TIRANA, Jan. 23 – A slowdown in the economic performance of Italy and Greece, Albania’s main trading partners, and lower EU accession funding following an eventual departure of the UK from the European Union next March will negatively affect Albania’s GDP growth prospects for the next couple of years, the United Nations warns.
In its 2019 World Economic Situation Prospects, the UN expects Albania’s GDP growth to slow down from an expected decade-high of 4.2 percent in 2018 to 4 percent in 2019 and 3.8 percent in 2020, in forecasts that are significantly higher compared to international financial institutions such as the World Bank and the IMF, but slightly lower compared to the Albanian government’s more optimistic scenario of growth picking up to 4.4 percent by 2020.
The UN report cites a slowdown in Italy, the Eurozone’s third largest economy and a top partner that accounts for 40 percent of Albania’s trade exchanges, as one of the main reasons for lower GDP growth in Albania through apparent spillover effects in trade, investment, and migrant remittance ties.
“Italy, which already has an elevated level of public debt, has openly stated its intention for increased fiscal spending. This creates the potential for an open clash between the limits and guidelines on fiscal policy set by the EU and national fiscal policy stances,” says the UN which expects growth in Italy to slow down to 1 percent by 2020, down from an average of 1.2 percent annually over 2018-19.
Meanwhile, neighboring Greece, Albania’s traditional second most important trading partner, is expected to experience new economic slowdown after growth is estimated to have recovered to a decade-high of 1.9 percent last year following an 8-year recession ending in 2016 that saw its economy shrink by about a quarter.
The UN expects Greece, the top foreign investor in the country, but whose trade links with Albania, have been reduced to 7 percent, down from 14 percent just before the onset of the global financial crisis, to slow down to 1.5 percent in 2020.
“Given the importance of trade, investment and remittance links with the EU, any deterioration in the economic performance of the EU will have negative consequences for the [Western Balkan] region. Some countries are strongly exposed to Greece and Italy and would suffer spillovers from possible deterioration in those countries,” says the UN report.
Recessions in Italy and Greece, Albania’s main trading partners, top investors and the hosts of 1 million Albanian migrants, had a series of negative effects on Albania through lower trade, investment and remittance flows in the aftermath of the 2008-2009 global financial crisis.
One of the world’s fastest growing emerging economies until 2017, Turkey’s growth is estimated to have halved to 3.5 percent in 2018 and the UN forecasts growth will further drop to 1.7 percent in 2019 amid a sharp depreciation of the Turkish lira against the US dollar triggering a double-digit hike in inflation.
Examining the channels for the transmission of Turkish market volatility to the Western Balkans, a late 2018 World Bank report shows Albania is little exposed in terms of exports, but to a higher degree if imports, foreign direct investment and the banking sector assets are concerned.
The UN report says stronger growth among regional EU aspirant countries is constrained by structural unemployment and inadequate infrastructure.
“Stronger growth is needed to address the region’s diverse problems, including the need for reindustrialization and a low labour force participation rate. However, the longer-term capacity expansion is constrained by structural unemployment, improving but still inadequate infrastructure, dependence on foreign financing, and a still challenging business environment,” says the UN report.
Average growth among the five EU aspirant Western Balkan countries covered in the report is expected to slow down to 3.7 percent over 2019-20 with Serbia, the region’s largest economy, forecast to register the strongest growth of 4 percent.
Brexit to cut EU pre-accession funding
The UN report says a possible Brexit by the end of March 2019 with or without a UK deal with EU leaders could see EU accession funding available for Albania and other EU aspirant countries cut by 10 to 15 percent.
“The pre-accession assistance provided by the EU has a tangible developmental impact. However, Brexit may lead to about a 10–15 per cent decline in funding available to EU accession countries,” says the UN.
While trade and investment links between Albania and Europe’s second largest economy are quite modest, London-based European Bank for Reconstruction and Development has earlier warned a disruption of cross-border supply and value chains between the UK and advanced economies that are key trading partners for Albania and other countries in the south-east Europe region could lead to spillover effects.
“Unless other member states increase their contributions, Brexit will lead to a 10 to 15 per cent decline in structural and accession funds available to countries in central and south-eastern Europe, amounting to a reduction of up to 0.4 percentage points of GDP in EU-supported investment. Brexit may also weaken the (perceived) prospects of EU accession for candidate and potential candidate countries. A slower reform momentum in these countries will then weigh on growth,” the EBRD warned in its latest regional economic prospects report.
The European Union has committed a total of €650 million in financial assistance under the Instrument for Pre-Accession Assistance II from 2014 to 2020, but Albania’s absorption capacities remain poor with the country managing to absorb only more than a third of funds allocated for the 2007-2013 period due to problems with the quality of tendering, property rights and time-consuming procedures.
An EU-candidate since mid-2014, Albania is hoping to launch accession talks next June, but EU leaders have said an eventual green light will depend on further progress with reforms strengthening rule of law and the judiciary as well as fighting organized crime and corruption.
“The prospect of EU accession, confirmed by the European Commission strategy paper, and the decision by the Council of the EU to open accession negotiations with Albania and the former Yugoslav Republic of Macedonia in 2019 (if they meet certain conditions) remain important macroeconomic policy anchors,” says the UN report.
