Albania
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
17 Apr 1997
eISBN:
9781451800609
Language:
English
Keywords:
ISCR; CR; gross domestic product; state enterprise; U.S. dollar; private sector; savings bank; book value; budget deficit; balance of payments; monetary policy; small business
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This paper describes economic developments in Albania during the 1990s. Macroeconomic performance deteriorated in 1996, as the fiscal stance was weakened ahead of the parliamentary elections in May. Although two large public sector wage increases contributed, it was mainly revenue shortfalls that drove the domestically financed budget deficit to more than 10½ percent of GDP—the highest level since 1992. Reflecting higher demand in the economy, the trade deficit increased from 19½ percent of GDP to 25 percent of GDP, and inflation nearly tripled to 17½ percent.

Abstract

This paper describes economic developments in Albania during the 1990s. Macroeconomic performance deteriorated in 1996, as the fiscal stance was weakened ahead of the parliamentary elections in May. Although two large public sector wage increases contributed, it was mainly revenue shortfalls that drove the domestically financed budget deficit to more than 10½ percent of GDP—the highest level since 1992. Reflecting higher demand in the economy, the trade deficit increased from 19½ percent of GDP to 25 percent of GDP, and inflation nearly tripled to 17½ percent.

I. INTRODUCTION

Albania has made impressive progress since the overthrow of Communism in 1991. After large output falls at the beginning of the transition period, for the last four years GDP has grown at an annual average rate of about 9 percent. Inflation was reduced from triple digits in 1992 to 6 percent by end–1995 (Chart 1, Table 1). The country has been supported by substantial assistance from donors and multilateral institutions. It has a well–educated population, natural resources, and a good location with the potential to attract tourism and to develop export–oriented light industry. However, despite its recent growth, Albania remains the poorest country in Europe, and years of isolation have left it with a crumbling infrastructure and institutions ill–adapted to the needs of a modern market economy.

CHART 1
CHART 1

ALBANIA Economic Developments, 1992–96

Citation: IMF Staff Country Reports 1997, 021; 10.5089/9781451800609.002.A001

Sources: Albanian authorities; and Fund staff estimates.
Table 1.

Albania: Basic Indicators,1992-96

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Sources: Albanian authorities; and staff estimates.

Data for 1994 and 1995 has been revised. Foreign savings may be everestimated by 1-2 percent of GDP in 1994 and 1995 (and hence private and total saving underestimated by the same amount) due to under-reporting of exports) to FRY during the trade embergo. Therefore, the projected step-up in private saving in 1996 is essentially statistical, not economic.

Current account excluding the net factor services and official transfers.

Commitment basis, excluding foreign financed investment.

Excluding official transfers only.

Strong adjustment policies have been the key to Albania’s success. Over the period 1992–1995, the authorities succeeded in reducing the domestically–financed budget deficit from 44 percent of GDP (in 1991) to below 7 percent, in reducing the current account deficit from 64 percent of GDP to 8 percent, and in building up official reserves from almost nothing to US$240 million (equivalent to over four months of imports of goods and non–factor services). At the same time, major structural reforms, including extensive privatization and virtually complete liberalization of prices, were effected. During most of this period, the Fund supported the authorities’ reform program, first through a Stand–By Arrangement and later through an ESAF arrangement.

Macroeconomic performance deteriorated in 1996, as the fiscal stance was weakened ahead of the parliamentary elections in May. Although two large public sector wage increases contributed, it was mainly revenue shortfalls that drove the domestically financed budget deficit to over 10½ percent of GDP—the highest level since 1992. Reflecting higher demand in the economy, the trade deficit increased from 19½ to 25 percent of GDP, and inflation nearly tripled to 17½ percent. Some measures were taken to reduce the budget deficit later in the year, including the long anticipated introduction of the VAT in July.

The beneficial effects of measures taken by the government in the second half of 1996 were, however, overshadowed by the rapid growth of financial pyramid schemes. Since the beginning of the transition Albania has had an informal market which has included investment funds offering high rates of return. In 1996, new companies entered this market, offering implausibly high rates, and the schemes already in the market raised their own rates to match them. By November 1996, most of the companies in the informal market had taken on the characteristics of pyramid schemes, offering interest rates of 8 to 40 percent per month (compared to inflation of less than 20 percent per year), and financing their interest payments by a growing pyramid of new deposits which they were incapable of repaying. The distorting effects of these pyramids schemes can be seen in developments in macroeconomic indicators during this period: higher remittances from emigrant workers attracted by high interest rates; a substantial, but ultimately short–lived, appreciation of the lek; and gyrations in the currency–deposit ratio. In early 1997, the inevitable collapse occurred, and the pyramid scheme mania turned into a panic, which continues at the time of writing.

The successful macroeconomic adjustment in recent years and the recent chaos of the pyramid schemes have taken place against a background of considerable change in market institutions and factor markets—which indeed accounts for much of Albania’s successful growth performance. From a situation in 1992, when all prices were set by administrative fiat with no relation to demand and supply, prices are now mostly market–determined, and exhibit a high degree of flexibility.1 The trade regime is open (the average tariff is about 12 percent) and largely free of quantitative restrictions. The labor market has also undergone considerable change as public employment contracted substantially over 1992–95 and employment in the private sector, especially services and farming has grown; the number of unemployment benefit recipients has fallen and wages are mostly market–determined.

Further structural reform, however, is badly needed in other areas. The government’s ability to reduce the budget deficit is limited by deficiencies in tax administration, where reforms that would extend the modern administrative procedures introduced in collecting the new value added tax (VAT) to other major domestic taxes are a key priority. Reform of the banking sector, and especially privatization of some of the state–owned banks, is another area where much remains to be done. The current banking system provides little by way of services (the payments system is still largely cash–based) and poor lending and loan–collection practices are endemic. Indeed, inefficiencies of the formal banking system played a significant role in the growth of the informal market. More progress has been made in privatization and in civil service reform, but further action is needed in these areas too. Finally, future agricultural development requires the creation of a functioning agricultural land market.

The remainder of this paper is divided into two parts. Section II gives more details on recent macroeconomic developments in 1995 and 1996. Section III discusses the major outstanding structural issues. The Albanian tax system is described in Appendix I, and is followed by the Statistical Tables.

II. MACROECONOMIC DEVELOPMENTS

A. Developments in the Real Economy

Output developments

Output grew by around 9 percent in 1995, a third successive year of strong growth after large output declines during 1990–92 (Table 2). The 1995 out turn is largely attributable to continued strong growth in agriculture (10½ percent). Over 1991–95 as a whole, agricultural output increased by 63 percent. Strong growth was also witnessed in construction (12½ percent), transportation (6 percent) and other services (8 percent), reflecting the continued development of shops and restaurants and the beginnings of a tourist industry. In 1995, industrial output rose for the first time since the transition began (by 1 percent) as new private industries, especially textiles and shoe manufacturing, began to take the place of still–declining state industries (energy production, mining and metallurgy); production in state–owned industries, however, continued to fall as in the previous two years.

Table 2.

Albania: GDP by Sector of Origin, 1990-95 1/

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Sources: Ministry of Finance; and staff estimates.

Given the very limited production-side data, these estimates are based mostly on demand-side developments, and should be treated with caution. There are significant discrepancies between data in this table and some production-side data, e.g., for agriculture.

Despite strong economic performance during 1993–95, reported GDP remains below the pre–transition level This is probably misleading: much of the pre–transition GDP was concentrated in industrial goods which were sold under special trading arrangements and at prices which did not necessarily reflect market values. Also, while there was undoubtedly a very substantial output collapse at the beginning of the transition process, living standards now appear to be higher than in 1990. On the other hand, there is also a risk of overstating annual growth, due to improvements in data collection by Albanian statistical agencies and government ministries, especially in categories such as private industry and services. The number of companies on the Business Register, for example, increased from about 47,000 in 1994 to over 55,000 in 1995; it is not clear how much of this increase is attributable to increased activity, and how much to fuller reporting of existing activity (Table 3). While allowance has been made for these potential distortions in the figures reported here, substantial scope for error remains, given still evolving data collection procedures in Albania.

Table 3.

Albania: Registered Private Enterprises by Activity, 1991-95

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Sources: Institute of Statistics; and staff estimates.

Services includes transport.

Agriculture

Agricultural output as a share of GDP rose slightly to about 56 percent of GDP in 1995, consolidating the very substantial rise in its share between 1990 and 1994 (from 37 percent to 55 percent). In part this reflects the decline in the share of industry (discussed below). While further growth in agricultural output appears likely, it will be constrained by the very fragmented structure of land holdings, the average farm size being only about 1½ hectares. Concentration of land holdings will require the development of an active land market, which has so far been absent. Future production will also be influenced by the limited availability of rural credit and of marketing channels. There is evidence of recent development of a food processing industry, which should improve marketing opportunities.

Industry

The collapse of output in industry has been longer lasting, and the decline in heavy industries such as mining and metallurgy has been precipitous. Employment in the state enterprises also fell sharply. In the 36 enterprises taken over by the Enterprise Restructuring Agency, employment fell from 49,000 to about 10,500 by mid–1995. Total public-sector employment fell to about one–third of its pre–transition level. Industrial output increased marginally in 1995 (by 1 percent), but this followed several years of substantial declines. The recent pick-up in activity is primarily due to new private industries, especially textiles and shoe manufacturing, replacing still declining state industries.

There was some output growth in state enterprises in 1995; the output of the state electricity company (KESH), for example, increased by about 13 percent in 1995. In other sectors, including furniture production, which were formerly dominated by state companies, privatization reduced production by state enterprises, but production in the sector as a whole probably increased. Data continues to be limited outside of the state sector, but the authorities have recently begun to collect data on production of processed foods and on certain light industries. The limited available data show that production by light industries such as textiles, shoes, light machinery, handmade goods, paper products and plastics, grew by 38 percent in value terms in 1995, albeit from a low base. While some of this increase may reflect improved data collection rather than higher activity, the increased production of many of these items, especially footwear, clothing and wood and leather products, is also reflected in the 1995 export figures.

Construction and services

Although official data on activity in construction and services are limited, there is no question that there was a significant increase in activity in these sectors in 1995. Growth in the construction sector is estimated at 12½ percent, with much of it being attributable to increases in private construction, estimated to have doubled in 1995, again from a low base. Some services saw even more rapid growth. For example, the number of nights spent by tourists increased by 46 percent in 1995, as new hotels opened, especially in southern Albania. Higher activity in services can also be seen in the number of businesses registered: in transport and services sectors taken together, registered businesses rose from about 15,500 to over 17,000.

Price developments

Following the large initial price liberalization in August 1992, annual inflation fell rapidly from triple digit levels and, monthly CPI inflation remained at a low level for a period of around two years over 1994–95 (Chart 2, Table 14). Using alternative indicators to eliminate the impact of administered price changes or large outliers (a “core” inflation index), underlying inflation was even lower. Inflationary pressures, however, picked up in the last quarter of 1995. Measured inflation in 1996 also rose as bread, kerosene and liquefied gas prices were liberalized and the VAT was introduced in July 1996; in addition, prices of public transportation were raised in August. By end–1996, annual (December–on–December) inflation had risen to 17½ percent (of which about 7 points reflected price liberalization and the VAT).

Chart 2
Chart 2

ALBANIA Inflation and the Exchange Rate, 1993-96

Citation: IMF Staff Country Reports 1997, 021; 10.5089/9781451800609.002.A001

Sources: Albanian authorities; and staff estimates.1/ Core inflation is defined as the central 75 percent of distribution of monthly inflation.2/ CPI excludes non-administered price changes; for the exchange rate, positive values indicate a depreciation.
Table 4.

Albania: Production of Selected Industrial Products in the State Sector, 1991-95

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Source: Institute of Statistics.
Table 5.

Albania: Construction Cost Index, 1993-95

(Q1 1993=100)

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Source: Instistute of Statistics.
Table 6.

Albania: Consumer Price Subsidies, 1990-95

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Sources: Ministry of Finance; and staff estimates.

This figure does not match total price subsidies in the budget data for 1993-94: For 1993, and to a lesser extent for 1994, some of these subsidies were apparently included in the budget figure for operations and maintenance.

Table 7.

Albania: Controlled Prices of Essential Retail Goods and Services, 1992-95

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Sources: Ministry of Finance, and staff estimates.

In November 1993, the official price became a ceiling price for private and state-owned bakeries; the actual retail price was well below the ceiling. However, by the end of 1994, the ceiling was nearly binding and stayed there because of an increase in international wheat prices despite several measures to reduce other input prices. For 1995, bread price for 75 percent extraction.

In April 1994, the prices of firewood and coal were liberalized and most other energy prices were raised to international levels.

Beginning in May 1993, individuals could buy their apartments or houses, and by end-1993 the process was virtually completed. The rents for private housing are completely liberalized.

Table 8.

Albania: Retail Prices for Energy, 1991-95

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Sources: Ministry of Finances; and staff estimates.

Prices were raised between October and November 1992.

Prices were raised in the second half of 1993.

Prices were raised in April 1994; prices for firewood and coal were liberalized.

45-65.9 octane benzine.

66-89.9 octane benzine.

90 octane benzine and above.

Price for “lifeline block” which is defined as electricity usage less than 250 kwh per month per household large cities, 150 kwh in small towns, and 70 kwh in rural areas.

The price for “lifeline block” was 0.8 lek/kwh, for the next 50 kwh 1 lek/kwh, and for greater usage 3 lek/kwh was charged.

Price differentiation was abolished in April 1994.

Table 9.

Albania: Agricultural Production, 1990-95 1/

(In millions of leks at constant 1994 prices)

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Sources: Ministry of Agriculture; staff estimates.

These estimates, which are based on Ministry of Agriculture data with some items that should properly be classified as inputs (e.g., manure, new trees) excluded from the output figures, are significantly below the demand-side based on GDP figures in Table 2.

Table 10.

Albania: Agricultural Production and Pattern of Ownership, 1990-95

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Sources: Ministry of Agriculture; and staff estimates.

As noted in footnote 1 in Table 4, these data, based on Ministry of Agriculture sources, differ significantly from the demand-side based data for agriculture in Table 2.

Beginning in 1991, production of cooperatives is included in the figures for private farms, as farmers spontaneously dismantled the cooperatives and distributed the land and livestock among themselves. In 1992, a policy formalizing this distribution was adopted.

Table 11.

Albania: Area Under Cultivation, Production and Yields of Selected Agricultural Crops, 1990-95

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Sources: Ministry of Agriculture; and staff estimates.

One quintal equals 100 kilograms.

Table 12.

Albania: Production and Yields of Selected Fruits, 1990-95

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Sources: Ministry of Agriculture; and staff estimates.