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. The government, led by Edi Rama, the prime minister, earned considerable public backing for its effective handling of the first wave of the coronavirus (Covid-19) pandemic. However, the situation has deteriorated in recent months and public support has started to wane. In early December Sander Lleshaj, the interior minister, was forced to resign amid public outrage at the killing by a police officer of a young man who had allegedly violated the coronavirus curfew. The protests abated after a week, but their intensity highlighted growing public discontent. On January 4th, following the interior minister's resignation, parliament approved a government reshuffle. The new government line-up keeps the prime minister's close associates in office and signals the launch of the informal election campaign ahead of the next parliamentary election, which is scheduled for April 25th.

ELECTION WATCH: The next parliamentary election is scheduled for April 25th. We maintain our forecast that a moderately successful vaccination rollout will be sufficient to help the SPA to retain power after the election. The speed and effectiveness of the vaccination programme has electoral implications because Mr Rama is keen to demonstrate the authorities' competence in dealing with the coronavirus. The SPA also wants the government to be able to lift many of the ongoing containment restrictions before polling day.

INTERNATIONAL RELATIONS: EU integration, leading to eventual membership, is the foreign policy priority. Albania has been expected to meet a long list of preconditions, mostly related to tackling crime and corruption and achieving further progress on judicial and electoral reform. We believe that EU membership will not happen within the forecast period 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 lifting of the lockdown and Albania's reopening to tourism in the summer months resulted in a rise in coronavirus infections, which developed into a second--much more deadly--wave in October. This has led to the reintroduction of a range of restrictions on the public; the latest measures, which were introduced on November 17th, banned gatherings of more than ten people indoors or outdoors. The Albanian healthcare sector is struggling to deal with the pressure resulting from the outbreak. Albania initially had two hospitals treating Covid-19 patients; by November this had expanded to four hospitals, all in the capital, Tirana.

ECONOMIC GROWTH: We have revised our growth forecasts for 2021 downwards, to 6% (compared with 7.5% previously), as the restrictions to contain the spread of the virus will be in place until at least the second quarter. These will dampen growth through weaker tourism, remittances, external demand and foreign direct investment, as well as tighter financial conditions. Remittances were 34.5% lower year on year in the second quarter of 2020, but increased by 6.9% in the third.

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 have helped to keep deflationary pressures under control. Inflation will increase from 1% in 2020 to 4% 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 6.4% of GDP in 2021, from 10.4% 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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