Thewesternbalkans
Part II
Started negotiations – Albania and Republic of Northern Macedonia.
The European commission’s staff presented its assessment on economic development and new economic reform programs for the Western Balkan countries.
The main conclusions of the staff for started negotiations countries are as follow:
ALBANIA
“Following 2 years of strong economic expansion, Albania’s real GDP growth moderated but exceeded expectations in 2023, and the economic reform programme (ERP) projects growth to gather pace in 2024-2026. Helped by exceptional performance in the tourism sector and rising investments, the economy expanded by 3.4% in 2023.
The ERP projects economic growth to accelerate from 3.7% in 2024 to 4% in 2026 on the back of increasing domestic demand and rising exports led by a further expansion of tourism. Net exports are expected to contribute positively to GDP growth. Rising domestic demand might boost imports more than forecast.
In 2023, the budget deficit narrowed to 1.4% of GDP, better than expected on the back of strong revenue growth but also due to lower than planned execution of public investments. The primary balance turned positive. The ERP projects the budget deficit to widen to 2.5% of GDP in 2024 on the back of higher spending on public wages, social insurance and interest costs. However, the primary balance is projected to remain in surplus, in line with the fiscal rule.”
The document said that: “Inflation declined on the back of external factors and also due to the central bank tightening its policy stance. The ERP expects inflation to already meet the 3% target in 2024.
The labour market registered positive developments with increases in employment and wages, which supported consumption. Helped by the tourism boom, the current account deficit continued to decrease to historically low levels.
A higher labour force participation rate is expected to be the main driver of labour supply growth, while the unemployment rate is projected to decrease gradually to 9.5% in 2026.
Fiscal consolidation accelerated and a positive primary balance was achieved, as envisaged. Expenditure on education, health and social protection increased in nominal terms while the methodology for data collection and processing on public expenses dedicated to R&D was not finalised.”
The Bank of Albania continued tightening monetary policy.
The document concluded that the main challenges facing Albania are the following:
Fiscal risks continue to stem from arrears and state-owned enterprises (SOEs), particulary in the energy sector. The state-owned energy utilities are reliant on government support either via guarantees or loans, which is a source of fiscal risks. Increased transparency and higher managerial accountability would increase SOEs’ fiscal performance and, in turn, reduce their reliance on budget support. While the Ministry of Finance has stepped up fiscal risk monitoring, further progress in this area remains important.
While revenues as a share of GDP increased in 2023, the ratio remains low compared to other countries in the region. After a 1 percentage point increase in 2023, the ERP projects public revenues to remain constant at 27.8% of GDP over 2024-2026.
Other key challenges are linked to addressing the informal economy, labour shortages and skills, and improving connectivity and energy security. Informality remains widespread, while the business environment needs further improvements. Furthermore, fighting informality and improving the business environment should help stem the tide of emigration.
Albania has a very high rate of low-skilled adults and high rates of early school leaving. Furthermore, it needs also to address the infrastructure gaps and improve connectivity. The energy sector is volatile, with hydro-electricity production dependent on rainfall and reliant on budget support.
These challenges are expected to be addressed through key structural reforms identified in the country’s reform agenda under the new Growth Plan for the Western Balkans.
REPUBLIC OF NORTH MACEDONIA
Following the document: “In 2023, the economic reform programme (ERP) optimistically projects growth to gradually accelerate to above 5% in 2026.
Coping with the repercussions of the cost-of-living crisis and weak external demand, the post-pandemic economic recovery remained slow. Annual GDP growth dropped to 1% in 2023, mainly reflecting muted domestic investment. Domestic demand was driven by private consumption, which benefited from an increase in remittances and a rebound in real wage growth from July 2023, in line with gradually abating inflation. Real GDP growth is expected to strengthen to an annual average of 4.4% in 2024-2026, mainly as increased public infrastructure spending would support domestic demand. External demand is also set to pick up, but the external balance would have a negative contribution to growth, albeit gradually less so over the programme’s timeframe.“
“Supported by tighter monetary policy and abating foreign price pressures, headline inflation continued to ease gradually to 3% in February 2023 from its peak of 19.8% in October 2022.
The 2023 budget deficit was above the government’s target and higher than the 2022 outcome. Mainly as a result of weaker than projected GDP growth and in spite of revenue-enhancing tax measures and the phasing out of some energy support measures, the general government budget deficit, at 4.9% of GDP, was above the government’s target of 4.8%. The ERP projects gradual fiscal consolidation, with the deficit falling by 1.6 percentage points (pps) between 2023 and 2026.
Fiscal consolidation is projected be driven entirely by savings in current expenditure, notably in government consumption as well as subsidies and social transfers” the document said.
The European Commission’s staff analysis pointed out that the Republic of North Macedonia is facing a number of key challenges as follow:
Fiscal consolidation needs to advance to restore fiscal space and ensure compliance with fiscal rules. In 2024, the government plans to lower the deficit to 3.4%, mainly by expenditure savings deriving, inter alia, from phasing out energy subsidies and reforming agricultural subsidies.
On the revenue side, ongoing implementation of the 2020 tax reform package is an important step in increasing public revenue and should be extended with further tax base-broadening measures.
Addressing large infrastructure investment needs requires substantial improvements in the management of public investment. However, capacities for managing investments according to established methodologies is weak, which calls for a swift implementation of the 2021 public investment management (PIM) action plan.
An increase in fiscal risks, partly stemming from the major construction projects carried out by state-owned enterprises, which may need state guarantees for borrowing or are poorly governed, require the centralisation and improvement of their monitoring. The need to raise additional private funding requires new financing structures and an adequate legal and regulatory framework to control associated fiscal risks, in particular with regard to public-private partnerships.
Key structural challenges are linked to:
- the labour market. The education system does not adequately equip young people with the key competences that they need to actively participate in the regular labour market. Persistent structural problems of the labour market, such as low participation rates, especially for women, and high youth unemployment dampen productivity growth.
- a large infrastructure investment gap. Digitalisation gaps are undermining the competitiveness of domestic companies.
- the need to progress with the green transition. Managing the green transition and meeting the greenhouse gas reduction targets set out in the European Green Deal requires large-scale investment and regulatory and legal adjustments. North Macedonia’s economy relies heavily on coal-fired electricity production, and the shift towards renewable energy sources, as well as improvements in energy efficiency, are likely to be costly. These challenges are expected to be addressed through key structural reforms identified in the country’s reform agenda under the new Growth Plan for the Western Balkans.
The implementation of the policy guidance set out in the conclusions of the Economic and Financial Dialogue of May 2023 has been partial. The government has implemented adequate measures to protect the households and firms that were most affected by the commodity price shock. The Parliament adopted amendments to several tax laws, cutting tax expenditures and broadening the revenue base. The new Fiscal Council has been set up and its rulebook and statutes have been adopted. However, the Council’s secretariat is not yet operational, due to recruitment obstacles. The Central Bank has tightened monetary policy to combat inflation until September 2023, and it has taken further measures to increase the use of the local currency. Key legal changes to safeguard the National Bank’s independence were adopted by the government and submitted to the Parliament. The government adopted a new strategy to formalise the informal economy as well as the smart specialisation strategy, meant to strengthen research and innovation. It has also enhanced the digitalisation of public services. The new Energy Efficiency Fund was given a legal basis and now needs to be made operational. Furthermore, the government adopted three key laws on education, strengthened active labour market policies and improved the coordination between labour market institutions.
Comments: The evaluations of the the European Commission’s staff for both countries are quite critical, and the identified risks for the economy of the Republic of North Macedonia in the next 3 years are great. It is expected that after the elections, the country will undergo serious political changes, which will further complicate the economic situation in view of a possible and completely real conflict with the EU. This will largely depend also on the results of the European elections in June this year.
To be continued
