When will Albania collapse financially?

by Alfred Kola     Click here for the version in albanian

The question of the title appropriate, because now it’s not a question whether Albania will collapse or not, but when will this happen. The current economic and social situation in the country does not leave any hopes that an eventual collapse will be averted. The Albanian government calls this dangerous mess” an unprecedented economic miracle never seen anywhere in the world”. The first to back this “success” are the Albanian economists, who all call themselves Doctors of Economic Sciences, a pompous title that implies that these individuals have contributed greatly in the development of economic theories and models, but unfortunately they don’t get the slightest hang of it. It’s a fact that, as with the college degrees, we also have an overproduction of academic titles, like worthless things that can be bought and sold in the flea market of social dilettantism.

These dilettantes, in the best scenario have no idea what economics is and in the worst scenario do not dare to be at odds with their “leader”. If the leader calls the public investments, which are included in the government spending, as vital investments in the economy, so do they. If the leader, in moments of delirium, challenges the German and French economies, which, according to him “lack the stability of the Albanian economy”, so do the dilettantes, by questioning the skills of the economists in those countries.

The chairman of the Bank of Albania speaks in an incomprehensive language, with self-made financial terms that are not found in contemporary economic books. With the exception of the opposition and two major televisions Top Channel and Vizion+ as well as two most widely circulated newspapers Shekulli and Tema, no one else mentions the grave economic crisis in Albania and the consequences associated with it. Even IMF never speaks of such a crisis, perhaps because the crisis is not very much called to attention due to the fact that Albanians, unlike other western nations, always prefer to tighten their belts at the maximum and live in poverty rather than take to the streets in violent protests for economic reasons, as it happens everywhere in the civilized world. But hushing about the crisis does not mean that the crisis is not there, and in Albania it is serious and all-inclusive.

There are a number of factors that combined together build a solid foundation that makes the collapse of Albanian finances inevitable. These factors are listed below sorted by the weight they have in the process:

National Debt

Domestic economic crisis

Economic crisis in Greece and Italy

Corruption with natural resources and national assets

Disaffiliation with the EU and the deviation from the European course

It’s a known fact already that Albania has an elevated national debt, over 60% of its GNP a danger zone for a low-productivity economy like Albania. IMF has warned the Albanian government of the consequences that will fall upon the country if it raises the debt further. For the last two years, the Albanian government has borrowed money at higher interest rate to pay the interest of old debts. For every economist in the world this means that the ship has reached the point of sinking. To simplify the meaning of this we can use the model of a household. When people hear that the head of a household has borrowed large amounts of money, frittered it away on lavish houses and fancy cars, and now has reached a point of borrowing money to pay for the interest of old debts, they will immediately think that very soon the creditors will knock at his door, kick him out of the house, repossess the cars and everything else he has and leave him penniless. Same thing may happen to a government, despite the differences it has with an individual. But they have one thing in common: they both, at certain point, will be forced to file for bankruptcy i.e. state their inability to pay back the creditors.

One government borrows money to cover the expenditures it made over budget, thus when it runs budget deficit. This type of debt means that future generations will pay higher taxes to pay back the debts. Therefore, it is in the country’s best interest that the government uses the borrowed money on vital sectors that sustain highest economic growth and large-scale employment. In economic terms this is called the increase in productivity and the pillars upon which it is based are:

Formation of capital

Technology

Quality labor: Education and Training

It is assumed here that this country’s government is not corrupt and law is enforced rigorously.

In the case of Albania as a poor country the view is quite the opposite. The huge government spending, financed through borrowings in foreign financial markets, are directed in inefficient sectors and projects that are ballyhooed as vital investments, with costs beyond the capacities of a country for more developed than Albania. The 60-km-long Durres-Kukes freeway with its unimaginable price of more than 1.5 billion dollars is a clear-cut example of the plunge of public finances.  The construction of another road or a parliament building at costs far larger than in the EU countries and the United States is expected to deal a harsh blow to the weak stability of the Albanian government’s finances. Such projects do not generate revenues for the Albanian government and the country, except for temporary employment of a number of people in need. But these insane projects have other aspects that make them even more inefficient: they are built by foreign companies that take their profits and deposit them in their bank accounts abroad. This means that Albanians will have to pay for a debt, half of which didn’t even stay in the country. Albania’s debt to foreign institutions, which make up half of the total, was acquired at very high interest rate due to the low credibility ratings of the Albanian government (to pay back the debts) by international rating agencies. But these high interests have to be paid and the government has no other way to raise revenue but taxation. So as the debts increase the taxes have to be raised too. But the government in Albania is aware of the poor situation of businesses in the country due to monopolistic commercial and politically selective policies and above all the large-scale theft of public and development funds. Therefore, the government makes the game more dangerous by borrowing money at higher interest rate to pay for the interest of old debts. The accumulation of these interests will force the government to surrender as it is becoming more and more difficult for it to find markets to borrow more money.

Until before the outbreak of world financial crisis of 2008 the governments in Albania had an easier task in managing the country, because the remittances from the Albanians residing abroad, particularly in Greece and Italy, constituted an important source of capital for the country’s economy. But the financial crisis in Greece and the high rate of unemployment that followed it shrank the revenue from this source drastically. Another similar crisis in Italy will cut the cash flow toward the Albanian economy contributing in the deterioration of the economic situation in the country. But even if the crisis in Italy is averted, the saving measures taken by the Italian government have already done the damage.

Albania had great chances to benefit from its rich natural resources to sustain a high economic growth but the corruption and insatiable greed of the Albanian government officials deprived it from this great opportunity. The sale of strategic sectors to shady companies, defiantly and unjustly excluding big and serious firms from largest western countries, took away from the government and the country important sources of capital that could be invested in sectors of economy that guaranteed growth and prosperity for the Albanian citizens. The concessions in mineral resources and oil production are a living proof of the historical irresponsibility of Albanian officials, who are willing to sell everything from their country to anyone, just to secure some support to keep them in power. The concessionary companies, most of which are rumored to belong to government officials, and Bankers Petroleum in particular, exploit ruthlessly the Albanian oil-fields and declare law production quotas. The oil is sold then to foreign markets and the money earned by the sales are deposited in bank accounts in Canada, which means that more than half of the money value of the Albanian oil reserves are not accounted for in the country’s economy. The government’s share of profit is just a tiny portion from the Albanians’ most valuable asset in these times of grave economic crisis and the increasing demand for “the black gold” in international markets.

The default of the Albanian government will be sustained by another reason. While Greece and other countries risking financial distress as members of Euro-zone and EU have the support of Germany and France in facing the crisis, Albania, which hasn’t obtained the status of a candidate country to join EU yet, will be all alone in facing a financial crisis, which accompanied by the poverty of population and the economic crisis, is expected to inflict disastrous consequences upon the nation.

So far the government has managed to pass the crisis on to Albanian citizens through spending cuts in welfare and social programs, the increase in unemployment rate by passing the ownership of state-owned companies to foreigners and other unorthodox means. But now, as the poverty has reached the levels of ’89-90s for most Albanians, it seems impossible to proceed further with these policies. Therefore, the perspective of the national finances is not very optimistic.

What is expected to happen afterwards is easily predicable. The extreme poverty and the collapse of the already weak state structures will cause uncontrolled unrests and turmoil in the country. The criminality will take control and Albania might enter a downward spiral that will leave behind a host of grave consequences for decades in the future.