POPULATION (MILLION) 2,9
GDP (CURRENT USD BILLION) 15,8
GDP PER CAPITA (CURRENT USD) 5,2
LIFE EXPECTANCY (YEARS) 78.5
Albania declared its independence from the Ottoman Empire in 1912, but was conquered by Italy in 1939 and occupied by Germany in 1943. Communist partisans took over the country in 1944. Albania allied itself first with the USSR (until 1960), and then with China (to 1978). In the early 1990s, Albania ended 46 years of isolated communist rule and established a multiparty democracy.
Albania joined NATO in April 2009 and in June 2014 became an EU candidate. Albania in April 2017 received a European Commission recommendation to open EU accession negotiations following the passage of historic EU-mandated justice reforms in 2016.
The transition from a centrally planned to a market-oriented economy, together with abundant international aid and other strategic assistance over the past decades, has helped Albania to make economic progress. Due to strong growth performance, Albania grew from the poorest nation in Europe in the early 1990s to middle-income status in 2008, with poverty declining by half during that period.
However, close trade, remittance, and banking sector ties with Greece and Italy make Albania vulnerable to spillover effects of possible debt crises and weak growth in the eurozone. Remittances, a significant catalyst for economic growth, declined from 12-15% of GDP before the 2008 financial crisis to 5.8% of GDP in 2015, mostly from Albanians residing in Greece and Italy. The agricultural sector, which accounts for more than 40% of employment but less than one quarter of GDP, is limited primarily to small family operations and subsistence farming, because of a lack of modern equipment, unclear property rights, and the prevalence of small, inefficient plots of land.
Inward foreign direct investment has increased significantly in recent years as the government has embarked on an ambitious program to improve the business climate through fiscal and legislative reforms since 2015. The government is focused on the simplification of licensing requirements and tax codes, and it entered into a new arrangement with the IMF for additional financial and technical support. Albania’s three-year IMF program, an extended fund facility arrangement, was successfully concluded in February 2017. The Albanian Government has strengthened tax collection amid moderate public wage and pension increases in an effort to reduce its budget deficit. The country continues to face high public debt, exceeding its former statutory limit of 60% of GDP in 2013 and reaching 72% in 2016.
Agriculture is an important economic sector for the Albanian economy. It contributes 18.4% of the GDP and employs 38% of the workforce (World Bank, 2019). Agricultural production concentrates on wheat, corn, oats, potatoes, vegetables, olives, tobacco, fruits, sugar beets, vines, livestock farming and dairy products. The agriculture sector in Albania suffers from a lack of modern equipment, highly fragmented land ownership and limited area of cultivation, all of which lead to a relatively low productivity. Only 24% of its territory is classified as agricultural land while 76% is non-arable land (of which 6% are forests; source: FAO).
The industrial sector accounts for 21.3% of the country’s GDP and employs 19% of the active population. The sector is concentrated on food processing, textiles and clothing, timber work (construction), oil, cement, chemical products, mining, transport and hydraulic energy. The manufacturing sector’s value added is estimated to contribute to nearly 6% of the country’s GDP (World Bank).
The services sector represents 47.9% of the GDP, employing 43% of the workforce. The tourism, telephony, banking and insurance sectors are all booming. According to a report by the World Travel & Tourism Council (WTTC), travel and tourism receipts in 2018 represented 27.3% of GDP.
The banking sector is regulated by Law 9662, “On Banks in the Republic of Albania.” The law defines guidelines to ensure sound management and administrative procedures for domestic and foreign banks.
Following the trends observed through the European economies and the large share of banks owned by European banks, financial consolidation in Albania has led to a reduction in depository financial institutions. The number of banks declined to 14 in 2018 due to the acquisition of two foreign subsidiaries in the Albanian banking system. The acquisition of the two banks followed similar developments of parent companies located in the euro area. As a result, the number of banks with foreign-owned capital has declined to 11 banks, of which seven banks are owned by financial institutions or agents located in the euro area. The capital of the three banks is owned by domestic agents. The share of total bank assets held by the 11 banks with foreign capital stands at 78%.
With the decline in the number of banks, the size of the banking system has slightly changed. The total number of bank branches or agencies operating across the country was 447 in 2018, a slight decline from 473 branches in 2017. In addition, the relative size of total bank assets in terms of GDP slightly declined to 96.8%, compared to 99.4% in 2017.
Despite the smaller number of banks, the financial activity of the banking sector has continued to grow with a moderate positive trend. The currency composition of deposits and loans held by the banks in Albania and the changes in exchange rate mask these positive trends. By the end of 2018, around 53% of bank deposits and around 51% of bank loans to the private sector were denominated in a foreign currency. When bank assets are accounted by with a fixed exchange rate, the total assets of the banking system expanded by 1.9%. Nevertheless, the sharp appreciation of the domestic currency to 123.4 Lek/€ (from 133 Lek/€ in 2017) and the high share of loans and deposits denominated in foreign currencies have led to a slight decline in total bank assets when measured in domestic currency by 0.7%.
Banking activity measured by total bank deposits expanded by 3%, after accounting for changes in exchange rate. Whilst total lending has seen a moderate decline, owning to the cutting down on lending to non-residents and to financial institutions, lending to the private non-financial sector has expanded.
The total loans to the non-financial (non-public) corporate sector and to households increased by 3%, mainly due to the expansion of credit to the latter. The sharp appreciation of currency in 2018 has masked some of these moderate trends owning to the direct accounting effects.
The financial soundness of the banking system has improved, in terms of capitalisation, asset quality and liquidity. Regulatory capital to risk weighted assets has continued the upward trend, observed in the previous two years, reaching 18.2%. Similarly, the liquidity position of the banking system has continued to improve as liquid assets to total assets reached 34.2% in 2018, up from 26% in 2010. The ratio of non-performing loans to total loans further declined to 11% in 2018, a decline of two percentage points compared to the previous year, and much lower than the peak of 23.5% observed in 2013.
Compared to the banking sector, the non-bank financial institutions account for a small fraction of the financial system when measured by asset size. Currently, there are 30 non-bank financial institutions and 13 savings and credit institutions. Despite the large number, their financial activity is relatively small. The total assets of non-bank financial institutions account for around 3.9% of GDP as of 2018.
The healthcare system in Albania is mainly public, while private practice is limited to a small niche market sector. The Albanian law guarantees equal access to healthcare for all citizens. Public healthcare in Albania is the major provider of health services, health promotion, prevention, diagnosis and treatments for the population of Albania. Primarily, the Government of Albania funds the State healthcare system. Other sources of funding include contributions from eligible employers, employees and the self-employed, a certain percentage of their wages or income are deducted and contributed to the insurance scheme. However, poverty in Albania is rather common, and only a few people can afford to make such contributions.
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