With an average growth rate of 0.9 percent during the first half of this year, the Albanian economy is reflecting clear signs of crisis from the Euro area partners and problems at home.
TIRANA, Oct. 15 – After the slight shrink in the first quarter of 2012, the Albanian economy returned to growth in the second trimester driven by progress in the industry and post-telecommunication sector which overcame their negative growth rates. A report published by the country’s Institute of Statistics, INSTAT, shows the Albanian economy grew by 2 percent year-on-year in the second quarter of 2012 after the 0.2 percent shrink registered in early 2012 when severe weather conditions paralyzed the country.
“In the second quarter of 2012, the Albanian economy grew by 2.04 percent compared to same period last year and 0.93 percent compared to the first quarter of 2012,” says state statistical institute, INSTAT, whose data are often prejudiced by the opposition and some experts doubting its independence.
While post-telecommunication, industry, services, trade and agriculture registered positive growth rates, crisis-hit construction sector, and transport which is facing record high fuel prices negatively contributed to the GDP growth.
The services sector, which accounts for around 60 percent of the GDP, grew by 5.6 percent year-on-year but was up by only 0.8 percent compared to the first quarter of 2012. The industry sector, which accounts for 12 percent of the GDP and is dominated by processing exporting businesses, grew by 6.4 percent compared to the second quarter of 2011 and was up by 16.7 percent compared to the first quarter of the year.
The post-telecommunication branch, which had been registering consecutive shrinks, also grew by 9.9 percent in the second quarter of 2012 year-on-year. The post-telecommunication sector, accounting for 3.3 of the GDP, grew by 9.9 percent year-on-year in the second quarter of 2012.
Agriculture which employs around half of the Albanian population and provides 20 percent of the GDP, continued having a positive contribution to GDP, growing by 5.6 percent year-on-year.
“Trade, hotels and restaurants,” which INSTAT values at 21 percent of the GDP, grew by 5.2 percent compared to the second quarter of last year but were down by 0.3 percent compared to the first trimester of 2012.
The construction sector, once the key driver of the Albanian economy, but now accounting for only 11 percent of the GDP, dropped by 18.4 percent year-on-year and was also down 12.1 percent compared to the first quarter of the year. In crisis since 2008, due to falling purchasing power especially from migrants, the construction sector has failed to recover during the past four years also due lending standards becoming tighter as bad loans stand at a record 21 percent. Unpaid government bills for finished construction works has also influenced.
The transport sector, made up of railway, maritime, air and travel agencies, and accounting for 6.2 percent of the GDP, shrank by 7 percent year-on-year but was up by 0.2 percent compared to the first quarter of the year.
With an average growth rate of 0.9 percent during the first half of this year, the Albanian economy is reflecting clear signs of crisis from the Euro area partners and developments at home where domestic consumption and exports remains sluggish, and public debt at the legal ceiling of 60 percent of the GDP poses a real threat. Government reviewed GDP growth target at 3 percent for 2012 will be achieved only if the country registers high growth rates of 5 percent for the third and fourth quarters of this year which under crisis circumstances seems an impossible challenge.
The growth rates for the first half of 2012 are in line with forecasts by international financial institutions such as the IMF and the World Bank which expect the Albanian economy to grow between 0.5 to 1 percent this year, citing impacts from Eurozone crisis and public debt.
Short-term statistics published by INSTAT show that despite top industries registering high growth rates, almost all of them cut staff, lowered wages or indexed them only to inflation.
Government is expected to collect Euro 850 in privatization revenues from the sale of Albpetrol oil firm and another Euro 150 million from the same of four small and medium-sized enterprises.
External, internal pressure
The escalating Eurozone crisis and especially the situation in Greece and Italy, Albania’s top trade partners and hosts to more than 1 million migrants, is expected to further aggravate matters. The IMF expects Italy, the destination of around half of Albanian exports to face recession in 2012 and 2013. Neighbouring Greece whose influence on Albanian trade and investments has been declining is expected to face another year of recession.
Lower domestic consumption, stagnating exports, some of the key industries in crisis, lending and deposits growth rates slowing down and government revenues far below targets are some of the symptoms of the ailing Albanian economy in the first half of 2012 which international financial institutions have warned will see Albania register growth rates between 0.5 to 1.5 percent, the lowest the country has faced after the shrink in the notorious 1997 pyramid investment schemes.
Poor performance in early 2012 when the economy officially shrank by 0.2 percent and top sectors such as industry and crisis-hit construction dropping by double-digits of around 20 percent proves the difficult situation.
Lower retail sales in the second quarter of 2012 signal the Albanian economy has not made much progress after the slight 0.2 percent shrink in the first quarter of the year. INSTAT data published this week show retail sales continued shrinking for the second quarter in a row dropping by 1.2 percent year-on-year.
Domestic consumption, the key driver of the Albania economy continues struggling as shown by the performance of value added tax and excise tax. VAT, which indirectly measures consumption, grew by a mere 1.4 percent while the excise tax levied on so-called luxury products such as fuel, tobacco and alcoholic beverages was down by 0.4 percent compared to the first half of 2011.
Public debt at the legal ceiling of around 60 percent of the GDP and the rising deficit in the pension scheme remain two of the key challenges the Albanian government faces.
Albania enjoyed an average annual growth rate of 6 percent from 2003 to 2008 and was one of the few countries to register positive growth of 3.3 percent in 2009 in the outbreak of the global crisis. According to INSTAT, the 2010 growth was at 3.9 percent, down from 7.5 percent in 2008. Back in 2011, the Albanian economy grew by 3.1 percent, remaining at the same moderate growth rates for the third year in a row. Despite having preserved an annual moderate 3 percent growth rate from 2009 to 2011, the Albanian economy lags behind almost every EU aspirant in GDP per capita and purchasing power indicators.
Facing crisis impacts, government has reviewed downward its overoptimistic GDP growth targets and raised public debt expectations to the legal ceiling of 60 percent of the GDP as revenues continue underperforming due to domestic consumption remaining sluggish. In its review to the 2013-2015 macroeconomic framework, the 2012 GDP growth forecast has been lowered to 3 percent, down from 4.3 percent in the initial budget and the public debt raised to 59.9 percent of the GDP, only 0.1 percent below the legal threshold. What’s worse government expects public debt to continue remaining at the 59.9 percent levels even for 2013 and 2014.
For 2013 and 2014 government expects the economy to grow by 4 percent and 4.2 percent respectively which is twice higher compared to what international financial institutions expect.
Central bank concerned
Undertaking supporting policies to increase foreign direct investments and closer cooperation between banks and businesses to boost lending are two of the measures government should target to increase domestic consumption, whose poor performance in 2012 is severely affecting Albania’s economic growth, says central bank governor Ardian Fullani.
“The curb of consumption as a reaction to the country’s future economic insecurity could turn into a spiral of reciprocal impacts among macro-economic indicators in Albania. The shrink in consumption is accompanied with a drop in domestic demand leading to a slowdown in economic growth and a decrease in household income at a next stage,” said Fullani.
The low level of consumption is also indirectly identified by the performance of the value added tax. The value added tax, which accounts for around 38 percent of total tax revenues, and indirectly measures consumption, grew by only 2.7 percent in Jan-Aug 2012 but was down around 5 billion lek compared to the target government has set.
According to Fullani, the low levels of private investments and lending will continue keeping the economy at low growth rates. Imports of “machinery and equipment” which measure investments continue remaining at negative growth rates, while credit to the private sector grew by only 5.5 percent year-on-year in July 2012 reflecting poor demand by businesses and tight lending standards as bad loans stand at a record 21 percent.
The central bank expects economic activity to remain at low levels conditioned by the poor performance of consumption and private investments and small space for fiscal stimulus.
Low inflation pressures have allowed the Bank of Albania to cut the key interest rate by 1.25 percentage point to a historical record low of 4 percent since Sept. 2011 in an effort to stimulate the economy but the moves have been poorly reflected in lower loan interest rates and an increase in investments.
