Albania is an upper middle-income country with a gross domestic product (GDP) per capita of USD 5,288 (2018) and a population of approximately 2.9 million people, around 45 percent of whom live in rural areas. According to IMF estimates, real GDP increased by 4.2 percent in 2018, and growth is expected to decline during 2019 but remain close to 4 percent in the medium term. Albania received European Union (EU) candidate status in June 2014 and has since been seeking to open accession negotiations. The EU has encouraged Albania to continue progress in reforms related to five key priorities: public administration reform, justice reform, the fight against corruption, the fight against organized crime, and protection of human rights, including the rights of persons belonging to minorities and property rights.
Foreign investors cite corruption, particularly in the judiciary, a lack of transparency in public procurement, and poor enforcement of contracts as continuing problems in Albania. In 2016, the Government of Albania (GOA) passed sweeping constitutional amendments to reform the country’s judicial system and improve the rule of law. The implementation of judicial reform is underway, including the vetting of judges and prosecutors for unexplained wealth. While numerous judges and prosecutors have been dismissed by a vetting commission for unexplained wealth or organized crime ties, foreign investors perceive the investment climate as problematic and say Albania remains a difficult place to do business.
Investors report ongoing concerns that regulators use difficult-to-interpret or inconsistent legislation and regulations as tools to dissuade foreign investors and favor politically connected companies. Regulations and laws governing business activity change frequently and without meaningful consultation with the business community; business owners and business associations frequently note they did not receive enough notice, time, or opportunity for engagement on regulatory and legislative changes. Major foreign investors report pressure to hire specific, politically connected subcontractors and express concern about compliance with the Foreign Corrupt Practices Act while operating in Albania. Reports of corruption in government procurement are commonplace. The increasing use of public private partnership (3P) contracts has narrowed the opportunities for competition, including by foreign investors, in infrastructure and other sectors. Poor cost-benefit analyses and a lack of technical expertise in drafting and monitoring 3P contracts are ongoing concerns. The government had signed more than 200 3P contracts by the end of 2018.
Property rights remain another challenge in Albania, as clear title is difficult to obtain. There have been instances of individuals manipulating the court system to obtain illegal land titles. Compensation for land confiscated by the former communist regime is difficult to obtain and inadequate. The agency charged with removing illegally constructed buildings often acts without full consultation and fails to follow procedures.
To attract FDI and promote domestic investment, the host government approved a Law on Strategic Investments in 2015. The law outlines investment incentives and offers fast-track administrative procedures to strategic foreign and domestic investors, depending on the size of the investment and number of jobs created. The government also passed legislation creating Technical Economic Development Areas (TEDAs), like free trade zones. The development of the first TEDA, in Spitalle, Durres, was granted to a consortium of local companies in August 2017, but only after the tender had failed three times. Development of the TEDA has yet to begin, as one of the bidders has challenged the decision in the court.
Transparency International’s 2018 Corruption Perceptions Index ranked Albania 99th of 180 countries, a drop of eight places from 2017. Consequently, Albania is now perceived as the most corrupt country in the Western Balkans. While it improved by two spots, to 63rd, in the World Bank’s 2019 “Doing Business” survey, Albania continued to score poorly in the areas of enforcing contracts, registering property, granting construction permits, and obtaining electricity.
The Albanian legal system ostensibly does not discriminate against foreign investors. The U.S.—Albanian Bilateral Investment Treaty, which entered into force in 1998, ensures that U.S. investors receive most-favored-nation treatment. The Law on Foreign Investment outlines specific protections for foreign investors and allows 100 percent foreign ownership of companies in all but a few sectors.
Energy and power, tourism, water supply and sewerage, road and rail, mining, and information communication technology represent the best prospects for foreign direct investment in Albania over the next several years.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||99 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2019||63 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||83 of 126||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2017||$56||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2017||4$,320||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
6. Financial Sector
Capital Markets and Portfolio Investment
In the absence of a stock market, the country’s banking sector remains the main channel for business financing. The sector is sound, profitable, and well capitalized, although the high rate of non-performing loans (NPL) remains a concern. The Bank of Albania’s legal measures to address the problem have generated mostly positive results. The banking sector is fully private. It has undergone significant consolidation over the last year, shrinking the number of banks to 12, down from 16 at the beginning of 2018. As of December 2018, the Turkish National Commercial Bank had further consolidated its position as the largest bank, with 28.4 percent of the market, followed by Austria’s Raiffeisen Bank, with 15 percent, and Albania’s Credins Bank, with 12.9 percent. The share of Greek banks has significantly decreased in recent years due to the departure from Albania of the National Bank of Greece and Greece-based Piraeus Group’s Tirana Bank.
The government has adopted policies promoting the free flow of financial resources to promote foreign investment in Albania. The government and Central Bank refrain from restrictions on payments and transfers for international transactions. Despite Albania’s shallow FX market, banks enjoy enough liquidity to support sizeable positions. Furthermore, portfolio investments remain limited mostly to company shares, government bonds, and real estate.
Nevertheless, the high rate of non-performing loans and the economic slowdown forced commercial banks to tighten lending standards. After a slight increase in 2017, the stock of loans decreased by 3.3 percent year-on-year in 2018, due also to the 9 percent appreciation of the domestic currency against the euro. The credit market is competitive, but interest rates in domestic currency can be high, ranging from 6 percent to 8 percent. Most mortgage and commercial loans are denominated in euros, as rate differentials between local and foreign currency average 2.5 percent. Commercial banks have improved the quality and quantity of services they offer, and the private sector has benefited from the expansion of these instruments.
Money and Banking System
Albania’s banking sector weathered the financial crisis better than many of its neighbors, due largely to a lack of exposure to international capital markets and lack of a domestic housing bubble. The sector has contracted in recent years. In December 2018, Albania had 474 bank branches, down from 552 in 2016. Capital adequacy, at 18.2 percent, remains above Basel requirements and indicates sufficient assets, which in 2018 totaled USD 13.54 billion. At the end of 2018, the return on assets was 1.2 percent. Non-performing loans continued to fall, reaching 11.1 percent at the end of the 2018, down from 13.2 percent compared with 2017, and a significant improvement over 2014, when NPLs stood at 25 percent.
The Bank of Albania has the flexibility to intervene in the currency market to protect exchange rates and official reserves, but not for longer than 12 months. As part of its strategy to stimulate business activity, the Bank of Albania has persistently lowered interest rates, which in June 2018 reached a historic low of 1 percent, down from a rate of 1.25 percent in place since May 2016.
Most banks operating in Albania are subsidiaries of foreign banks, and just two have Albanian shareholders. However, Albanian ownership is expected to increase because of the sector’s ongoing consolidation. Foreigners are not required to prove residency status to establish a bank account, aside from the normal know-your-client procedures. However, U.S. citizens must complete a form allowing for the disclosure of their banking data to the IRS as required under the U.S. Foreign Account Tax Compliance Act.
Foreign Exchange and Remittances
The Central Bank of Albania (BOA) formulates, adopts, and implements foreign exchange policies and maintains a supervisory role in foreign exchange activities in accordance with the Law on the Bank of Albania No. 8269 and the Banking Law No. 9662. Foreign exchange is regulated by the 2009 Regulation on Foreign Exchange Activities no. 70 (FX Regulation).
The Bank of Albania maintains a free float exchange rate regime for its domestic currency, the lek. Albanian authorities do not engage in currency arbitrage, nor do they view it as an efficient instrument to achieve competitive advantage. The Bank of Albania does not intervene to manipulate the exchange rate unless required to control domestic inflation, in accordance with the Bank’s official mandate. Foreign exchange is readily available at banks and exchange bureaus. However, when exchanging several million dollars or more, preliminary notification may be necessary, as the exchange market in Albania remains small. A 2018 campaign launched by the BOA with a goal to reduce the domestic use of the euro and other foreign currencies has yet to produce tangible results. The campaign is part of a larger reform that aims to improve the effectiveness of domestic economic policies.
The Banking Law does not impose restrictions on the purchase, sale, holding, or transfer of monetary foreign exchange. However, local law authorizes the BOA to temporarily restrict the purchase, sale, holding, or transfer of foreign exchange to preserve the foreign exchange rate or official reserves. In practice, the Bank of Albania rarely employs such measures. The last episode was in 2009, when the Bank temporarily tightened supervision rules over liquidity transfers by domestic correspondent banks to foreign banks due to insufficient liquidity in international financial markets. It also asked banks to halt distribution of dividends and use dividends to increase shareholders’ capital, instead. The BOA lifted these restrictions in 2010.
The Law on Foreign Investment guarantees the right to transfer and repatriate funds associated with an investment in Albania into a freely usable currency at a market-clearing rate. Only licensed entities (banks) may conduct foreign exchange transfers and waiting periods depend on office procedures adopted by the banks. Both Albanian and foreign citizens entering or leaving the country must declare assets in excess of 1,000,000 lek (USD 9,000) in hard currency and/or precious items. Failure to declare such assets is considered a criminal act, punishable by confiscation of the assets and possible imprisonment.
Although the Foreign Exchange (FX) Regulation provides that residents and non-residents may transfer capital within and into Albania without restriction, capital transfers out of Albania are subject to certain documentation requirements. Persons must submit a request indicating the reasons for the capital transfer, a certificate of registration from the National Registration Center, and the address to which the capital will be transferred. Such persons must also submit a declaration on the source of the funds to be transferred. In January 2015, The FX Regulation was amended and the requirement to present the documentation showing the preliminary payment of taxes related to the transaction was removed.
Albania is a member of the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), a Financial Action Task Force-style regional body. The 2019 INCSR maintains Albania in the “Major Money Laundering Jurisdictions” category following its inclusion for the first time in 2017. The category implies that financial institutions of the country engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking.
Sovereign Wealth Funds
Albania does not have a sovereign wealth fund. A draft law to establish the Albanian Investment Corporation is currently under discussion. The GOA plans to transfer state owned assets, including state-owned land, and provide initial capital to launch the corporation. The corporation would develop, manage, and administer state-owned property and assets as public investments.