A World Bank Lead Economist for Western Balkans warns the figure could be worse, depending on how the Greek economic crisis is resolved
TIRANA, June 5 – The World Bank has downgraded Albania’s GDP growth forecast to 1.6 percent, down from 2 percent earlier citing worsening economic conditions in the Eurozone and especially neighbouring Greece which are holding back economic activity and depressing government revenues. For 2013, the World Bank expects Albania’s growth to slightly accelerate to 2.5 percent, according to a World Bank SEE6 report examining Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia. The new World Bank forecast is slightly more optimistic compared to IMF’s 0.5 percent outlook, and EBRD’s 1.2 percent for 2012 but remains three times higher compared to government’s 4.3 percent growth outlook for this year. At 1.6 percent for 2012, Albania’s growth would be 0.5 percent above the regional average for 2012. However, next year’s expected growth of 2.5 percent would be 0.1 percent lower than the average of SEE 6.
World Bank representatives in Albania noted that the moderate economic growth Albania has had has not been accompanied by lower unemployment rates or increase in revenues for the poor.
Kseniya Lvovsky, the World Bank country manager for Albania, said the report determines lowering public debt as a priority for Albania suggesting that keeping deficit under control is key for its reduction. According to her, the budget deficit should be kept at 3 percent of the GDP for 2012 and target lower rates in the next couple of years. In order to achieve this there are several options in the expenditure or revenue with either lowering spending in the budget review or taking measures to manage taxes better.
Zef Preci, the director of the Albanian Institute for Economic Studies says the Albanian economy has stagnated under conditions of low aggregate demand and a tendency for lower public and private investments.
“Very careful public policies are needed regarding public debt management, improving fiscal performance in the fight against tax evasion, friendly policies to promote exports and domestic production,” Preci told VoA commenting on the World Bank report. According to Preci, the Eurozone crisis has mostly affected migrant remittances and exports while the banking system has managed to remain safe.
Roughly a fifth of the population in Albania and Macedonia report having had to stop buying medications or delay visits to the doctor. Reduction in wages or hours affected more than half of the Albanian population, followed by job loss or closed business for 40 percent, and reduced flow of remittances for 30 percent, says the report citing the EBRD Life in Transition survey.
As far as coping mechanisms are concerned, around 60 percent of the Albanian population say they reduced consumption of luxury goods. Around 40 percent also reduced alcohol and cigarette consumption, cut down on staple foods and vacations. Around 20 percent of Albanians are reported to have delayed utilities payments, cut TV, phone or internet
“Weak economic conditions in the Eurozone have exerted a drag on domestic demand, trade, and government revenues in SEE6 countries,” says ϥljko Bogeti欠Lead Economist for the Western Balkans at the World Bank, and author of the South East Europe Regular Economic Report No. 2 (SEE RER), the second of a series of regular bi-annual reports, presenting the report in Skopje this week.
After 2.2 percent growth in 2011, early indications are that Southeast Europe’s six (SEE6) countries are experiencing a significant slowdown to 1.1 percent growth in 2012. While the drop to 1 percent growth would mark a sharp slowdown, Bogeti桡lso emphasized that the figure could be worse, depending on how the Greek economic crisis is resolved.
“Importantly, this baseline projection assumes an orderly resolution of the Greek crisis and a containment of the broader contagion. Hence the importance of strengthening fiscal and financial buffers in all countries.”
Assuming no major external shocks the risk of government insolvency is low in SEE6, but weak conditions in the Eurozone and Western Balkans could still result in further pressures, especially if fiscal consolidation is delayed. The Government in Albania is already a net debtor to the financial sector, in addition to having a large debt stock. Slow growth in revenues and unplanned electricity imports will probably result in budget cuts for Albania, says the World Bank.
Albania and Montenegro are the most indebted countries in SEE6. Albania’s public debt also inched slightly higher to 58.4 percent of GDP, close to the statutory limit of 60 percent, and its large share of short-term debt is of particular concern. Montenegro’s public debt including guarantees has risen from 51 to 56.9 percent of GDP.
The report warns that Albania and Serbia will, unless major corrective measures are taken, breach their debt ceilings of 60 percent of GDP (Albania) and 45 percent of GDP respectively, set in their national legislation. Interest expenditures average around 1 percent of GDP in the SEE6 countries with the exception of Albania were interest expenditures in 2011 were 3.1 percent of GDP. Albania’s public debt as percent of government revenues at 228 percent is also the highest in the region with Montengro ranking second with 151.5 percent.
Non-performing loans (NPLs) remain significantly elevated, averaging 14 percent across SEE6, while in Albania they reached 20 percent in March 2012.
Fiscal consolidation
With high levels of public debt and financing pressures, most countries have to adopt significant fiscal consolidation programs.
“This is the key short-term policy challenge for countries whose public debt-to-GDP ratio has been increasing rapidly,” says World Bank’s ϥljko Bogeti欠emphasizing that “economic policy must strike a balance between the need to improve public finances and reduce macroeconomic vulnerabilities, on the one hand, and strengthen the economic policy environment for investment, growth, and jobs, on the other.”
Policymakers should especially take note of the difficult social situation and related trends: SEE6 countries are experiencing the highest unemployment and poverty rates in Europe.
Growth was weak and largely “jobless” during the nascent recovery in 2010-11. Poverty reduction gains from the pre-crisis period are being reversed, and the middle class has become more vulnerable, according to both objective and subjective indicators of welfare.
In the face of much more moderate growth prospects than before the crisis and high social pressures, SEE6 country governments should adopt a more ambitious and urgent structural reform agenda for growth and jobs.
“The SEE6 long-term structural reform agenda must be focused on leveraging greater trade and financial flows and, especially, on reforming labor markets and the public sectors,” says Jane Armitage, World Bank Country Director and Regional Coordinator for South East Europe.
