TIRANA, July 12 – A European Commission report has described the Albanian government’s economic forecast for the next three years as overoptimistic, warning that downside risks such as sluggish lending and falling commodity prices could undermine the country’s growth prospects.
In a report assessing Albania’s 2016-2018 economic reform program, the Commission says Albania’s recovery is facing downside risks, “notably due to sluggish bank lending amid a still high share of impaired loans and because falling commodity prices have weakened the outlook for the extractive industry, which has been an important growth driver in recent years.”
The Albanian government expects growth to accelerate to 3.4 percent in 2016 and 3.9 percent in 2017, forecasts which are 0.2 percent to 0.4 percent more optimistic compared to the European Commission’s Winter Forecast report.
“The medium-term budgeting process still needs improvement, not least because over-optimistic macroeconomic and revenue projections and the resulting unrealistic expenditure allocations have undermined its credibility,” says the report.
While public finances seem on track this year, the 2015 budget was revised downward three times last year due to sluggish consumption, a sharp cut in commodity prices and spillover effects from the debt crisis in neighbouring Greece, the country’s second largest trading partner and a main source of remittances as a host of some 500,000 Albanian migrants.
Tackling the business climate, debt-related vulnerabilities, fiscal consolidation, the high level of non-performing loans and attracting foreign direct into tradable sectors are described as Albania’s main challenges.
Albania’s public debt currently hovers at about 70 percent of the GDP while non-performing loans have reduced to about 18 percent, down from a record high of 25 percent in mid-2014, being a key barrier for the return of credit to positive growth rates.
“Businesses, which are predominantly SMEs, are burdened by a lack of access to finance, a high level of informality, still unclear land ownership and an excessive regulatory burden,” says the report.
Albania lost 35 places to rank 97th out of 189 countries in the latest Doing Business report published by the World Bank while surveys by key business associations show a deterioration in the business climate with the increased tax burden and high levels of corruption as the main concerns.
The European Commission also warns persistently low commodity prices could further affect investment in the extractive industry.
The Albanian government expects the extractive industry, which has been an important growth driver in recent years, to undergo a mild recession in 2016 as lower prices for oil and other commodities trigger production cuts.
The Commission says attracting foreign direct investment into tradable sectors would help boost productivity and broaden the export base.
“Foreign direct investment has been relatively high since 2007 and is expected to increase further, but it is concentrated in non-tradable and natural resource intensive industries as significant obstacles in the investment environment have so far undermined Albania’s attractiveness to higher value added activities,” says the report.
In its latest Spring forecast, the European Commission kept Albania’s economic growth forecast for 2016 and 2017 unchanged at 3.2 and 3.5 percent respectively on strong investment and recovering private consumption. The European Commission says investment will be supported by some large FDI-financed projects, implying the Trans Adriatic Pipeline and large hydropower plants, which are forecast to outweigh the oil price-driven reduction in investments in the extractive sector.
At 3.2 percent for 2016 Albania is expected to have the second lowest growth rate among five EU candidate countries, better only compared to Serbia but lower than Turkey, and neighboring Macedonia and Montenegro.
Low commodity prices affecting the extractive industry, weather induced vulnerability in agriculture and hydro-dependent electricity production and external risks related to the Eurozone and top trading partners Italy and Greece are considered key risks to the country’s macro-economic forecast.
