Albania

major macro economic indicators

(e): Estimate. (f): Forecast.

RISK ASSESSMENT

Growth supported by domestic demand

Growth could increase in 2020 and get close to its potential (4%). Household consumption, again the main contributor, will continue to benefit from the fall in unemployment, including among young people (from 34% to 21% since 2015), as well as from the increase in the participation rate linked to the decline in the informal economy. Wages are therefore expected to increase further. With the completion of the Trans Adriatic Pipeline to transport Azeri gas to Italy, as well as the completion of the second plant of the hydroelectric complex on the Devolli River, foreign investment has slowed. Nevertheless, it remains the major component of investment, with a continued preference for energy, mining and, increasingly, for tourism-related construction. Conversely, local investment remains weak. Its private share is hampered by a lack of skilled labour and entrepreneurship, as well as by poor-quality public services, while the building and upgrading of roads, railways (Tirana-Durres line) and port facilities are being constrained by fiscal consolidation, low government revenues and prudent lending by banks. Banks, most of which are subsidiaries of foreign groups (78% of total assets) from Turkey, Italy and Austria, will seek to further reduce the percentage of doubtful loans in their portfolios (11% in July 2019 down from 25% in 2014), while also lowering the share of the euro (about half) in their deposits and loans. Under these circumstances, growth in corporate credit should remain low, and the average interest rate on lek and euro loans should stay relatively high (6% and 4% in July 2019). The contribution of foreign trade to growth is expected to remain slightly negative. Exports could suffer from the European slowdown, while more moderate imports of capital goods will be offset by strong imports of consumer goods. Due to the strength of the lek, inflation is expected to remain low, below the 3% target. The central bank will likely maintain its key interest rate, which it lowered to 1% in June 2018 to ease the upside pressure on the currency. While all sectors, particularly services (40% of employment and 54% of GDP along with tourism and construction) should perform well, electricity production, which is reliant on rainfall, is difficult to predict, heightening the uncertainty of growth.

Fiscal consolidation necessary to reduce the debt burden

Since the end of the IMF programme and the elections in 2017, fiscal consolidation has stalled. The stakes are high given that the debt burden, although decreasing, remains considerable. Half of the debt is short term and divided equally between domestic creditors (60% is held by local banks and accounts for 25% of their assets) and foreign creditors. Its refinancing was estimated at 17% of GDP in 2018, as compared against government revenues of 25% of GDP. Adding to the debt burden are State guarantees under contracts carried out in partnership with the private sector in areas ranging from roads and health to energy and education, which represent 31% of GDP (the equivalent of an additional 15% is under negotiation). The cost of the electricity sector for the State is expected to decrease with the installation of meters, infrastructure upgrades and the phase-out of subsidised prices. Tax collection is benefiting from the reduction of the informal sector and computerisation, while improved investment management has made it possible to eliminate arrears of payments to suppliers.

Large trade deficit offset by tourism, remittances and FDI

Trade in goods will continue to show a large deficit (22% of GDP in 2019). This reflects the narrow production base (textiles, footwear, oil, ore, electricity, construction materials), which forces the country to import capital and consumer goods. Half of Albania’s exports are destined for Italy. In addition, the balance is sensitive to rainfall through fluctuations in hydroelectric power sales. The services surplus (8% of GDP) is expected to increase thanks to tourism and outward processing arrangements in the clothing sector. Remittances from emigrants (7%) could suffer as a result of poor economic conditions in Italy. FDI largely finances the current account deficit, which means that infrastructure-related imports are self-financing. External debt, which is declining, is denominated in euros and long term. It represented 57% of GDP in June 2019, excluding intra-group loans (14%) linked to FDI. The Albanian State is responsible for 58% of the total.

Political disorder

The Socialist Party won an absolute majority of seats in the 2017 elections, allowing Prime Minister Edi Rama to serve a second term. Nevertheless, tensions with the opposition are high. Members of the Democratic Party resigned in February 2019 and the entire opposition boycotted the June municipal elections, saying it would not participate in any election as long as the Prime Minister remained in power. In order to ease the pressure and pursue the reforms necessary to open accession negotiations with the EU, the government may have to broaden its base by involving part of the opposition. Much remains to be done to improve the effectiveness of administrative and court systems, make local agencies accountable and fight corruption, organised crime and smuggling between Albania and Italy.

Last update : May 2020