Central bank governor Ardian Fullani says agriculture and production should be set as new priorities to keep the Albanian economy growing
TIRANA, June 8 – As the global crisis impacts on the Albanian economy escalate, the need for a new growth agenda is seriously being examined. Although managing to grow by an average of 3 percent annually from 2009 to 2011, concerns about Albania’s moderate growth as a developing economy with the lowest GDP per capita in the region are growing after international financial institutions have downgraded the country’s growth to 1 to 2 percent for 2012 and 2013.
The Eurozone crisis, and close links to Italy and Greece, the country’s top trade partners, have had a severe impact with exports, remittances and FDI significantly lowering their pace. Domestic consumption, the key driver of the Albanian economy, continues remaining at low rates due to consumers’ saving trend and businesses’ hesitation and inability about new investments.
Public debt at around the legal ceiling of 60 percent of the GDP and bad loans at 20 percent are the most eminent threats to the Albanian economy, experts say.
Lending is also failing to support economic growth due to a drop in demand for new loans and banks having considerably tightened their standards as one in five loans is now officially considered non-performing.
The construction industry, once the key driver of the Albanian economy, continues suffering crisis impacts since 2008, and is projected to remain in crisis. Confidence in other key sectors such as services and industry remains at low levels, according to central bank surveys.
Agriculture, production
“The last global crisis evidenced that economic models, which are mainly based on debt and domestic demand, are not stable,” Bank of Albania governor Ardian Fullani has said earlier. According to him, increasing competitiveness and productivity of economies in the region remains the most immediate and long-term challenge.
Speaking at a recent investment conference with the Islamic Development Bank, central bank governor Fullani reiterated the need to reconsider the priorities of the Albanian economy.
“In our opinion, economic development policies should orient toward the establishment of a better balance in the priority of the development of economic sectors, being based on agriculture and production. The increase of economic capacities that improve the competitiveness of Albanian products and exploit foreign demand better is one of the most immediate objectives we have to face,” said Fullani.
INSTAT data show that agriculture which employs around half of the Albanian population, provides only 20 percent of the GDP. The sector is largely underdeveloped and is the least funded by government but also commercial banks. The production sector represented by industry accounts for 11 percent of GDP and is largely dominated by the manufacturing sector which produces Albania’s top exports of garment and footwear products. Governor Fullani has also stressed the need to improve financial infrastructure and quality education based on practice.
Ardian Civici, a member of the Bank of Albania Supervisory Council also supports the idea of a new growth agenda to keep growth at high rates. “From a model mainly based on consumption, we should target a model based on production and exports,” Civici has earlier said.
Finance Minister Ridvan Bode has emphasized the need to orient the Albanian economy toward exports and increasing their competitiveness. According to him, Albania and regional economies must coordinate their efforts to minimize negative effects from tough competition. The Minister said the Albanian economy would benefit from increasing mineral exports and further development of the tourism industry.
Opposition leader Edi Rama says the Albanian economy has stagnated because of lack of development strategy. “The Albanian economy has stuck because it has reached an end point due to not being based on a plan.” According to Rama, the current model has been exploiting resources barbarically and there has been no strategy on investments in tourism because of property issues and lack of regional development plans. Rama says the 10 percent flat tax on salaries and corporate taxes government has been implementing since 2008 have further widened the gap between the poor and the rich in Albania. The opposition says it will reestablish the progressive taxation as soon as it comes to power.
Prime Minister Sali Berisha has recently invited business representatives and academicians to join the debate on the fiscal stimuli and measures needed to guarantee economic growth. He has guaranteed no increase in taxes and pledged cuts in the number of procedures.
The Albanian economy grew by 3.1 percent in 2011, remaining at the same moderate growth rates for the third year in a row, according to GDP report published by the country’s state Institute of Statistics, INSTAT.
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, when the financial crisis broke out. According to the country’s Institute of Statistics, the 2010 growth was at 3.9 percent, down from 7.5 percent in 2008.
World Bank’s suggestions
The World Bank has recently suggested that Albania can sustain growth in the future by implementing a new generation of policies and reforms focused mainly on education and skills, ICT development, the energy sector, and better governance and rule of law. “Reaching the upper middle income country status in a relatively short time is a major achievement. It also poses new challenges. Under this new status Albania has to compete with low-wage poorer countries as well as with rich country innovators,” says Kseniya Lvovsky, the World Bank Country Manager for Albania.
Despite significant progress in economic and social development, Albania continues to face significant governance challenges that will need to be overcome if the country is to achieve critical development objectives, the World Bank warns in a recent report. Enduring politicization of the public administration and incomplete separation of powers, exemplified by instances of political interference in judicial processes, remain serious obstacles. Further efforts to strengthen the rule of law, ensure security of property rights, eliminate corruption, and improve government effectiveness are necessary to accelerate Albania’s integration with the EU, increase the country’s international competitiveness as an investment destination, and improve the quality and efficiency of public service deliveryءll of which are key priorities in Albania’s National Strategy for Development and Integration (NSDI) for 2007-2013, says the World Bank in the “Governance in Albania: A Way Forward for Competitiveness, Growth, and European Integration” report.
In particular, it will be necessary to work toward closing the gap between laws and policies as they stand on paper and their actual implementation. Another area of focus relates to the weak enforcement of regulatory policies and inconsistent application of laws, notably in the protection of real property rights, which pose serious constraints to improving Albania’s business climate, suggest the World Bank.
The Government will need to define a results framework with measurable indicators and ensure regular monitoring of implementation progress, ideally as part of the strategy’s monitoring and evaluation process.
