FDI continues decline, as tourism and remittances turn positive

A 17 percent decline in FDI for the first three quarters of this year equal to around 120 million euros reflects the business concerns over the corporate income tax which in January 2014 was raised by 5 percent to 15 percent, making Albania less competitive.
TIRANA, Dec. 11 – The shift to progressive taxation, government’s freeze of its stimulating policy on investments in hydropower plants and lack of privatization revenue has moderately affected foreign direct investment during the first three quarters of this year. However, tourism revenue is back on track while migrant remittances’ downward trend since the onset of the global crisis has slowed down, according to data published by the Bank of Albania in its quarterly balance of payments this week.
A 17 percent decline in FDI for the first three quarters of this year equal to around 120 million euros reflects the business concerns over the corporate income tax which in January 2014 was raised by 5 percent to 15 percent, making Albania less competitive compared to other regional countries which apply flat tax regimes of around 10 percent. Lack of privatizations has also had an impact. Privatization revenue hit a historic low in the first ten months of this year when at only 29 million lek (Euro 203,000), it registered the lowest level for the past decade, according to Finance Ministry data.
Bank of Albania data shows FDI suffered another blow in the third quarter of the year when it dropped to 207 million euros, down from 298 million euros in the third quarter of 2013. In total, FDI during the first three quarters of this year dropped to 590 million euros, down from 709 million euros during the same period last year.
FDI rose to a historic high of 953 million euros in 2013, up from 666 million euros in 2012 and a previous record of 793 million euros in 2010, says the central bank.
Fuelled by privatization revenue, foreign direct investments reached a record high in 2013, ranking Albania the most attractive economy among five South-East Europe candidate and potential candidate countries, according to a 2014 World Investment report published by the United Nations Conference on Trade and Development (UNCTAD). The report says that in Albania, the Trans-Adriatic pipeline bringing Caspian gas to Europe will generate one of that country’s largest FDI projects, with important benefits for a number of industries, including manufacturing, utilities and transport. TAP is scheduled to start construction in 2015 and carry the first gas by 2019. The pipeline will transport natural gas from the giant Shah Deniz II development in Azerbaijan through Greece and Albania to Italy, from which it can be transported farther into Western and Central Europe.
The manufacturing and extractive industries have attracted around half of the FDI stock in Albania during the country’s past two decades of transition into a market economy after the collapse of communist regime and its planned economy.
Bank of Albania data show manufacturing held the largest share of FDI stock in 2012 with around 892 million euros, down from 952 million euros in 2011 with the biggest investments in the production of non-metallic mineral products (construction materials).
The extractive industry increased its FDI stock to 810 million euros in 2012, up from 612 million euros in 2011 and only 311 million euros in 2010 thanks to huge investments in mining of oil, gas and metal ores.
Third ranks monetary and financial intermediation with euro 749 million, followed by transport, storage and communication with 402 million euros.
Canada, Switzerland, Austria, Greece and Italy are the biggest foreign investors in Albania.
Migrant remittances
Migrant remittances slightly recovered to 155 million euros in the third quarter of 2014, up from 153 million euros in the same period last year. In total, migrant remittances during the first three quarters of this year registered 406 million euros, slightly up from 405 million euros in 2013.
On a downward trend since the onset of the global financial crisis, migrant remittances whose overwhelming majority comes from around 1 million migrants in neighbouring Greece and Italy, continued shrinking even in 2013.
Bank of Albania data show migrant remittances hit a record low of 547 million euros in 2013, down from 680 million euros in 2012 and a historic high of 952 million euros in 2007 just before the outbreak of the global financial crisis.
On a falling trend since 2008, the sharp cut in migrant remittances has also influenced on the slowdown of the Albanian economy in the past five years, especially the crisis in the still ailing construction sector.
The sectors affected the most by remittances are construction, services and food, which are also the key contributors to Albania’s GDP. It is believed that the sharp contraction in construction has partly been a result of declining inflows from workers abroad.
Tourism revenue
Tourism revenue in the third quarter of the year, which is the peak of the tourist season, rose to 401 million euros, up from 362 million during the same period in 2013. In total, tourism revenue rose to 946 million euros, up from 760 million euros in the first nine months of 2013, according to Bank of Albania data.
Spending on trips abroad also rose to an estimated 369 million euros, up from 336 million euros in the third quarter of 2013. Expenditure on trips abroad rose to a total of 924 million euros in the first three quarters of 2014, up from 801 million euros in 2013.
Tourism revenue registered a drop for the fourth consecutive year in 2013. Central bank data show tourism revenue dropped to 1.1 billion euros in 2013, down from 1.14 billion in 2012 registering the lowest level since 2007.
Meanwhile, Albanians’ spending on trips abroad rose to 1.1 billion euros in 2013, up from 1 billion euros in 2012 and the peak 1.12 billion euros in 2011 when Albania’s visa regime to the Schengen area was lifted.
The number of foreign tourists visiting Albania registered a slight decline in 2013 while tourism revenue continued their downward trend for the fourth year in a row, unveiling the critical situation in one of Albania’s most promising sectors.
Data from the country’s state statistical institute, INSTAT, show the number of foreign tourists to Albania dropped by 1.5 percent to 3.46 million in 2013, down from a historic high of 3.51 million in 2012, registering the first decline since 2000.
Ethnic Albanians from Kosovo, Macedonia, Montenegro account for three-fifths of foreign tourists visiting Albania, with local experts often referring to this market as ‘patriotic tourism.’
Transfer of profits
Foreign companies operating in Albania increased their transfer of profits to 139 million euros in the first three quarters of 2014, up from only 58 million euros during the same period in 2013.
Earlier this year, the Albanian Parliament passed a new transfer pricing rules that became effective on 4 June 2014.
Since the onset of the global financial crisis, foreign companies operating in Albania have considerably increased the transfer of profits to their parent companies.
Bank of Albania data show the transfer of profits dropped to 82 million euros in 2013, down from 232 million euros in 2012 and 2011, 365 million euros in 2010 and a record 401 million euros in 2009.
“Under these conditions the increase in transfer of profits implies that foreign companies are reinvesting their profits in Albania less and sending back more in cash profits to their parent companies affected by the debt crisis,” experts say.
The transfer of profits from 2004 to 2009 ranged from Euro 19 million to euro 57 million annually, according to the Bank of Albania.