Middle-class insecurities in Albania

Middle-class insecurities in Albania

The current economic system is not functioning properly for the Albanian middle class. Although the economy and jobs have grown for about a decade, far more citizens are concerned about their economic security. The massive value of consumer credit, housing loans and the growth of loans outside the banking system partly reflect this economic stress.

Medium-sized households need more access to sustainable jobs that offer better wages and higher benefits. But these jobs are still hard to find, pushing families deeper into debt. This has pushed families to find alternative ways of paying off borrowing costs, mostly long-term from the banking system.

Thus, if we compare consumer credit, according to the credit report for the third quarter 2021, published by the Bank of Albania, it is observed that in addition to increasing financing for businesses, banks have also increased financing for individuals. Loans to households maintained high growth rates of 10.7% during the third quarter, following the positive trajectory started from the beginning of this year. Consumer credit has shown an acceleration of the annual growth rate to 8.2% during the third quarter. The expansion of consumer credit has reflected the increase in credit for overdraft for the purchase of volatile goods[1] and the increase in credit for the purchase of durable goods[2].

The home loan portfolio grew by about 13% during the third quarter, following the upward trajectory observed for more than a year now. This performance has led to an increase in the share of this portfolio in household loans to 65%, from 62% a year ago.

If this picture is extended to the countries of the Balkans and the European Union, it can be seen that credit to households is improving in all countries surveyed. It marked an average annual increase of 3.0% during the third quarter, from 2.3% in the second quarter of 2021. Demand for household loans is estimated to have increased, both for mortgage loans and consumer loans[3].

The continued expansion of consumer credit in a growing economy is a clear indication that things are not going well. Medium-sized households mostly often receive more debt than poor households because their incomes have to keep pace with higher costs for education, health care, and living standards. They take out consumer loans to help pay for their expenses. The reason lies in the short-term decline in income. For example, due to dismissal, shortening of working hours, inability to work due to illness or care for relatives, etc. Costs and risks have risen rapidly, while revenues have risen slowly. Consumer debt has become the pressure valve for the squeezed middle-class families.

According to the analysis of the Bank of Albania, close to 70% of the loan portfolio given to households is oriented towards home purchase (in lek and in foreign currency) and close to 30% of the loan portfolio provided to households is oriented to consumer purchase (in Albanian Lek and in foreign currency)[4], where over 85% of loans to households are to be repaid in long-term terms.

If we read from the data of INSTAT 2021, where about 314 thousand individuals have benefited from loans, this means that the current burden of credit for individuals is approximately 680 thousand ALL (5,600 Euro loans / individual). This is a fairly average indicator and does not really show that most of the loan stock is for housing (ALL 140 billion). But, from all this presentation of credit indicators for households, the fact is that the level of credit to households has increased by at least 3% in 2021 compared to the previous period.

The increase in household consumer debt has a direct impact on the decline in savings and disposable income of the middle class. This debt growth is particularly strong among low-level of middle-income households within the middle class.

Meanwhile, medium-sized businesses and a part of small businesses, which are part of the middle class, borrow to pay their current expenses. They use very few loans to improve their overall financial situation.

It is quite different with large businesses and those who have won large contracts to use resources under public fund or dubious large investment contracts. The loans that these businesses receive are because they want to improve their overall financial situation. They can do this by using the money offered by lenders on more favorable terms than the money borrowed by individuals and small and medium businesses.

Given the growing concern about middle-class insecurity it is necessary that a growing economy should not be associated with growing financial uncertainty. A number of measures and actions can help give families real economic security. This would include not only guaranteeing a secure job, but also a stable and well-paid job with good benefits.

Meanwhile, security must also be accompanied by a low level of fiscal burden on labor, which helps in real time to reduce the costs of individuals generating income from work.

In this context, capital gains tax needs to be reinforced with a more aggressive approach. The aim should be to have a harmonization of the fiscal burden towards the middle class, both for the taxation of labor, as well as of capital in a higher burden for him. But the security and guarantee of the middle class must go further.

Ensuring safety perimeter should also include monetary benefit in facilitating families to afford sending their children to school. Families would not need to borrow so much if they were not so constrained by the slow or no growth of individual income and high cost of living.

Although none of the major political parties that have been part of the government in recent decades have promised and kept their commitment to support the middle class, in recent years they have spoken out about raising the average wage.

But apart from the moderate increase of the average wage[5] in 10 years by 21.5%, the ratio of the average wage to the minimum wage in 2011 has been 2.3 times higher. While in 2021 it is 1.9 times higher with a decrease of the ratio of 0.4 percentage points. The average annual change in consumer prices for the period 2010 – 2020 is 33.5% higher at the end of 2020.

Meanwhile, if we look at the tax burden on wages in 2010 – 2020[6], it has increased by 32.7%. The main weight is held by the taxed average wage category at higher progressive levels in relation to its increase by at least 11.2 percentage points.

An increase in the tax burden on average wages, coupled with an increase in inflation higher than the increase in the average wage has reduced the disposable income in the hands of the middle class. This impact is even greater in the case of individual capital income tax[7]. The tax burden on individual capital income has increased in the period 2010 -2020 by 57.8%.

But, considering the growth rates of individual capital in this period (bank deposits, civil and industrial construction, rent, dividend income), as well as not having the necessary data, given the narrow base of contributors to this tax (close to 9,000 taxpayers) it seems that the higher burden falls on the middle class that generates income from work.

Governments in recent years have given more power to employers by allowing more concentrations of economic power in fewer hands. But even in the public sector, the policy of increasing middle-level wages has followed a routine rule due to the increase in the minimum wage, but always insufficient to cope with the rising costs of living.

In fact, if reasonable wages are offered, not only the low ones, there would be no problems in finding skilled workers, but it would also affect fewer outflows abroad for higher wages.

In this context, the investment policy should be under a deep analysis about tthe effect in labor market and competitiveness of economy. Although governments have invested in infrastructure in the last 13 years (2009-2021) by more than ALL 450 billion, this has had little effect on the creation of good jobs as a direct effect. But even the indirect effect of public investment in infrastructure has not enabled a major turnaround of economy.

If we translate it into more commodity turnover, private investment values, human turnover, as well as growth of economic sectors that produce quality job development it seems that we still do not have a productivity that presents sustainable growth.

Despite the reality, political leadership continues with new promises towards increasing welfare.

Economic growth below the level of optimization of livelihoods, as well as the creation of precarious and paid jobs at levels that do not represent the well-being of the middle class are not enough to protect this social stratum, which is the bridge between the poor and the class rich.

[1] Food, beverages, clothing and related products (INSTAT)
[2] Electronic equipment, furniture (INSTAT)
[3] https://www.bankofalbania.org/rc/doc/Tendencat_ne_kreditim_TETOR_2021_shqip_web_19857.pdf
[4] https://www.bankofalbania.org/rc/doc/Tendencat_ne_kreditim_prill_2021_shqip_web_18851.pdf
[5] At the end of June 2021, the average salary is 56,701 ALL / month (INSTAT), while in 2011 it was 46,665 ALL / month
[6] In 2020, tax collection on salaries (public and private sector) is ALL 21.9 billion. In 2010 the receipts were ALL 16.5 billion
[7] In 2020, the collections from the individual capital tax are ALL 12 billion. In 2010 the receipts were ALL 7.6 billion

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