TIRANA, Dec. 1 – The key macroeconomic risk in Albania stems from potential spillover effects from Greek crisis, mostly in the form of falling investment, lower remittances, higher costs for local subsidiaries of Greek banks and reduced trade flows, said the EBRD in its latest 2010 Transition Report published last month.
The relatively large public debt and high current account deficit also remain important risk factors.
“The country faces major reform challenges in a number of areas. The need to improve the quality of the infrastructure is a requirement, although the government does have major investment plans for roads, railways and electric power,” says the European Bank for Reconstruction and Development.
The banking sector has limited reach as a source of finance outside of the main cities, and non-bank financial institutions are at a very early stage of development. However, confidence in the Albanian banking sector is growing, reflected in the growth of deposits by 16.6 per cent year-on-year as of August 2010. The growth of credit remained substantial throughout much of 2009, increasing at double-digit rates, but has decelerated recently and stood at 8.6 per cent year-on-year as of August 2010.
In March 2010, the Supervisory Council of the BoA decided to abolish restrictions introduced a year ago on financial transactions of foreign-owned banks to their parent banks, following a substantial increase in deposits at commercial banks.
Macroeconomic performance
Albania remains one of the few transition economies that have weathered the global crisis reasonably well until now, partly because the economy is less integrated with global markets than others. Real GDP is estimated to have grown by 3.3 per cent in 2009, a slower pace relative to previous years but well above the regional average. Foreign direct investment (FDI) inflows continued to be strong throughout 2009 at Euro 680 million, mainly attributable to privatisation projects, but recent figures indicate that inflows slowed during the second half of 2009 and during the first half of 2010. Consumer prices rose moderately in early 2010 and inflation stood at 3.4 per cent year-on-year in September 2010. Inflation is expected to remain within the BoA’s target range of 3.0 +/-1.0 per cent for 2010.
The current account deficit remains high at around 15 per cent of GDP in 2009.
A combination of reduced industrial output, lower capital inflows, falling private transfers and slower credit growth has resulted in a considerable reduction in domestic demand in the first half of 2010. As a result of these factors the growth of GDP this year is expected to decrease to 3.0 per cent, although higher government spending has helped to prevent a sharper economic slow-down.
Recent developments
A number of important privatizations remain on hold. Major projects planned for the coming months include the privatization of the state oil producer, Albpetrol, and the further sale of parts of the state-owned power company, KESH. The privatization of the state insurer, INSIG, has been somewhat delayed, but a tender is expected to be called before the end of 2010. The government is planning to finalize the privatization of most public properties by the end of 2010, but strategic companies such as the country’s hydropower utilities will remain in state hands for the time being.
The functioning of KESH remains problematic, even after the privatisation of the distribution arm to the Czech power company, CEZ, in spring 2009. In its first year of operation, CEZ failed to reduce the level of electricity theft and losses, partly due to
a number of judicial and political obstacles that prevented CEZ from effectively tackling the issue, as well as a lack of political will to address the problem. As a result, capital transfers from the state to KESH remain substantial, imposing financial strains on the government, although KESH has recently made a significant loan repayment.
Structural reform priorities
ՠMore private capital is needed to help finance infrastructure investment, especially in transport and electric power. The priority is to accelerate the preparation of investment projects while ensuring that tenders are carried out in an open and transparent manner.
ՠThe system of tariff-setting at the municipal level is often non-transparent and politicized and hinders restructuring and investment in this sector. Reforms in this area should be pushed forward as soon as possible.
ՠThe level of development in the non-banking financial sector is still quite low by regional standards. A key priority in this regard is to come to a resolution on the sale of INSIG, which is scheduled for this year.
