2017 Business & Economy in review
January
Relations with IMF back to advisory
Albania concluded a three-year deal with the International Monetary Fund supported by a Euro 331 million loan, reducing the Fund’s role on the country’s economic and fiscal policies back to an advisory role.While the Fund had a decision-making role on the government’s fiscal policies in the past three years, conditioning its financial support at only 3 percent of the country’s GDP with a tougher discipline on public finances, experts and business representatives often criticized its continuous tax hike policy as not helping improve the business climate in crisis times.
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.
February
Business climate rated as unfavorable
Two-thirds of businesses in Albania consider the business climate unfavorable with courts, corruption and frequent changes in legislation and tax procedures as the top concerns, according to a survey conducted on behalf of the Foreign Investors Association of Albania, representing the country’s top investors.Courts and corruption became a tougher issue for about three-quarters of foreign investors in 2016 as the country struggled to approve a long-awaited justice reform that is expected to overhaul the highly corrupt perceived judiciary by vetting all prosecutors and judges over their professional proficiency, moral integrity and independence from the influence of the organized crime, corruption and political power.
March
EU export quota hold back fish industry
Albania’s emerging fish processing industry has been suffering in the past few years as its rapid growth has led to companies meeting the EU duty free export quotas in only seven months, paralyzing work and investment in an industry that employs about 4,000 to 5,000 people and produces the country’s top agricultural exports.
As the number of fish processing companies has increased to 10, the annual quota of 1,600 metric tons of duty free exports of processed fish set by the EU was met for the first eight months of the year in 2016 and is expected to be fulfilled in only seven months this year, paralyzing work for the rest of the year due to having to pay a 25 percent customs duty for extra exports to the EU.
Albania’s exports of fish and seafood increased by 36 percent to a record €27.5 million in 2016 when the country’s sales abroad reached 4,630 metric tons.
Albania announces de-euroisation strategy
Albania’s central bank says it is undertaking measures to implement a de-eurisation strategy by mid-2018 that would accelerate the reduction of the current high levels of foreign currency in the country’s banking system, considered a key barrier for the transmission of its easier monetary policy and giving a boost to sluggish credit and consumption.
Governor Gent Sejko says the country’s highest financial authorities have already identified some measures, including charging higher fees on transactions in foreign currency to curb high levels of foreign currency in the banking system, estimated at 60 percent for credit and almost 50 percent for deposits, with the overwhelming majority being euro-denominated.
The Albanian economy is highly euroized with euro-denominated deposits and loans accounting for half of the total. The euro is also the main currency used in the real estate industry.
AmCham: High tax burden remains top concern
Some of the country’s biggest local and foreign companies represented by the American Chamber of Commerce in Albania perceive the business climate to have considerably improved in 2016 but high taxes, unfair competition and government bureaucracy remained the top three concerns for the second year in a row.
Once again the high level of taxes tops the list of concerns as Albania’s tax burden has climbed to one of the region’s highest in the past few years, with the economy losing its competitiveness to neighbouring countries applying flat tax regimes of about 10 percent.
Albanian call centers cut first jobs
At least 30 call center companies operating in Albania and employing about 3,000 people suspended their activity in the country following some late 2016 legal changes in Italy making the supply of inbound and outbound services for Italy-based companies from non-EU countries such as Albania much tighter.
Call center representatives warn more closures could follow as Italy has recently announced a repatriation plan for Italian call centers operating outside the country offering them subsidies in a bid to create 20,000 jobs at home.
Data shows there were 847 call center companies operating in Albania at the end of 2015 employing about 25,000 people, compared to 414 companies in 2014 and only 75 in 2010 when Albania emerged as an attractive call center destination for the Italian market due to cheap labor costs and language skills by Albanian youth.
April
Discriminatory criteria mar public procurement
One of the main doing business barriers for local and foreign investors in Albania, public procurement continues to face issues related to limited competition and discriminatory criteria although the country has been offering e-procurement procedures since eight years in a bid to reduce corruption and increase transparency.
Reports by the Public Procurement Agency and the Procurement Commission appeals body show state-run institutions continue abusing public tender procedures awarding contracts with no race and placing discriminatory criteria apparently to select pre-determined winners.
Interconnector dispute: Albania, Kosovo lose millions of euros
A Kosovo-Serbia dispute over the ownership of transmission assets in Kosovo territory has been holding back a newly built 400 kV interconnection line between Albania and Kosovo for about a year, with negative effects on plans to create a common regional market and missed earning in both countries.
The Euro 70 million German-funded interconnector was sensationally inaugurated in mid-2016 by the Albanian and Kosovo prime ministers who announced 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.
Warnings of sanctions against Serbia by the Vienna-based Energy Community Secretariat, an international organization dealing with energy policy, if the dispute was not settled until the end of 2016, have not had an effect so far.
May
Poor production knowhow holds back Albania’s growth
Lack of productive knowhow has been identified as the key constraint holding back economic growth in Albania over the past quarter century during the country’s transition to democracy and market economy after the collapse of the 45-year communist regime and its planned economy, a report has shown.
Lack of adequate knowledge and skills needed to produce complex goods and services is also identified by low levels of exports of goods and services as a percent of the GDP and poor diversification compared to regional competitors.
“Albania faces a unique knowhow constraint that is deeply rooted in its closed-off past, and the limited diversification that has taken place in the private sector, can in nearly all cases, be linked to distinct inflows of knowhow,” says a recently published report by the Center for International Development at Harvard University (CID) – Harvard’s primary center for research on sustainable international development.
Minimum wage increases to €176
In an expected move ahead of the upcoming general elections, the ruling Socialist Party-led government has increased the minimum wage by 2,000 lek (€14.7) to 24,000 lek (€176), slightly increasing costs for businesses relying on cheap labor costs and social security contributions for self-employed people, but yet continuing to apply one of the region’s lowest minimum wage.
The 9 percent hike adopted ahead of the scheduled June 25 general elections comes after a 3-year freeze in the minimum wage and follows an increase in wages for some 164,000 public sector employees accounting for 18 percent of total employees. The public administration also had their wages increased following a 3-year freeze.
July
Threshold on tax free online purchases reduced to €22
The Albanian government has reduced the threshold on tax free online purchases and goods delivered from abroad in a move which has sparked anger among rising online buyers but which will benefit local traders who had complained of unfair competition.
Under a decision made last July, the Albanian government reduced the amount of tax free online purchases from abroad to 22 euros and goods delivered from abroad for personal reasons to Euro 45. The previous tax free threshold was at Euro 140.
Online buyers will now have to calculate an extra 20 percent in VAT and 2.4 percent in customs duties if they exceed the €22 amount.
Albania licenses first private stock exchange
Albania’s Financial Supervisory Authority licensed the Albanian Stock Exchange as the country’s first privately-owned stock exchange in a move that is expected to serve both the private sector and the government to find much-needed long-term financing on projects that commercial banks operating in the country are reluctant to support.
The decision comes two and a half years after the Albanian government closed down the state-run Tirana Stock Exchange in late 2014 after 12 years of remaining inactive.
The Tirana stock exchange was completely inactive due to the small number of listed companies counted on the fingers of one hand and lack of interest because of the high informality of Albanian businesses.
August
Gov’t to slash hundreds of public sector jobs
Hundreds of public administration employees will apparently lose their jobs following the drastic cut the new Socialist Party government out of the June 25 general elections has made to several ministries and government agencies.
Newly re-elected Prime Minister Edi Rama cut the number of ministries to 11, down from a previous 16, merging several ministries, while the number of government agencies is expected to be cut by a quarter to 104, from a current 141.
The cuts will apparently be more drastic in the newly created ministry of finance, economy and labor from the merge of finance and economy ministries and the shift of the labour component from the previous social welfare and youth ministry. Huge cuts are also expected from the merge of the current tax and customs directorates into one and the cut of several inspectorates and regional agencies from a current 12 to only 4.
Albania, China relations gain new momentum
Albania- China relations are gaining new momentum as the Asian superpower is increasing investment in Albania, its once tiny Balkan ally in the 1960s and 70s.
Four decades on, the present context is quite different as China has turned into the world’s second largest economy, and Albania is now a NATO country and an EU candidate country with its small economy being one of the Western Balkans’ most vibrant and holding one of the greatest potential due to the geographical advantage and natural resources.
Last year, Chinese companies acquired two of Albania’s most important assets, the country’s sole international airport and the largest oil company, increasing Chinese investment to Albania 10-fold to about $760 million, and turning China into one of top investors in a single year.
September
Lack of new major projects, political deadlock hit FDI
With no new major foreign investment in sight and a prolonged political deadlock ahead of the June 25 general elections, FDI suffered a blow in the first half of this year when it hit a three-year low amid poor investor confidence and uncertainties over election results and tax policies the new government would apply.
Central bank data shows FDI dropped to €380 million in the first half of this year, down from €409 million during the same period last year, registering a modest 7 percent decline, but warning of headwinds as two major ongoing energy-related projects are completed in the next couple of years.
The Trans Adriatic Pipeline bringing Caspian gas to Europe and the Devoll Hydropower project by Norway’s Statkraft have been the key drivers of FDI in the country in the past three years at a time when oil and mining investment has almost paralyzed following a slump in commodity prices in mid-2014, with a negative impact also on the country’s poorly diversified exports.
October
GDP grew by 4% in year’s first half
The Albanian economy grew by about 4 percent for the third quarter in a row at the end of the first half of this year, but the recovery of household consumption was twice lower, according to data published by INSTAT, the state statistical institute.
The growth rate is beyond expectations for a pre-general election period accompanied by a political deadlock and protests by the main opposition Democratic Party over guarantees about the June 25 elections, estimated to have negatively affected investor and consumer confidence.
The 4 percent growth rate in the second quarter of this year was again triggered by some major energy related investment such as the Trans Adriatic Pipeline and the Devoll Hydropower plant with no immediate positive impacts for the overwhelming majority Albanian households despite investment and employment benefits.
Unemployment, corruption remain top concerns
Albanian households have become slightly more optimistic, but unemployment, the poor economic situation and corruption remain top concerns, and one out of two Albanians is considering leaving the country and working abroad, according to a Balkan Barometer survey published by the Regional Cooperation Council.
Business perception also slightly improved but corruption, macroeconomic instability and the tax administration and tax rates were rated as the top three obstacles for business operation and growth.
VAT on small businesses, value-based property tax
The ruling Socialist Party has withdrawn from its intention to extend the 20 percent value added tax on all small businesses and set lower than expected property tax rates on households and businesses.
In its 2018 fiscal package, the VAT threshold on businesses has been lowered to annual turnover of 2 million lek (about €15,000), down from a current 5 million lek (€37,000) while the property tax will be collected on a value-based formula applying a 0.05 percent rate on homes and 0.2 percent on business facilities.
Albania has some 160,000 businesses, 90 percent of which small family-run ones employing up to four people.
November
Taxpayer support for PPPs set to sharply increase
The cost of about a dozen public private partnerships the Albanian government has signed with private companies in the key health, waste-to-energy and customs sectors is expected to increase by a third in 2018 and is set to register sharp hikes in the next few years as the Albania proceeds with an ambitious but rather controversial €1 billion PPP project.
In its 2018 budget report, the Albanian government expects taxpayer support to eight existing PPP contracts and three new concessions that become effective in 2018 to increase to 9.4 billion lek (€69.2 mln), up from about 7.2 billion lek (€53 mln) in 2017, registering a 30 percent or €16 million annual hike.
Business climate deteriorates
Albania lost seven places to rank 65th among 190 economies in the 2018 Doing Business report, lagging behind almost all regional competitors which made considerable progress over the past year, according to a World Bank report.
Albania’s ranking in this year’s flagship World Bank report, a reference point in foreign investors’ decision-making, was negatively affected by deterioration in key indicators such as getting electricity, paying taxes and enforcing contracts overshadowing last year’s major progress when Albania climbed 32 steps to rank 58th among 190 global economies. Although having introduced an e-system, dealing with construction permits still ranks Albania out of the top 100 performers.
Enforcing contracts, an indicator measuring the time and cost for resolving a commercial dispute at a local first-instance court and the quality of judicial process, ranks Albania 120th, unveiling the poor confidence in the highly perceived inefficient and corrupt judiciary which is about to undergo reform with the start of vetting process that will scan all judges and prosecutors.
Tax incentives to promote luxury tourism
With tourism on top of the agenda as one of the emerging key drivers of Albania’s growth, the Albanian government is offering a series incentives for current and new investments in a bid to also promote luxury travel in the country in addition to the rapidly growing mass tourism.
In some amendments to the tourism law, the ruling Socialist government proposes that new luxury accommodation units built by internationally renowned companies will benefit tax incentives for a ten-year period for building and operating four-star hotels and resorts with an investment value of at least €8 million. In case of five-star accommodation, the minimum investment value to obtain the special investor status is €15 million. Investments will have to be carried out by internationally renowned chained-brand hotels or under management or franchise contracts with them.
