TIRANA, Aug. 21 – The external sector of the economy presented a negative balance on current accounts compared to 2006, mainly caused by a high trade deficit, according to the Bank of Albania. Incoming capital was sufficient to offset the current deficit, allowing an overall positive balance amounting to EUR 207 million.
The current account indicator to the GDP accounted for about 7.3 per cent, maintaining the same level as in the previous year.
The trade deficit has become a permanent feature of foreign trade developments, affecting the high levels of the current account deficit. The high demand for imports, partly to meet economic growth needs and partly to meet consumer needs, has provided evidence for the expansion of imports. These dynamics as observed in imports was not followed by the growth of exports, causing the trade gap to deepen and constitute the main catalyst for the high current deficit.
The growth of imports over 2006 was a result of several external factors – the unusual oil price rise and the price rise of certain goods in the international markets – and of internal factors such as the aggravated energy situation in the country, which led to high imports in energy.
The relative indicator of imports to GDP accounted for about 31.8 per cent over 2006 compared to 29.8 in 2005.
Over 2006, Albania recorded the highest trade deficit ever, which amounted to EUR 1.7 million. Nevertheless, it would have been worse, if exports had not made any progress.
The slowdown in exports over the previous year – owing to the increase of the competitive pressures in key industries such as textiles and footwear, to the opening of the European markets towards the Far East countries including China, India and Turkey, followed the economic growth slowdown in partner countries and the aggravated situation with the energy supply in Albania which recovered considerably over this year. Export revenues accounted for about 8.7 percent of the GDP, which represents the highest level ever.
The considerable incoming current transfers over the years helped to reduce the high trade deficit, causing the balance of payments position to improve. Over 2006, the net flow of current transfers amounted to about EUR 1 billion, out of which about 93 per cent are a contribution of workers’ remittances. The latter totaled EUR 935 million, sharing about 12.8 per cent of the GDP.
On the other hand, this year’s current deficit was fully able to be financed by the foreign capital inflows in the form of capital transfers and by the financial flows in the form of foreign direct investments and borrowing from abroad.
These capital inflows caused the overall balance of payments to end in a surplus of about EUR 207 million, from EUR 125 million the previous year.
The overall balance surplus led to the increase of foreign reserves, which as of the end of 2006 totaled EUR 1.3 billion. It also party provides evidence for the stability of the lek over the year.
Despite the presence of the current deficit throughout the ongoing transition period, its level over the last two years is an issue financial officials will pay attention to.
Although having an adequate foreign reserve, Albania’s economic growth and its overall macroeconomic stability allow such a high deficit in the short run that its stability in the long run may require special attention.
Even in the short-run, the long-term stable sources constitute the favored means to finance the deficit. Foreign direct investments are the key source of financing, since they are stable and frequently contribute to technology and managing skills. Although Albania has attracted high flows of foreign direct investments during the privatization period, their relative indicator, as a share to GDP, remains low. For instance, in 2006, it accounted for 3.6 per cent of the GDP.
The financing of the ongoing current deficit through borrowing from abroad is generally considered a risky strategy, though it facilitates the country’s external position of being faced with the financial solvency of external debt.
External debt service is assessed at modest levels. For 2006, it accounted for about 4.1 per cent of total exports.
In the short-term, attention should be paid to the narrowing of the current deficit and to its financing through long-term and stable cash flow.
Considering that the increase of the current deficit is mainly a consequence of the deepening trade deficit, this is what the policy decision-making should focus on.
Albania’s current deficit may be stable in the short-term; however this stability may be put in question in the long-term, in case structural reforms will not be put in place for the growth of exports. In the medium-term, once the business environment improves, attention will be paid to the increase of domestic and foreign investments towards export-oriented activities.
