2014 Economic and Fiscal Programmes of Albania and Bosnia and Herzegovina

40 Pages·2014·0.51 MB·English

ISSN 1725-3209 (online)
ISSN 1725-3195 (print)
EUROPEAN
ECONOMY
Occasional Papers 198 | July 2014
2014 Economic and Fiscal Programmes of Albania and
Bosnia and Herzegovina:
The Commission’s country assessments
Economic and
Financial Affairs
Occasional Papers are written by the staff of the Directorate-General for Economic and Financial
Affairs, or by experts working in association with them. The Papers are intended to increase
awareness of the technical work being done by staff and cover a wide spectrum of subjects. Views
expressed in unofficial documents do not necessarily reflect the official views of the European
Commission.

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KC-AH-14-198-EN-N (online) KC-AH-14-198-EN-C (print)
ISBN 978-92-79-35382-6 (online) ISBN 978-92-79-36127-2 (print)
doi:10.2765/7540 (online) doi:10.2765/78907 (print)

© European Union, 2014
Reproduction is authorised provided the source is acknowledged.
European Commission
Directorate-General for Economic and Financial Affairs

2014 Economic and Fiscal Programmes
of Albania and Bosnia and Herzegovina:
The Commission's country assessments

EUROPEAN ECONOMY Occasional Papers 198

CONTENTS
Introduction 1
Part I: Overview 3
Part II: Country analysis 7
1. Albania 8
1.1. Executive Summary 8
1.2. Economic Outlook and Risks 9
1.3. Public Finance 12
1.4. Structural Reforms 16
1.5. Annex: Overall Assessment of Programme Requirements 18

2. Bosnia and Herzegovina 19
2.1. Executive Summary 19
2.2. Economic Outlook and Risks 20
2.3. Public Finance 23
2.4. Structural Reforms 26
2.5. Annex: Overall Assessment of Programme Requirements 28

LIST OF TABLES
Albania
II.1.1. Macroeconomic developments and forecasts 9
II.1.2. Financial sector indicators 12
II.1.3. Composition of the budgetary adjustment 13
II.1.4. Composition of changes in the debt ratio 16

Bosnia and Herzegovina
II.2.1. Macroeconomic developments and forecasts 21
II.2.2. Financial sector indicators 23
II.2.3. Composition of the budgetary adjustment 25
II.2.4. Composition of changes in the debt ratio 26

v

INTRODUCTION
In this Occasional Paper the Directorate General for Economic and Financial Affairs publishes its
overview and assessments of the 2014 Economic and Fiscal Programmes (EFP) of the potential
candidate countries (Albania and Bosnia and Herzegovina).
In 2001, a regular economic fiscal surveillance procedure was established for candidate countries. It
aims to prepare these countries for participation in the multilateral surveillance and economic policy
co-ordination procedures of the EU’s Economic and Monetary Union. The Pre-Accession Economic
Programmes (PEPs) of candidate countries are part of this procedure. Since they began in 2001, the
PEPs have evolved into an important platform for authorities in these countries to develop and
communicate appropriate medium-term economic, fiscal and structural policies that are consistent
with their EU membership aspirations.
For this reason, a similar exercise was started in 2007 with the potential candidate countries. These
countries, which were promised the prospect of joining the EU when they are ready but are not yet
recognised as candidates, are required to submit EFPs outlining a medium-term policy framework,
including public finance objectives and structural reform priorities. The programmes are also an
opportunity to help these countries develop the institutional and analytical capacity necessary to
participate in the EU’s economic governance framework, particularly in the areas of multilateral
surveillance and economic policy coordination.
Albania and Bosnia and Herzegovina submitted their EFPs for the period 2014-2016 at the end of
January 2014. Both programmes have been made public(1).
The assessment was prepared in the Directorate-General for Economic and Financial Affairs under the
guidance and coordination of Carole Garnier and Uwe Stamm. The principal authors were András
Tari (Albania) and Mariya Hake (Bosnia and Herzegovina).
The programmes and their assessments by the Commission staff were discussed during an experts’
meeting on 23 May 2014 in Brussels, with experts from Albania, EU Member States, the European
Central Bank and the Commission. Experts from Bosnia and Herzegovina were absent because of the
extraordinary circumstances following severe floods in the country.
Comments would be gratefully received and should be sent to:
Directorate-General for Economic and Financial Affairs
Economies of candidate and pre-candidate countries
Carole Garnier
European Commission
B-1049 Brussels
or by e-mail to: [email protected]

(1) Albania:
http://www.financa.gov.al/files/userfiles/Programimi_EkonomikoFiskal/Programi_Ekonomik_e_Fiskal/EFP_2014_english_FINAL.pdf;
Bosnia and Herzegovina:
http://www.dei.gov.ba/dei/media_servis/vijesti/default.aspx?id=13158&langTag=bs-BA.

1

Part I
Overview
1.
OVERVIEW OF THE 2014 PROGRAMMES
The programmes of Albania and Bosnia and Herzegovina share some common features and
objectives. They both aim to revive growth and consolidate public finances and lay out reforms to
achieve these intentions.
In 2013 net exports helped sustain modest growth in both countries. Energy exports (crude oil in
Albania, electricity in Bosnia and Herzegovina) were particularly strong, while weak domestic
demand subdued imports. In Albania, new rounds of monetary stimulus could not prevent weak
consumption and especially private investment spending from dragging down growth to an estimated
0.4 %, the slowest pace since 1997. Bosnia and Herzegovina fared somewhat better, overcoming a
recession in 2012 with 1.5 % growth in 2013.
In the medium term, both programmes expect a gradual firming of growth. Domestic demand is
forecast to strengthen and take over as the main growth engine in both countries. In Albania, this
assumption is supported by the new government's intention to clear large outstanding public arrears
within three years, financed by loans from the IMF and the World Bank. This is expected to improve
private sector liquidity and help restore
Table I.1.1:
confidence. In both countries, investment
Economic and Fiscal Programmes 2014 should also get a boost from some large
Key indicators energy projects already in the pipeline.
2010 2011 2012 2013 2014 2015 2016
…but various downside risks are present.
Growth (GDP, real, annual % change)
A sustained economic recovery will require
Albania 3.8 3.1 1.3 0.7 2.1 3.3 4.2
a revival of lending, which has been under
Bosnia and
0.8 1.0 -0.9 1.5 2.3 2.8 3.5 stress in both countries. Although domestic
Herzegovina
banks are well-capitalised and liquid, a high
Unemployment rate (%, LFS) share of bad loans has made them reluctant
Albania 13.7 13.4 14.4 16.9 16.2 15.5 14.3 to extend new loans. Despite earlier efforts
Bosnia and in both countries to resolve non-performing
27.2 27.6 28.0 27.5 27.5 27.1 26.4
Herzegovina
loans (NPLs), further action seems
necessary, especially in Albania where as
Current account balance (% of GDP)
many as 24 % of loans are classified as non-
Albania -11.5 -13.0 -10.7 -10.0 -8.2 -7.5 -7.3
performing. A strong investment revival
Bosnia and
-6.1 -9.7 -9.2 -6.7 -7.2 -7.8 -9.2
Herzegovina could also be constrained by glaring
weaknesses in the business environment,
Inflation (CPI, annual % change) such as uncertain property rights, onerous
Albania 3.6 3.5 2.0 1.9 2.7 2.8 3.0 and unclear regulations, as well as
Bosnia and
2.1 3.7 2.1 0.3 1.5 1.6 1.5 deficiencies in contract enforcement and the
Herzegovina
rule of law. The disruption caused by the
Source: Economic and Fiscal Programmes (EFP) 2014 for 2012-2016, CCEQ for 2010 and 2011.
recent severe floods in Bosnia and
Herzegovina will also affect the near-term outlook. Finally, renewed external headwinds could emerge
if the economic situation in the EU deteriorates, as it is the main trade and investment partner of both
countries.
External imbalances remain a source of macroeconomic vulnerability. Despite recent
improvements in export performance, the trade deficit is high in both countries, reflecting a narrow
production base and weak competitiveness. Remittances, which used to be an important source of
financing for this deficit, have been diminishing, particularly in Albania. This calls for a strong focus
on attracting productive FDI, which, apart from financing the current account deficit in the present,
has the potential to boost productivity and diversify the export base in the future. Both countries have
large untapped potential in some sectors, such as tourism, that could be better exploited by improving
the investment climate. In Albania, privatisation is well advanced, which highlights the need to

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