Albania: Risk Assessment
Country Risk Rating
Business Climate Rating
- Candidate for European Union membership, Stabilisation, and Association Agreement
- Mineral (oil, chromium, copper, iron-nickel, silicates, coal), hydroelectric, and tourism potential
- Long coastline
- Abundant and inexpensive labor
- Flexible exchange rate coupled with a strong lek against the euro and substantial reserves
- Small, open, and poorly diversified economy
- Unfavorable demography: aging and immigration
- Large albeit shrinking informal economy (one-third), which undermines government revenues
- Poverty, low priority is given to education, low-skilled workforce
- Dependence on rainfall: agriculture (one-fifth of GDP for 42% of jobs) and hydroelectricity (98% of electricity) and exposure to seismic risk
- The inefficient and politicized court system and administration
- Corruption and organized crime, in some cases linked to drug trafficking
A recovery constrained by external factors
In 2021, the recovery will be mainly supported by household consumption and public investment in reconstruction efforts following the earthquake at the end of 2019. Household consumption, the mainstay of demand, is expected to grow in the second half of the year with the lifting of restrictions aimed at preventing the spread of the pandemic. Low inflation, which is still below the central bank’s 3% target, should benefit households, as should the central bank’s accommodative policy (rate set at 0.5% since March 2020). However, this private demand will be adversely affected by the high unemployment rate (14.5% at the end of 2020), the large informal economy, which lessens the impact of government aid, and low remittances from Albanian expatriates in Italy and neighboring countries. Public expenditure will be primarily directed towards investment in infrastructure to complete the post-earthquake reconstruction efforts, which have been hampered by lockdown measures. The need for fiscal consolidation should, however, constrain these investments. Private investment will be largely carried out by foreign investors, who dominate the market, and will remain concentrated in the extractive industry (oil, ore), construction (especially tourism), and telecommunications services. Most of the investment comes from Switzerland, the Netherlands, and Canada and is likely to be affected by the climate of uncertainty and the sluggish recovery in Europe. External demand is expected to contribute only marginally to the recovery, held back by persistently weak activity in Italy, the main buyer of manufactured goods and the number-one source of tourist flows in the country. For the same reason, sectors linked to tourism (27% of GDP in total) will continue to be affected by obstacles preventing people from traveling. Agriculture will again be one of the mainstays of the economy (18.7% of GDP in 2019). The extractive industries (oil, ore) are also expected to grow, driven upwards by higher average prices. The manufacturing industry, which is chiefly focused on low-value-added goods, such as clothing, should remain constrained by activity in the country’s main partner, Italy.
Fiscal consolidation needed and a fragile but sustainable external position
While fiscal consolidation had begun to stall in 2017 with the end of the IMF program, the pandemic and successive aid plans derailed the trajectory of public finances. In 2021, the government will continue its consolidation strategy, aiming to broaden its tax base and make tax collection more efficient. The planned increase in civil servants' salaries should, however, limit the reduction in the deficit, which will be financed through domestic channels with withdrawals from the central bank and bank deposits, as well as through multilateral loans (following disbursements by the European Commission and other EBRD-type project loans). The public debt will remain sustainable, although the gross borrowing requirement is high because of the shorter maturity of its domestic share (50% of the total), which entails a refinancing risk. However, this risk will remain limited thanks to access to multilateral donors (EBRD) and continued low-interest rates on international markets as observed at the time of the June 2020 issue. Moreover, external debt remains largely concessional (52% of the total).
The trade deficit (23% of GDP) is expected to increase in 2021 with a rise in imports following the recovery in domestic demand, particularly for high-value-added goods and to meet reconstruction efforts. This revival will exceed the pick-up in exports (textiles, footwear, oil, ore, electricity), which are being affected by muted Italian demand, notwithstanding strong agricultural exports. Exports of services should continue to be hampered by the dismal performance of the tourism sector, while imports of support services for reconstruction work will increase. The current account deficit is expected to narrow thanks to an increase in the transferred surplus, supported by financial aid, as well as the recovery, albeit moderate, in expatriate remittances. The financing requirement should be covered by foreign direct investment and multilateral aid. Multilateral loans and the aforementioned bond issue have made it possible to replenish foreign exchange reserves (equivalent to 5.3 months of imports at the end of 2020), supporting the lek exchange rate.
Tensions run high in an election year
While the political climate had been tense since the 2017 elections, the November 2019 earthquake and the crisis linked to the COVID-19 pandemic have created a highly unstable situation in the run-up to the legislative elections scheduled for April 2021. With the Socialist Party led by Prime Minister Edi Rama in power, the main opposition parties left parliament in February 2019 in an attempt to move the center of the political scene to the streets. Tensions are running high in connection with the implementation of an electoral reform negotiated with the extra-parliamentary opposition and demanded by the European Union before opening accession talks. The outcome of the battle will be decided in the first few months of 2021. The winner will have much to do to improve administrative and judicial efficiency and fight corruption, organized crime, and smuggling between Albania and Italy.