Taxation as a growth engine: Albania between fiscal potential and institutional barriers

At a time when the debate over the efficiency of fiscal policies is more alive than ever, Albania stands as a typical case of an economy that has surpassed the minimal fiscal threshold for development, yet still struggles to build the structures needed to make this threshold truly transformative.

According to the ALTAX analysis (in Albanian), based on the IMF study “State Capacity, Institutions and Growth – Taxing for Takeoff,” Albania reached a tax revenue level of 18.4% of GDP in 2024, significantly above the critical 10% threshold the IMF considers as a turning point toward economic development.

This is a significant achievement: the country has generated the necessary “fiscal fuel” to power growth.
But the key question remains, does Albania have the “institutional and financial engine” to convert this energy into sustainable development?

An unbalanced Fiscal Capacity

At first glance, the figures seem encouraging. Tax revenues have increased, and the government has fiscal space for public investment. However, the structure of these revenues remains fragile. Over 65% come from indirect taxes, which are highly sensitive to consumption patterns and tourism seasonality, while the contribution of direct taxes and a broad tax base remains limited.

This heavy reliance on consumption and imports makes the fiscal base unstable. Furthermore, governance efficiency (46/100 according to WGI) and private sector credit (33.9% of GDP) show that the channels for converting this potential into sustainable growth are still weak.

The fragile Tripod of development

The ALTAX analysis defines the current situation as a “fragile tripod” where the three main pillars, fiscal policy, institutions, and finance remain out of balance:

1. Fiscality is above the minimal threshold but highly sensitive to economic fluctuations.
2. Public institutions operate with limited capacities, facing challenges in policy implementation and corruption control.
3. The financial system remains shallow, providing insufficient credit and long-term investment instruments.

Under these conditions, tax revenues create potential, but not sustainable development. As the analysis stresses, Albania has crossed the fiscal threshold, but not the institutional and financial ones.

Toward a new phase of fiscal policy

Drawing from the latest analytical insights, ALTAX proposes that Albania’s fiscal and development policy should be structured around three interlinked levels:

• Short term: Modernizing tax administration and formalizing the economy must be top priorities. Full implementation of e-invoicing, integrated with banks and customs, will enhance transparency and efficiency.
• Medium term: Deepening financial development and improving governance are essential. Guarantee mechanisms for SMEs, capital market development, and performance-based management in the public sector are necessary for a more resilient economy.
• Long term: Integration with EU standards and investment in human capital will enable sustainable growth and higher productivity.

From Potential to Reality

Albania stands at a decisive point in its development journey. Fiscal capacity exists, so the “fuel” is there, but to ignite the engine of growth, governance must be reformed, the rule of law strengthened, and the financial system deepened. Without these elements, growth remains cyclical, driven by seasonal factors, and not transformative in nature.

Compared with neighbors such as Serbia and North Macedonia, Albania has a comparable fiscal base but weaker institutions and financial depth. This makes a clear reform direction essential, one that unites taxation, investment, and institutional trust into a coherent development system.

In conclusion, as highlighted by ALTAX, the opportunity for “takeoff” exists, but only institutions and finance can make it real.
Albania has the tools, but not yet the structure, to turn them into sustainable growth. The time to build that engine is now; otherwise, the fiscal energy will burn out without moving the economy forward.

ALTAX – Fiscal Research and Analysis Center
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