Albania’s economy is expected to strengthen modestly in 2014. Support comes from continued growth in exports and a modest recovery in domestic demand. However, stagnating credit, weakening external demand and declining remittances all limit the pace of economic progress. Output remains below potential. The informal economy accounts for nearly onethird of GDP. Current high levels of debt are a deterrent to investors. Albania was Europe's poorest country for many years. Levels of per capita income have more than doubled since 2001. Despite modest progress, the economy remains vulnerable on several fronts because of a culture of tax evasion, significant amounts of long and short-term domestic public debt, and weak anti-money laundering laws. Investment is
badly needed to broaden the export base.
The economy slowed in 2012 and grew by just 0.7% in 2013. Weaknesses in investor confidence, tight lending and incomplete reforms of the investment regime amplified the slowdown.
The economy is expected to strengthen modestly in 2014 with real GDP rising by 2.1%. Support comes from continued growth in exports and a modest recovery in domestic demand. However, stagnating lending, weakening external demand and declining remittances all limit the pace of economic progress. Output remains below potential.
Inflation was 1.9% in 2013 and prices will rise by 2.7% in 2014. The target range of the central bank is 2.0-4.0%.
The real value of private final consumption fell by 0.2% in 2013 and gains of 1.6% are expected in 2014.
The current account deficit was 9.2% of GDP in 2013. Inflows of FDI and remittances are the main sources of external finance. The large imbalance leaves the country vulnerable to external shocks.
Unemployment is still very high, at 12.8% in 2013, despite the large number of people working abroad. The problem is that much of the income earned abroad does not create sustainable jobs at home.
The country's budget deficit will exceed 5.0% in the medium term despite efforts at fiscal consolidation. Fiscal slippages and government arrears have also pushed up the public debt. The officials' goal is to cut the public debt to less than 60% of GDP in the medium term. This will require tax and expenditure policy measures in addition to those introduced in 2013 and planned for 2014. Current high levels of debt are a deterrent to investors. The electricity sector poses a large fiscal risk.
Evaluation of market potential
Public and private consumption is expected to fall as a share of GDP as the business sec-
tor assumes a larger role. More aggressive efforts at fiscal consolidation will be necessary as Albania's public debt and financing needs are some of the highest in the region. Ongoing reforms to enhance the efficiency of tax administration – combined with a concerted effort to reduce the size of the informal sector – should raise tax revenue as a share of GDP. Risks include the country's high level of public debt, sluggish productivity growth and significant external vulnerabilities.
Sustainable growth will require reforms to strengthen governance, property rights protection and the rule of law. The large losses in the electricity industry put a major strain on the budget and reduce potential growth. Collection rates in the industry are only around 50%.
New company laws and legal reforms have improved transparency. The privatisation agenda is gaining momentum with almost all small and medium enterprises having been sold off. All commercial banks have been placed under private management. In other fields, however, progress in improving the business climate has been limited.
The authorities plan to undertake comprehensive reforms over the medium term to make the electricity sector and pension system sustainable. Other reforms involving the energy sector and local government are also underway.
Poor transport, telecommunications and other infrastructure are considered the main obstacles to investment. The government plans to increase spending on transport systems during the current development plan. An estimated 6 000 kilometres of roadway will be rehabilitated by 2013.
In the future, the government plans to broaden the tax base, a move which should eventually allow a reduction in the corporate income tax rate. The share of the underground economy in GDP is falling as the administration of tax revenue is improved.
Weaknesses in the institutional framework mean that the rule of law is limited and corruption is widespread.