The downward projection of domestic production needs to be read carefully

The latest publication of the Monetary Fund (World Economic Outlook, April 2022)[1], which follows the publications by the World Bank and the European Bank for Reconstruction and Development show an even darker situation of the economy, through the downward projection of economies of the Western Balkans, where in the case of Albania it is the lowest (only 2%).

When we look at the projected growth indicators in neighboring countries, it is noticeable that the largest growth for 2022 is projected in Serbia and Montenegro, with 3.5% and 3.8% growth, respectively. The development of their economy is projected at even higher rates for 2023. Meanwhile, the economic growth of North Macedonia, Kosovo and Bosnia and Herzegovina are projected for 2022, respectively by 3.2%, 2.8% and 2.4% growth.

Albania lags behind Bosnia-Herzegovina and Northern Macedonia in the 2023 forecasts.

Accommodation policies during the acute phase of the COVID-19 crisis seem to have had a better impact on the countries of the region, mitigating overall economic costs by providing sufficient and cheap liquidity to households and many affected businesses. Meanwhile, the consequences have turned out to be different regarding budget deficits in each country. Albania, Kosovo and Montenegro have the highest levels of expenditure ratios compared to revenues, but each of the countries has oriented expenditures to different levels. Albania has directed less budget funds for the pandemic and more for infrastructure and investment projects. Kosovo and less Montenegro have directed more funds to the social strata.

The war in Ukraine is exacerbating the economic forces at work, which contributed to the recovery from the pandemic. The war has further boosted commodity prices and intensified supply disruptions, boosting inflation.

The fiscal policy space has been eroded by the required higher COVID-related expenditures and lower tax revenues in 2020–2021.

In Albania, massive investments in the civil construction sector (reconstruction) with budget funds, at the height of the pandemic, seem to be forcing the government to face the rising costs of borrowing and the uncertain model of sustainable economic growth.

The lack of labor supply, especially in labor-intensive sectors, means that wage growth must be seen in the light of rapid growth. This is due to the fact that real wages have generally fallen because consumer price inflation has risen faster than nominal wages. Meanwhile, labor force participation rates generally remain below pre-pandemic levels.

Given this whole situation, that is difficult to predict accurately. Restoring consumer confidence, as well as performing neglected tasks due to the pandemic and the way public finances are managed by each state is first and foremost an obligation for citizens. If confidence is not restored, then an even stronger crisis may emerge leading to moments of harmful and devastating public debt crisis.

The probability of this outcome would increase significantly if monetary policy reacted even more strongly to inflationary pressures, as higher interest rates could lead to an erratic correction in current asset prices, including construction sector and transportation.

But, if these policies are made again in conditions when evasion and money laundering initiatives for Albania become political objectives, then there may be a sudden return of foreign and domestic capital flows, a factor that could jeopardize financial stability with consequences much stronger than to date.

[1] https://www.imf.org/-/media/Files/Publications/WEO/2022/April/English/text.ashx