European Commission releases report on economic reform programme

The European Commission has published a report on the fifth program of economic reforms, covering the period 2019-2021 drafted by the Albanian government.

In its comments, the European Commission stresses the high level of public debt, the collection of taxes below potential, the low level of competitiveness, high level of unemployment among youngsters, the low quality of education, shortages of qualified workers, etc.

The commission also notes that although Albania’s investments in education and healthcare were below the average of the region, they are predicted to drop even further.

Extracts from the report:

Albania’s economic reform programme (ERP) projects economic growth to accelerate to 4.5% by 2021 based on strong private domestic demand. GDP growth in 2018 was robust at 4.2%. Private demand is expected to continue driving economic growth in 2019-2021, based on greater employment, rising wages and favourable lending conditions for households. Private investment activity is projected to pick up significantly in this period, driven by emerging capacity constraints and favourable financing conditions. Net exports are expected to make only a marginal contribution to the economic expansion. The growth outlook appears optimistic in light of a worsening external environment, continued low levels of lending to businesses, and enduring weaknesses in the business environment.

The ERP expects Albania to cut public debt from 67% to below 60% of GDP by 2021 by reducing current expenditure and stabilising tax revenue. The 2018 budget deficit has turned out lower than planned with estimated 1.5% of GDP, mostly due to lower than expected capital spending. The ERP expects the budget deficit to fall to 1.2% of GDP in 2021 by reducing current expenditure but does not provide details of a fiscal consolidation strategy. The relatively low public expenditure does not allow for significant expenditure cuts which partly explains the moderate pace in debt reduction. The relatively low tax revenue is planned to stabilise without major reforms outlined and will thus remain below potential. Public investment is set to increase to over 6% of GDP by 2021, but achieving this increase could be difficult due to weaknesses in the planning and management of capital expenditure. The main challenges Albania faces are outlined in the bullet points below.

  • Public debt is still high, and large financing needs are weighing on debt sustainability; tax collection is also below potential. The planned debt reduction strongly depends on high economic growth until the end of the programme period. Advancing the fiscal consolidation can mitigate the risk of not achieving the debt reduction target in case of lower growth in coming years. Stronger fiscal rules on timing, enforcement, correction measures, and monitoring by an independent fiscal institution could all help in reaching the medium-term debt target. The high level of undeclared work and tax evasion provides ample scope for increasing tax revenues without raising tax rates. Unrecorded arrears and contingent liabilities undermine the credibility of the public debt position.
  • The ERP assumes rising investment, but does not address conditions necessary for increasing private investment or for improving the efficiency and growth impact of public investment. Private investment in Albania is hampered by shortages of skilled labour and the low quality of public services accessible to entrepreneurs. Entrepreneurs also lack productive and entrepreneurial know-how, financial literacy, and access to finance. Albania’s investment in education and health has been below the regional average, and the ERP plans to decrease even further the share of budget allocations to education and health. The increases planned for public investment should also be used to finance education, health and research, and this investment must be more efficient and more effective.
  • Albania’s competitiveness continues to be hampered by inefficiencies in the energy sector, including insufficient security of supply. The dependence on hydropower for electricity generation (98%) makes the economy vulnerable to climate change and hydrological conditions. In addition, Albania is a net importer of electricity contributing to the considerable trade imbalance. Investment in energy efficiency could contribute to lowering these vulnerabilities. Albania has adopted Part II Country analysis, Albania 15 legislation on the liberalisation and unbundling of the gas and electricity markets in line with the EU’s third energy package, but it is not yet fully implemented.
  • The tourism sector in Albania has a great potential, but it is underdeveloped. A comprehensive tourism strategy has been developed, but it has seen significant delays in its adoption, which jeopardises the sustainable development of this sector, in spite of its significant potential to contribute to economic development and to offer competitive export growth. There is a need to develop relevant Vocational Education and Training (VET) programmes in the tourism field.
  • High youth unemployment and inactivity, low female employment, high share of informal and vulnerable employment, insufficient social care services and low quality of education are key obstacles. Active labour market policies need to better target vulnerable jobseekers, provide more upskilling and be more relevant to labour market needs. Social assistance allowances are not sufficient to lift the poor above the extreme poverty line. Social care services for inclusion of vulnerable people are insufficient and many local government units lack capacities and resources to plan and deliver them. Educational outcomes are weak at all levels and the VET reform is delayed. Early childhood education suffers from very low investments and low enrolment for children from vulnerable families. Participation in adult education is particularly low.
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