TIRANA, May 15 – The European Commission has warned a number of downside risks related to domestic political and economic developments could pose a major threat to Albania’s 2017 growth prospects and fiscal consolidation efforts.
In its latest Spring European Economic Forecast report, the EU’s executive arm says the escalation of the political crisis ahead of the scheduled June 18 general elections, the relaxation of the current fiscal policy, sluggish credit, the conclusion of the ‘anchor’ deal with the IMF and weaknesses in public finance management pose challenges for the recovery of consumption, investment and public finances.
“In particular the political crisis surrounding the parliamentary election, scheduled for June 2017, may eventually dampen consumption and investment,” says the Commission.
The conclusions come as the country is heading to the June 18 general elections amid a political deadlock with the main opposition Democratic Party and its allies boycotting the polls unless they receive guarantees about impartial handling of elections which they claim are endangered by people with criminal records and drugs money from massive cannabis cultivation.
While the opposition Democrats have been staging a protest for about three months in a tent set up in front of the Prime Minister’s office, including two mass rallies, a deal has not yet been reached with the ruling Socialist Party-led government seeking a second consecutive term.
The European Commission expects Albania’s GDP growth to slightly recover between 3.7 and 3.9 percent in the next couple of years, but says the balance of risks is tilted to the downside.
“Credit recovery may take longer than expected and the still elevated level of sovereign debt provides little room for countercyclical policies in case of need,” says the Commission.
Credit in the country has been struggling to recover to positive growth rates in the past couple of years amid tight lending standards applied by banks as non-performing loans stand at about 20 percent and poor demand by both businesses and households. Meanwhile, public debt, currently hovering at about 70 percent of the GDP, registered its first annual cut in 2016 following a 5-year upward trend that saw it hit a record high of 72.6 percent of the GDP in 2015. The debt level is considered too high for the current stage of Albania’s economic development, with its high servicing costs affecting much needed investment in key infrastructure, health and education sectors.
The Commission also warns that while the pickup in commodity prices will benefit Albania’s poorly diversified exports strongly relying on domestic oil and mineral production, the appreciation of the national currency hitting a 7-year high of 134.3 lek against the Euro, affects the country’s price competitiveness as two-thirds of Albanian exports are destined for Eurozone countries, mainly Italy.
“Higher commodity prices are expected to support goods exports, but on the other hand the recent real appreciation of the Albanian currency has reduced price competitiveness.”
The Commission also warns its forecast of a 2 percent of the GDP fiscal deficit and lower public debt, are associated with a number of risks including the relaxation of the current fiscal policy stance ahead of the upcoming elections, the conclusion of the 3-year binding deal with the IMF, “removing an important anchor of the government’s fiscal consolidation strategy as well as remaining weaknesses in public finance management positing a challenge for the execution of public budgets according to plan.”
“On the upside, the implementation of structural reforms, such as the recently started comprehensive overhaul of the justice system, could improve the business environment and, eventually, the economy’s growth potential,” says the Commission.
Albania’s central bank and international financial institutions such as the IMF and the World Bank have also warned the escalation of the political crisis putting the June 18 elections at risk could hurt both public finances and deter investment, resulting in lower than expected growth prospects.
The Commission’s forecast of a 3.7 GDP growth for 2017 and a recovery to 3.9 percent in 2018 are more optimistic compared to its previous Winter report, but yet slightly lower compared to the Albanian government’s more optimistic forecasts of growth picking up to 4.1 percent in 2018, up from 3.8 percent in 2017. Albania’s growth rates are also slightly higher compared to regional EU aspirant competitors Serbia, Macedonia and Montenegro.
“Albania’s Economic activity continues to accelerate as household spending picks up while investment remains at a relatively high level. Foreign trade has revived and is set to expand at a decent pace,” says the report. “Inflation is projected to rise slowly towards the official target. An accommodative monetary policy supports household borrowing, but lending to the corporate sector remains constrained by the high level of nonperforming loans. The fiscal policy stance is expected to slowly reduce public debt as a share of GDP,” it adds.
Growth prospects are also optimistic for Albania’s main trading partners Italy and Greece with a positive impact on the small Balkan economy which has strong investment, trade and remittance links to the two neighboring countries, the hosts of 1 million Albanian migrants. The slowdown and recession the two top trading partners have been through in the past eight years has also considerably affected Albania whose growth pickup in the past couple of years has mainly been a result of some major energy-related investment, including the Trans Adriatic Pipeline and some big hydropower plants.
The Albanian economy has been growing by an average of 1 to 3 percent annually since 2009 following a pre-crisis decade of 6 percent annually, the growth rate estimated to bring welfare to the EU aspirant Balkan economy.
