Analysis: Economy in 2023, the challenges of the Albanian government

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High inflation will also weigh heavily on businesses. Raw material price increases in overseas markets will have a direct impact on production, shipping, and other costs. This means that the unit cost of a product will rise, and the company will have two options: charge it to the consumer with an increase in the final price, or amortize it from its profit rate, which has actually decreased in the midst of a general and multi-faceted economic crisis. The effects of high inflation will be reflected in a decrease in consumption, which is one of the primary engines of economic growth.

The government’s first challenge is to assist impoverished families who will be hardest hit by the price problem in order to increase demand and consequently economic growth.

Another catastrophe that will be linked to the pricing crisis this year is the interest crisis. Last year, the Bank of Albania began tightening monetary policy in an effort to slow the ongoing rise in inflation. In other words, the lek’s base interest rate has steadily increased from 0.5% in March to 2.75% today. The European Central Bank has implemented a similar tightening policy, raising the basic interest rate for the euro, which is also used as a reference (eurolibor) when loans are made in the euro currency.

The increase in the lek and euro’s basic interest rate will make loans more expensive, both new ones requested by firms and people, and current ones, at the time of the review, according to specific contracts. This means that borrowers’ monthly payments, whether in Lek or Euros, would rise (indeed, the rise has already begun), and they are additional charges that burden monthly budgets.

The increase in basic interest rates will be accompanied by difficulties in returning loans and a likely increase in the indicator of bad loans in a chain reaction of impacts. It is also predicted to be accompanied by a fall in loan demand, which would have an impact on economic growth.

The government’s second challenge is to assist businesses or priority sectors in order to boost economic growth.

The third and most concerning challenge is the labor shortage. Many industries, such as manufacturing, services, and trade, are experiencing a labor shortage as a result of rising immigration. It is not just about qualified employees, but also about individuals with limited qualifications and competence. Many industries today operate at decreased capacity, and the flow of emigration is not being slowed by salary increases, which, to be honest, have been very low.

According to Institute of Statistics data, the average gross monthly pay in the third quarter of 2022 was ALL 61,613, up 9.2% over the same quarter last year. The average monthly pay for a public sector employee is ALL 70,593, whereas it is ALL 57,613 for a private sector employee.

However, in order to encourage pay increases, the government agreed to raise the minimum wage to 32 thousand ALL. A choice that really punished the business by increasing its expenditures during times of crisis, while the executive benefitted from a rise in income in the deficit pension system.

The third challenge for the government is to use policy to favorably influence the labor market.

Businesses are currently facing serious challenges as a result of rising expenses from worldwide markets and a labor shortage caused by emigration. Albanian products are expensive and have grown less competitive and “interesting” in comparison to imported products. However, businesses are the primary economic agents, as they produce jobs and pay taxes. As it is, a hit by them equals a hit for everyone.

Challenge 4 for the government: assist businesses by engaging in open discussion with them.

Simultaneously, the government should simplify procedures and cut red tape in order to boost the business climate. It should also identify measures to stimulate foreign direct investment, which can be one of the sources of economic growth in times when other sources are drying up.

Challenge 5 for the government: fiscal consolidation

This is not just for this year, but for the medium term. Although signs of fiscal consolidation have begun to emerge with the 2022 and 2023 budgets, intervention is still required to increase revenues, primarily to combat fiscal evasion and informality, but also to reduce budget expenditures to the extent that it does not negatively affect economic growth.

Successive crises, beginning with the 2019 earthquake, then the pandemic, and now the Ukrainian war, have strained the budget, which was already suffering from poor fiscal management before to the strikes.

Finally, I believe that 2023 will be a challenging year, but also a test of responsibility. Citizens in managing their personal money, corporations in developing investment plans, and the government in overseeing public finances in an election year.