Challenges of the Economy

December 25, 2020
Interview of Head of Secretariat of Albania Investment Council, Diana Leka (Angoni)
Of paramount importance remain the justice reform and the consolidation of institutions, fair elections, and the exit from the pandemic still conditioned by the unexpected and the economic recovery in 2021. Priority sectors…

 

2020 has been a difficult year for the country, after the earthquake and unprecedented consequences following the Covid-19 crisis. Ms Diana Leka, Head of the Secretariat of the Investment Council claims that during 2020, the Albanian government and the business faced a significant economic downturn, implying a decline in production, consumption, income, and investment.

Seeing the crisis as an opportunity, Ms Leka recommends that SMEs should be introduced massively to digital transformation. This is not an option, but a condition for survival because if they stay out now, later on, they will find it very difficult to face regional competition. This can also be the positive side of the crisis.

2020 also marked the 5th anniversary of the establishment of the Investment Council, a consultative platform established in 2015 in the framework of the Memorandum of Cooperation between the Government of Albania and the EBRD, to build a model of dialogue between the private sector and decision-making.

Ms Leka claims that the platform has achieved its goal, but it should be emphasized that building a systemic dialogue between the parties and addressing the findings on the investment climate through concrete recommendations, is a dynamic, ongoing process and it requires a serious commitment from the parties, as well as the timely setting of priorities.

The Investment Council recommends that the country’s economic recovery could be accelerated if interventions and support were oriented to priority sectors such as tourism, agriculture and agro-processing, energy and mineral resource processing, with a particular focus on Information Technology and Innovation with a focus on SMEs, where Albania needs to invest heavily.

 

How can we consider the current business and investment climate in Albania?

In macro terms, I think that since the end of 2019 and especially the first half of 2020, the situation has been quite difficult for the country, bringing unprecedented consequences to the economy and forcing the government to take unique successive measures, to assist businesses and employees in coping with the COVID-19 pandemic situation. Figures such as the impact of the earthquake are estimated to have caused damages equivalent to 6.4% of Gross Domestic Product (GDP) and losses equivalent to 1.1% of GDP.

Meanwhile, the assessments of international organizations converge in terms of (i) sectorial impact and employment, (ii) the unique challenges of the Albanian economy after the earthquake of November 26, 2019, (iii) the expected recession in the economy, which relies mainly on trade exchanges and investments from European countries. Production and the tourism sector were most affected by the spread of the pandemic, raising unemployment levels in the country.

In a positive option, I would like to underline the completion of TAP project works, the signing of an important contract for a major investment in Karavasta to diversify the country’s energy resources, including the reshaping of Albania with potential in renewable energy in the Balkans, increasing of its agricultural exports, as well as in the implementation of some laws related to the business climate such as fiscalization, the register of accounts, loans, the adoption of the national tourism and broadband strategy, as well as specific initiatives in the framework of trade with the Balkan region, supported both politically and with concrete interventions (paperless customs, green channel).

Global forecasts remain challenging as, according to the IMF, the world economy will shrink (by about 4.4% [1] during 2020), more than during the 2008/2009 financial crisis. Eurozone countries will experience an even greater contraction by about 8.3%, Greece and Italy, Albania’s two main economic partners will experience a deep economic decline in the Eurozone during 2020, by 9.5% and 10.6%, respectively.

Meanwhile, Albania, first hit by the earthquake of November 26, 2019, and then by the COVID-19 pandemic, will have to face double consequences. Forecasts for its economic downturn range from -8.4% and -7.5% respectively according to the WB, and the IMF to -9% according to the EBRD. The Albanian government, in its forecasts [2], estimates that the country’s economic decline for 2020 will be at the level of 6.1%.

All of the above, point out that during 2020, the Albanian government and businesses faced significant economic downturns, implying declines in production, consumption, revenues, and investments.

 

What has been the role of the IC Secretariat during this year?

In response to the emergency, and with the purpose to enable a more realistic debate, during the period March-May 2020, IC conducted the survey “Assessment of COVID-19’s Impact on the Business in Albania”, to identify the main problems and suggestions for coping with the situation from a business perspective. The response was carried out promptly, taking into consideration that since 2015, the Secretariat of the Investment Council, has continuously conducted surveys to design dynamic analysis for assessing fiscal measures and anti-informality in the investment climate in the country.

New tasks were also entrusted to the Secretariat by the IC Chair and its members to rigorously follow the previous recommendations of the IC and facilitate the five working groups (7 meetings attended by 70 people).

In this context, since the end of January 2020, the Secretariat paid special attention and followed-up attentively a) business concerns about the freezing of bank accounts by local commercial banks and the transparency of local business taxes and fees imposed by municipalities, b) commencement of the work of three Working Groups – established in the priority areas: Agro-processing, ICT, Energy – after the formalization of the respective orders signed by the respective ministers.

 

Some findings from the IC Survey

According to the survey, all sectors of the economy are expected to be negatively affected by the pandemic and almost half of the Albanian economy stopped operating, predicting a decline of more than 20% in their annual revenues. Lack of customers, lack of liquidity, difficulties in liquidating salaries and compliance with tax obligations and payments are the most common problems that business is facing during this period. The pandemic also changed the way we work.

Today, the business is dealing with the inability of its staff to be present in the workplace, forcing the business to change its “mentality”. Today, a significant share of the business is implementing online work. On the other hand, during the lockdown, many businesses admit to using online services and even declare that they will continue to use them in the future. Both of these, highlight the ever-increasing importance that technology is taking on in the day-to-day business and consumer activity, putting the private but also the public sector in the face of the challenge for heavy investment in technology.

Another challenge that the pandemic highlighted is the fact that our economy is highly dependent on imports. Almost all sectors of the economy are highly dependent on imports, where the industry is almost entirely dependent. The IC survey shows that only a very small part of the business, about 2% of companies operating in Trade, Industry, and Services can rely totally on domestic products. We emphasize that today, as a result of the pandemic, European economies are looking to find alternative sources for their imports, sources closer to their location, and this may be an opportunity for our country. More specifically, we analyzed this issue recently, in the framework of the study on maximizing potentials in agro-processing, where more specific recommendations were given.

If we refer to the IC survey data, our companies are seriously unprepared in dealing with emergencies. 86% of companies stated that they do not have an emergency plan and do not have risk assessment strategies, making them quite vulnerable.

Meanwhile, during 2020, the Investment Council consolidated its position already established since its establishment in 2015, as the most stable platform for consultation and dialogue in the business-institutions-donor triangle. The created profile is the result of serious work by all members over the years at the IC. In this regard, it is worth mentioning the proactive role of the business community in presenting at the IC meetings concrete impediments of the investment climate. On the other hand, the constructive attitude of the institutions toward the platform and the raised concerns has facilitated the dialogue between the parties and the monitoring process.

Of course, the Secretariat, supported by its partners, and being composed by a body of independent experts, has conducted all the preparatory and analytical work regarding the preparation of materials and analysis of issues raised by the business, even during these difficult months for all as a result of COVID-19.

These analyses, based on the legal-regulatory and economic plan, I think have given a comprehensive and consistent character to all the findings and recommendations discussed in the IC, especially those related to the impact of COVID-19 on the Albanian economy and its recovery in the following years. Here, it is worth mentioning the great support of the EBRD / SECO and MFE for the Secretariat and the entire IC platform, advocating the role of the latter, as a necessity to increase trust in the dialogue regarding the investment climate between business and policymakers.

The IC and the Secretariat never stopped working during the most emergency phase of COVID-19, especially in March-June, being close to the business community and professionals. The proactive role of the Secretariat in presenting the first national survey with businesses on the Impact of COVID-19 on the economy, periodic and short preparation of legal summaries in a context where legal dynamics, measures, and changes were daily, and organization of extraordinary meetings of the IC with the absolute participation of its members and a large number of observers, I think are already known to all.

The role of the IC and the Secretariat in the country and the region was positively recognized during the Global Conference of EBRD-supported Investment Councils held online on June 2-3, 2020, with the participation of representatives from various governments, as well as from the business community.

Of course, this is the largest part of the work that is most easily identified, while behind there is a daily and systematic preparatory work, which enabled 4 plenary meetings of the IC:  i) “Business-Municipality Interaction” (January), ii) “Survey on the COVID-19’s Impact on the Economy” (April), iii) “On the Economic Recovery Post-COVID-19”, and iv) “On Stimulating Investments in Agro-processing”, as well as the establishment of working groups with the participation of relevant institutions responsible for Agro-processing and Digitalization and conducting preliminary meetings; rigorous monitoring of recommendations given; a considerable number of meetings and discussions with our partners, as well as all the work for making the transparent and real-time publication of all the IC and the Secretariat’s activity.

 

What do you consider to be the challenges of the Albanian economy in 2021 and do you think that the sources of economic growth in the coming years should consider supporting specific sectors?

In general, remain priorities the justice reform and consolidation of institutions, fair elections, as well as the exit from the pandemic—still conditioned by the unexpected and the economic recovery in 2021. While in the context of IC analyses and suggestions in these 5 years of work, I can emphasize that: (1) Formalization of the economy is an important challenge for the country and especially for sectors such as tourism, agriculture, services, etc., in which informality shows specific typologies and is a key factor that threatens fair competition.

Also, the successive crises related to the situations created in the country after the earthquake and during COVID-19, create premises for increasing informality, but at the same time make it difficult for the government to provide timely assistance to the beneficiaries; (2) The other inherent challenge is the consolidation of institutions and the simplification and stabilization of the fiscal legal and sub-legal framework, as a premise for sustainability in doing business.

The government’s recent initiatives in abolishing the profit tax for SMEs and raising the VAT threshold can create a breath for small business, especially after the difficulties created in this time of pandemic; the challenge of labour force quantification and retraining, especially in the context of the digital revolution, property and global climate and environmental prioritization.

Meanwhile, regarding the prioritization of sectors – I emphasize that based on our analysis, mainly on the suggestions of business and IC members, it is suggested that the country’s economic recovery could be accelerated if interventions and support are focused on some priority sectors:

Agriculture and Agro-processing provide a significant part of the country’s Gross Domestic Product and take up a significant share of employment. Even during the pandemic period, agriculture was the least affected sector, which continued to operate despite the situation.

In this context, (1) incentive measures on de-fragmentation of agricultural land and promotion of competitiveness of local production “Made in Albania”—showing that it has potentials, such as tomatoes; and, (2) making transparent and facilitating access to information on donors’ support policies for the agriculture / agro-processing sector would be the first premises for optimizing the potential and qualitative growth of the sector. Even the combination of tourism with the agro sector is showing that they are inherent potentials for Albania, but it remains to be monitored.

Albania has potentials in the energy sector and processing of mineral resources. More specifically, the timely completion of the legal framework on the renewable energy sector and making effective liberalized energy market and the Energy Exchange, but also the investment in the energy distribution network, to improve the technical access for local solar and wind energy producers, are some of the recommendations that IC thinks will develop this sector of the Albanian economy, affecting the economic growth of the country.

In addition to the above sectors, Albania needs to seriously invest in Information Technology and Innovation with a focus on SMEs. COVID-19 highlighted the need to diversify the way services are provided and highlighted the problem of lack of business continuity plans, therefore in the post-COVID-19 phase, investments in this area are very important, as ICT and Innovation significantly interconnect and influence all sectors of the economy.

 

Which issues will be on the IC agenda?

In close cooperation with the IC partners, the Secretariat prepares on an annual basis a tentative agenda of issues to be analyzed and then discussed in IC meetings. The agenda is determined by the voting of all members based on a proposal list with numerous business topics and issues pre-filtered by the Secretariat. Currently on the agenda are issues related to environmental permits, SMEs innovation and access to funds, administrative appeals, etc.

 

This year marked also the 5th anniversary of the IC. Do you think you have advocated enough on the suggestions and recommendations of the business and other stakeholders in IC meetings?

As I mentioned above, the IC was established in 2015 as a consultative platform in the framework of the Memorandum of Cooperation between the Government of Albania and the EBRD, and it has as its primary goal the establishment of a structured, transparent, and formalized dialogue model between the private sector and decision-making—always focused on the investment climate in the country.

In this function, I think that the platform has achieved its goal, but it should be emphasized that building a systemic dialogue between the parties and addressing the findings on the investment climate through concrete recommendations, is a dynamic, on-going process and it requires a serious commitment from the parties, as well as the timely setting of priorities, which is not always easy to do especially at the institutional level, or in the face of national natural or global health crises.

The IC working methodology is based on a bottom-up approach, so the issues come from the business and are directed for dialogue and solution to decision-making through the Secretariat. The solution to these problems is discussed with representatives of the business community at meetings with experts in specific fields and specific companies.

To this end, the Secretariat bases its work on the preliminary legal and economic analyses, prepared by the Secretariat in a balanced and impartial manner and trying to be as professional as possible, as well as on surveys with the business. Collaboration with the business community is one of the strengths of this platform. To date, 10 surveys have been conducted with over 2,000 surveyed companies, giving voice to entrepreneurship.

Finally, addressing business issues is done through recommendations submitted for voting in the IC and through systematic monitoring of their implementation by line institutions. Based on the above and from our point of view, the recommendations adopted in the IC are not an arrival point, but an important starting point for solving business problems. In this sense, advocating for IC recommendations and positive pressure for their implementation should be seen as an ongoing role of all actors involved in the discussion platform.

Figure 1.              Usage of online services

Source: Albania Investment Council

 

Figure 2.              The focus on future investments

Source: Albania Investment Council

 

Which sectors can benefit from the crisis and how?

2021 is a unique year in terms of coming out from uncommon natural, health, and electoral challenges. I think that the crisis has resized the speed with which some sub-sectors have become more “necessary” for the economy and above all for the functioning of the society in emergency conditions.

Our analysis during 2020 highlighted the unique role of digital reform (online services) of public services in mitigating business challenges, as well as the need to design emergency plans to ensure business continuity. Meanwhile, agriculture mitigated the effects of the crisis in the short run and contributed positively to the import/export balance.

In this context, I would say that the services sector will continue to consolidate its contribution to the country’s economy, especially services (online shopping, etc.) related to digitalization and Artificial Intelligence services. From the sectorial point of view, I believe that the sub-sectors related to health, education, and accurate knowledge on nutrition and well-being will be prioritized, both by the public service, but also by the social and private service. Likewise, investments in the digitalization of services in the financial area, as a result of the two laws adopted during 2020, provide premises for a new impetus in 2021 of the sub-sector.

Meanwhile, SMEs need to massively embark on the path of digital transformation. This is not an option, but a condition for survival because if they stay out, they will find it very difficult to face regional competition. Honestly, I believe that this could be the positive side of the crisis, as it is known that Albania rates poorly in terms of “business sophistication”. The adoption of the broadband strategy in 2020 and the inclusion in the 2021 budget is a step forward in creating the basic infrastructure to stimulate this process.

I believe that public investments focused on infrastructure (roads, railways, energy) will stimulate the performance of investments in sectors that are currently waiting for the end of the health crisis, such as tourism or the processing industry, while the construction sector has continued to grow during 2020.

Meanwhile, the renewable energy sector is innovation, and to optimize the impact on the country’s economy, it must be harmonized in time with the progress of public investments. If the preparation of the legal and sub-legal framework will be made in time, this sector will need to be stimulated as long as we have incentives and a range of financial and banking instruments that facilitate this progress.

 

Published on Monitor Magazine (25 December 2020).

 

Investment Council is supported by the Ministry of Finance and Economy, the EBRD and the Swiss State Secretariat for Economic Affairs (SECO)

Albanian Investment Council