The World Bank has downgraded Albania’s 2013 GDP growth rate to 1.3 percent, and expects the country’s growth to slightly accelerate to 2.1 percent in 2014
TIRANA, Dec. 10 – The World Bank says Albania’s public debt could be lowered to 58.5 percent of the GDP by 2020 only if it is combined with tax and pension reforms. In its new South East Europe Regular Economic Report, the World Bank expects Albania’s public debt to grow to 76 percent of the GDP by 2018 under a baseline scenario without fiscal adjustments and structural reforms in taxes, pensions and the energy sector.
The World Bank Albania says could reduce its public debt to 62 percent by 2020 on a tax policy reform and to 58.5 percent of the GDP on combined tax and policy reforms.
The World Bank also warns the energy sector contingent liabilities require an increase in tariffs. Energy sector possible liabilities, currently estimated at 1.3 percent of the GDP could rise to 6.7 percent of the GDP without a loss reduction program which requires a review in tariffs.
The hydro-dependent Albanian energy sector faces a chain of debts involving KESH power corporation and CEZ Shperndarje distribution operator which has been under state management since the Czechs had their licence revoked in early 2013.
In the new report, the World Bank has downgraded Albania’s 2013 GDP growth rate to 1.3 percent and expects the country’s growth to slightly accelerate to 2.1 percent in 2014. The forecasts for 2013 and 2014 rank Albania with the second lowest growth rate in the six South Eastern European countries (SEE6): Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Montenegro, and Serbia.
“Albania’s economic growth in the next two to three years will range between 2 to 3 percent. The low growth and debt sustainability has become a major concern. Currently, the public debt is estimated at 68 percent of the GDP and reaches 72 percent of the GDP if accumulated unpaid bills are taken into account,” said Abebe Adugna, Lead Economist and co-author of the SEE Regular Economic Report.
At 66.2 percent of the GDP, Albania has the highest public debt level among the six SEE countries while budget deficit expected to climb to 5.9 percent at the end of 2013 is the second highest after Serbia. Non-performing loans at around 25 percent rank Albania the most problematic country in the six EU aspiring Western Balkan countries.
Albania’s inflation rate at 2.1 percent, unemployment at 12.8 percent, and current account deficit at 9.7 percent of GDP are among the lowest in the region.
USD 100-200 million loan
The World Bank says it could provide USD 100 to 200 million in lending to support Albania’s sluggish public finances. “While the amounts are known for the investment projects we are supporting in Albania, which is around 86 million USD, the loan to the budget support will depend on the results of discussions of the 2014 budget. And we believe it will be between 100 to 200 million USD,” said Ellen Goldstein , the World Bank Country Director for South East Europe in a press conference in Tirana this week.
Government has previously announced that it is negotiating with international financial institutions over a loan to pay off accumulated unpaid bills and arrears to the business community. The Albanian government owes the business community 24.6 billion lek (Euro 172 million) in unpaid bills and arrears, according to findings of an audit carried out by accountancy giant Deloitte.
Export- oriented growth
Supporting and strengthening the fragile recovery and growth in Albania requires a shift from domestic demand driven growth to export-oriented growth, says the World Bank in its recommendations to the new Albanian government out of the June 23 general elections. In its set of policy briefs intended to serve as input to the new government’s program of reforms, the World Bank suggests fiscal consolidation to reduce public debt over the medium term as a priority for macroeconomic stability and growth. Public debt expected to climb to 69 percent of the GDP by the end of the year, unpaid government bills and arrears at around 400 million euros and bad loans at 25 percent are considered the major threats to the Albanian economy which has been suffering escalating spillover impacts from the Eurozone crisis and top trade partners Italy and Greece.
“For growth, the way forward must be to tap external demand which for a small economy like Albania remains an important source of growth. For this, Albania needs to accelerate structural reforms in at least three areas: improving the quality of governance and rule of law; strengthening the quality of human capital (education and skills) and overcoming infrastructure bottlenecks, in particular in the power sector,” says the World Bank.
Slow road to recovery
The countries of the South East Europe (SEE6) region exited from recession in the first half of 2013, led by improved export performance, according to the latest World Bank South East Europe Regular Economic Report (SEE RER).
Average growth of real income of the six countries rebounded from negative 0.7 percent in 2012 to 1.8 percent (year-on-year) in the first half of 2013, supported by nascent recovery in the Eurozone. In addition, favorable weather conditions supported a strong contribution of agricultural output to economic growth and helped weaken inflationary pressures.
“Industry – especially manufacturing exports and energy – drove the recovery,” says Gallina Andranova Vincelette, Lead Economist and co-author of the SEE RER.
The report notes on the downside that domestic demand remained depressed across the region, reflecting high unemployment, sluggish growth of household incomes and credit, and a difficult investment climate. Beyond these short-term factors, a slowdown in productivity growth and rising unit labor costs adversely affected economic growth, lowering competitiveness and demand for labor.
Satu Kahkonen, a World Bank Manager for macroeconomic and poverty reduction work in South East Europe emphasizes that “The South East Europe countries need to continue to prioritize strengthening their domestic macroeconomic fundamentals and policies that boost their productivity and resilience to external turmoil. The nascent export-led growth of 2013 is a positive development, but sustaining it will be a challenge. In addition to the need to improve their fiscal positions, decrease public debts, and strengthen their banking systems, the SEE6 countries face significant structural challenges in improving productivity and competitiveness, including in the areas of the investment climate, the labor market, and the public sector.”
