Year in Review: Economy in 2014

Tirana Times
By Tirana Times December 30, 2014 13:11

Year in Review: Economy in 2014


 Tax burden increases

The shift to progressive taxation on corporate and personal income starting January 2014 made Albania less competitive to other regional countries as far as the tax burden is concerned. Data show the increase of the corporate income tax to 15 percent for mid-sized and big enterprises ranks Albania now ranks Albania on par to Serbia which increased corporate income tax to 15 percent in 2013.  Macedonia, Bosnia and Herzegovina and Kosovo continue applying a 10 percent tax rate while Montenegro implements a 9 percent tax.

EU member Croatia and EU aspirant Turkey apply the highest rate in the region at 20 percent.

The shift to progressive personal income tax has also increased Albania’s tax rate for people earning more than 130,000 lek/month (Euro 912).

The 2014 World Bank Paying Taxes report estimates the total tax rate in Albania at 31,7 percent of profit, considerably higher than in Croatia, Macedonia, Montenegro, Bosnia and Herzegovina, Kosovo, but lower than Serbia.



“Albania 1 Euro” initiative back

 The Socialist Party-led government reintroduced the Albania 1 Euro initiative, offering state-owned assets for a symbolic price of 1 Euro in return for investments and job creation. The “Albania 1 Euro” initiative had also been launched by former Prime Minister Sali Berisha back in 2006 but proved unsuccessful in attracting foreign investors in these kinds of investments.

The decision foresees that state run assets with an area of 500 m2 and more can be given for 1 Euro under tender procedures for investments of Euro 10 million in manufacturing industry and in the garment and footwear industry locally known as “façon” for which government has not set any investment threshold.

The government initiative is an effort to make Albania more attractive to foreign investors after the corporate income tax was raised to 15 percent this year, angering the business community which opposed the initiative as making Albania less competitive compared to other regional countries applying 10 percent flat tax regimes.

  Oil discovery to increase exports

Oil production in the newly discovered Shpirag 2 well in the district of Berat could increase Albania’s oil exports by 50 percent and also be used for domestic consumption due to its good quality, government officials say. The Royal Dutch Shell and Canadian-based Petromanas have already completed the drilling of Shpirag 2 and are currently conducting drilling at Molisht 1, with total investments of around USD 200 million. Petromanas has a 25 percent working interest in Block 2-3 and is the operator while Shell holds the remaining 75 percent working interest.

Albania’s oil exports in the past eight years have increased by more than 30 times, emerging as one of the key exports, mainly due to huge investments by Canadian-based Bankers Petroleum which since 2004 operates and has full rights to develop the Patos-Marinza and Kuçova heavy oilfields under a 25-year concession contract with the Albanian government.



Less dependent on imports

While the Albanian economy has considerably slowed down since the outbreak of the global economic crisis in late 2008, the good news is that exports have more than doubled in the past five years and the country has become less dependent on imports. The situation has considerably improved Albania’s trade gap although the slowdown in imports in 2012 and 2013 has been linked to shrink in consumption and investments.

Data published by the country’s state Institute of Statistics shows the export/import coverage ratio rose to 48.1 percent in 2013 up from a mere 24.4 percent in 2009 and an average of 24 percent from 2000 to 2008.

INSTAT data shows Albania’s exports grew by 15.6 percent in 2013, registering growth rates for the fourth consecutive year after the shrink in the onset of the global crisis in 2009. In 2013, imports dropped by 3 percent to 512 billion (Euro 3.58 billion) on lower imports of “minerals fuels and electricity.”


 FDI registers historic high

 Double digit growth rates in foreign direct investment and exports were Albania’s key drivers of growth in 2013 when the economy registered its poorest growth rate in more than a decade.

Boosted by investments in hydropower plants and privatization revenue, foreign direct investment registered a record high for the past decade in 2013. Central bank data show FDI in Albania rose to a historic high of 923 million euros in 2013, up from 666 million euros in 2012 and a previous record of 793 million euros in 2010.

Since the outbreak of the global financial crisis, FDI has been constantly growing from Euro 665 million in 2008 to Euro 923 million 2013.

The growth rate in times of crisis is related to several privatizations and concessions especially in the energy sector. The application of a 10 percent flat tax regime in force from 2008 to 2013 has also helped attract foreign direct investment.

New package on garment and footwear industry

Government finalized a package of facilitating measures on garment and footwear producers in an effort to give a boost to this sector which has been the traditional top Albanian exporter and one of the key employers in the past two decades despite negative impacts from the Eurozone crisis in the past few years. The move came after the corporate income tax was raised to 15 percent starting January 2014, sparking strong opposition by this business community, worried over losing competitiveness to regional peers applying 10 percent flat tax regimes.

The new package includes a series of measures which offer garment and footwear producers, locally known as façon, state facilities for a symbolic rent of only one Euro, accelerate VAT refunds to 30 days, and lift of a series of customs barriers. Government says the extra 5 percent from corporate income tax will go back to garment and footwear producers in support policies to promoting employment in these enterprises by paying social security and health insurance contributions for new employees for a certain period.

Reform to increase retirement age

Government finalized the much roumoured pension reform in a bid to reduce the huge gap in the system which secures 45 percent of funding from other government revenue, proposing an increase in the retirement age for women and the introduction of social pensions for people aged 70 and over who have not contributed to the system.

The new system envisages that starting January 2015, the retirement age for women, currently at 60, will gradually increase by two months per year to reach 63 years old by 2032. The increase in retirement age for men, currently at 65, will continue only after 2032, to reach 67. The retirement age for both men and women is expected to increase to 67 years old by 2056.

Albania has 570,000 pensioners and some 700,000 contributors to the scheme with the gap in the pension system increasing to $430 million in 2013.


Italy strengthens top trade partner position

 Six years after the onset of the global financial crisis, exchanges with top trade partner Italy have remained unaffected but suffered a sharp shrink with neighbouring Greece which  overcame its six-year recession only in 2014.

Bank of Albania and INSTAT data show trade exchanges with Italy were affected only in 2009 when both exports and imports suffered a shrink. Meanwhile, trade exchanges with Greece have been on a constant decline since 2009 with the neighbouring country hardly managing to preserve its second top trade partner position in 2013 with only a slight advantage over China.

Greece, which last year suffered its sixth consecutive year of recession, ranked the sixth most important destination of Albanian exports in 2013 after Spain, Kosovo, China and Germany and Turkey with only 3 percent of the total and the second most important destination only for imports with around 10 percent, according to INSTAT.


Albania-CEZ dispute finally over

Eighteen months after having its licence revoked and just before an expected EU decision on Albania’s candidate status that could be endangered by a Czech Republic veto, the Albanian government and Czech giant CEZ reached an amicable out-of-court solution to the Albanian electricity distribution operator whose majority stake was sold to CEZ in 2009 for Euro 102 million and managed for three and a half years by the Czech company until it had its Albania licence revoked in January 2013.

Under the deal signed by the Albanian government and CEZ, whose 70 percent stake is owned by the Czech government, Prague-based CEZ will get in annual installments in the next four years a total of Euro 95 million, an amount slightly lower to its initial investment in the Albanian distribution system, but half of the Euro 200 million CEZ had warned it would claim in international arbitration proceedings.


 GDP per capita from 67% to 141%

 GDP per capita in Albania’s 12 regions varies from 67 percent of the country’s average in the northeastern Dibra region to 141 percent in the central Tirana region, according to a regional GDP report for 2012 published by the country’s state statistical Institute, INSTAT. This means the gap between the country’s poorest and richest region is twofold with the GDP per capita at around 310,000 lek (Euro 2,182) and 650,000 lek (Euro 4,578) respectively, considerably narrowing compared to 2011, when the GDP per capita in the region of Dibra, which mainly relies on mining and agriculture, was at 59.8 percent of the country’s average.

The INSTAT report which has divided the country into three statistical units shows the central region which includes only Tirana and Elbasan has a GDP per capita at 23 percent above the country’s average but at only 36 percent of the EU 28 average.

The region of Tirana, where a quarter of the country’s 2.8 million resident population lives, accounts for more than one-third (38 percent) of the country’s GDP with the services sector dominating with 67 percent.


 Lending back to positive growth

 Lending to the economy registered a turning point in July 2014 when it overcame a 12-month moderate decline of around 2 percent as the economy struggled with its poorest growth rate in more than a decade and bad loans stood at around a quarter.

Bank of Albania data shows lending grew by 0.5 percent year-on-year in July 2014, positively reflecting the easier lending standards banks are applying and a recovery in demand by both households and businesses as average interest rates on loans denominated in the national currency have dropped by around 2 percent.

After growing by 30 to 50 percent annually in the pre-crisis years, lending grew by an average of 10 percent from 2009 to 2011 but sharply decelerated to 2.36 percent in 2012 and shrank by 1.25 percent in 2013 as bad loans hit a record of 24 percent.

 Greece regains top foreign investor position

After six-years of recession expected to come to an end only in 2014, neighbouring Greece  regained its top foreign investor position in Albania, overtaking Canada which emerged as a top foreign investor in the past couple of years due to huge investments in oil and mining.

Neighbouring Greece, whose position as Albania’s second top trade partner sharply weakened during the past six years, registered a surprise increase in foreign direct investment in 2013 with its FDI stock exceeding 1 billion euros, according to annual Bank of Albania.

Data shows Greece increased its FDI stock to 1.088 billion Euros in 2013, up from 782 million euros in 2012, according to revised BoA data.

Greek businesses are present in almost every sector of the Albanian economy, including strategic ones such as telecommunications, the banking system, energy, industry, construction, trade and tourism, significantly contributing to the country’s economic growth.


 2% growth target at risk

 At a time when the Albanian economy seemed to have overcome its sluggish growth in the past two years, it suffered a major unexpected setback in the second quarter of 2014 when it registered negative growth rate, putting into doubt the 2 percent growth target both the government and the IMF have set for 2014.

INSTAT data shows the Albanian economy registered negative a growth rate of 0.61 in the second quarter of this year affected by poor performance in the long-ailing construction sector, transport and industry. The quarterly shrink which was the fifth since the onset of the global financial crisis in 2009, signals the road to recovery for the Albanian economy will be long and require key reforms.

The shrink in the second quarter of the year means the Albanian economy grew by only 0.56 percent in the first half of 2014, which is the worst performance in the past six crisis years.

Crisis forces 133,000 migrants home

The Eurozone crisis in the past five years, especially in top trade partners Italy and Greece where more than one million Albanian migrants live and work, has brought back to Albania around 10 percent of migrants there, a study carried by Albania’s state statistical institute, INSTAT, and the International Organization for Migration has found.

The survey shows some 133,544 adult Albanian migrants returned home in the 2009-2013 period, 71 percent of whom from neighbouring Greece and 24 percent from Italy due to the crisis in these two host countries. The number of returnees is almost the same to the 2001-2011 period when 139.827 Albanians returned home, says INSTAT.

“The main reasons for the return of immigrants included loss of job in the country of immigration, melancholy and longing for the family and the country, as well as problems faced by the family left behind in Albania. Other reasons for return included better job opportunities in Albania, investment plans and health-related issues,” said the survey.

Immigration was one of the major reasons for the decline in Albania’s population between 2001 and 2011 when 481,000 Albanians left the country.

Best ever ranking in Doing Business

Albania achieved its best ever result in the Doing Business report, ranking 68th among 189 global economies, considerably improving its image among foreign investors who consider the flagship report as a reference point before deciding to invest. The 2015 Doing Business report released by the World Bank ranked Albania 68th, up from 108th a year ago on business regulatory reforms and a change in methodology which saw Albania’s ranking in 2014 deteriorate from 90th to 108th.

However, Albania still has to improve its competitiveness in the Balkan region as it currently ranks better only compared to Serbia, Kosovo and Bosnia and Herzegovina.

In the 2015 Doing Business, Albania improved in three areas of business regulatory reform including starting a business, dealing with construction permits, and registering property.


Albanians to pay an extra €112 million

Albanians will pay an extra 16 billion lek (around 112 million Euros) in higher taxes on non-wage income, fuel and tobacco in 2015, according to the 2015 fiscal package government approved.

While key taxes such as the personal and corporate income taxes will remain unchanged, defying businesses calls for a return to the flat tax regime after the corporate income tax was raised by 5 percent to 15 percent in 2014, the fiscal burden will further increase by raising the withholding tax on dividends and rents, increasing the circulation tax on fuel and imposing higher excise rates on tobacco.

 Optimistic budget scenario okayed

In a bid to bring the economy back to sustainable growth, the Socialist Party-led left wing majority approved a rather overoptimistic budget for 2015 expecting a 3 percent growth and a slight reduction of public debt already hovering at 70 percent of the GDP at a time when the country’s economy continues suffering crisis impacts with the GDP having grown by only 0.56 percent in the first half of this year.

Government’s optimistic scenario is based on the increase of two key taxes and reforms in the energy and pension systems whose huge deficits take hundreds of millions of euros from the state budget. The heavy fiscal burden with the corporate income tax which will continue remaining at 15 percent, the rise in the withholding tax on non-wage income and the increase in the circulation tax on fuel further angered the business community which claims such measures will have a negative impact on the country’s economy and its attractiveness of foreign direct investment.

Key rate cut to new historic low

In a bid to give a new stimulus to consumption and private investments by promoting lending through lower interest rates, the country’s central bank made a new cut to the key interest rate, taking it to a historic low of 2.25 percent. The new cut is also expected to have a positive impact on private investments by further discouraging investments in deposits whose interest rates have already dropped below the average inflation rate.

The central bank’s supervisory council estimates that the cut of the key interest rate will create conditions for better financing of the economic activity, bring the economy back to its potential and inflation rate into target in the mid-term.

The cut which is the third for this year comes as inflation rate hit a ten-month record low of 1.4 percent in October 2014 and after the European Central Bank cut its key rate to a record low of 0.05 percent last September.



Tirana Times
By Tirana Times December 30, 2014 13:11