The developments over 2009 have indicated that the Albanian economy has been impacted by the recent global crisis, mainly as a consequence of decreased foreign demand and remittances, higher risk premiums, reduced and high-cost financing resources. The June elections and the following political crisis between the majority and the opposition raised insecurities over the countries economic perspectives.
However, the economy continued to record a positive growth rate during this period, while the domestic inflationary pressures remain subdued. In August, the annual inflation was 2.2 percent and inflation expectations remain well anchored around the target of the central bank.
Albanian recorded a 5.5 per cent GDP growth in the first half of 2009 and is forecasted to conclude the year at the same rate. Non governmental institutions forecast growth to be around 3%, which will still rank Albania with the highest growth in the old continent.
The country’s economic activity has been sustained by the fiscal stimulus and the preservation of steady consumer demand, while investments and exports have recorded lower growth rate in the first nine-month period of the year.
The economic performance over the first 9-month period of the year, albeit positive, attests to growth rate slowdown, reflected even in the gradual slackening of inflationary pressures. In spite of a slight improvement during 2009, the current-account deficit remains high, reflecting high levels of consumption in the Albanian economy and unfeasibility of production capacities to meet it. The fiscal policy has had an expansionary nature during 2009, reflected in increased budget spending, mainly due to rapid growth of capital expenditures.
Budget revenues maintained a slower-than projected rate, due to slow-down in the economic growth rate during this period.
Under a supplementary budget adopted in mid-year, the deficit is projected to increase from 4.2 per cent to 6.8 per cent of GDP this year. A fall next year to 3.9 per cent of GDP is projected, as the government pushes ahead with investment to modernise an inadequate road network.
Consequently, the additional budget spending has been financed through the use of
privatization receipts and the higher public borrowing.
Privatisation receipts helped finance a sharply higher budget deficit resulting from a spending burst ahead of last June’s election. Under a supplementary budget adopted in mid-year, the deficit is projected to increase from 4.2 per cent to 6.8 per cent of GDP this year. A fall next year to 3.9 per cent of GDP is projected, as the government pushes ahead with investment to modernise an inadequate road network.
Despite the credit crunch, the country raised a 250 million euro, three-year syndicated loan arranged by Deutsche Bank, Alpha Bank and National Bank of Greece to finance the completion of a 1.2 billion euro highway to Kosovo ahead of the election. But at 11 per cent, the cost of borrowing was high compared with the 5 per cent interest rate on a 230 million euro loan raised in 2008.
Market openness and increased competition have made the Albanian economy benefit the fruits of private sector initiatives. The practice of economies based on free market principles has broadly indicated that this sector remains the most efficient engine of the economic activity.
This process has been sustained even by the constant reduction of the state’s share to the
economy, as well as by its focus on procurement of public goods and infrastructure
development. Positive financial market development has generated the necessary funds for supporting investments and consumption in the economy. Though chiefly for historical reasons, the banking system in Albania has based its activity on the intermediation of domestic funds of the economy, the recent developments indicated that it remains as much capable in generating foreign funds to provide capital and liquidity backstop to the Albanian economy.
On the other hand, the integration of the financial system into the European one has raised the resilience of the Albanian economy to various shocks, of which the latest is still under operation. It has also brought about a necessary expertise in terms of financial and economic business administration, has developed the infrastructure and means of payments in the economy and has helped efficient risk transfer in the economy.
Economic Vulnerabilities
First, domestic consumption and investments have been the main beneficiaries, while the
Albanian economy has not yet succeeded in establishing a competitive export sector,
capable of generating steady foreign currency income, which would enable the preservation of external economic balances. From another viewpoint, this development does not seem as balanced in sectoral terms. So, some sectors such as trade, construction and services have contributed disproportionably the country’s development while others, such as agriculture and industry have contributed less.
Second, Albanian economy continues to suffer from structural vulnerabilities, which contract its competitiveness in international markets of products and capital. This behaviour is illustrated even by international competitiveness indices compiled recently by the World Economic Forum, where Albania is ranked below regional countries. Some acute problems refer to the need for enhancing education and infrastructure, in all dimensions. Both these problems restrain the attraction of foreign investments and impede the country’s development.
Third, efficiency in using the economy funds should be improved even at micro level. This implies the need for improving private businesses’ management and control systems, enhancing analytic and forecasting capabilities, as well as transparency.
Business Regulation Reforms
“Doing Business 2010,” a report of the World Bank and IFC that evaluates the regulations affecting ten areas of everyday business and assesses ease and equal opportunity for businesses in 181 economies, moved Albania to the 89th position and ranked Albania among the top ten countries with respect to reforms for protecting investors. Albania also established a public credit registry allowing financial institutions to share credit information covering 8.3 percent of the adult population. This reform allows banks to better evaluate the creditworthiness of potential borrowers, facilitating access to credit for firms and individuals. Albania also strengthened investor protection. A new company law requires that disinterested shareholders approve transactions between interested parties and obligates those parties to disclose all information on the transaction to the public. The law also reinforces directors’ duties and requires directors, when found liable, to pay damages and return profits to the company. A new bankruptcy law approved during 2008 provides a more efficient framework for closing a business. Despite good progress in those areas, Albania needs to do more to improve its ranking in other indicators. In addition, much remains to be done because the report doesn’t measure other important indicators that have significant impact on the business climate like corruption, infrastructure and the efficiency of the public administration.
Property Rights
There has been little progress in consolidating property rights. The land valuation maps, an essential basis for compensation, have been finalised for the entire country. The Immovable Property Registration Office (IPRO) has continued initial property registration in different parts of the country but the process is not completed. A complete inventory of State land earmarked for compensation remains to be completed. Unresolved legal issues with regard to the compensation of former owners continued to hamper progress. The number of court cases stemming from disputed property rights has further increased.
The Agency for legalisation of informal zones (ALUIZNI) increased its staff from 350 to 900 in order to speed up the process of legalisation. However, the process remains non transparent and few legalisation requests have been processed. Other legal amendments, were adopted in a piece-meal and uncoordinated manner. Considerable further efforts are needed regarding the first registration of real estate, property restitution, and compensation and legalisation of informal constructions. The adoption of a comprehensive strategy accompanied by an action plan will be key in this area.
Overall, there has been little progress in consolidating property rights, a key European
Partnership priority. The problems relating to the property reform require a wide-ranging
approach and the setting-up of a comprehensive legal and institutional framework.
Uncertainties about property rights continue to hamper development of a functional land
market and keep foreign investment below potential.
Employment
Albania lost 1200 jobs in the non agriculture sector in the first six month of 2009, the National Statistical Institute, INSTAT, reported on Tuesday. The number of Albanians employed in the nonfarm sector fell despite the extensive fiscal stimulus that the government offered by investing heavily in infrastructure projects.
In June there were 141,335 jobseekers in Albania, the same as in December 2008. INSTAT considers unemployed in its tabulation only the active jobseekers and has classified several hundred thousand Albanians as “non-active jobseekers.” In addition, the government has classified 568,549 Albanians as “self-employed in agriculture,” a move that has come under fire by experts who argue that most farmers in the country are self subsistence farmers.
The Dwindling Remittances
Immigrant remittances dropped by 3% or 200 million euros in 2009 from a year earlier,
Remittances were 9.6% of GDP in 2009, down from 12.3%, mainly due to negative consequences of the global financial crisis.
Around 39% of Albanian migrants said they sent money home every six months and 19% at least once every three months.
Remittances have served as a balancing factor for productivity and growth in previous years, in addition to foreign direct investment. In their absence, economic growth will slow down, according a recent study by the Bank of Albania.
The experts argue that remittances have been a stable source of economic growth in recent years, when according to the Bank of Albania, remittances made up 10 to15 percent of the country’s GDP.
But in the last three years there was clear trend of decline from 14.6 percent of GDP in 2005, to about 10.6 percent in 2008. In annual terms, in 2008, remittances marked a decline of about 6 percent against 2007.
The trend will continue, hence an economic strategy to boost domestic production becomes imminent if the country is to keep the high growth level that it has experienced so far.
Shrinking Foreign Trade
Albania’s trade deficit rose by 1.9% on the year to 266.4 billion leks ($2.914 billion/1.927 billion euro) in the first ten months of 2009, as exports fell much faster than imports according to data from the National Statistics Office.
In the ten months through October, imports fell by 2.2% on the year to 350 billion leks, while exports slumped 13.4% to 83.6 billion leks.
European Union member states accounted for 79% of Albania’s exports through October and 64.5% of its imports. Italy and Greece were Albania’s main trading partners in the first ten months of the year.
Growth in Foreign Direct Investments
Inflows of foreign direct investment doubled in the first half to 460 million euro but the bulk of funds came from privatisation deals negotiated before the global crisis. CEZ, the Czech energy company that is expanding rapidly in south-east Europe, paid 102 million euro for OSSH, Albania’s only electricity distributor. Other deals included the sale of Armo, the state-owned oil refinery, to local investors and of a residual stake in AMC, a leading mobile telephony operator, to its majority shareholder, CosmOTE of Greece.
Construction Stagnation
The construction sector, as the rest of the economy, was deeply affected by global financial downturn and the economic climate. Even though official data from INSTAT showed that the sectors was experiencing growth levels 9.8 and 3,9 per cent respectively in the first two quarters of 2009, as many as 4000 apartments have remained unsold through 2008 and 2009.
The difficulties in raising funding to begin or to finish construction-work is seen as one of the determinant factors in the slowing down of the sector, believe the contractors.
In addition, falling demand as consumers were affected by the global crisis and a tightened lending policy has not helped matters.
Construction is one of the most active sectors of the Albanian economy. In 2008 this sector made up 14 % of the Gross Domestic Production (GDP). That year the construction sector assured 17 % of the sales of all the productive non-agrarian sectors and has employed an average of 18 % of total employees that have been employed in productive sectors besides the agricultural sector.
Infrastructure Development
The Albanian government has continued to push hard on the completion of many infrastructure projects. The highlight in the sectors was the completion of the Durres-Kukes Highway, which is the Albanian part of the axis connecting the Adriatic coast with Kosovo. Costing around 1.4 billion euro, almost double the original projection, the highway is the largest and the costliest public work ever build in Albania.
The highway is expected to boost investments in the northern part of Albania, why also providing an important transport route for Kosovo. In addition, regions such as south Serbia and north Macedonia are also expected to benefit from its construction, giving the highway a regional importance.
In addition to the Durres-Kukes Highway, the country is close to complete the Arber Highway which connects the south and north ends of the country and with the respective neighbours in Greece and Montenegro. Parts of this highway are already in function, mainly in the central part of the country.
Other that road projects, many other projects have been initiated to improve existing maritime ports and construct new ones, both for civil and cargo services.
Inheriting a very poor infrastructure from the communist era, the development of the sectors is seen as a key to the development of other economic sectors.
Energy Sector Improves
The highlight in the sectors was the nine month export of electric energy to neighboring countries of Kosovo and Greece. For the first time Albania exported energy this while usually it has been forced to import in order to cover domestic demand while relying on an overly amortized production and transmission system.
More than 100 concessions for the construction of small, medium, a big size hydro power plants have been issued by the government during 2009, some of the concessions amounting close 1 billion euro. The country projects to be a net exporter of electric energy in the close future. Electricity production is supposed to increase by 50% in the next four year, while demand is forecasted to grow with 5% every year, the highest growth rate in Europe.
Meanwhile, projects have been studied to use alternative energy sources, such as to harvest wind farm energy. Albania continues to rely on hydro power energy production, which accounts for more than 90% of total production.
The inauguration of a new thermo powered plant in Vlora this fall has easened electricity supply in the south, even though environment concerns regarding carbon emissions remain high.
Italy has emerged has the main investor in the Albanian energy sector with contracts worth 3 billion euro signed this year with Italian companies to complete various energy projects in the country.
However, Albania still needs to improve its transmission system where around 35% of the energy is lost for technical reasons. In addition, CEZ, the new owner of the Albanian Distribution System Operator is forced to face an annual 30 per cent loss in revenues due to unpaid bills. A request to increase electricity prices by 23 per cent in 20010, in order for CEZ to covers its costs, was not approved by the Energy Regulation Entity (ERE). ERE approved only a 13% hike, an increase that is expected to affect both the Albanian poor and CEZ itself.
Tourism
Despite the global economic downturn, The government of Albania announced that there was a 42 percent increase in the number of tourists visiting the country compared to last yea
More than 2 million visitors entered Albania from January to September, a 42 per cent hike on the same period in 2008.
Roughly one million visitors were from overseas, with 92 per cent of foreign visitors coming from Europe. Most of the remaining 8 per cent came from the US or Asia.
Statistics show that 89 per cent of registered visitors said that they were in the country on vacation, or to meet relatives and friends. A smaller percentage said they were in the country on business.
The largest single group of foreign visitors were from Kosovo (37 per cent), followed by visitors from Macedonia and Montenegro. All three have large ethnic Albanian populations and local experts often refer to this sector of the market as patriotic tourism.
Albanian tourism has experienced exponential growth in the last few years as the country slowly emerges from a difficult and often tumultuous transitional period.
However, while the government points to statistics in demonstrating the purported success of the tourism industry, tour operators and lobby groups complain that the country’s underdeveloped infrastructure and lack of promotion are leaving the Albanian market several steps behind its competitors.
Albania’s tourism is one of the most promising industries in the country. With rugged beauty, long Adriatic coast and vicinity to large European markets it is bound to develop. However, when compared to neighbouring countries with similar features it still has much catching up to do. Prospects of tourism bringing substantial revenues, as it does in Croatia, Greece or Bulgaria, remain a distant hope and even Montenegro is still far away from the reality of Albania today. Due to a very large Diaspora, Albanian expatriates returning home for their holidays influence both tourism arrivals and revenues. However, these could hardly be considered the kind of tourists able to determine the tourist development of the country. On the contrary, this type of arrival makes tourism planning even harder for the government.
In addition, the problem of land ownership remains a barrier to foreign investors interested in the market. In May, Club Med pulled the plug on a 400 luxury villas resort it had planned in Kakome Beach, south of Albania. Even though the project had started as early as 2005, it was immediately halted by a dispute between the company and the local land owners who demanded their right to ownership and compensation.
In the latest World Economic Forum report on competitiveness in the international travel and tourism industry, Albania ranked 90th on a list of 133 countries.
In contrast, Tirana’s neighbour to the north, Montenegro, was ranked at 52nd, while Croatia sat at 34th . Albania managed to come ahead of only two states in the region, Bosnia and Herzegovina and Moldova. The countries listed in a similar position include war-torn African nations.
Albanian travel and tourism industry employs 41,000 workers and earned 358 million euros in 2008, equivalent to 4.1 per cent of GDP.
Conclusion
Albania will register a positive economic growth around 3-5 per cent in 2009, perhaps the highest in Europe. The country has survived the global economic and financial crisis relatively unscathed, despite a banking panic during the end of 2008 and the start of 2009. A slash of the base interest rate by 0.5% by the central bank and other measures insured that the bank panic remained superficial.
However, its effects were reflected in a more cautious approach from banks toward the economy by severely tightening lending criteria, both for the private sectors and for consumers. In addition, a high financial demand from the government, engaged in an election year, dried up the market of necessary liquidity for the boosting of economy.
In addition, while government expenditures remained high, they were not focused on sectors on the production sectors of the economy, hence, the government intervention to ease the impact was almost absent.
Meanwhile, effects of the global economic crisis channeled themselves into the Albanian economy, affecting trade and business activity. By mid September, Lek (the national currency) had depreciated by more than 8 per cent toward the Euro.
Overall, the impact of the global economic crisis revealed the need for a restructuring of Albanian companies, of economic sectors, and of the countries economic strategy. Whether the economic players in Albania have learned any lessons at all, that remains to be seen. In addition, the country needs to improve key areas such as the judicial system, property rights, and the overall business regulations.
