Country Report Albania

Outlook for 2008-09

The next parliamentary election is not expected to take place until 2009, as scheduled. The government, headed by the prime minister and leader of the Democratic Party of Albania (DPA), Sali Berisha, has a little over a year to push ahead with its policy agenda. Albania has received a NATO membership invitation, and the government will continue to focus on EU integration. The Economist Intelligence Unit forecasts real annual GDP growth of 6% in 2008-09, although power problems and slow euro zone growth present downside risks. We forecast average inflation of 4% in 2008 (up from 3.5% previously) and 3.5% in 2009 (previously 3%). There is a risk that inflation could be higher still in the event of an external shock or a looser than expected fiscal policy. The current-account deficit will remain large over the forecast period, at an annual average of more than 11% of GDP.

The political scene

Parliament has approved amendments to the electoral system, following an agreement between the ruling DPA and the opposition Socialist Party of Albania (SPA). All 140 members of parliament will in future be elected by regional proportional representation from party lists. Albania's president can now be elected by a simple majority in parliament, instead of the previous three-fifths majority. Smaller parties are challenging the changes.

Economic policy

The budget ran an unexpected surplus in the first quarter of 2008, and the government has reduced its full-year deficit target following IMF pressure. The Bank of Albania (BoA, the central bank) has kept its key policy rate at 6.25%, despite higher headline inflation. The government has received bids for Albania's state-owned oil refinery.

The domestic economy

Inflation in March and April was above the upper limit of the BoA's informal target range of 2-4%. This reflects rising food and energy prices, as well as higher domestic electricity tariffs. Commercial bank credit grew by 45% in the year to March. Electricity supplies have improved, but the finances of the state-owned power utility remain precarious.

Foreign trade and payments

The (lek) trade deficit rose by 17% year on year in the first quarter, reflecting rising import costs and a tailing off of the mining boom. The current-account deficit exceeded 10% of GDP in 2007, although FDI hit a record €463m. The authorities have postponed a debut Eurobond issue, citing lower than expected funding requirements in 2008 and the need to improve debt management.