The high deficit of the current account remains a structural weakness of the Albanian economy and it needs to be addressed through further structural reforms, says the Italian Vice-Minister of Economy
TIRANA, April 23 – The external shocks, weak domestic demand, and structural shifts in the economy have posed significant policy challenges for Albania, the IMF has warned. “Against a background of increased uncertainty and higher-risk premium in the euro area, Albania managed to grow at a positive rate of close to 3 percent during 2011. Growth was supported mainly by external demand and a slight fiscal stimulus throughout the year,” said Vittorio Grilli, Italian Vice-Minister of Economy and Finance speaking at the International Monetary and Financial Committee on behalf of Albania, Greece, Italy, Malta, Portugal, San Marino, Timor-Leste.
“Economic growth reflected mostly the increase of export-related industries and services related to tourism activity, while the construction sector continues to underperform due to a backlog of unsold inventories and a weak demand for residential buildings. This pattern of structural shifts in the economy has proceeded in the past few years, in line with a new growth model being adopted by Albania,” said the Italian representative.
The fiscal stance is increasingly oriented toward long-term fiscal sustainability, as the remaining fiscal space is being reduced. The prudent behavior of the fiscal authorities will reduce vulnerabilities and risk premium in the Albanian economy, ensuring a favorable environment for sustainable and private-sector led growth. In contrast, domestic consumption and investment remain weak, partly on account of a secular shift toward a more prudent behavior from consumers and investors, and partly on account of uncertainty stemming from international financial market developments, added Vittorio Grilli.
CPI inflation averaged 3.5 percent during 2011, in line with the Bank of Albania’s (BoA) inflation objective. However, high food and commodity prices during the first half of the year required a careful stance of monetary policy, geared toward preserving inflation expectations. The BoA decreased its policy rate during the fourth quarter to the lowest historical level, while continuing to provide liquidity at an increasing maturity and against an extended range of collateral to the banking system. Conversely, prudent fiscal policy has contributed to controlling the budget deficit at 3.5 percent of GDP and public debt at 58.8 percent of GDP, below the legal ceiling of 60 percent. Despite the wide current account deficit of around 12 percent of GDP, the exchange rate has been stable, reflecting the high FDI attracted in the country. Nevertheless, the high deficit of the current account remains a structural weakness of the Albanian economy and it needs to be addressed through further structural reforms.
Monetary developments have reflected the performance of the real economy, and the careful strategies and behavior of banks. In addition to the low demand for credit, cautious credit behavior by banks adds a supply dimension to the picture.
The performance of domestic financial markets has been stable; inflation and liquidity risk premium have been declining; and interest rates of government securities, deposits, and loans have been decreasing. The financial system indicators remain sound, and domestic stress tests indicate that the system is liquid and capitalized enough to withstand large shocks.
IMF’s outlook
The International Monetary Fund says Albania will be one of the hardest-hit emerging economies in the Central and Eastern Europe region in the next seven years. In its April World Economic Outlook, the IMF expects the Albanian economy to grow by only 0.5 percent in 2012, 1.7 percent in 2013 and at an annual 2.5 percent from 2014 to 2017, recording one of the lowest growth rates among 14 Emerging and developing economies in central and eastern Europe.
What’s more concerning, Albania’s public debt currently at around 59 percent of the GDP, is expected to jump the legal deadline of 60 percent of the GDP by 1.7 percent in 2012 and gradually grow to 67 percent until 2017, remaining lower only compared to EU member Hungary, according to the IMF database.
