Albania

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Political tensions to ease as incumbents consolidate power

The centre-left Socialist Party of Albania (SPA), headed by prime minister Edi Rama, consolidated its position as the ruling force in Albanian politics by maintaining its slight parliamentary majority (74/140 seats) in the April 2021 elections. Though the main opposition party, the centre-right Democratic Party of Albania (DPA), increased its representation (43 to 59 seats), it did so at the expense of its junior coalition partner, the Socialist Movement for Integration. Indeed, their decision to boycott the system by abandoning parliament for two years appears to have been counterproductive. While clashes between SPA and DPA supporters had resulted in one casualty in the run-up to the election, tensions are expected to ease as the opposition licks its wounds. Although the country has had violent elections in its recent past, it appears to be in an improving governance trend, with Brussels signalling strong optimism on the prospects of EU accession. However, the country remains in the FATF’s grey list, meaning it still has progress to make in regulating the informal sector. 

Buoyant tourism and Italian spill-overs fuel a stellar recovery

The surprisingly intense rebound of 2021 is expected to moderate swiftly now that output has largely recovered its pre-pandemic level. This trend applies to all categories of domestic demand, and, to a lesser extent, exports, which will benefit from the still dynamic demand for low-end consumer goods in Italy. Favourable spill-overs from Italy will also come in the form of higher expatriates’ remittances (10% of GDP). Tourism is showing an impressive capacity to recover, with a summer 2021 season only slightly below 2019 figures. The net contribution from the external sector will therefore be close to null. At 83% of GDP, household consumption has an oversized weight in the economy and will therefore account for the lion’s share of growth. Unemployment will continue to decrease but will remain structurally high, stabilizing between 11 and 10%, due to the stubborn pre-eminence of the informal sector. The country has historically had trouble in diversifying its industrial base, but is expected to increasingly attract foreign investment in the following years. This should flow in particular into the construction and real-estate sectors, with post-November 2019 earthquake reconstruction efforts still incomplete and investor enthusiasm for building capacity in the hospitality sector. Authorities will closely monitor the buoyant real-estate market for threats to financial stability and money laundering. The imperative for fiscal consolidation will lead to a scaling back of public investment. Domestic power production, largely hydroelectric, benefited from exceptionally good rainfall in 2021, an equivalent performance in 2022 would be surprising. This will leave the county vulnerable to imported energy inflation. Nonetheless, headline inflation is not expected to overshoot the central bank’s 3% target. Agriculture will again be one of the mainstays of the economy (18.7% of GDP in 2019). The extractive industries (oil, ore) are also expected to grow, driven upwards by higher average prices. A comparatively low vaccination rate, however, implies downside risks stemming from possible COVID-19 resurgences. 

External and fiscal imbalances remain concerning

While fiscal consolidation had begun to stall in 2017 with the end of the IMF programme, the earthquake, the pandemic, and successive aid plans derailed the trajectory of public finances. In 2022, the government will resume its consolidation strategy, aiming to broaden its tax base and make tax collection more efficient. The increase in civil servants' salaries should, however, limit the reduction in the deficit, which will be financed through domestic channels with withdrawals from central bank and bank deposits, as well as through multilateral loans (European Commission and EBRD funds) and a Eurobond emission. The public debt will remain sustainable, although the gross borrowing requirement is high (20% of GDP) because of the shorter maturity of its domestic share (50% of the total), which entails a refinancing risk. However, this risk will remain limited thanks to access to multilateral donors (EBRD) and lenient global financial conditions, despite the coming tightening cycle of key central banks. Moreover, external debt remains largely concessional (52% of the total).

The trade deficit (22% of GDP) is expected to increase in 2022 with a rise in imports following the recovery in domestic demand, particularly for high value added goods and to meet reconstruction efforts. This will not be compensated by the rise in exports, despite the strong Italian rebound. Amid the revival of tourism and remittance flows, the current account deficit will continue to moderate but remain large. The financing requirement should be covered by foreign direct investment and multilateral aid. Standing at around 8 months of imports, foreign reserves provide a comfortable margin, supporting the lek exchange rate.

Last updated: February 2022