TIRANA, Jan. 17 – Translating economic growth into employment and inclusive welfare is one of the main challenges facing the Albanian economy for 2018, economy experts say.
The Albanian economy is estimated to have grown by a nine-year high of about 4 percent in 2017, fuelled by some large-energy related projects and the emerging tourism industry, but consumption grew by only about 2.5 percent in the first three quarters of last year, triggering concerns of non-inclusive growth.
“One of the main shortcomings in Albania’s economic policies and development strategies is the difficulty to translate economic growth in employment and all-inclusive welfare,” says economist Ardian Civici.
“Unfortunately, despite the undeniable positive results, there are many times when Albania has been classified among countries with ‘an impoverishing economic growth’ which means countries which despite having positive economic growth, still produce social and territorial inequalities, strong external and internal migration. In this context economic policies must target two main elements, the increase in production and employment and the transformation of economic growth into development and welfare,” Civici has told Monitor magazine in an interview.
Albania has had one of the region’s highest growth rates in the aftermath of the global financial crisis in 2008, but when it comes to inclusive growth it stands in the middle of 79 developing countries, according to a 2017 report by the World Economic Forum, a Switzerland-based think tank.
On a 1 to 7 scale with one representing the worst and seven the best, Albania scored 4.02 to rank 38th among 79 developing countries at the Inclusive Growth and Development Index, worse than neighboring Macedonia which ranked 24th, but better compared to Serbia’s 42nd.
GDP per capita, which nationwide is at about a third of EU average, remains significantly lower in some northern Albanian regions in an ongoing development gap that dates back to communism, despite the past 25 years of transition to democracy and market economy having somehow bridged the gap.
Due to few employment opportunities and poorly paid jobs, more than 100,000 Albanians have left the country in the past three years, mostly seeking ungrounded asylum in wealthy EU member countries, adding to Albania’s already high levels of migration. About a third of Albania’s population lives abroad, mainly Italy and Greece, where 1 million Albanians live and work.
The World Bank also expects Albania’s upper middle-income poverty rate, measured against the regional standardized benchmark of US$5.5 a day in 2011 purchasing power parity, currently affecting about 33 percent of the population, to reduce by 2.6 percentage points to 30.2 percent in 2019.
The poverty rate remains one of the regions highest and is one of the key factors for Albania having one of the world’s highest migration rates compared to its population.
Arben Malaj, another economy expert who served as the country’s finance minister in the aftermath of the 1997 turmoil triggered by the collapse of some pyramid investment schemes, says only a 6 percent growth rate can bring tangible results among poor households.
“Albanian policymakers and the elected government face the challenge of a higher and fairer economic growth. The government has expressed its ambition of achieving an economic growth of 6 percent at the end of its second mandate, a difficult but crucial target to soften the social wounds and assist people in need,” says Malaj.
The Albanian economy has been growing by 1 to 3 percent in the past eight years compared to a pre-crisis decade of 6 percent annually, the growth rate estimated to bring welfare in one of Europe’s poorest countries.
The Albanian government expects the economy to recover to 4.2 percent for 2018 but international financial institutions such as the IMF and the World Bank forecast Albania’s growth will slow down to 3.5 to 3.7 percent as major energy related investments taper off and no new projects replace them except for the ambitious but controversial Euro 1 billion public private partnership project to upgrade road, health and education infrastructure and a package of tax incentives in the emerging tourism sector to attract investment in luxury hotels and resorts.
“The poor levels of growth in consumption and business loans in both lek and foreign currency, and the labor costs’ failure to increase are indicators showing concrete untapped space in the increase in business investment and public investment which have a considerable impact on the aggregate demand growth,” says Malaj.
Speaking about the economic policies that the ruling majority should pursue in order to produce all inclusive and sustainable growth, Malaj suggests undertaking structural reforms and clear fiscal policies as well eliminating the practice of accumulated unpaid bills to private sector companies.
“Firstly, it’s the structural reforms that provide positive energy in consumption and investment both the in the public and private sectors. I am not elaborating on the reforms in detail, but well-governance, rule of law, property rights, fight against corruption and a better business environment are estimated as very important for a higher, sustainable and fairer economic growth,” he adds.
Corruption, high tax rates and an inefficient judiciary are the top concerns facing foreign and local businesses operating in Albania, surveys have shown.
2017 performance
Economists describe Albania’s 2017 performance positive considering the country’s troubled experience with public finances in electoral years.
Arben Malaj says there were positive developments in the preservation of the stability in public finances last year, “but the burden of fiscal consolidation mainly shifted on the cut of public expenditure, to a critical degree for some public services.”
“In addition to the positive trends, the Albanian economy continues to face some challenges. Inflation continues to remain considerably below the monetary policy’s target and that is also because of the ongoing economic growth below its potential historical average. The gap is only slowly narrowing and that does not increase households’ disposable income, a factor that keeps inflation rate below the targeted level,” says Malaj.
Albania’s inflation rate hit a five-year high of 2 percent in 2017, but continued remaining below the central bank’s 3 percent target estimated to have a positive impact on consumption and the economy as a whole.
The recovery comes after consumer prices hit a 16-year low of 1.3 percent in 2016 and reflects rising global oil and food prices in 2017, but also sluggish domestic consumption as the economy has been growing between 3 to 4 percent in the past couple of years, mainly thanks to some major energy-related investment.
Meanwhile, economist Ardian Civici says the Albanian economy was influenced by four main factors in 2017 including the conclusion of a binding IMF deal, the June 25 elections and the political deadlock ahead of them with a negative impact on the economy, the politic tension over the long-awaited justice reform and the drastic change in the structure of the new government with the merge of some ministries and institutions.
“Among negative elements I would single out the standstill in internal consumption and the reduction of the nationwide average wages, the inflation level at 2 percent, the poor level in credit to the economy, the increase in the tax burden, problems with the business climate especially with the property issues and corruption and tax repression,” says Civici.
“There were also delays in executing public investment and completing some major infrastructure projects. There was lack of clarity and tensioned political debate on the public private partnerships and concessions, the fluctuations in efforts to put public debt in check, and very modest results in reducing poverty and achieving a balanced territorial development,” adds Civici.
2018 prospects
Economists are optimistic Albania could achieve growth of up to 4 percent in 2018 but warn keeping FDI at high levels after the two major energy-related projects complete by 2018 will be a challenge.
“Possible concerns I could identify include weaknesses in attracting FDI at a time when the immediate need of the Albanian economy is to replace two of its most important FDI projects such as TAP and the Devoll Hydropower that complete in 2018,” says Ardian Civici.
“There is also need for institutional and financial clarification of conditions and procedures to execute PPPs, handling difficulties in fulfilling the budget revenue targets, reducing public debt as a percentage to the GDP, the efficient use of public investment and the boost of bank credit, the reduction of informality and putting an end to economic and financial activity linked to the proceeds of dubious origin from drugs, crime and money laundering,” says Civici.
According to him, the 2018 challenges are making use of the regional and EU integration processes, increasing investment in some high technology and innovative sectors that produce new and well paid jobs and the start in the implementation of the justice reform that will have positive impacts on the business climate.
“We should be more prepared about how to read ‘market and price signals and messages’ translating them into quality and efficient investments and wise tax, managerial and institutional policies,” says Civici, adding that Albania should learn from its past mistakes of massively orienting investment toward the construction industry, petrol stations and bars and restaurants.
“The trends in ‘economic behavior” or ‘economic reaction’ are conditioned by the presence and expected effects of a series of factors and policies. Excluding the deepening of political conflict that can turn into a factor triggering a series of negative economic phenomena, 2018 is expected to be a ‘normal’ year,” says Civici.
Economist Arben Malaj is also optimistic about Albania’s 2018 prospects and says the recovery of Italy and Greece will have a positive impact despite uncertainties over Italy’s next March’s general elections.
“I believe the Albanian economy will be more and more conditioned by internal developments. Impacts from foreign markets will be limited. Developments in the economies of our main trading partners are expected to be positive even though the Italian economy could face in 2018 tough problems with the debt level and its cost and budget costs on the banking system restructuring,” says Malaj.
“Business expect and hope all barriers in their investment projects will reduce by 2018. Barriers and abusive costs could be at a local or central government level. There should be a thorough analysis on the reasons for the gap in production capacities that are estimated below their historical average. The gap should narrow through an increase in production and services that bring employment,” he adds.
“The stability, neutrality and simplicity of fiscal policies as well as public and tax administration have to significantly improve,” says Malaj, adding that the government should also put an end to the practice of accumulated unpaid bills and delays in VAT refunds to the private sector as barriers, as barriers reducing their resources on new investment and lower the private investment contribution to employment and economic growth.
