Low taxes not enough for Italian companies to invest in Albania, ambassador says

Low taxes not enough for Italian companies to invest in Albania, ambassador says

TIRANA, Feb. 19 – Low taxes are not enough when it comes to major Italian investors to consider Albania, their tiny neighbor across the Adriatic, as an investment destination, says Italy’s ambassador to Tirana, Alberto Cutillo. “Investors insist on a

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De-euroization will not be war against euro, governor says

De-euroization will not be war against euro, governor says

TIRANA, Feb. 15 – Albania’s central bank governor says the de-euroization measures will target a gradual reduction in the current widespread use of Europe’s single currency by about 10 percent to below 40 percent as the International Monetary Fund has

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Inflation rate unlikely to meet 2.7% target for 2018

Inflation rate unlikely to meet 2.7% target for 2018

TIRANA, Feb. 14 – Albania’s inflation rate significantly dropped last January, hinting sluggish domestic consumption and that the 2.7 percent target the Albanian government has set for 2018 will be difficult to achieve. Data published by the country’s state statistical

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Heavy rainfall lifts hydro-dependent electricity sector out of crisis

Heavy rainfall lifts hydro-dependent electricity sector out of crisis

TIRANA, Feb. 14 – Heavy rainfall during the past couple of months has lifted Albania’s hydro-dependent electricity system out of crisis with state-run KESH power utility now meeting domestic consumption needs and even regularly exporting small quantities. The situation has

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IMF urges Albania to press ahead with reforms

IMF urges Albania to press ahead with reforms

TIRANA, Feb. 14 – Improvements in infrastructure, the business environment and rule of law will boost Albania’s growth potential, a senior International Monetary Fund official said during a visit to Albania this week. Speaking after concluding his Albania visit, Tao

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Businesses, experts divided over de-euroization implications

Businesses, experts divided over de-euroization implications

TIRANA, Feb. 13 – The de-euroization package that Albania’s central bank has announced has found exporters and economy experts divided over the effects such a policy could have on the country’s highly euroized economy. Alban Zusi, the head of Albania’s

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IMF warns Albania to draw lessons from airport concession as it proceeds with new PPPs

IMF warns Albania to draw lessons from airport concession as it proceeds with new PPPs

TIRANA, Feb. 12 – As Albania has started implementing an ambitious €1 billion public private partnership project, the International Monetary Fund has warned that Albania must ensure that the country’s potential benefits are realized while managing the PPPs fiscal costs

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Arbitration threat: Albania loses $80 million in one month

Arbitration threat: Albania loses $80 million in one month

TIRANA, Feb. 12 – Albania has been ordered to pay back the country’s largest oil producer dozens of millions of dollars over a tax dispute under a decision that comes as a second consecutive blow the country’s public finances receive

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Season’s first strawberries tap local markets

Season’s first strawberries tap local markets

TIRANA, Feb. 8 – The first local strawberries are already tapping local and international markets for this year as more and more farmers and businesses in the southern region of Fier, known as the breadbasket of Albania’s agriculture, have discovered

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Investment funds return to growth as net assets exceed half a billion euros

Investment funds return to growth as net assets exceed half a billion euros

TIRANA, Feb. 8 – Investment funds returned to double digit growth rates in 2017 after suffering a modest contraction in 2016, the first since their establishment in 2012 and rapid growth in the following three years. A report by the

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                    [post_content] => TIRANA, Feb. 19 - Low taxes are not enough when it comes to major Italian investors to consider Albania, their tiny neighbor across the Adriatic, as an investment destination, says Italy’s ambassador to Tirana, Alberto Cutillo.

“Investors insist on a factor considered crucial. They need clear laws. They can also accept higher costs, but also want to know about the investment laws when they develop a business plan and that they must be able to rely on the fact that these laws are clear and stable,” ambassador Cutillo has said in an interview.

“Despite considerable progress in several sectors, there is need to work and create conditions for a safe, fair and steady treatment as time goes by. If the tax rate plays an important role in selecting the investment country, in my opinion, but also the opinion of economic operators this embassy keeps in touch daily, that is no the key element,” he added.

The comments came as a delegation of some 200 Italian businesses led by Italy’s deputy economic development minister Ivan Scalfarotto visited Albania this week under an Italian-government supported initiative favoring the internationalization of Italian companies and serving Italian companies to consolidate their presence in Albania.

“Such a mission which in general targets much larger and geographically distant markets is something which also confirms Italy's strong confidence in the Albanian market, bringing here its top companies with the target of easing useful investment for both sides,” Ambassador Cutillo told has local Monitor magazine in an interview.

Since 2014, the corporate income tax and the withholding tax on dividends, rents and capital gains have increased by 5 percent to 15 percent, making the tax burden in Albania one of the region’s highest and a key concern for foreign and local investors.

However, corruption and an inefficient judiciary have emerged as top concerns in the past few years as the country has been struggling to attract major foreign direct investors except for two energy-related projects such as TAP and a big hydropower plant that are set to complete their investment stage by the end of this year.

“The challenge for Albania is to be prepared to welcome this extraordinary opportunity. In order to do this, I think it is crucial to improve the current business climate, implement structural reforms in key sectors, and especially in the judiciary, having an efficient and healthy public administration and economy counterparts able to respect the rules and terms anytime,” says Cutillo.

“For a greater economic development of the country, there must be no space for informality, corruption and behavior that runs counter to the law on both sides.  Lack of big Italian groups in the country's strategic sectors such as telecommunication and insurance in some cases is also a result of unfavourable past experience because of phenomena such as corruption, problems with property ownership and widespread perception of an inefficient justice system that does not guarantee legal security and contractual relationship between parties,” he adds.

NATO member and EU candidate Albania is hoping to launch accession talks with the European Commission this year as it has started implementing a long-awaited justice reform, a key requirement by the EU and the foreign business community in the country.

Italy has been Albania’s traditional top trading partner during the past quarter of a century of the country's transition to democracy and a market economy with trade exchanges hitting a historic high of 325 billion lek (€2.45 billion) and accounting for 36 percent of Albania’s total in 2017, according to state statistical institute, INSTAT.

The host of some 500,000 Albanian migrants since the early 1990s following the collapse of the communist regime, the Albanian migrant community in Italy has played an important part in the country’s development in the past 25 years of transition, contributing through remittances, investment and know-how.

However, when it comes to investment, the pace of Italian investment to Albania has been slowly progressing in the past few years with Italy ranking the fifth largest foreign investor in late 2017 with its FDI stock at €640 million in late 2017, according to Albania’s central bank.

The Italian ambassador says potential industry investors also request dedicated physical infrastructure such as industrial areas with access to key services as electricity, water and public transport for their investment in Albania which he calls a ‘natural partner’ for Italy.

"Albania has a lot of appropriate characteristics for the attraction of foreign investment such as important natural resources, competitive labor costs and taxation and the advantage of its geographical position as a hub to the whole region. The proximity and historical links between our two countries as well as the spread of Italian language and the massive presence of Albanian citizens in Italian territory, in my opinion, makes Italy, Albania's natural partner, especially to accompany the Albanian economy to the European Union,” says Cutillo.

Albania’s links with Italy date back to ancient Roman times with traces of Roman civilization present in many historic sites. The first wave of Albanians moving to Italy dates back in 1468 after the death of Albania's national hero Skanderbeg and the country shifting back to Ottoman occupation. Italian architects designed major public buildings and squares in Albania from 1925 to 1943.

A new massive exodus of Albanians to Italy resumed in the early 1990s after more than four decades of isolation under communism, with the Albanian migrant community there now estimated at half a million.

Some 2,000 Italians also live and work in Albania, mainly studying, but also working and in retirement.

 

PM seeks tourism investment

 Addressing an Albania-Italy business forum this week, Prime Minister Edi Rama urged Italian investors to take advantage of the tax incentives in the tourism industry.

"Albania offers many growth potentials and investment opportunities in the energy, oil, mining, agriculture but especially the agri-food sector. But the space where opportunities are also accompanied by very strong demand that exponentially grows each year is that of tourism. There is still a lot to be done in this field as each year the growth in demand exceeds supply and our operators are forced to refuse 5 percent of demand. There are tourists from Central, Northern Europe, but also Italy," said Rama.

EU companies operating in Albania are dominated by Italian firms whose number in 2016 dropped by a modest 91 to 2,662, but yet providing half of the employment generated by foreign companies in the country, according to Albania’s INSTAT. Italian companies in Albania are mainly involved in the services sector and dominated by micro-enterprises employing up to 4 people. Some 174 Italian companies employ more than 50 people, and operate mainly in the garment and footwear and call center industries, two sectors heavily reliant on demand from the neighboring country across the Adriatic, the Eurozone’s third largest economy.

“Taxes are at very low rates and bureaucracy as well. We have a very advantageous legislation for everybody who comes to invest in tourism. Let's just bring to mind that whoever invests in a hotel or 4 or 5-star accommodation unit, will operate tax-free for 10 years, they will not pay the construction tax, the property tax, no corporate income tax, but a 6% VAT for 10 years. They can also get the casino and marine licenses for free if they want to,” said Rama.

"We are preparing a program accompanied with incentives on agri-tourism based on the Italian model, especially the model that Italy followed in the early 1990s with its support program deeply changing and exponentially growing agri-tourism,” added Rama.

The stock of Italian FDI in Albania grew to €640 million at the end of the third quarter of 2017, up from about €500 million in early 2014, ranking Italy the fifth largest investor in Albania after Greece, Canada, Switzerland and the Netherlands, according to Albania’s central bank.

Italian legal changes making the supply of services from non-EU countries have already given a blow to the call center industry, employing about 25,000 people, with dozens of companies having closed down and others diversifying in English-language support services and speculative services such as online trading platforms or currency exchange investments.

Italy has been a strategic partner for Albania and one of the main supporters in the country’s Euro-Atlantic road.

Europe's third largest economy will be heading to general elections on March 4, amid uncertainties over the new government as the economy is slowly picking up.
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                    [post_content] => TIRANA, Feb. 15 – Albania’s central bank governor says the de-euroization measures will target a gradual reduction in the current widespread use of Europe’s single currency by about 10 percent to below 40 percent as the International Monetary Fund has suggested.

"Euroisation is currently 10 percent above the optimal rate. De-euroisation is not war against the euro, but stimulus on the increased use of the national currency, lek, in the national economy and this is mainly being carried out to increase the efficiency and flexibility of the monetary policy and consolidate financial stability in Albania,” Sejko told a press conference this week.

About half of deposits and lending in Albania’s banking system is carried out in Europe’s single currency limiting the impact of the central bank’s easier policy on boosting sluggish lending and exposing borrowers and savers to currency exchange risks especially when their income is in the national currency.

The governor said the central bank could consider new measures related to what he called ‘unnecessary transactions’ in Europe’s single currency if euroization does not drop in the next three to five years.

“The high level of euroization is a result of some unnecessary transactions such as in the real estate, vehicles etc. We haven't made it compulsory for these transactions to be carried out in lek, but we could do it in the future if euroization does not drop. For the moment these measures are only related to banks,” said governor Sejko.

The measures involving higher reserve ratios for foreign-currency assets are expected to make it more expensive for banks to provide Euro-denominated loans, triggering an eventual hike in interest rates and discouraging borrowing in Euro, currently accounting for more than half of the total.

The governor says the euro-lek pair will not be affected in Albania’s free floating exchange where supply and demand are the decisive factors.

Commenting on whether the move affects Albania’s EU integration bid, governor Sejko said the initiative does not run counter to country’s aspirations.

"It's exactly because our integration aspirations that we have to strengthen the national currency. It has also been proved in other countries that this is the right moment. The EU suggests that accession countries use their own currencies up to two years after joining,” said the governor.
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                    [post_content] => TIRANA, Feb. 14 - Albania's inflation rate significantly dropped last January, hinting sluggish domestic consumption and that the 2.7 percent target the Albanian government has set for 2018 will be difficult to achieve.

Data published by the country’s state statistical institute, INSTAT, shows inflation rate dropped to 1.7 percent last January, 1.3 percent below the central bank’s 3 percent target estimated to have a positive impact on the country’s economic growth and domestic consumption.

Back in January 2017, consumer prices hit a five-year high of 2.8 percent fuelled by a hike in fuel and liquid gas prices and one of the coldest months in three decades paralyzing the country and causing huge damage to greenhouse crops.

The significant slowdown in January 2018 is mainly a result of lower imported inflation with food and non-alcoholic beverage prices increasing by only 2.2 percent, compared to 5.8 percent a year ago.

“Food and non-alcoholic beverages” takes the majority 44.3 percent of households budgets, significantly more than in regional EU aspirant countries, a survey by Albania’s state statistical institute, INSTAT, has shown. The situation is a result of the high level of imports and VAT being applied at an undifferentiated 20 percent rate even on basic food products.

The FAO food price index, a measure of the monthly change in international prices of five commodity groups, was down by an annual 3 percent last January, affecting Albania as a net importer.

Albania’s central bank has postponed its expectations for the 3 percent inflation target for the first half of 2019 due to poor capacity utilization rates ranging between 60 to 70 percent in main industries and low levels of imported inflation.

The central bank also says it will continue maintaining an easy monetary policy during the whole of 2018 and keep the key interest rate unchanged at a historic low of 1.25 percent, a policy it has been following since mid-2016 in a bid to boost sluggish credit and consumption.

Albania’s inflation rate hit a five-year high of 2 percent in 2017 following a 16-year low of 1.3 percent in 2016.

The Albanian economy is estimated to have grown by an average of 3.9 percent in the first three quarters of 2017, but household consumption was twice lower, reflecting growth mainly driven by some major energy-related investment such as the Trans Adriatic Pipeline and several big hydropower plants with not much direct impact on bringing welfare to the average Albanian.

Albania has one of Europe's lowest price levels for consumer goods and services at only half of the European Union average, but the country’s actual individual consumption (AIC), a measure of households’ material welfare, is about 60 percent below EU average, according to Eurostat, the statistical office of the European Union.
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                    [post_content] => TIRANA, Feb. 14 – Heavy rainfall during the past couple of months has lifted Albania’s hydro-dependent electricity system out of crisis with state-run KESH power utility now meeting domestic consumption needs and even regularly exporting small quantities.

The situation has also relieved public finances of a huge burden after a prolonged drought in 2017 forced the country to make costly electricity imports of about €200 million in the second half of the year, ranking the wholly hydro-dependent domestic electricity generation as the key threat facing the 2018 budget.

State-run KESH power utility which manages the country’s three largest hydropower plants in the northern Drin cascade says reservoir water levels are at almost peak levels, meeting domestic electricity needs and allowing the country to export part of its production in order to keep compulsory water discharges as low as possible.

Energy minister Damian Gjiknuri says electricity production on Feb. 13 hit a historic high of 28.86 GWh, breaking a previous Dec. 30, 2010 record of 27.8 GWh.

"Such a level of production is a result of the synergy triggered by the favorable hydro situation combined with the performance of KESH engineering and technical staff who monitor and guarantee the availability of generation units in real time," Gjiknuri said, adding that production at the cascade is at full capacity.

The Drin, Koman and Vau i Dejes HPPs at the northern Albanian Drin Cascades, built in the 1970s and 1980s under communism, currently account for about three-quarters of electricity generation, with the rest being generated by more than a hundred private and concession small and medium-sized HPPs.

KESH power utility has already exported electricity worth millions of euros since the resumption of exports in early December after severe floods hit central and southern Albania regions.

The improving hydro-situation and the resumption of exports also marks a turning point for state-run OSHEE distribution operator which in late 2017 was unable to meet the country’s huge needs of electricity imports and needed government financial support to handle them.

The new circumstances mean OSHEE can now continue with much-needed investment in distribution grid and reduce declining but still high level of electricity losses.

Albania’s domestic electricity generation is currently wholly hydro-dependent triggering the government to offer incentives for liquid gas-fired thermal power plants as the major Trans Adriatic Pipeline bringing Caspian gas nears completion.

In a bid to diversify domestic resources, the government has also urged investors to consider untapped potentials in solar and wind energy following a boom in the construction of small and medium-sized hydropower plants built under concession contracts in the past decade, currently producing about a quarter of domestic electricity, but being at risk of adverse weather conditions such as last year’s prolonged drought.

Meanwhile, a dispute between Serbia and its former breakaway province Kosovo over a long-standing electricity transmission issue continues to hold back a newly built German-funded Albania-Kosovo interconnection line which has been available for use since mid-2016.

The deadlock, which Germany is trying to mediate, has also halted Albania-Kosovo plans to set up a joint energy market and a power exchange helping Kosovo’s lignite-fired power plants and Albania’s hydro-dependent electricity system exchange electricity during their peak production levels, reducing dependency on costly imports.

 

World Bank concern

As a five-year $150 million World Bank supported power recovery project nears completion by late 2019, the Washington-based lender has downgraded Albania’s overall implementation progress to moderately unsatisfactory from a previous satisfactory.

In a January 2018 update on the project’s implementation, the World Bank says the state-run Albanian power sector is once again under financial stress following a prolonged drought paralyzing domestic electricity generation and failure to meet loss targets in the distribution grid.

Electricity losses in the distribution grid have dropped to 28 percent, down from a record 45 percent in mid-2014 when the distribution operator was nationalized following a failed short-term privatization, but are far from the mid-2019 target of 14 percent, says the World Bank describing overall progress in the past three years as moderately satisfactory.

“The vulnerability of the electricity sector to the meteorological situation in the country is the main risk factor," says the World Bank.
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                    [post_content] => [caption id="attachment_135796" align="alignright" width="300"]zhang Tao Zhang, the IMF deputy managing director[/caption]

TIRANA, Feb. 14 - Improvements in infrastructure, the business environment and rule of law will boost Albania's growth potential, a senior International Monetary Fund official said during a visit to Albania this week.

Speaking after concluding his Albania visit, Tao Zhang, the IMF deputy managing director, stressed the need for the Balkan country to press ahead with reforms and take advantage of the favorable external environment in Europe, where Albania's main trading partners Italy and Greece have escaped their recessions.

“In my discussions with the [Albanian] authorities, I emphasized that this is the moment to accelerate reforms. The global economy is in an upswing. This includes Europe, where inflation and interest rates remain low. However, such favorable external conditions are not going to last forever. So now is the time to press ahead with reforms and build up stronger economic and financial defenses," Zhang said, noting the progress Albania has made in reducing poverty, maintaining stability and developing the economy.

“I also discussed with authorities policies to boost Albania’s growth potential. These include improvements in infrastructure, education, and business environment, especially the rule of law. Reducing public debt is an important goal that can be achieved by strengthening public expenditure management and the tax system," added the senior IMF official.

In a meeting with Finance Minister Arben Ahmetaj, the IMF official offered assistance to curb potential risks stemming from the much rumored public private partnerships which IMF has warned could further increase public debt, currently at about 70 percent of the GDP.

The Washington-based lender of last resort expects the Albanian economy to slow down to 3.7 percent in 2018, down from an expected 3.9 percent in 2017 as the TAP and Devoll Hydropower project reduce their FDI contribution by an estimated €180 million in 2018 alone and by €360 million in 2019.

The Albanian government’s growth expectation for 2018 is at 4.2 percent, 0.5 percent higher than the IMF and 0.7 percent more optimistic compared to the World Bank’s forecast.
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                    [post_content] => TIRANA, Feb. 13 - The de-euroization package that Albania’s central bank has announced has found exporters and economy experts divided over the effects such a policy could have on the country’s highly euroized economy.

Alban Zusi, the head of Albania’s Exporters' Association, fears the central bank's strategy to discourage saving and lending in Europe’s single currency will lead to a stronger national currency and losses for the country’s exports, two-thirds of which are destined for Eurozone countries, mainly Italy and Greece.

The national currency, lek, is already trading at an 8-year high of about 133 lek against Europe’s single currency in a gradual upward trend that began in mid-2015 as the euro’s five-year reign of about 140 lek came to an end.

“The euro's depreciation by 6 percent in the past couple of years has led to losses of about €60 million for the country's exporters considering total exports of about 1 billion euros," says Alban Zusi, the head of the Exporters Association, worried over the implications such a policy could have on the country's free floating exchange rate regime.

Exporters are also worried a stronger national currency could make them lose their competitive advantage especially in key sectors such as the garment and footwear industry producing the country’s top exports, employing about 100,000 people and relying on cheap labor costs.

Albania’s exports grew by 12 percent in 2017 following sluggish performance since the mid-2014 slump in commodity prices paralyzing the country’s poorly diversified exports, but Albania's trade gap still widened by 5.2 percent last year due to a hike in imports fuelled by some major energy-related investment.

When it comes to imports, a stronger national currency will make them cheaper, but damage local producers who will be forced to reduce prices to survive tough competition from abroad. An increase in imports will also negatively affect the country’s GDP growth as Albania is already a net importer with exports meeting only about 44 percent of what the country imports.

Zef Preçi, an economy expert who heads the Albanian Centre for Economic Research, is also against the central bank’s de-euroization strategy, saying the move could have negative effects for Albania’s long-term EU integration prospects and even further strengthen the national currency in the short-run with a negative impact on the country’s competitiveness and exports.

Preçi favors Albania’s unilateral introduction of the Euro as neighbouring Kosovo and Montenegro have done, saying this policy will help Albania deal with high public debt levels and curb the effect of money laundering and drug proceeds on the national economy.

"A rapid move toward the euro instead of the Albanian lek will undoubtedly serve the reduction of risks and buffering from shocks on the horizon as a result of the government's careless policies, especially regarding the aggressive increase in public debt, the threatening involvement of the private sector in public infrastructure investment and even the evident exposure of the national economy toward money laundering from criminal proceeds such as the cultivation, processing, trade and exportation of marijuana and other stronger drugs," says Preçi.

Albania’s public debt is already at 70 percent of the GDP, a high level for the country’s stage of development, while public private partnership and hike in cannabis cultivation in 2015-2016 have become hot topics in Albanian politics and economy.

"That does not also exclude the adverse effect, such as the case of PIIGS, the Mediterranean countries that adopted the euro and were the gist of Eurozone's 2011-12 crisis, which showed that the decrease in public debt interest rates only pushed the governments to increase their public debt levels," says Preçi.

"In order not to repeat this phenomenon, I think that by unilaterally adopting the euro, a favourable environment is created for more transparency over public debt and a greater role of the European Central Bank in this respect. In addition, I think that the introduction of the euro will help curb dangerous PPPs especially in the future and somehow protect the national economy from the evident and threatening money laundering phenomenon," he adds.

Expert Selami Xhepa has earlier said the de-euroization measures could curb the financial market and drive investors to seek other opportunities abroad.

“The more you increase rigidity toward investment alternatives in euro, the more investors and banks as part of the financial system, will look for alternatives abroad where there is zero risk regarding the exchange rate risk,” says Xhepa, warning that the measures negatively affect investors who receive payments in euro from abroad and use euro as their currency in their day-to-day operations.

 

In favor 

Other economy experts see the central bank's move as not a war against Europe's single currency, but the protection of borrowers and savers that could also help the Bank of Albania on a better transmission of its monetary policy.

"The reason for the initiative to reduce the use of euro in the economy is based on several factors; statistics show there is about 1 billion euros annually in migrant remittance flows, 65 to 70 percent of the trade exchanges are carried out in Europe's single currency and tourism which is the sector contributing most income to the economy and has 90 percent of its inflows in euro,” says Adrian Civici, an economy expert.

“The Albanian economy has a 50 percent euroisation rate. Facing this situation, the Bank of Albania has undertaken a de-euroization process for a better pass-through of its monetary policy to the economy and protect customers from the sharp exchange rate fluctuations as the biggest volume of loans is Euro-denominated at a time when salaries are in the national currency, lek," adds Civici.

Banking expert Elvin Meka says the process the central bank has initiated is the right one but, will not be easy.

“There will not be any effort to drastically stop the use of euro in the economy and the Albanian financial system. What we target is a balance on the use of Albanian and foreign currencies in the economy," says Meka.

"As far as businesses are concerned it must be clear that there will be no administrative measures that banks can impose on businesses. The measures have a regulatory character that target promoting a greater use of the national currency in the economy and the financial system such as lending and saving," Meka has said.

 

De-euroization package

 The new de-euroization rules that Albania’s central bank will apply by next June make it more expensive for commercial banks to provide Euro-denominated loans and accept deposits in Europe’s single currency, by increasing compulsory reserve requirements.

Compulsory reserve requirements for lek-denominated deposits and loans, currently at about half of the total, have been lowered or kept at the same levels in a bid to encourage the use of national currency and protect savers and borrowers from exchange rate fluctuations.

“These regulatory amendments aim at making foreign currency transactions in the banking sector more costly (i.e. less preferred) and promote mechanisms for raising the awareness of borrowers (especially those households who are unhedged against the exchange rate risk) on risks that accompany foreign currency borrowing," central bank governor Gent Sejko has said.

The compulsory reserve requirement for foreign-currency liabilities that mainly involve Euro-denominated deposits has been raised to 12.5 percent, up from a previous 10 percent on both foreign and local currency deposits. For commercial banks where foreign-currency deposits account for more than half of the total, the reserve requirement for any liability above the 50 percent level has been set at 20 percent.

Meanwhile, compulsory reserve requirements for lek-denominated deposits has been lowered by 2.5 percent to 7.5 percent.

Similarly, the minimum requirements on foreign-currency denominated liquid assets has been increased to 20 percent of the short-term liabilities, up from a previous 15 percent and preserved at 15 percent on lek-denominated liquid assets.

In a bid to raise awareness of the risks facing borrowing in foreign currency, commercial banks have also been asked to propose borrowers an alternative lek-denominated loan and provide examples of changes in loan instalments in case of currency exchange fluctuations.

The de-euroization package will also serve the country’s central bank to increase income and reduce losses it incurs from the high level of Euro-denominated deposits and loans.

A recent IMF working paper by international and Albanian experts, estimates that Albania loses a total of about 9 billion lek (€67 million) annually, 0.6 percent of the GDP, from its high euroization levels at about 50 percent.

IMF experts estimate Albania’s current euroization level of about 47 percent needs to drop by only 10 percent in order not to negatively affect the country’s banking system and economy.
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                    [post_content] => TIRANA, Feb. 12 – As Albania has started implementing an ambitious €1 billion public private partnership project, the International Monetary Fund has warned that Albania must ensure that the country's potential benefits are realized while managing the PPPs fiscal costs and risks.

In a report examining public infrastructure in the six EU aspirant Western Balkans countries, the IMF notes that the region's economies have one of the worst scores for the management of PPPs.

The IMF brings Albania’s experience with the 20-year concession contract it signed back in 2005 with a German-led concessionaire on upgrading and operating the country’s sole international airport as a deal under which important lessons can be learned.

“The PPP achieved some main objectives, but important lessons can be learned. Albania secured construction and operation of a modern airport of high standards, allowing for continued strong growth in travel demand and imposing only minimal fiscal risks on the country. The investment, however, could have been better designed from the onset, facilitating stronger traffic growth, increasing revenue growth associated with higher levels of activity, and positioning Albania more competitively in the regional aviation market,” says the IMF.

“Many Albanians travel by bus to airports in Kosovo, Montenegro, and Macedonia, and the relatively high costs of flights to Albania may also have affected inbound tourism,” says the IMF, attributing the low number of low-cost carriers to the airport's high landing fees.

The Tirana International Airport consortium had its exclusive rights on international flights lifted only in mid-2016, about 12 years after it launched its operations in return for extending its concession term for another couple of years until 2027 for the operation of the Kukes airport, in northeastern Albania, which is unlikely to launch operations as the country's second international airport in the short to mid-term due to its unfavorable geographical position.

The Albanian government's latest initiative of building a new international airport in Vlora, southern Albania, is set to extend the Tirana airport's concession term by another two to three years depending on the year it becomes operational.

Albania recently concluded its first major project as part of its ambitious, but rather controversial €1 billion PPP project for the next four years to upgrade road, health and education infrastructure. The project is a long-awaited major road linking Albania to neighboring Macedonia which will be built by an Albanian company for €240 million in the next four years in return for repayment in annual instalments and traffic guarantees for a 13-year period until 2031.

Insufficient fiscal space and public sector inefficiencies make private financing of infrastructure investment attractive, but the IMF says PPPs involve risks in all stages of the project.

“PPP investments involve fiscal risks in all stages of the project cycle, including budget preparation, procurement, financing, and managing performance-based contracts. PPPs can generate large explicit and implicit contingent liabilities (for example, guarantees), and encourage off-balance operations that reduce transparency,” says the IMF.

The Washington-based lender of last resort has earlier warned Albania’s €1 billion PPP project will not only fail to bring public debt down to 60 percent by 2021, but could create hidden costs which if included in the debt stock could take it to 71 percent of the GDP, a high burden for Albania’s current stage of development.

Albania has already had troubled experience with a more than a dozens of concession contracts in the key health, customs sectors which are expected to cost taxpayers about €70 million in 2018 and much more in the next few years as more PPPs become operational.

The IMF suggests sound planning and project selection as well as strong fiscal institutions with sufficient control at each stage of the PPP process including possible contract renegotiations as some of the key elements for ensuring government success in PPPs.

The Washington-based financial institution says it expects Albania’s growth to slow down to 3.7 percent of the GDP in 2018, down from 3.9 percent this year as investment by large energy related projects such as the Trans Adriatic Pipeline and Devoll Hydropower project taper off and no new major projects appear in sight to replace them.

The IMF’s role in Albania was downgraded to advisory in early 2017 after the conclusion of a 3-year binding deal supported by a €331 million loan also conditioning the government’s tax policies.

 

Infrastructure gap 

All Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Montenegro and Serbia have underdeveloped transport, power and telecoms networks compared with the European Union average, says the IMF report.

"Better transportation, energy, and telecommunications networks would help Western Balkan countries raise productivity, integrate deeper into the bloodstream of global trade, and improve the region’s attractiveness for foreign investment," says the IMF.

However, lack of ample budget resources and strong institutional frameworks governing the selection, execution, and monitoring of projects are missing in the Western Balkans where most countries already have high public debt and budget deficit levels.

“A regionally coordinated public infrastructure push, coupled with better management of actual projects, could significantly increase per capita income. The long-term gain of real GDP per person could be as high as a 3-4 percentage points," says the IMF.

The World Bank has earlier warned catching up with the average EU income could take Albania and other EU aspirant Western Balkan economies about six decades unless current sluggish GDP growth doubles to 5 or 6 percent.

Western Balkan countries are preparing to adopt measures for an EU-backed regional economic area, a test before their apparent eventual European Union integration.

Short and mid-term enlargement prospects for the six Western Balkan countries have been hampered by internal developments in the bloc with the Brexit, the migrant and financial crises as well as rising populism high on the agenda.

A recent European Commission enlargement strategy has recently unveiled only Serbia and Montenegro, the only two Western Balkans that already launched accession talks, are likely to join the block by 2025.
                    [post_title] => IMF warns Albania to draw lessons from airport concession as it proceeds with new PPPs
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                    [post_content] => TIRANA, Feb. 12 – Albania has been ordered to pay back the country’s largest oil producer dozens of millions of dollars over a tax dispute under a decision that comes as a second consecutive blow the country’s public finances receive over the course of one month from international courts.

Paris-based International Chamber of Commerce has ruled the Albanian government will have to pay back Bankers Petroleum $57 million (€46.5 mln) over a tax dispute dating back to 2011. The conflict escalated in 2015 following an audit by a government agency claiming the country’s largest oil producer had artificially increased operating costs in order to avoid paying the profit tax, a national TV reports citing a copy of the decision by Paris-based international arbitration court.

The ruling is the second international punishment Albania has received during the past month after Strasbourg-based European Court of Human Rights decided last January the Albanian government will have to compensate owners of a seaside apartment block a total of about €17 million ($21 mln) for illegally demolishing it in late 2013 to pave the way for a coastal promenade.

The two rulings take the total bill Albania has to foot to about $80 million, a significant amount for Albania’s struggling public finances burdened by the high cost of the country’s public debt, currently at 70 percent of the GDP, a high level for Albania’s current stage of development.

The rulings also unveil the Albanian government’s arbitrariness when enforcing contracts and respecting property rights, two of the main concerns facing foreign investors in the country in addition to highly perceived corruption and an inefficient judiciary that Albania is trying to reform.

Top Channel TV has learned the costs the Albanian government incurs from the arbitration trial with Bankers Petroleum amount to $60 million including court expenses and interest rates.

In Sept. 2016, Bankers Petroleum was acquired by a Chinese company for C$575 million (€392 mln) from Canadian investors who ran the country's largest oil producer for 12 years under a 25-year concession deal with the Albanian government which expires in 2029.

 

Bankers Petroleum conflict

The conflict with the Albanian government started in 2015 after an audit by the national agency for natural resources claimed the company had artificially increased its expenses by $300 million in order to avoid paying the profit tax which companies operating in the oil industry pay at a 50 percent rate only after meeting their investment costs. To date, no oil company operating under concession contracts in Albania has paid the profit tax, justifying it with high investment costs.

Earlier in 2015, the then Canadian-run came under fire over failing to meet safety requirements following the eruption of water and gas from two of its oil wells, causing property damage and the temporary evacuation of local residents who claim the company's drilling operations trigger constant earthquake-like tremors.

The Albanian government and Bankers Petroleum suspended arbitration proceedings in early 2016 after agreeing to hire a third-party auditor over the $57 million tax dispute as Bankers continued to pay the disputed amount in instalments.

However, later in late 2016, the Albanian government resumed legal action at the Paris-based arbitration court, dissatisfied with the ruling of PwC, one of the Big Four auditors, which ordered the Albanian government to pay back Canada-based Bankers Petroleum $37 million it had already paid in instalments over the disputed amount.

Bankers Petroleum, which since Sept. 2016 has been run by China’s Geo Jade, has considerably curbed oil production and delayed new drilling following the mid-2014 slump in international oil prices.

The company is now exporting its crude oil production after the late 2017 suspension of operations of a local oil refiner that went bankrupt left more than 1,000 oil workers jobless.

Bankers Petroleum operates the Patos-Marinza, one of Europe’s largest onshore heavy oilfields, and accounts for the overwhelming majority of 95 percent of Albania’s total oil production.

Bankers was one the country's largest debtors to the Albanian tax authorities at the end of 2016 with debts estimated at 2.5 billion lek (€18.7 million), according to a report by the Supreme State Audit.

State auditors say oil companies operating in the country are actively engaged in practices of fictitiously reporting high expenditure in order to avoid paying the corporate income tax which in case of oil companies is paid at a 50 percent only after investment costs are met.

Oil companies are charged a 10 percent royalty tax, making crude oil exports, the country’s second largest, a low value added product.

BMI Research, a unit of Fitch credit rating agency , estimates Albania's production of crude and natural gas and other liquids to have slowed down to 17,600 barrels of oil per day (bopd) in 2017, from 18,100 bopd in 2016 and a record high of 27,500 bopd in 2014 when oil prices were at their peak levels.

International oil prices recovered to $57 a barrel, up from a record low of $45 a barrel in 2016, but yet almost half of the peak level of more than $110 in mid-2014, says BMI Research.

Albania is a major oil producer but due to the poor quality and heavy refining needs of domestically produced oil, the country imports the overwhelming majority of its needs.

Currently, Shell oil giant is also engaged in oil explorations in the country, having made some key oil discoveries in southern Albania.

Last December, Albania concluded contract negotiations with the Royal Dutch Shell over a new oil exploration block, extending the British-Dutch multinational’s operations in the country, currently at an exploration stage, to three blocks.

Due its high tax burden levied on oil, Albania faces one of Europe’s highest fuel prices, but paradoxically one of the continent’s lowest GDP and consumption per capita estimated at only a third of the EU 28 average.

At €1.3.4/liter in February 2018, Albania’s diesel prices were the Western Balkan’s highest and even higher compared to Europe’s superpower Germany, says the Global Petrol Prices portal.

The oil industry produces Albania’s second largest exports and employs more than 3,000 people.

 

Arbitration threat 

 The decisions by the two international French courts ordering Albania to pay back about $80 million to private investors, unveils a new threat facing the country’s public finances for 2018 when two-major energy-related investment complete such as the Trans Adriatic Pipeline and big hydropower plant complete, leaving a huge gap in FDI, government revenue and contribution to GDP.

A late 2017 leaked confidential document by the country’s justice ministry showed that Albania faces the threat of being punished with a staggering €2 billion from a handful of arbitration cases with foreign companies, raising concern over the devastating effects it would have on the country’s public finances and one of Europe’s poorest economies.

Former Justice Minister Petrit Vasili says the country faces a severe financial threat.

"It's a fearful financial emergency and the Prime Minister faces the criminal offence responsibility for his destructive financial actions with the unilateral cancellation of contracts, but also his inaction, because he did nothing even though he was informed in writing over the situation," says Vasili, an opposition Socialist Movement for Integration (SMI) MP who in April 2017 was justice minister representing the SMI in the coalition government when he informed Prime Minister Edi Rama of the €2 billion arbitration court threat.

In case such a scenario is materialized, Albania risks losing almost a fifth of its GDP and half of the annual budget, not to mention public debt costs and economic and social effects from sharp cuts in government spending.

In its 2018 fiscal package, the Albanian government ranks potential punishment from international arbitration cases as one of the key threats facing the 2018 budget in addition to the prolonged drought paralyzing the country’s hydro-dependent domestic electricity generation in the second half of 2017 and triggering costly electricity imports of more than €100 million.

Albania recently won its first major legal battle with Italian businessman Francesco Becchetti over cancelled waste management and renewable energy projects dating back to two decades ago. Bechetti whose Albania assets, including a local TV station, were seized in mid-2015 on suspicion of money laundering and fraud-related offences, is still seeking hundreds of millions of euros other arbitration trials in the U.S. and Austria.

Albania is estimated to have lost about 8.5 billion lek (€63 million) in arbitration cases until the end of 2016, the majority of which in one case dating back to 2010 in the so-called electric train project with U.S. giant General Electric over the unilateral cancellation of a 2005 contract.
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                    [post_content] => TIRANA, Feb. 8 - The first local strawberries are already tapping local and international markets for this year as more and more farmers and businesses in the southern region of Fier, known as the breadbasket of Albania’s agriculture, have discovered strawberry cultivation as their new success story.

Currently selling at about 500 lek (€3.7) a kg, strawberry prices are expected to undergo a sharp decline and drop to as low as €1.5/kg  as the peak production stage nears in the next few months, meeting domestic market needs but also exporting a small part of production to neighbouring countries, mainly Kosovo.

Strawberry production was quite limited until five years ago when the first massive cultivation began by farmers who had mainly worked in neighboring Greece and Italy.

The Kafaraj village in Fier has also been nicknamed ‘the strawberry village” due to the massive greenhouse strawberry cultivation in the past few years.

This year's production is set to be one of worst for the Karafaj farmers as they had their greenhouses damaged twice by floods in the past couple of months due to the local Vjosa River overtopped its banks.

However, dozens of other villages in Fier and Lushnja have high expectations about this year’s production.

One of the many many Italian entrepreneurs in Albania, Adriano Mazza found a “strawberry paradise land” in in the village of Grabian, Lushnje. He tried almost 14 varieties of strawberries, of which two had the highest yield and production is mainly destined for export.

“Strawberries are a smart investment in Albania, as they have 3 months production season far better than in some other countries where the production season lasts only 15 days. Albania’s sea position in the West makes the climate very favourable for this fruit,” Mazza has told the Agroweb portal.

Albania’s average yield of strawberry increased to 55 to 60 metric tons per hectare in 2017, up from an initial 40 to 50 metric tons in the early 2010s when large-scale cultivation began, says USAID Albania. The U.S. Agency for International Development has been assisting Fier farmers with alternative strawberry varieties to enable earlier harvest and shift production toward earlier, more profitable market windows as well as nutrition systems to improve the quality and food safety of strawberries.

In addition to dozens of farmer entrepreneurs and local pickers, an agriculture company run by one of the country's richest man is also engaged in strawberry cultivation in Lushnje through tunnel greenhouses among other fruit and vegetables it cultivates.

SuperBerry Albania, a Fier-based Dutch-Albanian joint venture has been exporting berries to the Netherlands since late 2015 after it launched a new packing facility.

Albania’s strawberry production relies on the Camarosa variety to a large extent and other short-day strawberry varieties including Sabrina, Fortuna, Nabila, Oso Grande, Splendor, and Miranda.

Experts say Albania has the ideal climate to grow berries, that can be harvested twice a year rather than once, providing for ‘out of season’ raspberries.

The southwestern Albanian region of Fier, known as the breadbasket of Albania’s agriculture, produces about a third of total vegetables and a quarter of the country’s field crops, making agriculture in this region a key sector in addition to its oil industry which has slowed down in the past three years due to a slump in international oil prices.

Agriculture is one of the main sectors of the Albanian economy, employing about half of the country’s population but producing only about a fifth of the country’s GDP, unveiling its poor productivity and huge untapped potential hampered by the fragmentation of land into small plots, poor credit and lack of subsidies.
                    [post_title] =>  Season’s first strawberries tap local markets 
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                    [post_content] => TIRANA, Feb. 8 - Investment funds returned to double digit growth rates in 2017 after suffering a modest contraction in 2016, the first since their establishment in 2012 and rapid growth in the following three years.

A report by the country's Financial Supervisory Authority shows net assets in the three investment funds rose by an annual 11.4 percent to 72.7 billion lek (€547 mln), accounting for about 5 percent of the country's GDP.

The double-digit hike comes as a new Albanian-run investment fund has been operational since mid-2016, breaking the monopoly held by the Albanian subsidiary of Austria’s Raiffeisen Bank with its two investment funds.

The hike also comes at a time when interest rates in traditional deposits stand close to zero and investments funds, overwhelmingly investing in government securities, offer much more profitable investment alternatives.

The number of investors in the three investment funds rose by 7 percent to 31,314 at the end of 2017.

The emerging investment fund market is dominated by investments in government bonds and T-bills, accounting for about 80 percent of total assets.

Yields on 2-year notes, the government's key domestic instrument for long-term internal borrowing, rose by 0.12 percent to 3.35 percent in last January's auction, up from 2.55 percent last June, but were down from 3.8 percent in January 2017.

Meanwhile, yields on 12-month T-bills, the government's key instrument for short-term internal borrowing, slightly rose to 2.67 percent this week, on a constant upward trend since last March when they stood at 2 percent, according to Albania’s central bank.

Operational since early 2012, the two Raiffeisen-run investment funds and Credins Premium, a newly launched Albanian-owned fund, have increased their market share to 5 percent of the GDP, but yet account for only 7 percent of the bank deposits.

In its latest country report on Albania, the International Monetary Fund warns that investment fund supervised by the country’s Financial Supervisory Authority, lack an adequate crisis management framework.
                    [post_title] => Investment funds return to growth as net assets exceed half a billion euros
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            [post_content] => TIRANA, Feb. 19 - Low taxes are not enough when it comes to major Italian investors to consider Albania, their tiny neighbor across the Adriatic, as an investment destination, says Italy’s ambassador to Tirana, Alberto Cutillo.

“Investors insist on a factor considered crucial. They need clear laws. They can also accept higher costs, but also want to know about the investment laws when they develop a business plan and that they must be able to rely on the fact that these laws are clear and stable,” ambassador Cutillo has said in an interview.

“Despite considerable progress in several sectors, there is need to work and create conditions for a safe, fair and steady treatment as time goes by. If the tax rate plays an important role in selecting the investment country, in my opinion, but also the opinion of economic operators this embassy keeps in touch daily, that is no the key element,” he added.

The comments came as a delegation of some 200 Italian businesses led by Italy’s deputy economic development minister Ivan Scalfarotto visited Albania this week under an Italian-government supported initiative favoring the internationalization of Italian companies and serving Italian companies to consolidate their presence in Albania.

“Such a mission which in general targets much larger and geographically distant markets is something which also confirms Italy's strong confidence in the Albanian market, bringing here its top companies with the target of easing useful investment for both sides,” Ambassador Cutillo told has local Monitor magazine in an interview.

Since 2014, the corporate income tax and the withholding tax on dividends, rents and capital gains have increased by 5 percent to 15 percent, making the tax burden in Albania one of the region’s highest and a key concern for foreign and local investors.

However, corruption and an inefficient judiciary have emerged as top concerns in the past few years as the country has been struggling to attract major foreign direct investors except for two energy-related projects such as TAP and a big hydropower plant that are set to complete their investment stage by the end of this year.

“The challenge for Albania is to be prepared to welcome this extraordinary opportunity. In order to do this, I think it is crucial to improve the current business climate, implement structural reforms in key sectors, and especially in the judiciary, having an efficient and healthy public administration and economy counterparts able to respect the rules and terms anytime,” says Cutillo.

“For a greater economic development of the country, there must be no space for informality, corruption and behavior that runs counter to the law on both sides.  Lack of big Italian groups in the country's strategic sectors such as telecommunication and insurance in some cases is also a result of unfavourable past experience because of phenomena such as corruption, problems with property ownership and widespread perception of an inefficient justice system that does not guarantee legal security and contractual relationship between parties,” he adds.

NATO member and EU candidate Albania is hoping to launch accession talks with the European Commission this year as it has started implementing a long-awaited justice reform, a key requirement by the EU and the foreign business community in the country.

Italy has been Albania’s traditional top trading partner during the past quarter of a century of the country's transition to democracy and a market economy with trade exchanges hitting a historic high of 325 billion lek (€2.45 billion) and accounting for 36 percent of Albania’s total in 2017, according to state statistical institute, INSTAT.

The host of some 500,000 Albanian migrants since the early 1990s following the collapse of the communist regime, the Albanian migrant community in Italy has played an important part in the country’s development in the past 25 years of transition, contributing through remittances, investment and know-how.

However, when it comes to investment, the pace of Italian investment to Albania has been slowly progressing in the past few years with Italy ranking the fifth largest foreign investor in late 2017 with its FDI stock at €640 million in late 2017, according to Albania’s central bank.

The Italian ambassador says potential industry investors also request dedicated physical infrastructure such as industrial areas with access to key services as electricity, water and public transport for their investment in Albania which he calls a ‘natural partner’ for Italy.

"Albania has a lot of appropriate characteristics for the attraction of foreign investment such as important natural resources, competitive labor costs and taxation and the advantage of its geographical position as a hub to the whole region. The proximity and historical links between our two countries as well as the spread of Italian language and the massive presence of Albanian citizens in Italian territory, in my opinion, makes Italy, Albania's natural partner, especially to accompany the Albanian economy to the European Union,” says Cutillo.

Albania’s links with Italy date back to ancient Roman times with traces of Roman civilization present in many historic sites. The first wave of Albanians moving to Italy dates back in 1468 after the death of Albania's national hero Skanderbeg and the country shifting back to Ottoman occupation. Italian architects designed major public buildings and squares in Albania from 1925 to 1943.

A new massive exodus of Albanians to Italy resumed in the early 1990s after more than four decades of isolation under communism, with the Albanian migrant community there now estimated at half a million.

Some 2,000 Italians also live and work in Albania, mainly studying, but also working and in retirement.

 

PM seeks tourism investment

 Addressing an Albania-Italy business forum this week, Prime Minister Edi Rama urged Italian investors to take advantage of the tax incentives in the tourism industry.

"Albania offers many growth potentials and investment opportunities in the energy, oil, mining, agriculture but especially the agri-food sector. But the space where opportunities are also accompanied by very strong demand that exponentially grows each year is that of tourism. There is still a lot to be done in this field as each year the growth in demand exceeds supply and our operators are forced to refuse 5 percent of demand. There are tourists from Central, Northern Europe, but also Italy," said Rama.

EU companies operating in Albania are dominated by Italian firms whose number in 2016 dropped by a modest 91 to 2,662, but yet providing half of the employment generated by foreign companies in the country, according to Albania’s INSTAT. Italian companies in Albania are mainly involved in the services sector and dominated by micro-enterprises employing up to 4 people. Some 174 Italian companies employ more than 50 people, and operate mainly in the garment and footwear and call center industries, two sectors heavily reliant on demand from the neighboring country across the Adriatic, the Eurozone’s third largest economy.

“Taxes are at very low rates and bureaucracy as well. We have a very advantageous legislation for everybody who comes to invest in tourism. Let's just bring to mind that whoever invests in a hotel or 4 or 5-star accommodation unit, will operate tax-free for 10 years, they will not pay the construction tax, the property tax, no corporate income tax, but a 6% VAT for 10 years. They can also get the casino and marine licenses for free if they want to,” said Rama.

"We are preparing a program accompanied with incentives on agri-tourism based on the Italian model, especially the model that Italy followed in the early 1990s with its support program deeply changing and exponentially growing agri-tourism,” added Rama.

The stock of Italian FDI in Albania grew to €640 million at the end of the third quarter of 2017, up from about €500 million in early 2014, ranking Italy the fifth largest investor in Albania after Greece, Canada, Switzerland and the Netherlands, according to Albania’s central bank.

Italian legal changes making the supply of services from non-EU countries have already given a blow to the call center industry, employing about 25,000 people, with dozens of companies having closed down and others diversifying in English-language support services and speculative services such as online trading platforms or currency exchange investments.

Italy has been a strategic partner for Albania and one of the main supporters in the country’s Euro-Atlantic road.

Europe's third largest economy will be heading to general elections on March 4, amid uncertainties over the new government as the economy is slowly picking up.
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