Doing Business in Albania
Global economic and financial crisis, which intensified significantly over the first half of last year, tested foundations of Albania economy: financial stability and macroeconomic balances. Immediate reaction by public authorities, increased coordination of economic policies, bearing with world trade channels, avoided the creation of negative economic spirals.
The Albanian economy has had a positive economic growth during the first nine months of the year is characterized by a progressive slowdown during 2009. This performance is conditioned by reduced foreign demand and a slowdown of domestic demand, in the presence of a tight liquidity situation, the limitations of funding and increased uncertainty.
Economic growth during 2009 was 3.1 percent, compared with 6 percent in the same period of the last year.
The sectors that have benefited most from economic growth are those of services and construction, while the industry sector faced more problems. Positive pace of growth is supported by the fiscal incentives; consumer demand and the contribution of external sector of the economy have been relatively stable, while private investment has shown a decrease.
Growth of consumer demand is supported by light increase of employment and salaries, (official figures for 2009 show an unemployment rate of 12.5%. ) while the shrinkage of consumer credit and mortgage, as well as reduction of remittances (they amounted to USD 1.03 billion or 11.5 percent of GDP) and an increased uncertainty, have had the opposite effect.
The decline of private investments came from limited funding resources, reduced support for credits by banking system and limited access to international capital markets.
Effects of domestic economic slowdown and the global economic crisis have appeared in foreign trade. Foreign economic activity is characterized by a simultaneous decline in exports and imports of goods and services, making the effect of this sector to economic growth not to be significantly during 2009
On the other hand, fiscal incentive, injected mainly during the first half of the year, has contributed to the rapid growth of budget expenditures and public debt.
Economic growth below its potential has created in general an environment of reduced inflationary pressures.
Annual inflation in December was 3.5 percent, while average annual inflation rate was 2.2 percent.
Both these indicators are in line with the Bank of Albania's target for price stability.
These factors are expected to exert inflationary pressures during the first half of 2010, possibly being completed by the expected reduction of supply of agricultural products as a result of flooding that has just passed.
However, short-term developments in foreign trade for the months from October to November show a somewhat different performance compared with the first nine months of the year, testifying to a modification of the trends observed earlier. Thus, the country's exports fell in terms of annual average about 7.4 percent, marking a slowdown compared with the average decline of 19 percent during the first nine months of the year. On the other hand, imports have decreased by an annual average of 17% per cent in these two months, compared with average annual decline of 7 percent during 2009 display. These developments include encouraging signs about the sustainability of balance of payments in the short term.
Fiscal policy has been expansionist nature during most of the year, being materialized in a budget deficit of 6 percent of GDP. Slowdown of economic activity in the country has dictated a slower pace of growth in budget revenues, especially after the first quarter of the year. In late November, the annual growth of budget revenues was only 2 percent, reflecting the slow pace of generation of income tax. On the other hand, public expenditures have maintained high growth rates by value 16.4 percent recorded in November.
Unlike the first six months of 2009, where curbing credit growth was more affected by the tightening of supply, in the second half of the year is a decrease in demand for loans that dictates the credit performance dictates.
However, monetary developments during the second half of the year confirm an improvement of the situation of deposits during the second half of 2009. The improved public confidence, as well as increased remittances during the summer months, has contributed to stabilize the situation of liquidity in the banking system.
Financial markets are characterized by a calmer situation during the second half of the year. During this period the banking system has continued to be characterized by lack of liquidity, lack of which is completed by injection from the Bank of Albania. The improvement of liquidity situation as a result of increased deposits and enhancement of security on the market, created a suitable environment of positive signal of monetary policy in banking market.
The EU remains, by far, Albania’s main commercial partner, providing more than 60 percent of Albania’s imports and receiving above 80 percent of total exports. Trade with Italy and Greece represent the largest share of EU trade with a combined over than 40 percent of imports and near 80 percent of exports. Exports with Italy represent nearly 70 percent of export flows, followed by Greece with 9 percent of export flows.
On December 1, 2006, the Interim Agreement between Albania and the European Union entered into force. The Interim Agreement will reduce the average nominal tariff on EU imports and is expected to increase imports from EU countries.
Trade with neighboring countries has improved since 2003, when the first bilateral Free Trade Agreement entered into force.
On July 26, 2007, all of Albania's bilateral trade agreements with countries in the region were transformed into a multilateral one, the Central European Free Trade Agreement (CEFTA), which includes eight countries (Albania, Macedonia, Montenegro, Kosovo, Moldova, Croatia, Serbia and Bosnia and Herzegovina). Albania's trade with its neighbors is seeing modest growth, but it starts from a low base and is constrained by poor infrastructure such as roads and ports.
Market Challenges
No sector in Albania is closed to foreign investors and there are no legal barriers to market entry. The National Center for Registration of Businesses provides a "one-stop-shop" solution for business registration. The NRC serves as a single "window" for all types of business entities throughout Albania to perform and apply for all business registration-related processes, including tax registration at national and municipal levels, health and social security, labor inspectorate and the National Statistics Institute. E- Procurement, E- taxes ,the reduction and simplification of taxes simplification of licensing procedures are the major elements of Government of Albania business reform
In order to attract FDI, the GOA has developed a range of incentives for investors and has applied a set of liberal fiscal policies.
One stop shop for granting licenses
The Albanian Government’s has established on May 2009 the “One Stop Shop” for issuing licenses and permits, National Licensing Center (NLC). This will lead to the simplification of licensing procedures. From now on the time and effort required to obtain a license is significantly lower.
The law on concessions
The purpose of this law is to create a favorable framework for promoting and facilitating the implementation of privately financed Concession Projects enhancing transparency, fairness, efficiency and long-term sustainability, in development of infrastructure and public service projects. . It aims to better regulate unsolicited proposals and the public-private partnership in general. The law applies to a wide-range of sectors:
- transport (railway system, rail transport, ports, airports, roads, tunnels, bridges, parking, public transport);
- generation and distribution of electricity and heating;
- production and distribution of water, treatment, collection distribution and administration of waste water, irrigation, drainage, cleaning of canals, dams;
- collection, transfer, processing and administration of solid waste;
- telecommunication;
- education and sport;
- health;
- tourism and culture;
- prison infrastructure;
- recycling projects, rehabilitation of land and forests, in industrial parks, housing, governmental buildings, service of maintenance of IT and data base infrastructure;
- natural gas distribution;
- management contract or provision of public services including those related to sectors specified above
This list is however not an exhaustive one since the Council of Ministers can authorize upon the proposal of the Minister responsible for economy Concessions to be implemented in other sectors.
VAT credit on machinery imports
Importers of machinery and equipment can take advantage of a 100% VAT credit if the machinery and equipment are used solely as part of their taxable economic activity.
Facon producers’ VAT exemption
Facon producers are not subject to VAT on services provided to their contractors providing that products under the scheme are re-exported. This is based on Law 7928, dated April 27,1995, "On Value Added Tax," Article 25/6.
Subsidized leases of state-owned premises
Investors are eligible to lease state-owned property such as land or buildings at rents below market rates. In the case of production activities, the level of rent reduction will be made accordingly to the level of investment made and of new jobs created. This is based on DCM no.315, dated 24.04.2006 “On the leasing of state enterprises and institution’s property”.
The country's physical plant remains under-developed while some progress has been made in its financial infrastructure. There are shortages of power and water, especially in rural areas, and also during certain periods of the year. During 2007, drought conditions meant power shortages were more frequent and a reliable electricity supply still remains a major impediment to private sector development. These shortages also increase businesses’ costs of production. Public administration is not considered to be efficient and, despite continuing efforts to improve their performance, tax and customs administration can be difficult and not transparent. Biased implementation of the law and corruption remain concerns for many investors. Cumbersome procedures for permissions or licenses for some commercial activities, such as tourism and construction, have caused investment delays.
Market Opportunities
Energy, oil and gas, telecommunications, agro processing and services, insurance, transportation, tourism and banking are considered to have the best future growth in the country. Albania offers considerable natural resources, including oil, gas, coal, iron, copper, chrome, and water/hydroelectric potential. Increases in raw material market prices have made the energy and mining sector, in particular, more attractive.
The telecommunications sector has experienced spectacular growth during the last four years due to the entry of and heavy investment by two new mobile companies. A third mobile operator is operational from 2008 and the Albanian government has issued the fourth license. However, fixed line telephone density remains low and the potential for high rates of growth is still present. Demand continues to increase for physical facilities and equipment to meet the telecommunication companies' expansion needs.
Agro processing is another sector with great potential because domestic production covers only one eighth of demand. Packaging and distribution facilities, refrigeration and storage, and quality control rank high among the services that Albania demands in this sector.
Tourism remains the only sector registering a net positive trade balance, and has the potential to play a leading role in the economic development of Albania. The tourism sector represents one of the most important sources of cash revenue for the economy. For the first nine months of 2007, the export of tourism services generated Euro 754 million, an increase of 23 percent from 2006.
The Government has embarked on an ambitious investment plan in the transportation sector. Public investments have increased considerably for the construction of new roads throughout the country. The most important project is the Durres-Kukes corridor, a significant part of which will be built by the American/Turkish Bechtel-Enka consortium. Another major project in the transportation sector was the construction of a new passenger terminal at Tirana International Airport and of the container terminal in the port of Durres. There are already plans to extend the passenger terminal at Tirana due to the very fast growth in the number of passengers. Other on-going projects include the construction of a new passenger terminal and other infrastructure improvements at the port of Durres and also the modernization of the port of Vlora.
The GOA’s transport sector policy has been moving towards privatization and commercialization of services in the road, maritime and railway systems as well as in civil aviation. Other important sectors slated for privatization are the oil and power sectors - including the state-owned oil extraction and refining companies (Albpetrol and ARMO), an insurance company (INSIG), state-owned stakes at the mobile operator AMC and the electricity distribution system. In addition, several small hydropower projects are being given under concession contracts.
Market Entry Strategy
To enter the local market, companies should have an agent and/or local distributor. Agents can be found by contacting the U.S. Embassy's Economic and Commercial Section, the American Chamber of Commerce in Albania, local chambers of commerce and industry, Albinvest (a GOA agency that promotes business opportunities in Albania), law firms, consulting companies and other business organizations. Agents can also be identified by meeting them in person at trade events both in the U.S. and Albania.
It is recommended that companies interested in investing here should visit the country. This is especially true for service, high tech and telecommunications businesses. Most companies that come to Albania give detailed presentations and provide demonstrations of their products and/or services. For consumer goods, however, companies may work solely through agents or local distributors.
