Macro: COVID-19 Update Albania: Expansionary policies to stimulate growth in a challenging environment

COVID-19 development: Starting from June most of the restrictions related to the COVID-19 pandemic have been lifted and the economy has reopened. As expected, the number of infections has increased to an average 114 daily cases after the lockdown, up from 22 cases in the lockdown period. Casualties have moved up in parallel with infections.
Economic development: Q2 2020 GDP figures are not out yet but based on high frequency indicators a sharp contraction is expected for the period. In the second quarter of 2020, monthly fiscal indicators show a deterioration of 23% compared to the same period of 2019. We expect a higher contribution from external demand to GDP in the third quarter, with the tourism sector impacted but still successful considering the initial expectations. Nevertheless, in our opinion it will not be enough to shelter the economy from the consequences of the lockdown in Q2 and we expect the GDP to contract by 6.5% for the whole 2020.
Fiscal policy implications: Actual fiscal policies have been rather limited, constrained by the limited fiscal space the government faced. On July 29 the parliament approved another updated budget which envisages a drastic increase in the fiscal deficit. The government now expects the deficit to reach 8.5% of GDP and a debt-to-GDP ratio slightly over 80%.
Inflation: Nevertheless, in our opinion this will only partially compensate the drop in private demand and therefore inflation pressures will continue to be subdued. This will push forward the inflation target to be achieved by the Bank of Albania. We still expect the inflation rate to hover around 3% only in 2023 with the base rate unchanged at 0.5% for the most part of 2022

This Research was produced and first published by Raiffeisen Bank International AG which is supervised by the Austrian Financial Market Authority and the National Bank of Austria.