While VAT rose by 25 percent in the first four months of this year indicating a recovery in domestic consumption, imports of machinery, equipment and spare parts, an indicator measuring private investments, rose by only 3.7 percent despite the 20 percent VAT having been lifted on production machinery.
By Ervin Lisaku
TIRANA, May 28 – Double digit growth rates in VAT and a slight recovery in imports of machinery, equipment and spare parts in the first four months of this year hints the Albanian economy has made progress in domestic consumption but still lags behind in private investments. Lending to the business community at a negative 2 percent also reconfirms the poor investments by the private sector after the Albanian economy grew by only 0.4 percent in 2013, the poorest growth rate in more than a decade.
INSTAT data published this week show VAT, which is levied at a fixed 20 percent rate on almost every product and service and is the key tax accounting for one-third of total revenue, rose by 25.4 percent, signaling a recovery in domestic consumption which is the key driver of Albania’s growth.
Meanwhile, Finance Ministry data show imports of machinery, equipment and spare parts, an indicator also measuring investments by the business community, rose by only 3.7 percent to 28.5 billion lek (Euro 200 million) year-on-year in the first four months of this year, despite the 20 percent VAT having been lifted on production machinery.
Bank of Albania data show lending to businesses plunged into moderate negative growth rates of around 2 percent in March 2014 as non-performing loans stand at a record 24 percent.
The sharp reduction in public investments and the increase in the level of taxation from the shift to progressive taxation and higher excise taxes has limited the role of fiscal stimulus in early 2014. However, the start of payment of accumulated unpaid bills following a Euro 331 million loan by the IMF is expected to have a positive impact on investments and lending in the second half of the year.
The first quarter of the year hints 2014 could be a turning point for the Albanian economy as indicators of growth, business perceptions and the performance of financial markets is recovering faster than we expected, says central bank governor Ardian Fullani in the monetary policy report for the first quarter of the year.
The central bank estimates that the performance of the Albanian economy in the short run will depend on the progress of private investments and consumption, two components of aggregate demand which have been facing sluggish growth in the past couple of years.
Affected by escalating trouble with public finances and spillover impacts from top trade partners Italy and Greece, the Albanian economy struggled to remain at positive growth rates in 2013, facing the worst situation since the 1997 turmoil triggered by the so-called pyramid investment schemes. Data published by the country’s state statistical institute, INSTAT, show the Albanian economy grew by only 0.44 percent in 2013, down from 1.3 percent in 2012, an average of 3.4 percent annually from 2009 to 2011 and a pre-crisis decade of an average 6 percent.
Prospects for 2014 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 24 percent are some of the key wounds of the Albanian economy. Lending having plunged to moderate negative growth rates and deposits striving to maintain positive growth rates are some other indicators of the critical 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.
The good news is that mid-term prospects appear optimistic and Albania will return to moderate growth rates.
The International Monetary Fund expects Albania to be one of the best performing economies among emerging and developing European countries in the next five years. In its latest World Economic Outlook for April 2014, the IMF expects the Albanian economy to recover to 2.1 percent in 2014 after sluggish growth in 2013 and accelerate to 3.3 percent in 2015.
The same to the Albanian government’s projections, the IMF expects public debt to climb to 71.6 percent of the GDP in 2014, before going on a downward trend and drop from 71.1 percent in 2015 to 57.1 percent in 2019.
