Coun­try pro­files

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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.

Eco­nomic prospects

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%.

Busi­ness en­vi­ron­ment

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.

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