Economy

The transition
The tremendous financial crisis - due to the major restructuring of the economic system - that had affected the country in the 1988-1992 period seemed to have come to an end when, with a sudden inversion of trends, Albanian rate of growth exceeded those of most Eastern European countries. A 7-8 % yearly GDP increase, contained unemployment and stable inflation were read as clear signs of recover.

The progress realised from 1993 was mainly due to a policy of decentralisation and transition to a market economy.

The process, though, caused - among different problems - a restriction of the industrial sector that finally led to a financial stall in 1995. The temporary difficulty was obviated through massive investment in financial pyramids that were estimated to involve between 50 and 90% of the population.
The fall of the fragile system � and the uncover of many instances of frauds � took the Albanian economic and political establishment to collapse in 1997. The country fell into chaos and the looting of several military depots resulted in a situation of anarchy with an armed population and local gangs confronting each other in the streets. An estimated 1,500 people lost their lives. Although most of the looted weapons were recovered, still many citizens remain armed.
The immediate impact of the financial crisis did not have long lasting effects: by the end of 1997, the production regained the standards previously attained that were substantially reconfirmed in the following years.

The current economic situation is characterised by persistent and widespread poverty, a rather scarce industrial production (11,8% of GDP) vis � vis a considerable contribution from the agricultural sector (52,9% of GDP). The first outcome of the limited production of refined goods is the extremely high import rate resulting in substantial imbalance.
The remittances coming from the 700,000 Albanians living abroad still constitute the most flourishing resource of the country, mostly considering the rise in the national unemployment rate (from 18 to 20% in 1999).
The recent positive results registered in the fight against organised criminality are probably going to reestablish the climate of calm that might boost foreign investment in the internal market.

The lack of confidence in the government�s economic policy and the level of unemployment (which reached about 16% at the end of 2003 according to the Albanian statistical office), are believed to be the main factors with relevant negative influence in the economic development of Albania. Nevertheless, the persistent deficiencies of the Albanian judiciary, customs, taxation and other business-related administrations, as well as the problem of corruption and the so far unresolved issue of land ownership, continue preventing a significant increase in investments and adversely affect economic prospects. A detailed Action Plan was adopted in 2003, aiming at removing administrative barriers to investment in the areas of customs and tax administrations, land ownership and construction, the appeal system and the provision of licenses for the non-food sector.

The economic climate, during 2004 was assessed satisfactory, characterizing by very strong economic growth of about 6 % and the average annual of 3.9%, which contributed to an improvement of the situation in the labor market and supported the observance of the budget estimate, which in line with the current IMF program of 2004 is to amount to just under 5 % of GDP.
As a progress and important factor with regard to market-oriented structural reforms, was the privatization of the largest Albanian bank, the �Savings Bank�, on January 2004 from Austrian Bank Reiffeisen, because the loans of this bank will stimulate the private investments during 2005. This major step forward is also expected to have a positive impact, together with the steps taken to privatize the main Albanian insurance company, �INSIG�, represent considerable progress towards the completion of the privatization of the financial sector. Efforts need now to continue in order to complete the restructuring and privatization of the remaining state owned companies.

Some steps have also been taken in relation to the banking system. Although the Albanian economy remains largely cash-driven and the majority of transfers and payments are still carried out outside the banking system, efforts are being made to promote the use of it, notably through steps towards the payment of civil servants� salaries through the banks, and the encouragement to pay electricity and telephone bills via the banking sector.

From 1998 to date, foreign investments in Albania are the lowest in the region. Actually, they make up $35 per inhabitant and the public investments are only at the 67 percent target level. One hundred thousand Albanians leave Albania every year. Foreign and domestic firms are treated equally under the law and are guaranteed safety from expropriation or nationalization. The government does not screen foreign investments, and nearly all sectors of the economy are open to foreign investment. Political instability, crime, corruption, and a thriving informal market continue to discourage foreign investment and undermine the implementation of reform.

Current Economic Situation

The election of 2005 will develop different economic situations, although the economic growth will be without doubt of 6 %. A big challenge during the electoral year 2005 will be the creation of a favor situation for a regular function of private sector. Albania is considered a potential member of EU, therefore the private sector should have the European standards, which is still far away.

The fiscal package for 2005 remains an important part of Tax Revenue System, which means growth of incomes from costums and taxes as well as the improvement of reports between tax system and private sector, stimulating the international investments.

The development of Albanian economy during 2005- 2006 will be stimulated by the private sector, which will be an important innovation in banking sector. Such situation is based on a fiscal politic which strengthen the public finances. The strategy of the European Bank for Reconstruction and Development (EBRD) for Albania is to focus its action on private sector development and support to SMEs, participation in strategic privatization�s, more particularly in financial and telecommunications sectors, and infrastructure financing and development, especially in the energy and transport sectors.

Nevertheless, the financial sector still needs to strengthen its structures, including banking supervision, and to play a more central role in the country�s economic development (especially by being more active in providing credits to productive units).

To improve business climate the government should reduce the fiscal envasion and the fiscal package of 2005 is a good compromise between the government and the business community.