Before the global financial crisis, Albania was one of the fastest-growing economies in Europe. However, after 2008, average growth halved and macroeconomic imbalances in the public and external sectors emerged. Now the new government is introducing reforms to get the economy back on track. Why Emerging Europe speaks to Dr. Arben Ahmetaj, Minister of Economic Development, Tourism, Trade and Entrepreneurship of Albania, about how the country wants to further improve its business climate and attract foreign direct investment.
Right now Albania is undertaking structural reforms. How should these reforms improve business conditions in the country?
In September 2013, when the new Government took office, right from the start we knew that the only way to tackle the major problems that we found would be to address the structural issues. From a broken down electricity sector to large arrears owed to the private sector — over $720 million — to a pension scheme that was becoming a danger to economic growth.
From the IMF program, which is helping us consolidate public finances, to the pension reform, begun with World Bank support six months after taking power, the government has been taking all necessary steps to stop once and for all the wrongdoings of 22 years of transition. We are undertaking a deep reform in the electricity sector, addressing everything from theft to the faulty system that was reinforced after years of mismanagement, and which ultimately is costing Albanians over €150 million per year.
We undertook a deep reform of the business climate, which is one of the pillars on which we can base our sustainable economic growth in the future. Not only did we create new mechanisms and institutions that would ensure the communication with entrepreneurs but we have also implemented mechanisms to ensure that the government will not become a hindrance to business in Albania. We view businesses as partners and this is quite a big change from the previous government.
And the results are already showing. Of course, there is a long road ahead. But I like our chances as we have one of the youngest and most active populations in Europe, low wages and a lot of potential for growth in the near future. For example, at our historic rate of growth, it will take us 22 years to merge our levels of income with the EU income per capita, which means that some of the most vibrant sectors of the economy, such as agriculture, tourism, energy and production will grow well into double digits over the next few years. And with the candidate status granted last summer, our EU path is ensured. We know we need to work hard to improve, as our history proves that change does not come easy, but we have the will and commitment to bring a European Albania into the EU.
Openness to FDI and bringing in quality investments across sectors will help us lift the bar in each of those sectors. This is why our focus in 2015 is on deregulation and FDI. In a year there will be less procedures, less time spent dealing with government and less costs to businesses in Albania. We are confident that the future of the enterprises in Albania is being built on a strong foundation of communication and trust.
In the latest edition of the World Bank’s Doing Business Report, Albania is ranked 68th, higher than a few other countries in the Balkans and definitely higher than in 2014 (108th). What are the biggest challenges for Albania now?
Even though we are aware that this is just the beginning of a long path, the results are there. This year Albania ranked 40 places higher in the Doing Business Report, to 68th place, the highest since the report started ranking Albania. Standard and Poor’s has reviewed the outlook on our economy twice over 2014, from negative to stable and now positive. Some of these reforms have had measurable impact, such as the support package to the manufacturing industry, which increased exports by 24 per cent in 2014, and which has put Albania on the manufacturing map of Europe.
Starting from a low point, in September 2013, we had realised the need to view the business community as a partner in the economic future of the country. This is why the reforms that we are undertaking are aimed at improving the real conditions on the ground for enterprises, in order for them to fulfil their economic potential. This is crucial to our economy. This is what can make the difference where it really counts.
As such we did undertake a series of steps that would help us improve the situation for businesses. And it does not just relate to the Doing Business reforms, though we also looked at that carefully. The intention of the business climate reforms is to free up entrepreneurs to pursue their projects without government hindrance. This is more than just measures, it is a new mentality. Take the example of our manufacturing reform. The package which increased exports by $165 million year on year was neither based on fiscal relief nor on government ideas on how to improve the sector. In fact, it was based on what business people working in the sector advised us to do. Of the 28 measures, all come from the manufacturing community. This explains the almost immediate success. And this we are applying to other sectors as well, mobilising their full capacity.
The biggest challenge associated with quick success is doubtlessly the need to follow it up. Otherwise novelty grows old and issues reappear. We are following up to what we did and even increasing communication with the business community to find better and more creative ways in which to help. We are closely monitoring sectors and their potential and soon we will have other success stories in tourism, energy and light industry. The key to our reforms is sustainability. After we have grasped the low hanging fruit we will continue to expand on new ideas while following through with the changes that are absolutely necessary to the economy.
The Doing Business reform will continue this year and the next, not only to improve our standing, but to ensure that we have improved the standing of all businesses within the country.
Albania is a great tourist destination with over 300 km of coast, but unfortunately, neglected by tourists. What other sectors are worth considering as far as foreign investment is concerned?
I would not say neglected because actually there is growing interest in tourism and I am very pleased to see that interest rise every day. Albania is Europe undiscovered and it does have an impact on anyone who visits. Of course, there are many links that we need to add up to create a more complete and representative tourism product and there are problems that are being solved with infrastructure and development, but on the whole, Albania is a wonderful experience for visitors. Only a few days ago I meet with a consultant who had worked with our Ministry for three days and who came back two weeks later with his wife, for tourism. He is staying three weeks this time around.
The issue we have with tourism is not the beauty of our land and sea but the image and the need to create the infrastructure necessary for the support of large numbers of tourists. Unfortunately, for many years we have boasted of tourism, but done little to improve the sector. And this is the direction in which we are working now. Soon there will be a new law on tourism, to open the sector to large projects of FDI and there will a tourism support package as well, which will help improve the product that we offer to tourists.
For a long time land ownership was an issue. Government bureaucracy and corruption were an issue. The lack of proper infrastructure was an issue. Now we are trying to improve all these and to make sure that FDI is implemented as soon as possible. We cannot linger through procedures; we are taking active steps to assist in a speedy timeframe all investors. Soon the law on Strategic Investments will pass through Parliament, enabling the government structures to actively assist and support investors on the ground.
This is the only reason why we are less popular than our neighbours, though our sites are just as beautiful, while the food and sea are probably better. Bringing in quality investors is a priority for us because we need to bring the whole sector to a new level of performance and hospitality, one that is on par with the beauty of our Riviera.
Before the crisis Albanian economy grew quite fast, for example by over 7 per cent in 2008. How do you see the growth this year and the following years?
I believe that this is a very interesting moment for Albania’s economic development. We have introduced a new economic model that focuses on production and sectors with real growth potential. These new drivers of growth will move the economy forward in a sustainable way. The lessons of the past are that relying on the same sectors over decades may slow down growth right when you need it during a crisis. As such, our model of economic growth is based not only on sectors that have developed under capacity but also on expanding to new levels in each sector. We focus strongly on the next phase of growth as we improve present performance. There is focus on professional learning and innovation, so that we can draw full advantage of our youth in economic growth terms.
Over 2014 we were able to go back to positive growth, year on year, after four years of slowing growth. This was a hard achievement in a year of fiscal consolidation where the government repaid arrears of over 2 per cent of GDP. But the growth, even though at 2.1 per cent, was quality growth, as it was driven by increased exports, a spurt in labor and by growth in consumption. 2015 will be a consolidation year when we will establish the basis for future growth, mechanisms like the law mentioned above but also the new law on PPPs and the law on Economic Development Zones. 2015 will be year we open our doors fully to FDI and growth will accelerate to 3 per cent. We expect 2016 to be the year when some of the reforms and improvements will start to bring in returns with growth coming to around 5 per cent by 2017.
But here again, we are trying to look beyond just the present and the tools that we have available to us just now to the next phase where we would like to get. Last August, in Berlin, a very important process initiated by the German Chancellor and the European Commission, began for the Western Balkans. The process of regional connectivity. Albania has tried to play a very pro-active role in this process as we break with the past of the region and prepare for a new era of cooperation and connectivity. There are many new projects that are being prepared, projects which will bring the Western Balkans closer together, in infrastructure and market terms, but which will also bring the entire region closer to Europe. We view this as an opportunity that we should assist and support.
Connectivity can help us improve tourism, the labour market, trade and transport. With the present budget situations, most of the countries in the region would have to wait for decades to create the necessary connections to the region and Europe. But we should not wait for decades; we need to bring about real change now. As such, Albania is following this process closely, as well as other opportunities, in order to ensure a new stage of growth and development.
The factors of economic growth will change as we get closer to Europe. The history of the countries that have gone through the process before us tells us that for a period of time the country will grow at high rates as it improves and nears to the EU. This will be an interesting and surely successful opportunity for the country, and especially for businesses here. And this is precisely why we started with the structural reforms right from the get go, in order not to waste time but in order to be prepared to make a quality jump for the economy and for our citizens’ welfare. Our next phase of development will be built on solid foundations.