By Ervin Lisaku
TIRANA, Dec. 21 – The Albanian economy is expected to face another tough year in 2016 despite forecasts of a slight recovery fuelled by an expected boost in energy-related foreign direct investment and positive effects from reforms in the energy sector and the nationwide campaign against informality.
Sluggish domestic consumption, public debt at around 72 percent of the GDP, non-performing loans at 20 percent, exports and lending struggling to recover to positive growth rates and an ongoing decline in migrant remittances hint Albania will face another tough year after the economy is expected to accelerate to 2.7 percent in 2015 following poor growth rates of 1 to 2 percent in the 2012-2014, an average of 3 percent in 2010 and 2011 and a pre-crisis decade of 6 percent.
In addition, the uncertain economic outlook on Albania’s top trading partners is expected to continue having a negative impact on Albania’s economy in the next couple of years.
A modest recovery in Italy and a new recession in Greece will further affect Albania’s exports, investments and remittances from the two neighboring countries, the hosts of more than 1 million Albanian migrants.
A reform in the energy sector launched in late 2014 has proved successful lifting the state-run electricity distribution operator out of financial collapse by cutting massive illegal connections to the grid and collecting accumulated unpaid bills after a failed privatization by Czech giant CEZ.
Meanwhile, a recent nationwide campaign against rampant tax evasion, estimated at more than 30 percent of the GDP, has proved a double-edged sword for public finances which are failing to recover even after thousands of businesses previously operating informally registered with authorities in the past few months. Experts explain the situation with the aggressiveness of the campaign accompanied by legal changes increasing fines of up to 50-fold on tax evasion and making informality punishable by prison which has curbed investments and demand for new loans by the business community. In addition, a sharp decline in consumption also affected by more than 50,000 Albanians who have left the country to seek asylum mainly in Germany this year has had a negative impact on domestic consumption in a small country of 2.8 million resident consumers, especially after the end of the summer tourist season.
The Albanian government has cut the 2015 budget twice, most recently in the past few days following underperforming revenue even after an aggressive nationwide campaign against informality.
A sharp decline in international oil and base metal prices has also strongly affected investments and jobs and government revenue from the royalty tax in one of the top exporting industries. The decline in prices has affected production by Canada-based Bankers Petroleum, the country’s biggest oil producer while a Turkish-Chinese consortium operating a copper plant in the northern Albanian district of Puka announced the suspension of its activity for one year, leaving hundreds of workers jobless.
Prospects seem grim even for 2016 as Canada-based Bankers Petroleum, has announced a sharp cut in investments and oil production fueled by record low international oil prices and an ongoing tax dispute with the Albanian government which is expected to have negative effects in the 2016 government revenue. In its 2016 budget, Bankers Petroleum says it plans to invest only $56 million in its Albania operations in 2016, down from a revised $153 million in 2015 and a record high of $291 million in 2014, hitting a record low since 2009.
The garment and footwear sector, Albania’s top exporting industry which employs about 100,000 people has also been facing difficulty during this year, citing increased tax burden which has lowered the competitiveness of this sector relying on cheap labor costs.
Agriculture and tourism have emerged as new investment opportunities after the ongoing decline in the long-ailing construction industry, but both sectors have failed to attract foreign direct investment which would increase their competitiveness and know-how.
While the ruling majority has already approved the 2016 budget and some amendments to the Criminal Code envisaging prison time on tax evasion, the business community has expressed its concern over the increased tax burden in the past couple of years and lack of incentives which would improve the business climate in the country.
The lift of the profit tax on some 70,000 small businesses is the major concession the government has made for 2016 as a tough nationwide campaign again tax evasion is under way. New legal changes have also increased fines on tax evasion by up to 50-fold and now range from 500,000 lek (€3,529) on small businesses to 10 million lek (€71,000) on big businesses.
The business community has also strongly opposed new amendments to the Criminal Code which replace fines on tax evasion with prison time.
Albania lost 35 places in the latest World Bank Doing Business ranking 97th out of 189 countries, lagging behind all regional competitors.
Key taxes such as the corporate income tax and the withholding tax on dividends, rents and capital gains will remain unchanged at 15 percent even in 2016 after their increase by 5 percent in the past couple of years, defying business calls for a return to the 10 percent flat tax.
Foreign direct investment prospects for 2016 seem more optimistic as the major Trans Adriatic Pipeline bringing Caspian gas to Europe has already launched its construction works in its Albania section and Norway’s Statkraft continues the construction of Devoll hydropower plant, the biggest investment in renewably energy in the past three decades in Albania.
In its newly adopted 2016 budget, the Albanian government expects the economy to slightly accelerate to 3.4 percent, up from an expected 2.7 percent this year, recently revised downward on lower international oil and base metal prices affecting exports and spillover effects from the crisis in neighboring Greece. The forecasts are in line with international financial institutions such as the IMF, the World Bank and the EBRD which are assisting the Albanian government with reforms and loans.
Underperforming revenue resulting in two budget cuts since mid-2015 forced the Albanian government to draft a more realistic budget for 2016 when it expects revenue to increase by 5 percent and spending to drop by 1 percent in a bid to reduce the deficit and public debt. The tight spending policy will allow the Albanian government to also bring down public debt to 70.9 percent of the GDP in 2016, down from a historic high of 73.7 percent at the end of the third quarter of 2015.
