Country Report Albania December 2008

Outlook for 2009-10

The next parliamentary election is expected to take place around mid-2009, as scheduled. This means that the government, headed by the prime minister and leader of the Democratic Party of Albania (DPA), Sali Berisha, has a little over six months to push ahead with the rest of its policy agenda. Albania is set to join NATO in 2009, after it received a membership invitation in 2008, and the government will continue to focus on EU integration. The Economist Intelligence Unit has revised down its forecast for real GDP growth to an average of 4.5% per year in 2009-10, owing to the downturn in the euro zone. We forecast average annual inflation of 3% in 2009-10, although this could be higher in the event of an external shock, such as an unforeseen rise in fuel prices, or a looser than expected fiscal policy. The current-account deficit will remain large over the forecast period, at an average of around 12.5% of GDP.

The political scene

Parliament has approved a controversial election law, backed by the two main political forces, the DPA and the opposition Socialist Party of Albania (SPA), which puts in place a system based entirely on proportional representation and limits the role of the smaller parties in the vote-counting commissions. Several smaller parties have taken steps to merge or join larger parties, because the new electoral system puts them at a disadvantage.

Economic policy

The government has approved a draft budget for 2009 that sets a deficit target of 4.2% of GDP, down from its forecast 5.2% of GDP in 2008. The government has indicated that it does not intend to conclude a successor agreement with the IMF when the current arrangement expires in early 2009. The Bank of Albania (BoA, the central bank) has kept its key policy rate on hold at 6.25%, and expects inflationary pressures to ease in the coming months.

The domestic economy

Buoyant domestic activity, rising exports and fast credit growth in January-September point to real GDP growth reaching 6% in 2008. The total stock of loans at end-September 2008 was estimated at 31% of GDP, up from 26% of GDP a year earlier. Inflation has come down earlier than expected, slowing to 2.8% year on year in October, well within the BoA's target range of 2-4%.

Foreign trade and payments

Although exports outperformed imports in the third quarter of 2008, the tradedeficit expanded by 15% year on year, reaching Lk80bn (US$1bn). The current-account deficit doubled year on year, to 344m (US$544m), in the second quarter.