Albania can expect its economy to grow by 2.9% this year according to the European Commission’s spring forecast, up from the autumn forecast with a slightly more gloomy 26%, but, despite this, the export sector will continue to face challenges due to social issues and the euro-lek exchange rate.
The Commission’s analysis shows a decrease in economic growth from 4.8% in 2022, partly due to a decrease in available credit for the private sector because of increased interest rates. The forecast for 2024 was also revised by the Commission, rising from a 3.4% projection in the autumn to 3.8% in the spring.
Overall, the report found that the Albanian economy grew due to high consumption and private investments. Consumption was boosted by growth in employment, wages, high foreign direct investment inflows and increased exports.
In addition, a good tourist season boosted the services sector, and increased prices meant increased profits for exporters.
Furthermore, business confidence improved since the autumn report across all sectors, but the increase in interest rates at the tail end of last year hampered further investment.
Despite upward pressures, the projection stated that consumption is expected to grow by 3% and will be supported by employment and wage growth.
While the GDP will likely grow by 2.9% by the end of the year, net exports are set to remain flat, while next year, growth will increase, and the unemployment rate will fall to 10.3%. Risk factors in achieving these projections include issues in the energy sector as it is almost totally dependent on hydropower and rainfall. In addition, labour shortages and high levels of migration remain a concern.
Inflation is projected to decrease to 4.6% in 2023 from its current rate of around 5%. The Bank of Albania raised the key interest rate to 3% to cope with inflationary pressures and is set to continue normalising the stance of monetary policy.
While import prices are falling and price pressures from the domestic market are diminishing, inflation is expected to approach the 3% target in 2024
Meanwhile, last week, the euro fell to a historic low against the lek with an exchange rate of 110.73 lek to each euro, according to the central bank of Albania.
The situation was due to a large influx of euros in the market, combined with increased direct foreign investment and an uptick in exports over the last year. The situation was also likely compounded due to the local elections held on 14 May.
Representatives of export businesses asked the government to take action as the rate is problematic for those exporting goods that are paid for in euros, then having to pay staff and local bills in lek. They say that many are at risk of bankruptcy if the trend continues.
On Thursday of last week, the Ministry of Finance and Economy announced short-term measures to alleviate the situation.
Firstly, VAT refunds for exporters, which previously took 30 days to be processed, will now be processed in three days. Secondly, there will be a prepayment of profit tax instalments for all exporting companies that export more than 70% of their products.
Additionally, a working group will be set up with the Bank of Albania, exporters and the Association of Banks to discuss further action.
But by Tuesday, the euro had risen to a high not seen since 20 April, with one euro equivalent to 111.89 lek, an increase of 0.58 from Monday.
The rapid recovery of the euro in the foreign exchange rate is following a trajectory similar to the end of last year. According to foreign exchange agents, one reason that explains this increase may have been the creation of expectations that the euro would rise again after the elections.
This is believed to have led to strong demand to buy euros, especially after Friday, and has pushed the euro to its highest level in almost a month, bringing a glimmer of hope for export businesses.
However, with the tourism season looming with record figures of visitors expected over the coming months, meaning a big influx of euros, experts say the rate is not likely to improve much more.
(Alice Taylor | Exit.al)
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