Albania has emerged as an unexpected success story since the start of the Europe-wide economic crisis triggered by Russia’s invasion of Ukraine in February 2022.
The country had one of the region’s lowest inflation rates in 2022, the lek is at a record high against the euro, and projections indicate Albania will be among the fastest-growing economies in Emerging Europe over the next three years.
Like the rest of the region, Albania is poised for a slowdown in 2023 as inflation takes its toll on international economies. However, it is expected to maintain growth that is considerably ahead of the average for Central and Southeast Europe.
This follows a better-than-expected 2022, when the country achieved economic growth of 4.8% in 2022. The government has thus maintained its GDP growth forecast for 2023 at 2.6%.
The World Bank, meanwhile, forecasts growth of 2.8% in 2023, accelerating to 3.3% in each of the following two years.
The International Monetary Fund (IMF) has lowered its forecast to 2.3% for this year in its latest World Economic Outlook (WEO), released on April 12, anticipating that the country will continue to be negatively affected by the global economic crisis caused by the Russian war in Ukraine.
Next year, the economy is seen by the IMF as expanding by 3.3%, while in 2028 the projection is for 3.4% economic growth.
The Vienna Institute for International Economic Studies (wiiw) put Albania among the three fastest-growing countries of the 23 it assesses from Central, Southeast and Eastern Europe and Central Asia.
Growth in Albania, together with fellow Southeast European economies Kosovo and Romania, will consistently outstrip that in the wider region, according to wiiw. It projected Albania’s growth at 3.3% in 2023, 3.8% in 2024 and 4.0% in 2025.
“The real out-performers, the really strong stories are predominately in Southeast Europe, which is certainly not always the case,” commented Richard Grieveson, deputy director of wiiw, during an April webinar to present the institute’s spring forecast.
“That applies to a mix of both the non-EU members like Kosovo, Albania – really a growth success story of this downturn – and to an extent Montenegro, but also some EU member states, especially Croatia and Romania.”
Albania’s inflation, while elevated during the second half of 2021 and throughout 2022, has not advanced as fast as in other countries in the region.
Inflation peaked at 8.3% in October – well below the double digits recorded in several of its peers – and has since declined.
The latest data show that inflation decreased to an average level of 6.5% in the first quarter of 2023, down from 7.9% a quarter earlier. The decline was particularly fast in March, when annual inflation dropped to 5.3%.
Ivailo Izvorski, chief economist for the Europe and Central Asia region at the World Bank, attributed Albania’s relatively low inflation to a combination of the price caps introduced by the government and the fact that it produces 100% of its electricity from hydropower, during a webinar on May 3.
The strong hydropower sector provided some insulation from the ongoing energy crisis, even though low water levels meant it did not cover the 85% of domestic energy demand it would in a year with average precipitation, said a recent World Bank report.
Another factor was the high lek/euro exchange rate. “[T]he exchange rate against the euro continued to appreciate (by 4.9% in December), thus restraining the transmission of imported inflation into the domestic economy,” the report said.
Central bank holds key rate
In its latest rate-setting decision, the Bank of Albania’s supervisory council decided on May 3 to keep the base interest rate unchanged at 3.0%, a statement from the bank said.
“Inflation continued its downward trend during the first quarter, influenced by the general decline in inflation in the world environment, the effect of the high comparative base of the previous year and the first effects of the normalisation of the monetary policy stance,” central bank governor Gent Sejko told a press conference on May 3, according to a transcript published by the Bank of Albania.
“At the same time, the economic activity in the country has continued to grow at a steady pace and – along with it – employment and wages in the private sector.”
Central bank forecasts suggest that inflation will continue its gradual decline this year and will return to target within the first half of 2024. Meanwhile, economic growth is expected to remain positive, “supported by solid balance sheets. the private sector, the positive perspective of the labour market, the improvement of the confidence of economic agents and the still accommodating financing conditions,” Sejko said.
Lek at record highs
The Albanian lek (ALL) has reached a record high against the euro after steadily strengthening in late 2022 and experiencing a sharp rise in recent weeks.
As of April 26, the exchange rate stood at ALL111.31 to the euro – close to the record-high values for the lek since the euro was launched in 2002. It compares with ALL120.51 a year earlier. In April 2013, the exchange rate was ALL140.62 to the euro.
The current ALL-EUR exchange rate is closely monitored in Albania, since the eurozone is by far the country’s biggest trade partner.
The rise in the strength of the lek is causing stress for export-oriented businesses in the country. However, at the same time, the strong lek has made imports more affordable, which has helped keep inflation levels relatively low at a time when inflation has soared across Europe.
As reported by the Tirana Times, experts believe that the euro's weakness in the Albanian market can be attributed to several factors.
They include the large amount of foreign currency on the market, resulting from the rise in tourism revenue, the seasonal effect of the Easter holidays and an increase in remittances.
After Albania’s tourism sector rebounded in 2022, another strong tourism season is anticipated this summer.
There are also concerns about inflows of money from the grey or black economy abroad, the Tirana Times reported, referencing reports from the Albanian border police of catching people trying to enter the country with large amounts of undeclared cash.
The strong lek has also helped Albania reduce its debt burden after it borrowed during the pandemic to support the economy.
Albania’s public debt in the first quarter of 2023 dropped to 63.27% of the country’s GDP, down from 64.58% at the end of 2022, a statement from the finance ministry said on May 2.
“According to the structure [of public debt], the largest weight is the external debt and here I want to emphasise the effect of the exchange rate on the reduction... of the debt, since a large part of the debt is assessed and received in euros, the exchange rate has brought a slowdown in the figure of public debt,” Finance Minister Delina Ibrahimaj told a conference on May 2.
Ibrahimaj also reported a strong increase in budget revenues in the first quarter of 2023, as positive trends in the economy continued.
Total budget revenues came in at ALL3.67bn (€32.8mn) higher than planned during the first quarter. This was an 11.7% year-on-year increase, which was well above the average inflation rate of 6.5% for the first quarter. Meanwhile, VAT revenues were up by 16.7% y/y.
"Incomes and their growth have continued to be affected by the increase in prices, but for the most part it is the economic activity that has influenced the growth of incomes,” said Ibrahimaj, according to a ministry statement.
The minister also reported good progress in employment in key sectors such as construction, transport and trade. New businesses were created in March 2023, with the total number of businesses up by 905 compared to at the end of 2022.