TIRANA, April 11 – The World Bank has kept unchanged its Albania forecast for the next couple of years when it expects the country’s GDP growth to slow down as two major energy-related projects complete their investment stage and a series of downside risks related to public debt, public private partnerships and business climate face the country’s economy.
In its latest Spring report on the Western Balkans, the World Bank expects Albania’s GDP growth to slow down to 3.6 percent in 2018, down from an estimated 9-year high of 3.8 percent in 2017 and further moderate to an average 3.5 percent for 2019 and 2020 in the most pessimistic scenario by a major international financial institution.
The International Monetary Fund expects Albania’s growth for the next four years to range between 3.7 percent to 3.9 percent, worried over the completion of the TAP and Devoll energy-related projects that led the Albanian economy growth for the past four years and a controversial €1 billion PPP program that the Albanian government plans to implement over the next four years, apparently hindering efforts to bring down public debt, currently hovering at 70 percent of the GDP.
The Albanian Socialist Party government expects growth to pick up to 4.2 percent for 2018 and gradually accelerate to 4.5 percent by 2021 when its second consecutive term of office expires.
“Growth is projected to moderate to 3.6 percent in 2018 as two large FDI projects in the energy sector are completed, and then to average 3.5 percent in the next two years. As the demand stimulus from the FDI projects diminishes and economic activity returns to close to potential, growth is expected to moderate,” says the World Bank in its latest report.
“Increasingly, growth will rely on private consumption, supported by better labor market conditions and higher net exports in response to heightened demand from the EU and to domestic structural transformation,” it adds.
Having registered one of the highest growth rates in the Western Balkans over the past couple of years, Albania is one of the two EU aspirant regional countries along with Montenegro whose GDP growth is expected to slow down over 2018-2020.
The World Bank estimates that a third of Albania’s population still lives in poverty, compared to about a quarter of the populations in Serbia and Macedonia and only 4 percent in tinier Montenegro.
Albania’s poverty rate, measured against the regional standardized benchmark of US$5.5 a day in 2011 purchasing power parity, dropped to 32.8 percent in 2017, down 3.1 percentage points compared to 2014, says the World Bank.
To bolster job creation and spur sustainable growth over the medium term, the World Bank report calls for bold structural reforms in the Western Balkan region.
“Weather-related shocks, such as harsh winters and unexpected natural disasters, as well as country-specific vulnerabilities, such as political uncertainty, continue to threaten growth in the region,” it says.
Downside risks
The World Bank says Albania needs to preserve its fiscal consolidation and be careful with its PPP agenda as well as improve business climate in order to avoid internal and external downside risks.
“Economic prospects are vulnerable to several risks. With public debt still high, the government needs to fully realize its fiscal consolidation plans and further tighten tax compliance if it is to preserve the macro-fiscal stability that is the foundation for Albania’s current growth,” says the World Bank report.
“In particular, the government needs to toughen its management of PPPs to minimize their fiscal risks and to ensure that each investment is cost-effective,” it adds.
The €1 billion PPP program aimed at upgrading road, health and education infrastructure has also been criticized by the IMF which has warned that the ambitious project will not only fail to bring public debt down to 60 percent by 2021, but could create hidden costs which if included in the debt stock could take it to 71 percent of the GDP, a high burden for Albania’s current stage of development.
The World Bank says harnessing growth will require improving the business climate through legal, land, financial, and energy reform and upgrading the skills of the labor force.
“Continued efforts to consolidate public finances, improve the efficiency of spending, reduce debt and contingent liabilities, and introduce structural reforms in the energy, financial, and judiciary sectors are critical to foster confidence and drive sustainable growth,” says the report.
The Washington-based lender warns lower than expected growth in trading partners and higher global interest rates are also a serious concern for Albania’s growth and its public finances.
Albania’s main trading partner and the Eurozone third largest economy, Italy has been involved in a political deadlock to form a new government following the inconclusive March 4 general elections and its GDP is only expected to slightly pick up to 1.5 percent this year following double-dip recession between 2008 and 2013.
Meanwhile, growth in Greece growth in Greece, Albania’s traditional second largest trading partner, is expected to pick up to 2.5 percent for 2018 and 2019 after escaping one of its worst recessions in modern history ending in 2016.
Recessions in Italy and Greece, the host of about 1 million Albanian migrants, have significantly affected Albania during the past decade mostly in investment, trade and remittance flows.
