The ruling Socialist Party of Albania (SPA) is likely to become more dependent on its smaller coalition partners after losing its parliamentary majority, but the SPA-led government is expected to remain in office until the next parliamentary election, scheduled for mid-2005. The Economist Intelligence Unit forecasts that the opposition Democratic Party of Albania (DPA) will emerge as the largest party after the election. However, the DPA could be denied a return to power if a new party led by Ilir Meta, a former SPA prime minister, were to emerge as kingmaker and reach an agreement with the SPA. Closer integration with the West will remain the central tenet of foreign policy in 2005-06, but Albania's failure to implement reforms will continue to delay the signing of a stabilisation and association agreement (SAA) with the EU. We forecast real annual GDP growth of 6% in 2005-06, with power supply problems, low levels of foreign investment and a weak external environment preventing faster expansion. Average annual inflation is forecast at 3% in 2005-06, with inflationary pressure kept in check by IMF-backed fiscal constraints and falling global oil prices. The annual current-account deficit is expected to widen to 5.7% of GDP in 2005 before falling back to 4.9% of GDP in 2006.
The political scene
The SPA lost its parliamentary majority in September after Mr Meta formed the Socialist Movement for Integration (SMI) with eight other MPs. The SPA and the DPA have yet to reach agreement on electoral laws, prompting further criticism from the EU. Parliament approved a property restitution law for a second time.
Economic policy
The general government budget deficit was lower than expected in January-August, reflecting slow realisation of investment projects. The Bank of Albania (BoA, the central bank) cut its repo rate on July 28th by 25 basis points, to 5.5%.
The domestic economy
Annual consumer price inflation in September stood at 2%, at the bottom of the 2-4% target range set by the central bank, owing to falling food prices and the appreciation of the lek. Electricity supply in the second quarter of 2004 was up by 17.2% year on year.
Foreign trade and payments
Albania ran a trade deficit of Lk49.1bn (US$484m) in the first four months of 2004, down by 6% from the same period of 2003. Net foreign direct investment reached US$168m in January-June, up from US$86m in the year-earlier period.
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Political structure
Official name
Republic of Albania
Legal system
A new constitution was adopted by referendum on November 22nd 1998 and came into effect on November 28th 1998. It replaced the interim constitution that had been in place following the abandonment of the Marxist-inspired constitution in April 1991
National legislature
Unicameral Assembly of 140 members: 100 elected directly and 40 by proportional representation from party lists
National elections
June-August 2001 (parliamentary); next elections: 2005 (parliamentary), 2007 (presidential)
Head of state
President, Alfred Moisiu, elected by parliament in June 2002 and sworn in on July 24th 2002
National government
Coalition government, led by the Socialist Party of Albania, sworn in on July 31st 2002
Main political parties
Governing coalition: Socialist Party of Albania (SPA); Agrarian and Environmentalist Party (AEP); Social Democratic Party (SDP); Democratic Alliance Party (DAP); Union for Human Rights (UHR); Party of Social Democracy (PSD). Main opposition coalition: Union for Victory (UV), comprising Democratic Party of Albania (DPA), Legality Movement Party (LMP), Liberal Union (LU), National Front Party (NFP), and Republican Party (RP). Other opposition parties: Socialist Movement for Integration (SMI), Movement for National Development (MND), New Democratic Party (NDP), Reformed Democratic Party (RDP)
Leading members of government
Prime minister Fatos Nano (SPA)
Deputy prime minister Namik Dokle (SPA)
Key ministers
Agriculture & food: Agron Duka (independent)
Culture, youth & sports: Blendi Klosi (SPA)
Defence: Pandeli Majko (SPA)
Economy: Anastas Angjeli (SPA)
Education & science: Luan Memushi (SPA)
Environment: Ethem Ruka (SPA)
Finance: Arben Malaj (SPA)
Foreign affairs: Kastriot Islami (SPA)
Health: Leonard Solis (UHR)
Industry & energy: Viktor Doda (SPA)
Justice: Fatmir Xhafa (SPA)
Labour & social affairs: Engjell Bejtaj (SDP)
Local government & decentralisation: Ben Blushi (SPA)
Planning & tourism: Bashkim Fino (SPA)
Public order: Igli Toska (independent)
Transport & telecommunications: Spartak Poci (SPA)
Minister of state: Marko Bello (SPA)
Minister of state for European integration: Ermelinda Meksi (SPA)
Assembly speaker: Servet Pellumbi (SPA)
Central bank governor
Shkelqim Cani(a)
(a) Mr Cani's mandate expired in August 2004, but he remains in office pending the appointment of a successor.
Economic structure: Annual indicators
2000a 2001a 2002a 2003a 2004b
GDP at market prices Lk bn 531 610 678 757b 834
GDP US$ bn 3.7 4.3 4.8 6.2b 8.0
Real GDP growth (%) 16.7 10.7 4.7 6.0b 6.0
Consumer price inflation (av; %) 0.1 3.1 5.5 2.4 3.0
Population (m) 3.1 3.1 3.1b 3.2b 3.2
Exports of goods fob (US$ m) 255.7 304.5 330.2 447.2 550.0
Imports of goods fob (US$ m) -1,070.0 -1,331.6 -1,485.3 -1,783.5 -2,052.3
Current-account balance (US$ m) -156.3 -217.4 -407.6 -406.7 -443.0
Foreign-exchange reserves excl gold (US$ m) 615.7 739.9 838.8 1,009.4 1,152.5
Exchange rate (av) Lk:US$ 143.71 143.48 140.16 121.86 104.38
a Actual. b Economist Intelligence Unit estimates.
Origins of gross domestic product 2003 % of total Components of gross domestic product 2002 % of total
Agriculture 24.7 Private consumption 91.5
Industry 10.2 Public consumption 10.3
Construction 9.1 Gross fixed investment 19.3
Transport 10.0 Exports of goods & services 18.5
Other services 46.1 Imports of goods & services -39.7
Principal exports 2003 % of total Principal imports 2003 % of total
Textiles & footwear 64.6 Machinery 21.7
Building materials 11.5 Food, beverages & tobacco 19.9
Food, beverages & tobacco 8.3 Textiles & footwear 14.5
Wood 4.1 Building materials 13.1
Machinery 3.5 Minerals, fuel & electricity 11.8
Main destinations of exports 2003 % of total Main origins of imports 2003 % of total
Italy 74.9 Italy 33.5
Greece 12.8 Greece 20.0
Germany 3.4 Turkey 6.5
Macedonia 0.7 Germany 5.6
Economic structure: Quarterly indicators
2002 2003 2004
3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr
Government finance (Lk m)
Revenue 37,034 43,967 35,046 44,469 39,962 46,624 41,356 n/a
Expenditure 48,355 62,485 39,725 49,004 -51,211 60,140 43,374 n/a
Balance -11,321 -18,518 -4,679 -4,534 -11,249 -13,516 -2,018 n/a
Prices
Consumer prices (Dec 2001=100) 98.0 99.6 102.2 102.3 100.8 102.8 106.2 105.2
Consumer prices (% change, year on year) 5.1 3.7 0.8 2.6 2.9 3.2 3.9 2.8
Financial indicators
Exchange rate Lk:US$ (av) 138.5 136.9 130.5 123.2 120.3 113.5 105.9 105.3
Exchange rate Lk:US$ (end-period) 138.9 133.7 129.2 118.5 118.1 106.6 106.5 106.6
Repo rate (end-period; %) 8.5 8.5 8.5 8.0 7.5 6.5 6.5 5.8
M1 (end-period; Lk bn) 153.2 152.7 143.8 138.8 141.6 144.7 140.9 140.5
M1 (% change, year on year) 18.6 6.7 -3.1 -11.3 -7.6 -5.2 -2.0 1.3
M2 (end-period; Lk bn) 406.4 416.6 420.4 426.6 443.7 448.4 456.0 458.1
M2 (% change, year on year ) 12.1 5.9 7.1 7.9 9.2 7.6 8.5 7.4
Foreign trade & payments (US$ m)a
Exports fob 86.1 96.0 108.5 113.7 102.0 122.9 136.5 n/a
Imports fob -383.1 -426.3 -394.0 -453.8 -434.0 -501.6 -451.3 n/a
Trade balance -297.0 -330.3 -285.5 -340.1 -332.0 -378.7 -314.8 n/a
Services balance -10.3 28.9 3.8 -15.2 -33.0 -38.6 -6.0 n/a
Income balance 39.8 29.7 38.9 42.3 51.9 37.2 36.3 n/a
Transfers balance 149.1 150.6 210.3 192.4 204.7 234.7 209.9 n/a
Current-account balance -118.5 -121.1 -32.5 -120.6 -108.4 -145.3 -74.6 n/a
Reserves excl gold (end-period) 817.8 838.8 892.4 918.1 948.7 1,009.4 1,007.9 1,079.3
a Data for 1 Qtr 2004 balance of payments from Bank of Albania (BoA).
Sources: Bank of Albania (BoA), Monthly Statistical Report; Institute of Statistics, Indeksi i Cmimeve te Konsumit; Situation of Foreign Trade Monthly Brief; Konjuktura; IMF, International Financial Statistics.
Outlook for 2005-06: Domestic politics
The ruling Socialist Party of Albania (SPA) no longer commands a parliamentary majority on its own following the decision by Ilir Meta, a former prime minister, to turn his newly formed Socialist Movement for Integration (SMI) into a separate party. The ruling coalition—made up of the SPA and five other parties—still has a parliamentary majority, but Mr Meta's move has left the SPA increasingly dependent on its smaller allies, and has put his political rival Fatos Nano, the prime minister and SPA leader, in a difficult position. To secure the continued support of the SPA's coalition partners, Mr Nano may have to give them a greater say in the process of modifying electoral laws ahead of the parliamentary election scheduled for mid-2005, as well as more seats in a likely cabinet reshuffle.
The reshuffle will probably increase tensions between the SPA and its coalition partners in the short term, raising the risk of further delays to the political and economic reforms required by the EU and other international institutions. Nevertheless, it remains unlikely that Albania will face an early general election—not least because the opposition parties appear unable to muster the 71-seat majority needed to carry a no-confidence motion. Moreover, the Democratic Party of Albania (DPA), the largest opposition party, is focusing on the process of changing the electoral laws rather than pushing for an early election, and the smaller parties in the ruling coalition are unlikely to have any incentive to bring the government down when they seem poised to extract further concessions from the SPA.
Outlook for 2005-06: Election watch
Although splinter parties in post-communist Albania have a poor electoral record, Mr Meta has national name recognition and a strong base of support in the south of the country, and (despite having already served as prime minister) is from a younger generation than Mr Nano and Sali Berisha, the leader of the DPA. The SMI could fare well among existing SPA supporters who are disillusioned with Mr Nano's leadership, and with voters who want an alternative to both Mr Nano and Mr Berisha.
Rising disillusionment with the government may lead many other voters to abstain rather than vote for the DPA, in part because Mr Berisha is offering few clear policy alternatives. The DPA may be hampered by popular memories of Mr Berisha's period in office in the 1990s, which was marked by autocratic rule and financial collapse. In addition, a new political movement led by the son of the former king of Albania is more likely to take votes from the DPA than the SPA.
Nevertheless, the DPA gained ground on the SPA in the October 2003 local elections, even winning in traditional SPA strongholds in the south of the country, and there are signs of increasing voter disenchantment with the SPA, which has been the dominant party in government since mid-1997. The likelihood that Mr Meta's party will help to divide the existing SPA vote provides further support for the Economist Intelligence Unit's forecast that the DPA will emerge as the largest party after the next parliamentary election.
Were he to become prime minister, Mr Berisha would almost certainly have less room for manoeuvre than he did in the 1990s. Albania would continue to work (albeit slowly) towards meeting EU norms in many areas of domestic policy, notably justice and home affairs, and the IMF and World Bank would set the broad framework for macroeconomic policy.
There is a possibility that Mr Berisha's DPA could be denied a return to power were Mr Meta to emerge as kingmaker after the election. Mr Meta would be highly unlikely to contemplate a coalition arrangement with Mr Berisha, whom he dislikes even more than he dislikes Mr Nano, but he has not ruled out the possibility of supporting another SPA-led government.
Outlook for 2005-06: International relations
Further integration with the West is likely to remain the central tenet of Albanian foreign policy in 2005-06, regardless of the result of the next parliamentary election. In the meantime Mr Nano may try to gain some leverage with both the US and the EU by playing up the dangers of Mr Berisha's returning to power.
The Nano government will look to cement its ties with the US, and has offered to increase its modest troop presence in Iraq (a fresh contingent of Albanian peacekeeping troops departed for Iraq on October 11th). Albania has strong US support for its NATO membership bid, but is unlikely to obtain a clearer idea of its accession prospects until after the next parliamentary election.
EU integration commands strong support among Albania's main political parties and the population at large. However, the government will fail to achieve its target of concluding a stabilisation and association agreement (SAA) with the EU in 2004, because of its poor record in improving the functioning of the judicial system, and fighting corruption and organised crime. Given the EU's unwillingness to sign an SAA with Albania before observing the conduct of the next general election, we expect that the SAA negotiations will continue into the second half of 2005, and possibly even into 2006.
Outlook for 2005-06: Policy trends
The broad framework of Albania's economic policy in 2005-06 will continue to be set by agreements with the IMF and the World Bank. Within this framework, the authorities will face the major challenge of tackling widespread poverty and high unemployment. Public investment is expected to concentrate on improving infrastructure, healthcare and education; the supplementary budget passed by parliament in mid-2004 will channel half the funds from the privatisation of Savings Bank, the nation's largest, into these three priority areas.
Having finally sold Savings Bank to Raiffeisen Zentralbank (Austria), the government had hoped to sell a majority stake in Albtelecom, the incumbent fixed-line operator, by the end of 2004. However, the latest deadline in this long-delayed privatisation is almost certain to be missed, owing to a continued lack of investor interest. The privatisation of Korporata Elektroenergjitike Shqiptare (KESh), the state-owned power utility, is an even more distant prospect, owing to the company's poor financial health and the need for large-scale restructuring prior to any sale. In the meantime the government will aim to make the electricity supply more reliable and reduce Albania's near-total dependence on hydroelectric power generation.
Outlook for 2005-06: Fiscal policy
The supplementary 2004 budget that parliament approved in June increased the projected general government budget deficit (including grants) to 5.9% of GDP, up from 5.1% of GDP in the original budget, to allow for increased capital expenditure. However, the budget deficit in January-August 2004 was only 85.6% of the target for the period, as lower than expected investment spending more than offset the customary shortfall in revenue collection.
The data highlight the continued inability of the Albanian authorities to develop realistic capital spending programmes and to execute investment projects on schedule. This raises the risk of a concentration of spending in the latter part of the year, with potentially destabilising effects. The IMF will also continue to urge the authorities to expand the tax base by cracking down on tax evasion, smuggling and fraud, but budget revenue as a proportion of GDP is likely to remain low by regional standards.
On the assumption that fiscal policy remains within an IMF-approved framework, we expect the annual budget deficit to fall to 4.5% of GDP in 2005, and to decline further in 2006. Given the risk of delays to planned asset sales, the IMF will advise the authorities to be highly conservative in budgeting for privatisation revenue.
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Outlook for 2005-06: Monetary policy
Since April 2004 the Bank of Albania (BoA, the central bank) has made four cuts totalling 100 basis points in its key interest rate, amid low inflationary expectations, bringing the repo rate down to 5.5%. The BoA acted primarily to check the appreciation of the lek against the US dollar and the euro, which the bank fears will harm the competitiveness of Albanian exports and could lead to faster than expected growth of the trade deficit. The bank should have scope for further small interest rate cuts over the forecast period, although its room for manoeuvre will be limited by the need to keep average annual inflation within the 2-4% target range, and to maintain IMF-mandated levels of foreign-exchange reserves.
A lower repo rate could help to put downward pressure on commercial bank lending rates, potentially stimulating corporate investment. However, the effectiveness of the central bank's monetary policy will be limited by the high proportion of foreign-currency transactions in Albania (84% of outstanding bank loans at end-July 2004 were in hard currency); the imminent resumption of lending by Savings Bank, which is so large relative to the sector that it could have the power to set a de facto market interest rate; and the high volume of cash transactions.
Outlook for 2005-06: International assumptions
International assumptions summary
(% unless otherwise indicated)
2003 2004 2005 2006
GDP growth
World 3.9 4.9 4.3 4.0
Japan 2.5 4.2 1.7 1.5
EU25 1.1 2.4 2.5 2.2
Euro zone 12 0.5 1.9 2.2 2.0
Exchange rates
US$ effective (1990=100) 93.4 87.1 84.8 84.7
¥:US$ 115.9 108.9 107.5 106.0
US$:€ 1.13 1.23 1.28 1.29
Financial indicators
US$ 3-month commercial paper rate 1.10 1.40 3.00 4.94
¥ 2-month private bill rate 0.03 0.00 0.05 0.38
Commodity prices
Oil (Brent; US$/b) 28.8 36.1 32.0 28.0
Gold (US$/troy oz) 362.8 421.3 375.0 337.5
Food, feedstuffs & beverages (% change in US$ terms) 6.6 8.6 -4.2 8.9
Industrial raw materials (% change in US$ terms) 12.8 20.2 -0.3 -3.6
Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.
We expect modest real GDP growth in the euro zone of 2.2% in 2005 and 2% in 2006, with domestic demand set to remain constrained in the absence of a significant easing of fiscal and monetary policy. Domestic demand remains sluggish in Italy, which bought three-quarters of all Albanian exports in 2003. Real annual GDP growth in Italy is estimated at just 1.2% in 2004; we forecast growth of 1.8% in 2005, slowing to 1.6% in 2006. High international oil prices (of US$36.1/barrel in 2004) present a further risk to Albania's external balance, although prices are expected to fall in 2005-06. This will constrain growth in import costs and help Albania to keep its current-account deficit in check.
Outlook for 2005-06: Economic growth
Real GDP grew by an estimated 6% in 2003, up from 4.7% in 2002 and in line with our expectations. Growth accelerated in all major sectors in 2003, and industrial sales data for January-July suggest another robust performance in 2004, but constraints on economic expansion will persist over the forecast period. In particular, large privatisations such as that of Albtelecom may be hard to conclude; the government will have to keep expenditure and investment under control as part of its IMF arrangement; electricity supply problems will continue; and domestic demand looks likely to remain weak in Italy, which is by far the largest market for Albanian exports. Although we forecast that annual real GDP growth will remain steady in 2005-06 at 6%—a seemingly impressive performance by regional standards—this expansion is from a low base and is below the rates that Albania recorded in the mid- to late 1990s.
Outlook for 2005-06: Inflation
Consumer prices fell in month-on-month terms for four consecutive months in May-August 2004, owing to the appreciation of the lek, falling food prices and lower than expected government spending. Although this trend was halted in September, the consumer price index rose by only 0.1% from August and by only 2% in year-on-year terms—at the bottom end of the 2-4% target range set by the BoA. Barring any major external shocks, we expect that the BoA will be successful in keeping annual inflation in line with its target of around 3% over the forecast period. Fiscal constraints, relative currency stability and lower global oil prices will help to prevent the build-up of significant inflationary pressure in 2005-06.
Outlook for 2005-06: Exchange rates
In mid-2004 the lek was trading strongly against the US dollar at levels not seen since before the financial collapse of 1997, and the currency will continue to be supported in 2005-06 by large inflows of foreign currency from Albanians living abroad. The movement of the lek against the US dollar is strongly correlated with that of the euro against the US currency, reflecting the fact that Albania conducts the vast majority of its foreign trade with euro zone countries, and this relationship is expected to persist over the forecast period. We forecast that the euro will strengthen further against the US dollar in 2005, to an average of US$1.29:€1, with the nominal appreciation of recent years forecast to come to a halt in 2006. We therefore expect the lek to appreciate in nominal terms against the US dollar in 2005, with this trend reversing slightly in 2006. The relative nominal stability of the lek against the euro will lead to further real appreciation against the currencies of Albania's major trading partners in 2005-06.
Outlook for 2005-06: External sector
The weakening of the US dollar against the euro in 2003-04 has inflated the US dollar value of Albanian exports, more than 90% of which go to the EU. This trend is expected to continue in 2004-05. Export volumes are not expected to rise significantly in 2004-05, given the major restructuring that is still required in all sectors of the Albanian economy and the poor external outlook, especially for Italy. Albania imports several times more by value than it exports, an imbalance that is expected to persist over the forecast period. We therefore expect the trade deficit to increase to more than US$1.7bn in 2005 and to almost US$1.9bn in 2006.
The current-account deficit totalled US$407m in 2003, equivalent to 6.5% of estimated GDP. We expect that further growth in the trade deficit will be offset to a large extent by higher net transfers, which will be driven by higher private remittances from Albanians living abroad. We forecast that the current-account deficit in US dollar terms will increase to almost US$500m in 2005 (5.7% of forecast GDP), before falling both in US dollar terms and as a percentage of GDP in 2006. Foreign direct investment (FDI) has received a boost in 2004 from the sale of Savings Bank, but other privatisations are likely to be subject to further delays.
Outlook for 2005-06: Forecast summary
Forecast summary
(% unless otherwise indicated)
2003a 2004b 2005c 2006c
Real GDP growth (av) 6.0b 6.0 6.0 6.0
Agricultural output growth (av) 3.0 3.0 4.0 3.0
Industrial output growth (av) 9.0 9.5 10.0 8.0
Consumer price inflation (av) 2.4 3.0 3.0 3.0
Lending rate (%) 14.3 11.0 10.0 10.0
Government balance (% of GDP) -4.1b -5.4 -4.5 -4.2
Exports of goods fob (US$ m) 447 550 631 711
Imports of goods fob (US$ m) -1784 -2052 -2339 -2585
Current-account balance (US$ m) -407 -443 -493 -452
Current-account balance (% of GDP) -6.5b -5.5 -5.7 -4.9
Exchange rate Lk:US$ (av) 121.9 104.4 102.7 104.9
Exchange rate Lk:€ (av) 138.0 128.0 132.0 135.0
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.
The political scene: Mr Meta establishes a spin-off party from the SPA
On September 6th Ilir Meta, a long-standing rival of Fatos Nano, the prime minister and head of the ruling Socialist Party of Albania (SPA), officially transformed his Socialist Movement for Integration (SMI) into a new political party that will stand in the parliamentary election scheduled for 2005. Mr Meta, himself a former prime minister, created the SMI in June as a new grouping within the SPA, and delayed his decision to form a new party for fear of being held responsible for provoking an open split within the ruling party (August 2004, The political scene). The emergence of the SMI, which has nine seats in parliament, marks the first time in the post-communist era that a breakaway party has been formed from the SPA.
This development indicates that Mr Meta's feud with Mr Nano had become too serious to allow for a possible reconciliation. Although Mr Meta was aware of the risks in forming a new party, he calculated that his chances of regaining his position within the SPA in the foreseeable future were almost nil, as he and his supporters had been excluded from the party's decision-making bodies since the SPA congress in December 2003. In addition, Mr Meta, who has national name recognition and a strong base of support in the south of the country, clearly believes that the SMI can be a credible electoral force.
Mr Meta hopes to appeal to SPA voters who are disillusioned with Mr Nano's government, and to the expanding pool of undecided voters who do not identify with either the SPA or the opposition Democratic Party of Albania (DPA), which between them have dominated the political scene in post-communist Albania. Although Mr Meta has continued to criticise Mr Nano for failing to advance Albania's EU integration and for having allegedly been captured by dubious economic interests, their rivalry reflects a mixture of power struggle and personality clash rather than any significant policy differences. Indeed, Mr Meta has been careful not to rule out the possibility of reaching an agreement with the SPA after the next parliamentary election.
The political scene: The SPA no longer has a parliamentary majority
The defection of nine MPs from the SPA to Mr Meta's new party has deprived the SPA of its majority in the 140-seat parliament (it now has 63 seats). The SPA's coalition partners between them control 11 seats—the Social Democratic Party (SDP), the Agrarian and Environmentalist Party (AEP) and the Union for Human Rights (UHR) each have three seats, and the Democratic Alliance Party (DAP) and the Party of Social Democracy (PSD) have one seat each—and are trying to extract concessions from Mr Nano in exchange for their continued support.
With the SPA's smaller allies demanding greater representation in cabinet, where at present only the UHR and the SDP have seats alongside the SPA, Mr Nano faces a tricky balancing act if he is to avoid further defections by SPA members to the SMI. The SPA has not commented publicly on the possibility of a cabinet reshuffle, and discussions have been delayed owing to Mr Nano's official visits to China and the US in September. Mr Nano is now buying time until the government needs an overall majority of 71 seats to pass a major bill such as the budget.
In any case, the opposition remains reluctant to try to force a no-confidence vote in parliament. This reluctance probably reflects a realisation that the opposition would fall short of the 71 votes that it would need to topple the government, as well as the fact that the parliamentary election is only eight or nine months away. The DPA in particular is now focusing on trying to influence pending reforms of electoral legislation to its possible advantage rather than on seeking an early poll.
The political scene: The SPA reacts to the split
Although both Mr Nano and Gramoz Ruci, the SPA secretary-general, have played down the impact of Mr Meta's new party on the stability of the government's majority and of the SPA itself, the SPA seems to have been deeply shaken by the split. All SPA members who joined the SMI have been removed from their public positions, from ambassadors to local officials. In addition, Erion Brace, the editor-in-chief of Zeri i Popullit, the SPA's official publication, started a campaign calling for radical changes in the 19-strong steering committee, the party's highest decision-making body. Mr Brace accused some high-ranking party secretaries and ministers of not being up to the job, and said that they should make room for the younger generation in the party.
Mr Brace's comments were widely seen as having been inspired by Mr Nano, who in the wake of Mr Meta's departure was possibly more sensitive to criticisms that he had stifled internal debate within the SPA. The attacks on SPA cabinet ministers and officials on the party's steering committee could also pave the way for Mr Nano to carry out a cabinet reshuffle in which the party's smaller parliamentary allies gained more seats.
At a steering committee meeting on October 2nd Mr Nano raised the idea of a "big conversation", in which SPA officials would have grassroots meetings with intellectuals and various interest groups that are under-represented in the SPA. Mr Nano has even advocated a "one member, one vote" system within the SPA, something that Mr Meta had strongly advocated before leaving to form the SMI. Although the prime minister said that he supported the need for changes in the SPA's leading bodies, all decisions were postponed until a follow-up meeting to be held by end-October. The only concrete change to date has been the resignation of Bardhyl Agasi, the SPA's public relations secretary, who had been attacked by Mr Brace for incompetence. Many local media analysts regard the "big conversation" idea (which Mr Nano previously mentioned at the December 2003 party congress) and proposals for a shake-up of senior SPA figures as an attempt by Mr Nano to buy time in the wake of Mr Meta's departure.
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The political scene: The pretender to the throne forms a parliamentary group
The other main change in parliament has been the formation of a six-member parliamentary group that includes the Movement for National Development, a new party led by Leka Zogu, the son of the former king of Albania (August 2004, The political scene). The pro-monarchist group also includes the Legality Movement Party (LMP) and the National Front Party (NFP), and, bizarrely, is headed by Maksim Begeja, the deputy head of the Republican Party (RP). The RP described Mr Begeja's decision as "personal", and has not removed him from the leadership of the party.
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The political scene: Electoral reform
The SPA and DPA have yet to agree on a framework of electoral laws
The parliamentary electoral reform commission established in July 2004 had made no progress by the end of its two-month mandate in early September, because the ruling Socialist Party of Albania (SPA) and the opposition Democratic Party of Albania (DPA) were unable to agree on the partisan composition of the Central Election Commission (CEC). The 16-member parliamentary panel, which was set up under the auspices of the Organisation for Security and Co-operation in Europe (OSCE), comprises eight members from both the government and the opposition. The panel was asked to amend Albania's electoral code and address the shortcomings noted by the OSCE in previous elections (August 2004, The political scene). However, the dispute over the composition of the CEC meant that the group has yet to address other issues, such as the compilation of an accurate list of eligible voters.
The Albanian constitution says that two of the CEC's members must be chosen by the president, two by parliament and three by the Supreme Council of Justice (SCJ), the body that appoints and removes judges. Although the constitution says that the CEC is independent and that its seven members are not allowed to pursue other political activities, the partisan composition of the CEC has been a divisive issue for some time. An OSCE-backed agreement in mid-2003 stipulated that four members of the commission be proposed by the SPA and three by the DPA. Since important decisions require the support of at least five members of the CEC, such a balance of forces would in effect give the DPA a veto over election-related proposals with which it disagreed.
However, shortly before the local elections in October 2003 the SCJ chose Deshira Subashi, an SPA nominee, to be the seventh member of the commission. Her election prompted the DPA to claim that the SPA now controlled five of the seven seats on the CEC, potentially undermining the integrity of the election process. Since the CEC also intervenes in cases when local electoral commissions (each of which have four members from one major party and three from the other) are unable to reach decisions with a majority of at least 5:2, the DPA feared that the SPA's control of the commission would allow it to make key election decisions across the country.
When the ad hoc parliamentary commission began work in July, the DPA reiterated its demand that the CEC be composed of four members from the SPA and three from the DPA. In trying to find a middle ground, the OSCE suggested ways to guarantee the 4:3 partisan balance on the CEC, such as abolishing the constitutional reference to the CEC's independence (which in practice has come under strong political pressure); changing the procedures for nominating CEC members; or ending the mandate of the existing commission and appointing new members.
On September 16th, at the peak of the debate, Iliran Celibashi was elected by his fellow commissioners as the head of the CEC. Mr Celibashi, who is regarded as an SPA nominee, had been elected to a second three-year term earlier in 2004, but since he failed to win the support of the majority of CEC members, the vote had to be retaken six months later.
The SPA continued to hold its ground and proposed that the electoral reform commission instead discuss the voter registration list, but the DPA insisted that the CEC issue be solved first. Osmo Lipponen, the head of the OSCE mission in Albania, was criticised by the SPA for pushing for a more balanced CEC, and he was unable to bring the two main parties closer to a deal before his mandate expired at the end of September. The smaller parties in parliament had previously decided to boycott the commission, accusing the OSCE of letting the SPA and DPA dominate discussions of electoral reform.
The impasse has the potential to harm Albania's international standing and its prospects for Western integration, given previous warnings from the EU in particular that the next general election should be conducted in line with international standards. On October 4th parliament extended the mandate of the parliamentary commission for another month, but it is unclear whether the two main parties will manage to reach agreement. As with the bitter debate over the property restitution law, the deadlock over electoral reform highlights the inability of the two main parties to form a consensus over major issues, despite international pressure.
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The political scene: The SPA refuses to amend the property restitution law
The SPA and the DPA were also unable to reach agreement on a law regarding the restitution of farmland expropriated by the communist regime in Albania, following its controversial initial approval in early June (August 2004, The political scene). After the vote Alfred Moisiu, the president, sent the bill back to parliament and urged the two parties to reach consensus on the two most controversial elements of the bill—namely, the limit of 60 ha of land per restitution claim, and the procedure for nominating the head of the state body in charge of the restitution process. However, the SPA held its ground, and the opposition again boycotted proceedings when parliament approved a largely unchanged bill on July 29th. Under the constitution Mr Moisiu was obliged to sign the bill into law.
The 60-ha limit remained, and the method of nominating the head of the State Committee for Restitution and Compensation of Property was only slightly changed. The bill that parliament passed in June stipulated that the head of the body would be proposed by the government, and not by the president, as the opposition DPA wanted and as an earlier law drafted by the Organisation for Security and Co-operation in Europe (OSCE) had envisaged. The final version of the restitution law calls for the Council of Ministers to propose a candidate to the president, who then forwards the name to parliament, although Mr Nano and Mr Moisiu have yet to agree on a suitable candidate to put forward.
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The political scene: Public nominations lead to tensions with the president
Appointments to other state institutions have proved similarly problematic, reflecting the focus on electoral reform and the SPA's preoccupation with internal matters in the wake of Mr Meta's decision to form a new party. A new governor of the Bank of Albania (BoA, the central bank) has yet to be appointed, although the mandate of Shkelqim Cani, the incumbent, expired in August. A vacancy in the Constitutional Court has also remained unfilled since parliament rejected Mr Moisiu's candidate, and the president has been under pressure from both government and opposition regarding the choice of a new head of the Supreme State Audit (SSA). The law stipulates that the president should nominate a candidate to head the SSA after consultations with the opposition, but the SPA has instead been suggesting names of its own.
The SPA has become increasingly irritated with Mr Moisiu and has publicly criticised some of his decisions (such as returning the property restitution bill to parliament). The opposition DPA has also criticised the president on occasion, notably for not being more decisive in trying to resolve a constitutional impasse towards the end of 2003, when Mr Nano was having difficulty securing parliamentary approval for ministerial nominations (February 2004, The political scene). As a result, negotiations regarding various state appointments have dragged on without a solution.
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The political scene: The EU criticises Albania for a lack of will to reform
On September 14th the EU once again expressed its concern about the pace of reform in Albania, warning the government that it must demonstrate more political will to address serious issues such as electoral reform and the fight against organised crime and corruption. In arguably its strongest criticism of Albania to date, the EU made it clear that the current rate of progress was insufficient, and that failure to conduct a parliamentary election in 2005 that is fully compliant with international standards would represent a serious setback in Albania's relationship with the EU.
With Mr Nano on an official visit abroad, Marko Bello, the minister responsible for reforming the public administration, tried to downplay the EU's criticism by saying that the declaration had been issued by the Dutch presidency, which he claimed was less well acquainted than other EU member states with the progress made by Albania. However, Lutz Salzmann, the EU ambassador in Tirana, said in an interview for German broadcaster Deutche Welle that the declaration had been issued by all 25 EU member countries. The EU declaration and Mr Salzmann's comments were in line with previous criticisms that the EU has made of Albania, notably in the annual stabilisation and association report released in March 2004 (May 2004, The political scene).
In line with its increasingly critical stance, the EU decided to postpone by one month the latest round of talks with Albania regarding a stabilisation and association agreement (SAA), which had been scheduled to take place at end-September. The decision to delay the talks regarding a free-trade agreement between Albania and the EU was officially put down to changes in the EU Commission, but the step was widely seen as a warning from the EU that negotiations could be delayed further if Albania does not speed up its reform efforts.
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The political scene: The OSCE says that Albania is at a critical juncture
The statement from the EU was followed on September 30th by an equally critical report by the OSCE presence in Albania, which described the country as being at a critical juncture. The OSCE regretted the breakdown of consensus between the SPA and DPA over important issues such as the property restitution law and electoral reform, and said that the next parliamentary election would be a test of Albania's institutions, its political maturity and its aspirations for Western integration.
The report highlighted continued corruption, especially in the judicial system, and poor pre-trial detention conditions, and reiterated concerns that the influence of business and political interests was threatening media objectivity (August 2003, The political scene). The OSCE also expressed concern that Albania was increasingly being cited as a source of cannabis, and had become a transit route for heroin coming from Afghanistan.
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The political scene: Albania becomes eligible for further US financial assistance
One of the few pieces of good news that Albania has received from abroad in the past few months also came on September 30th, when the US government announced that Albania was now eligible to apply for grants from the Millennium Challenge Account, a US aid programme for poor countries. Albania had failed to qualify for the funding in May, owing to high levels of corruption (August 2004, The political scene).
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The political scene: Mr Rugova visits Albania for the first time since 1997
Ibrahim Rugova, the president of Kosovo, made a three-day visit to Albania on September 8th-10th, his first since the SPA took office in 1997. Mr Rugova's visit, which included meetings with Mr Moisiu, Mr Nano and Mr Berisha, the leader of the DPA, seemed to indicate an improvement in his relations with senior Albanian politicians, as well as a possible change in attitudes in Tirana. Mr Rugova has had a rocky relationship with the SPA, and refused previous invitations by the Albanian authorities to visit Tirana. This was a consequence of the SPA-led government's support for the Kosovo Liberation Army (KLA), which led a violent uprising against Serbian rule in the province, in contrast to Mr Rugova's policy of passive resistance. (Parties led by former KLA commanders are the main challengers to Mr Rugova's Democratic League of Kosovo in the province's parliamentary election scheduled for October 23rd.)
The SPA now appears keen to distance itself somewhat from the KLA and its successor parties, and to support Mr Rugova's attempts to establish a distinctive Kosovo Albanian identity. Mr Rugova made a point of meeting the leaders of both main Albanian parties. Mr Moisiu said that Albania hopes for a swift resolution of Kosovo's final status and that it does not support any division of Kosovo along ethnic lines, or the establishment of parallel structures by the Serbian authorities. Mr Moisiu also praised Mr Rugova's work towards satisfying the Kosovo Albanians' aspiration for independence, thereby giving the Kosovo president a fillip in the Kosovo election campaign.
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Economic policy: Low capital spending keeps the budget deficit below target
The Ministry of Finance has reported that Albania ran a general government budget deficit of Lk15.4bn (US$152m) in January-August 2004, or only 85.6% of the target for the period. Total revenue in the first eight months was Lk116bn, or 91.5% of the target, but total expenditure, at Lk131.4bn, reached only 90.8% of the target.
The main reason for the smaller than expected deficit in the first eight months of the year was a shortfall in capital spending, which at Lk17bn was equal to 62% of the eight-month target, and only 31.5% of the allocation for the whole year of Lk54.6bn. Current expenditure in January-August was roughly on target, at Lk114bn, but the shortfall in investment spending meant that total expenditure (Lk131.4bn) was only 90.8% of the Lk144.8bn target.
The IMF had previously urged the Ministry of Finance to develop a more realistic capital spending plan in 2004 than in 2003, when the budget included numerous investment projects for which foreign financing had not been confirmed. The fact that capital expenditure is once again below projections suggests that the authorities continue to have problems in organising tenders, disbursing funds and implementing projects on a timely basis.
The slow realisation of investment projects in January-August raises doubts as to whether the government will be able to spend the additional Lk6.15bn allocated to investments in the supplementary budget passed by parliament in June (August 2004, Economic policy). In its most recent staff report, released in July, the IMF noted the tendency for the Albanian authorities to make over-optimistic investment plans in annual budgets, and suggested that the extra capital spending items be allocated over two fiscal years. However, the government intends to realise all the additional spending in 2004.
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Economic policy: Revenue collection falls short
The shortfall in general government revenue in January-August stemmed from lower than expected tax revenue, as well as smaller than planned profit transfers from the Bank of Albania (BoA, the central bank), owing to low Treasury-bill yields. The finance ministry reported that tax revenue reached Lk105.6bn in January-August, or 96.3% of the target. Receipts from value-added tax (VAT) and profit tax, which between them generated almost 45% of total revenue in the period, were both ahead of target, but revenue from personal income tax was again well short of projections. The authorities have long struggled to meet collection targets for personal income tax, primarily because private companies under-declare their numbers of employees, and the salaries they receive, in order to minimise their tax liabilities.
The customs directorate continues to be hindered by low (declared) import volumes of goods that are subject to excise duty. Collection of excise duties in January-August totalled Lk5.35bn, or 92% of the target. The volume of fuel imports was lower than in the same period of 2003, owing to increased domestic production (see The domestic economy). Higher domestic production of beer reduced import volumes for that product, and coffee imports also fell. Cigarette imports rose slightly in the first eight months of 2004, as strong year-on-year increases in July and August outweighed the 33.9% decrease recorded in the first half of the year. (The January-June figure reflected a strong base-period effect prior to the introduction on July 1st 2003 of new regulations regarding health warnings.)
Import volumes of selected goods, Jan-Aug
(tonnes unless otherwise indicated)
2003 2004 % change
Fuel 194,241 177,270 -8.7
Cigarettes 2,673 2,774 3.8
Beer 19,117 15,713 -17.8
Coffee 2,858 2,484 -13.1
Source: Customs directorate.
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Lek-denominated customs revenue was also hit by the appreciation of the lek against both the euro and the US dollar, in which around 65% and 35%, respectively, of Albania's imports are denominated. The budget projection for customs revenue was based on average exchange rates for 2004 of Lk135:€1 and Lk120:US$1, but so far in 2004 the lek has traded at an average of Lk128.4:€1 and Lk104.7:US$1. The customs directorate estimates that the strength of the lek has reduced lek-denominated customs revenue by Lk3bn.
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Economic policy: The government cuts spending
The IMF's fourth review of its three-year agreement with Albania, which was completed in July, states that in the event of a revenue shortfall the government will reduce expenditure—especially current spending and non-priority investment. In line with this provision, the government announced on July 23rd that it would cut administrative spending in 2004 by Lk2bn. This step, together with revenue-enhancing measures such as the increase in excise duty on cigarettes (August 2004, Economic policy), is designed to help protect priority investment spending on infrastructure, health and education.
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Economic policy: The allocation of budget funds raises transparency questions
On July 30th the government decided to allocate Lk3.58bn from the budget for the reconstruction of ten road segments in different regions of Albania, without issuing open tenders for the work. The government instead awarded the contracts either by direct procurement or by pre-selecting local and foreign companies to compete for a certain project. Although Albania's public procurement law allows such procedures, they are intended to be the exception rather than the rule, with open tenders always being the first option. Spartak Poci, the transport and communications minister, said that since tender procedures tend to last for months, the government had opted to speed the process up in order to make better use of the funds allocated to road reconstruction. However, local media argued that such a strategy made the use of public funds non-transparent.
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Economic policy: Payments to go to political prisoners and landowners
The government has announced that the compensation of communist-era political prisoners and the restitution of property expropriated by the communist regime will have no financial impact on the 2004 budget. Parliament approved the relevant laws in July (August 2004, The political scene; Economic policy). Arben Malaj, the finance minister, said that the government was ready to make lump-sum payments totalling Lk90m to people over 60 years old who spent more than 15 years in prison. Monthly compensation payments ranging from Lk1,500 (around US$14) to Lk5,000 will be paid out starting in 2005 and will cost some Lk250m annually, Mr Malaj said. The property restitution law envisages the establishment in 2005 of a fund for the financial compensation of property claims. The fund will be in existence for ten years.
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Economic policy: The government plans to cut some business taxes in 2005
The finance ministry has indicated that it will make some concessions to businesses in the 2005 fiscal package, by lowering the rate of profit tax from the current 25% (the new rate has yet to be announced), and reducing the simplified profit tax paid by small businesses from the present level of 4%. At the same time Mr Malaj made it clear that the authorities would not consider the perennial request of the business community for a two-tier value-added tax (VAT) system, or a reduction of the VAT rate from the current 20%.
On the recommendation of the IMF, the government is also considering introducing VAT on sales of buildings, which are currently exempt. However, the government may well postpone such a measure, given strong opposition from powerful construction associations and the general election scheduled for 2005.
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Economic policy: The WTO accepts Albania's request to protect local beer
In September the government announced that the World Trade Organisation (WTO) had accepted a request by the Albanian authorities to postpone for two years the scrapping of customs tariffs on imported beer. The government proposed abolishing the tariff in 2004 in line with Albania's WTO accession agreement. However, the government's proposal was rejected by parliament following heavy lobbying by local beer producers, and the tariff remained at 10%. The WTO has now agreed to postpone the abolition of tariffs on imported beer until 2007.
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Economic policy: Pyramid schemes' money to be distributed to creditors
Seven years after the collapse of pyramid schemes in which most Albanians lost their savings, the government has announced that it will start distributing the money raised from the sale of the assets of one such scheme. A previous government led by the ruling Socialist Party of Albania (SPA) put more than a dozen pyramid schemes in administration in 1998, including the five largest ones, but the restitution process has dragged on for years. The distribution of money will start with the "Kamberi" scheme. A total of Lk587m raised from the sale of assets will be distributed to 14,400 creditors, who will receive roughly 10% of their original investment.
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Economic policy: The BoA lowers the repo rate
On July 28th the BoA lowered the repo rate by a further 25 basis points, marking the fourth time in 2004 that the central bank has cut its key policy rate. At 5.5%, the repo rate is at its lowest level since its introduction in 2000. The BoA justified its move by pointing to the subdued level of inflation and the strong appreciation of the lek against the euro and the US dollar. Annual consumer price inflation is expected to remain within the central bank's target range of 2-4%. Average annual inflation in the first eight months was well within the target range.
The BoA also hopes that cutting the repo rate will encourage commercial banks to lower the rates they pay on lek deposits, thereby narrowing the gap with rates on hard-currency deposits and restraining demand for local currency. However, the market has so far been slow to react in cutting lek deposit rates. The BoA has reported that commercial banks have lowered interest rates for lek time deposits by only around half of the 25-basis-point cut in the repo rate.
Interest rates on lek-denominated loans have been even less responsive to the BoA's rate cuts, and have increased throughout 2004 (see The domestic Economy: Financial indicators). Average interest rates on lek-denominated loans have increased because banks are issuing more longer-term credits, and because the market for local-currency loans is uncompetitive and dominated by a small number of banks making micro-loans at high interest rates.
Interest rates on bank loans, Jul 2004
(annual %; period av)
Lek US dollar Euro
0-6 months 12.23 7.64 7.75
6-12 months 18.33 8.94 10.25
1-3 years 21.12 8.17 9.22
3+ years 15.37 8.49 9.08
Source: Bank of Albania.
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The imminent resumption of lending by Savings Bank, which is now a subsidiary of Raiffeisen Zentralbank (RZB; Austria) could have a greater effect than the BoA's repo rate cuts in bringing local-currency loan rates down. However, much of RZB's initial lending is likely to be in US dollars or euro, in line with existing market trends (84% of the total stock of loans in Albania at end-July was in hard currency).
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Economic policy: The central bank continues to buy hard currency
The BoA has combined its repo rate cuts in 2004 with purchases of hard currency in the foreign-exchange market. This intervention has the twin goals of stopping further appreciation of the lek and injecting local-currency liquidity in order to bring lek interest rates down. In August, BoA interventions helped to subdue upward pressure on the lek resulting from the large influx of Albanian emigrants in the tourism season, and for the first time in months the lek depreciated slightly against both the euro and the US dollar (see The domestic economy: Financial indicators).
Intervention in the currency market helped the central bank to meet its three quantitative targets under the IMF programme. At end-August the BoA had net international reserves (reserve assets minus reserve liabilities) of US$992.3m, or US$121.2m above the minimum required by the IMF, and its net domestic assets were Lk64.7bn, or Lk10.2bn below the ceiling. At end-July net domestic credit to the government was Lk267bn, or Lk6.1bn below the ceiling set by the programme.
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Economic policy: The BoA looks at moving to an inflation-targeting regime
The central bank has announced its intention to switch from the current system of monetary targeting to an inflation-targeting regime in around 2007. Such a regime would involve the BoA's setting a medium-term objective for inflation, with the possibility of short-term fluctuations in price growth. The BoA has been mulling over this idea for some time, and believes that with average annual inflation having been relatively low since 1999, the time is right to consider the shift to inflation-targeting.
Albania would have to satisfy numerous conditions before it could adopt an inflation-targeting regime. These include the requirements that the central bank be independent to choose the inflation target, that the mix of fiscal and monetary policy be sufficiently tight to limit government demand for credit, and that the outlook for the external position of the economy be positive. The financial system would also have to be more developed than at present, to improve monetary policy transmission. The IMF has generally praised the BoA for maintaining price stability in recent years, but has yet to comment on this proposed change in monetary policy.
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Economic policy: Parliament approves six new BoA board members
On October 8th parliament approved six members of the BoA's new nine-member supervisory board after the mandate of the outgoing board expired in August along with that of Shkelqim Cani, the central bank governor. The new board will include Ardian Fullani, the head of Italian-Albanian Bank and the president of the Albanian Banking Association; Ksenofon Krisafi, a lawyer and the current secretary-general of the Council of Ministers; and Tefta Cuci, all of whom were nominated by the Council of Ministers. Fatos Ibrahimi, a current BoA deputy governor, and Andis Harasani, the general manager of power utility KESh, were proposed by the SPA parliamentary group, and Elisabeta Gjoni was nominated by the parliamentary group of the Democratic Party of Albania (DPA).
Mr Cani has not been nominated by the SPA for a second term as governor, despite being generally regarded as having secured the BoA's independence and having kept inflation under control. Fatos Nano, the prime minister and SPA leader, appears to support Mr Fullani, although Alfred Moisiu, the president, will nominate a candidate for governor from among the nine new board members. He or she would then need to be approved by parliament.
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The domestic economy: Industrial sales continue to grow rapidly
The latest available data on industrial sales are in line with the Economist Intelligence Unit's view that Albania is on course for another year of relatively rapid real GDP growth in 2004, albeit still from a low base. Figures released by the Bank of Albania (BoA, the central bank) indicate that the total value of industrial output sold in January-July 2004 was Lk14.6bn (US$140m), a 40% year-on-year increase.
Sales of industrial products, Jan-Jul
(Lk m)
2003 2004 % change
Oil refining and marketing 3,061 3,559 16.3
Electricity 4,183 7,239 73.0
Metallurgy 118 25 -78.1
Chemicals, glass, china & plastics 48 55 15.2
Textiles 53 52 -1.7
Leather & shoes 186 278 49.8
Wood & paper processing 77 83 8.3
Total (incl other) 10,417 14,628 40.4
Source: Bank of Albania.
The increase in industrial sales was driven in part by higher electricity sales, which rose in lek terms by 73% year on year in January-July, despite a much smaller increase of 11.2% in the volume of power sold. The discrepancy reflects the increase in electricity tariffs that took effect in January 2004, as well as some improvements in the management of Korporata Elektroenergjitike Shqiptare (KESh), the state-owned power monopoly.
Sales in major processing sectors maintained the pattern set earlier in 2004. Metallurgy posted a year-on-year drop in sales of almost 80%, reflecting the decision by Turkish company Kurum to scale back production at the Elbasan steel plant in response to higher electricity prices. Textile sales dropped slightly year on year, possibly because the appreciation of the lek has made exports less competitive. Sales of leather and shoes rose by almost 50% year on year in January-July 2004, helping to offset part of the slump in metallurgical activity.
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The domestic economy: The labour force shrinks in the first quarter of 2004
The Institute of Statistics (Instat) has yet to release data on employment and unemployment in the second quarter of 2004, after reporting a jobless rate of 14.9% at the end of March (August 2004, The domestic economy: Employment, wages and prices). The number of persons employed in Albania at end-March stood at 919,000, down by 8,000 from the end of 2003. In part, the drop reflects continued layoffs in the state sector, as the government attempts to reform the public administration and prepare state-owned companies such as Albtelecom for privatisation. However, the fall in reported private-sector employment (by 5,000 people during the first quarter) may have been at least partly caused by the failure of companies to register all their employees for social insurance purposes by the annual deadline of March 31st. A clearer picture of the labour market, and especially of employment trends in the private sector, should emerge once the second-quarter data are published.
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The domestic economy: The government increases unemployment benefit
On September 9th the government decided to increase the monthly level of unemployment benefit by 10% to Lk4,360 (around US$42). At the end of March 2004, according to Instat, only 12,000 unemployed persons were receiving jobless benefits out of a total of 161,000 registered unemployed. This reflects the fact that only those unemployed persons who have contributed to the social insurance scheme are eligible to receive benefits.
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The domestic economy: Seasonal effects and the strong lek subdue inflation
The consumer price index fell in month-on-month terms for four consecutive months in May-August, owing to the appreciation of the lek, falling food prices and lower than expected government spending. Although this trend was halted in September, the index rose by only 0.1% from August and by only 2% in year-on-year terms—at the bottom end of the 2-4% target range set by the BoA.
Prices of food and non-alcoholic drinks traditionally decline in month-on-month terms during the summer as output hits the market, but this seasonal effect continued into September, with food prices falling by 2.9% year on year. The downward pressure on prices in this segment reflects increased domestic output, especially for fruits and vegetables.
Most of the inflationary pressure in recent months has come from rent and utilities prices, which rose by 10.4% year on year in September. Transport prices rose by 4.1% year on year in August and by 3.3% in September, mainly because of higher international oil prices, although the strong appreciation of the lek against the US dollar has helped to mute the inflationary impact of higher oil prices in Albania. The appreciation of the lek has also helped to subdue inflationary pressures via import prices from Italy and Greece, Albania's main trading partners.
Consumer prices
2003 2004
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
Index (Dec 2001=100) 101.5 101.9 105.0 104.8 106.8 106.9 107.0 105.1 103.6 103.5 103.3 103.3
% change, month on month 0.2 0.4 3.1 -0.2 1.9 0.1 0.0 -1.7 -1.4 -0.2 -0.2 0.1
% change, year on year 2.9 3.4 3.3 3.3 4.4 4.0 3.2 2.6 2.9 3.1 2.7 2.0
Food & non-alcoholic drinks 4.3 4.8 2.7 3.2 2.7 2.3 0.1 -1.1 -0.7 -0.1 -1.4 -2.9
Beverages & tobacco 4.4 5.1 5.0 5.6 4.5 4.8 4.5 4.5 4.4 1.1 1.1 0.7
Clothing & footwear -4.0 -2.9 -3.5 -3.6 -3.0 -2.8 -2.5 -2.2 -2.3 -2.0 -1.4 -1.9
Rent & utilities 2.8 3.8 4.1 3.7 8.5 8.3 11.0 9.7 9.7 9.9 9.7 10.4
Household goods 0.3 -0.3 -0.7 -0.5 -0.5 -0.5 -0.7 -0.9 -1.1 -1.1 -1.0 -1.0
Healthcare 5.0 5.1 4.5 2.8 3.0 3.0 2.7 3.0 2.7 2.6 2.4 2.3
Transport 2.4 2.5 2.9 0.1 0.5 -1.4 -0.7 1.5 2.5 2.8 4.1 3.3
Communications -2.0 -1.7 54.3 53.4 54.6 54.6 17.1 17.4 16.7 16.7 16.4 15.6
Entertainment & culture 0.6 0.5 -0.3 0.3 0.0 -0.4 -0.5 1.7 1.4 1.5 1.8 1.7
Education 3.8 8.3 8.5 8.2 8.7 8.7 8.7 9.5 10.1 10.2 9.9 11.3
Hotels, bars & restaurants 2.4 2.2 2.2 2.3 4.6 4.2 3.7 3.5 3.7 3.6 4.0 3.5
Personal goods -1.9 -2.2 -0.6 -1.3 -1.7 -1.8 -1.8 -1.7 -0.6 -0.6 -0.3 -1.0
Source: Institute of Statistics (Instat), Consumer Price Index, September 2004.
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The domestic economy: M2 growth decelerates in line with lek deposits
The M2 money supply aggregate (which excludes hard-currency demand and time deposits) grew by 5.9% year on year in July 2004, continuing a decelerating trend that began in late 2003. The deceleration in the rate of M2 growth reflects a slower rate of increase of lek time deposits, which rose by 8.8% year on year to Lk214bn in July, the slowest rate of growth so far in 2004. The slowdown in the growth of lek deposits stemmed from the decision by commercial banks to lower their local-currency interest rates in response to successive repo rate cuts by the central bank in 2004, and from the increase in consumer spending during the summer holiday season.
Foreign-currency demand and time deposits grew faster than lek deposits in July (by 9.3% year on year, to Lk108.5bn), reflecting the influx of hard currency brought back by Albanian emigrants returning home for the summer. The rise in hard-currency deposits also reflected the decision by Raiffeisen Zentralbank (RZB), the new owner of Savings Bank, to raise interest rates on its US dollar deposits. (Savings Bank controlled more than 50% of all lek deposits at end-2003, but only around 20% of hard-currency deposits.) RZB raised its US dollar deposit rates by 0.4-0.7 percentage points across all maturities, offering up to 2% for one-year deposits and 2.5% for two-year placements, the highest rates in the market. Nevertheless, the annual growth in hard-currency deposits (expressed in local-currency terms) was slower in July than in previous months, in part because of the continued appreciation of the lek against the US dollar and the euro. Foreign-currency deposits accounted for 31.4% of all deposits at end-July, in line with their share at end-2003.
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The domestic economy: Hard-currency loans account for 84% of the total stock
The stock of outstanding loans stood at Lk60bn at end-July, up by Lk9.3bn since the start of 2004. Hard-currency loans continue to dominate, accounting for 84% of the total. Interest rates on local-currency loans have actually increased in 2004, despite successive repo rate cuts by the central bank (see Economic policy).
Banks continue to lengthen the repayment periods on their loans. At end-July medium- and long-term loans (with maturities of more than one year) made up 64.4% of outstanding loans, up from 54% at end-2003. The trading sector is still the single largest recipient of bank loans, although its share of total credits fell from 34% at end-2003 to 22% in July. Lending for construction and real estate purchases accounted for 9.3% and 15.5%, respectively, of the stock of outstanding loans at end-July. At the end of June bank credits were equivalent to only 7.4% of GDP, a very low level compared with other transition economies.
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The domestic economy: The government will sell its stakes in two banks
Overall return on equity and return on assets in the second quarter were both lower than in the same period of 2003, reflecting lower profitability at two banks where the state continues to control a minority stake. These two banks—Italian-Albanian Bank and United Bank of Albania (an Islamic bank)—each have relatively poor loan books, with a combined bad loans ratio of 15.1% at end-June, compared with a sector average of 2.7%. This has forced the two banks to make much higher bad-loans provisions than their competitors.
The government decided in September to sell the 40% stakes that it holds in both Italian-Albanian Bank and United Bank of Albania. Existing shareholders will have right of first refusal, with the government issuing international tenders in 12 months' time if none make an offer. Banca di Roma, which owns 40% of Italian-Albanian Bank, has said that it also wants to sell its stake. The successful sale of the government's stakes would leave the entire banking system in Albania in private hands, although interest in the two banks appears to be relatively limited at present.
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The domestic economy: T-bill yields follow the repo rate downward--with a lag
Treasury-bill yields for all maturities fell by 40-50 basis points in September and have fallen by more than 1 percentage point (100 basis points) since the end of 2003, in line with the total cut in the BoA's repo rate so far in 2004. The central bank made three cuts in the repo rate in the second quarter of 2004, totalling 75 basis points, but T-bill yields fell far less sharply during that period. This reflected the fact that around three-quarters of the T-bill stock is held by Savings Bank, which relies heavily on its T-bill holdings for its profits (August 2004, The domestic economy: Financial indicators). However, the drop in T-bill yields in September means that the BoA's repo rate cuts have now fed through into rates on T-bills.
Treasury-bill yields
(%, end-period)
2003 2004
2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr
3-month 8.18 7.26 7.34 7.04 6.82 6.30
6-month 9.91 9.49 8.76 8.36 8.18 7.55
12-month 10.18 10.08 9.49 9.26 9.00 8.43
Source: Bank of Albania.
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The domestic economy: The lek remains strong against the US dollar and the euro
In the third quarter the lek remained near the highs that it reached in mid-July, when it stood at Lk124.2:€1 and Lk101.3:US$1, its highest value against the US dollar since 1997. The Albanian currency traditionally strengthens in the summer months as increased agricultural output reduces the need for food imports, and as tourists and returning emigrants bring in hard currency that is subsequently converted into lek. Besides seasonal effects, the lek has been supported in 2004 by other factors. These include the relatively high interest rates on lek deposits relative to those on hard-currency savings (although the BoA's repo rate cuts have begun to narrow the gap); a relatively stable macroeconomic environment and subdued inflation; the reduced need for electricity imports in 2004; and remittances from Albanian seasonal workers in Greece for the Olympic Games in Athens in August.
The central bank intervened in the market during July and August to arrest the upward trend in the lek, although the extent of its hard-currency purchases has not been revealed. The lek depreciated against both the US dollar and the euro in August, although it strengthened again in September as the central bank did not intervene in the market.
The appreciation of the lek has limited the inflationary impact in Albania of higher global oil prices, and of imported price pressures from Italy and Greece, its main trading partners. On the other hand, the stronger lek has harmed Albanian re-exporters of textiles and shoes, whose costs (such as wages, rent and utilities) are in lek but who sell into the euro zone. Despite the strong lek, trade figures for the first four months of 2004 suggest that Albanian exporters remain competitive owing to low labour costs.
Selected financial indicators
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
M2 (Lk bn)
2002 306 307 306 306 308 312 313 313 315 316 317 325
2003 325 329 328 329 331 334 337 338 340 344 346 350
2004 351 351 353 352 353 354 361 – – – – –
M2 (% change, year on year)
2002 15.5 15.5 15.4 14.3 13.5 13.5 12.3 11.5 10.9 10.1 9.0 6.4
2003 6.2 7.0 7.0 7.5 7.5 7.0 7.5 8.0 8.0 8.7 9.1 7.7
2004 8.0 6.7 7.6 7.1 7.0 6.0 5.9 – – – – –
Lending rate (annual %)
2002 14.7 15.4 15.3 14.8 14.6 14.6 14.5 15.1 14.8 18.8 16.4 14.6
2003 15.3 14.7 14.9 15.0 13.7 14.3 13.6 13.8 14.5 15.9 13.8 11.8
2004 15.4 13.5 10.4 10.2 11.2 11.9 12.2 – – – – –
Deposit rate (annual %)
2002 7.8 7.7 7.8 7.8 8.6 8.6 8.7 8.8 8.9 9.2 9.3 9.3
2003 9.3 9.2 9.2 9.2 8.8 8.3 7.8 7.8 7.8 7.8 7.6 7.6
2004 7.3 7.1 7.0 6.9 6.8 7.0 6.4 – – – – –
Sources: Bank of Albania; IMF, International Financial Statistics.
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The domestic economy: Tougher regulations hit the construction industry
Data from Instat indicate that only 69 new construction permits were issued during the first quarter of 2004, less than one-tenth of the number issued in the same period of 2003. The permits that were issued indicated that construction companies planned to spend Lk4.3bn in January-March, down by 80% from the first quarter of 2003. The slowdown in permit issuance is sharpest in the three cities where construction activity is generally most vibrant: the capital, Tirana, and the coastal cities of Durres and Saranda. Only 15 permits were issued in these three cities in the first quarter (all of them in Tirana), compared with 266 in the first quarter of 2003.
Construction statistics
(no. of permits issued)
2003 2004
1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr
Residential 482 453 978 292 28
Non-residential 275 234 390 167 41
Hotels 117 28 24 19 0
Wholesale & retail trade premises 92 113 196 79 28
Industrial buildings 14 29 58 18 6
Other 52 64 112 51 7
Total 757 687 1,368 459 69
Source: Instat, Quarterly Statistical Bulletin, No. 1, 2004.
Officially, the tighter restrictions on issuing construction permits are related to the drafting of new development plans for city centres across Albania. However, local media have suggested that powerful construction groups have themselves encouraged the slowdown in permit issuance with the aim of preventing a drop in prices, given the current excess supply of residential and commercial buildings.
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The domestic economy: Power supply increases
Data from Instat indicate that electricity supply in the second quarter of 2004 was 17.2% higher than in the same period of 2003. This reflected increased generation of electricity through hydropower schemes, helped by water reserves being at their highest level for a decade. Imports and exchange (that is, pure imports plus power "borrowed" from abroad under regional exchange agreements) were around one-fifth of the level in the year-earlier period, and Albania was able to export seven times more power than it did in April-June 2003.
Power balance
(m kwh)
2003 2004
2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr
Total supply 1,360 1,259 1,550 6,146 1,853 1,594
Output 1,044 789 1,242 4,904 1,606 1,527
Hydropower 1,026 768 1,224 4,822 1,587 1,509
Thermal plants 18 20 18 81 19 18
Imports & exchange 316 470 308 1,242 247 67
Total usage 1,360 1,259 1,550 6,146 1,853 1,594
Households 543 509 552 2,220 636 529
Other consumers 280 292 349 1,271 381 364
Power plants 15 13 18 74 5 5
Exports & exchange 26 2 46 326 82 182
Losses 495 443 585 2,255 749 514
Source: Instat, Balance of Electric Power, Second quarter 2004.
Electricity losses (through technical problems, theft or non-payment) in the first half of 2004 were equal to 38.8% of total supply, just below the target of 39.1% in the donor action plan co-ordinated by the World Bank. KESh, the state-owned power monopoly, managed to collect 87.2% of its receivables in the first half of 2004, above the target of 86.5%. As the installation of electricity meters continues, KESh intends to introduce a pre-paid card for electricity in a pilot project. The scheme will be introduced in two cities: in Shkoder in northern Albania, where the rate of bill collection is very low, and in Gjirokaster in the south, where collection is high.
Although the need for power imports has been limited so far in 2004, Albania's heavy dependence on hydropower makes the country's electricity supply vulnerable to changes in climatic conditions. KESh intends to establish a contingency fund that would help to finance electricity imports once government subsidies to the company are phased out from 2005 onwards.
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The domestic economy: Work on the Vlore thermal power station to begin in 2005
The government intends to reduce Albania's reliance on hydroelectric power by building a new 140-mw thermal power plant near the southern port city of Vlora—the first major investment in the power sector in 25 years (February 2004, The domestic economy: Sectoral trends). In September the European Investment Bank (EIB) approved some €40m in financing for the €110m first phase of the project, which is also being funded by the European Bank for Reconstruction and Development (EBRD), the World Bank and KESh. The tender to select a company to build the plant is scheduled to be completed in February 2005. Construction, which was originally scheduled to begin in mid-2004, is now expected to start in May 2005 and to last for 18-24 months.
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The domestic economy: The EBRD and IFC lend US$60m to a cement factory
The EBRD and the International Finance Corporation (IFC), the World Bank's private-sector arm, have agreed to lend a combined US$60m to Seament Albania, a Lebanese-run cement factory located in Fushe Kruja, 35 km north of Tirana. The loan will help to finance construction of a new environmentally friendly production line with an annual capacity of 1.3m tonnes. Seament Albania will also receive loans of US$18m from the OPEC Fund for Reconstruction and Development and US$10m from Alpha Bank (Greece) to help finance the project. The Lebanese group took control of the Fushe Kruja cement factory after it was privatised in 2000. The investment, one of the largest foreign-financed projects in Albania's manufacturing sector since transition began, should boost domestic cement production and reduce the need for imports.
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The domestic economy: Albtelecom plans to invest US$8m in Eagle Mobile
Albtelecom, the country's dominant fixed-line operator, has announced plans to invest US$8m to buy equipment for, and develop the network of, Eagle Mobile, its new cellular subsidiary. The launch of Eagle Mobile, which will be Albania's third cellular operator, was originally scheduled for mid-2004 and was intended to make Albtelecom more attractive to potential foreign buyers ahead of its planned privatisation. However, the new company is now not expected to start operations until the first half of 2005, and will find it difficult to compete with Albania's existing mobile operators, which are controlled by Vodafone (UK) and OTE (Greece).
The government has issued an international tender for up to 76% of Albtelecom. Potential investors have until the end of October to express interest, and the government says that it will choose a winner by the end of 2004. However, previous attempts to sell Albtelecom have failed owing to lack of interest, and there is a risk that the latest long-delayed tender may meet a similar fate.
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The domestic economy: New players enter the local insurance market
Five new insurance companies obtained operating licences from the market regulator in July, almost doubling the number of insurers in Albania. Locally-owned SIGAL, the largest non-life insurer in Albania, has also obtained a licence to operate in the life market. The issuance of the new licences—two in the life insurance market and three in the non-life segment—is likely to increase competition for INSIG, which remains majority-owned by the state and until now has been the only company operating in both sectors.
Although the Ministry of Finance sets minimum levels for premiums that insurers offer to clients, most companies except INSIG ignore these and offer lower premiums, thereby eroding INSIG's market share and making it harder for the insurer to attract a foreign strategic investor. (The EBRD and the IFC bought a combined 39% of INSIG in October 2003, with the view that the government would sell a majority stake in the company to a foreign investor within the following two years.) The recent expansion of the insurance market highlights the need for tighter regulations and better supervision in a sector that Albania's attorney general, Theodhori Sollaku, has accused of being involved in money-laundering.
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Foreign trade and payments: The trade deficit falls
The Institute of Statistics (Instat) has reported that Albania ran a trade deficit of Lk49.1bn (US$484m) in the first four months of 2004, down by 6% from the Lk52.3bn deficit recorded in the same period of 2003. When expressed in euro, the currency in which Albania conducts the overwhelming majority of its foreign trade, the four-month trade deficit was virtually unchanged from January-April 2003, owing to the appreciation of the lek against the euro during the intervening period. (Instat has not released any more recent foreign trade data, owing to technical difficulties related to the installation of new customs software in Tirana and Durres.)
Despite the appreciation of the lek against the euro in January-April, exports rose by 5.7% year on year to Lk19.9bn, with all major categories showing year-on-year increases. Sales of textiles and footwear, by far Albania's largest export category, increased slightly to Lk12.8bn from Lk12.6bn in January-April 2003. Exports of building materials jumped by 55% year on year to Lk3bn, on the back of higher domestic cement production, which also helped to reduce imports in this category.
Imports totalled Lk69bn in January-April, down by 3% from the same period of 2003. The main reason for the decrease was the greatly reduced need for electricity imports owing to higher domestic power production (see The domestic economy: Sectoral trends). Slight decreases in imports were registered for food, beverages and tobacco (Lk14.3bn, down from Lk14.5bn in January-April 2003), and for construction materials (Lk7.8bn, down from Lk8bn in the year-earlier period). In addition, the appreciation of the lek against the euro in the first four months of 2004 reduced the value of euro-denominated imports when expressed in local currency.
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Foreign trade and payments: Imports from China increase
The geographic pattern of Albania's foreign trade was a familiar one in January-April, with the EU buying 91.5% of all exports and supplying 68.7% of imports. However, Instat also reported that imports from China rose by 38% year on year to Lk2.6bn. This made China the fifth most important source of imports in January-April, up from 11th in the same period of 2003.
The increase could indicate that Chinese producers are using Albania to circumvent restrictions that EU countries placed on trade with China after the outbreak of Severe Acute Respiratory Syndrome (SARS) in late 2002. Imports from China (mainly textiles, but also food products and fish) are then re-exported to Europe as Albanian products, thereby profiting from the preferential trade regime that Albania has with the EU.
The issue was raised by the EU earlier in 2004 during negotiations with the Albanian authorities regarding a stabilisation and association agreement, and could become increasingly contentions if imports from China continue to rise. The customs authorities in Albania have highlighted at least one case in which socks imported from China were to be re-exported to the EU as if they had been made in Albania.
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Foreign trade and payments: Exports rise to FTA countries
The Instat data indicate that exports to regional neighbours with which Albania has free-trade agreements (FTAs) have increased in the first four months of 2004. Albania has signed FTAs with Bosnia and Hercegovina (BiH), Bulgaria, Croatia, Macedonia, Romania, Serbia and Montenegro, and the UN-administered province of Kosovo.
Exports to the four countries with which FTAs are currently in force (Macedonia, Croatia, Romania and Bulgaria) increased fivefold in lek terms in January-April. Exports to Macedonia, with which Albania signed its first FTA in 2002, more than doubled to Lk186m. However, the increases came from a very low base; exports to the four countries only accounted for 1.5% of total exports in January-April.
Exports to selected countries, Jan-Apr
(Lk m)
2003 2004
Bulgaria 3 86
Croatia 0 31
Macedonia 57 186
Romania 2 10
Four-country total 62 313
Source: Institute of Statistics (Instat), Situation of Foreign Trade, April 2004.
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Foreign trade and payments: The Savings Bank sale boosts FDI in the first half of 2004
The delay in releasing trade statistics means that the Bank of Albania (BoA, the central bank) has yet to release data on the current account for the second quarter. However, the central bank has reported that foreign direct investment (FDI) totalled US$168m during the first half of 2004, up from the US$86.3m reported by the IMF for the same period of 2003. The main factor behind the year-on-year increase was the US$126m in privatisation receipts from the sale of Savings Bank, which were booked during the second quarter of 2004.
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Foreign trade and payments: Foreign reserves reach US$1.15bn at end-July
At the end of July Albania had international reserves (excluding gold) of US$1.15bn, according to the IMF, up from US$1.01bn at the end of 2003. The increase reflects further central bank intervention in the foreign-exchange market in an attempt to check the appreciation of the lek.
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