The economy recorded positive developments in 2008. Albania maintained macroeconomic stability and continued with structural reforms aimed at advancing economic efficiency and further solid development. In general, economic developments were in line with the mid-term budget programming envisaged for economic development. Business stimulation through facilities, fiscal incentives and administrative policies had a positive impact on business performance.

Continuous infrastructure upgrading, technology transfer and human capacity development gave an impetus to the overall plan of economic efficiency, which will be progressively transformed into a factor of economic growth.

 

Real economic growth was 7.2 percent in 2008. Both average and annual inflation were the lowest in the region, 3.4 and 2.2 respectively. Unemployment fell to 12.7% and salaries increased significantly in most sectors, including the public one. Current account deficit widened to 14.9% of GDP against 10.5% in 2009. Exports grew by 17% and imports by 15%; trade deficit was 27.5% of GDP compared to 26.5% in 2007 due to the high share of imports. Imports would have been lower if not for considerable import of machinery, equipment and other materials used mainly in public infrastructure investment. Annual decline of remittances by 12% affected current account deficit considerably.

 

However, current account deficit was widely covered by foreign capital inflows resulting in a surplus of balance of payments. Foreign reserve increased by round 192 million EUR and foreign reserve stock is safely sufficient to cover around 4 months of imports. Despite current deficit, general external position looks more positive considering that half of the current deficit is covered from non-debt capital inflows, i.e. from foreign direct investment (FDI).

FDI inflows continued to grow considerably through 2009, despite the high increase of 86% in 2007. Net FDI grew by 36% in 2008, because of privatisation inflow and a considerable share from greenfield investment in various sectors. Central government budget was executed generally in line with the plan. Both revenue collection and total expenditure execution were around 2.5% less than the respective projection, resulting in a targeted fiscal deficit of 5.5% of GDP. Revenue was 1% of GDP more than the previous year, or 26.7% of GDP. Tax and customs revenue fell short of the targeted plan by only 2%.

 

Current expenditure was 2.7% less than the projected plan and capital expenditure reached 99.7%, the highest figure in the last decade, or 8.5% of GDP. The deficit of 5.5% of GDP was covered from internal debt by 1.4% of GDP, 0.5% of GDP from privatisation capital and the rest of 3.3% of GDP was financed with external debt.

 

Real economic growth was around 4.8% in 2009, or around 2% less than the 7% potential growth of real economy. To mitigate the negative impact of the crisis, authorities planned and started implementing a series of crisis response measures. Monetary and fiscal policies were planned in full coordination with each-other.

 

Table 1. Macroeconomic situation

Source: INSTAT, Ministry of Finance, IMF.

Source: Bank of Albania.

 

Albanian economy recorded a real growth of 7-8 percent in 2008. GDP quarterly[1] growth in 2008 stood at 8%. Growth was supported by a good performance of the extracting and processing industry, a considerable boost of the construction sector driven mainly by large public investments, and positive developments in agriculture and energy in the wake of a difficult year. Also, services such as telecommunications, financial activities and education recorded significant increase in 2008.

Aggregate supply showed high investments driven by public investment and private technological investment made by domestic and foreign investors, a normal consumption rising trend and a high increase of exports of goods versus imports. However, high exports meant that net exports of goods and services contributed less to economic growth – by 3.5% compared to 5.2% in 2007.

This positive trend is supported also by other short-term (quarterly) indicators, such as the turnover indicator, employment index, index[2] of wages and salaries clearly shows higher sales by businesses during 2008 in almost all the sectors represented by this index, except the extracting industry which recorded a downward trend compared to the last two years; even sales in this sector were even lower in the fourth quarter of 2008 compared to the same period the previous year. In 2007, this industry experienced a boom in terms of production and sales, but by the end of 2008 there was a sharp decline of demand by commercial partners due to the global crisis.

Positive developments were manifested also in the labour market. Referring to the Employment Index and the Wages Index, the total number of employees in economy sectors' activities grew in average by 14% during the first 9 months of 2008, whereas the wages fund increased by around 31%, which means that real wages increased. Also other administrative indicators fall in line with these statistical indicators.

Unemployment rate decreased to 12.7% by the end of 2008 from 13.2 by the end of 2007. Employment in non-agricultural private sector grew by 9 000 persons or by 4% compared to 2007. Private agriculture sector accounts for the highest employment share with 26 500 employees more than the previous year, or 5% more in relative terms. Employment in public sector maintained almost the same level, with 500 employees less during 2008. Average monthly salary in this sector increased by around 7.5%, whereas minimum reference salary increased by around 21.5%. Unemployment fell by 1% and the number of people benefiting unemployment benefit grew by around 4%.

Neither quarterly PBB growth, nor any other statistical indicator (for example Sales Index, Production Index and Turnover Index) manifest any significant slowdown of overall economic growth during the last quarter of 2008.

GDP grew by 2.5% in the fourth quarter 2008 compared to the same period the previous year, or by 2% in 2007 and by 0.8% in 2006. In annual terms, GDP recorded an 8.6% increase in the fourth quarter 2008. This figure was 8.1% in 2007 and 7.3% in 2006. However, the extracting industry exhibited a significant slowdown in the last quarter of 2008, due to the decreased international demand for these products and decline of prices of minerals and main products exported by this industry.

Since statistical short-term indicators that represent the real sector performance during the first quarter 2009 are not published yet, an analysis of "indirect" indicators of tax performance such as VAT, Income Tax and Excise Duty collected by the tax administration (tax on production and consumption and significantly correlated to these variables) shows no clear evidence of slowdown of domestic production (at least for domestically consumed products – excluding exports).

Revenue from gross VAT (including reimbursed VAT) increased by 11% in the first quarter 2009, or by 10.7% in net terms. Income tax revenue grew by 25%. Revenue from excise domestic goods recorded an increase of 19%.

Exports of goods fell by 5% in annual terms during the first quarter[3], not including 830 million ALL of energy export value. Growth slowdown is supposed also in service sectors directly linked with foreign trade, such as commerce and transport. Imports fell by 4% in the first quarter.

Referring to Foreign Trade Statistics, imports decreased by 4.4% in annual terms during the first two months. Fuels and energy declined by round 30%, affecting the total import decrease with 6 percentage points. Imported fuels increased by 2% in terms of quantity, but in value terms they fell due to rapid decline of prices, implicating reduced cost and higher added value for an output unit. Shrinking import of electric energy had a considerable effect in the reduction of imports, consequently brining increased added value in economy.

Imports of goods used in manufacturing recorded a clear increase, implying for a solid increase of production and domestic sales. Imports of chemicals and plastic material grew by 14% and contributing by 1.3% to total imports; imported construction material and metals increased by 20%, with 2.7% share in total imports.

2008 is characterised by significant values of energy production and consumption. Statistics on energy generation and use show a prevalence of household consumption which added to network losses accounts for 67% of total energy used.

During this year, domestic electric energy production, particularly in hydro power plants, recorded maximum levels, mainly due to favourable climatic conditions and good management through the year. However, there is still a need for new alternative energy sources. Improved economic immunity against hydro-energy resources constitutes a major national priority of strategic character.

The annual inflation rate was 3.4% in 2008, remaining with the Bank of Albania target range of 3 ± 1. Inflation pressures emerged in the first month of 2008, just like the previous year. As a result of increased prices of some imported goods, average inflation rate rose to 4% during the first half of 2008. In the second half, decreased prices of raw material in international markets and the positive contribution of domestic aquaculture products alleviated domestic inflation pressure. Reduced fluctuation of labour supply and macroeconomic stability helped in the normalisation of inflation within the targeted range. Lowest inflation was 2.2% in the end of 2008.

Inflation during the first quarter showed a declining trend in line with inflation developments in international economies. Annual average inflation rate in the first quarter 2009 stood at 1.9%. In the first quarter, the lek depreciated characterised by fluctuations, loosing 5% against the Euro; in March, the lek stabilised.

Annual average inflation in 2008 reflected high prices of some basic food products and fuels. In the fourth quarter and particularly in the third quarter, favourable climate conditions boosted domestic demand, thus pressuring some unprocessed seasonal food prices to decline. On the other hand, inflation rate in the second half of the year reflected the global trend of falling consumption prices, particularly of foods and fuels. Low inflation of virtually all categories influenced in the total inflation during the second half of 2008.

"Processed food products" recorded a significant decrease in the second half of 2008, as a result of smoother inflation pressure from international markets and lower bread prices. However, "processed food products" continue to represent the main share in the total inflation rate; this share halved in the end of 2008 compared to February-June. Annual inflation of "unprocessed food products" recorded negative values during the whole year, falling with averagely 2.3% since December 2007.

Prices of the category "Services" showed an upward trend during 2008, explained by the increasing prices of restaurant and hotel services and particularly more expensive transport services due to the oil price crisis in the beginning of the year.

The category "Housing" recorded low values in 2008, owing to relatively stable renting prices, albeit being affected by the effects of new house prices in 2008.

Prices of "Administered goods" increased in average by 3.6% during the second half of 2008. Annual inflation for this category continued to decline from March onwards, immediately with the increased energy prices. In the second quarter, average growth was 6.2% and in the last quarter this growth fell to 2% due to falling prices of "communications" category by around 19.2%.

Other categories that contributed to the decline of annual inflation rate include "long-term consumption products" and "non-food consumption goods"; their prices recorded a falling trend through the second half of 2008.

 

 

Nominal exchange rate reflected a series of developments in 2008. Albanian currency continued to appreciate against main foreign currencies during January-April, with the highest appreciation in April (6.2% in annual average terms). The following two quarters manifested a slowdown of annual increase (1.4% in September) and a depreciation trend in the third quarter (averagely -3.2%).

Depreciation of lek against main foreign currencies showed a relative waning of bumper effect played by the exchange rate on imported inflation. In annual terms, the lek depreciated against the US dollar and the Euro by 13.1% and 1.2% respectively in the fourth quarter. Annual average exchange rate in 2008 stood at 83.89 lek vis-à-vis the US dollar and 122.80 lek against the Euro.

Interest rates in the inter-banking market showed an upward tendency in the second half of the year and fluctuations particularly in September-November. During this period, the banking system continued to manifest shortages of liquidity. Bank of Albania injected liquidity through operations in the open market through mutual re-purchase agreements of weekly basis.

The balance of payments was positive during 2008. The total balance of payments showed an increase of foreign currency reserve by 192 million Euro. Current accounts recorded a deficit of 1,319 million Euro compared to 831 million Euro the previous year. Current deficit against the GDP stood at 14.9% in 2008, with a significant increase compared to 10.5% in 2007. This deficit implies the high deficit in goods (from 2,104 million to 2,432 million Euro). Trade deficit in 2008 was 27.5% of GDP against 26.5% in 2007. Annual exports grew by 17% and reached 918 million Euro, while imports grew by around 15% compared to the previous year. Imports and exports ratio remained unchanged to 27%. Highest trade deficit was recorded in the fourth quarter (741 million Euro) and it was the main factor in the depreciation of lek against the Euro in the first months of 2009.

Payments for imports increased particularly for these categories: machinery and equipment (24%), processed goods (12%) and fuels (265). These three categories combined represent 60% of total imports value. So, main factors contributing to rising imports and consequently to widened current account deficit are mainly due to increased business activity which continued to increase capital investment and the demand for goods for the manufacturing process. In 2009, imports of some of these goods are expected to decrease, both capital and energy, and the trade balance and current account deficit are expected to return to normal rates. Exports of textile and footwear industry fell slightly, but continued to top the export categories, and accounted for 43% of total exports revenue. In the meantime, there were positive developments in the exports of domestic mining products and minerals.

Net current transfers were estimated at 934 million Euro, 833 million of which were monetary inflows in the form of remittances. Annual remittances were down by 12% of 950 million Euro the previous year, falling from 12% to 9.2% of GDP.

Financial account was characterised by significant fluctuations in 2008 and recorded a net inflow of 1,533 million Euro; 78 million of these were capital investment in the form of grants, while 1,455 million in the form of net financial fluxes. Capital inflow financed a large current account deficit of 1,319 million Euro, ensuring increased foreign currency reserve by 192 million Euro. Most distinctive items were foreign direct investment, state borrowing and currency from residents abroad. FDI inflow in the Albanian economy (653 million Euro) dominated capital inflow. This year, these investments flowed in the financial sector, in telecommunications and as privatisation capital.

Disbursement of long-term credit and favourable loans from foreign crediting is estimated at 463 million Euro in 2008, 74% of which for the public sector, mainly public investment.

Foreign currency invested outside the Albanian economy in 2008 recorded a net decline of 94 million Euro. This is reflected mainly in investment in the form of banking deposits in non-resident financial institutions. The banking system opted to switch from currency deposits to investment portfolio during 2008. Portfolio investment reported an annual increase of 69 million Euro.

Currency inflow in the form of financial capital was reflected in the increased foreign currency reserves. International reserve increased by 192 million Euro. In the end of 2008, international reserve stock was preserved at 1,695 million Euro, enough to cover 4.2 months of imports.

 

In parallel to structural reforms, a stimulating fiscal policy was pursued during 2008, by reducing tax burden and enhancing public investment. So, profit tax was reduced by 50% and fight against unfair competition/fiscal evasion was intensified. Profit tax reduction was a great impetus for businesses and spared them 18 billion ALL. Public investment showed a strong increase particularly in road infrastructure projects. The boost in public investments was supported by the improved performance of tax collection, mainly due to more concentrated measures against tax evasion and to external borrowing. Internal borrowing as a percentage of GDP maintained the same level of 2007, thus ensuring that public investment increase would not have a negative impact on the crediting of private sector.

 

Budget revenue in 2008

 

State budget revenue amounted to 290 billion ALL, or 26.71% of GDP in 2008, against 25.77% in 2007. Compared to 2007, revenue increased by 15.3% and this represents the highest figure in the last decade, or 5.5% more than the average of 2001-2007 period.

 

Tax revenue amounted to 264 billion ALL against the targeted 270,9 billion ALL, resulting in 6,9 billion less or 97.46% of the targeted objective. Tax revenue in 2008 are 35.9 billion ALL more or 15.7 more than in 2007, despite the significantly reduction of profit tax by 50%.

 

2008 VAT revenue rose to 107 billion ALL against the targeted 106,9 billion ALL, accounting for 190 million ALL more than the targeted objective. 2008 VAT revenue represent 19.3 billion ALL more or 22% more than in 2007. Revenue increased to 9.8% of GDP against 9% in 2007, 7.9% in 2005 and 7.4% in 2002.

 

2008 Profit tax revenue amounted to 18.1 billion ALL against 21 billion ALL in 2007, which means 14% less with a taxation base halved. This implied that administrative improvements or better reduction of tax evasion related to profit tax was over 50%.

 

Profit tax reduction encouraged the business significantly. If profit tax rate had not been changed and stood the same as in 2005, budget revenue in 2008 would have 40 billion ALL specifically from profit tax collection. In other terms, reduction of profit tax from 23% in 2005 to 10% in 2008 alleviated the business from a tax burden equal to 30 billion ALL. In spite of the reduced profit tax, the 2008 targeted plan was met by 98.3%, with a difference of 312 million ALL.

 

Revenue from excise duties in 2008 stood at 28.7 billion ALL against the targeted 32.5 billion ALL, or 2.9 billion ALL less. In comparison to 2007, excise revenue grew by around 3.7 billion ALL and maintained roughly the same level with 2007 of 2.9% of GDP. Despite missing the objective, clearance of cigarettes in 2008 increased by 19.5% or by 676 tons compared to 2007, amounting to 4,143 tons.

 

Revenue from income tax was estimated at 24,4 billion ALL, or 1,1 billion ALL more than the targeted objective (+4,78%) in 2008. Income tax revenue rose to 2.24% of GDP from 1.5% of GDP in 2007, 0.9% in 2005 and 1% in 2002, thus recording the highest increase in the last years.

Compared to the same period the previous year, this revenue maintained the rising trend and resulted in the collection of 9.5 million ALL more than in 2007. This figure is three times more compared to 2005 performance.

 

Customs revenue in 2008 were 8.6 billion ALL from the targeted 9.4 billion ALL, representing 92.02% of the targeted objective and missing on 751 million ALL. Also compared to the previous year, customs revenue fell by 1.1 billion ALL.

 

National taxes including circulation tax amount to 14.4 billion ALL against the targeted 16.2 billion ALL, representing 88.96% of the targeted objective and 1.7 billion ALL less. This performance was partly affected by the amendment of the law on national taxes in mid 2008 which reduced the number of national taxes from 21 to 6.

 

Social insurance contributions in 2008 account for 47.6 billion ALL against the targeted 48.15 billion ALL, representing 98.83% of the targeted objective and 565 million ALL less. However, social insurance contributions collected in 2008 are 5.5 billion ALL more than the previous year, or 13% more. In respect to GDP, social insurance contribution maintained the similar level of 4.4% of GDP as in 2007.

Non-tax revenue amounted to 22.9 billion ALL against the targeted 24.7 billion ALL, representing 92.69% of the targeted objective and missing on 1.8 billion ALL. Nevertheless, non-tax revenue increased by 764 million ALL compared to 2007.

 

Customs revenue

VAT collection performance realised the targeted plan by 89.12%, or 10.3 billion ALL against the planned 11.6 billion ALL, with 1.27 billion ALL less.

VAT collection accounts for 260 million ALL less than the same period the previous year. Reduction of imports by 17% compared to the same period had a direct impact on VAT revenue, although they fell only by 2.4%; this means that imports structure has improved.

Customs duties collection accounts for 8% more than the targeted objective, with 991 million ALL against 914 million ALL planned. Reduction of customs tariffs because of contractual obligations account for 435 million ALL less in customs tariffs than the same period in 2008.

Excise duty revenue stood at 3 billion ALL against the targeted 3.6 billion ALL, representing 82.33% of the targeted objective or missing on 641 million ALL. However, this performance accounts for 203 million ALL more than the same period of the previous year.

 

Performance during January-February 2009

Tax revenue

Tax revenue performance met the targeted objective by 99.4%, whereas health and social insurance contributions collection met the targeted objective by 104.35%. In total, tax revenue amounted to 25.3 billion ALL, with 8.9 billion ALL from health and social insurance contributions.

Income tax revenue amounted to 4 billion ALL from the targeted objective of 3.4 billion ALL, representing a positive performance of 18% over the objective. Income tax revenue increased by 29% compared to the previous year.

Profit tax revenue amounted to 2.4 million all against the projected 2.8 billion ALL: 391 million ALL less or 86% of the targeted plan. However, compared to the same period of the previous year, there were collected 264 million ALL more or 12%.

Revenue from national taxes amount to 2.4 billion ALL against the projected 2.3 billion ALL, meeting the targeted plan by 104.17%. Compared to the same period of the previous year, this group of taxes showed a slight increase of 61 million ALL. The comparison with previous year is not quite reliable, because the group of national taxes in 2009 includes only some of the taxes represented in this group in previous years.

Performance of excise duty collection amounts to 68.5% of the targeted plan, or 1,3 billion ALL against the projected 1.9 billion ALL, missing on 622 billion ALL. Revenue collected this year are lower than the same period last year by around 198 million ALL or 13%.

VAT revenue represent 6.2 billion ALL against the targeted 6 billion ALL, representing 103.01% of the targeted plan. Compared to the same period of 2008, VAT revenue increased by 620 million ALL or by 11%.

 

Financial crisis response measures

Complicated economic situation projected for a considerable number of world economies constitutes a potential risk to our economy. However, it should be said that the engines of Albania's economic development rest on the domestic market and domestic economic operators; for this reason, Albanian economy is in a relatively protected against non-favourable international developments.

Fiscal policy pursued during this period has been and shall continue to be focused on minimising negative impacts on our economy. This policy is fully coordinated with the monetary policy in order to generate an optimal mix of macroeconomic policies.

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