Sluggish domestic consumption, poor private investments, underperforming government revenue, public debt having climbed to around 70 percent of the GDP, non-performing loans at around 25 percent are some of the key wounds of the Albanian economy
By Ervin Lisaku
TIRANA, Dec. 23 – Albania is expected to face another tough year in 2014 after the economy has been considerably slowing down in the past couple of years affected by spillover impacts from the Eurozone crisis and problems with public finances at home. Albania is forecast to grow by only 1.2 percent in 2013, down from 1.6 percent in 2012 and an average of 3 percent in the 2009-2011 period when it was one of one of the best performing economies in the region.
At only 1.2 percent, Albania would register the poorest performance in the past 16 years after the 1997 recession triggered by the notorious pyramid investments schemes.
Prospects for next year appear slightly more optimistic with international financial institutions and government expecting growth to slightly accelerate to 2 percent as top trade partners Italy and Greece are forecast to escape recession.
Sluggish domestic consumption, poor private investments, underperforming government revenue, public debt having climbed to around 70 percent of the GDP, non-performing loans at around 25 percent are some of the key wounds of the Albanian economy. In addition, poor consumer and business confidence and some increased taxes for 2014 are expected to further complicate the situation for 2014, when Albania switches to progressive taxation, abandoning its 10 percent flat tax system in force since 2008.
Lending having plunged to negative growth rates and deposits striving to maintain positive growth rates are some other indicators of the deteriorated situation. Both migrant remittances and tourism revenue have been on a downward trend since the outbreak of the global crisis in 2009.
Meanwhile, exports and foreign direct investment have been on an upward trend emerging as Albania’s key drivers of growth.
Unpaid government bills and arrears to the business community, estimated at around 172 million Euros by an audit firm, have further complicated the situation for the business community, especially the ailing construction sector which has been in crisis since 2008.
Inflation rate at around 2 percent during 2013 has allowed the central bank to make several consecutive cuts to the key interest rates to a historic low of 3 percent but the moves have only been reflected on lower T-bill yields and lek-denominated deposited. Interest rates on lek-denominated loans, which account for around 40 percent of total lending, have remained almost unchanged reflecting the tight lending standards applied by the 16 commercial banks in Albania which the central bank says remain liquid and well capitalized.
The new Socialist Party-led Albanian government, which took office in September 2013, has adopted a new fiscal package which starting January 2014 switches Albania to progressive taxation, lowering personal income tax for low and middle-income households but increasing corporate income tax for mid-sized and big businesses to 15 percent, a move strongly opposed by the business community.
In addition, an increase in fuel taxes by 10 lek/litre starting January 2014 is expected to take fuel prices at a record high of 200 lek/litre (Euro1.4), further increasing costs for both businesses and households. Government has also doubled property taxes and imposed higher excise rates on tobacco.
The new fiscal package has been drafted with the assistance of the IMF, which has returned to Albania with a new three-year mission and a Euro 300 million loan which will be used to pay off unpaid bills to the business community. The IMF concluded its permanent mission to Albania in January 2009 when relations with the Fund were reduced to an advisory role.
Albania’s escalating trouble with public finances has also been reflected on the latest rating by Standard & Poor’s, one of the top three international agencies, which has lowered Albania’s long-term sovereign credit ratings to ‘B’ from ‘B+ with a negative outlook.
International financial institutions have suggested that supporting and strengthening the fragile recovery and growth in Albania requires a shift from domestic demand driven growth to export-oriented growth.
In its 2013-2017 programme, the Socialist Party-led government recognizes the limitations of the development model based on a remittances-fuelled construction boom and raw material exports, and aims to shift the focus to new sources of growth by identifying manufacturing, energy, tourism and agribusiness as priority areas. The programme also pledges fiscal discipline and the payment of accumulated public arrears.
