By Piercarlo Padoan*
Economic growth slowed down during 2013, reflecting both the cyclically weak aggregate demand and the increased uncertainty surrounding the mid-year general elections.
Aggregate demand remains constrained by low business and consumer confidence, subdued domestic demand, difficult external environment and tight financing conditions. Economic growth declined to an expected annual rate of 0.5 percent in 2013, while inflation averaged 1.9 percent throughout the year. The lower growth figures have had their effect on credit, whose dynamics turned negative during 2013.
With due regard to macroeconomic stability, the Albanian authorities have progressively engaged in countercyclical policies. The monetary stance has been made more expansionary, given the clear rationale provided by the weak underlying inflationary pressures and the negative output gap. The Bank of Albania lowered the interest rate by 1 percentage point to historical lows during the year. Moreover, the Central Bank implemented a series of macroprudential measures to tackle the negative credit growth and improve credit quality. A series of laws were also passed, to unburden the bank balance sheets and improve the financial stability indicators. All in all, the financial system remains well-capitalized and able to withstand pressures from domestic and foreign markets, as was evaluated on the latest FSAP conducted by the IMF in December. Coupled with the expansionary monetary policy, this package of measures has started having effect on the economy, by slowing down the growth of non-performing loans and lowering financing costs throughout the economy.
With rising public debt and limited fiscal space, fiscal policy has been cautious and fiscal stimulus low. At the end of last year public debt reached over 70 percent of GDP and is projected to rise further during 2014. The government signed a new arrangement with the IMF under the EFF program, which will be used to clear the arrears, ensure fiscal consolidation and improve debt sustainability, and support the reform program. Fiscal consolidation will take into account the cyclical position of the economy, so that it does not hinder GDP growth. The parliament agreed on new tax measures, mostly addressing the revenue side. The country moved away from flat personal income and profit taxes, to a higher rate progressive system.
The overall policy mix has been largely successful in preserving macroeconomic stability.
The on-going fiscal adjustment and the broadly stable economic and financial environment will provide a solid basis for balanced growth for the country. Notwithstanding, the Albanian economy is in need of structural reforms to increase productivity, address labor market rigidities and improve competitiveness. The authorities remain committed to tackle this issue through an ambitious and detailed reform agenda.
(Statement by Mr. Piercarlo Padoan, Italian Minister of Economy and Finance, speaking on behalf of Albania, Greece, Italy, Malta, Portugal, San Marino at the International Monetary and Financial Committee, Washington, April 12, 2014)
