Politics 

The general election in April 2021 put Edi Rama’s Socialist Party back in power for another four years. As the party’s third term — unprecedented in post-communist Albania — gets underway, however, the focus is on the ructions within the opposition Democratic Party, where former party leader and ex-president of Albania Sali Berisha is trying to unseat his successor Lulzim Basha. 

The rivalry between the two came to a head on January 8 when supporters of Berisha gathered outside the Democrats’ headquarters in Tirana. Protesters used a sledgehammer to break down the doors of the building while others scaled the walls with ladders. Berisha and his allies have now been expelled from the party but the former president has not given up his efforts to wrest control from Basha. 

With the Socialists holding another majority in parliament, the Democrats in disarray and the Democratic League of Socialists (LSI) almost wiped out as a parliamentary party in the 2021 general election, there are valid concerns about the lack of an effective opposition in the country. 

In Albania’s confrontational politics, accusations of authoritarianism by the opposition can be taken with some scepticism but it’s worth noting that concerns about state capture have been raised by Transparency International, while Albania’s democracy score declined in the latest Nations in Transit report from Freedom House. 

The Socialists made a strong start on fighting corruption when they first came to power in 2013 after it had been allowed to flourish under Berisha’s last government. More recently, however, there have been signs of backsliding especially in the awarding of lucrative public-private partnership (PPP) contracts, many of them issued after unsolicited proposals from private companies, a process criticised by the International Monetary Fund (IMF) and other international observers. 

Meanwhile, as well as seeing the country through the pandemic and continuing with reconstruction after the deadly earthquake of 2019, Rama’s latest government has set numerous tasks for its third term, as outlined in a speech by the premier in September 2021. 

Concerning the earthquake, Rama said 2022 “should close the entirety of all earthquake wounds”. Until those made homeless by the quake get their new homes, all affected families will continue to receive rent payments from the state. 

The Socialists also announced reforms to the police force, including digitalising the State Police, strengthening the Security Academy and further reducing the average age of the police force. 

In the health sector, which continues to battle with the pandemic, the focus will be on hospital autonomy, increasing the digitisation of the health system, strengthening human capital, improvement of infrastructure and logistics for hospitals, clinics and health centres, and tackling bribery. 

Rama pledged to raise the minimum wage from the current ALL30,000 (€244) to at least ALL38,000 and if possible to ALL40,000. Salaries of teachers, doctors and nurses will be raised by 40%, and public administration salaries by 30%, Rama promised. 

A sovereign guarantee of €50mn is planned to support the transition to new production lines and a special programme will be launched to encourage innovation and excellence in manufacturing, with a financial mechanism to reimburse companies' costs to increase their human capital in innovation, design, marketing, research and development, the prime minister said. 

The government has announced ambitious infrastructure investments including the construction of new ports and airports. In the energy sector, the government aims to turn Albania into a net exporter of electricity. Albania is already encouraging investment into new renewable capacity as it diversifies away from dependence on hydropower. 

The pursuit of EU accession remains a priority for the government, but for the moment Albania’s progress is held back by a dispute between existing EU member Bulgaria and North Macedonia. As Albania’s progress is coupled with North Macedonia’s, Tirana will most likely be unable to start accession talks until Bulgaria’s lifts its veto on the launch of talks with its neighbour. 

Meanwhile, following the justice reforms carried out previously – one of the requirements for Albania to advance toward EU accession – Rama said he planned to do more to tackle corruption, including through the digitisation of public services. 

 

Macroeconomy 

GDP growth: Albania achieved robust GDP growth during 2021 as the economy recovered from the coronacrisis, and this is expected to continue in 2022 though risks remain, not least the spread of new variants of the virus, and a potentially long-lasting energy price hike, which would push up prices of electricity imports.

Albania’s 2022 budget is based on projected GDP growth of 4.1% for the year, slightly higher than the forecasts from intentional financial institutions. 

In late 2021, the European Bank for Reconstruction and Development (EBRD) made a strong upward revision to its 2021 growth forecast for Albania, lifting it to 8.0% – 3.5 percentage points (pp) up compared to its previous forecast made in June. At the same time, however, the EBRD lowered its forecast for Albania’s 2022 growth by 0.3 pp to 3.7%. 

The European Commission also lifted its 2021 forecast to 6.9% – a significant upgrade from the 4.1% it projected in June — and said growth is expected to remain strong at 3.7% in 2022 and 3.6% in 2023, supported by the expected full recovery of tourism and manufacturing to pre-crisis levels. 

The World Bank, meanwhile, has upped its 2022 growth forecast by 0.1pp to 3.8% in 2022, and GDP is projected to grow by 3.7% in 2023. 

According to the latest data released by the statistics office, Instat, Albania’s year-on-year GDP growth moderated to 7.0% in the third quarter of 2021. The drop in the y/y figure from 17.9% in Q2 reflects the extraordinary base effect of the lockdown in the second quarter of 2020, followed by a revival of economic activity in the third quarter of the year. While Albania’s economy has continued to be affected by the pandemic since then, it has not seen another large-scale shutdown of economic activity. 

By sector, the biggest contrition to the y/y increase in GDP in Q3 came from trade, transport, accommodation and food services, which increased by 13.76% to add +2.41 pp to the overall increase. Industry, electricity and water showed robust growth of 9.37%, adding +1.03 pp. Public administration, education and health expanded by 6.85% to push the overall figure up by +0.83. The fastest growth was in financial and insurance activity, which rose by 27.71% y/y, adding 0.60pp.

Tourism was one of the main factors behind the faster-than-expected economic recovery in Albania in 2021. The tourism sector rebounded strongly in the summer season with the number of foreign tourists was close to that in pre-pandemic years in June-August. Other factors were high investment growth, a recovery of private consumption and reconstruction after the 2019 earthquake. 

External environment: According to the IMF, Albania’s current account deficit is expected to fall to 8.3% of GDP in 2022, down from an estimated 8.7% in 2021 and 9.6% in 2020. Even pre-pandemic, the deficit had been on a generally increasing trend. 

Remittances sent to Albania from Albanians living abroad revived in 2021 after falling the previous year. In the first nine months of the year, remittances were up by 16.3% year on year, according to central bank data. In the third quarter, remittances stood at just under €200mn, up 1.1% y/y. This followed a decline in 2020.

Albania’s exports and imports both revived strongly in 2021 as its domestic and international economies recovered from the coronacrisis. 

Data from statistics office Instat shows that in 2021 Albania exported goods worth ALL369bn (€3bn), up 35.6% on 2020. The value of imports was ALL801bn, an increase of 32.3%. The trade deficit grew by 29.6% to reach ALL432bn.

In December, Albania exported goods with ALL32bn, up 38.2% year on year, while imports rose 43.1% y/y to ALL88bn. However, exports were down by 14.5% month on month in December, and imports grew by only 9.1% compared with November. 

The biggest contributor to the annual change in exports in December was from minerals, fuels and electricity, which added 12.2 percentage points (pp), followed by textiles and footwear (8.2 pp) and construction materials and metals (7.1 pp). 

The same groups were the chief contributors to the y/y rise in exports; construction materials and metals added 14.1 pp, mineral, fuels, electricity 10.8 pp and textiles and footwear 3.7 pp. 

For overall imports, minerals, fuels, electricity was the main contributor, adding 18.7 pp. There were smaller contributions from construction materials and metals (6.3 pp), chemical and plastic products (4.9 pp) and other sectors. 

Inflation and monetary policy: Consumer price inflation rose sharply during 2021, from just 0.4% at the beginning of the year to as high as 3.7% in December, as the international post-coronacrisis recovery gathered pace. High international energy prices have had a knock-on effect on prices in Albania. 

In December, there was strong upward pressure on the CPI from food and non-alcoholic beverage prices, which rose by 6.4% year on year to push the overall annual inflation figure up by 2.22 percentage points (pp). The fastest growth in prices was for transport, where prices increased by 9.0% y/y from a low base, contributing 0.48 pp to the overall rise.  Other sectors to experience rapid price growth included recreation and culture (4.2% y/y), communication and hotels, coffee-houses and restaurants (3.3% each) and alcoholic beverages and tobacco (2.1%).

Fast-rising prices have led to protests in Albania by both farmers concerned about the high costs of fertilisers, fuel and other inputs, and by citizens fearing high energy and fuel bills. 

However, the IMF notes that while headline inflation has risen on account of higher food and energy prices, core inflation has increased only modestly, and broader inflationary pressures are subdued. 

The Bank of Albania, which also noted the upswing in inflation in the fourth quarter was mainly due to higher prices of food, oil and electricity in global markets, anticipates this external shock will keep inflation above our target in the coming months. However, the bank said, “we expect demand-supply to re-adjust in global markets, logistic problems be resolved and energy prices to stabilise. This performance will ease inflationary pressures and reduce the effect of foreign prices on inflation in Albania.” 

The central bank said that is sees the balance of risks surrounding inflation appears tilted upside in the short run and balanced in the medium term. “In one hand, a faster or prolonged increase of prices in international markets and a slower consolidation pace constitute upside risks to inflation. On the other hand, slower recoveries of both global and Albanian economies, due to the prolongation of the pandemic or upswing of prices in international markets, constitute a downside risk to inflation,” according to the Bank of Albania. 

So far, the Bank of Albania has resisted hiking the policy rate, keeping it at a low 0.5% at the latest meeting of the supervisory council in December. Members of the council said the policy stance remains “adequate”, and the monetary stimulus supports the increase in the demand for goods and services, compensates the expected reduction of fiscal stimulus and establishes the premises for the rise of employment, wages and inflation in line with the bank’s target. However, it added that meeting the inflation target in the medium term will require the gradual normalisation of the monetary policy in the coming quarters.

 

Real economy 

Retail: Albania’s retail sales revived in 2021 after the shock of the coronavirus pandemic and initial spring 2020 lockdown the previous year. Growth may slow in the coming quarters, not just because of the phasing out of the base effect from 2020, but also because of rising inflation. 

The latest data show Albania’s retail sales rose by an annual 4.9% in the third quarter of 2021, slowing from a 9.9% increase in the previous quarter, according to statistics office Instat. Compared with the previous quarter, the retail sales were up 6.9%, after edging down 0.3% in the previous quarter, seasonally adjusted data showed.

The biggest contribution to the annual growth in retail sales came from sales of motor fuel with 2.4 percentage point (pp) and the group of non-food products in specialised and non-specialised stores (1.9 pp). Food, beverages and tobacco in both specialised and non specialised stores contributed 0.6 pp.

Albania has one of the smallest shares of online retail in Europe, but more people started being online during the pandemic and this continued into 2021, when 21.4% of the population aged 16-74 saying they had made an online purchase in the preceding 12 months. 

Closures of bricks and mortar shops during the early months of the pandemic added to the existing trend of a gradual increase in online shopping. However, Albania’s online retailers continue to struggle with a lack of trust and a widespread use of cash rather than payment cards. Among the products and services bought online, the most popular were clothing, shoes and accessories. 

Banks: The Albanian banking sector has appeared resilient to the external shocks from the two-year pandemic, central bank governor Gent Sejko said in an address to bankers on December 16. 

The activity of the sector has continued to expand, supported mainly by domestic deposits, which account for over 80% of assets. Sejko noted that the pandemic has not affected the overall capitalisation of the banking system, thanks to increased capital additions and prudent policies on dividends followed by banks. “Profit has improved while liquidity remains high,” said Sejko. 

Meanwhile, banks’ loan portfolio shows “well-diversified growth” both in lek and foreign currencies, for businesses, retail and mortgage loans.

The non-performing loan ratio has decreased to 6.3%, as a result of both the expansion of the loan portfolio and the reduction of non-performing loans. According to the central bank governor, "there is still ample room for credit growth, given the abundant liquid reserves, low credit/deposit ratios and positive profit, which can fully support capital". 

Sejko also commented that the financial infrastructure of the banking sector has been further consolidated over the last two years. 

The Bank of Albania and the National Payment Systems Committee have launched a national strategy for strengthening the small value payment market and increasing the financial inclusion of citizens, with the aim of doubling the number of citizens who have a bank account in 2023. 

In late 2021, Hungary's largest lender OTP Bank signed an agreement to acquire 100% of the Albanian subsidiary of Greece's Alpha Bank from Alpha International Holdings Single Member for €55mn. Another regional player may follow as Slovenia's largest bank Nova Ljubljanska Banka (NLB) was reported in May to be mulling plans to enter the Albanian market. 

Industry: While the industrial sector revived after the initial spring 2020 lockdown, towards the end of 2021 industrial companies were increasingly affected by the international energy crisis. 

An executive from steel and energy producer Kurum International warned in a recent interview with Monitor.al that the energy crisis makes its steel factory uncompetitive. The company’s economic director Arif Shkalla added that overall, expectations for 2022 are “not so good”. 

Companies in the Balfin Group’s chrome mining and processing sectors were negatively affected by the pandemic, and according to reports in the Albanian media, Ballin is close to selling mining company AlbChrome to Turkish Yildirim International Mining Investments. AlbChrome is Albania’s biggest chrome ore producer and a major producer of ferrochrome, used in the production of stainless steel. The two companies reportedly aim to close the transaction in early 2022. 

As elsewhere in the region, automotive components manufacturers are suffering from the shortages of semiconductor chips, which has forced automakers to cut production with a knock on effect on demand for other components.

Energy & power: Albania produces virtually all of its electricity from hydropower, which means it has a head start on its coal-dependent Western Balkan neighbours when it comes to the green transition. The downside is domestic electricity generation is dependent on precipitation, meaning there are wide fluctuations in the level of production, requiring costly power imports at times. 

After his re-election in 2021, Albanian Prime Minister Edi Rama set the goal of turning the country into a net electricity exporter. In the meantime, however, Albania is suffering during the energy crisis as it had to import power at high prices in the autumn.

Efforts to invest into other forms of renewables are already underway, and Albania has particularly high potential for solar power generation. Albania has “extensive” opportunities for solar energy, as well as potential to produce wind and geothermal energy, said a 2021 new report from the International Renewable Energy Agency (IRENA). 

Commercial operation of Albania’s first floating solar power plant started in June 2021. The plant was set up by renewable energy company Statkraft, present in Albania since 2007, and Norway’s Ocean Sun. It is located on the Banja reservoir, where Statkraft already operates the 72-MW Banja hydropower plant. The first unit of the plant has 1,536 solar panels and an installed capacity of 0.5 MWp. An additional three floating units are planned, with a total capacity of 1.5 MWp. Also in June 2021, Albania launched its first tender for utility-scale onshore wind power plants.

Albania is also looking to benefit from its location on the Trans-Adriatic Pipeline (TAP) which will carry Azerbaijani gas across Southeast Europe to Italy. The TAP Consortium, the Albanian Ministry of Infrastructure and Energy and Albgaz signed a co-operation and delivery agreement on the Fier South gas facility in July 2021. The new gas exit point in Fier will a provide strategic access point for Albania and the Western Balkans to gas reserves in the Caspian region. 

Also in July, Excelerate Energy LP, Snam SpA and Albgaz Sh.a have agreed to explore potential co-operation on the construction of a natural gas pipeline from Albanian’s Vlora Terminal to other natural gas infrastructure opportunities in Albania. The plan was announced after Excelerate signed a separate memorandum of understanding with ExxonMobil in March to carry out a feasibility study on the potential development of a liquefied natural gas (LNG) project at the port of Vlora. 

Construction: Tirana and other parts of Albania are experiencing a construction boom. This is party down to post-earthquake reconstruction efforts but it’s also because real estate remains a convenient place to deposit money in the country that lacks a developed capital market. The construction sector has thus been one of the main drivers of the recovery, along with consumption and tourism.

A number of major infrastructure projects are also underway or at the planning stage. The government aims to encourage more tourists to visit Albania with the construction of several new airports at cities including Vlora and Saranda. Several ports are also being developed. In the roads sector, Albania signed a memorandum of cooperation with Bulgaria and North Macedonia on the construction of sustainable infrastructure along the pan-European Corridor VIII in 2020. The completion of Corridor VIII, which includes road, rail and port infrastructure, will lead to better transport and economic connectivity between the three countries, as well as improved efficiency of transport services.

However, some of the new developments have run into controversy. There was fierce opposition to the demolition of the old National Theatre in Tirana and other projects initiated by Tirana city hall are now under scrutiny. Environmental groups oppose the plans for the new airport near Vlora, located in a protected wetland area.

Major Sectors: Tourism is an important sector of the Albanian economy, and the recovery of the sector was a major driver of the recovery in 2021. Arrivals, including foreign arrivals, in the peak summer months of July and August were not far off the pre-crisis peak set in 2019, and prospects for 2022 are encouraging. 

Albania’s large textiles and footwear sector was damaged by the pandemic as clothing sales slumped when people were stuck at home during the spring 2020 lockdowns and are making only a gradual recovery. There are hopes that if people’s lives start to return to normal in 2022, international clothing and footwear sales will recover, which would lift the export-oriented sector in Albania. However, higher costs of inputs, notably of cotton, electricity and transport could make Albanian producers less competitive. 

Albania’s agricultural sector has been suffering as a result of the energy crisis, which has also pushed up prices of fertilisers. This led to several protests by farmers from the Lushnje area, who demanded revisions to the budget and support through the crisis. The ruling Socialists aim to increase agricultural exports to $1bn a year during their current term in office.

 

Budget and debt

Albanian MPs backed the 2022 budget at a plenary session on November 16 after two days of often heated debate. The budget is based on projected GDP growth of 4.1% in 2022. The fiscal deficit in 2022 is planned at 5.4% of GDP, as revenues are projected to reach ALL536.8bn and expenditures ALL637.6bn. Public debt is projected at around 78.9% of GDP. 

The government intends to continue to support priority sectors such as education, health, agriculture and infrastructure, as well to continue the reconstruction process after the 2019 earthquake, Minister of Finances and Economy Delinda Ibrahimaj told MPs in October. Public investments are projected at 6.4% of GDP, or ALL119bn. 

Shortly after the budget was adopted Albania placed a €650mn, 10-year sovereign eurobond on November 24. The country’s fifth eurobond to date was issued with a coupon of 3.50%, down from 3.625% on the previous eurobond, with a seven-year tenor, issued in 2020. The long-term interest rate is 3.75%. The government is using the funds raised to support the 2021 and 2022 budgets. 

The IMF has called for fiscal consolidation in Albania. Despite the recovery in tax revenue, Albania’s primary deficit is expected to remain at 4.6% of GDP, which is close to the 2020 level. Meanwhile, general government debt is projected to rise to almost 80% of GDP at end-2021, which the fund points out is among the highest in the region. 

“[Debt] is expected to decline gradually as support measures and reconstruction wind down and the fiscal rule of a zero primary balance is adhered to starting 2024 as per the requirement of the Organic Budget Law (OBL). Without further adjustment efforts we project debt will still hover above 70% of GDP in the medium term. The government’s gross financing needs remain high at about 20% of GDP annually,” the IMF warned. 

 

Markets

The Albanian Securities Exchange (ALSE) was set up the first private capital securities exchange in Albania. ALSE, launched by a group of financial markets specialists, was intended as a fresh start for the Albanian capital market after the Tirana Stock Exchange (TSE) never had a single listed security in its 18 years of operation. 

In the fourth quarter of 2021, the value of trades on ALSE amounted to ALL9.4bn for T-bills and ALL516.3bn for T-bonds. 

In March 2021, the Albanian Securities Registry (ALREG) launched its operations after joining the Bank of Albania’s real-time gross settlement system (RTGS).

ALREG is now jointly licensed by the Bank of Albania as an operator of the securities settlement system and by the Albanian Financial Security Agency (AFSA) as a registrar, “thus fulfilling the legal requirements to be considered a central securities depository according to the provisions of the legislation in force”, the Bank of Albania said at the time. ALREG is the first private entity of its kind to be licensed and start operating in the Albanian market.