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Corruption, the biggest problem for the economy in Albania

Corruption, the biggest problem for the economy in Albania

The survey of "Monitor" with economic experts has shown that, in general, their assessment of the progress of the Albanian economy is positive. Most of them expect improved economic growth for 2024 and an inflation rate within the Bank of Albania's target. However, experts' forecasts are negative for the performance of exports, while most of them expect a further strengthening of the Lek in the foreign exchange rate. According to them, the main threat to the Albanian economy remains corruption, followed by the demographic problem

"Monitor" has developed a survey, with a panel of economists, to evaluate their perceptions on the state the Albanian economy is going through and their predictions for the progress of the main macroeconomic indicators this year.

In general, the perception of economists about the state of the Albanian economy is positive. 42.9% of respondents estimate that the state of the country's economy is stable.

28.6% of respondents assess the state of the country's economy as improving. 14.3% of respondents estimate that the state of the economy is stable, but with stratified polarization, to the detriment of the middle class.

14.3% of respondents estimate that there is an unstable sectoral situation. According to one of the economists, if tourism is driving growth, other sectors, such as agriculture, processing industry and construction, can be a threat to this growth.

"Currently, the increase in wages in the public sector can further stimulate the consumption of the population, however there are pressures in the increase in the prices of 'luxury' goods, as a result of the demand from tourism, which can threaten the budget of the middle classes. ", - says one of the economists.

Corruption, the biggest problem for the economy

According to economists, corruption remains the biggest problem and the main threat to economic growth. 85.7% of the surveyed economists selected corruption in the list of main problems for the Albanian economy.

After corruption, the second biggest problem is the demographic one. 57.1% of the surveyed economists have selected the shrinking of the population and its aging as a problem for the country's economy.

According to the official data of INSTAT, since 2015 until the beginning of this year, the population of Albania has shrunk by more than 6%. However, these figures are estimated to not give the full dimension of depopulation, given the impossibility of accurately measuring emigration during the last decade. It is expected that the population census, which took place last year, will give a more accurate answer regarding the real extent of the country's population decline.

A shrinking and aging population means a smaller market and smaller potential for consumption and economic growth, while on the other hand, it adds major challenges to the labor market, the pension system and state budget balances.

Also, the lack of labor is considered an economic problem for 57.1% of the surveyed economists. The aging of the population and especially the high rate of immigration of the last decade, especially among young people, have brought difficulties to ensure the sufficient labor force for many sectors of the economy.

Labor shortages have become the main impetus for relatively high wage growth in the private sector in the post-pandemic period.

33.3% of the respondents consider the overvaluation of the local currency as a problem, which is making the Albanian economy less competitive in the export of products and services.

Other problems identified by the economists participating in the survey are low productivity, the recognition and protection of property rights, as well as the lack of trust as a whole.

Economic growth, forecasts close to 2023 levels

Preliminary INSTAT data showed that the Albanian economy grew by 3.44% last year. Most economists project higher growth for this year.

Four out of seven economists surveyed predict higher economic growth than last year. Of them, two predict growth of 3.5%, one "above 3.5%, but depending on the tourism sector and the hydropower situation", while one of the economists predicts that the growth will be higher than last year, but without giving a forecast point.

Two of the economists have given a forecast for economic growth of 3%, while one of them, around 3.2%.

The average of economists' minimum forecasts for economic growth next year is close to 3.3%, not far from the growth recorded last year. Recently, the European Bank for Reconstruction and Development (EBRD) confirmed the forecast that the Albanian economy will grow by 3.3% this year.

Last year, the growth of the Albanian economy was supported especially in the construction and real estate sectors, which during the four quarters had a relatively high weight in the growth structure of the Gross Domestic Product.

Meanwhile, somewhat paradoxically, the contribution of the commercial services sector (including hotels and restaurants) was not very high, despite the record numbers of foreign tourists who visited Albania last year.

Many analysts think that this is largely due to the informality that prevails in tourism businesses.

Sustainable consumption, investment in improvement

50% of the surveyed economists assess the general situation of private consumption in a stable economy. 33.3% of them assess the state of consumption as improving, while only 16.7% assess it as worsening.

Based on INSTAT data, the average economic growth of private consumption of the population last year was about 2.7%. Consumption growth was lower than average GDP growth.

Despite record numbers of foreign tourists, the impact of the tourism sector on overall consumption appears to have been limited. However, some analysts think that this can be partly related to the high degree of informality in the tourism sector.

Economists' perception of the progress of capital expenditures in the economy is generally positive. 57.1% of them assess the state of investments in the economy as improving, 28.6% assess it as stable, while only 14.3% think that the pace of investments is deteriorating.

This forecast seems in line with the better performance of investments in the economy last year, in relation to other components of aggregate demand. Gross fixed capital formation grew by more than 6.3% on average over the past year.

Indirectly, this may indicate a significant contribution of the construction and real estate sector to overall economic growth.

Experts' expectations for the country's trade balance are clearly negative. 71.4% of them think that this year, exports will decrease and imports will increase, which translates into an increase in the country's trade deficit.

28.6% of experts predict that both exports and imports will increase this year.

The predominance of negative experts' expectations regarding the trade balance seems to be in line with last year's developments.

It is estimated that the appreciation of the local currency has negatively affected the competitiveness of Albanian exports and has translated into a significant decrease in them last year and in the first part of this year.

Meanwhile, record numbers of foreign tourists are expected to increase the need for imports of consumer goods.

According to INSTAT data, last year, exports of goods fell by 9.5%, while imports of goods decreased by 8.2%. The trade deficit decreased by 6.7% compared to 2022.

The downward trend of exports has been confirmed in the first quarter of 2024, with a drop of more than 22%. Meanwhile, imports have appeared stable, with a very slight increase of 0.3% compared to a year ago.

However, the external position of the economy, as measured by the Balance of Payments, improved significantly last year. The current account deficit touched the lowest historical value for the past year.

According to data from the Bank of Albania, this deficit decreased to the value of 191 million euros, down by 78% compared to 2022. Services and tourism in particular provided the main effect in the historic narrowing of the current account deficit.

Inflation forecast, close to BSH's target

In average terms, experts' forecasts place inflation at the end of this year close to the 3% target of the Bank of Albania. The range of experts' predictions is wide.

Some of them predict a further drop in inflation below current levels (2.1% for the month of April), while some experts expect a rise in inflation by the end of the year, up to an interval between 4% and 5%.

Inflation this year has continued to decline and for April it dropped to 2.1%, the lowest level in three years. The Bank of Albania reacted by keeping the base interest rate unchanged at 3.25%.

After the last meeting of the Supervisory Council, Governor Sejko emphasized, however, that this rapid decline in inflation is due to supply factors and mainly to the effect of falling prices of imported goods, but also to the strengthening of the Lek in the exchange rate.

According to him, this rapid drop in inflation is expected to be temporary.

"The increase in the supply of food items has led to a rapid decrease in their inflation in all the countries of the region. However, the effect of this strike in Albania was more significant, due to the high weight that food items have in the consumption basket.

Our analyzes suggest that food prices in the country will continue to be subject to this shock for several months, but its effect is expected to remain transitory anyway.

On the other hand, internal inflationary pressures, although decreasing, remain relatively high. These pressures are fed by the solid demand for goods and services, which is reflected in the rapid growth of employment, wages and production costs of the private sector", said Sejko.

According to the latest forecast of the Bank of Albania, after the meeting of the Supervisory Council in May, "inflation is expected to fluctuate near the current levels in the short-term horizon and gradually return to the target within the time frame of one year".

The exchange rate is expected to strengthen the Lek more

The majority of participating economists think that the Lek will continue to strengthen in the exchange rate with the Euro until the end of this year. 57.2% of respondents think that the exchange rate between the Euro and the Lek will continue to fall.

28.6% of the respondents think that the exchange rate will remain at similar levels, while 14.3% think that the exchange rate will increase (the Euro will strengthen) until the end of the year.

The lek is following a several-year trend of appreciation in the foreign exchange rate, but in the last two years, the rates of this appreciation have accelerated significantly. In mid-May, the Euro-Lek exchange rate was down more than 10% annually.

Given the seasonal dynamics, it is expected that the decline of the Euro exchange rate will continue in the summer months. In general, the lowest annual exchange rates are recorded between the end of July and the beginning of August.

However, in recent years, Leku has continued to maintain strong positions even after the end of the summer season, and even went very close to the minimum annual levels even in the last quarter of the year.

Last year, the Euro-Lek exchange rate recorded a record annual decline. At the end of 2023, the decline was close to 9%, while in July, the decline reached more than 14%.

According to the Bank of Albania, the main impact on the strengthening of the Lek was given by the significant improvement of the external balance of the economy. The current account deficit touched the highest historical level, while inflows to the financial account, mainly related to Foreign Direct Investments, also touched record levels.

The value of Foreign Direct Investments, of almost 1.5 billion euros, has exceeded the value of the current account deficit by more than seven times. This shows that the inflows of foreign exchange into the economy have been greater than the outflows.

The survey with economists was carried out by "Monitor" during the first half of May and included seven economists with experience in the private sector or with previous academic experience, in public and private universities.

They agreed to respond on condition of anonymity. None of the economists interviewed held political or non-political positions in the public administration at the time of the interview.

Also, none of the economists had active engagements in the leadership structures of political parties. The survey was conducted through a questionnaire sent electronically to each of the economists.

The results of the survey are published as a simple average of the responses given by economists./ MONITOR

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