Interview of Erjon Luçi, Economist at World Bank Tirana Office to 'Monitor' magazine

January 9, 2012

1. What is your opinion about the progress of the Albanian economy during 2011?

As for most countries in Europe, 2011 has been defined by developments in the euro area especially in the last quarter of the year. What initially appeared as a robust recovery was disrupted by the increased concerns about the sovereign debts of euro area periphery countries that escalated into a systemic threat. In particular problems in Italy and Greece, two countries at the center of the sovereign debt crisis and the host of many Albanian emigrants, depressed domestic demand through lower remittance’s flows. Persisting international commodity demand helped exports grow and industry recover amid euro crisis intensification. But the jump in electricity imports, as a result of drought weather hitting the region, prevented trade balance (net-exports) to improve. As a result aggregate demand did not take off as expected at the beginning of the year, compromising the hopes of returning to higher growth rates. Overall, the moderate growth during 2011 was concentrated in agriculture and the services sector, which did not suffer the demand contraction seen in other sector like construction.   

2. What have been some achievements/problems?

A major positive development is the resumption of the political dialogue which is an important factor for pushing the reform agenda and the integration process of Albania. Despite current problems in the euro area, Integration with the EU remains the most viable economic option for Albania in the long-term. More specifically on the economic arena, the  recent issuance of the second 3G license  is an example of a good measure which is expected to improve the competition in the ICT sector. Albania also succeeded in keeping fiscal deficit and inflation in line with the original targets despite the adverse external shocks which exerted significant pressure on food prices and on fiscal revenues. The experience in the past few years has shown the importance of pursuing prudent fiscal policies. Having fiscal space helped Albania to withstand external shocks like those experienced in 2009 without major disruption of key public spending and to preserve the soundness of the banking sector.  The elevated uncertainty of the external environment has reinforce the necessity of rebuilding fiscal space that may seem imposing sacrifice  in the short run but certainly rewarding in the long run.

3. How can you evaluate the business climate and how can it be improved?

Inspection reform has been an important step in the right direction.  As the Doing Business 2012 has shown, Albania needs to accelerate reforms in certain areas. Property rights remain a major challenge for improving business environment in the country. A related problematic area, where progress urgently needed, has been dealing with construction permits. In the long run the focus should remain on improving regulatory certainty, skills and infrastructure. Regarding the latter, the major advancements made in the past years need to be preserved by carefully planning sufficient maintenance funds while allowing for a pricing framework that ensures cost-recovery and sustainability of quality infrastructure services.

4. What measures should be taken to amortize the financial crisis and to reduce the debt?

Referring to our chief economist Mr. Gill, if during the crisis you can shield the very poor and vulnerable from being harmed and increase the efficiency of public spending, if you can make it easier for private investors to do business, if you can improve the balance between social protection and work incentives, then the crisis could be an opportunity to do more good than harm.  Therefore for countries with limited fiscal space like Albania, improving public finance efficiency and prioritization that ensures delivery of critical social services like public security, general education and healthcare, provides a good chance to escape this crisis relatively unharmed. This prudent approach should also help not to lose sight of the long term agenda of structural reforms to continue the convergence and integration process, and to position Albania well in the increasing global and regional economic competition.

5. What is your forecast for the Albanian economy during 2012?  What should be improved?

As euro zone enters a new mild recession stage, and global growth and trade slow, business and consumer confidence could worsen further.  With private demand still weak and public sector tightening, the pace of growth is expected to slow.  Assuming an orderly resolution of the euro area crisis, growth in Albania is likely to remain between 2 and 3 percent in 2012. In the current external environment, this remains respectful growth performance to maintain macroeconomic equilibrium, but it is nevertheless below the level needed to continue lifting people out of poverty as it was the case prior to the global financial crisis in 2009. Therefore it is important not to lose sight of the human dimension of the crisis. Improving administration, coverage and targeting of social protection becomes particularly important during difficult times given the high sensitivity of vulnerable groups to economic swings.