storage), reinforcing sector resilience and competitiveness.

As the Western Balkans advance toward EU integration, scaling inclusive and sustainable agri finance will be critical to drive resilience, long-term productivity, and convergence. This aligns closely with EU priorities: stronger value chains, food security, reduced climate pressures, and enhanced competitiveness. Blended finance and innovative financial instruments play a catalytic role and can further accelerate this transition – by mobilizing private capital at scale, mitigating risks, and strengthening local capacities.

At ProCredit Bank, supporting the sustainable growth of MSMEs, particularly in agriculture, remains a strategic priority, given the sector’s strong potential and persistent financing gaps. With EFSE’s support, we are better positioned to address key client challenges, from low productivity to increasing climate risks, while expanding our portfolio in a resilient and responsible way. Through targeted technical assistance, we work closely with our agricultural clients to strengthen capacities and promote practical solutions such as efficient irrigation and improved water management.

Dobrinka Stefanova Gjorgieva, Head of the Sustainability Unit at ProCredit Bank, North Macedonia, one of EFSE’s partner banks on sustainable agri-finance

The insights presented in this article are based on a combination EFSE internal analysis and monitoring data as at December 2025, as well as country level market analyses prepared for the Fund through EFSE’s Development Facility, including, primary data collected through stakeholder interviews and surveys.

List of references

¹ Data sourced from World Bank, 2024 and ILOSTAT, 2025. Employment data for Kosovo sourced from the Ministry of Finance, Labour and Transfers

² Medicinal and Aromatic Plants (MAPs) represent about 20-25% of all agricultural exports from Albania, with 90% of the production export-oriented; see Ibraliu et al., 2025, , Assessment of the medicinal and aromatic plants value chain in Albania, Journal of Applied Research on Medicinal and Aromatic Plants

³ Data sourced from Eurostat, 2025, and national statistical offices, including, Statistical Office of the Republic of Serbia, 2023; Albania Institute of Statistics, 2023

⁴ E.g. in Serbia, outdated livestock barns, marked by poor ventilation and flooring, cause heat stress and disease that can reduce growth by an estimated 15-20%, while manual feeding and the absence of basic sensors or health monitoring depress productivity compared with modern facilities (Serbia agricultural market analysis prepared for the Fund, 2025)

⁵ To illustrate, only around one quarter of milk produced in North Macedonia meet appropriate safety standards, limiting EU export potential (North Macedonia agricultural market analysis prepared for the Fund, 2024)

⁶ USDA, 2022, Serbia: Serbia: Serbia Grain Summer Update

⁷ ClimaPannonia, 2025, Organic and Resilient: Farming with Nature in Vojvodina

⁸ A growing body of evidence shows that nature-based solutions can generate strong economic returns and improve farm-level productivity and resilience; see World Bank Group, 2025, Rebooting Development: The Economic Power of Nature-Based Solutions

⁹ In 2025, EU agri food exports to the Western Balkans reached EUR 7.1 bn, while imports from the region to the EU totalled around EUR 3.4 bn; see European Commission, 2026, EU trade with Western Balkans 6 – statistical factsheet

¹⁰ Regional Rural Development Standing Working Group in South-East Europe (SWG), 2024, European Integration and Agriculture in the Western Balkans: Current Trends and Challenges

¹¹ Data sourced from FAOSTAT, 2024 Credit to Agriculture and national central banks’ sectoral lending statistics, including Central Bank of Kosovo, 2026; National Bank of North Macedonia, 2026; National Bank of Montenegro, 2024

¹² Closing the capital stock gap to EU average levels implies about EUR 30bn in additional investment (per hectare benchmark). Source: FAOSTAT, 2023 FAOSTAT Capital Stock database (market and impact landscape assessment prepared for the Fund, 2026)

¹³ Nie et al., 2023, Banking Sector Risk in the Aftermath of Climate Change and Environmental-Related Natural Disasters, World Bank Working Papers

¹⁴ According to Convergence Capital, blended finance has mobilized approx. USD 276 bn globally over the past 2 decades, with over half directed to financial services and agriculture, while Europe and Central Asia account for only around 9% of the total volume

¹⁵Information compiled from OECD, 2021, Making Blended Finance Work for Agri SMEs: Selected Case Studies; Palladium for USAID, 2018, Transforming the Market for Agricultural Financing in Ghana: Lessons Learned from the Implementation of the Financing Ghanaian Agriculture Project (USAID FinGAP)

¹⁶ European Commission, 2024, Evaluation of the Implementation of EU Blending in the EU Neighbourhood and the Western Balkans Regions (2015–2021)

¹⁷ The Western Balkans Investment Framework (WBIF) is the EU’s main platform for channelling blended finance to support growth, competitiveness, and convergence under the EU Growth Plan. It deploys repayable investment instruments, guarantees, grants, and TA via financial institutions, with competitiveness and innovation (incl. in agriculture) being among priority areas

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