“Judicial reform is a major turning point for Albania”
FIAA: What is your perception of the Albanian economy currently?
Mr. Reinke: We have been saying for some time that a modest recovery is on the way. We see growth rates rising slowly — perhaps a bit too slowly — but nonetheless the outlook is positive. We remain somewhat concerned about the still high level of non-performing loans in the banking sector and very slow credit growth.
If we look at the performance of the economy in a regional and global context, it’s doing quite well. Both the recovery in the Eurozone and the current performance and outlook for emerging markets globally are much worse than we were expecting at the beginning of Albania’s programme with the IMF. Nonetheless Albania is continuing to recover. It is a broad-based recovery affecting all the sectors.
Both exports and inward FDI are doing OK, and the banking sector remains stable. We endorse the Bank of Albania’s inflation targeting regime and the targets set. We believe that the Bank of Albania is taking the right measures to address persistently low inflation.
We are also following developments in the fiscal sector including tax reform, the informality campaign and efforts to bring the fiscal deficit under tighter control. Broadly, we think the government is undertaking the right efforts. We think that much more capacity building and a more structured, consistent reform effort in the revenue agencies is needed to raise government revenue in a sustainable way.
What are your expectations for the Albanian economy for the remainder of 2016 and early 2017?
We see continued growth, but Albania will likely be battling a non-conducive external environment. Because the major export markets will probably not show too much growth, internal developments will have to drive growth. There should be an impetus to reform because improved efficiency in the economy and improved efficiency in government spending and public investment would drive further growth.
Separately, there are signs that the oil price might be recovering. This would be very positive for Albania, particularly with regard to continued investment in the oil sector in Albania and of course with regard to government revenues from oil.
What are some of the government initiatives to promote economic growth that you find most encouraging?
One effort that I strongly support is the comprehensive reform attached to the resolution of nonperforming loans.
There are some other efforts such as the special investment zones or processing zones which, on balance, we look at with some caution. Many of the benefits that accrue to investors under such special regimes should be available to everyone in the country, such as better legal security, protected property rights, streamlined procedures and reduced red tape. That should be the objective of policy that improves the business environment more broadly.
At the same time, the country has limited fiscal space and has to be very careful in offering tax incentives to specific sectors or investors. We believe that the simplified but universal application of standard tax rates would benefit the country, also in terms of enhancing the simplicity and user-friendliness of taxes.
Another area where the country has identified potential, but has to develop it carefully, is in public private partnerships. Private public partnerships can be a valuable vehicle for enhancing investment in sectors such as infrastructure, but they have to be carefully monitored for the contingent liabilities that they may entail for the government.
What is your assessment of the business operating environment for foreign investors and where do you feel there may be scope for improvement?
Albania is one of the highest growth economies in Europe and is moving towards integration with the EU. I think investors with a long time horizon might want to establish a footprint here because in the long run it could be an important country to serve the south eastern European sub-region, and a lower cost manufacturing base for the rest of Europe.
Having said this, the country has severe challenges in the field of the rule of law, which includes areas such as contract enforcement, land title and the rights of individuals and companies vis-à-vis government institutions. The country has great potential to improve its investment climate by improving the way government and the judiciary work.
Are you seeing any signals that this is happening?
Judicial reform is major step forward and it is maybe the biggest turning point for the country in recent years and in the foreseeable future. If judicial reform is implemented well, the country might well be on the way to joining Western Europe as a modern, reliable state.
This is a crucial moment for the country to implement reform successfully. And as reform is progressing right now, I see that as a positive sign. But we still have some way to go before we can declare judicial reform successful.
In the economic field, this government has a very good track record in reform. It has performed very well under the IMF programme and I expect this to continue. But in the wider business environment, the legal environment is really the big issue for the coming years.