Friday, January 22, 2016

Albania: The need for a fiscal and monetary stimuli strategy

P0294110010501-538509The four main symptoms of the economic crisis that has gripped the country since 2011 are: extremely difficult to access credit, falling aggregate demand, high unemployment and low FDI levels. Following the external shocks from the Great Recession and sovereign debt crises in Greece and Italy (Albania’s largest trading partners and financiers), the economic growth in Albania has been insignificant – straddling the 2 per cent of the GDP mark—relative to the economy’s size.

The immediate results have been very painful: FDI dried up, remittances from the Albanian diaspora stopped, and the housing market "bubble" burst; the main drivers of economic growth since 2000 (until 2010 the average growth was 6 per cent). Consequently, bad debt levels rose to 25 per cent of total loans. There was a strong slowdown in the flow of transactions, a trend that continues and intensifies. As a result, there are strong deflationary pressures, which will intensify because of the lack of new jobs and credit. In 2015 alone, new credit for businesess fell by more than 13 per cent compared to 2014.

Albania’s economy remains Europe’s poorest with the lowest GDP per capita at around one-third of the EU28 average. Isn’t this a crisis in intself? Tragically, the economic outlook for growth remains bleak; in its latest report, the World Bank forecasted a 3.5 per cent GDP growth until 2018. The country’s ‘catch-up’ growth potential is sadly not being realised. The growth is mainly driven by a pitoval European energy project – the Trans Adriatic gas pipeline, which luckily passes through Albania too.

I have previously described the Albanian economy as a "zombie" which was left to "starve" by the former Prime Minister Berisha’s coalition government with Ilir Meta. Berisha’s government inaction and bad governance caused the four main symptoms’ deterioration. Attempts were made to improve Doing Business indicators, and are currently being made by Prime Minister Edi Rama’s and Meta’s new coalition government, yet the economy’s attractiveness remains staunchly low. Albania is the only country in the region where the business environment has actually worsened since 2011.

The economic situation PM Rama inherited in 2013 was indeed dire. He described the Albanian economy as plagued with "cancers" in every sector, and promptly began "operating" all these "cancers" simultaneously; sometimes he cut deep, like in the energy sector, and at other times only scratched the surface, like the banking sector. Yet the economy continues to underperform and I would argue this is also due to the shock it has endured under his leadership.

The approach PM Rama has chosen is a severe one: ‘shock’ therapy fiscal stabilisation and fast, deep structural reforms. And one can understand the temptation to blindly follow this approach, when it is recommended by international financial institutions such as the IMF and World Bank. But what are the transitory costs of these structural reforms in the "zombie" economy’s context?

I would argue that they are proving adverse to economic recovery and could potentially cause a transitory recession because structural reforms are subject to a ‘time-inconsistency’ problem. The economy and its agents need to see quick improvements and have an optimistic view of the future, before agreeing to costly structural reforms. He is demanding that Albanians accept losses in the short-term for long-term promises of benefits, a situation many cannot afford.

To return confidence in the economy and high economic growth, we first need to address our issues of tight credit, low aggregate demand and high unemployment. Only once we tackle these will attractiveness of the economy meliorate – leading to higher levels of FDI. The moment when the economy is revived would be the best time to gradually implement structural reforms.


The Alliance for a European Albania was voted by an overwhelming majority in the 2013 general election for the economy’s and state’s "rebirth", to strengthen the rule of law, and to improve Albanian citizens’ living standards. The manifesto for the "rebirth" of Albania was a social democractic program but clearly an unrealisitic one, as ultimately it failed to understand the power of monetary policy and finance. Where are we today? Promises for free healthcare services have been met with increased privatisation, and there’s little sign of the 300,000 new jobs outlined.

What’s more, since PM Rama came to power he has borrowed from external financial markets circa 1.2 billion US dollars, but little of this money has trickled down to the real economy. The government has spent its budgets repaying companies for infrastructure projects commissioned by Berisha; energy reform – including investment in the distribution grid; urban regeneration projects; and good governance reforms. Yet there has not been any new major transport infrastructure project: whilst there is a vision for an Adriatic highway linking Croatia and Albania, and a new international airport in the south of the country (near the beautiful city of Saranda) exactly how these will be financed remains unclear. Consequently, Albania remains the most expensive European destination to travel to, and affects its ability to develop a strong tourism sector as neighbouring countries have done.

Now the political focus is on the rule of law reform – a key condition for the commencement of accession negotiation with the EU, and for the sustainable development of the country. Yet nothing is being done to increase aggregate demand or ease access to credit. How can this be when the consumption level fell by around 3 per cent in 2015 compared to 2014?

Only after a year in office is the Governor of the Albanian Central Bank (ACB), Genti Sejko, reportedly evaluating options other than lowering interest rates for a 15th time since 2013. The absence of a strategy to use monetary policy to revive the ‘zombie’ economy is an irresponsible and tragic mistake. Instead, the ACB is busy trying to squash scandals: Ardian Fullani, the long-serving governor, was arrested on September 5th 2014, after an ACB employee confessed to stealing 5 million euros from the vault where he worked (he was recently acquitted by the Appeal Court).

Meanwhile, PM Rama is quickly implementing structural reforms, but without substantial public investments or compensations. This has already undermined the economic recovery from external shocks; hence, his government’s legitimacy. The 15 per cent progressive tax system implemented immediately after he came to power (replacing a competitive 10 per cent flat tax) was done too fast. As a result, tax and customs revenues are experiencing extremely high budget deficits of around 10 per cent. This directly affects his government’s ability to service the alarmingly high public debt (73 per cent of the GDP).

In September 2015 PM Rama, pressured by the IMF to meet budget targets, declared the beginning of a national action to formalise the economy. This policy makes sense when you consider that the "grey" economy in Albania could actually account for as much as 20 per cent of the whole economy. However, the speed at which this formalisation is taking place is resulting in bankruptcies of the very small businesses that constitute a vital part of Albania’s economy.

The dichotomy between the state and the economy is a showdown in extremis: therefore, the economy seems to be reacting, for worse not for better, to Rama’s actions. The desperation of situation is reflected by the fact that in 2015 alone, more than 52,000 Albanians (not only from Albania though) applied as asylum seekers in Germany. The necessity to seek opportunities elsewhere has returned; further contributing to the ‘brain-drain’ problem.

Power of finance

Macroeconomic stability could be better achieved, if structural reforms were implemented much more gradually. For a successful gradual approach we would first need to boost the economy by fiscal and monetary means to return 6 per cent GDP growth as early as this year. Credit-easing schemes would be the best instrument to achieve this, and a new interventionist mandate for the ACB is needed.Only once the economy has been revived should deep reforms be implemented. The need to stimulate demand and credit supply provokes a debate that goes beyond economic technicalities to questions about the government’s overarching responsibilities. But the justification for such a policy must transcend economic logic if it is to win political support.

There are many proposed methods that could improve the trade-off between inflation and production in monetary policy. A greater role for the government and ACB requires an overriding mission like a stimulus package to return 6 per cent GDP growth in the short and medium term. The ACB urgently needs a new mandate to replace the defunct conservative objective of inflation, with a more developmental objective of growth or employment. The ACB should allow a lower level of commitment to inflation and produce a monetary stimulus to restore confidence in the economy and stimulate internal consumption and investment.

Quantitative easing is not appropriate because all commercial banks operating in the country are well capitalised. Instead the ACB needs to act as the guarantor for credit easing schemes and other initiatives to boost aggregate demand and investment. This is because there is little room in Albania for a fiscal stimulus (that chance was missed in 2013). In the end of January, the government signed a deal with the European Bank for Recostruction and Development (EBRD) for a credit easing scheme for the agro-business. EBRD is the guarantor, so the risk is shared. Although this scheme is welcomed (albeit is long-awaited) the problem is that it’s a one-off and not part of a national strategy to make credit easier to access and cheaper.

The government, in partnership with the ACB and commercial banks, must devise credit-easing schemes targeted to help, for instance, young couples buy their first-time home (a demographic that could actually revive the housing market). Because of Albania’s development level, it is also important that all financial actors work to expand micro-financing in urban and rural areas. This would support structural adjustments aimed at developing of the workforce in accordance with modern technology’s specific requirements - a way out of youth unemployment. They should consider the creation of a new public-private bank for entrepreneurs, and small to medium enterprises. Also, crowdfunding initiatives should be encouraged.

I am pessimistic that these ideas will be adopted by the coalition government, because after more than two years in power, it is clear PM Rama’s priority is not to boost the economy and household’s budgets but to strengthen the state. He believes this will stimulate the economy, which sadly has been shown to be untrue, at least in the short and medium term. Moreover, the IMF and World Bank continue to support the approach they advised to PM Rama.

The IMF has played an important role in post-communist Albania, but history shows there have been both positive and negative results. It suggested "shock" therapy liberalisation, stabilisation, and privatisation in 1993, which created the breeding ground for ”pyramidal” Ponzi schemes whose collapse led to civil anarchy in 1997. The IMF suggested ”shock” therapy monetary stabilisation in 1998 and enshrined price stability as the ACB’s only goal. But the Albanian economy is a product of our history – one that is defined by isolation, continued periods of transition and tribal politics – and as such is best understood by educated Albanians themselves.Although, macro-economic stability is a necessity, it can be better achieved if the strategy is not austerity, but growth.

The main reason why there have not been fiscal and monetary stimuli in Albania since 2011 (and why "shock" therapy fiscal consolidation is being enforced) is because there is no audience cost for policy in the debate in Albania. Public policy remains the domain of few. The media and education is corrupt and unprofessional; hence cannot "educate" the population. Therefore, PM Rama never faced questions over whether to implement austerity and costly structural reforms quickly or gradually.

The major political parties should reach a consensus for an interventionist mandate for the Central Bank, and the other ideas outlined above to return 6 per cent GDP growth in the short and medium term.

Epidamn Zeqo holds an MSc in European Political Economy from the London School of Economics and a dual MA in International Relations and Modern History from the University of St. Andrews. A native of Albania, he lives and works in London.

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