TIRANA, July 17- The European Commission published its annual “Progress Towards Meeting the Economic Criteria for EU Accession” assessment on July 11, which aims to bring together into a single document the economic chapters of the European Commission’s country reports for the seven enlargement countries Albania, Bosnia and Herzegovina, North Macedonia, Kosovo, Montenegro, Serbia and Turkey. The annual country reports assess progress achieved in each of the countries in advancing the necessary political and economic reforms as well as the legal transformation in line with the EU accession criteria.
The document writes that Albania has made some progress and is moderately prepared in developing a functioning market economy. The economic growth, lowering unemployment which was yet high, the decreasing public debt, the improving of the financial stability, a developing non-banking financial market, and the progressive liberalization of the energy sector were positively noted. Yet, lending to the private corporate sector remained muted and the high use of foreign currency in the domestic market persisted. The comprehensive judicial reform advanced well, but shortcomings in the rule of law continued to hamper businesses and deter investment. The business environment has only improved in some areas, and while formal employment grew, informality is estimated to have remained high.
So the functioning of the market economy will improve, the European Commission suggested that Albania should advance fiscal consolidation and developing a plan to mobilise revenue and address informality; ensure monitoring and control of fiscal liabilities stemming from Public-Private Partnerships and arrears; improve access to finance by strengthening collateral enforcement and raising financial inclusion; improve the labour market relevance, quality and targeting of active labour market policies, including upskilling of adults.
In terms of economic governance, Albania remained committed to strengthening macroeconomic stability and fiscal consolidation by reducing the public debt at a faster pace than originally planned due to the appreciation of the currency and underspending on the budget. Yet the report noted that creating a stronger link between the budget process and policy-making remains a challenge which affects expenditure planning.
The economy continued to expand and the GDP to grow, mainly driven by private consumption supported by rising employment, and low rates of interest and inflation. Yet the purchasing power parity stood only at 29 percent of the EU average. The high current-account deficit continued to narrow at 6.3 percent of GDP, and was financed by foreign direct investment (FDI) inflows. This decline was helped by larger remittances and rising exports of both goods and services. Further, the persistently below-target inflation and the rapidly strengthening currency prompted further monetary easing and foreign-exchange interventions by the Albanian central bank.
The government’s fiscal deficit is now 50 percent below its 2010-2015 average, falling to 2.1 percent of GDP in 2017. However, the public debt remains high at 67.3 percent of GDP. This high debt level could be unsustainable in case of an adverse shock to the economy. Public financing is not sufficient to bridge the large infrastructure gap, so the government is seeking to mobilise private capital, mainly through public-private partnerships (PPPs). The World Bank, the International Monetary Fund and the EC have their concerns on the rise of the PPP contracts as they generate contingent liabilities and therefore fiscal risks. Nevertheless, the overall macroeconomic policy mix has been broadly appropriate, and Albania has complied with fiscal rules set by the EU.
In terms of business environment, Albania’s competitiveness and private-sector development remained below potential, as efforts to improve the business environment had poor results. This came mainly from the slow establishment of enterprises, and ineffective regulation and informality which continue to pose major challenges for businesses. The private sector remained dominant in the economy with the state holding only 19 percent of the total assets, but although overall market liberalisation is well advanced, there are delays in the liberalisation of the energy market. The declining stock of non-performing loans improved the stability of the banking system, but sovereign exposure and poor collateral-execution remain risks to the financial stability. Financial intermediation remained undeveloped, and credit growth to the business sector stayed subdued.
Although employment increased and unemployment decreased especially in the 15-29 years old age group to 23.1 percent, wages grew by about 3 percent in 2018 and the salaries in Albanian overall are among the lowest in the region, which reflect the low productivity. Low incomes, low social security and low-quality job offers continued driving citizens, in particular the higher educated (“brain drain” ), into emigration, although the recent employment growth decelerated this trend.
But, the education system remains well below EU-average and is inadequately tuned to private sector needs. The capacity for technological absorption, research, development and innovation also remained low. The infrastructure gap to the regional and the EU average levels remains large, although improved. The economy shifted further to the services sector, followed by agriculture and industry, however, most investment and employment depends on a very small number of enterprises, as only 5 percent of them hire more than 10 people. The overall trade levels remained well below potential and undiversified.
As regards the economic criteria, Albania has made some progress and is moderately prepared in developing a functioning market economy, but the reforms weren’t fully implemented and there are still some obstacles the financial market faces. Albania has made some progress in terms of energy, transport and digital infrastructure development, but lack of productive know-how, low education levels and technology transfers hinder Albania’s competitiveness and integration into international value chains.
Note: you can read the full report here.
