TIRANA, Sept. 26 – Hydropower was the key driver of Albania’s economic growth for the second quarter in a row fuelled by heavy rainfall doubling domestic electricity generation at a time when the contribution by main traditional sectors was quite modest.

A report by Albania’s state-run statistical institute, INSTAT, shows the Albanian economy grew by 4.32 percent in the second quarter of 2018 and an average of about 4.4 percent in the year’s first half fuelled by rainfall lifting the state-run electricity sector out of crisis. The strong recovery comes following a prolonged drought that almost paralyzed domestic electricity generation in the second half of 2017, triggering costly electricity imports of around €200 million and placing public finances in trouble.

The GDP growth for the first half of this year even exceeds government expectations for a 4.2 percent growth rate this year following a 9-year high of 3.8 percent in 2017 and is considerably above forecasts by international financial institutions such as the World Bank and the IMF which expect the country’s economy to grow between 3.5 to 3.7 percent this year amid a slowdown in foreign investment as two major energy-related projects approach their final investment stage.

The majority state-run hydropower sector alone contributed by 1.76 percentage points in the second quarter of 2018 as domestic electricity generation almost doubled, allowing the country to secure electricity needs and export part the excess production.

State-run KESH power utility, which produces two-thirds of domestic electricity from three large HPPs on the northern Albania Drin River cascade, says it managed to secure about €60 million from electricity exports in the first half of this year.

However, stripped of the rainfall effect that lifted Albania’s wholly hydro-dependent electricity sector out of crisis GDP growth in the second quarter of 2018 would have been at a mere 2.5 percent, a moderate growth rate for Albania’s developing EU aspirant economy, which experts say needs to grow by at least 6 percent annually in order to produce tangible welfare for the country’s households and bridge the huge gaps with EU member countries.

Albania's electricity sector is currently wholly reliant on hydropower, something which puts it at risk of adverse weather conditions such as last year’s prolonged drought, one of the worst in decades.

Albania also has more than a hundred smaller private and concession HPPs, including the under construction major Devoll Hydropower by Norway’s Statkraft, producing a total of about a third of domestic electricity.

In a bid to diversify electricity generation, the country’s authorities have offered tax incentives on solar and wind plants as well as natural gas fired plants at a time when the major Trans Adriatic Pipeline, also crossing through Albania, is scheduled to bring first Caspian gas to Europe by 2020.

Calculating growth through the ‘expenditure method,’ INSAT reports Albania’s household spending grew by about 3.35 percent year-on-year in the second quarter of 2018, compared to a 3.43 percent growth in government spending.

Household consumption grew by 2.7 percent in 2017, significantly below the country's GDP growth of about 3.8 percent fuelled by some major energy-related projects and the emerging travel and tourism sector.

Key contributors

The ‘industry, energy and water’ group had a 2.37 percentage point contribution to the second quarter growth. Within this group, the processing industry, represented by the major garment and footwear industry producing the country's top exports, grew by an annual 11 percent.

Meanwhile, the extractive industries continued contracting despite international oil and mineral prices gradually picking up following the mid-2014 slump and improving prospects for the country’s key oil and mining industries.

‘Trade, transport, accommodation and food services’ had a 0.82 percentage point contribution to the second quarter growth mainly boosted by a hike in the number of tourists visiting the country.

The professional activities and administrative services group, mainly represented by the call center industry, had a positive 0.44 percentage point effect on the second quarter growth.

Agriculture, a sector that employs about half of the country's population but produces only a fifth of the GDP, contributed by 0.3 percentage points to the second quarter growth, once again unveiling the poor efficiency of a sector hampered by high land fragmentation, poor access to financing and subsidies as well as insufficient irrigation infrastructure.

The information and communication group represented by the telecommunication sector contracted for the third quarter in a row as mobile operators continue posting lower profits due to mobile app communication gaining ground over traditional phone calls and text messages.

Construction turns negative

The construction sector which in the past couple of years turned into a key driver of growth following a long-ailing post crisis period, had a negative contribution of about 0.2 percent in the second quarter of 2018 as it contracted by 2.16 percent following three years of consecutive positive growth.

The construction sector returned to one of the key contributors to growth in 2016 and 2017 after years of recession following a pre-crisis boom, fuelled by some major foreign investment such as the Trans Adriatic Pipeline and some big hydropower plants, now in their final construction stage.

A new boom in apartment block constructions in Tirana, a new stadium and several public investment was also contributed to the sector’s recovery.

However, the main opposition Democratic Party and some experts allege the construction sector has also revived due to drug and other criminal proceeds being laundered into the industry amid sluggish recovery of credit, in a phenomenon they also link to the sharp depreciation of Europe’s single currency against the Albanian lek this year due to a sharp hike in euro inflows.

The construction sector now accounts for about 10 percent of Albania’ GDP compared to a record 18 percent of the GDP in 2008 just before the onset of the global financial crisis.

Euro depreciation threat

A sharp strengthening of Albania’s national currency, lek, against Europe’s single currency is emerging as a new threat to the Albanian economy during this year, in addition to the already high public debt levels, sluggish credit and consumption as well as non-performing loans at declining but still high levels.

Having stabilized at about 126 lek in the past four months following ongoing emergency intervention, Europe's single currency continues to trade at about 6 percent below its late 2017 rate and is 10 percent below the mid-2015 level when its five-year reign of about 140 lek came to an end.

Euro's free fall against the Albanian lek has had a series of negative effects for Albania’s highly euroised economy, mostly Eurozone-destined exports, local producers facing tougher competition from cheaper imports and sizeable Euro-denominated savings and remittances.