The governance approach needs to be changed

At first glance, it seems that now that we have entered the second six months of 2023, there are no chances for further price increases. This perception is based on the official inflation indicator in the country, which fell to 4.7%, leaving the 7.9% level of last year. But, while we pay with Lek in hand instead of prices in Euros, until today tolerated by financial institutions, informality and informal money are not leaving room for price reduction. Meanwhile, even though the government’s fear of a pessimistic performance for the economy has disappeared and the Bank of Albania itself has felt more comfortable with the effect of the increase in interest rates, most of the population and the formal part of the economy are feeling many burdens on themselves, starting from cost overruns to high-level corruption that has driven up its prices.

The problem is that the effect of inflation has not really subsided. The price increase has already spread on a broader basis. So, public, and private salaries, as well as pensions together with packages that increased by about 7% in the last year can hardly be called further growth. For the economy, although the energy and fuel price shock has faded, their core inflation has remained stubborn and frustrating.

Meanwhile, Albania’s Ministry of Finance is showing caution with budget spending, in contrast to the rest of the rich world, where many governments are adding fuel to the inflationary fire by running budget deficits of a scale usually seen during deep economic downturns. .
Rising interest rates threaten financial stability in the eurozone’s most indebted member states, especially Italy, its main trading partner.

Investors are hoping that central banks can return inflation to their 2%-3% targets without triggering a recession.

But history suggests that the decline in inflation will be painful and long-lasting.

Moreover, the internal forces driving inflation in the country are likely to strengthen, taking advantage of a situation that is little controlled by institutions dampened by corruption and lack of legal accountability. This chaotic institutional situation, which until a few years ago had several functional mechanisms monitored by the Government, seems to have been forgotten just like the promises that are fulfilled extremely late and are no longer of interest to most of the market and people.

The Albanian economy and budget are at a crossroads with the breakdown of the status quo of political relations within the Balkans in recent months. Trade agreements now need to be revised to replace the current efficient supply chains with ones that guarantee long-term security even though they may be initially costly. Demands on the public purse to spend on everything from subsidies to defense will only intensify.

The Central Bank pledges that it is determined to meet its targets. By raising rates, it may have affected demand enough to reduce inflation.

But the costs of inducing an anti-inflationary policy, together with the long-term pressures on inflation, suggest a different scenario. The Central Bank should try to avoid further interest rate hikes just to meet its targets and instead study a scenario where it can live with higher inflation than the current monetary policy target, let’s say 4%.

On the other hand, it is necessary to change the governance approach since its current model has not been able to respond to the legal requirements for the needy classes and economy. We have mentioned more facts about this approach in our analyses and studies and those of other experts.

This whole current situation is the mirror where we look and notice that the political programs and the electoral approach have failed long ago in the framework of a multi-faceted reformation. The whole situation of the last few years is summed up in more actions and measures that are not effectively related to each other and headed by corruption at top-down levels. This approach, where the lack of expertise within the institutions is at the limits of survival, is increasingly damaging the long-term economic performance, continuing the inability to make Albania anything more than a country with an uncertain economic future.

Now the government has shown that it cannot even fulfill the first and greatest responsibility of a leadership, to guarantee the security of the state by exposing the country and the people to the risk of informality-based activities and money laundering with political support.

Whether the amortization of the governing model comes soon, or in months or years, it is emerging as a misstep for the country’s leadership and would show political responsibility to join the fledgling political elite.

Moreover, in a world where power is everything, the Prime Minister now looks like a weakened leader, precisely because of the waste of opportunities and resources.

A dozen individuals who serve as an epitome of everything that is the opposite of the system, we love are now the loyal shield used to alibi some of the most serious actions at home and abroad.

The way they are using the state, its resources and the assets of the country and the contribution of the people are showing how much the public agencies have eroded in the wrong direction.

At this moment, it seems as if from this whole model of power corruption, we will see a situation of weakness of the Rama government. The political reality and civic perception are that the survival of government, even in weaker times than today, can continue for a long time if there is no obvious alternative and if there are still many individuals who are surviving in politics on the side of an old and poisonous spirits.

However, two factors are working against the current governance model. The first is the government itself with its actions and recklessness. The counteroffensive of economic reality continues to make steady progress, and this is a rising tide that is slowly approaching the day of reckoning in the absence of accountability and inclusiveness.

The theory of the survival of not only this government is that if everything that the West and its strategic allies require is assessed as fully fulfilled, then with only a few small problems, this does not disturb the peace of the government’s survival.

In this case, for all the massive part that does not agree with this model of governance, if the new and old challenges are not achieving the progress that is needed and programmed for a long time, then preparing the voters for the break from the current model is what should be done. be the main objective of the uncaptured civil society, the individuals who are losing from this model and the young people who have the right ambitions to move it forward without the rampant corruption.

The second problem is the economy.

Last year it held up well, thanks to oil and consumer goods prices that rose when the war in Ukraine began. This cost was paid by the poor population, the middle class and the businesses that make up most businesses.

The money that supplies various parts of the informal economy, including construction, has continued and the government still has enough money after taking on domestic and foreign debts. Although economic growth is volatile, an economic crisis seems unlikely, at least this year.

However, the Prime Minister, Mr. Rama does not have all the resources to fulfill the political program as it wants to supply the electoral propaganda machine.

Income from dirty money that has been used in bulk during 2022[1] both from inflows from abroad, but also those that are undeclared in the formal system within the country, as well as those that are expected to come from legal initiatives for the legalization of cannabis for export purposes etc.[2] may not be fulfilled as planned.

The gap between government spending (including huge infrastructure costs) and revenue will widen even though keeping the Lek overvalued may help budget accounts and official statistics that are already being looked at with suspicion even by the Albanian Eurobond exit study[3].

But in the Albanian market, the Leku has lost almost 20% of its value in commodities market compared to last year.

This form of keeping indicators using instruments with short-term impacts may seem positive, but negative for most citizens and the productive economy.

[1] 34.7% of foreign investments or converted to 475 million Euros come from money laundering jurisdictions
[2] Gambling, cryptocurrencies, inaction of institutions
[3] https://www.rns-pdf.londonstockexchange.com/rns/5872C_1-2023-6-13.pdf