albania economic overview

Macroeconomic performance

The global economic crisis has had less effect on Albania so far than on most other countries in the region. The economy grew by around 7 per cent in 2008 and 6 per cent in the first quarter of 2009, driven by public infrastructure investments and activity in the services and telecommunications sectors.

The 2008 budget deficit increased to 5.7 per cent, up from 3.5 per cent in 2007, mainly due to an increase in the number and size of infrastructure projects. Revenue administration and public debt management were strengthened, leading to increasing tax revenues in 2008 despite a reduction of corporate and personal income tax rates to 10 per cent. The government debt burden remains high at above 50 per cent of GDP, while external debt is manageable at around 20 per cent of GDP.

The biggest impact of the crisis was felt in the real economy due to lower remittances (a fall of 18 per cent in the first half of 2009 compared with a year earlier) and lower exports (down 17 per cent year on year in the first half of 2009) while imports decreased by less than 2 per cent. As a result, the current account deficit continues to remain high at around 15 per cent of GDP. In response to falling foreign currency inflows and tighter lending conditions, the Bank of Albania (BoA) lowered its policy rate from 6.25 to 5.75 per cent in January 2009.

Inflation has remained well within the BoA’s 2 to 4 per cent target range, and continued its downward trend in 2009, reaching 2.2 per cent year on year in July. International reserves have remained broadly stable at around four months of imports as a result of prudent monetary policy and the flexible exchange rate regime.

Outlook and risks

Albania’s less-advanced financial sector and limited exposure to international goods and capital markets provide buffers against the crisis, and local banks seem well placed to overcome the current crisis due to strong capitalisation, limited reliance on wholesale funding and still-low loan-to-deposit ratios. However, export growth is expected to decline further and the global recession will continue to affect remittances. As a result, it is likely that Albania will achieve a significantly lower, but still positive growth in 2009.

Key macroeconomic challenges include financing the large trade and current account deficits. Fiscal risks remain as the government continues to subsidise underperforming state-owned utilities, especially water, power generation and transmission, where revenues do not cover necessary maintenance and investment. Continuing EU approximation, which culminated with the recent formal bid for EU membership, as well as membership of North Atlantic Treaty Organization (NATO), has improved Albania’s image as an investment destination and should contribute to a rebound in growth in the second half of 2010 and further catch-up growth over the medium term.