TIRANA, July 9 – The Albanian economy suffered a slight shrink in the first quarter of this year, which is the second during the past two years, revealing that the global crisis impacts will be far tougher than government expects. Latest data published by the country’s Institute of Statistics (INSTAT), often prejudiced for the unreliability of its data, show the GDP contracted by 0.2 percent in the first quarter of 2012 year-on-year as performance in the key industry and construction sectors registered sharp double-digit shrinks.
The last time the Albanian economy registered a shrink was in the final quarter of 2009 when INSTAT first reported a 0.8 percent drop but later adjusted it to 1.5 percent year-on-year.
The first quarter performance was an expected result considering the poor performance of domestic consumption and exports, the key drivers of the Albanian economy. In addition, severe weather conditions paralyzing the country’s northern and southeastern areas and huge electricity imports further aggravated matters. Foreign direct investment, tourism revenue and remittances were the only indicators to register positive growth in early 2012.
Industry and the already crisis-hit construction were the poorest performing sectors suffering sharp shrinks of 19.3 percent and 17.6 percent, respectively. Post-telecommunication and transport also dropped by 4.8 percent and 1.7 percent y-o-y.
Services, trade and agriculture were the only sectors to register positive growth in the first quarter recording growth rates of 11.1 percent, 5.3 percent and 4.5 percent respectively.
Albania enjoyed an average annual growth rate of 6 percent from 2003 to 2008 and was one of the few countries to register positive growth of 3.3 percent in 2009 in the outbreak of the global crisis. According to INSTAT, the 2010 growth was at 3.9 percent, down from 7.5 percent in 2008. Back in 2011, the Albanian economy grew by 3.1 percent, remaining at the same moderate growth rates for the third year in a row. Despite having preserved an annual moderate 3 percent growth rate from 2009 to 2011, the Albanian economy lags behind almost every EU aspirant in GDP per capita and purchasing power indicators.
Govt, opposition reaction
Speaking of the country’s economic performance in the first quarter of this year, Prime Minister Sali Berisha blamed the poor first quarter performance on the harsh winter which he said paralyzed 70 percent of the country’s territory, and low level of domestic hydro-electricity generation.
“All these factors and the deep crisis affecting the surrounding countries of course created serious difficulty in the first quarter but the difficulties were overcome in the second and third quarters. It is the performance of these quarters that made possible the increase of wages and pensions,” said Berisha at a meeting with his Democratic Party lawmakers this week.
Reacting to the INSTAT publication, the opposition Socialist Party said the state statistical institute controlled by Prime Minister Sali Berisha was hiding the economic shrink which is far bigger than reported. Ilir Beqja, a SP secretary for the Programme said the shrink in the industry, construction and post-telecommunication sectors was not a result of the tough dry winter but wrong policies revealing the spontaneous development of the Albanian economy, corruption and lack of anti-crisis action.
Debate over INSTAT’s reliability
In early 2012, ruling majority MPs put the country’s state Institute of Statistics, INSTAT, under the exclusive control of Prime Minister Sali Berisha sparking fresh debates over the already biased data it publishes as the country’s economy’s economy strives to overcome the crisis impacts.
Opposition MPs and economy experts strongly opposed the move saying that the control the Prime Minister already had over INSTAT was being legally enforced and suggested that the state institute producing national accounts should be placed under Parliament’s authority in order not to further harm its reliability.
As the most important international financial institution monitoring Albanian public finances, the IMF has also often voiced concern over the reliability of data produced by INSTAT. In its latest 2011 country report, IMF underlined ongoing problems with respect to the reliability of the annual and quarterly national account estimates.
First quarter performance
Finance Ministry data show total government revenues during the first three months of this year grew by only 1.2 percent to 78.4 billion lek year-on-year failing to meet government targets by 5 percent or 4 billion lek (Euro 28.5 million). Government expects revenues to increase by 7.8 percent and the economy to grow by 4.3 percent for 2012, which is twice higher compared to what international financial institutions forecast. Experts have earlier noted that a mere 1.75 percent growth in government revenues for 2011, the lowest in the past 11 years and failure to meet revenues targets by 4 percent even after mid-year budget cuts in 2011 is the clearest sign government has drafted an overoptimistic budget for 2012 and will be forced to make sharp cuts during the year as global crisis impacts become tougher and the Eurozone is expected to face mild recession.
Prospects become more pessimistic as both domestic consumption and exports, two of the key drivers of Albania’s growth failed to grow in early 2012. Businesses also faced tough times in early 2012 after profit tax registered a sharp 21.8 percent shrink at the end of the first quarter.
The value added tax and excise taxes, two of the key indicators measuring domestic consumption
and accounting for almost half of total government revenues, grew by only 0.8 percent and 3.2 percent respectively, failing to meet targets by 5 percent each.
Government’s balance sheet was further deteriorated by a 2 billion lek loan to state owned power corporation KESH for emergency power imports which increased the budget deficit to 11.5 billion lek, 3.7 times higher than planned for the first quarter of 2011.
The performance of exports which in the first quarter of this year shrank by 12 percent due to sluggish demand from crisis-hit EU countries makes Albania’s economic prospects for 2012 even grimmer.
INSTAT data on imports also confirm the poor performance in domestic consumption. A net import country, Albania imported 21.5 billion lek of “food, beverage and tobacco” during the first quarter of this year, down 1.2 percent compared to the same period in 2011. Albania’s total imports slightly rose by 2.2 percent only thanks to huge electricity imports during the first quarter of 2011.
Growth prospects
Although managing to grow by an average of 3 percent annually from 2009 to 2011, concerns about Albania’s moderate growth as a developing economy with the lowest GDP per capita in the region are growing after international financial institutions have downgraded the country’s growth to 1 to 2 percent for 2012 and 2013.
Expectations for 2012, when the country celebrates its 100th independence anniversary, become even worse as the Eurozone, especially Italy and Greece which are Albania’s top trade partners and the hosts of more than one million immigrants, struggle with severe debt crisis while the EU 27 as a whole remains on the brink of recession.
However, prospects for the second quarter of seem rather more optimistic considering that exports ended their downward for the first five months of this year and electricity situation improved with state-run utility KESH returning to minor exports. A second negative growth rate would put Albania into official recession. Albania has not been in recession since 1997 when the notorious pyramid investment schemes collapsed.
The International Monetary Fund and the European Bank for Reconstruction and Development expect the Albanian economy to grow by 0.5 percent to 1.2 percent while the World Bank has made a 1.6 percent forecast, citing high public debt levels and spillover impacts from the crisis in Greece and Italy.
Government, which had initially set a 4.3 percent GDP growth target seems to have postponed budget cuts for next September waiting to collect some extra revenues from privatization of four small and medium sized hydropower plants and Albpetrol oil company hoping to collect some USD 400 to 450 million in total.
Public debt at around the legal ceiling of 60 percent of the GDP and bad loans at 20 percent are the most eminent threats to the Albanian economy, experts say.
However, what’s more concerning is that lending is having a minor impact in supporting the economy. Tighter lending standards as one in five loans is now officially considered non-performing and poor demand by both consumers and businesses have also affected credit growth. In the 2009-2011 period, lending grew at moderate rates of 10 to 13 percent annually compared to the pre-crisis levels of 30 to 50 percent. The central bank interventions in the monetary policy have also had a minor impact.
Although having lowered the key interest rate by 1 percentage point to a historical record low of 4.25 percent since Sept 2011, the Bank of Albania interventions in the monetary policy have been poorly reflected in lowering interest rates for loans in the domestic currency lek, and T-bill yields.
