BANK OF ALBANIA

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BANK OF ALBANIA

• Competitiveness of the Albanian economy with a
  view to eventual EU accession Current situation
  and challenges ahead
• Niuton MULLETI
• NBRM Spring Conference
• Skopje, May 30, 2008

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Outline

• Definition of competitiveness
• Current situation
• Challenges ahead

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Definition of competitiveness

• No reference to exchange rate competitiveness
• The extent to which a country, in the conditions
  of a free and fair market, produces goods and
  services that meet international markets
  standards, while preserving and increasing its
  citizens real income in the long-run (OECD)
• Competitiveness should be equalled to
  productivity (World Bank)
• Policies, institutions and factors driving
  productivity and, thus, enabling sustained
  economic growth and long-term prosperity (World
  Economic Forum)

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Exchange rate competitiveness

• During 2007, ALL has appreciated by 1.4 p.p. in
  annual nominal effective terms towards foreign
  currencies, compared to 1.1 p.p. during 2006
• During 2007, the real effective exchange rate
  grew by 4.4 p.p. compared to a rise by 1.0 p.p.
  during the previous year ?affecting negatively
  the competitiveness of Albanian goods in
  international markets

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Real exchange rate competitiveness

• Graph Annual changes of ALL in nominal effective
  terms (NEER) and real terms (REER) (left-side)
  Daily developments in ALL/euro and ALL/USD
  (right-side)

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Current situation

• Weak competitiveness of the Albanian economy is
  mainly reflected in the trade and FDI indicators
• Table Trade and FDI indicators during 2006 (in
  percentage)

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Current situation

• Albanian exports remain highly undiversified.
• Textiles and footwear constitute 55 of
  Albanian exports. The next largest export
  category is minerals.
• Table Exports (in million euro) according to
  different categories
• 72.6 of exports are directed to Italy, 9.6 to
  Greece

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Current situation

• Status of structural reforms EBRD Transition
  Report 2007
• First-phase (Market-enabling) reforms
• a) Small-scale privatisation
• b) Price liberalisation
• c) Forex and trade liberalisation
• Table Average of first-phase reforms indices

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Current situation

• Second-phase (Market-deepening) reforms
• a) Large-scale privatisation
• b) Financial sector reform (banking and
  non-banking)
• Table Average of second-phase reforms indices

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Current situation

• Third-phase (Market-sustaining) reforms
• a) Governance and enterprise restructuring
• b) Competition policy
• c) Infrastructure reform
• Table Average of third-phase reforms indices

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Current situation

• World Competitiveness Report 2007-2008
• Basic requirements
• 1. Institutions
• 2. Infrastructure
• 3. Macroeconomic stability
• 4. Health and primary education
• Efficiency enhancers
• 5. Higher education and training
• 6. Goods market efficiency
• 7. Labour market efficiency
• 8. Financial market sophistication
• 9. Technological readiness
• 10. Market size
• Innovation and sophistication factors
• 11. Business sophistication
• 12. Innovation

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Current situation

• World Competitiveness Report 2007-2008 rankings
• Competitiveness of the Albanian economy mainly
  driven by its factor endowments (low wages,
  natural resources)

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Current situation

• Ease of Doing Business 2008 rankings (World
  Bank)
• Albania 136
• Bosnia and Herzegovina 105
• Serbia 86
• Macedonia 75
• Bulgaria 46
• Albania particularly fares weakly with the
  categories of dealing with licences,
  protection of investors and closing a
  business, which affect the business climate.

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Current situation

• Index of economic freedom 2008 The Heritage
  Foundation and Wall Street Journal
• Business freedom
• Trade freedom
• Monetary freedom
• Freedom from Government
• Fiscal freedom
• Property rights
• Investment freedom
• Financial freedom
• Freedom from corruption
• Labour freedom

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Current situation

• Index of economic freedom 2008 ranking

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Current situation

• Corruption remains a serious constraint regarding
  business environment
• Table Transparency International 2007 Corruption
  Perception Index

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Current situation

• Albania is a potential candidate country for EU
  accession
• Stabilisation and Association Agreement between
  Albania and the EU signed in June 2006
  ratification process expected to be completed
  within 2008.
• Fulfillment of the Copenhagen economic criterion
  (European Commission, 2007 Progress Report on
  Albania)
• ?Albania has made progress towards establishing
  a functioning market economy
• ?Major reforms are still needed to enable it to
  cope over the long-term with competitive
  pressures and market forces within the Union.

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Challenges ahead

• Albania has experienced a sustained and high
  economic growth since 1991, delivering rising
  incomes and poverty reduction
• Still, Albania has a low GDP per capita compared
  to neighbouring countries
• Table GDP per capita in PPS, EU27100

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Challenges ahead

• Growth has been driven by productivity gains
  6.1 TFP growth was the main component of GDP
  growth of 6.3 (1993-2003) World Bank
  assessment
• Sustaining growth will require increasing both
  capital and labour accumulation and expanding
  exports
• Though increasing, private investment remains low
  with periodic bursts driven by privatisation and
  private participation in infrastructure
• Labour participation remains low and unemployment
  high (13.2)
• Exports are picking up but are still concentrated
  in unskilled labour and natural resource
  intensive products

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Challenges ahead

• Strong tradition of pro-business government
• Sound macroeconomic policies
• An increasingly open economy and deepening
  financial sector
• Strategic location, good natural resources,
  reasonably educated labour force
• Key challenges remain in infrastructure and
  business environment

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Challenges ahead

• Lasting solutions need to be found for a stable
  and secure power supply
• The road infrastructure needs to be substantially
  improved
• The functioning of the judicial system needs
  considerable improvement
• Property titles need to be properly registered
  and persistent uncertainties on property rights
  need to be clarified
• Measures related to the market entry and exit of
  companies need to be simplified

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Challenges ahead

• Measures against corruption need to be
  intensified
• The large informal sector needs to be tackled
• Supervision of non-bank financial institutions
  needs further improvement
• Future focus to be on structural reforms
  ?improvement of governance and business
  environment ? significant growth in FDIs and
  productive diaspora investment
• Main challenge ensure an exports-driven growth
  in the future.

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• Thank you!