RECENT ECONOMIC DEVELOPMENTS
Albania’s economy expanded 3.4% in 2016, supported by robust domestic demand. Private investment in two large FDI-financed energy projects and a recovery in private consumption drove growth, contributing 1.8 and 2.1 percentage points respectively. Improvements in employment and credit growth encouraged private consumption. Net exports contributed 2.1 percentage points, driven by tourism services exports. With extractive industry affected by unfavorable commodity prices, services were the main driver of growth, followed by construction and agriculture. Recent data confirms stronger growth in early 2017. Business confidence strengthened, especially in services.
The fiscal deficit declined to 1.8% of GDP in 2016 (compared to 4.9% in 2015) in line with the country’s fiscal consolidation efforts. The primary surplus of 0.7% of GDP helped lower the debt to GDP ratio for the first time since the global crisis, reaching 72.4% of GDP in 2016. Despite the general elections, revenues and expenditure remained within budgeted targets in the first half of 2017, consistent with constrains in the new organic budget law. Average annual inflation fell from 1.9% in 2015 to 1.3% in 2016, below the Bank of Albania’s target of 3±1 percent. However, higher food prices lifted inflation to 2.2% in the first half of 2017.
The current account deficit (CAD) narrowed from 10.8% in 2015 to 9.6% in 2016, despite the increase in investment related imports. Lower electricity imports and higher services exports more than compensated for the increase in investment related imports. Remittances remained broadly stable despite weak growth in source EU countries.
Net FDIs increased to 8.9% of GDP from 8% in 2015, helped by inflows associated with energy projects, and financed 93% of the CAD. Despite the steady growth in exports, a pickup in imports of energy during the summer 2017 are expected to drive a widening of the current account in 2017. Stronger growth stimulated job creation in 2016. In 2016 employment grew by 2.5 percentage points, reaching 48.7%, driven by industry and services.
Labor force participation increased to 57.5%, 1.8 percentage points higher than in 2015. The official unemployment rate declined by 1.9 percentage points to an average of 15.2% in 2016. Labor market recovery continued in the first half of 2017, with improvements in the employment rate (1.5 pp y-o-y) driven mostly by declining unemployment (2.3 pp y-o-y).
Poverty is estimated to have declined as growth and employment continued to pick up. The poverty rate (measured as US$ 5.5/day, 2011 PPP) is estimated to have decreased in 2016 to 33.9%, compared to 35.4% in 2015.
Albania’s economic outlook is expected to improve over the medium-term. Growth is projected at 3.5% during 2017-19 driven by private investments and private consumption.
As the economy continues to accelerate and labor markets improve, further gains in poverty reduction are expected. Continued fiscal consolidation and other reform efforts are expected to gradually reduce the debt-to-GDP ratio below 60% of GDP by 2021.
Economic prospects are vulnerable to downside risks. Uncertain global market conditions, and a slower growth in the Euro area, could reduce Albania’s exports and FDI inflows, with implications for a slower output growth.
Harnessing growth will require continuous efforts to stabilize the economy and achieve fiscal consolidation. Importantly, the reform agenda should be informed by equity considerations to sustain and enhance the poverty and inclusion gains thus far.
Last Updated: Oct 13, 2017