Economy heading toward moderate recovery

Both domestic consumption and private investments, the two key drivers of the Albanian economy, registered a significant recovery in the first seven months of this year, while lending returned to positive growth rates after a 12-month moderate decline of around 2 percent.
By ERVIN LISAKU
TIRANA, Sept. 8 – Lending back to positive growth rates, a slight recovery in domestic consumption and private investments, budget revenues up by double digits and the clearance of arrears progressing are positive signals that the Albanian economy is heading toward moderate recovery in 2014 after growing by an average of 1.2 percent in the past couple of years. However, public debt at around 70 percent of the GDP, bad loans at around a quarter, exports having dropped to a single-digit growth, deteriorating competitiveness on a regional and global level and huge deficits in the pension and energy system continue posing significant threats to the country’s economy and public finances.
Data published by the country’s state institutions show both domestic consumption and private investments, the two key drivers of the Albanian economy, registered a significant recovery in the first seven months of this year while lending returned to positive growth rates after a 12-month moderate decline of around 2 percent.
Finance Ministry data shows the value added tax which is levied at a 20 percent rate on almost all products and services and accounts for around a third of total government income, registered a significant double-digit growth of 17 percent in the first seven months of this year, hinting a significant recovery in domestic consumption.
Meanwhile, INSTAT data shows imports of “machinery, equipment and spare parts”, an indicator also measuring private investments, rose by 7.4 percent to 54.5 billion lek (Euro 384.5 million) in the first seven months of this year, unveiling a recovery in business confidence.
Lending to the economy also 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. Average interest rates on lek-denominated loans dropped to 8.58 percent in July 2014, down from 9.05 percent last June and 10.98 percent in July 2013, positively reflecting the consecutive cuts to the key interest rate by the country’s central bank.
Since September 2011, the country’s central has cut the key interest rate by 2.75 percentage points to a historic low of 2.5 percent in several consecutive slashes in an effort to give a boost to consumption and private investments, but the moves have mostly been reflected on lower interest rates for lek-denominated deposits and T-bill yields, which have almost halved during the past year, while interest rates on lek-denominated loans have registered only a slight decline.
Deposits’ growth also recovered to 2.45 percent year-on-year in July 2014 after almost plunging into negative growth rates earlier this year due to interest rates having dropped to below 2 percent, the same as the average inflation rate for this year. The slowdown in deposits is also a result of sharp cuts in interest rates and more favourable interest rates in the emerging investments funds, which the IMF describes as inadequately supervised and regulated, investing mostly in longer-dated securities and their clients appearing to consider these funds as substitutes for bank accounts.”
Obstacles to growth
The shift to progressive taxation in January 2014 and tighter fiscal discipline in cooperation with IMF and World Bank have considerably improved Albania’s public finances which this year are back on track with a double digit increase of 11 percent.
However, the bad news about the Albanian economy in the first seven months of this year is that Albania’s exports ended their double digit increase in July 2014 affected by a cut in electricity exports which this year have been at minimal levels due to prolonged drought. INSTAT data shows exports slowed down to around 153 billion lek (Euro 1.078 billion) in the first seven months of this year, up 7.5 percent compared to the same period last year but down from 10 percent in the first half of 2014.
A recent report published by the World Economic Forum ranked Albania 97th in the 2014-2015 Global Competitiveness report on deteriorating basic requirements, efficiency enhancers and innovation and sophistication factors, lagging behind all regional countries, and losing 19 places compared to its best ranking in the 2011-2012 report.
The report shows corruption remains the most problematic factor for doing business in Albania for 21.2 percent of respondents, followed by access to financing for 20.2 percent, inefficient government bureaucracy at 13.8 percent, tax rates at 11.3 percent, poor work ethic in national labour force at 8.7 percent and inadequately educated workforce at 7.4 percent.
Albania’s budget deficit dropped to around 31 billion lek (Euro 217 million) in the first seven months of this year compared to a record high of 49 billion lek (Euro 348 million) during the same period of the past general elections year. Meanwhile, public investments in the first seven months of this were down by 47 percent to around 24 billion lek (Euro 168 million).
In its latest country report on Albania, the IMF says Albania will need no new fiscal measures for 2014, but government authorities should tackle emerging fiscal risks such as the acceleration of arrears clearance, addressing non-performing loans and structural reforms to further improve the business climate.
Public debt, which is expected to climb to a record 72 percent of the GDP in 2014, will remain Albania’s key barrier to growth with total debt service expected at 66 billion lek (Euro 462 million), more than three quarters of planned 84 billion lek in investments for 2014.
Public debt, including government arrears at 5 percent of the GDP, is estimated to have climbed to 70.5 percent of the GDP in 2013, and is expected to further climb to 72 percent of the GDP before going on a downward trend starting 2015, according to the 2015-2017 macroeconomic and fiscal framework.
While Albania has already approved a reform in the pension system gradually increasing the retirement age with no immediate impacts in the short-run, a reform is also expected in the electricity system which causes the Albanian government around USD 200 million annually in power losses and thefts from the distribution grid and electricity imports.
Back on track
The IMF which is assisting Albania get back to sustainable growth with a renewed three-year deal supported by a Euro 334 million loan to clear accumulated arrears, says fiscal consolidation is proceeding as planned and no additional revenue and expenditure measures are needed to achieve the 2014 targets of 2.1 percent growth and bring the public debt back to below 60 percent of the GDP by 2019.
The IMF says Albania’s medium-term outlook is generally favorable. “Economic growth is expected to gradually rebound to 4.5 percent over the medium term on the back of critical structural reforms that improve the business climate and raise potential growth, a gradual recovery in European partners and large energy-related investments. EU accession-related reforms would also improve Albania’s prospects as an investment destination.”
The International Monetary Fund expects the Albanian economy to strongly recover and public debt to sharply reduce in the next five years. In its latest country report on Albania, the IMF which is assisting the Albanian government boost growth and achieving macroeconomic stability, expects the Albanian economy to recover from an estimated 0.4 percent growth in 2013 to 2.1 percent in 2014, 3.3 percent in 2015 and 4.2 to 4.7 percent from 2016 to 2019.
Ambitious reforms, including in the areas of pensions, energy, local government, public administration and the business environment, are essential to support medium-term growth and debt sustainability, notes the IMF.
The Albanian economy grew by 1.65 percent year-on-year in the first quarter of 2014, signalling the country is on track to achieving its target of a 2 percent growth rate after an initial estimated growth of only 0.44 percent in 2013, which was the poorest in the past 16 years, according to INSTAT.
In its latest report, INSTAT revised the GDP for 2013 upward to 1.42 percent, up from an earlier 0.44, giving a wrong impression of 2013 as the worst year in Albania’s economy as the 2012 growth rate is estimated at only 1 percent. Revised data shows the Albanian economy grew by 3.7 percent in 2009, 3.75 percent in 2010, 2.17 percent in 2011 and only 1 percent in 2012.
Newly revised data also shows the Albanian economy has grown by an average of 2.6 percent annually during the 2009-2013 crisis years compared to a pre-crisis decade of an average 6 percent, being one of the best performers in the region, according to INSTAT.
Albania’s recovery in the first quarter of 2014 has also improved the country’s performance compared to other EU aspirants. A European Commission report shows the Albanian economy performed on par with neighbouring Montenegro in the first quarter of 2014 when it grew by 1.7 and outperformed Serbia and Iceland.
Revised data by INSTAT show that even at 1.4 percent for 2013, Albania’s growth was the poorest among eight EU aspirants. During the global crisis years of 2009 to 2012 Albania was among the best performers at a time when most regional countries suffered negative growth rates.
Euro 218 million in arrears cleared
The Albanian government says it has paid off more than 40 percent of accumulated unpaid bills to private companies, estimated at $720 million or 5 percent of the GDP. In an update to the process of the clearance of arrears, a process which started last March after loan deals with the IMF and the World Bank, the Finance Ministry says it paid a total of around 31 billion lek (Euro 218 million) until late July 2014 in accumulated bills to private companies, of which Euro 67 million for public investments, Euro 45 million for supply of goods and services in current expenditure, Euro 74 million in VAT refunds and Euro 31 million in the energy sector.
The payment of the arrears came after the IMF awarded the Albanian government a Euro 334 million soft loan which is expected to give a boost to the ailing economy by promoting new investments and reducing non-performing loans.
The Socialist Party-led government estimates the payment of arrears in accumulated bills to the business community will also help banks by reducing their non-performing loan stock by 3 to 4 percent.
The Finance Ministry has prepared a draft strategy which foresees the payment of a total of 72.6 billion lek (Euro 500 million) in government arrears over the next three years. The arrears, estimated at 5.3 percent of the GDP include unpaid bills to the business community for finished public works and services, VAT and profit tax refunds as well as bills from court decisions against the Albanian government, expropriations and payment of social assistance to people with disabilities.
In its latest report on Albania, the IMF said “addressing the problem of unpaid bills and arrears would enhance the government’s credibility and boost liquidity and confidence. Clearance of these liabilities would strengthen private sector balance sheets, facilitate the resumption of credit growth by helping lower nonperforming loans (NPLs) and support domestic demand.”
Top financial institutions optimistic
Top international financial institutions such as the World Bank and the IMF have made optimistic forecasts about the Albanian economy.
In line with the Albanian government and the IMF, the World Bank expects the Albanian economy to recover to 2.1 percent in 2014 after growing by only an estimated 0.4 percent in 2013, the lowest rate in more than a decade
The World Bank expects the Albanian GDP to further recover to 3.3 percent in 2015 and to 3.5 percent in 2016, slightly above the average of the ten Central and Eastern European economies.
In two recently-approved development policy loans totaling $220 million, the World Bank will support Albania’s public finance management and financial sector stability. The World Bank is also supporting the Albanian energy sector with a USD 150 million loan.
In its latest Regional Economic Prospects report, London-based EBRD says Albania will see a modest upturn in 2014-2015 with growth of 1.7 and 2.0 per cent, respectively supported by a new agreement with the IMF and World Bank assistance in dealing with high levels of non-performing loans and weak credit growth. The forecasts are slightly lower compared to the Albanian government and the IMF which expect the economy to recover to 2.1 percent in 2014 and accelerate to 3.3 percent in 2015.
Citing austerity measures by the new Socialist Party-led government, the Vienna Institute for International Economic Studies is pessimistic and expects a slowdown in the Albanian economy for the next three years. New forecasts by the Vienna Institute show the Albanian economy is expected to grow by 1.3 percent in 2014, 1.5 percent in 2015 and slow down to 0.9 percent in 2016, differently from other top international financial institutions which expect growth to range between 2 to 3 percent during the period.
“Due to the new Albanian government’s austerity policy we expect domestic demand to stay rather depressed for the years to come. This is one of the main reasons why we have decided to reduce the outlook for GDP growth for 2014 to 1.3 percent. Our forecast for 2015 remains at 1.5 percent and we expect GDP growth in 2016 not to surpass 1 percent,” says the Vienna Institute in its latest forecast.