Prospects appear grimmer this year as the economy keeps slowing down and indirect indicators such as lending, investments and profit rates stand at negative growth rates
TIRANA, Nov. 19 – Albania’s private sector, which accounts for 80 percent of the GDP and provides the overwhelming majority of employment, is facing its most critical situation in the past five global crisis years. The situation deteriorated in 2012 when Albania’s economy grew by 1.6 percent, registering the poorest GDP growth rate in the past 15 years and half of the average 3 percent growth rate from 2009 to 2011. Prospects appear grimmer this year as the economy keeps slowing down and indirect indicators such as lending, investments and profit rates stand at negative growth rates. A chain of unpaid government bills and arrears estimated at around 55-60 billion lek (Euro 382 to 416 million) further deteriorate the situation.
While Albania’s business climate has slightly deteriorated in the global crisis years, the good news is that Albania has been one of the top FDI recipients in South-East Europe.
Although remaining one of the best performing enlargement economies in the global crisis years of 2009 to 2012, the Albanian economy is showing sluggish signs of recovery and has been overtaken by most EU aspirants in the first half of this year, shows a European Commission report. At only 1.1 percent during the second quarter of 2013, Albania’s GDP registered the second lowest growth rate among candidate and potential candidate countries, better only compared to Serbia.
Lower investments and lending at negative growth rates as domestic consumption remains sluggish are the most obvious symptoms of the difficult situation businesses in Albania are facing. Finance Ministry data shows imports of machinery, equipment and spare parts, which indirectly measure business investments, dropped by 10 percent to 64.5 billion lek (Euro 452 million) in the first three quarters of this year. Meanwhile, Bank of Albania statistics show lending to businesses shrank by 2.4 percent year-on-year in third quarter of this year, affected by a sharp drop in loans to the ailing construction sector. The profit tax paid by businesses in the first three quarters of this year dropped by 9.3 percent compared to the same period last year.
Business/consumer confidence
Since the onset of the global financial crisis in 2009, the Economic Sentiment Indicator, measuring both business and consumer confidence, has been below its long term average. A boost in confidence in the services and industry sectors had a positive impact on the Economic Sentiment Indicator which climbed by 10.3 percentage points to 87.9 percent in the third quarter of 2013 after a drop in the second quarter of the year. A recent central bank survey shows the improvement in the Economic Sentiment Indicator, measuring both business and consumer confidence, was first of all influenced by a considerable increase in the services sector which accounts for 60 percent of the GDP and provides 32 percent of the employment. The industry sector, which accounts for 11 percent of the GDP and secures 11 percent of employment, also registered a slight increase in confidence. Meanwhile, confidence in the long-ailing construction sector, whose contribution has dropped to 8.6 percent of the GDP and 6.5 percent of employment, continues remaining poor. Consumers, whose confidence in the first two quarters of the year increased, became more pessimistic in the third quarter of the year.
Rising difficulty in paying off
Bad loans in the construction, manufacturing and trade industries have reached alarming levels with one out of two debtor enterprises failing to pay off for at least three months which is the deadline classifying loans as non-performing, warns the Bank of Albania. In its financial stability report for the first half of 2013, the central bank says bad loans in the construction sector rose to a record 53.2 percent in the first half of this year compared to 32.3 percent at the end of 2012. The processing industry also saw its bad loan portfolio increase to 44.6 percent compared to 27.7 percent at the end of 2012. Meanwhile, bad loans for businesses operating in the trade sector rose to 46.2 percent, compared to 29.2 percent at the end of 2012.
Bad loans have also sharply risen to around 38 percent in the agriculture sector, from around 22 percent at the end of 2012.
The Bank of Albania warns the credit risk represents the main challenge in the banking system activity. “The presence of a high stock of non-performing loans in banks’ balance sheets increases the cost of the banks’ activity, limits their financial intermediation ability and requires the use of additional and non-efficient capacities.”
At the end of the first half of 2013, non-performing loans for households rose to 18.44 percent, increasing by 1.5 percentage points compared to the end of 2012 and 2 percentage points compared to the end of first half of 2012. Non-performing loans for businesses rose to 26.49 percent at the end of the first half of 2013 compared to 22.77 during the first half of last year.
With lending having plunged to negative growth rates, non-performing loans which are considered the second major threat to the Albanian economy after public debt, rose to 24.34 percent in the third quarter of 2013, up from 22.7 percent during the third quarter in 2012.
National Economic Council
The business community in Albania has welcomed the establishment of the National Economic Council, hopeful that their views will be taken into consideration in the drafting of new legislation. Albania’s National Economic Council, a new body established as an instrument to institutionalize dialogue between government and the business community, will convene quarterly under the lead of Prime Minister Edi Rama to handle business issues and review the economy’s growth agenda.
“The National Economic Council, as a permanent structure, will convene every three months and will treat through the best international and domestic expertise, issues which in the short-term are related to debts to the private sector for public works, VAT refunds, and in the long term with the structure of the economy itself,” Prime Minister Rama has said.
The National Economic Council will meet every three months with international experts and business representatives under the lead of the Prime Minister and every month in the presence of the finance and economic development ministers.
Inappropriate behaviour by the tax administration, corruption, arbitrariness and abuse of power will be the focus of the Council. To increase transparency, an office dealing with complaints and requests by the business community will be established at the Council of Ministers.
Prime Minister Rama says the Council will also deal with the new growth model of the Albanian economy under circumstances when two key drivers such as remittances and the construction sector have been exhausted by the crisis.
“The era of an economic growth without employment has been exhausted and we need economic growth with employment which means a manufacturing economy which is able to create new jobs,” says Rama.
