TIRANA, Jan. 10 – Key sectors of the Albanian economy such as tourism and agriculture continue to remain unattractive to foreign investors in Albania who have mainly focused on energy-related projects in the past few years.
A report published by the country’s central bank shows that agriculture, a key sector that employs about half of the country’s population but produces only about 20 percent of the GDP, has attracted an FDI stock of only about €8 million, unveiling the huge untapped potential as Albanian agriculture production and exports are increasing.
The fragmentation of farm land into plots of little more than one hectare split in four parcels in the early 1990s land reform is described as a huge burden for the development of Albanian agriculture in terms of access to financing and investment, reducing their competitiveness due to high costs.
The Albanian government spends only 0.5 percent of the GDP on agriculture while credit to the sector represents only 2 percent of total credit to businesses, according to central bank data.
When it comes to tourism, a sector which has emerged as one of the key drivers of Albania’s growth in the past few years, the FDI stock in the travel and tourism industry represented by ‘transportation and accommodation’ has remained stuck at about €160 million in the past four years.
Albania is trying to lure investors with a package of tax incentives in a bid to promote investment in luxury hotels and resorts, but the long-standing unclear property issue and inefficient judiciary and highly perceived corruption remain key barriers.
The industry which directly employs 85,000 people is emerging as a key driver of the Albanian economy already accounting for about 13 percent of the country’s GDP and with optimistic mid and long-term growth prospects as the country’s attracts more and more tourists.
More and more Albanian investors have turned to agriculture and tourism in the past few years to diversify their investment following a long-ailing construction industry which has revived only thanks to key energy-related and tourism projects.
Energy tops FDI stock
Due to two main energy-related projects that have been under construction in the country in the past few years, the Trans Adriatic Pipeline and the Devoll hydropower, Albania’s FDI stock in the electricity and gas sectors has soared since 2014.
The FDI stock in the hydropower and gas sector rose to €1.45 billion at the end of the third quarter of 2017, up from a mere €13 million in 2014 just before the Devoll HPP by Norway’s Statkraft and the Albanian TAP section bringing Caspian gas to Europe launched their construction works, leading the FDI stock by sector.
The extractive industry, dominated by oil and mining, had a FDI stock of about €800 million at the end of the third quarter of 2017, up only €70 compared to mid-2014 just before the slump in commodity prices almost paralyzing the country’s exports.
With a third of FDI stock concentrated on energy-related sectors, some €2.2 billion out of €6.3 billion, the situation also affects Albania’s poorly diversified exports, two-thirds of which rely on garment and footwear and oil and minerals.
“FDI inflows have been increasing mainly in the energy (gas pipeline, hydropower) and mining sectors, but remain limited in other tradable sectors, which suggests that the recent surge of FDI may not generate significant export growth,” says the IMF in a report.
Albania’s exports likely registered double-digit growth rates in 2017 following sluggish performance affected by a slump in commodity prices in previous couple of years, triggered by the resumption of the country’s largest steelmaker.
The Washington-based financial institution warns Albania’s undiversified export markets and the concentration of its exports in low value-added sectors may be an impediment to future growth.
The IMF, whose relations with the Albanian government were downgraded to an advisory role in early 2017 following the conclusion of a loan supported binding deal, expects the Albanian economy to grow by 3.7 percent in 2018 when the two major energy-related projects are set complete their investment stage.
“In contrast to the higher value-added chemicals and manufacturing exports of neighboring countries such as Serbia and Macedonia, Albania’s exports are mainly in the textile and footwear sectors, and oil and minerals. Growth prospects are thus constrained by the subdued medium-term outlook for oil prices, especially given Albania’s high cost of oil exploitation,” says the IMF.
“While regional exports are rising, more than half of exports go to Italy. While some of these products, especially textiles, are processed in Albania from imported Italian components and are subsequently re-exported to other markets, a large portion are intended for final consumption in Italy, thus making Albania dependent on a country facing low growth potential,” the Fund adds.
Canadian, Dutch, Swiss race
Canada, the Netherlands and Switzerland each increased their FDI stock to an equal €826 million at the end of the third quarter of 2017, each sharing the second largest investor position.
Swiss and Dutch foreign direct investment in Albania have registered a sharp increase in the past couple of years thanks to two major energy-related foreign direct investment such as TAP and the Devoll HPP which are being channeled through these countries.
Meanwhile, Canadian FDI is also picking up as oil prices recover from the mid-2014 slump and investment increases following the late 2016 acquisition of Bankers Petroleum, Albania’s largest oil producer, by Chinese investors.
Neighboring Greece, whose economy is showing signs of recovery after escaping its worst ever recession, remains the largest investor in Albania with an FDI stock of €1.26 billion.
Albania’s top trading partner, Italy, increased its FDI stock to €639 million in late 2017, ranking the fifth largest investor.
FDI prospects
FDI slightly dropped to €677 million in the first three quarters of 2017, down by 4.25 percent or €30 million compared to the same period in the previous year, in an expected slowdown for an election year that was preceded by a tense political situation ahead of the June 25 elections and uncertainties over the new government and its tax policy.
The Trans Adriatic Pipeline bringing Caspian gas to Europe and the Devoll Hydropower project by Norway’s Statkraft have been the key drivers of FDI in the country in the past three years at a time when oil and mining investment almost paralyzed following a slump in commodity prices in mid-2014, with a negative impact also on the country’s poorly diversified exports.
With no major FDI projects in sight, the Socialist Party government intends to fill the gap expected to be created starting 2019 with a package of incentives stripping luxury tourism investments of taxes for a 10-year period as well as a rather controversial €1 billion public-private partnership project to upgrade the country’s road, health and education infrastructure. The ambitious PPP project has already triggered concern over the benefits the country will have considering the troubled experience Albania has had with concessions, already costing taxpayers dozens of millions of euros in commitments the Albanian government has for specific services offered in key health sector as well as the customs scanning and waste management services.
