Reforms, technology and leadership will help Albanians toward the next storm

Albanian GDP growth is now back in the levels it was a decade ago, and its unemployment rate is at an eleven-year low, with the program-era labor reform facilitating formalization and job creation.

Its business climate is more attractive to investors. So, in the years 2004-2006 it used to take almost more than a month (40 days) to start a business. Now (2016-2018) it takes only five days.

Its economy has rebalanced to become more export-oriented, including a more oriented to regional market of the tourism sector and energy generation, leading the external current account to move from chronic deficits of around 20 percent of GDP to 11 percent.

It has made impressive progress in cutting the fiscal deficit and reducing borrowing costs, especially in latest years.

But, when we see that picture of economy of Albania in the global European and regional economic picture, we check that risks in the rest of the world are increasing and will likely constitute the most significant source of instability for the Albanian economy. So, pursuing reforms today might be difficult, but these reforms will help during next storm.

Let be true, the facts do not show yet the near recession, but downside risks have clearly risen in the neighbors of Albania and main trade partners.

What are the challenges?

A slowdown in EU and especially the slowdown in main trade actors with Albania such as Italy, Turkey, Greece could lower the export target of Albanian goods for 2019 and beyond.  Although the transition to lower, more sustainable growth is welcome, there is a risk that the deceleration in Italy and Turkey could be faster than expected. Even if new stimulus in EU countries is effective, it is being targeted at relatively less import-intensive activities, and not in view of increasing investment outside the EU. So the rest of the Balkan might still feel a deceleration. Germany, has some difficulties in the auto sector and lower external demand, which will weigh on growth in 2019, and for Italy is the same, where sovereign and financial risks are adding headwinds to growth. In general, growth forecast for 2019 in the Euro Area is 1.6 percent, a 0.3 percentage point reduction compared to the forecast just some months before.

Growth of trade barriers. The recent move by the Kosovo government to apply the trade barriers to Serbian and Bosnian goods can affect 0.2-0.5 percent of Albania’s economic growth, as supply chains are deteriorating and the investment environment becomes more uncertain due to the aggravation of regional political relations. This situation, although it seems to Albania as a good opportunity to increase exports, is in fact not easy to be feasible in commercial practice. The main problem of replacing Serbian-Bosnian trade partners is tariff and non-tariff barriers, as well as logistics to reach the Kosovo consumer market. This reality is also apparent from foreign trade statistics for Albania since the official statistics, as well as the confirmations of Albanian exporters, does not appear to have a saturation of trade gap caused by 100% taxation on Serbian-Bosnian goods. Meanwhile, Albania has a growing trend of trade accounts with Serbia, where trade exchanges with Serbia in comparison to other Western Balkan countries account for 34% of the total. This difficult relationship between the three Western Balkan states (Kosovo, Serbia, Bosnia), following the imposition of a special government tax (though political in nature), will increase the possibility of trade cooperation between Serbia-Montenegro and Northern Macedonia by turning de facto this route in a new chain of commodity circulation deviated from the Kosovo movement in the regional market.

Knowing the situation, which economy will go through the economic challenges ahead will require Albanian leaders to have a clear sense of direction and steady but decisive will on the next economic productivity. The current environment still offers the opportunity to advance policies and reforms and build fiscal and financial scenarios for sustainable, robust, and inclusive growth. Albanian leaders need to take advantage of this moment, despite the current position in relation to their neighbors and the economy.

Structural reforms are the very serious problem for economy to boost saving, investment and productivity. All these basic elements of economy are essential to raise living standards while helping the economy growth in qualitative way, reducing existing vulnerabilities and risk externalities. 

Key steps include making the labor market work better, simplifying regulations, and improving the efficiency of judicial processes. These reforms can be targeted in a way that shield the poorest in society and reduce the inequality, which in the last years has been increased.

A timeline for the future technology. All countries are undergoing a period of fast technological change which will reshape the way we live and work. These changes cannot be ignored, and it is critical that Albanians should be prepared, starting from regulatory framework and infrastructure that help consumers and economy to be cost profit and real competitive with other countries of Western Balkans. Developing an education system, like supply chain system in the good circulation that is geared for the needs of the future workforce.

Many of the challenges facing us today transcend national borders and require coordinated responses. Some countries in the Western Balkans have not made sufficient progress during 2018 in cutting deficits and placing their debts on a downward path. Reducing the risk at national level is really necessary for the predictability of regional risk with the aim that they all interact from one country to another and affect the applicability and effectiveness of each country.

On this occasion the primary action is about boosting productive spending targeted at raising potential growth. This would have further positive outreach to other neighboring economies that borrow and copy politics from one another. This move will be a step forward in influencing the objectives that need to be set for sharing between the countries of the region, both in the public and private sectors, but by weighing this approach to fiscal capacity, which should be be fully able to withstand external and internal treasures. This action will be a step forward to enhance risk-sharing, in both the public and private sectors, but still should be measured with fully capable central fiscal capacity.

The second action for Albanians is the intensity of cross-border private sector risk-sharing through the financial markets, or better said, a much deeper financial sector union. This means advancing the Union of Albanian Financial Market, to facilitate more cross-border investment diversification through traded financial instruments. It also means that full-cycle cooperation of banks that are resident in these countries should be effective in this regard.

Albanians are well placed to benefit from this technological revolution. It has long been an outward-facing country and is successfully reorienting its economy towards technology and innovation. The Albanians could engage the sources and capacities to build a service area where to be a shelter for big tech companies.