TIRANA, Oct. 15 – Albania has made moderate progress in improving its ability to take on the obligations of membership, in particular in the areas of competition, taxation, statistics, justice, freedom and security, education and culture and customs union, says the European Commission in its latest 2012 progress report on Albania. Progress has been limited in other areas such as freedom of movement for workers, public procurement, intellectual property law, food safety, fisheries, energy, and environment and climate change.
Albania should be able to cope with competitive pressures and market forces within the Union in the medium term, provided that it accelerates and deepens structural reforms, including by reinforcing the legal system and strengthening physical and human capital, says the European Commission in its 2012 progress report on Albania.
Weaknesses in the rule of law hinder the enforceability of contracts while pending issues in the area of property rights hamper investment and business environment in general. The informal sector and weak tax collection remain a challenge. The high and increasing level of non-performing loans in the banking system is an issue of concern. Investment in human capital and infrastructure remain inadequate. The lack of diversification of the production base in terms of sectors and export markets leaves the economy vulnerable to external shocks, says the report.
“Energy market reforms require further efforts to ensure the viability of the sector. The administrative capacity and independence of the Energy Regulatory Entity require further strengthening. Overall, preparations in the field of transport and in the field of energy are not very advanced. A dispute between KESH and the distribution company CEZ over outstanding mutual debt remains unsolved and may endanger the stability of the electricity sector.”
The independence and administrative capacity of INSTAT has to be secured, says the report.
Albania maintained macroeconomic stability. GDP growth, driven mainly by domestic demand, decelerated but remained positive at 3.1% in 2011. Economic activity has been stagnant in the first quarter of 2012 amid weather related power disruptions. Underperforming revenue and higher expenditure led to a rise in the government deficit and consequently higher public debt. Structural reforms lost steam in part due to the fragile domestic political dialogue. Monetary policy remained sound and kept inflation within the target range. Weak enforceability of contracts and the rule of law, inadequate levels of infrastructure and human capital, as well as the informal economy continue to hamper economic development.
As regards the economic criteria, Albania made some further progress towards becoming a functioning market economy.
Concern over public debt trajectory
The European Commission has expressed its concern over the changes the Albanian government has made to macroeconomic fiscal framework under which public debt is expected to remain unchanged at its legal ceiling of 60 percent of the GDP for the next four years.
In its latest economic quarterly on pre-accession countries, the European Commission says “Public debt is planned to remain just below 60% of GDP in the period 2012-2015 – a trajectory which is significantly less ambitious than foreseen in the 2012 Economic and Fiscal Programme. The macroeconomic scenario underlying the MEFF assumes a much slower pace of GDP growth,” says the Commission.
Economic growth in 2012 is projected at 3%, accelerating gradually to 4.5% by 2015, according to the Albanian government.
In its review to the macroeconomic framework, government expects public debt to remain at 59.9 percent of the GDP for the 2012-2014 period, only 0.1 percent below its legal ceiling
International financial institutions expect the Albanian economy to grow between 0.5 to 1.5 percent for 2012 while government has not reviewed downward its overoptimistic 4.3 percent target yet.
With an estimated growth rate of 3 percent in 2011, Albania’s economy is the only one among the 9 EU candidate and potential candidate countries to have recorded a lower GDP growth rate compared to 2009 when all EU aspirants registered negative growth rates, revealing that although initially immune to the crisis, recovery will be difficult and might take longer than its peers. Having recorded the highest growth rates in 2009 and 2010, Albania’s growth in 2011 ranks only the fifth highest after Turkey, Macedonia, Iceland and Kosovo, according to a quarterly report published by the European Commission’s Directorate General for Economic and Financial Affairs.
While Albania’s official unemployment rate and inflation rate at 13.3 percent and 3.5 percent respectively at the end of 2011 are among the lowest in all EU aspirants, the current account deficit at 12.2 percent of the GDP is the second highest after Montenegro’s 19.9 percent.
Despite having preserved an annual 3 percent growth rate from 2009 to 2011, compared to an average of 6 percent in the pre crisis period, the Albanian economy lags behind almost every EU aspirant, including Bosnia Herzegovina in GDP per capita and purchasing power indicators.
