Economic Studies
Albania

Albania

Population 2.8 million
GDP per capita 4787 US$
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Synthesis

major macro economic indicators

  2013 2014 2015  2016(f)
GDP growth (%) 1.1 2.0 2.6 3.2
Inflation (yearly average) (%) 1.9 1.6 2.0 2.5
Budget balance (% GDP) -5.0 -5.2 -4.2 -3.4
Current account balance (% GDP) -10.7 -13.0 -11.0 -12.0
Public debt (% GDP) 70 71 72 72

 

(f) Forecast

STRENGTHS

  • Candidate for accession to the European Union
  • Extended Fund Facility from the IMF
  • Youthfulness of the population
  • Mineral (oil, chromium, copper, iron-nickel, silicates, coal) and hydroelectric potential
  • Low energy deficit
  • Coastline with several ports
  • Stability of the currency - the lek- against the euro 

WEAKNESSES

  • Size of grey economy
  • Weak education system (3% of GDP) and vocational training
  • Corruption and organised crime (drugs)
  • Inefficient and politicised court system and administration
  • Extreme sector and geographic specialisation of exports
  • Vulnerability to climate variables: agriculture (20% of GDP and 45% of jobs) and hydroelectricity (95% of production) 

RISK ASSESSMENT

 

 

2016: deepening recovery based on investment 

With prospects for reforms associated with European Union accession negotiations, foreign investments will continue, especially in energy (electric power lines linked with neighbouring countries, power stations, Trans-Adriatic pipeline transporting Caspian gas to Western Europe). With 2016 being a pre-election year, public investment is likely to pick up timidly. Conversely, private, local investment will remain limited by the slow recovery of lending and high interest rates (almost 8% on average). The banks, mostly subsidiaries of Italian, Austrian and Greek banks, will remain cautious due to the still high proportion of their non-performing loans (20% of their portfolio), the high euro-isation level of credit (60%) and the often precarious financial position of the local players. Household consumption is expected to rise more rapidly due to an improved job market and continuing low inflation, although this will be in a context of continued sluggishness in expatriate remittances and further fiscal consolidation. Trade's contribution to growth is still likely to be negative, as the increase in exports to European markets will be both tempered by low prices for minerals and metal parts for construction and offset by imports linked to foreign investments.

 

A budget constrained by the black economy and a costly energy sector

The high levels of debt and the public deficit leave little room for fiscal manoeuver. Moreover, the State is exposed to the risk of an increase in the number of compensation claims for property expropriated during the Communist era and is expected to complete payment of arrears to businesses - which could amount to more than 1% of GDP - in 2016. Against this, income represents only 25% of GDP. Tax collection is hampered by the large size of the black economy and the low level of computerisation. Revenues consist only of VAT and social security contributions. Due to gaps in land registration data, the scale of illegal construction and inadequate information on property values, property tax receipts are non-existent. On the spending side, the electricity sector needs to be subsidised because of under-pricing, theft and losses. Likewise, the pension system because of the low level of participation (25% of the economically active population) associated with undeclared work and the lack of proportionality between contributions and benefits. Reforms are underway.

 

Substantial trade deficit linked to the narrowness of the productive base

There is a very high trade deficit, which in 2014 stood at 25% of GDP. This reflects the narrow productive base (textiles, shoes, oil, minerals and electricity), which means the country has to import many of its consumer and capital goods, and also indicates a lack of competitiveness. Over half of its exports go to Italy (75% to the European Union). The trade in services is in surplus due to the scale of outward processing arrangements in the textile sector, and the growth, though modest, in tourism. Remittances from emigrants in Italy and Greece are lacklustre. The trade deficit is primarily financed by foreign investments, which help boost the foreign exchange reserves. Many of the 22,000 Italians who have moved to the country in recent years have set up businesses. Budget aid from multilateral organisations (the EU, the IMF with an extended credit facility until 2017, and the World Bank) also makes a smaller contribution.

 

Reforms in the lead-up to EU accession are expected to continue

The 2013 parliamentary elections were won by the Socialist Party and the Socialist Movement for Integration. The coalition, led by the Prime Minister, Edi Rama, has 83 of the 140 seats in Parliament. It is committed to continuing the series of structural reforms (modernisation of the civil service, the justice system and the energy sector, combatting corruption, organised crime and the grey economy, respect for property, bankruptcy law, financial data …) in order to satisfy the conditions for its accession to the EU. An improvement in relations with Serbia in respect of Kosovo and with Macedonia regarding the large Albanian minority is also a condition. The European partners would like to see the whole Albanian political class, not just the governing coalition, commit to the reforms. The opposition, represented by the liberal conservatives of the Democratic Party of Albania, are making their support conditional on obtaining a consensus regarding the core texts.

 

Last update : January 2016

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