ECONOMIC OUTLOOK 2018ALBANIA

Secretariat

Investment Council Albania

October, 2018

1

Note: This is a summary of the main indicators on economic situation in Albania as published by official sources or internationalorganizations. This document does not represent the opinions and views of the Secretariat or the Investment Council.

Data used in the presentation have been generated from the databases of the official websites of Albania Institute of Statistics, Bank of Albania, World Bank, International Monetary Fund, etc.

2

Economic Growth in Years

After a steady growth at average rate of 6% during 2000-2008, Albanianeconomy slowed down affected by the global financial and debt crises. Theeconomic recovery was confirmed in 2015, while economic growth continued toimprove. In the first half of 2018, economic growth was announce at the rate of4.42%(see:

Source: IMF International Monetary Fund, World Economic Outlook Database, April 2016. After 2012 the values are estimations.

3

6.95

8.29

4.54

5.53 5.52 5.535.90 5.98

7.50

3.353.71

2.55

1.421.00

1.772.23

3.37

3.93

0.000

2.500

5.000

7.500

10.000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Gro

wth

Rat

e (i

n %

)

Gross Domestic Product per Capital

Source: IMF International Monetary Fund, World Economic Outlook Database, April 2018. After 2016,the values are estimations.

In 2017, GDP per capita was reported to estimated to reach 4,582 in current USD or 12,507 USD based on purchasing power parity (PPP).

4

0.00

3,500.00

7,000.00

10,500.00

14,000.00

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

in U

SD

Gross domestic product per capita, current prices

Gross domestic product based on purchasing-power-parity (PPP) per capita GDP

Sectors’ Contribution to Economic Growth

(yoy, in %)

Source: INSTAT, Annual National Accounts 2018 (Production Methods)

• Main sources of economic growth are industry, professional services and recreation activities.

• Construction sector, financial activities and ICT sector impact on growth manifests contraction in 2018 if compared to 2017.

• Agriculture sector, real estate activity and trade remain stable in their contribution to growth.

5

1.67

3.16

9.18

12.55

2.92

3.06

14.84

0.85

3.63

4.68

4.06

1.93

19.90

9.55

2.10

3.75

-2.99

-1.16

0.01

5.54

2.10

4.30

-6.25 0.00 6.25 12.50 18.75 25.00

Agriculture, forestry and fishing

Industry

Manufacturing Industry

Construction

Trade

ICT

Financial and Insurance

Real estate activities

Professional Services

Public Sector

Art&Entertainment

2017:T1 2018:T1

Albanian Exports 2015-2017 (Per group of commodities, in million ALL)

Source: INSTAT, Foreign Trade according commodities 2005- 2017

Main Exports are from textiles, mineral products, electricity and fuels, construction materials and metals followed by agro-food products.

6

0

75,000

150,000

225,000

300,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Food, beverages, tobacco Minerals, fuels, electricity Chemical and plastic products Leather and leather manufactures Wood manufactures and articles of paper

Textile and footwear Construction materials and metals Machineries, equipments and spare parts Others

Albanian Imports 2005-2017 (Per group of commodities, in million ALL)

Source: INSTAT, Foreign Trade according commodities 2005-2017

Imports are dominated by machineries and equipments, followed by food, beverages and tobacco products, minerals and fuels as well as plastics

7

0

175,000

350,000

525,000

700,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Food, beverages, tobacco Minerals, fuels, electricity Chemical and plastic products Leather and leather manufactures

Wood manufactures and articles of paper Textile and footwear Construction materials and metals Machineries, equipments and spare parts

Others

EXPORTS IN SERVICES IN 2017 –

REGIONAL CONTEXT

Source: World Development Indicators,

Albania ranks second in the region regarding exports of services, which are mainly dominated by exports

of tourism and travel. ICT exports in 2017 represented 31% of total service exports for Albania. ICT

exports in the region (in value) are the highest in Serbia, while for FYR of Macedonia exports of ICTs

represent 54% of exports in services.Travel exports represent the largest share of service exports for

Kosovo, Montenegro and Albania,

8

0

1,500

3,000

4,500

6,000

7,500

ALB BiH MKD MNE KSV SRB

Exports in services (in Mio USD) Export in Travel (in Mio USD) Exports in ICT (in Mio USD)

Consumer Index Price

Source: INSTAT, April 2018

Inflation in all these years has been stable and within the threshold of monetary policy objectives, which is a 4% yoy rate of inflation.

Inflation rate was reported to 2.1% (yoy) in September 2018.9

3.9

4.7

4.5

4.3

2.7

3.9

3.6

3.1

2.8

3.2.9

1.71.6

0.6

1.

1.6

1.9

2.2

2.72.8

2.6

2.42.5

2.7

2.52.4

2.3

2.1

2.3

1.6

1.2

1.71.7

1.

1.9

1.7

1.9

2.2

1.71.6

1.5

1.8

2.

1.51.4

1.7

0.7

1.3

2.32.2

2.3

1.8

1.41.3

1.9

2.22.12.1

2.

1.5

0.20.30.3

0.7

1.2

1.92.

1.8

1.5

1.9

2.2

2.8

2.22.1

1.92.

2.2

2.

1.61.6

1.9

1.71.8

1.7

2.12.

2.12.1

2.42.3

2.22.1

0.

1.3

2.5

3.8

5.

2011-01 2011-06 2011-11 2012-04 2012-09 2013-03 2013-08 2014-01 2014-06 2014-11 2015-04 2015-09 2016-02 2016-07 2016-12 2017-05 2017-10 2018-03 2018-08

Labour Force per Age Categories

Source: INSTAT, Labour Force Survey, 2017

Labour Force Participation rate in(%) Unemployment %

• During 2017, Increasing labour participation and declining unemployment lead to higher employment.

• Youth unemployment remains still the highest if compared to other unemployed age groups. 10

0.0

20.0

40.0

60.0

80.0

100.0

2009 2010 2011 2012 2013 2014 2015 2016 2017

15-29 30-64 15-64 15+

0.0

10.0

20.0

30.0

40.0

2009 2010 2011 2012 2013 2014 2015 2016 2017

15-29 30-64 15-64 15+

Average Wages per Sector (in ALL)

Source: INSTAT, General Directorate of Tax, 2016-2017

• The highest wages in 2017 were recorded in financial and insurance sector, followed by ICT Lowest wages are reported in trade, repair services and transport.

• Fastest growing wages are reported in art and entertainment sector followed by public administration.

• Average wages in 2017 is reported to 55,198 ALL (442 Eur) and increased by 2.78% yoy. 11

36,264

40,390

43,104

34,627

73,471

103,641

55,940

59,921

49,427

'- 27,500 55,000 82,500 110,000

Agriculture

Industry

Construction

Trade, repair, services

Information and communication

Financial and insurance activities

Professional Services

Public administration

Arts, entertainment and recreation

2016 2017

Cost of Labor for Western Balkans

Countries, 2015 (EUR)

183 200

271317

179 181

417

530

600

813

378

469

ALB MKD SRB MNE KSV BIH

Cost of labor as minimum wage Cost of labor as average wage

Source: Statistical Offices of Countries, for Albania is used as reference the public administration salary of 2015.

• Albania compared to other Western Balkans Countries lhas a lower cost of wage if measured through average wage

• If cost of labour is compared through minimum wage, the cost of labour in Albania is comparable with Kosovo, Bosnia and Herzegovina and Macedonia.

12

0

500

1000

1500

2000

2500

2012 2013 2014 2015 2016 2017

In M

io E

uro

Public Investment (in Mio EUR) Private Investment(in Mio EUR) Foreign Direct Investment (in Mio EUR)

Public, Private and Foreign Investments in

Albania (in Mio Euro)

Source: Ministry of Finance, Bank of Albania, INSTAT

• Positive trend in private investments after 2015 are observed;

• FDIs and public investment are slowly taking off and entering in a positive cycle.

Investments per Sector (Mio ALL)

Source: INSTAT – Enterprises Surveys

▪ Electricity, gas, water and waste sector as well as processing industry have reported the largest investments growth in 2016 (yoy).

▪ Investments in 2016 contracted in transport and communication sector and mining.

▪ Investment in accomodation and food services are the lowest in absolute values, while experiencing very positive dynamics in 2016.

14

0

25000

50000

75000

100000

Minining Processing Industry Electricity, gas, water and waste Construction Services Trade Accomodation and food services Transport,infrustructure, communication

2012 2013 2014 2015 2016

0

30

60

90

120

150

180

210

240

270

300

330

Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016 Q1 2017 Q3 2017 Q1 2018

Quaterly Flow of FDIs, in Mio Euro

0

800

1,600

2,400

3,200

4,000

4,800

5,600

6,400

7,200

8,000

Q12014

Q32014

Q12015

Q32015

Q12016

Q32016

Q12017

Q32017

Q12018

Quarterly Stock of FDIs, in Mio Euro

Flow and Stock of Foreign Direct Investment

Although the flow of FDI has been volatile and following business cycles, after 2015 the stock of FDIs has enetered positive dynamics.

FDI Stock according to Countries of Origin (Mio EUR)

Source: Bank of Albania, October 2018

• Greece continues to lead the stock of FDIs in volume terms;• Strong positive dynamics of FDIs from Swicherland, Netherland and France

are observed in the first half of 2018.

16

0

140

280

420

560

700

840

980

1,120

1,260

1,400

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Q32016

Q42016

Q12017

Q22017

Q32017

Q42017

Q12018

Q22018

Greece Switzerland Netherland Canada Italy Turkey Austria France

Quarterly Stock of FDI per Economic Activity (Mio EUR)

Source: Bank of Albania, October 2018

17

• The most attractive sectors for FDIs are Energy and Waste Managment, Mining and Quarrying, Insurance and Real Estate;

• A slow down in stock of ICT and Transport/Accommodation tor Sector is observed starting from the second quarter of 2017;

0

500

1,000

1,500

2,000

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018

Mining and quarying Manufacturing Industry Energy and Waste Managment

Transport and accomodation Information and Communication Insurance and real Estate

All other sectors

Flow of FDI in the Western Balkans

Source: World Development Indicators

In USD current In % to GDP

Albania is ranked the second in the region for the value of the foreign investments in years and for the contribution to the gross domestic product.

18

0

1,250,000,000

2,500,000,000

3,750,000,000

5,000,000,000

6,250,000,000

2011 2014 2015 2016 2017

ALB BIH KSV MKD MNE SRB

0.0

4.5

9.0

13.5

18.0

22.5

2011 2012 2013 2014 2015 2016 2017

ALB BIH KSV MKD MNE SRB

Stock and Profile of Enterprises

2010 - 2016

Source: Enterprise Survey, INSTAT

• Enterprise structure in Albanian economy is dominated by micro, small and medium enterprises which represent 99% of enterprises.

• In 2017, 33% of registered enterprises were operating as producers of goods, 67% were reported as operators in services sector.

19

Per number of employees Years

2011 2012 2013 2014 2015 2016 2017

Total 109,039 106,837 111,083 112,537 152,288 160,679 162,452

1-4 97,836 95,520 99,782 101,025 136,470 145,456 146,304

5-9 5,194 5,636 5,235 5,387 8,172 7,631 8,023

10-49 4,744 4,439 4,660 4,647 5,994 5,902 6,297

50+ 1,265 1,242 1,406 1,478 1,652 1,690 1,828

Producers of goods 17,099 16,413 16,842 16,989 37,950 48,585 53,250

1-4 12,991 12,592 13,071 13,273 33,255 44,179 48,819

5-9 1,717 1,718 1,565 1,603 2,080 1,865 1,842

10-49 1,923 1,650 1,681 1,562 1,971 1,877 1,851

50+ 468 453 525 551 644 664 738

Producers of services 91,940 90,424 94,241 95,548 114,338 112,094 109,202

1-4 84,845 82,928 86,711 87,752 103,215 101,277 97,485

5-9 3,477 3,918 3,670 3,784 6,092 5,766 6,181

10-49 2,821 2,789 2,979 3,085 4,023 4,025 4,446

50+ 797 789 881 927 1,008 1,026 1,090

Active Enterprises according to

Economic Activity - 2017

Source: Enterprise Survey, INSTAT

20

37,684

11,0664,500

48,873

5,928

21,909

2,927

29,565

0

12,500

25,000

37,500

50,000

62,500

Agriculture Industry Construction Trade Transport Accommodation and food ICT Other Services

Government Revenues to GDP in the

Countries of Balkan Region (in %)

Source: IMF, World Economic Outlook, October 2018

The share of government revenues to GDP for Albania ranks among the lowest in the region, however it has been on an increasing trend from 2013.

21

20.0

23.5

27.0

30.5

34.0

37.5

41.0

44.5

48.0

51.5

55.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

Albania Bosnia and Herzegovina Croatia Kosovo FYR Macedonia Montenegro Serbia

Dynamics of Public Debt 2005 - 2018

Source: Ministry of Finance, Macroeconomic and Fiscal Framework, 2018 – 2021

0.0

20.0

40.0

60.0

80.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

Total Public Debt Domestic (stock) Foreign (stock

• Public debt remains high, with a very slight trend of contraction after 2017.

• Fiscal consolidation measures are reverting the dynamics of public debt toward a declining debt to GDP. More fiscal consolidation measures will ensure stable reverting trend of public debt

22

Main Taxes for 2018

❑ Value Added Tax - 20%

❑ Profit Tax on Annual Turnover:a) 0-5 Million ALL (≈ 36,500 EUR) – 0%b) From 5 Million ALL – 8 million Leke (≈

58,400 EUR) – 5%c) Over 8 Million ALL – 15%

❑ Dividend Tax – 15%

23

Ranking of Western Balkan Countries on

Ease of Doing Business Indicator

Albania ranking improved by 2 positions in 2018/2019 report.

Source: http://www.doingbusiness.org/data/exploreeconomies/

24

48

50

10

44

89

63

43

41

11

40

86

65

47

51

10

60

81

58

59

46

12

66

79

97

0 25 50 75 100 125

Serbia

Montenegro

Macedonia, FYR

Kosovo

Bosnia and Herzegovina

Albania

2019

2018

2017

2016

Ranking of Albania in

International Reports and IndexesIndex/ Report Organisation 2014/2015 2015/2016 2016/2017 2017/2018

Perception of Corruption

Transparency International

110 (out of 175 countries)

88 (out of 168 countries)

83 (out of 176

countries)

91 (out of 180)

Economic Freedom The Heritage Foundation

54 (out of 178 countries)

63 (out of 178 countries)

65 (out of 180 countries)

Doing Business World Bank 62 (out of 189 countries)

97 (out of 189 countries)

58 ( out of 190

countries)

63 (out of 190 countries)

World Competitiveness Index

World Economic Forum

97 (out of 144 countries)

93 (out of 140 countries

80 (out of 138

countries)

75 (out of 137 countries)

25

Doing Business Indicators

Indicator 2014/2015

2015 /2016

2016/2017

2018/2019

Starting a Business 54 58 46 50

Dealing with Construction Permits 122 189 106 151

Getting Electricity 159 162 156 140

Registering Property 104 107 106 98

Getting Credit 36 42 44 44

Protecting Minority Investors 18 8 19 26

Paying Taxes 130 142 97 122

Trading across Borders 37 37 24 24

Enforcing Contracts 96 96 116 98

Resolving Insolvency 40 42 43 39

26

Albania ranks the lowest in the area of dealing with construction permits, energy, fiscal procedures and property registration. There is improvement on energy, enforcing contracts and registration of properties. Albania ranks best in indicators relating to financial system.

Trading across Borders - DB 2017/2018 Export time and costs

27

Time: Border compliance (hours)

Cost: Border compliance (USD)

Time: Documentary compliance (hours)

Cost: Documentary compliance (USD)

Ranking

Albania

9

55

6

10

Europe &

Central Asia

28

195

27

111

24 out of 190 economies

Competitiveness IndicatorsIndicator 2015-

20162016/2017 2017/2018

Institutions 103 76 68

Infrastructure 90 91 94

Macroeconomic Environment 122 93 75

Health and Primary Education 62 33 36

Higher Education and Training 60 42 80

Goods Market Efficiency 93 69 49

Labour Market Efficiency 93 98 57

Financial Market Development 114 94 91

Technological Readiness 91 82 81

Market Size 105 109 78

Business Sophistication 104 94 105

Innovation 120 109 74

28

• Institutions, market efficiency and innovations have improved;

• Education and business sophistications are index of competitiveness in significant deterioration;

Economic Freedom Indicators

Indicator ( ranked 65th position) 2016 2018

Property Rights 86 79

Freedom from Corruption 113 156

Fiscal Freedom 34 47

Government Spending 72 77

Business Freedom 80 73

Labour Freedom 128 134

Monetary Freedom 49 56

Trade Freedom 37 14

Investment Freedom 50 58

Financial Freedom 19 35

29

• Corruption, labour market are the most problematic areas in the economic freedom index; whereas trade freedom is considered favorable.

• Investment freedom and financial freedom are reported as deteriorating.

Source: https://www.heritage.org/index/about