TIRANA, Feb. 26 – Albania and other Western Balkans EU aspirant countries could need up to two centuries to catch up with EU living standards, a report by London-based European Bank for Reconstruction and Development has shown.
The 200-year gap is the pessimistic convergence scenario that the EBRD predicts for the region to fully converge with average EU living standards compared with a baseline scenario of 60 years and an optimistic scenario of 40 years.
“The speed of catch up would depend on the pace of addressing the challenges that hamper the region from developing its full potential. Full EU convergence will require states to implement a determined and comprehensive reform agenda towards boosting productivity and investment,” says an EBRD diagnostic report as the financial institution hosted its third Western Balkans London investment summit this week.
Low productivity is identified as the fundamental problem holding back the region’s economic development, reflecting years of underinvestment, weak institutions and a difficult business environment. “The biggest challenges persist in the areas of competitiveness and good governance. Institutions are often weak and the still-heavy state presence in certain industries is preventing the private sector – the main contributor to economic output – from reaching its full potential,” says the EBRD.
The report says that private sector productivity across the Western Balkans is at just 60 per cent of EU levels overall, with manufacturing at only 55 per cent of EU productivity levels and services on average at 70 per cent. A 2013 EBRD/World Bank survey shows Albania has the region’s poorest labour productivity, defined as total sales divided by full-time employment.
Some catch-up with EU living standards has already taken place in the past 15 years when the Western Balkan economies grew by an average of 3.2 percent from 2001 to 2016 compared to a growth rate of 1.4 percent in the European Union.
However, the speed of convergence significantly slowed down in the post crisis period from 2009 to 2016 when average growth in the six Western Balkan economies was just 1.2 per cent, compared with 0.7 per cent in the EU. In the pre-crisis period of 2001 to 2008, annual growth in the Western Balkan was more than three percentage points higher than in the EU.
“A baseline scenario, which uses the average growth rates for the period of 2001-16, implies that the WB6 region, on average, could achieve the average GDP per capita in the EU in about 60 years time. An optimistic scenario, which uses pre-crisis growth rates, would yield catch up with
EU living standards in just under 40 years, while a pessimistic scenario, which uses the post-crisis average growth rates, means that catching up takes place after 200 years,” says the EBRD report.
The findings of the EBRD report are in line with a late 2017 World Bank report showing that catching up with the average EU income could take Albania and other EU aspirant Western Balkan economies about six decades unless current sluggish GDP growth doubles to 5 or 6 percent, the World Bank has warned in a recent report.
“With faster growth of 5 to 6 percent, convergence could be achieved in just two decades. That will require a bold and sustained implementation of structural reforms and steady progress in EU accession processes,” says the Washington-based financial institution.
Albania, whose consumption and GDP per capita is at only a third of the EU average, will need 35 years to catch with the EU average income if it continues growing under the current 4 percent rate and 20 years if growth accelerates to an annual 5 percent, World Bank officials have said citing an optimistic scenario.
To close the prosperity gap, reforms aimed at building sustainable market economies must be intensified. The EBRD report calls for measures to promote a dynamic and vibrant private sector, backed up by strong domestic and foreign investment flows, and says “the state must play an important growth-enabling role by providing the rule of law, a stable macroeconomic environment and clear rules of the game for businesses.”
The latest EBRD Transition report has shown that more than a quarter of a century after the collapse of the country’s communist regime, similarly to regional Western Balkan competitors, the Albanian economy still has some indicators representing little or no change from a rigid centrally planned economy in the corporate, energy, infrastructure and financial sectors.
On a 1 to 10 scale with 10 denoting the frontier in terms of a sustainable market economy, the Albanian economy scored an average of 5, slightly lower compared to key regional competitors in the transition scores for six qualities of a sustainable market economy that involve being competitive, well-governed, green, inclusive, resilient and integrated.
The EBRD expects the Albanian economy to grow by 3.7 percent over 2017-2018 driven by some major energy-related investment, but warns significant downside risks associated with the embedded structural weaknesses in public administration and infrastructure, as well as vulnerability to external shocks in the Eurozone, where Italy and Greece are Albania’s main trading partners.
The EBRD forecast is significantly lower compared to the Albanian government’s optimistic scenario of growth recovering to 3.9 percent in 2017 and picking up to 4.2 percent in 2018 when some major energy-related projects such as TAP and the Devoll HPP are completed.
An EU-candidate since mid-2014, Albania is hoping to launch accession talks this year as it has launched the implementation of its long-awaited justice reform, a key requirement by the European Commission that would also boost investor confidence in the judiciary.
Serbia and Montenegro are the only two regional countries to have opened accession talks that could join the EU by 2025, according to the new EU enlargement strategy.
Rama appeals for oil, tourism investment
Addressing the EBRD summit, Prime Minister Rama urged what he called weather-depressed British investors to consider Western Balkans as a morale booster investment opportunity.
He said Albania offers opportunities in the oil and gas sector where British-Dutch giant Shell has already obtained three oil exploration blocks and the promising tourism industry.
“We are reasonably optimistic that there are new major oil and gas resources in Albania and the region,” said Rama.
Commenting on tourism, one of Albania’s most promising sectors, Rama said investments are sure to pay off as about a quarter of tourists booking their holidays in Albania are already being turned down by tour operators due to lack of sufficient accommodation capacity.
“Tourism will be our main focus at least for the next ten years because there is strong and growing demand. Whoever comes and whoever explores opportunities in tourism is welcome and there is good reason to come to the Balkans as profit is good,” said Rama.
The tourism industry has been one of the country’s fastest growing in the past few years, attracting more than 4 million tourists and generating about €1.5 billion, about 14 percent of the country’s GDP, in 2016 alone.
New luxury accommodation units built by internationally renowned chained-brand hotels or under management or franchise contracts with them, 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 or five-star units worth at least €15 million, according to package of tax incentives Albania approved in late 2017.
De-euroization, Regional Investment Platform
At the London-summit, the EBRD joined the Albanian government’s de-euroization strategy aimed at reducing lending in Europe’ single currency by signing a deal with Albania’s central bank to join forces in boosting local currency lending by offering an alternative to foreign-currency financing, currently accounting for more than half of total credit, something which limits the central bank’s monetary policy impact and places borrowers at currency exchange risk.
A new electronic tool was also launched at the EBRD Western Balkans Investment Summit in London which will facilitate market access and raise the region’s attractiveness to foreign direct investment, a key driver of growth in emerging markets.
The online Regional Investment Platform will provide a one-stop shop for foreign investors interested in the Western Balkans.
Back in mid-2017, regional leaders agreed to develop an EU-backed regional economic area where goods, services, investments and skilled workers can move without obstacles.
The EBRD is one of Albania’s main private sector lenders, having supported more than 80 projects worth about 1 billion euros in key sectors of the country’s economy and more than €10 billion in some 600 operation in all six Western Balkan economies.
