ECONOMIC HEALTH CHECK
January 11, 2013
- Albania’s economy has ridden out eurozone crisis well so far
- Lowering public debt, keeping recovery on track are key priorities
- Addressing troubled loans, restarting structural reforms essential for growth
After showing resilience during the past two years, Albania’s economy is now beginning to slow down, the IMF said in its annual review of the Balkan nation’s economy.
Growth in 2012 is likely to be sharply lower—at below 1 percent—because of the euro area crisis, weak demand at home, and disruptions caused by harsh winter. In 2013, growth is expected to recover, but slowly, to 1.3 percent, the IMF report said.
“The euro area crisis will continue to create headwinds and complicate policymaking in the near term,” said Nadeem Ilahi, IMF mission chief for Albania. The country, which applied formally for EU membership in 2009, has shown surprising resilience since the outbreak of the global crisis in 2008, but that could change. In the period ahead, it will have to tackle the high public debt, make banks more resilient, and advance growth-enhancing reforms, he said.
Speaking to IMF Survey, Ilahi outlined the reasons behind Albania’s resilience to the eurozone crisis, the policy priorities, and the near and medium-term challenges the economy faces.
IMF Survey: Albania managed to both avoid recession and maintain financial stability in the wake of the global economic crisis. How did it achieve this?
Ilahi: Until recently, Albania coped with the unfavorable external economic environment quite well. The economy avoided a sharp fall in output, inflation stayed low and stable, and the banking system remained sound.
Albania’s main external links are through exports, banks, and remittances, mainly with its two next door neighbors—Italy and Greece. Despite the problems in Europe, spillovers to Albania through these channels have been limited so far. There are several reasons for this.
First, Albania’s exports are a small part of the economy. And, since the onset of the crisis, the country has been able to reorient and redirect some of its exports towards new products and markets.
Second, although most banks in the country are foreign owned, they depend largely on domestic deposits. This is partly the result of sound regulatory policies adopted by the central bank prior to the global crisis, which helped contain systemic risks. As a result, the Albanian banking system has not experienced the kind of withdrawal of funding we have seen in some other countries in the region.
Third, even though remittances from Albanians living abroad—mainly those in Greece and Italy—have been on a declining trend, the effect has been partly offset by returning migrants bringing back their savings to Albania.
Not least, the authorities’ timely and sound policies in response to the crisis have also played a role. A fiscal stimulus at the onset of the crisis, and more recently, the central bank’s gradual easing of monetary policy, proved useful. In addition, policies to ensure that banks had adequate capital and liquidity were instrumental in maintaining financial sector stability.
IMF Survey: In the report, you say that fiscal consolidation is now needed to reduce debt. Why is that necessary?
Ilahi: Albania’s public debt is high. Its debt-to-GDP ratio today—at around 60 percent—is among the highest in the region. A large part of this debt is domestic and of short term duration and is held by foreign-owned commercial banks. Further increases in debt could affect the confidence of the existing debt holders, worsen the rollover risks, and crowd out private credit and investment. As a result, we think that further fiscal stimulus financed by new debt would be counterproductive.
But while we have advised the authorities to undertake fiscal consolidation, our advice takes into account the structure of Albania’s debt as well as the current weak position of the economy. How quickly the fiscal deficit is brought down needs to be balanced against the need to minimize the negative effects of the consolidation on growth and the poor and vulnerable.
So it is all about getting the pace of fiscal consolidation right. And we recommend spreading the adjustment over the next five years, to allow for a more gradual pace of adjustment. At the same time, to make the adjustment credible, it has to be accompanied by a solid anchor and well specified consolidation plans. We have also advised the authorities to not cut back on capital projects because such spending enhances economic activity and job creation, particularly in lean times.
IMF Survey: Most of Albania’s banks are foreign owned. In light of this, has the banking sector suffered from deleveraging?
Ilahi: During the crisis, foreign-owned banks had to adjust their balance sheets in response to changes in policies of their parent banks. But the threat of parent banks withdrawing funds suddenly from Albania is not high because banks rely mostly on funding from domestic deposits.
However, we believe that risks remain. As the eurozone crisis lingers, the central bank should continue to monitor banks’ capital and liquidity. With lingering economic weakness many loans have also run into trouble, posing a risk to the banking system. Our advice is to improve the process through which banks can deal with troubled loans in a timely manner.
IMF Survey: What other challenges does Albania need to tackle?
Ilahi: What matters over the medium term is how rapidly Albania can embark on a high and sustained economic growth path. Attracting investment from domestic and international sources is critical. In addition to the measures discussed above, the authorities need to address the constraints that hinder private sector investment in Albania today. These are uncertain property rights, weak enforcement of the rule of law, and inadequate physical infrastructure.