Albania: Economy

Albania's economy has improved substantially over recent years and has outperformed many other countries in the region. However, it is still considered one of the poorest countries in Europe. According to the Bank of Albania, per capita income was $4,070 in 2009, and was expected to reach $4,200 in 2010. According to preliminary data by the World Bank's Poverty Assessment Program, 12.4% of the population lived below the poverty line in 2008, marking a considerable improvement from 25.4% in 2002; this decline in poverty levels was due mainly to higher per capita GDP. The official unemployment rate is 13.52%, with almost 60% of the workforce employed in the agricultural sector, although the construction and service industries have been expanding recently. Tourism has been boosted significantly by ethnic Albanian tourists from throughout the Balkans. GDP is comprised of services, including trade, hotels, and restaurants (21%), transport (5.5%), and communication (4.5%); agriculture (19%); construction (14%); industry (10%); and remittances (9%).

The Albanian economy has been partially sheltered from the global financial crisis and the economic downturn. The International Monetary Fund (IMF) projects growth at 3.4% and 3.6% for 2011 and 2012 respectively. A reduction in remittances from Albanian workers abroad has constrained economic activity, although exports grew in 2010.

During the global financial crisis, bank deposits shrank considerably and lower liquidity pushed commercial banks to tighten lending. While current bank deposits have reportedly surpassed pre-crisis levels and bank liquidity has improved, the demand for credit is still low. In December 2009, the growth rate of loans dropped to 10% from 35% in 2008. The low demand for credit continued into 2010, with the growth rate of loans slowing to 9.1% for the first 6 months of 2010. In general, the banking sector remains viable, well capitalized, and able to further finance the economy, as the ratio of loans to deposits, approximately 65%, is still low compared to Western standards.

Albania is trying to attract foreign direct investment (FDI) and promote domestic investment. Increasing FDI is a top priority for the Albanian Government, especially in light of the steady decrease of remittances. In 2010, Albania was the only country in the region to see a net increase in FDI, with total foreign investment surpassing $1 billion. The Government of Albania has embarked on an ambitious program to improve the business climate by undertaking fiscal and legislative reforms and by improving infrastructure.

The recent investment in energy generation through new transmission lines and the privatization of the electrical distribution arm will partially address the lack of reliable energy supply, which was a major concern for businesses following power shortages during 2005-2007. However, Albania remains predominantly dependent on hydroelectric generation and can only meet its national demand for energy in times of plentiful rainfall.

Heavy investments in the country’s main road corridors have contributed to improved transportation conditions. The recent completion of the 106 miles (170 km) of highway linking Durres with Kosovo has provided a major transportation corridor connecting markets in the central Balkans through Kosovo to the port of Durres. Similar large-scale infrastructure investments are needed to further improve Albania’s road transportation corridors and limited railway system and to expand the capacity of its sea ports and airports.

Background
Albania was the last of the central and eastern European countries to embark on democratic and free market reforms, and it started from a disadvantaged position due to Hoxha's catastrophic economic policies. The democratically elected government that assumed office in April 1992 launched an ambitious economic reform program meant to halt economic deterioration and put the country on the path toward a market economy. However, the collapse of the infamous pyramid schemes in 1997 and the instability that followed were a tremendous setback. The country subsequently recovered and is aggressively pursuing its Euro-Atlantic integration agenda. In June 2006, the Albanian Government signed a Stabilization and Association Agreement (SAA) with the European Union, the first step in the EU accession process. In April 2009, Albania became a NATO member country and at the same time submitted its application for EU membership, both considered major milestones in the country’s history.

Albania’s economy has improved markedly over the last decade; reforms in infrastructure development, tax collection, property law, and business administration are progressing. Despite the effects of the recent global financial crisis and economic downturn, the country has outperformed many other countries in the region. During 2006-2009 the average growth rate was 5.5%, while for 2010 the Government of Albania anticipated growth reaching 4.1% (the IMF predicted 2.7%).

Albania still ranks as one of the poorest countries in Europe according to major income indicators, although per capita GDP figures do not fully capture remittance income from the extensive network of Albanians abroad and income from the informal market, which the IMF estimates at 30%-40% of GDP. Remittances, a significant catalyst for economic growth in the past, have experienced a decline over the last few years after peaking in 2007. The Bank of Albania estimates that remittances fell by 6% in 2009 compared to 2008, and their share of GDP declined to 9% in 2009. The reduction continued during the first three quarters of 2010, though on a smaller scale.

The Albanian banking sector survived the global financial crisis with sufficient liquidity, and the system has recovered from the sharp decline in deposits at the start of the crisis. Fiscal and monetary discipline has kept inflation relatively low, averaging roughly 2.6% per year during 2006-2009. The average inflation rate was expected to reach 3.6% for 2010, still within the Central Bank target of 3 plus or minus 1%. According to official estimates, the unemployment rate as of September 2010 was 13.52%.

Albania has put in place a liberal foreign investment regime, and the government is working to better the business climate through fiscal and legislative reforms and infrastructure improvements. FDI has increased significantly over the last few years and in 2009 reached almost $1 billion, up from $262 million in 2005. The Government of Albania has invested almost U.S. $2 billion in the country’s main road corridors, and it has pledged to invest at least another billion until 2013. Electricity supply has also improved, while the distribution system has been privatized.

Trade
Albania continues to be an import-oriented economy and, despite reforms, its export base remains small, narrow, and undiversified. In 2010 imports averaged 39% of GDP and exports 13%, while export volume was approximately one-third the size of imports. Trade volume in 2010 increased by 20%, with imports increasing by 11.4% and exports by 56%. Exports and imports have continued to pick up 2011. As of June 2011, exports rose by 20.3% year-on-year while imports rose by 15.5%.

The Stabilization and Association Agreement (SAA) signed with the EU in June 2006 was the first step in Albania's EU accession process, and a related Interim Trade Agreement entered into force the following December. On December 19, 2006, Albania joined other countries in the region and signed the Central European Free Trade Agreement (CEFTA.) Albania also has free trade agreements with Turkey (signed in 2006 and entered into force on May 2008) and the European Free Trade Association (EFTA member states are Iceland, Liechtenstein, Norway, and Switzerland).

The EU remains Albania’s main trading partner, providing 64.1% of Albania’s imports and receiving 70.2% of exports as of September 2010. Trade with Italy and Greece, although steadily declining since 2008, continues to represent the largest share of EU trade, with a combined 40.8% of imports and 56.4% of exports as of September 2010. Other major trading partners include Turkey, China, and Germany. The impact of CEFTA in Albania’s trade with member countries has been small.

Trade with the United States continues to account for an insignificant part of Albania's trade volume, focusing on a narrow range of goods and products. As of September 2010, total trade volume with the U.S. accounted for 3% of Albania’s total trade volume, up from 2.4% in September 2009. Agricultural products, footwear, and textiles are the main exports to the United States, while imports from the U.S. are generally from food (mainly meat), transportation equipment (vehicles), machinery, and computer and electronic equipment.

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