Where is the Albanian economy heading to?

Where is the Albanian economy heading to?

IBNA Special Report

Tirana, May 28, 2014/Independent Balkan News Agency

Albanian economy is predicted to have a slow economic growth this year, but according to expectations, there will not be a recession. The government is working in two directions. One of them is a better management of public finances, including the consolidation of the taxing system. Work is also being done about the issue of arrears. The second aspect is that of structural reforms. This includes the treatment of institutional issues and those of the management of the energy sector and system of pensions, which is equally important.

As far as energy is concerned, the government is controlling its distribution, as the last government annulled the contract with the Czechs who bought CEZ. As far as pensions are concerned, a new package is expected to come into effect in 2015. Under this package, there will be an increase of the retirement age and the limit of the monthly pension contribution will be lifted.

A reform is also in place about the system of the data of the social services which relate to the economic welfare program. This reform aims to identify as many people as possible, suspected of benefiting social allowance in an abusive way.

All of this will consist on new incomes for the state budget.

Nevertheless, the budget faces dangerous points, such as the taxation system and energy situation.

Tahseen Sayed, head of the World Bank Office in Tirana, says that some of these reforms had been carried out in the previous years and there were completed by the new government in the past 6-7 months.

Based on these steps, Tahseen Sayed says that forecasts for Albania in the years to come seem positive and encouraging, but she adds that “of course, this forecast will not only depend on reforms in the country, but also on the external environment in the region and Europe”.

Energy reform

As far as the energy sector is concerned, World Bank has been involved along with Albanian authorities in the reforms which will help this sector recover. Issues that are being revised include those relating to energy provision, institutional aspects, distribution, transmission, etc. Tahseen Sayed says that these aspects are being discussed with the Albanian government.

“This engagement determines the domains where the World Bank will assist the government through a project which is being prepared by our technical teams and those of the government, ministry of Energy and others relating to it. We’re optimistic that in the weeks to come, we will finalize talks with the government in order to bring sufficient sources, to have an impact and back the reforms in the energy sector and sustainability of the sector in the future”, says Sayed.

One of the problems of the energy sector is the situation with CEZ, where the World Bank is the guarantor. Agreement with CEZ is in a process of negotiation between the Albanian government and CEZ authorities. The government says that this issue will be solved through negotiations, although CEZ has demanded indemnity from the International Court of Arbitrage. In fact, there have been several months that talks are being held, but the Albanian government is reluctant to talk about the results, although start of June is the last deadline.

The World Bank has encouraged both sides to negotiate. Nevertheless, the World Bank cannot be a negotiating party. Tahseen Sayed explains: “These are bilateral negotiations. The World Bank is not a party to these negotiations and legally, it cannot be. We have a very clear positioning on this issue. We have also informed the government about it. What we wish and what we want is for these negotiations to be concluded on time and in a successful way, as they’re very important in launching the right signals in the external environment”.

Endless reforms

It’s been more than 20 years that Albania undertakes endless reforms in different domains of life. The majority of these reforms affect the economic aspect. Only a small part of these reforms can be fully applied, some others partially and others at all.

In this situation where reforms overturn each other, such as it’s the case with the taxation reform, has an impact on state revenues and economic progress.

Nevertheless, economic growth for 2014 and 2015 is forecasted to be accelerated. This growth is also conditioned by the recovery of financial intermediacy.

Hilda Shijaku, economist at the World Bank Office in Tirana, says that there are sufficient reasons to believe that in the years to come, economic growth will be better than in 2013. “First of all, there are several important reforms tackling the stability of the financial system and reduction of the burden caused by problematic loans. Another element is the payment of arrears, which will enable the payment of a part of these bad loans and reduction of credit risk”, says Shijaku.

Nevertheless, the expert says that the risk cannot be tackled through these measures: “In spite of this, there are risks, which relate to funds entering mother banks and banks’ business plans in circumstances when the entire region is assessed with some sort of risk”.

Problematic loans, a serious problem

Loans which are not being paid back are a real problem in the Albanian financial system. Authorities admit that the level of problematic loans in Albania is over 25%. This means that nearly one fourth of total loans are problematic. Ministry of Finance says that the reform has started to reduce the percentage of problematic loans. Tahseen Sayed says that World Bank is engaged along with the Bank of Albania in the program of reform in order to support the banking sector and the non banking sector. “Our support has also consisted on budgetary support in the financial sector. There are a number of measures and reforms in the financial sector which have been recently approved by the World Bank Board”, says Tahseen Sayed. /ibna/