TIRANA, May 10 – Albania’s inflation rate remained close to zero for the third month in a row in an unprecedented situation for the past 15 years although authorities have downplayed deflation concerns with the sharp cut in international oil and food prices.
Consumer prices registered sluggish annual growth rates of 0.2 to 0.3 percent in February-April 2016, considerably below the central bank’s 3 percent target which is estimated to have a positive impact on consumption and growth.
The country’s central bank says Albania’s is experiencing a disinflationary situation as inflation rate has not registered negative growth rates yet in order to plunge into deflation.
However, its surprise cut to the key interest rate last week to a new historic low of 1.25 percent despite the poor transmission of the monetary policy into lower lending rates and higher credit reflects its concerns. Since late 2011, the central bank’s easier monetary policy has been mostly reflected on deposit rates and T-bill yields on government’s internal borrowing, rather than lower loan interest rates which are still considered high and unaffordable by the business community because of being seven times higher compared to the deposit rates following their drop to below 1 percent.
In its monetary policy document, the central bank says that “in practice, an inflation rate close to zero could correspond to a deflationary situation.”
In 2015, the Bank of Albania revised its annual inflation target to 3 percent, up from a previous 2 to 3 percent target band, saying that the 3 percent rate reflects the development stage of the Albanian economy as a small, open and developing economy in transition.
The annual inflation rate remained unchanged at 0.3 percent last April, affected by a significant slowdown in food and non-alcoholic beverage prices, the key item in the consumer basket, and lower shoe and clothes, health and transport prices, according to INSTAT, the state statistical office.
The transport group registered the biggest annual decline of 5.3 percent in the April consumer prices with oil prices down by 8.6 percent year-on-year.
Despite a sharp cut in international oil prices, at €1.15/litre Albania still has one of Europe’s highest fuel prices due to the high tax burden applied on oil.
INSTAT says the 2 percent increase in “food and non-alcoholic beverages” and transport prices dropping by 5.3 percent had a combined contribution of 0.4 percent in the April consumer prices. Meanwhile, garment and footwear prices have been registering negative growth since more than one year, hinting sluggish demand.
Albania’s inflation rate increased by an average of 0.57 percent in the first four months of this year, putting at risk the central bank and the government’s expectations of 2 percent for 2016.
Albania’s central bank expects the inflation rate to remain at about 2 percent in 2016 and return to its 3 percent target only by mid-2018.
The disinflation situation forced Albania’s central bank to cut the key interest rate by another 0.25 percent to a historic low of 1.25 percent earlier this month in a new effort to boost sluggish consumption and credit.
Albania’s annual inflation rate slightly accelerated to 1.95 percent in 2015 after hitting a 15-year low of 1.6 percent in 2014, yet standing 1 percent below the central bank’s 3 percent target which is estimated to have a positive impact on the country’s economic growth, according to INSTAT.
The disinflation and deflation situation has also affected regional countries and the euro area where the drop in international oil prices has been better reflected.
Consumption concerns
The Albanian economy registered a significant recovery in 2015 when the GDP grew by 2.6 percent but consumption turned to negative growth rate and unemployment rates registered only a modest decline.
Household consumption contracted by 0.17 percent in 2015 following modest growth rates of 0.13 percent to 2.68 percent in the previous five years. Meanwhile, the unemployment rate slightly dropped to 17.7 percent at the end of 2015 compared to 18 percent in 2014, according to state statistical institute, INSTAT.
Experts say that apart from external factors such as the slow recovery in top trading partners Italy and Greece affecting remittances, trade exchanges and investments, there are a number of other factors such as increased tax burden on businesses, the 2015 asylum exodus and the aggressive nationwide campaigns to collect accumulated unpaid power bills and reduce widespread informality.
Since 2014, the corporate income tax and the withholding tax on dividends, rents and capital gains have increased by 5 percent to 15 percent, making the tax burden in Albania one of the region’s highest.
The asylum exodus in 2015 when more than 65,000 left the country to seek asylum in EU countries is one of the factors not frequently cited for the drop in consumption. For a small economy of 2.8 million residents such as Albania, 65,000 consumers less is a whole city disappearing, negatively affecting consumption of goods and services.
In addition, the nationwide campaigns against electricity thefts and informality are also estimated to have reduced consumption. Dozens of thousands of households nationwide are paying accumulated unpaid bills in monthly installments of about Euro 18 while thousands of businesses previously operating informally are now paying taxes, affecting consumption which has been reflected with only a modest increase in total government revenue.
Central bank governor Gent Sejko explains the drop in consumption as a saving trend by consumers and a psychological effect in times of uncertainty.
The country’s central bank has been stimulating consumption through consecutive cuts to the key interest rate in an effort to reduce interest rates for loans denominated in the national currency and discourage savings as deposit interest rates have dropped to a record low.
Economy experts and business associations have suggested improving the country’s business climate by reducing taxes and bureaucracy to make Albania more competitive in attracting foreign direct investments among regional countries applying lower flat tax regimes of up to 10 percent.
