Albania

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Sluggish consumption weighed down by inflation and the European cooling

The main engine of growth, household consumption (83% of GDP in 2021) should only partially overcome in 2023 the inflationary shock that has affected basic necessities (food representing a third of the average basket) and energy prices, but also expatriate remittances (down), while social spending remains constrained. The size of the informal economy coincides with poorly financed social shock absorbers, a situation that is, among other things, linked to drugs and the high unemployment rate.

A legacy of communism, the high level of public employment (16% of the total) certainly provides protection, but the price to pay in the medium term is high debt. Thanks to external financing, notably in the shape of European funds, public investment should be maintained in 2023, in particular to improve the continuity of road and electricity networks. VAT exemptions on renewable energies were voted in October 2022 and photovoltaic "farms" are being developed, with several floating facilities awarded after a call for tender in 2021 (12.9 MW in Banja, 100MW in Spitallë). Exploiting the solar potential of this Mediterranean country could help to overcome intermittent supply cuts due to rainfall and the seasonal nature of hydroelectricity (98% of the electricity produced in 2021). At the same time, the private construction sector is expected to slow down with the increase in the Bank of Albania's main interest rate (expected to reach 3% in early 2023).

Exports (30.6% of GDP) are growing in tourism (about 20% of GDP) and industry, but at a rate insufficient to offset imports and sustain growth. Exceeding the number of entries in 2019, the 2022 summer tourist season confirms the attractiveness of a coastline under development. Since a wave of Italian relocations in the 1990s and 2000s, the textile industry has provided the bulk of exported goods. Smaller manufacturing units should continue to develop in the medium term, benefiting from an influx of labour from the primary sector, even though the storm clouds hanging over the Italian economy may reach subcontractors in 2023. Agriculture, which still accounted for 36% of the workforce in 2021, is not expected to receive the necessary investment to modernise in the absence of a sectoral plan.

Fiscal discipline welcomed, but current account deficit structurally unchanged

In line with the pre-pandemic consolidation of public finances, Tirana plans to increase actual tax revenues in order to reduce the deficit. In detail, the reduction of exemptions and the fight against tax avoidance will be central to the efforts. On the expenditure side, continued high inflation would push for extended measures in favour of poor households and increase the cost of investments. Between social tensions and an unfavourable debt structure, the government has relied on concessional financing for the 2022 budget. Mostly mature in the short term, Albania's debt could pose a foreign exchange risk (50% of the stock issued abroad), as the local banking system is still largely euro-based (50%).

Due to a narrow export sector, the Albanian current account deficit will remain among the highest in Eastern Europe. The balance of goods is the linchpin of the difficulties: negative at around 22% of GDP in 2022, it will remain largely so in 2023 due to a structural dependence on foreign trade for a wide range of products (machines, vehicles, pharmaceutical drugs, fuels, plastics, etc.), exacerbated by inflation and investment needs. While the tourism boom is expected to support the surplus in services (9% in 2022), the drop in expatriate remittances due to the slowdown in the German and Italian economies will not ease foreign trade imbalances, which should continue to be financed by FDI and concessional financing for infrastructure.

In 2022, one step closer to joining the European Union

Faced with social instability and confidence that is being tested internally and externally, Prime Minister Edi Rama is in a hurry to act against corruption. He relies on his outgoing socialist majority, having won the 2021 legislative elections. Recurring demonstrations in the spring of 2022 led the government to deploy an anti-inflation shield (capped fuel prices, indexation of pensions, etc.). The term of office of the independent institution of justice ethics (KPK) was extended for a period of five years. Liberated after the fall of an autarkic communist regime, emigration persists in the face of unemployment (11.1% in Q2 2022), the absence of job prospects for graduates and living conditions which are among the lowest on the continent (GDP/per capital of ~$5,200 in 2021).

After the invasion of Ukraine, the EU officially opened accession negotiations with Albania and Northern Macedonia in July 2022. Tirana has asserted its ties by applying sanctions against Moscow despite its dependence on grain and oil. A member of NATO since 2009, Albania and its army should benefit from the installation of alliance troops at the Kucova air base from 2023. Its diplomatic choices are not without consequences, with the country being the target of cyber-attacks attributed to Iran in September 2022. Rapid integration to the EU is not expected, however, due to the extent of anti-corruption reforms that need to be carried out. At the same time, Albania continues to nurture ties with its neighbours, notably through concrete cooperation projects, i.e., a high-voltage line between Epirus in Greece and southern Albania, and a gas interconnection project with Serbia from the Trans-Adriatic gas pipeline.

Last updated: April 2023