Albania: Country outlook

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Economist Intelligence Unit
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Economy, Outlook, Forecast, Overview
Political Geography

Albania: Country outlook


POLITICAL STABILITY: The ruling party, the Socialist Party of Albania (SPA), won the June 2017 parliamentary election with enough seats to form a government on its own. Two years later, the opposition appeared to have been rendered ineffective after the two main opposition parties, the Democratic Party of Albania (DPA) and the Socialist Movement for Integration (SMI), left parliament in February 2019. Following the mass resignations, the electoral authorities invited unsuccessful candidates on those parties' lists from the June 2017 election to take the newly vacated parliamentary seats. The new members of parliament, who were promptly expelled from the DPA and the SMI for breaking their parties' boycott of the legislature, proved to be generally co-operative with the SPA.

ELECTION WATCH: The next parliamentary election is scheduled for April 25th. The Economist Intelligence Unit maintains its forecast that the SPA will emerge as the biggest party and be able to form the next government. However, the polls indicate that it will be a close contest and the margin between the two main camps appears to be narrowing. The momentum could shift towards the DPA-led opposition coalition in the closing stages of the election campaign. There are three factors that could benefit the opposition. First, the SPA-the party of Edi Rama, the prime minister-has been in government for two terms and there may be a mood for change, especially given the growth slowdown that preceded the pandemic. An estimated 360,000 people (12.6% of the population) left the country in 2019, which indicates widespread disenchantment with the status quo. Second, the pandemic has had a major negative impact on Albania's small business-dependent economy, dominated by retail and hospitality, which have been especially hard hit. A third factor is the large number of undecided voters (around 17% of those polled), who could sway the result in favour of the opposition parties. If the opposition coalition was to win the election, it would not mean a major policy shift, given its commitment to EU integration and pro-business reform agenda.

INTERNATIONAL RELATIONS: EU membership is the foreign policy priority. Albania has been invited to open accession negotiations, but must first meet a number of preconditions, mostly related to tackling crime and corruption and making progress on judicial and electoral reform, before the formal process can get under way. We believe that EU membership will not happen within the forecast period (2021-25) and remains a longshot even beyond this timeframe.

POLICY TRENDS: In the short term policy will focus on mitigating the economic fallout from two successive shocks: the earthquake that shook north-western Albania in November 2019 and the coronavirus pandemic. The second wave of the pandemic, which started in October 2020, intensified in the early months of 2021 and the total number of infections had doubled by mid-March compared with the start of the year. Since then, the situation has improved owing to the imposition of restrictions on social activities, which include an overnight curfew, the compulsory wearing of face masks in public and a ban on gatherings of more than ten people. Following the recent improvement in the public health emergency, on April 12th the authorities shortened the overnight curfew by two hours: it now starts at 10 pm (instead of 8 pm) and ends at 6 am. The lifting of all coronavirus restrictions is linked to the success of the vaccination programme. The authorities plan to have vaccinated 500,000 people by end-May 2021 to ensure that the tourism industry can take advantage of a further relaxation of restrictions. However, we expect widespread vaccination to be completed only in March 2022.

ECONOMIC GROWTH: The Albanian economy has been hit hard by the coronavirus pandemic: real GDP dropped by 3.3% in 2020, although this was a smaller contraction than we were expecting. We expect the economy to rebound this year and forecast real GDP growth of 4.5%, with domestic demand driving the recovery. Economic growth will be boosted by an increase in remittances from Albanians working abroad as the economic outlook improves in countries with a large proportion of immigrants (Germany, Greece and Italy). However, the limited coronavirus safety net and high shares of informal employment and self-employment will be a constraint on domestic demand, which has been the main driver of growth in recent years. The pandemic will also delay earthquake reconstruction efforts until late 2021. Western European firms are the primary investors in the region, but are likely to stay on the sidelines as they recover from the crisis.

INFLATION: The supply disruption caused by the pandemic has more than offset downward price pressures from the collapse in consumer demand, but the accommodative policy stance and the flexible exchange-rate regime pursued by the Bank of Albania (BoA, the central bank) have helped to keep deflationary pressures under control. We forecast that inflation will increase from 1.6% in 2020 to 3.1% in 2025 as a weakening currency and recovering consumer demand and global oil prices underpin price rises. The BoA will tighten monetary policy to ensure that inflation stays within its informal target band of 3% (plus or minus 1 percentage point).

EXCHANGE RATES: We expect the lek to weaken against the euro over the forecast period. In the short term this will be driven by the sharp decline in foreign tourist visits and plummeting remittances from the large Albanian diaspora. After stabilising in 2021, helped by strong inflows of foreign aid for reconstruction efforts and recovering remittances, the lek will continue to weaken in both nominal and real terms. Albania's wide current-account deficit and growing concerns about the country's ability to fund its external financing gap in the medium term will weigh on the currency.

EXTERNAL SECTOR: The recovery in global trade and tourism will help to narrow the deficit in the second half of 2021. Export and tourism receipts will drive a contraction of the current-account deficit, to an estimated 8.5% of GDP in 2021, from 8.9% in 2020. Imports of goods and services will also rebound, owing to an influx of machinery, materials and technical expertise in support of the earthquake reconstruction efforts.

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