TIRANA, Feb. 20 – Warnings by the main two opposition parties to abandon their MP mandates amid calls for a caretaker government that would guarantee free and fair early elections have worried some of the country’s foreign and Albanian business representatives over the implications that an escalation of the political crisis could have on the country’s slowly recovering economy.
The American Chamber of Commerce in Albania and the Konfindustria business association representing some of the country’s main foreign and local investors say political instability would negatively affect the country’s business climate and hold back new investment.
Mark Crawford, the AmCham president, says a tense political climate and potential instability is a disadvantage that will put planned investment on hold.
“I am not worried about investors that are already here or those who we know could come here, but I am concerned over those who don’t come and we don’t know whether they could have otherwise come,” Crawford told reporters this week.
According to him, a positive image of the country and a stable political situation helps Albania remain competitive with neighboring competitors of a similar size such as landlocked North Macedonia and Kosovo.
Frequently changing tax policies, almost on an annual basis, a higher tax burden compared to other regional countries, unclear land ownership titles and lack of a cadastral map are the key barriers current and potential foreign investors face in Albania, the American Chamber of Commerce in Albania has earlier noted.
Meanwhile, the Konfindustria business association representing some of the country’s major producers and service providers, says failure to find a solution to what will likely turn into a prolonged political deadlock, risks further deteriorating the country’s economic situation, already struggling with new government arrears that place the debt reduction agenda at risk and hurt investor confidence.
The Albanian government has accumulated new unpaid bills of around €200 million, representing 1.5 percent of the GDP, which take the public debt stock to 70 percent of the GDP, a high level for the current stage of Albania’s economic development which the government is targeting to bring down to a more affordable 60 percent of the GDP by 2021.
The new arrears, mainly involving VAT refunds, and central and local government payments for road construction, are a key barrier to boosting investor confidence and hamper the liquidity of local companies at a time when credit is struggling to recover amid a declining but still high level of non-performing loans.
The reactions by the business associations come after the main center right opposition Democratic and its main ally, the Socialist Movement for Integration, held on Feb. 16 a large anti-government rally that turned violent amid calls for the resignation of Prime Minister Edi Rama. The opposition demands a caretaker government that would handle both planned June 30 local elections and early general elections on the same day on allegations of vote rigging by the ruling majority whom they accuse of links to organized crime and destroying the economy through multi-million euro public private partnerships awarded to major Albanian businessmen whom they call oligarchs.
While the ruling Socialists already have a comfortable more than 70 MPs in the 140-seat Parliament, a boycott of the upcoming local elections by the main opposition parties could escalate political tensions in the country with a series of negative effects on the Albanian economy which even without a political deadlock is already expected to slow down this year.
A prolonged drought hitting domestic electricity production, a recession in main trading partner Italy, the destination of more than half of Albanian exports, and lower foreign direct investment as two major energy-related projects near completion are all expected to have a negative effect on the Albanian economy which the Albanian government expects will slightly recover to 4.3 percent after a decade high of 4.2 percent in 2018.
In addition, Europe’s single currency trading at a 10-year of around 124 lek, having lost 7 percent against the local currency during the past year, is putting mounting pressure on Albanian Eurozone exporters, mainly industries relying on cheap labor costs, who have been facing considerable losses.
International financial institutions such as the World Bank and the International Monetary Fund expect the Albanian economy to slow down to 3.5 to 3.7 percent this year, in forecasts that are likely to be further revised downward due to the country already facing an electricity crisis triggered by a prolonged drought that has led to costly electricity imports of around €1 million a day during the past couple of months. Albania’s exports declined for the second month in a row last January and were unable to continue the growing trend in Kosovo following a good start last November after Kosovo imposed a ban on imports from Serbia, its traditional main trading partner it declared independence from 11 years ago.
The run-up to elections has been traditionally accompanied by tensions in Albania’s past quarter of a century of transition to democracy and a market economy. In addition, pre-electoral spending often soars, placing public finances in trouble during the second half of the year.
Tensions in the run-up to the June 30 elections could also produce negative effects for the 2019 tourist season by affecting the number of bookings, considering the country’s heavily reliant summer-based coastal tourism.
2019 challenges and opportunities
Albania faces a series of economic challenges at home, primarily related to attracting new foreign direct investment that will replace the Trans Adriatic Pipeline and the Devoll Hydropower, the two major energy-related investments that conclude by the end of 2019 after driving FDI and economic growth for the past four years.
With no major project in sight yet, except for some controversial PPPs awarded to local investors, potential investment by Shell oil giant which has made some key oil discoveries in the country is currently the sole major project that could replace a huge gap of some €300 million annually in FDI left by TAP and the Devoll Hydropower.
Albania also faces a tough challenge with boosting credit, currently at moderate growth rates of around 4 percent when adjusted for the exchange rate effect and the write-off of non-performing loans which have dropped to around 12 percent, down from a record high of 25 percent in mid-2014 in a situation that keeps lending standards tight amid ample deposit-funded liquidity in the country’s banking sector.
Experts say the country also needs to make increased efforts to improve the business climate and become more competitive compared to regional EU aspirants, by reducing both taxes and bureaucracy that often keep potential investors away, in addition to perceived high levels of corruption and an inefficient judiciary that is undergoing reform with the vetting of all judges and prosecutors over alleged links to corruption and the establishment of new bodies targeted to restore public trust in the judiciary.
On the positive side, a possible green light by the European Commission to launch long-awaited accession talks in mid-2019 could also have a positive impact on the Albanian economy, boosting investor confidence and helping the country continue rule of law and economy reforms.
Albania’s has been an EU candidate since mid-2014, but efforts to launch accession talks have been hampered by rule of law and judiciary reforms, currently under way.
