TIRANA, Dec. 8 – New upper middle income countries like Albania face competition from both low-wage competitors producing the same kinds of products on the basis of cheap labour and richer countries producing more complex innovative products, says the World Bank in a recent report called Albania, the new growth agenda.”
“In addition, Albania is becoming increasingly integrated into global production systems, becoming more dependent on international trade, technology and capital. Over the near to medium term the global growth is likely to be sluggish and the terms and availability of capital harder. Such external factors are becoming increasingly important for Albania to consider and adapt to.”
These challenges suggest the need for a “new growth agenda” and this is the central topic of the report, says the World Bank.
The last two years have highlighted the risks due to uncertainty in the external environment and the need for cautious forecasts for the purposes of budget planning.
Albania’s strong growth of the last decade was underpinned by sound fiscal and monetary policies and low macroeconomic volatility. The stable environment created by a strong policy framework supported a major transformation of the economy in which resources moved from agriculture and old-style industry to construction and services. “Albania became increasingly integrated with the economies of the surrounding countries, with a solid growth of exports, but a rising trade gap financed by remittances, privatization receipts and some concessional foreign financing and FDI. Although the growth momentum was slowed somewhat by the global economic crisis, the effects of this were partly offset by an acceleration of public spending in 2008 and 2009.”
An initial underestimation of the implications of the recent global economic and financial crisis for Albania (as in many other countries) led to over optimistic growth and revenue forecasts. As a result, lower than forecast tax revenues implied increased budget deficits or the need to adjust spending plans during the process of budget execution. Unanticipated changes in either the deficit or expenditures risk inducing a loss of confidence on the part of foreign investors and lenders, whose resources will be needed to realize Albania’s growth aspirations, warns the World Bank.
Growth
Since 1998, Albania has experienced an important transformation that has lifted it into the ranks of upper middle income countries and has allowed a sharp reduction in poverty. Growth averaged more than 6 percent per year between 1998 and 2010 – the best performance in Europe. This helped to reduce absolute poverty by half, with the headcount rate falling from 25 percent of the population in 2002 to 12 percent in 2008. The recent period of global turmoil has dampened growth somewhat but not as sharply as in many other countries.
The World Bank suggests that fiscal policy requires an anchorسo that markets and investors are convinced of its long run sustainability. Such an anchor is particularly important when debt levels are relatively high, and in the current climate of concern about sovereign debt. For many years, Albania benefited from a prudent fiscal policy, in which deficits had been on a downward trend and the target established for debt reduction broadly ensured fiscal sustainability. These policies were accompanied by IMF-supported programs.
The report supports the proposal of the authorities to define a fiscal rule as a policy anchor. Such a fiscal rule would imply the adoption of realistic assumptions for the medium term macroeconomic framework and make it easier for governments to adhere to a commitment to fiscal sustainability. This in turn should increase access to financial markets at relatively low interest rates. It would also help consolidate the strong macroeconomic record of the past and enhance the credibility of the medium term budget framework.
Albania also faces a challenge arising from the success of its economic development. The progress achieved over the last decade implies that the demand for the inputs necessary for the development process is growing, and it is changing in character. The analysis in the report indicates that despite progress made (for example in education reform and infrastructure investment), the most pressing constraints to further growth appear to be in the areas of human capital (particularly marketable skills), and infrastructure (connectivity, electricity supply and to a lesser degree transport). These constraints reflect rising income levels and the consequent increase in the sophistication of the goods and services produced and demanded. In effect, the demand for human capital, management skills and sophisticated infrastructure has increased more quickly than the supply. The gap needs to be closed to keep returns to investment attractive and sustain future growth. Moreover, in this more complex environment, institutional infrastructure including the implementation of laws and policies (effectiveness of public institutions) become more important.
IMF
According to the IMF, growth averaged some 6ܠpercent during 2005-08, largely based on advancements in total factor productivity, while inflation was kept in check. Although current account deficits had crept up over time, they mainly reflected an ambitious public investment program and transition-driven productivity gains.
Before the crisis, Albania enjoyed strong growth with comparatively benign external vulnerabilities. Sustained macroeconomic stability, a simplification of the tax system, and structural reformsةn the context of subsequent Fund-supported programs and generally good implementation of past Fund adviceبelped boost investment and productivity.
Bank of Albania
Central bank governor Ardian Fullani says Albania needs to adopt a new economic growth model considering the shortcomings of the current model, based on credit expansion and high consumption rates, and will cooperate with the Oxford University to conduct research on this.
“The future economic growth model requires the drafting of a national strategy on the country’s economic development. The future model should be based on the increased productivity of inputs in all sectors of the economy,” said Fullani at a recent round table meeting with Oxford University experts.
Governor Fullani said the country’s macroeconomic stability can be guaranteed only if the central bank’s decisions on monetary policy, the supervisory policy and the financial stability interact and are harmonized with the economic growth, the key objective of economic policies.
Economy recovering slowly
The Albanian economy continues growing at low rates mainly because of the ongoing crisis in the construction sector and lower foreign direct investment and immigrant remittances triggered by the global financial crisis.
The latest data published by the Institute of Statistics (INSTAT) show the Albania economy grew by 3.3 percent year-on-year in the second quarter of this year and 2.4 percent compared to the first quarter of 2010.
Industry, trade and transport had the biggest impact on the second quarter performance growing by 31.8%, 12.7% and 8%, respectively compared to the same period last year.
Meanwhile, construction and telecommunications, two of the country’s most vital sectors in previous year, continued suffering, registering negative growth rates.
INSTAT year-on-year data show construction activity fell by 29 percent while telecommunication market shrank by 2.6 percent in the second quarter of 2010.
Compared to the first quarter of 2010, industry, trade and transport registered growth rates of 11.2 percent, 3.3 percent and 2.7 percent, respectively.
Data published by the Albanian National Institute of Statistics, INSTAT, show that the country experienced a slowdown of economic activity in the last quarter of 2009.
The growth of gross domestic product, GDP, decreased by 0.8 per cent in the fourth quarter of 2009 compared with the same quarter of 2008 and registered a 2.4 per cent drop compared with the third quarter of 2009.
