As incomes decline and living costs rise, households struggle to pay off debt

Tirana Times
By Tirana Times May 4, 2015 15:30

Three-quarters of Albanian households in debt report having an income of less than 351 euros per month 

TIRANA, May 4 -  Albanian households are having trouble paying off debts due to a decline in income and an increase in the cost of living, a survey conducted by the country's central bank has found.

One out of three households in Albania has borrowed money from banks and through informal channels, according to the official data.

A Bank of Albania survey with some 1,200 households nationwide unveiled 30 percent of the households had at least one debt to pay at the end of 2014, around 1 percent more compared to the first half of 2014, but their ability to repay considerably deteriorated at the end of the year.

The survey showed both the number of people with an income and those having a job declined at the end of 2014.

“The total number of household members with an income declined by 1.8 percent compared to the first half of 2014 and was down by 5.5 percent compared to the end of 2013. The number of employees also declined, especially in the private sector," said the survey, adding that households' financial situation deteriorated due to lower income and higher spending.

Around three-quarters of Albanian debtor households (74 percent) report modest income of 17,000 to 50,000 lek (Euro 120 to 351), a sharp deterioration compared to the first half of 2014 when only 55 percent of households reported such modest income for an average family of four in Albania. 

Due to tight lending standards and high interest rates in the banking sector, informal borrowing among debtor households remains widespread with an estimated 60 percent.

A Bank of Albania survey in the first half of 2014 showed three out of five households in need address friends and relatives as well as local groceries where they buy on credit usually in interest-free informal borrowing.

The debtor households' ability to repay loans sharply deteriorated at the end of 2014 when one out of three cited a decrease in household income and a rising cost of living.

Prospects over the ability to repay for the first half of 2015 remain pessimistic with an overwhelming majority of 84 percent expecting no improvement.

Meanwhile, the situation for businesses slightly improved at the end of 2014 with enterprises in the industry, construction and services sectors reporting an increase in sales, according to another Bank of Albania survey with some 721 companies nationwide.

More than half of enterprises (some 57 percent) reported having a loan to pay mainly for long-term investments. Differently from households, only 8 percent of businesses are reported to be involved in informal borrowing.

Asked about their relations with banks, businesses described the process of being granted a loan as somehow difficult, mainly because of the high loan costs.

The Albanian economy is estimated to have slowed down in the first quarter of 2015 when the country suffered severe floods and exports declined on lower international oil and base metal prices.

The situation is also confirmed by the latest survey conducted by the country's central bank showing that after recovering for four consecutive quarters, Albania's Economic Sentiment Indicator, measuring both business and consumer confidence, dropped by 4.6 percentage points in the first quarter of this year, but yet remained 0.5 percent above its long-term historical average.

“The decline was affected by a confidence drop in all sectors of the economy, including industry, construction, services, trade, and deteriorating consumer confidence,” the Bank of Albania said.

Other indirect data published by INSTAT and the Finance Ministry show both consumption and private investments remain sluggish as indicated by the performance of the value added tax and imports of machinery, equipment and spare parts.

Top trade partners Italy and Greece escaping recession and the start of the Trans Adriatic Pipeline construction are expected to have a major impact on the Albanian economy in 2015 when government and international financial institutions expect a recovery to 3 percent after sluggish GDP growth rates of 1 to 2 percent in the past three years.

Public debt at around 70 percent of the GDP, non-performing loans at around a quarter, lending struggling to remain at positive growth rates and a slowdown in exports are considered key barriers to Albania's growth.

This is a web update, read more on this topic in Friday's print edition.

Tirana Times
By Tirana Times May 4, 2015 15:30