AIM - Albanian economy: better in war than in peace

Effects of Kosovo crisis during and after the war


SUN, 26 DEC 1999

AIM Tirana, 13 December, 1999 - Albania came out as the winner of the war in Kosovo, not only in the moral but also in the economic sense. During the months of the crisis, local currency remained strong in comparison with foreign currencies, inflation was minimum, the sector of services was activated and export grew. In the just published report of the Bank of Albania - central institution which regulates monetary policy - it was made public that regardless of the created difficulties "it is estimated that national economy registered progress in comparison with the period before the crisis". This is in a way a surprising statement, if one has in mind the enormous migration of about 500 thousand Kosovar emigrants who had in just a few weeks literally flooded the demolished infrastructure of the poorest country in Europe. However, according to Albanian economic experts, the current assistance of the international community and engagement of the local population enabled taking of certain advantages of the crisis in Kosovo.

Massive banishment of the population in the end of March this year was the most obvious result of the war in Kosovo. Majority of the banished persons crossed the border of the Republic of Albania. In the course of just about two weeks the population increased by about 15 per cent. Lack of appropriate infrastructure and evident unstability of the country in the past few years did not offer much hope that the created situation would be overcome. This especially because it was believed that the conflict would continue until the end of the year and that banished Kosovars would remain in Albania until the end of year 2000. However, this did not happen. After signing of the peace agreement less than three months after breaking out of the war, equally unbelievable and momentary return of the displaced persons from Kosovo followed. These were shifts of destiny which not only saved Albanian economy of further damage, but even ensured certain profit for it.

Some of the greatest difficulties this country was faced with was lack of infrastructure, shortage of food, transportation of people from north-eastern zones towards the centre of the country's territory, accommodation - in order to receive hundreds thousand people. However, thanks to the assistance of the international community, engagement of the Albanian government and the population, this emergency situation was overcome very well. They succeeded even in creating conditions for reception of an even larger number of the displaced persons and their sustenance after the end of 1999. These efforts at first cost dearly the economy and the budget of the Albanian state. The government was forced to block investments and postpone the rise of very low salaries of employees in state administration. Apart from the blocked investments, paralysing of reforms and privatisation process should also be listed among main items on the lists of costs of the crisis. Considerable increase of the risk of investments in countries of the Balkan region, especially in Albania is evident from the loss of interest of foreign investors, as well as local ones, for participation in the privatisation process of state-owned enterprises. The sum of income in the budget planned to be made from privatisation has not been reached. Investment activities of companies present on the domestic market were also mostly blocked. These are phenomena which according to experts could have proved to be part of the negative trends reducing chances for stability of the macro-economic balance in the medium-term period.

Expressed in figures, additional expenses of Albania in overcoming the crisis amounted to about 150 million US dollars. About 10 million US dollars should also be added to this figure due to reduced income from customs dues, as another direct result of the crisis. These expenses would be insurmountable or at least accompanied by destructive deterioration of economic indicators if the international community had not reacted accepting the request of the Albanian government to directly finance its budget with about 160 million USD.

The fact that the international community also financed most of the expenses for supporting the newcomers from Kosovo contributed greatly to evading a new breakout of inflation. Like during the months of crisis and after it, monetary policy did not suffer deformations and inflation was stabilised on the level of industrialised countries. According to plans by the end of the year its increase should not exceed five per cent in comparison with the previous year.

Even a quick glance at some of the items on the the balance sheet of payments of the Albanian state for the period March-May 1999 shows that the arrival of 500 thousand Kosovans was accompanied by consequences which can be characterised as being far from fatal. For instance, income made from export of services - in the balance sheet, for methodological reasons the displaced are classified in the category of "tourists" - has increased 4.7 times, reaching the profit of 88 million USD. According to data of the Bank of Albania, Kosovo refugees have spent enormous sums of money for the necessary consumer goods and for rent. The calculations show that daily expenses per person amounted to about 1.4 Americal dollars which means that along with the refugees, Albanian market was also flooded - by 59 million USD. Their source were the savings of Kosovar families and money they received from the diaspora. Another source of foreign currency for Albania was transfer of money for international organisations, humanitarian agencies, media, military troops, which were present in the months of the crisis.

The balance of foreign trade also proved to be in the black in the crisis of Kosovo. Growth of the population by about 15 per cent in the month of April 1999 caused an increase of internal demand which reflected in the increase of import (mostly of consumer goods) by about 35 per cent in comparison with the period of three months before the crisis. Observations of the Bank of Albania show that import increased by seven per cent and as result of the fact that on their trip back to Kosovo refugees carried with themselves considerable quantities of foodstuffs and industrial goods.

The conflict in Kosovo also had as the result the decrease of money orders sent by 500 thousand Albanians who work in Greece, Italy or Germany. However, this decrease was compensated on the level of the economy by a remittance of the sum of about 31 million USD by the European Union as support to the government budget. These are factors the joint effect of which explains why the Albanian currency, lek, was stable in relation with other currencies in the five-month period between April and August 1999. It should not be forgotten that immediately after the end of the war Albanian lek was in use on the market of Kosovo in the vicinity of the border with Albania along with the dinar and the German mark.

It is understandable that tumultous developments in the region brought to interruption of foreign investments. However, this was preceded by disagreeable internal developments. In 1997, as the result of the chaos that was created in this state, foreign investments decreased from 90 million USD registered in 1996 to 40 million USD. Contrary to that, during the months of the crisis in Kosovo positive trends were registered in this field, too. There was a significant realisation of investments in infrastructure, such as construction or reconstruction of roads or construction of the airport in Kuks. These are the facts which induced Shkelquina Cani, governor of the Bank of Albania to declare that in the months of the Kosovo crisis "the economic situation has not deteriorated as it was predicted". Governor Cani believes that in the end of this year "macro-economic situation in Albania will be within programmed limits". Although it did not turn into a kind of war economy, Albanian economy seems to have done better in war than in peace.