POLIFAKTIA change in the direction of the country is urgently needed

1 Shkurt, 20230

In this current economic background, inflation in Albania rose to the highest levels in decades. Initially, the higher inflation was seen as transitory, reflecting increases in relative prices for a small number of items affected by the pandemic. But inflation proved persistent, widening over time. In response, the Central Bank set us ahead of time with the pace of tightening lending policies. Rising inflation and changing expectations for policy response led to periods of financial market volatility, with financial conditions tightening significantly during the year, albeit from an extremely easy position.

This combination of forces creates a challenging look. The mix of high inflation, high and volatile supply costs, as well as significant domestic tensions bear an uneasy resemblance to episodes resembling global stagflation.

An uncertain perspective of how business is affected by the lack of freedom in the market during 2022 and beginning of 2023 together with increased corruption reinforces the growing risks.

Unlike in the past in many different countries, stagflation today would occur alongside increased financial vulnerabilities, including stretched asset prices and high debt levels, which could exacerbate any slowdown in growth.

Recent economic developments complicate even more this political commitment, impossible due to tasks not done by the government.

The measures that were adopted came as a reaction not dictated by the country’s specific conditions and needs, but as a compilation of policies that were found to be effective in neighboring and European countries.

In the short term, the priority was to reduce inflation by limiting as much as possible the cost to economic activity and maintaining financial stability. However, this did not happen according to the expectations and demands of local actors and interest groups.

At the same time, it was first imperative to rebuild the new balances in the monetary and fiscal market through a stable normalization of the policy, instead of aiming for a policy with a social approach oriented towards the mobilization of resources with visionary ideas and initiatives.

A lot of political time and energy was consumed during 2022 on the political initiative for a fiscal amnesty, which according to the leading political force was defended with the argument that it would save the economy.

Recent economic developments complicate even more this political commitment, impossible due to the tasks not done by the government.

Fiscal policy in particular faces pressure to address higher living costs and increase spending that is already exceptional in nature.

While long-term commitments must be respected to direct the economy towards internal, but also external commitments, based on agreements and relationships built over the years.

These challenges prioritize supply-side reforms to foster sustainable growth.

The experience of the past year, ranging from bottlenecks in supply chains to European stagflation pressures caused by conflict in Ukraine and problematic domestic resource mobilization, reinforces the importance of revitalizing the engine of favorable spending for economic growth, especially investment accompanied by reforms. on the supply side.

These can increase growth and make it more resilient, thus facilitating the normalization of monetary and fiscal policies over time.

As some of the measures will include increased targeted spending, care is needed about what is offered as a further benefit, in an environment of limited fiscal space, where there is also a premium to make the tax system more tax-friendly and growth is needed the most. But the urgent task is to dismantle corruption and cronyism from the administration of public finances and the country’s most important institutions. This requires a modification of the will, which is exceedingly difficult to accomplish in the current corrupt political class.

As one of the most urgent tasks, the transition of the economy and social policy towards a “new contract” requires targeted measures to establish a more sustainable policy mix and a sustainable and future-friendly resource mobilization.

Lowering barriers for firms to enter and strengthening competition in the economy would help accommodate pandemic-induced changes in consumer preferences and bring businesses closer to the productivity frontier. But that alone is not enough, as the environment of doing business needs to reflect responsibly and honestly with and for the public, for everything that has not been reflected until today.

Suffice to say, that last year 2022 there was an increase by the government of restrictive trade and market rules against market freedom with the argument of protecting consumers from high food and fuel prices. But this began to affect rising costs and prices, beyond the constraints caused by monetary policy with high interest rates, increasing the risk of further restrictions on exports.

Analyzes from neighboring countries suggest that an orderly transition, containing a timely increase in investment in some vital sectors of the economy that perform better than others, such as: diversification of energy sources, the financial market, may impose small costs in the short term, but will bring sustainable long-term gains, measured in terms of economic output.

In contrast, a disorderly transition, where technology adaptation stagnates and intensive economic resources are quickly closed or continue to be used rather slowly, would involve significant costs in both the short and long term.

This reflection on the country’s orientation to the post-pandemic transition holds much value, as the war in Ukraine has sharpened the focus on energy security, which, especially in the long term, is consistent with the push to “green” the economy.

However, this push does not apply in the same way in the case of Albania, which does not have the same challenges as EU member countries regarding the transition to “green” energy. Energy problems in the country are political and managerial in nature.

That said, in the near term, energy security considerations are likely to delay the Albanian economic transition given that the short-term costs of the transition may be higher than conventionally assumed and may create additional fiscal burdens.

To activate sustainable growth and where fiscal space allows, albeit belatedly, it should benefit from increased spending on human and physical capital.

Increased and more oriented spending on education would help compensate for losses in education and skills even during the pandemic but would affect the future trend of young people leaving.

In terms of physical capital, investment to improve the state of public infrastructure, if chosen carefully and implemented effectively, can make the economy better prepared to face any future shocks, be they health or natural disasters and to support the normal functioning of the economy.

But in Albania, the breakpoint is exceeded, if we start from the cost and benefit analysis. Investments in at least the last 5 years have exceeded every element of the effectiveness of the benefit from the investments made by comparing it with the rate of economic growth. The latter has grown on average over the past 5 years at a level of up to 2.9%. This average growth level is the indicator that the investments have not yet entered into the function of economic growth, but on the other hand they have taken part of the expenses that should have belonged to the social expenses, which in addition to the insufficient social investment are already facing the increase of inflationary pressure by returned years back to the level of well-being they enjoyed 2-3 years ago.

This situation that we analyze after 5 years shows us that only investment policy disconnected from the context of social and financial trends cannot produce added value, if it is not included as a policy harmonized with the demands and needs of the moment.

Thus, e.g., the lack of complete reforms in the financial market sector, especially in the wage reform, in the continuous reform of pensions, as well as in the reform of social support are already the highest costs as it will have to be paid even for the time when they are not have managed to be realized according to the political objectives of the government.

Another priority is to maintain competitive and open markets and avoid real and financial fragmentation, especially in the face of geopolitical tensions and rising prices.

While some of these adjustments are necessary and desirable, it will be important to avoid growing impulses in favor of populism, cronyism, and fragmentation, given the importance of trade and the interaction of all actors for the growth and productivity of the economy and the well-being of the people.

Another priority that received little focus from the government is related to maintaining a competitive and open market and avoiding its real and financial fragmentation, especially in the face of geopolitical tensions and rising prices.

However, the repeated and systematic use of other non-priority policies over the past decade in the face of economic weakness, combined with the difficulties in rebuilding policies in good times is one reason, why the space for politics for maneuver for macroeconomic improvements has narrowed so much with the passage of time.

In the current political reality with a lack of trust and a corrupt political class that does not have the necessary transparency to be considered responsible for future policies, it should find the moment to create the conditions for fresh and more responsible leadership capacities.

A change in the direction of the country is urgently needed.


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