Subchapters:

• Basic data
• Public finances and the state budget
• Banking system
• Tax system

Basic data

The Albanian economy coped very well with the consequences of the earthquake in 2019 and the impact of the pandemic in 2020 (GDP decrease of only 3.3%), which, however, happened at the expense of the growth of the state’s debt. With the recession of the pandemic, the recovery of tourism, the increase of remittances of Albanians working abroad and the significant increase of the government’s investment in infrastructure, there was an economic growth of 8.5% in 2021 (data of the central bank). Economic growth will continue in the medium term, in 2022 the EIU expects GDP growth of 3.0% (down from the initial outlook of 4% due to the war in Ukraine), in 2023-26 average growth of 3.5%. Growth stimulators in 2022 will be government consumption (investment in public infrastructure, public sector salary increases) and tourism recovery, in the following years, especially household consumption following the drop in unemployment and the rise in wages and salaries. Due to higher domestic demand and an increase in energy prices, inflation is rising, reaching 3.7% year-on-year at the end of 2021. According to the central bank, inflation will range between 4-6% in 2022, and should decrease in 2023. According to local sources, unemployment reached 11.4% by the end of 2021. Due to the significant share of the gray economy (approx. 40%), the EIU estimates real unemployment at 7.8%, unemployment will drop below 7% in the following years. Check ebizdir for economical facts of Albania.

The Albanian economy has an unbalanced structure. Composition of GDP creation: 48% services (of which 27% tourism services), 20% industry including construction (industrial production 6%, construction 11%), 19% agriculture. Export performance is weak, 30% of goods and services created are exported, mostly with low added value, of which 50% goes to Italy. Imports of goods are twice as large as exports. The negative trade balance is offset in the balance of payments by income from tourism and remittances from Albanians working abroad. The trade balance deficit will continue to increase following the implementation of new infrastructure projects and the rise in prices of imported products.

The key sectors of the Albanian economy for development are agriculture and tourism. The agricultural sector is fragmented and inefficient. Although it employs more than 40% of the population, its share of GDP is only 19%. Tourism is developing slowly, underdeveloped infrastructure, lower quality of services and the caution of foreign investors due to unclear ownership relationships to the land are preventing further expansion. The industry is focused on the processing of local agricultural and mineral raw materials and the use of cheap labor (shoe and clothing production for foreign companies). The structure of Albanian exports has not changed over the years, with exports of textiles and footwear (38%), construction materials and metals (15%), raw materials and electricity (14%) and vegetables, fruits and other foodstuffs (14%). Due to the country’s weak industry, mainly engineering products (22%), food (18%), chemical products and plastics (15%), construction materials and metals (13%) and textiles (12%) are imported. Within the Western Balkans region, Albania has the smallest share of GDP per capita.

Pointer	2019	2020	2021	2022	2023
GDP growth (%)	2.2	-4.0	8.5	3.0	3.2
GDP/population (USD/PPP)	14,366.20	13,696.00	15,120.00	16,340.00	17,280.0
Inflation (%) – average	1.4	1.6	2.1	4.2	3.5
Unemployment (%)	5.9	6.8	7,8	6.6	6.3
Export of goods (billion USD)	2.7	2.1	3.6	4.2	4.5
Import of goods (billion USD)	5.9	4.9	7.7	8.5	9.2
Trade Balance (Billion USD)	-3.5	-3.4	-3.9	-4.2	-4.5
Industrial production (% change)	ON	ON	8	7	6
Population (millions)	2.9	2.9	2.9	2.8	2.8
Competitiveness	ON	ON	ON	ON	ON
OECD export risk	05/VII	05/VII	05/VII	ON	ON

Source: EIU, OECD, IMF

Public finance and state budget

Public finance	2021
State budget balance (% of GDP)	-6.5
Public debt (% of GDP)	74.7
Current account balance (billion USD)	-1.4

Taxes	2022
AFTER	0%, 5%, 15%
F.O	0%, 13%, 23%
VAT	20%, 6%

The budget for 2021 envisaged a planned deficit of 6.5% of GDP. However, the actual deficit was only 4.6% as there was an increase on the revenue side due to a better than expected performance of the economy. The 2022 budget works with a planned deficit of 5.4% of GDP and assumes public investment of 6.4% of GDP (0.9 billion EUR). Strategic sectors for government investment allocation are transport infrastructure (roads, railways, ports, airports) and energy infrastructure (transmission and distribution network). The government has also created conditions for private investment based on BOT and PPP projects (construction of airports, ports and solar power plants). From 2023, there should be a gradual consolidation of public finances and annual budget deficits not exceeding 4% of GDP.

The current account of the balance of payments ended in 2021 with a deficit of USD billion, or 8% of GDP, which was the highest since 2017. Revenues from services in the field of tourism did not reach the level before the pandemic, and even though remittances from Albanians working abroad were at their highest level in history, it was not enough to mitigate the impact of the increase in trade balance liabilities on the balance of payments. In 2022, as a result of the war in Ukraine, the number of tourists from Ukraine (up to 100,000) and Russia will decrease, and thus income from the sale of services will also decrease, which will be reflected in a further deepening of the current account deficit of the balance of payments to 8.2% of GDP. In the coming years, an increase in the number of tourists and continued growth in remittances are already expected, which will help reduce the current account deficit of the balance of payments to USD billion in 2023 (7.4% of GDP).

High deficit budgets in 2020 and 2021 caused public debt to rise, rising from 68.7% of GDP in 2019 to 82.2% of GDP by the end of 2020 (government figure). From 2021, the public debt should gradually decrease, or oscillate around the value of 75% of GDP. The consolidation of public finances is the main medium-term goal of the government. By 2028, public debt should be reduced to 67.6% of GDP.

External debt increased to USD 1billion (70% of GDP) in 2021 and will grow slightly in the following years, debt service increased by 8% year-on-year to USD 1.24 billion (7% of GDP) by the end of 2021 . Foreign exchange reserves increased by 17% to USD billion by the end of 2021 and are enough to cover up to twelve monthly imports.

Albania has the prerequisites for at least medium-term economic growth, and in the case of a responsible budgetary policy of the government, it is able to manage the increase in public debt. This is also why the Standard & Poor’s rating agency in 01/2022 confirmed Albania’s credit rating as B+ with a stable outlook.

Banking system

The banking system in Albania is made up of the Central Bank of Albania and 16 commercial banks that have around 560 branches throughout the country. 95% of Albanian banks are owned by foreign companies. The most important foreign owners are from Austria, Turkey, Italy, Greece and France. The banking sector manages million bank accounts, of which 160 thousand are business accounts and the rest are accounts of natural persons.

The five largest banks:

• RaiffeisenBank (Austria, assets 290 billion ALL)
• BKT (Turkey, assets ALL 272 billion)
• Intesa Sanpaolo Bank (Italy, assets 149 billion ALL)
• Credins Bank (Albania, assets 109 billion ALL)
• TiranaBank (Albania, assets 101 billion ALL)

The banking system is open, trade financing (letters of credit, guarantees, trade finance instruments) is provided according to European standards. Interest rates are low, the currently valid base rate announced by the Bank of Albania in 03/2022 is 1.0%.

Tax system

The tax system is not predictable (stable) and clear, due to many exceptions and amendments to the legislation. The main regulation is Law No. 8435 On Taxation in the Republic of Albania of 12/28/1998 (as amended). Albania is struggling with bad tax collection, the “gray” economy is 36% according to the World Bank, some sources say up to 50%.

From 2021, an electronic invoicing system between the private and state sectors will be introduced, from 1 September 2021, the 3rd stage of “fiscalisation” (similar to the Electronic Sales Record in the Czech Republic) will be introduced for small companies and self-employed people. International economic institutions repeatedly call on Albania to simplify the tax system and improve tax collection.

Taxes:

• Personal income tax – income up to 40,000 ALL per month is exempt, from 40,001 ALL to 250,000 ALL is taxed at 13% and from 250,001 ALL above is taxed at 23%.
• Corporate income tax – income of companies up to 5 million ALL/year (approx. 1 million CZK) – 0%, income from 5 million ALL to 14 million ALL – 5%, income above 14 million ALL (approx. 3 million CZK/year) – 15%. Reduced tax of 5% for companies in the automotive industry, agritourism, software services and for agricultural cooperatives. The reduced tax is allowed for a period of 10 years from the start of the business.
• Value added tax (VAT) is 20% (6% reduced rate for selected products and services). The payer is a legal entity or an individual whose annual turnover exceeds ALL 2 million, for entrepreneurs in agrotourism, ALL 5 million.
• Other taxes: withholding tax – 15% (bank interest, profit from the sale of securities, royalties, technical services), 8% (dividends), construction tax – 2-8% of the sales price, paid by the event investor, and excise tax on tobacco and tobacco products, alcoholic and non-alcoholic beverages, fuel and their derivatives and coffee.

The government has prepared a road map for the reform of good governance until 2030, which also includes the reform of public finances and its digitization.