TIRANA, Jan. 26 – Albania faces key macroeconomic risks relating to both external and internal factors that could jeopardize the sustainability of economic growth and the achievement of the twin goals of reduced poverty and shared prosperity, warns the World Bank in a country diagnosis report.
External risks pertain to lower than expected growth and possible delays in Europe’s overall economic recovery, especially top trading partners Italy and Greece.
“These delays would have an effect on Albania’s economic outlook through their adverse impact on exports, remittances, and capital flows because the EU countries, particularly Greece and Italy, are Albania’s largest trading partners and source of financial flows. External economic development and the pace of the economic recovery in key export markets such as Greece and Italy are uncertain and beyond the control of the authorities,” says the World Bank.
Experts have earlier warned a modest recovery in Italy and a new recession in Greece in the next couple of years, will further affect Albania’s exports, investments and remittances from the two neighboring countries, the hosts of more than 1 million Albanian migrants.
The World Bank warns a slower than projected pace of recovery in the Eurozone could also lead to lower than expected export-led growth, revenue collection, and fiscal consolidation. “Insufficient fiscal consolidation could undermine already fragile investor confidence and adversely affect the rollover of public debt and holdings of government paper. Similarly, deterioration in the financial health of foreign parent banks, most of which are in the Eurozone, could jeopardize credit recovery and undermine credit, growth, and inclusion,” says the World Bank report.
The domestic risks are related to the implementation of the fiscal and structural reforms currently
under way to reduce public debt and ensure inclusive and sustainable growth over the medium term.
Public debt is estimated to reach 73.5 percent of the GDP in 2015 and stay above 72 percent over the medium term, posing interest rate and rollover risks. “Spending on interest, at about 3.2 percent of GDP, is already much higher in Albania than in the other SEE countries, crowding out more productive spending and representing a major source of vulnerability,” says the World Bank.
The international financial institution which is one of the key donors in Albania says decisive fiscal consolidation has now become imperative for the Albanian government to reduce the risk of macroeconomic crisis, reduce interest payments, and free up resources for productive investments in education, health, and infrastructure.
The financial sector is also exposed to a number of potential vulnerabilities, which, if realized, could negatively affect economic growth, warns the World Bank. Key potential vulnerabilities to financial stability include low and declining commercial bank profitability, the large stock of non-performing loans, substantial levels of euro-based lending giving rise to indirect foreign exchange credit risks, the continued deleveraging of foreign bank subsidiaries leading to shrinking subsidiary balance sheets, the consolidation of the savings and credit association sector ahead of the introduction of the sector’s deposit insurance scheme, the expansion of government debt issuances without an active secondary market, and the presence of contingent liabilities.
Property restitution and compensation for formerly expropriated land is identified as another major source of fiscal and growth risk. The recent rulings of the European Court of Human Rights in favor of previous property owners who must receive compensation for expropriated land have heightened the potential fiscal risks from property compensation.
Reforms and poverty reduction
“Albania needs to rekindle and rebalance economic growth, moving from a past growth model led by consumption, to a new one driven by investment and exports; reforms in this direction are starting to pay off” , said Ellen Goldstein, the World Bank Country Director for Southeast Europe, at a recent seminar in Tirana. After being hit by the global financial crisis of 2008, the Albanian economy is recovering and is expected to grow at 3.5 percent per year in 2016-17. Key reforms in the areas of energy, pensions and public arrears clearance are starting to deliver positive results while fiscal deficit is narrowing and public debt is on a stabilizing path, says the World Bank. Declining losses and improved collection rates in the energy sector as well as pension reforms have enhanced Albania’s social and fiscal stability.
“Alongside efforts to accelerate and sustain economic growth, reforms should also aim at accentuating its inclusiveness and poverty reduction impact,” said Ana Revenga, a senior director of the Poverty and Equity Global Practice. This requires improving the quality and inclusiveness of labor markets by eliminating disincentives and barriers to formal jobs, and making public services more efficient. Continuing the implementation of sound fiscal policies, informed by the impact on poverty and inequality, will ensure lasting gains in income growth and poverty reduction, suggests the World Bank.
Moving forward, Albania needs to stay the course on reform implementation aimed at restoring macro-fiscal sustainability, ensuring growth benefits all, fostering inclusion and stimulating private sector growth. “Unleashing the potential of the private sector and its contribution to jobs and growth will require world-class institutional and business environment, transparency and good governance.”
Investor protection
The World Bank also suggests increasing investor protection by strengthening the legal framework and undertaking new incentives to make Albania more attractive to potential foreign investors.
Weak law enforcement and justice system, uncertainty in regulations on licensing and concession agreements are described as a major concern of investors.
“It is important that the legal framework for investment is characterized by clarity and certainty and predictability in the application of the law. Strengthening the legal framework would result in a more transparent and consistent investment climate,” says the World Bank.
As regards investment incentives, the World Bank says the government should consider increasing transparency and improving governance, analyzing costs and benefits, minimizing distortions to competition, and improving administrative efficiency while contemplating on new forms of investment incentives.
GDP forecast
The World Bank has slightly revised downward its economic outlook for Albania for 2015 and 2016 on spillover effects from top trading partners and an ongoing decline in international oil and base metal prices affecting the country’s exports.
In latest Global Economic Prospects report, the World Bank expects the Albanian economy to grow by 2.7 percent in 2015, down from 3 percent in its June forecast, in line with the Albanian government and the IMF. The forecast for 2016 has also slightly been revised down by 0.1 percent to 3.4 percent while the 2017 economic outlook has been left unchanged at 3.5 percent.
The report expresses concern over Albania’s high level of non-performing loans at 20 percent affecting the country’s financial stability.
Tahseen Sayed, the World Bank country manager for Albania, has said Albania should continue its fiscal consolidation path in order to reduce public debt to 60 percent of the GDP in the next four years.
