TIRANA, July 23 – The European Commission has described the Albanian government’s 2018-2020 economic growth and public debt targets as overoptimistic at a time when Albania continues to face several obstacles to improving potential growth and competitiveness.
In its assessment of Albania’s 2018-2020 economic reform programme, the EU’s executive arm says Albania’s mid-term growth prospects will be hampered by two large energy-related projects completing by the end of this year which forced it to revise downward Albania’s 2018 forecast by 0.2 percentage points earlier this year.
TAP and the Devoll Hydropower, the two major energy-related that drove growth in the past four years complete their investment stage by the end of 2018, leaving a huge gap of about €300 million unless other major projects replace them.
“A baseline scenario with output growth of around 4 percent is not implausible in the current context, but the projected trajectory appears slightly optimistic. Steady output acceleration in 2018-2020 is likely to be prevented by decelerating investment activity as the two large energy projects approach completion… and it seems slightly optimistic to expect the remaining impact to be overcompensated by higher consumer spending and public investments,” says the Commission.
The Albanian government’s baseline scenario is that the country’s growth will range between 4.2 percent to 4.4 percent over the next three years on stronger domestic demand leading to higher consumption as well as rising public investment.
However, in its latest ‘Spring’ European economic forecast report, the European Commission downgraded Albania’s growth outlook for the next couple of years and now expects the Albanian economy to slow down to 3.6 percent in 2018, down from a 9-year post crisis high of 3.8 percent and recover to 3.9 percent in 2019 to register the highest growth rates among regional EU candidates.
The Commission says there is risk that new investment will be unable to bridge the gap that TAP and Devoll HPP leave in the country’s FDI.
“The ERP [economic reform programme] recognizes that FDI inflows associated with the two large projects, which are about to be completed, will diminish, but seems to expect — without any discussion — that this will be compensated by new FDI projects,” says the report.
“Albania’s success in attracting foreign investment in recent years has been heavily concentrated in non-tradable and natural resource-based industries. There is a risk that new investment opportunities in these industries will dry up and that investments in other sectors like tourism will be on a smaller scale,” says the Commission, adding that attracting FDI to higher value-added activities would require wide-ranging structural reform to bring about substantial improvements in the investment environment.
Albania’s FDI is largely focused on energy, with electricity and natural gas having attracted a record €1.7 billion in the past four years mainly as a result of the two major energy-related projects. Major investment has also been made in the low value-added oil and mining industry, the majority of which ends up being exported as crude oil and chrome ore.
Weaknesses to growth
The EU says institutional weaknesses to growth and competitiveness have only been partially addressed so far.
“Albania faces several obstacles to improving potential growth and competitiveness. A weak judiciary, insufficient enforcement of property rights and burdensome administrative procedures are institutional weaknesses that have been only partially addressed so far. This is hampering both local businesses and potential FDI inflows, unfortunately these important weaknesses are not being taken into account despite ongoing reforms,” says the report.
EU experts also warn plans to increase the use of public-private partnerships and concession contracts entail significant fiscal risks in the form of contingent liabilities for the state budget and the public debt reduction agenda.
The warning comes at a time when the Albanian government is implementing an ambitious but rather controversial €1 billion PPP program which the IMF says risks creating new hidden arrears which if included in the public debt stock could increase it by another 7 percent of the GDP.
Albania’s public debt currently stands at about 70 percent of the GDP, a level considered too high for the current stage of Albania’s economic development, with its high servicing cost curbing much-needed public investment in key education, health and road infrastructure. The government expects it to drop to 60 percent of the GDP by 2020.
The Commission says government’s projection for the downward path of public debt might require additional fiscal measures due to downside risks to growth and budget execution.
The European Commission says Albania’s inflation rate running below the central bank’s 3 percent target for five consecutive years reflects the absence of upward price pressures from a domestic economy that is still operating below potential, in combination with disinflationary impacts from the external environment.
Local Albanian experts have also rated the currency exchange risk as one of the key threats facing the Albanian economy this year following an unprecedented stronger lek against Europe’s single currency with a series of negative effects on the country’s Eurozone destined exports, local producers facing tougher competition from cheaper imports and major euro-denominated savings.
In late June 2018, EU leaders at the European Council decided to delay Albania’s opening of EU accession talks for mid-2019, requiring the Balkan country to show more progress with reforms in the judiciary, tackling high level corruption and organized crime.
