Economy of Albania

History

The collapse of communism in Albania came later and was more chaotic than in other Eastern European countries and was marked by a mass exodus of refugees to Italy and Greece in 1991 and 1992. The country attempted to transition to autarky, but this eventually failed badly. Attempts at reform began in earnest in early 1992 after real GDP fell by more than 50% from its peak in 1989. Albania currently suffers from high organised crime and corruption rates.

The democratically elected government that assumed office in April 1992 launched an ambitious economic reform program to halt economic deterioration and put the country on the path toward a market economy. Key elements included price and exchange system liberalization, fiscal consolidation, monetary restraint, and a firm income policy. These were complemented by a comprehensive package of structural reforms including privatization, enterprise, and financial sector reform, and creation of the legal framework for a market economy and private sector activity. Most agriculture, state housing, and small industry were privatized. This trend continued with the privatization of transport, services, and small and medium-sized enterprises. In 1995, the government began privatizing large state enterprises. After reaching a low point in the early 1990s, the economy slowly expanded again, reaching its 1989 level by the end of the decade.

Macroeconomics trends

This is a chart of Gross Domestic Product (GDP) of Albania in US dollars based on Purchasing Power Parity (PPP) from estimates by the International Monetary Fund.

For purchasing power parity comparisons, the US dollar is exchanged at 49 leks (2007 estimate). Mean wages were $3.83 per man-hour in 2009.

Albania is an upper-middle income country by Western European standards, with GDP per capita greater than the several countries in the region. According to Eurostat, Albania's GDP per capita (expressed in PPS – Purchasing Power Standards) stood at 35 percent of the EU average in 2008. Unemployment rate of 17.3% is considerably higher than many countries in Balkans, For Example, Serbia has an unemployment rate of 16.6%.

Results of Albania's efforts were initially encouraging. Led by the agricultural sector, real GDP grew by an estimated 11% in 1993, 8% in 1994, and more than 8% in 1995, with most of this growth in the private sector. Annual inflation dropped from 25% in 1991 to single-digit numbers. The Albanian currency, the lek, stabilized. Albania became less dependent on food aid. The speed and vigour of private entrepreneurial response to Albania's opening and liberalizing was better than expected. Beginning in 1995, however, progress stalled, with negligible GDP growth in 1996 and a 9% contraction in 1997. A weakening of government resolve to maintain stabilization policies in the election year of 1996 contributed to renewal of inflationary pressures, spurred by the budget deficit which exceeded 12%. Inflation approached 20% in 1996 and 50% in 1997. The collapse of financial pyramid schemes in early 1997 – which had attracted deposits from a substantial portion of Albania's population – triggered severe social unrest which led to more than 1,500 deaths, widespread destruction of property, and an 8% drop in GDP. The lek initially lost up to half of its value during the 1997 crisis, before rebounding to its January 1998 level of 143 to the dollar. The new government, installed in July 1997, has taken strong measures to restore public order and to revive economic activity and trade.

Albania is currently undergoing an intensive macroeconomic restructuring regime with the International Monetary Fund and the World Bank. The need for reform is profound, encompassing all sectors of the economy. In 2000, the oldest commercial bank, Banka Kombetare Tregtare/BKT was privatized. In 2004, the largest commercial bank in Albania—then the Savings Bank of Albania—was privatised and sold to Raiffeisen Bank of Austria for US$124 million. . Macroeconomic growth has averaged around 5% over the last five years and inflation is low and stable. The government has taken measures to curb violent crime, and recently adopted a fiscal reform package aimed at reducing the large gray economy and attracting foreign investment.

The economy is bolstered by annual remittances from abroad representing about 15% of GDP, mostly from Albanians residing in Greece and Italy; this helps offset the towering trade deficit. The agricultural sector, which accounts for over half of employment but only about one-fifth of GDP, is limited primarily to small family operations and subsistence farming because of lack of modern equipment, unclear property rights, and the prevalence of small, inefficient plots of land. Energy shortages because of a reliance on hydropower, and antiquated and inadequate infrastructure contribute to Albania's poor business environment and lack of success in attracting new foreign investment. The completion of a new thermal power plant near Vlore has helped diversify generation capacity, and plans to improve transmission lines between Albania and Montenegro and Kosovo would help relieve the energy shortages. Also, with help from EU funds, the government is taking steps to improve the poor national road and rail network, a long-standing barrier to sustained economic growth.

Reforms have been taken especially since 2005. In 2009, Albania was the only country in Europe, together with Poland, San Marino and Liechtenstein, to have economic growth; Albanian GDP real growth was 3.7%. Year after year, the tourism sector has gained a growing share in the country's GDP.

Data published as of July 2012 by the National Institute of Statistics, INSTAT, show the economy contracted by 0.2 per cent in the first quarter of the year - a downturn blamed mainly on the eurozone debt crisis.

The informal sector makes up a portion of the economy, although its share remains unclear due to its secretive nature.

According to Santander Bank, foreign direct investment in Albania now accounts for 50% of its GDP.

Challenges and solutions

Reforms in Albania are constrained by limited administrative capacity and low income levels, which make the population particularly vulnerable to unemployment, price fluctuation, and other variables that negatively affect income. The economy continues to be bolstered by remittances of some 20% of the labour force that works abroad, mostly in Greece and Italy. These remittances supplement GDP and help offset the large foreign trade deficit. Most agricultural land was privatized in 1992, substantially improving peasant incomes. In 1998, Albania recovered the 8% drop in GDP of 1997 and pushed ahead by 7% in 1999. International aid has helped defray the high costs of receiving and returning refugees from the Kosovo conflict. Large-scale investment from outside is still hampered by poor infrastructure; lack of a fully functional banking system; untested or incompletely developed investment, tax, and contract laws; and an enduring mentality that discourages initiative.

Albania's credit rating is low, although it was upgraded in February 2016 to B+ by Standard & Poor’s.

World Bank commentary

More recently, the World Bank's 2015 report provided the following outlook for Albania:

"Economic growth, combined with labor market trends and patterns, is estimated to have reduced poverty and promoted inclusion. Albania has benefited from positive job creation. Labor markets have continued to improve steadily, with employment growing by 6.7% in annual terms in the second quarter of 2016. Better employment outcomes are the result of a reduction in unemployment as well as higher labor force participation rates.

The Albanian economy is expected to expand in the near term, driven by a recovery in consumption and robust investments. Net exports are expected to gradually contribute to growth as EU economies recover. Risks to the outlook are mostly on the downside, but a stronger pace of structural reforms could help mitigate the impacts.

However, external developments associated with slow growth in the EU may adversely impact Albania’s growth and poverty prospects through reduced remittances, exports, and foreign investment. Fiscal pressures or increased business uncertainty associated with next year’s elections could also slow down growth. Faster than expected improvements in the business climate and reforms to address the high nonperforming loans could further strengthen private investment and consumption over the medium term.

According to the World Bank, the Gross Domestic Product (GDP) dropped very significantly between 2008 and 2013. (Between 2001 and 2013, the GDP was the highest by far in 2008.) By 2014 however, it had started increasing and was projected to continue to increase until at least 2019.

Economic growth is projected to be 3.2% in 2016, 3.5% in 2017, and 3.8% in 2018. The medium-term outlook depends on the pace and depth of the structural reforms and on additional fiscal consolidation measures to reduce debt, sustained reforms in the energy and financial sectors, improvements in the management of public investments, and the recently approved reform of the judiciary, which has implications for the investment climate and credit growth."

Other recommendations

According to analysts at Forbes, as of December 2016, the Gross Domestic Product (GDP) was growing at 2.8%. However, the country had a Trade Balance of -9.7% and Unemployment was quite high at 17.3%. Forbes noted some factors that might make corporate investment in Albania problematic: "Complex tax codes and licensing requirements, a weak judicial system, endemic corruption, poor enforcement of contracts and property issues, and antiquated infrastructure contribute to Albania's poor business environment making attracting foreign investment difficult. Albania’s electricity supply is uneven despite upgraded transmission capacities with neighboring countries."

However, Forbes also indicated some progress: "with help from international donors, the government is taking steps to improve the poor national road and rail network, a long standing barrier to sustained economic growth. Inward FDI has increased significantly in recent years as the government has embarked on an ambitious program to improve the business climate through fiscal and legislative reforms. The government is focused on the simplification of licensing requirements and tax codes, and it entered into a new arrangement with the IMF for additional financial and technical support."

The International Monetary Fund's January 24, 2017 report also offered some positive reinforcement: "Economic program remains on track, good progress in implementing structural reforms, Bank of Albania’s accommodative monetary policy stance remains appropriate". The IMF inspectors who visited Tirana provided the following action plan: "Going forward, the main priorities should be: to continue expanding revenue to strengthen public finances and to ensure debt sustainability, reduce NPLs to strengthen financial stability and support credit recovery and advance structural reforms to improve the business climate. Important progress has been made in these areas, and further efforts are needed to cement these gains. In this regard, strengthening of tax administration, broadening the tax base, and introduction of a value-based property tax remain important objectives. Improved public financial management will help ensure more efficient public spending and control of arrears. Rapid implementation of the strategy for resolving non-performing loans is needed to strengthen lending to the private sector. Structural reforms to enhance the business environment, address infrastructure gaps, and improve labor skills will be crucial to strengthen competitiveness."

The Executive Board of the IMF will meet to discuss the disbursement of about €72.44 million to Albania in February 2017.

Application to the European Union

Full European Union membership would benefit Albania's economy. The country had received candidate status in 2014 (based on the 2009 application), but the European Union has twice rejected full membership. The European Parliament warned the government leaders in early 2017, that the parliamentary elections in June must be "free and fair" before negotiations could begin to admit the country into the Union. The MEPs also expressed concern about the country's "selective justice, corruption, the overall length of judicial proceedings and political interference in investigations and court cases" but the EU Press Release expressed some optimism: "It is important for Albania to maintain today's reform momentum and we must be ready to support it as much as possible in this process".

Albania also needs to improve its infrastructure, particularly highways within its borders and connecting the country to its neighbors. Once there is evidence of significant progress on this front, the country's chances of acceptance into the EU should improve. Discussions are underway to get the funding to do so.

In the meantime, China is one of the major investors in Albania having purchased drilling rights to the oil fields of Patos-Marinze and Kucova (from a Canadian company) and Tirana International Airport SHPK. China Everbright and Friedmann Pacific Asset Management will operate the airport until 2025. As of March 2016, China was the country's main trading partner, with 7.7 percent of the country’s total international trade; that is far more than the trade with Greece and Turkey. This is reminiscent of the strong relationship between Albania and China in the 1970s.

Agriculture

Agriculture in Albania employs 47.8% of the population and about 24.31% of the land is used for agricultural purposes. Agriculture contributes to 18.9% of the country's GDP.

The main agricultural products in Albania are tobacco, figs, olives, wheat, maize, potatoes, vegetables, fruits, sugar beets, grapes, meat, honey, dairy products, and traditional medicine and aromatic plants.

The Wine of Albania is characterized by its unique sweetness and indigenous varieties. Albania produced an estimated 17,500 tonnes of wine in 2009. During communism, the production area expanded to some 20,000 hectares (49,000 acres). Albania has one of Europe's longest histories of viticulture. The today's Albania region was one of the few places where vine was naturally grown during the ice age. The oldest found seeds in the region are 4,000 to 6,000 years old. Ancient Roman writer Pliny describes Illyrian wine as "very sweet or luscious" and refers to it as "taking the third rank among all the wines". Albanian families are traditionally known to grow grapes in their gardens for producing wine and Rakia.

Oil and gas

Albania has the second largest oil deposits in the Balkans and the largest onshore oil reserves in Europe. Albania's crude output amounted to more than 1.2 million tonnes in 2013, including 1.06 million by Canada's Bankers Petroleum, 87,063 tonnes from Canada's Stream Oil and 37,406 tonnes by Albpetrol on its own. Three foreign firms produced the rest. Oil exploitation in Albania began 80 years ago on 1928 year in Kuçova Oil field and was continuously increasing and one years later in Patos, in sandstone reservoirs. Oil production in Albania was increasing continuously. During the periods 1929-1944 and 1945-1963 the total production was only from the sandstone reservoirs, while after 1963 year was and from the carbonate reservoirs. Up to the 1963 year from the sandstones were produced 4 974 649 ton oil.

Albanian oil and gas is represents of the most promising albeit strictly regulated sectors of the economy. It has attracted foreign investors since the early nineties marking the beginning of reforms which transformed the public exclusive rights, control and responsibilities with regard to exploration and exploitation, to the private sector. Oil and gas reserves still remain property of the Albanian State which enters into agreements and grants rights with regard to evaluation, exploration, production, refining/processing and transport of the product.

In March 2016, affiliates of China's Geo-Jade Petroleum purchased the drilling rights (from a Canadian company) for exploiting the oil fields of Patos-Marinze and Kucova. They paid €384.6 million, presumably indicating an interest in accelerating the process.

Trans Adriatic Pipeline

The Trans Adriatic Pipeline is a pipeline project to transport natural gas from the Caspian Sea, starting from Greece via Albania and the Adriatic Sea to Italy and further to Western Europe.

TAP's route through Albania is approximately 215 kilometres onshore and 37 km offshore in the Albanian section of the Adriatic sea. It starts at Bilisht Qendër in the Korça region at the Albanian border with Greece, and arrives at the Adriatic coast 17 km north-west of Fier, 400 metres inland from the shoreline. A compressor station will be built near Fier, and an additional compressor is planned near Bilisht should capacity be expanded to 20 billion cubic metres (bcm). Eight block valve stations and one landfall station will be built along its route.

In the mountainous areas, approximately 51 km of new access roads will be constructed while 41 km of existing roads will be upgraded, 42 bridges refurbished and three new bridges built. In the summer of 2015, TAP started the construction and rehabilitation of access roads and bridges along the pipeline's route in Albania. The work is expected to be completed during 2016.

Tourism

A significant part of Albania's national income derives from tourism. In 2014, it directly accounted for 6% of GDP, though including indirect contributions pushes the proportion to just over 20%. Albania welcomed around 4.2 million visitors in 2012, mostly from neighbouring countries and the European Union. In 2011, Albania was recommended as a top travel destination, by Lonely Planet. In 2014, Albania was nominated number 4 global touristic destination by the New York Times. The number of tourists has increased by 20% for 2014 as well.

The bulk of the tourist industry is concentrated along the Adriatic and the Ionian Sea coast. The latter has the most beautiful and pristine beaches, and is often called the Albanian Riviera. The Albanian coastline has a considerable length of 360 kilometres (220 miles), including the lagoon area which you find within. The coast has a particular character because it is rich in varieties of sandy beaches, capes, coves, covered bays, lagoons, small gravel beaches, sea caves etc. Some parts of this seaside are very clean ecologically, which represent in this prospective unexplored areas, very rare in Mediterranean area.

The increase in foreign visitors has been dramatic. Albania had only 500,000 visitors in 2005, while in 2012 had an estimated 4.2 million – an increase of 740% in only 7 years. Several of the country's main cities are situated along the pristine seashores of the Adriatic and Ionian Seas. An important gateway to the Balkan Peninsula, Albania's ever-growing road network provides juncture to reach its neighbors in north south, east, and west. Albania is within close proximity to all the major European capitals with short two- or three-hour flights that are available daily. Tourists can see and experience Albania's ancient past and traditional culture.

A report from the United States Agency for International Development (USAid) in October 2015 indicated that the direct contribution of tourism is becoming a significant part of the country's Gross Domestic Product, a full 4.8 percent of it in 2013. The total contribution to the GDP was about 17 percent "including wider effects from investment and the supply chain". This is expected to increase in future.

Seventy percent of Albania's terrain is mountainous and there are valleys that spread in a beautiful mosaic of forests, pastures, springs framed by high peaks capped by snow until late summer spreads across them.

Transport

Transport in Albania has undergone significant changes in the past two decades, vastly modernizing the country's infrastructure. Improvements to the road infrastructure, rail, urban transport, and airports have all led to a vast improvement in transportation. These upgrades have played a key role in supporting Albania's economy, which in the past decade has come to rely heavily on the construction industry.

A great deal of additional progress needs to be made. One possible accelerator in the process may be the pending deal with China State Construction Engineering to finish building a 16-mile road to Macedonia, the Arber Road project. However, there is no evidence that a contract has been signed for this project as of February 2017; the country was seeking financing to proceed with such projects, including the planned Peace Highway for connecting Albania with Serbia and Kosovo.

Currently, there are three main motorways in Albania: the dual carriageway connecting Durrës with Vlorë, the Albania–Kosovo Highway, and the Tirana–Elbasan Highway. The A1 Albania–Kosovo Highway links Kosovo to Albania's Adriatic coast: the Albanian side was completed in June 2009, and now it takes only two hours and a half to go from the Kosovo border to Durrës. Overall the highway will be around 250 km (155 mi) when it reaches Prishtina. The project was the biggest and most expensive infrastructure project ever undertaken in Albania. The cost of the highway appears to have breached €800  million, although the exact cost for the total highway has yet to be confirmed by the government.

Two additional highways will be built in Albania in the near future: Pan-European Corridor VIII, which will link Albania with the Republic of Macedonia and Bulgaria, and the north-south highway, which corresponds to the Albanian side of the Adriatic–Ionian motorway, a larger regional highway connecting Croatia with Greece along the Adriatic and Ionian coasts. When all three corridors are completed Albania will have an estimated 759  kilometers of highway linking it with all its neighboring countries: Kosovo, the Republic of Macedonia, Montenegro, and Greece.

From 1989 to 1991, because of political changes in the Eastern European countries, Albania adhered to the International Civil Aviation Organization (ICAO), opened its air space to international flights, and had its duties of Air Traffic Control defined. As a result of these developments, conditions were created to separate the activities of air traffic control from Albtransport. Instead, the National Agency of Air Traffic (NATA) was established as an independent enterprise. In addition, during these years, governmental agreements of civil air transport were established with countries such as Bulgaria, Germany, Slovenia, Italy, Russia, Austria, the UK and Macedonia. The Directory General of Civil Aviation (DGCA) was established on 3 February 1991, to cope with the development required by the time. Albania has one international airport, the Tirana International Airport Nënë Tereza, which is linked to many European destinations. It has seen a dramatic rise in passenger numbers and aircraft movements since the early 1990s. The Airport handles over 1.9 million passengers per year. It is the only port of entry for air travelers to Albania. The airport is named after Mother Teresa, an Albanian Roman Catholic nun and missionary. Albania plans to build two new airports which will mainly serve the tourism industry.

Albania's main seaports are Durrës, Vlorë, Sarandë, and Shëngjin. By 1983 there was regular ferry, freight, and passenger services from Durrës to Trieste, Italy. In 1988 ferry service was established between Sarandë and the Greek island of Corfu. A regular lake ferry linked the Macedonian town of Ohrid with Pogradec. The Port of Durrës is one the largest ports in the Adriatic Sea. As of 2014, the port ranks as the largest passenger port in Albania and one of the largest passenger port in the Adriatic Sea, with annual passenger volume of approximately 1.5 million.

The railways in Albania are administered by the national railway company Hekurudha Shqiptare (HSH) (which means Albanian Railways). It operates a 1,435 mm (4 ft 8 ¹⁄₂ in) gauge (standard gauge) rail system in Albania. All trains are hauled by Czech-built ČKD diesel-electric locomotives.

The railway system was extensively promoted by the totalitarian regime of Enver Hoxha, during which time the use of private transport was effectively prohibited. Since the collapse of the former regime, there has been a considerable increase in car ownership and bus usage. Whilst some of the country's roads are still in very poor condition, there have been other developments (such as the construction of a motorway between Tirana and Durrës) which have taken much traffic away from the railways.

Macroeconomic indicators

GDP (PPP): $36.524 billion (2017)

GDP per capita (PPP): $13,368 (2017)
country comparison to the world: 95

GDP - real growth rate: 3.5% (2011)
country comparison to the world: 109

Inflation: 2.0% (2012)
country comparison to the world:

Unemployment: 13.3% (2010 est)
country comparison to the world: 141

Industry

Industrial production growth rate: 3.4% (2015 est.)
country comparison to the world: 71

Agriculture

Products: wheat, maize, potatoes, vegetables, fruits, sugar beets, grapes; meat, dairy products

Foreign trade

Exports: $2.32 billion (2014 est.)
country comparison to the world: 134th

Top export items 2014: Petroleum ($444 million), Leather Footwear ($276 million), Footwear Parts ($147 million), Chromium Ore ($117 million) and Non-Knit Men's Suits ($81.8 million)

Top export destinations by dollar (2014): Italy ($1.15 billion), Spain ($168 million), China ($130 million), Turkey ($92.8 million) and India ($88.5 million).

Imports: $4.2 billion (2014 est.)
country comparison to the world: -

Top import items 2014: Refined Petroleum ($547 million), Cars ($198 million), Packaged Medicaments ($129 million), Tanned Equine and Bovine Hides ($97.4 million) and Footwear Parts ($86.2 million).

Top import origins by dollar (2014): Italy ($1.38 billion), Greece ($413 million), Turkey ($315 million), China ($278 million) and Germany ($235 million).

Import partners: Italy 45.6%, Greece 7.8%, Turkey 7.4%, Germany 5.6%, Switzerland 5%, China 4.2% (2014)

Remittances: $600 million (2014 est.)

Current account balance: -$1.704 billion (2014 est.)
country comparison to the world: 152

Foreign exchange reserves: $2.479 billion (2008)
country comparison to the world: 103

Energy

Electricity – production: 6.99 billion kWh (2009)
country comparison to the world: -

Electricity – production by source:

Electricity

country comparison to the world: 102

Oil

country comparison to the world: 94

country comparison to the world: 108

Natural gas

country comparison to the world: 84

country comparison to the world: 108

country comparison to the world: 100

Exchange rates