FDI, remittances drop in year’s first half, tourism revenues recover

Foreign direct investment for the first half of 2014 registered 380 million euros, down from 411 million euros during the same period last year, registering a 7.5 percent decline, according to Bank of Albania data.
By Ervin Lisaku
TIRANA, Sept. 15 – The shift to progressive taxation, government’s freeze of its stimulating policy on investments on hydropower plants and lack of privatization revenue has moderately affected foreign direct investment during the first half 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.
Foreign direct investment dropped to 183 million euros in the second quarter of 2014, down from 197 million in the final quarter of 2013 and 286 million euros in the second quarter of 2013, according to revised Bank of Albania data. However, the decline for the first half of 2014 remains moderate due to the positive performance in the first quarter of the year when FDI rose by 57 percent to 197 million euros year-on-year. In total, FDI for the first half of 2014 registered 380 million euros, down from 411 million euros during the same period last year, registering a 7.5 percent decline.
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.
Meanwhile, remittances which have been on a downward trend since the onset of global crisis in 2008, registered a slight recovery in the second quarter of 2014 when they rose to 135 million euros, down from 131 million euros during the same period last year. Compared to the first half of 2013, remittances continued their downward trend although at a slower pace, dropping to 251 million euros, down by 2 million euros compared to the same period last year.
Tourism revenue is back on track this year, registering a double digit increase of 14 percent after declining in the past four years. Data shows tourism revenue recovered to 313 million euros in the second quarter of 2014, up from 232 million euros in the first quarter of the year and 227 million euros in the second quarter of 2013. In total, tourism revenue rose to 454 million euros in the first half of 2014, up from 398 million euros in the first half of 2013.
Albanians’ spending on trips abroad has also considerably increased in the first half of this year, when it rose to 555 million euros, up from 465 million euros in the first half of 2013, up 19 percent year-on-year, unveiling that more and more Albanians are preferring foreign destinations for their holidays.
Largest FDI recipient among EU aspirants
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).
Data shows FDI inflows reached a historic high of $1.225 billion in 2013, ranking Albania on top of five transition SEE economies which also include EU candidates Serbia, Montenegro, Macedonia and potential candidate Bosnia and Herzegovina.
Serbia ranked the second largest FDI recipient in 2013 with $1.03 billion, followed by Montenegro with $447 million, Macedonia with $334 million and Bosnia and Herzegovina with $332 million.
“In Albania, FDI inflows reached $1.2 billion, owing mainly to the privatization of four hydropower plants and to the acquisition of a 70 percent share of the main oil-refining company ARMO by Heaney Assets Corporation (Azerbaijan),” says the report.
The UNCTAD report shows FDI in Albania registered a record $1.225 billion in 2013, up from $856 million in 2012 and a previous peak level of $1.05 billion in 2010.
Albania’s FDI stock at the end of 2013 was at $6.1 billion dollars, up from only 247 million euros in 2000 just before major privatizations took place, ranking higher only compared to neighbouring Macedonia and Montenegro.
Since the outbreak of the global financial crisis, FDI has been constantly growing from Euro 665 million in 2008 to Euro 953 million 2013.
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.
TAP Pipeline
The UNCTAD 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. “The pipeline will enhance Europe’s energy security and diversity by providing a new source of gas,” says the report.
Findings by Oxford Economics study show that during its four years of construction (2015-18), inclusive of direct, indirect and induced effects, TAP will contribute a total of Euro 370 million to Albanian GDP, create an average of 9,900 jobs per year and generate Euro 90 million for the Albanian treasury.
Albanian experts have described TAP as an opportunity that would benefit Albania both economically and politically, making the country an important hub of the international gas pipeline for the Western Balkans.
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.
Migrant remittances
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.
A study carried out by the Bank of Albania has found that remittances, one of the main sources of income for thousands of families in Albania, are very sensitive to the economic activity in the Eurozone, where most Albanian immigrants live and work. Remittances also constitute a critical driver of Albania’s domestic demand. Estimates suggest that for the overall economy (excluding agriculture) a 10 percent decline in remittances would lead to a 3.6 percent reduction in domestic demand. 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 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 continued transferring considerable amounts to their parent companies ahead of the entry into force of the transfer pricing law regulating the price at which divisions of a company transact with each other. Bank of Albania data show foreign companies transferred euro 45 million in the second quarter of 2014, up from euro 29 million in the first quarter of 2014 and euro 37 million in the second quarter of 2013.
Earlier this year, the Albanian Parliament passed a new transfer pricing rules that became effective on 4 June 2014. The new legislation is aimed at providing a more comprehensive regulatory framework on transfer pricing, aligned with the OECD Transfer Pricing Guidelines of 2010. The changes affect the income tax and tax procedures laws and introduce for the first time, transfer pricing documentation requirements, thereby shifting the burden of proof that related parties’ transactions are in line with the arm’s length principle, from the tax administration to the taxpayer.
Since the onset of the global financial crisis, foreign companies operating in Albania have considerably increased the transfer of profits to their parent companies.
Foreign companies in Albania continued transferring considerable amounts even in 2013, even though at a lower level compared to the past six crisis years.
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.