Economic Analysis
Albania

Albania

Population 2.8 million
GDP per capita 3946 US$
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Synthesis

major macro economic indicators

  2014 2015  2016 (e)  2017 (f)
GDP growth (%) 1.8 2.6 3.4 3.6
Inflation (yearly average) (%) 1.6 1.9 1.0 1.8
Budget balance (% GDP) -6.0 -4.8 -2.5 -2.2
Current account balance (% GDP) -12.9 -11.2 -13.0 -14.0
Public debt (% GDP) 72.1 72.7 73 71

 

(f) Forecast

STRENGTHS

  • Candidate for accession to the European Union
  • Youthful profile of the population
  • Mineral (oil, chromium, copper, iron-nickel, silicates, coal) and hydroelectric potential
  • Low energy deficit
  • Coastline with several ports
  • Strength of the currency, the lek, against the euro

WEAKNESSES

  • Size of the grey economy (30 to 40%)
  • Poverty (per capita GDP = 30% of the European average), low priority given to education (3% of GDP)
  • Dependence on rainfall: agriculture (23% of GDP and 45% of jobs) and hydroelectricity (95% of electricity production)
  • Poor transport infrastructure
  • Ineffective and politicised court system and administration
  • Corruption and organised crime

RISK ASSESSMENT

Growth sustained by investment and consumption

Growth is expected to increase still further in 2017. It will continue to benefit from continued foreign investment in infrastructure, especially in energy, with the ongoing construction of the Trans Adriatic pipeline transporting gas from Azerbaijan to Italy, and of the Devoll river hydropower plants. These installations will take over from local oil production, which peaked in 2014. In contrast, domestic investment will remain limited by the narrow fiscal scope and conservative lending by the banks. The banks, mostly subsidiaries of Italian, Austrian and Greek banking groups, are still dealing with a high proportion of non-performing loans (21.4% of their portfolio at the end of August fin 2016) and high "euro-isation" levels of their deposits (50%) and their loans (56.6%). In these conditions, the recovery of private sector credit is likely to be moderate and average interest rates on loans in lek (7.7% in summer 2016) to remain high, despite a cut in key rate to 1.25% in May 2016. For its part, household consumption is expected to pick up slightly due to greater labour market participation linked to a shrinking of the informal economy and related employment, even if unemployment remains high (16%, 30% of young people).

 

Fiscal consolidation required to reduce the debt burden

Fiscal consolidation is continuing and does not appear to have been called into question by the holding of general elections and the expiry of the IMF's Extended Credit Facility in 2017. Reserves have been set aside to cover the compensation claims for property expropriated during the Communist era. The cost of the electricity sector to the State, estimated at 0.3% of GDP, is expected to reduce further with the installation of meters, infrastructure modernisation and the gradual end to subsidised tariffs. Tax collection is benefiting from the reduction in undeclared work and from computerisation, while improved management of investments has enabled the elimination of payment arrears to suppliers. This issue is all the more important because government debt is still high. The proportion of domestic debt (50% of the total) has an average maturity of 2 years and accounts for 20% of commercial bank assets.

 

Substantial current account deficit broadly covered by FDIs

There is a very high trade deficit, standing at 22% of GDP in 2015. This reflects the narrow productive base (textiles, shoes, oil, minerals, electricity), which means the country has to import many of its consumer and capital goods. Over half of its exports go to Italy. There is a trade surplus in services of 5% of GDP thanks to tourism and outward processing arrangements in the clothing sector. Because of the ties with the Greek and Italian economies, remittances from emigrants are lacklustre, but represent 7.4% of GDP. The current account deficit is primarily financed by foreign direct investments (FDIs), which means that imports related to infrastructure are self-financing. Budget aid for development (IMF, World Bank, EU) also makes a small contribution. Despite the importance of the non-debt creating funding, external debt represented 74.2% of GDP in 2015. The fact that 42% of the debt is borne by the State in the form of long-term public loans and 23% is linked to FDIs puts this in perspective. The remainder is shared between non-financial businesses and the banks.

 

The June 2017 election results are not expected to slow the pace of reform

Structural reforms are continuing in anticipation of EU accession. As well as reform of the electricity market, the pension system has been modified, in particular introducing better proportionality between contributions and benefits. In July 2016, constitutional reform was put in place aimed at combating inefficiency and corruption. The legislation still needs to be adapted accordingly. This is crucial as much for EU accession as for encouraging foreign investment. One month prior to this, the reform of bankruptcy law was adopted. It is intended to allow the banks to reduce their non-performing loans by facilitating the implementation of guarantees. Much remains to be done to improve administrative efficiency, make local agencies accountable, combat organised crime and all kinds of smuggling between Albania and Italy. The coalition, led by Edi Rama and composed of of the Socialist Party and the Socialist Movement for Integration, is standing again in the parliamentary elections in June 2017 against the Democratic Party led by Lulzim Basha.

 

Last update : January 2017

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