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Albania - Economy

Albanias economy has improved markedly over the last decade; reforms in infrastructure development, tax collection, property law, and business administration are progressing. The country was largely spared from the severe fallout of the 2008-2009 financial crisis since its economy is not heavily integrated into the Euro-Atlantic system. Economic output has slowed but remained positive in each year from 2009 to 2011. The government's main task is to maintain positive economic growth while preserving macroeconomic stability. Major challenges are the difficult fiscal and budgetary environment and the crises in the Eurozone, especially in neighboring Greece and Italy (major trading partners of Albania with a large presence in the banking sector and also host to roughly one million Albanian emigrants).

In 2011, GDP was estimated to have reached close to $13 billion. Major contributors to GDP according to 2010 preliminary data were: service sector with 57.6% including trade, hotels, and restaurants (20.9%), transport (6.3%), communication (3.4%), and other services 27%; agriculture 20.3%; industry 11.3%; and construction 10.7%. The government estimates growth to have reached 3% in 2011 and forecasts 4.3% growth in 2012. In 2011 unemployment officially stood at 13.3%. Half of the workforce is considered self-employed in the agriculture sector.

GDP per capita in 2011 is estimated to have reached $4,560. Although GDP per capita has steadily increased over the years, the country still ranks as one of the poorest countries in Europe according to major income indicators. 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 International Monetary Fund (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 16% in 2010 compared to 2009, and their share of GDP declined to approximately 7.6% in 2010. The downward trend continued during the first three quarters of 2011, 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. The banking sector is adequately capitalized and liquidity has been bolstered by a considerable increase in deposits during the last 2 years. Since December 2009, deposits in the banking sector rose by $2.3 billion, reaching $ 9.2 billion at the end of 2011. Fiscal and monetary discipline has kept inflation relatively low, averaging roughly 2.8% per year during 2006-2010. In 2011, average inflation was 3.5%, within the Central Bank target of 3% plus or minus one percentage point.

Almost 60% of all workers are 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. The GDP is comprised of services (50%), agriculture (19%), industry (12%), construction (14%), and transport and communication (6%). The Albanian economy has been partially sheltered from the global financial crisis and the economic downturn. In April 2009, the International Monetary Fund (IMF) predicted that Albania would be one of two countries in Europe to enjoy a positive growth rate for 2009, but lower remittances from Albanian workers abroad (approximately 9.6% of the GDP in 2008), mostly in Greece and Italy, and smaller exports will put a strain on economic activity.

The global financial crisis reduced Albanian citizens' trust of commercial banks, even though the domestic banking sector has remained largely insulated from the crisis. Although bank deposits dropped by 10% since September 2008, withdrawals have diminished recently and deposits have stabilized during the second quarter of 2009. Lower liquidity has forced commercial banks to tighten lending procedures. In February 2009, the growth rate of loans dropped to 29% from 35% in 2008. In general, the banking sector remains viable and able to further finance the economy, as the ratio of loans to deposits, approximately 65%, is still low compared to western standards.

Albania was the last of the central and eastern European countries to embark upon democratic and free market reforms. Furthermore, Albania started from a comparatively disadvantaged position due to Hoxha's catastrophic economic policies. The transition from a centrally planned economy to a market-oriented system has been almost as difficult for Albania as the country's communist period.

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. Key elements included price and exchange system liberalization, fiscal consolidation, monetary restraint, and a firm income policy. These were complemented by a comprehensive package of structural reforms, including privatization, enterprise and financial sector reform, and creation of the legal framework for a market economy and private sector activity.

Results of Albania's efforts were initially encouraging. Led by the agricultural sector, real GDP grew, and Albania's currency, the lek, stabilized. The speed and vigor of private entrepreneurial response to the opening of Albania's economy was better than expected. In 1995, however, progress stalled. The collapse of the infamous pyramid schemes of the late 1990s and the instability that followed were a tremendous setback, from which Albania's economy continues to recover.

In recent years the Albanian economy has improved, and infrastructure development and major reforms in areas such as tax collection, property laws, and business climate are proceeding well. During 2004-2008, Albania experienced an average 6% annual GDP growth. Fiscal and monetary discipline has kept inflation relatively low, averaging roughly 2.9% per year during 2006-2008. In 2008, inflation increased to 3.4%, still within the target range set by the Bank of Albania. Albania's public debt reached 55.9% of GDP in 2008, and the growing trade deficit was estimated at 26% of GDP in 2008. Economic reform has also been hampered by Albania's very large informal economy, which the IMF estimates at 50% of GDP.

Business growth was hampered by Albania's inadequate energy and transportation infrastructure despite some significant investments in both sectors during the last few years. The capital, Tirana, and the main port of Durres generally receive electricity most of the day, but frequent power outages plague every other city, small town, and rural village. Although recent steps have been taken to improve the transportation infrastructure, Albania has a limited railway system and just one international airport. Because of the mountainous terrain and poor road conditions, overland goods transport is arduous and costly. However, the government has invested heavily in road construction over the last three years, and the country now sports a new, modern highway along its entire coastline, from Shkoder in the north to the southern resort city of Sarande. In addition, completion of the 170-kilometer Durres-Kukes highway in fall 2009 will provide a major transportation corridor connecting markets in the central Balkans through Kosovo to the port of Durres.

As Albanian families are large in size, in many cases Albanians abroad still have many relatives remaining in Albania, thus keeping ties relatively close. In some cases the diaspora groups participate in politics through fundraising in their current country of residence. Remittances represent the largest influx of foreign capital into the Albanian economy. Remittances amounted to 9.2 per cent of GDP in 2008, although for the first quarter of 2009, remittances were down eight per cent from 2008 to 196 million euro. Some remittances finance construction and other business activities, but most are used to help poor families meet immediate needs. Generally, remittances seem to be the largest impact that the diaspora has on Albania. The diaspora community does invest in Albania, although it is difficult to determine the scale of investment. Certainly Albanians living abroad contribute financially to help relatives start businesses and build homes, which also creates jobs indirectly by increasing demands for other products. The future potential for diaspora investment should be positive, however given the investment climate, particularly with respect to private property, potential investors are often scared away by what they (correctly, in many cases) see as a less than ideal place to invest money.



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