Unstable economy and finances: How much do they cost us?

Our economy has been experiencing a long-term decline in its overall competitiveness in the international market not only against neighboring economies but also with other countries that are part of the Mediterranean basin.

All this relationship between the economy and the market, already unequal for decades, has contributed to maintaining a high deficit in the trade account in general goods and services. As can be seen from the INSTAT data for the period 2010-2020, the negative balance between imports and exports comes with a high share 10 years ago (-22.7% of GDP) with a downward trend after 2011 reaching the point lowest in 2018. But shortly thereafter slight increase began.

The economy has experienced particularly sharp fluctuations in its trade competitiveness, realizing that it continues to be particularly exposed to external economic “shocks”, such as the economies of European Union countries, which are the main partners in demand for Albanian goods and services, but also due to fluctuations in energy exports and prices of oil and mineral products.

Source: INSTAT

On the other hand, although decisions on the conduct of economic relations have been taken regularly with a focus on profitability or protection from the financial sector, what has actually resulted has been an effect that has not served the interests of the economy in its broadest sense. Even the financial sector has not managed to take steps forward in terms of market expansion, as well as increasing lending with the lower cost for economy. Meanwhile, non-performing loans of the financial sector after 2016 have had a significant decline, reaching the lowest level of the decade by -8.1%, August 2020, mainly with impacts from the effects of natural disasters. 

Source: BoA

However, due to the high informality of the economy, money in circulation is still mostly outside the financial sector. In 2019, money outside banks was at levels as high as 22.1% of total money in circulation, reaching high levels again, which had not been repeated since 2009.

In fact, people seem to have less confidence in banks and other institutions, already influenced also by the uncertainty created by the pandemic situation. Meanwhile, higher interest rates on loans to businesses are another indicator that shows instability and lack of confidence in the efficiency of the financial market.

If we look at hard lending terms for small and medium businesses as well as startups, it is another indicator of an unsustainable market. Thus, Albania ranks last in the region for the level of lending in relation to GDP (at level of 33%) having a very small increase in lending from year to year.

According to fiscal data of recent years, it is a fact that the economy has not been affected by the budget deficit. But this fact in the analysis of the deficit relationship with both sides of the budget shows its situation of fiscal “anemia”. Expenditures have been kept under control and adjusted to the poor performance of revenues by realizing those parts of expenditures that have not affected the further increase of the deficit, and as a result, a part of the projects that have been needed to be developed have been kept limited contrary to the budget forecast.

The economy as a whole has not strengthened over the last decade although attempts have been made to use the financial sector as a support tool, but generally given the problems of “anorexia” and the weak development of the financial sector have been used to finance external lending, through Eurobond.

This borrowing is timely, as long as the European financial market is in difficult situations with the market demand for money and of course this applies to Albania, as a low-cost debt to the economy has been obtained. But when the use of external debt in a good part of it goes to pay off old debts and current interest rates will be more costly in the future, due to its non-introduction in terms of economic competitiveness, but generally in function of the financial system. This means that the current model of the economy and financial market seriously risks not being able to withstand any further serious shocks in the financial sector. 

The threat of a liquidity risk for Albania is not problematic, as lending is in fact with many problems in its exposure to the Albanian market being threatened by chronic “diseases” of the market, such as: informality, sensitive high rate of evasion, and the level of corruption in every sector of the economy.

Since Albania is particularly sensitive to external shocks and this makes the economic situation unstable, in itself it means that further shocks, such as: impact from pandemics or even natural disasters that are inevitable, will likely affect poor trade, financial and fiscal balance indicators. 

Policymakers do not seem to have assessed the risks that the financial sector may have and how it affects the economy, giving effects of instability to tax revenues, derived from financial ones. 

The conclusion of the analysis shows that the current model of the economy is fundamentally unstable and is in great danger of imposing further substantial burdens on today and tomorrow taxpayers.