Country Report Albania September 2008

Outlook for 2008-09

The next parliamentary election is expected to take place in 2009, as scheduled. This means that the government, headed by the prime minister and leader of the Democratic Party of Albania (DPA), Sali Berisha, probably has less than a year to push ahead with the rest of its policy agenda. Albania has received a NATO membership invitation, and the government will continue to focus on EU integration. Real GDP is forecast to grow by 6% per year in 2008-09, although power problems and slow euro zone growth present downside risks. The Economist Intelligence Unit forecasts average inflation of 4% in 2008 and 3.5% in 2009, but this could be higher 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

Mr Berisha has carried out a minor cabinet reshuffle that has weakened one of the smaller parties in the ruling coalition. A lengthy dispute over Supreme Court nominees has created friction between the government and the president, Bamir Topi. US officials have warned that government interference with the work of independent institutions could lead to Albania's NATO accession being delayed until after the parliamentary election in 2009.

Economic policy

Parliament has adopted a supplementary budget that cuts the forecast deficit in 2008 to 5.2% of GDP, from 7.9% of GDP. The budget deficit was just Lk2.3bn (US$29m) in the first half of 2008, compared with a planned deficit of Lk18bn. 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 over the coming months.

The domestic economy

Industrial sales data suggest that economic growth remained strong during the first quarter of 2008. A new labour force survey indicates that the workforce is much larger than indicated by other official statistics, although the estimated unemployment rate is the same. Inflation slowed to 3.7% in July, within the BoA's informal target range of 2-4%.

Foreign trade and payments

The trade deficit expanded by 12.6% year on year in the second quarter of 2008, to Lk76bn, because of soaring fuel prices and increased imports of machinery. The current-account deficit widened by 58% year on year, to €289m (US$430m), in the first quarter. Foreign direct investment (FDI) totalled €119m in January-March, compared with €91m in the year-earlier period.