BANK OF ALBANIA

1. BANK OF ALBANIA Competitiveness of the Albanian economy with a view to eventual EU accession: Current situation and challenges ahead Niuton MULLETI NBRM Spring Conference Skopje, May 30, 2008

2. Outline • Definition of competitiveness • Current situation • Challenges ahead

3. Definition of competitiveness • No reference to exchange rate competitiveness • “The extent to which a country, in the conditions of a free and fair market, produces goods and services that meet international markets` standards, while preserving and increasing its citizens` real income in the long-run” (OECD) • “Competitiveness should be equalled to productivity” (World Bank) • “Policies, institutions and factors driving productivity and, thus, enabling sustained economic growth and long-term prosperity” (World Economic Forum)

4. Exchange rate competitiveness • During 2007, ALL has appreciated by 1.4 p.p. in annual nominal effective terms towards foreign currencies, compared to 1.1 p.p. during 2006 • During 2007, the real effective exchange rate grew by 4.4 p.p. compared to a rise by 1.0 p.p. during the previous year ►affecting negatively the competitiveness of Albanian goods in international markets

5. Real exchange rate competitiveness • Graph: Annual changes of ALL in nominal effective terms (NEER) and real terms (REER) (left-side); Daily developments in ALL/euro and ALL/USD (right-side)

6. Current situation • Weak competitiveness of the Albanian economy is mainly reflected in the trade and FDI indicators Table: Trade and FDI indicators during 2006 (in percentage)

7. Current situation • Albanian exports remain highly undiversified. “Textiles and footwear” constitute 55% of Albanian exports. The next largest export category is “minerals”. Table: Exports (in million euro) according to different categories • 72.6% of exports are directed to Italy, 9.6% to Greece

8. Current situation • Status of structural reforms – EBRD Transition Report 2007 • First-phase (Market-enabling) reforms a) Small-scale privatisation b) Price liberalisation c) Forex and trade liberalisation Table: Average of first-phase reforms indices

9. Current situation • Second-phase (Market-deepening) reforms a) Large-scale privatisation b) Financial sector reform (banking and non-banking) Table: Average of second-phase reforms indices

10. Current situation • Third-phase (Market-sustaining) reforms a) Governance and enterprise restructuring b) Competition policy c) Infrastructure reform Table: Average of third-phase reforms indices

11. Current situation • World Competitiveness Report 2007-2008 • Basic requirements 1. Institutions 2. Infrastructure 3. Macroeconomic stability 4. Health and primary education • Efficiency enhancers 5. Higher education and training 6. Goods market efficiency 7. Labour market efficiency 8. Financial market sophistication 9. Technological readiness 10. Market size • Innovation and sophistication factors 11. Business sophistication 12. Innovation

12. Current situation • World Competitiveness Report 2007-2008 rankings • Competitiveness of the Albanian economy mainly driven by its factor endowments (low wages, natural resources)

13. Current situation • Ease of Doing Business 2008 rankings (World Bank) • Albania 136 • Bosnia and Herzegovina 105 • Serbia 86 • Macedonia 75 • Bulgaria 46 • Albania particularly fares weakly with the categories of “dealing with licences”, “protection of investors” and “closing a business”, which affect the business climate.

14. Current situation • Index of economic freedom 2008 – The Heritage Foundation and Wall Street Journal • Business freedom • Trade freedom • Monetary freedom • Freedom from Government • Fiscal freedom • Property rights • Investment freedom • Financial freedom • Freedom from corruption • Labour freedom

15. Current situation • Index of economic freedom 2008 ranking

16. Current situation • Corruption remains a serious constraint regarding business environment Table: Transparency International 2007 Corruption Perception Index

17. Current situation • Albania is a potential candidate country for EU accession • Stabilisation and Association Agreement between Albania and the EU signed in June 2006; ratification process expected to be completed within 2008. • Fulfillment of the Copenhagen economic criterion(European Commission, 2007 Progress Report on Albania) ►Albania has made progress towards establishing a functioning market economy ►Major reforms are still needed to enable it to cope over the long-term with competitive pressures and market forces within the Union.

18. Challenges ahead • Albania has experienced a sustained and high economic growth since 1991, delivering rising incomes and poverty reduction • Still, Albania has a low GDP per capita compared to neighbouring countries Table: GDP per capita in PPS, EU27=100

19. Challenges ahead Growth has been driven by productivity gains: 6.1% TFP growth was the main component of GDP growth of 6.3% (1993-2003) – World Bank assessment Sustaining growth will require increasing both capital and labour accumulation and expanding exports Though increasing, private investment remains low with periodic bursts driven by privatisation and private participation in infrastructure Labour participation remains low and unemployment high (13.2%) Exports are picking up but are still concentrated in unskilled labour and natural resource intensive products

20. Challenges ahead • Strong tradition of pro-business government • Sound macroeconomic policies • An increasingly open economy and deepening financial sector • Strategic location, good natural resources, reasonably educated labour force • Key challenges remain in infrastructure and business environment

21. Challenges ahead • Lasting solutions need to be found for a stable and secure power supply • The road infrastructure needs to be substantially improved • The functioning of the judicial system needs considerable improvement • Property titles need to be properly registered and persistent uncertainties on property rights need to be clarified • Measures related to the market entry and exit of companies need to be simplified

22. Challenges ahead • Measures against corruption need to be intensified • The large informal sector needs to be tackled • Supervision of non-bank financial institutions needs further improvement • Future focus to be on structural reforms ►improvement of governance and business environment ► significant growth in FDIs and productive diaspora investment • Main challenge: ensure an exports-driven growth in the future.

23. Thank you!